Attached files
file | filename |
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EX-32 - NEULION, INC. | ex32.htm |
EX-21 - SUBSIDIARIES - NEULION, INC. | ex21.htm |
EX-31.1 - NEULION, INC. | ex31_1.htm |
EX-31.2 - NEULION, INC. | ex31_2.htm |
EX-10.23 - CONTRACT FOR PRODUCTS AND SERVICES - NEULION, INC. | ex10_23.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31,
2009.
|
or
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to .
|
|
Commission
File Number: 000-53620
|
NEULION,
INC.
(Exact
name of registrant as specified in its charter)
Canada
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98-0469479
|
|
(State
or Other Jurisdiction of
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(I.R.S.
Employer
|
|
Incorporation
or Organization)
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Identification
No.)
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1600
Old Country Road, Plainview, New York
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11803
|
|
(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (516) 622-8300
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|
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Securities
registered pursuant to Section 12(b) of the
Act:
|
Title of each class | Name of exchange on which registered |
None |
Securities
registered pursuant to Section 12(g) of the Act:
Common
Shares
|
(Title of
Class)
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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. ¨
Indicate
by check mark whether registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer | o | Accelerated filer ¨ |
Non-accelerated
filer (Do not check if a smaller Reporting company) |
o | Smaller reporting company x |
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: $50,149,594.
There
were 116,744,404 shares of the registrant’s common shares issued and outstanding
as of March 10, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Our
definitive Proxy Statement relating to our Annual and Special Meeting of
Shareholders to be held on June 15, 2010 (the “Proxy Statement”), to be
filed with the Securities and Exchange Commission (the “SEC”) pursuant to
Regulation 14A under the Securities Act of 1934, is incorporated by reference in
Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.
NeuLion,
Inc.
Index
to Form 10-K
Page
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Part
I
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1
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7
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17
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17
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17
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17
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Part
II
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18
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22
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23
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52
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52
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52
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52
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52
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Part
III
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53
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53
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53
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53
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53
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Part
IV
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54
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SIGNATURES
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57
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PART
I
Item
1. Business
Overview
NeuLion,
Inc. (“NeuLion,” the “Company,” “our,” or “we” and similar phrases), a
corporation incorporated on January 14, 2000 under the Canada Business Corporations
Act (“CBCA”) whose common shares (the “Shares”) are listed on the Toronto
Stock Exchange, is a leading Internet Protocol (“IP”) television company,
providing end-to-end IPTV services. “IPTV” refers to the distribution
over an IP network of streamed audio, video and other multimedia content,
similar to television programming content, using industry-standard streaming
protocols. We build and manage private networks for content owners
and aggregators (our content partners) that are used to stream content to
multiple platforms through browser-based devices. That content
includes live and on-demand sports and international and variety programming,
which we then deliver to subscribers and pay-per-view customers for viewing on
Internet-connected browser-based devices such as personal computers, laptops and
mobile devices and on standard television sets through Internet-connected set
top boxes (“STBs”). NeuLion’s main business objective is to enter
into agreements with companies seeking their own private networks to reach
target audiences and to provide complete IPTV services to these
companies. We also acquire the rights to certain sports and
international content from television broadcasters (our channel partners), which
we then stream to end users through our own private networks.
Our
business model has evolved from a professional IT services and international
programming provider to an end-to-end provider of IPTV services. By
“end-to-end provider of IPTV services,” we mean that we provide the following
services:
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·
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content
management – encoding of various digital and analog TV and video
formats;
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·
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subscriber
management – managing subscriber access and control of subscriber
accounts;
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·
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digital
rights management – preserving the integrity of the content and protecting
it from unauthorized access;
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·
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billing
services – enabling customers to view subscription accounts, providing
pay-per-view transactional billing and payment
processing;
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·
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delivery
– delivering streamed audio, video and other multimedia content anywhere,
anytime through the Company’s IPTV service and infrastructure;
and
|
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·
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advertising
insertion.
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Customer
Relationships
We have
two types of relationships: business-to-business (“B2B”) and
business-to-consumer (“B2C”).
B2B
relationships have been our primary focus in the past and are expected to be the
focus in the future. A B2B relationship is focused on providing an
end-to-end solution to a customer to enable that customer to provide its
content, by way of an IPTV platform built for that customer, to its end
users. B2B customers typically aggregate the content, negotiate the
licensing rights and directly market the availability of the
content. This customer avails itself of the full services of the
Company in delivery to its end users. This type of relationship is
typical in the professional and college sports properties and in our agreements
with international and broad-based content providers.
Our B2C
relationships are individual consumer oriented. We have signed
distribution agreements with our channel partners and content providers in
exchange for revenue share or royalty payments to such providers. We
then market the content on one (or more) of the proprietary targeted websites
that we have developed which are focused on a specific diaspora community, as
well as on the general Company website for purchase by an end
user. We often aggregate the content into bundles or packages of
similar interest (e.g. Talfazat for the Middle East community; TV-Desi for the
South Asian community). We incur marketing expenses in promoting the
availability of such content.
The
United States and Canada are the principal markets in which our sales
occur.
Products
and Services
Sports
Programming
Through
our comprehensive end-to-end IPTV solution, we provide our sports programming
content partners with the ability to deliver live and on-demand
content. We maintain distribution and technology services agreements
with leading professional and collegiate sports properties as well
as with the sports network ESPN. Amongst professional sports
leagues, NeuLion counts the National Football League (NFL), the National Hockey
League (NHL) and the American Hockey League (AHL). Through our recent
acquisition of Interactive Netcasting Systems Inc. (“INSINC”), a provider of
sports, government and entertainment webcasting services, we expanded our
portfolio of sports content partners to include the Western Hockey League (WHL),
the Ontario Hockey League (OHL), the Central Hockey League (CHL), the British
Columbia Hockey League (BCHL), the Central Canadian Hockey League (CCHL), the
Alberta Junior Hockey League (AJHL), the Central Junior Hockey League (CJHL) and
the Canadian Football League (CFL).
We also
operate our own portfolio of sports-oriented websites, including Cycling.tv,
CollegeSportsDirect.com and selected World Cup soccer properties. On
the collegiate level, we are the premier partner for National Collegiate
Athletic Association (NCAA) colleges and universities, with agreements in place
with approximately 170 colleges, universities or related sites.
Ethnic/International
and Specialty Programming
The
Company also offers what is referred to in the industry as “ethnic television,”
which the Company defines as programming directed at a specific diaspora
community, as determined by a shared nationality, language or culture, and
generally excluding communities for which English is the primary
language. We have license agreements directly with channel partners
representing approximately 185 channels in 55 countries that give NeuLion rights
to stream, predominantly on an exclusive world-wide basis, the channel partners’
live linear television feeds over the public Internet using our proprietary
private networks such as Talfazat and TV-Desi.
Our
subsidiary, INSINC, also distributes government and entertainment
content. Its clients in those industries include Business News
Network (BNN), CTV News Channel, Rogers Sportsnet, TVG Networks, The Canadian
Press, the Canadian Ministry of Justice, the BC Ministry of Education, and the
Legislative Assemblies of British Columbia and Newfoundland and Labrador, among
others.
We also
have relationships with other specialty programming customers such as Sky Angel
U.S. LLC, which streams faith-based programming.
Services
Our suite
of technology and other services is directed at the entire spectrum of content
aggregation and delivery. Our services include:
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·
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content
ingestion;
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·
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website
design and hosting;
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·
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live
and on-demand streaming of content on multiple
platforms;
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·
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billing
services;
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·
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facilitating
online merchandise sales;
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·
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mobile
features (streaming highlights, alerts, wallpaper and ring
tones);
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·
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online
ticketing;
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·
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auction
engine (jerseys, tickets);
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·
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social
networking;
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·
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customer
and fan support; and
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·
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marketing
and advertising sales.
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Distribution
Methods
We
distribute content through two primary methods:
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·
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Internet-connected
browser-based devices such as personal computers, laptops and mobile
devices; and
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·
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standard
television sets through use of our Internet-connected
STBs.
|
Both of
our distribution methods take advantage of an open IPTV network, the public
Internet. As a result, content delivered by NeuLion is available
globally and is potentially unlimited in breadth.
Revenue
We earn
revenue in two broad categories: services revenue and equipment
revenue. Services revenue includes subscriber revenue, eCommerce
revenue and technology services revenue. Equipment revenue includes
the sale and shipping of STBs. Our revenue streams are described in
detail in Item 7—Management’s Discussion & Analysis under the caption
“OPERATIONS”.
Competition
New
technologies and entrants could have a material adverse effect on the demand for
NeuLion’s IPTV offerings. For example, fixed line telecommunications
and mobile telephony companies who offer or plan to offer video services may be
competitors of NeuLion. Together with other industry observers, we
have witnessed and expect to continue to witness the launch of various closed
network IPTV services around the world. As they strive to maintain
and grow their customer bases, fixed line telecommunications companies will
likely see closed network IPTV as a central element of a “triple-play” strategy
that will package telephone, television and Internet services in a single
offering. Moreover, certain IPTV service providers have an internal
IP distribution strategy whereby they make their live linear feeds, as well as
repurposed content, available through their own websites on a paid basis or free
advertisement-supported basis.
We also
face competition from other online content providers who offer sports,
entertainment, and/or international programming. In addition, there
are multiple operators of pirated video content who stream content for which
they have not received consent from the legal and beneficial owners of such
content. Furthermore, there are multiple front-end providers that
provide a menu of links to streaming video content via websites on the
Internet. These “bootleggers” and front-end providers have varying
menus of ethnic content and offer such content at varying degrees of streaming
quality.
We may
also be placed at a competitive disadvantage to the extent that other video
providers are able to offer programming of higher technical quality than we
can. While we expect to continue to improve the technical quality of
our products and services and offer our video content at increasingly higher
streaming speeds, we cannot assure you that we will be able to compete
effectively with other video providers.
To
distinguish our product line from our competitors’ offerings, we seek to be a
“one-stop shopping” source for our customers. Our suite of technology
and other services, discussed above, is directed at the entire spectrum of
content aggregation and delivery. Many companies in our markets offer
far narrower choices of services than we offer. For example, some
content providers deliver only their own content, while we offer the content of
multiple providers. Or, an agency may provide only online ticketing
services, while we also provide related online shopping and fan
networking. We also provide the STBs used to view our content on a
television set. We strive to meet every customer’s needs at every
level and partner with them across product lines and extensions.
Supplier
Dependence
We depend
significantly upon TransVideo International, Ltd. (“TransVideo”), a related
party, and Tatung Technology Incorporated (“Tatung Technology”) to provide the
STBs used by our customers.
Customer
Dependence
For the
year ended December 31, 2009, no customer accounted for more than 10% of
NeuLion’s revenues. For the year ended December 31, 2008, three
customers accounted for 54% of revenue, as follows: 32%, 12% and 10%.
For the year ended December 31, 2007, two customers accounted for 85% of
revenue, as follows: 68% and 17%.
Seasonality
Our
sports content business is subject to fluctuation because demand for our sports
programming corresponds to the seasons of the sports for which we stream
content.
Regulation
Governments
and regulatory authorities in some jurisdictions in which our subscribers reside
or NeuLion content originates may impose rules and regulations requiring
licensing for distribution of IPTV content over the
Internet. Regulatory schemes can vary significantly from country to
country. We may be subject to broadcasting or other regulations in
countries in which we have subscribers or from which our channel partners
distribute their live linear feeds to us, and we may not be aware of those
regulations or their application to us. Further, governments and
regulatory authorities in many jurisdictions regularly review their broadcasting
rules and policies, including the application of those rules and policies to new
and emerging media.
Traditional
over-the-air and cable television broadcasting businesses are generally subject
to extensive government regulation and significant regulatory oversight in most
jurisdictions, including many of the countries from which NeuLion’s channels
originate and many of the countries into which NeuLion distributes its content
to subscribers. Regulations typically govern the issuance, amendment,
renewal, transfer and ownership of over-the-air broadcast licenses, cable
franchise licenses, competition and cross ownership and sometimes also govern
the timing and content of programming, the timing, content and amount of
commercial advertising and the amount of foreign versus domestically produced
programming. In many jurisdictions, including Canada and the United
States, there are also significant restrictions on the ability of foreign
entities to own or control traditional over-the-air television broadcasting
businesses. We are not aware of any regulations in any of the
jurisdictions in which our subscribers reside that would require us to be
licensed to distribute content over the public Internet.
Governments
and regulatory authorities in some jurisdictions in which our subscribers reside
may impose rules and regulations affecting the content distributed over
IPTV:
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·
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In
the United States, we may fall within the statutory definition of a
multichannel video program distributor (“MVPD”), making us subject to the
provisions of the Communications Act of 1934, as amended, and Federal
Communications Commission (“FCC”) regulations applicable to
MVPDs. In August 2008, the FCC sought comments regarding
whether regulatory fees should be imposed on IPTV service. The
FCC, however, has not ruled whether providers of IPTV content over the
public Internet are MVPDs, and as such, we do not consider that the
statutory and regulatory requirements of MVPDs apply to
NeuLion. If we were found to be an MVPD, we would be required
to scramble any sexually explicit programming we distributed, close
caption programs we offered subscribers, comply with certain FCC
advertising regulations and be subject to the FCC’s equal employment
opportunity rules, but we would not be subject to licensing or rate
regulation or be required to secure approval to deliver IPTV content over
the public Internet to subscribers residing in the United
States.
|
|
·
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A
European Union directive, entitled the “Audiovisual and Media Services
Directive ” (the “Directive”), was adopted on December 19,
2007. This Directive could subject IPTV service providers and
content, including subscription-based IPTV content that is distributed
over the public Internet in the United Kingdom and to other European Union
member states, to regulatory requirements. European Union
member states had until December 19, 2009 to implement this
Directive. A streamed IPTV service could be subject to
regulation as a broadcast service in certain situations. For
example, the United Kingdom, as part of its implementation of the
Directive, amended its definition of what constitutes a television
licensable content service (i.e., a broadcast service) to include
Internet-delivered television services. The service will be
regulated if it is an on-demand service which contains primarily
programs. Under the Directive, whether a broadcast or on-demand
service, it will be regulated in the member state in which the service
provider is established (for example, where it has its head office and
editorial control is exercised), but the service will be able to be
received freely throughout the other European Union member
states.
|
In March
2010, the United Kingdom will implement the regulations dealing with on-demand
services.
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·
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It
will adopt a co-regulatory structure with The Association for Television
On-Demand (“ATVOD”) having primary responsibility over content issues and
the Advertising Standards Association would regulate advertising on
voice-on-demand services;
|
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·
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The
Office of Communications (“Ofcom”) will have backstop powers to regulate
both content and advertising on such
services;
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·
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Ofcom
has issued guidance on what on-demand services fall within its regulatory
scope.
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·
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Service
providers caught by the new regulatory regime for on-demand service will
have to register their service with ATVOD by April 30, 2010 and pay a
license fee.
|
If
NeuLion merely provides access but does not exercise editorial control over the
content of a voice-on-demand service, it will not be
regulated. Further, as we believe that NeuLion is not currently
established in the United Kingdom or any other European Union member state for
the purposes of the Directive, we do not consider that either our streamed
or on-demand video services are regulated within the European
Union.
In
Canada, our activities fall under the jurisdiction of the Broadcasting Act,
which is applied by the Canadian Radio-television and Telecommunications
Commission (“CRTC”). In October 2009 the CRTC issued Broadcasting
Order CRTC 2009-660, committing the regulator to a “New Media Exemption Order”
under which the CRTC will continue to refrain from regulating most aspects of
audiovisual content made available and delivered over the Internet, or delivered
using other point-to-point technology and received by way of mobile devices.
This exemption includes refraining from requiring Canadian ownership and control
or the licensing of undertakings engaged in such activities. There are two
exceptions to the scope of this exemption: an Internet anti-discrimination rule;
and an increased role in monitoring the development of markets in audiovisual
content on the Internet, possibly making us subject to CRTC reporting
requirements whose scope is currently being considered by the CRTC (Broadcasting
Notice of Consultation CRTC 2010-97).
Our
operations in Canada are also affected by CRTC rules preventing Internet access
providers from discriminating against traffic transmitted to and from our users
under the Internet Traffic Management Practice (“ITMP”) regulatory framework
issued in Telecom Regulatory Policy CRTC 2009-657 and, depending on a Federal
Court of Appeal reference case initiated by Broadcasting Order CRTC 2009-452,
possibly under the New Media Exemption Order. The ITMP framework
regulates how Internet access providers handle traffic on the public
Internet. The ITMP framework: prohibits content-blocking; requires
detailed prior public notice, followed by a 30-day warning period, before any
retail traffic-shaping measures are implemented; and prohibits traffic-shaping
which does not address a justifiable purpose in a manner that is narrowly
tailored, minimizes harm, and could not have been reasonably avoided through
network investment or economic approaches. An ongoing proceeding
initiated by Telecom Notice CRTC 2009-261, in which the CRTC is considering how
wholesale Internet access requirements affect broadband providers’ ability to
allocate bandwidth to their IPTV operations, may also affect our ongoing
operations in Canada.
Except as
otherwise described, while we are not aware of any proposed regulatory
initiatives regulating IPTV content in any of the jurisdictions in which our
subscribers reside, we cannot assure you that regulations or orders will not be
amended in the future in a manner that requires us to modify or block content in
particular jurisdictions in order to continue distributing our IPTV services to
subscribers in those jurisdictions or that otherwise affects our operations in a
materially adverse manner.
Our
business may be adversely affected by foreign import, export and currency
regulations and global economic conditions. Our current and future
development opportunities partly relate to geographical areas outside of the
United States and Canada. There are a number of risks inherent in
international business activities, including government policies concerning the
import and export of goods and services, costs of localizing products and
subcontractors in foreign countries, costs associated with the use of foreign
agents, potentially adverse tax consequences, limits on repatriation of
earnings, the burdens of complying with a wide variety of foreign laws,
nationalization and possible social, labor, political and economic
instability. We cannot assure you that such risks will not adversely
affect our business, financial condition and results of operations.
Furthermore,
a portion of our expenditures and revenues will be in currencies other than the
U.S. dollar. Our foreign exchange exposure may vary over time with
changes in the geographic mix of our business activities. Foreign
currencies may be unfavorably impacted by global developments, country specific
events and many other factors. As a result, our future results may be
adversely affected by significant foreign exchange fluctuations.
Employees
As of
March 10, 2010, we had 224 total employees, all of whom were full-time
employees.
Executive
Officers
The
following sets forth the executive officers of the Company. There are no
family relationships among the executive officers. The term of each
officer is for one year or until a successor is elected. Officers are
normally elected annually.
Name
and Age
|
Office
|
Officer
Since
|
Nancy
Li, 52
|
Chief
Executive Officer
|
2008
|
G.
Scott Paterson, 46
|
Vice
Chairman
|
2008
|
Arthur
J. McCarthy, 53
|
Chief
Financial Officer
|
2008
|
Roy
E. Reichbach, 47
|
General
Counsel and Corporate Secretary
|
2008
|
Horngwei
(Michael) Her, 46
|
Executive
Vice President of Research and Development
|
2008
|
Ronald
Nunn, 57
|
Executive
Vice President of Operations
|
2008
|
J.
Christopher Wagner, 50
|
Executive
Vice President of Sales
|
2008
|
Nancy Li
has been the Chief Executive Officer of NeuLion since October
2008. She is the founder of NeuLion USA, Inc. (“NeuLion USA”), a
wholly-owned subsidiary of NeuLion, and has been its Chief Executive Officer
since its inception in 2003. From 2001 to 2003 Ms. Li established and ran iCan
SP, a provider of end-to-end service management software for information
technology operations and a wholly owned subsidiary of CA Inc., which was
formerly known as Computer Associates International, Inc. (“Computer
Associates”). From 1990 to 2001 Ms. Li was Executive Vice President
and Chief Technology Officer for Computer Associates, and prior to that held a
variety of management positions covering virtually every facet of Computer
Associates’ business from a development and engineering
perspective. Ms. Li holds a Bachelor of Science degree from New York
University. Ms. Li is married to Charles B. Wang, Chairman of the
Board of Directors of the Company.
G. Scott
Paterson has been the Vice Chairman of NeuLion since October
2008. Prior to his current position, Mr. Paterson was Chairman of the
Company from January 2002 until October 2008 and Chief Executive Officer from
May 2005 until October 2007 and again from June 2008 until October
2008. Mr. Paterson is a Director, Chairman of the Audit Committee and
a member of the Strategic Committee of Lions Gate Entertainment
(NYSE:LGF). Mr. Paterson is also Chairman of Automated Benefits Corp.
(TSXV:AUT) and a Director of Run of River Power Inc (TSXV:ROR). He is
also the Chairman of the Merry Go Round Children’s Foundation and a Governor of
Ridley College. From October 1998 until December 2001, Mr. Paterson was
Chairman and CEO of Yorkton Securities Inc., which under his leadership became
Canada's leading technology investment bank. Mr. Paterson has served as the past
Chairman of the Canadian Venture Stock Exchange and as a former Vice Chairman of
the TSX. Mr. Paterson is a graduate of Ridley College and earned a Bachelor of
Arts (Economics) degree from the University of Western Ontario. In 2009, Mr.
Paterson obtained the ICD.D designation by graduating from the Rotman Institute
of Corporate Directors at the University of Toronto.
In
December 2001, Mr. Paterson entered into a settlement agreement with the Ontario
Securities Commission (the “Commission”) in connection with conduct that was, in
the view of the Commission, contrary to the public interest in connection with
certain corporate finance and trading activities engaged in by Mr. Paterson and
the investment dealer with which he was associated. Mr. Paterson has
fulfilled the terms of the settlement agreement, which provided that he could
not be registered under the Ontario Securities Act until December 19, 2003, that
he make a voluntary payment to the Commission of one million Canadian dollars
and that he temporarily cease trading for a six-month period. There
were no allegations of securities rule or law breaches.
Arthur J.
McCarthy has been the Chief Financial Officer of NeuLion since
November 2008. Mr. McCarthy is an Alternate Governor of the New
York Islanders on the NHL Board of Governors. From 1985 until 2008 he was
the Senior Vice President and Chief Financial Officer for the New York Islanders
and was responsible for the New York Islanders’ financial affairs and its
affiliated companies, including the Lighthouse Development Group, LLC.
From 1977 to 1985, Mr. McCarthy was a member of the Audit Practice of KPMG
Peat Marwick, reaching the position of Senior Manager. Mr. McCarthy
was licensed in the State of New York as a Certified Public Accountant in 1980
and holds a Bachelor of Science degree from Long Island University─C.W. Post
College.
Roy E.
Reichbach has been the General Counsel and Corporate Secretary of NeuLion since
October 2008 and has been the General Counsel and Corporate Secretary of NeuLion
USA since 2003. Mr. Reichbach is an Alternate Governor of the
New York Islanders on the NHL Board of Governors. From 2000 until
October 2008 he was also the General Counsel of the New York Islanders and was
responsible for the legal affairs of its affiliated real estate companies,
including Lighthouse Development Group, LLC. From 1994 until 2000 Mr.
Reichbach was Vice President – Legal at Computer Associates. Prior to
that, he was a trial lawyer in private practice. Mr. Reichbach
holds a Bachelor of Arts degree from Fordham University and a Juris Doctorate
degree from Fordham Law School. He has been admitted to practice law
since 1988.
Horngwei
(Michael) Her has been the Executive Vice President of Research and Development
of NeuLion since October 2008 and the Executive Vice President of Research
and Development of NeuLion USA since its inception in 2003. From 2000 to
2003 Mr. Her ran the development team for iCan SP. Prior to that,
Mr. Her served as Senior Vice President for Research & Development
at Computer Associates. He is also the co-inventor of several computer
systems patents. Mr. Her holds a college degree from Taipei Teaching
College and a Master of Science degree from the New York Institute of
Technology.
Ronald
Nunn has been the Executive Vice President of Business Operations of NeuLion
since October 2008 and the Executive Vice President of Business Operations
of NeuLion USA since January 2004. From 2000 to 2003 Mr. Nunn was in
charge of business operations at iCan SP. Between 1987 and 2000,
Mr. Nunn held a number of senior management positions at Computer
Associates. From 1982 to 1987 Mr. Nunn directed certain research and
development and operating projects with UCCEL (formerly University Computing
Company).
J.
Christopher Wagner has been the Executive Vice President of Sales of NeuLion
since October 2008 and the Executive Vice President of Marketplace Strategy
of NeuLion USA since its inception in 2003. From 1984 to 2000
Mr. Wagner held several positions at Computer Associates, culminating in
his becoming Executive Vice President and General Manager of Services,
responsible for building that company’s Government Partner Program and Global
Consulting Business. From 2000 to 2003 Mr. Wagner worked as the Chief
Executive Officer and member of the Board of Directors of several private equity
and venture capital firms, including Metiom, MetaMatrix, Exchange Applications
and Digital Harbor. Mr. Wagner received a Bachelor of Arts degree
from Delaware University.
Item
1A. Risk Factors
An
investment in our Shares is highly speculative and involves a high degree of
risk. The following are specific and general risks that could affect
us. If any of the circumstances described in these risk factors
actually occur, or if additional risks and uncertainties not presently known to
us or that we do not currently believe to be material in fact occur, our
business, financial condition or results of operations could be materially
adversely affected. In that event, the trading price of our Shares
could decline, and you may lose part or all of your investment. In
addition to carefully considering the risks described below, together with the
other information contained in this annual report on Form 10-K, you should also
consider the risks described under the caption “Regulation” in Item 1 hereof,
which risk factors are incorporated by reference into this Item
1A. In addition, these factors represent risks and uncertainties that
could cause actual results to differ materially from those implied by
forward-looking statements contained in this annual report on Form
10-K.
We
may need additional capital to fund continued growth, which may not be available
on acceptable terms or at all.
Our
ability to increase revenue will depend in part on our ability to continue
growing the business by developing IPTV platforms for new customers as well as
maintaining and increasing our private networks’ subscriber bases, which may
require significant additional capital that may not be available to
us. We may need additional financing due to future developments,
changes in our business plan or failure of our current business plan to succeed,
which could result from increased marketing, distribution or programming
costs. Our actual funding requirements could vary materially from our
current estimates. If additional financing is needed, we may not be
able to raise sufficient funds on favorable terms or at all. Recent
developments in the financial markets such as the scarcity of capital have made
it more difficult for early stage companies such as NeuLion to access capital
markets on acceptable terms or at all. If we issue Shares in the
future, such issuance will result in the then-existing shareholders sustaining
dilution to their relative proportion of our outstanding equity. If
we fail to obtain any necessary financing on a timely basis, then our ability to
execute the current business plan may be limited, and our business could be
adversely affected.
The
global economic crisis could result in decreases in customer traffic and
otherwise adversely affect our business and financial results and have a
material adverse effect on our liquidity and capital resources.
The
global economy, including the U.S. economy, is experiencing a severe
recession. As a business that is dependent upon consumer
discretionary spending, NeuLion faces a challenging fiscal 2010 because our IPTV
platform customers’ subscribers and our private network subscribers may have
less money for discretionary spending as a result of job losses, foreclosures,
bankruptcies, reduced access to credit and sharply falling home
prices. Any resulting decreases in customer traffic and revenue will
negatively impact our financial performance because reduced revenue results in
smaller profit margins. Additionally, many of the long-term effects
and consequences of the economic recession are currently unknown; any one or all
of them could potentially have a material adverse effect on our liquidity and
capital resources, including our ability to raise additional capital if needed,
or otherwise negatively impact our business and financial results.
We
are an early-stage enterprise with a short operating history, which makes it
difficult to evaluate our prospects.
We are
still in the early stage of building out our business. Many of the
expenses, problems and delays encountered by an enterprise in its early stage
may be beyond our control. As an early-stage enterprise, we expend
significant funds on:
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marketing;
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programming
and website development;
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maintaining
adequate video-streaming and database
software;
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building
subscriber management systems;
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pursuing
and maintaining distribution agreements with our content partners and
channel partners; and
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acquiring
and maintaining Internet distribution rights to our
content.
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From our
inception, we have incurred substantial net losses, and we expect to continue
operating at a loss in the near future. If we are ultimately unable
to generate sufficient revenue to become profitable and have sustainable
positive cash flows, our investors could lose their investment.
We may
also encounter certain problems or delays in building our business, including
those related to:
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regulatory
policies and compliance;
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marketing;
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consumer
acceptance of Internet-based
television;
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unsuccessful
commercial launches of new programming
content;
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costs
and expenses that exceed current
estimates;
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financing
needs; and
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the
construction, integration, testing or upgrading of the NeuLion
distribution infrastructure and other
systems.
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Delays in
the timely design, construction, deployment and commercial operation of our
business, and consequently the achievement of positive cash flow, could result
from a variety of causes, many of which are beyond our
control. Substantial delays in any of these matters could delay or
prevent us from achieving profitable operations.
Demand
for IPTV may be insufficient for us to achieve and sustain
profitability.
IPTV is
an emerging service. Potential NeuLion IPTV platform customers may be
slow to adopt the Internet as a medium through which they distribute their own
content, and their and our subscribers may be slow or refuse to adopt IPTV as a
preferred method of viewing content. We cannot estimate with any
certainty the potential demand for our services or our ability to satisfy that
demand. Among other things, acceptance of our services will depend
upon:
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our
ability to develop and introduce new services that offer enhanced
performance and functionality, in a timely manner, in response to changing
market conditions, customer and subscriber requirements or our
competitors’ technological
advances;
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the
cost and availability of technology, such as computer hardware and
high-speed Internet connections, that are required to utilize our
service;
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the
marketing and pricing strategies that we employ relative to those of our
competitors;
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the
acceptance of our subscriber management
systems;
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whether
we acquire, market and distribute high-quality programming consistent with
subscribers’ tastes; and
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the
willingness of subscribers to pay pay-per-view or subscription fees to
obtain our service.
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Our
results of operations will depend in part upon our ability and that of our IPTV
platform customers to increase our respective subscriber bases while maintaining
our preferred pricing structures, managing costs and controlling subscriber
churn rates. If demand does not develop as expected, then we may not
be able to generate enough revenue to generate positive cash flow or achieve and
sustain profitability.
One of
our objectives is to acquire and maintain programming that sustains loyal
audiences in or across various demographic groups. The attractiveness
of our content offerings and our ability to retain and grow the audiences for
our programs will be an important factor in our ability to sell subscriptions
and advertising. Our content offerings may not attract or retain the
number of subscribers that we anticipate and some content may offend or alienate
subscribers that are outside of the target audience for that
content. There can be no assurance that our content offerings will
enable us to retain our various audiences. If we lose the rights to
distribute any specific programming or channels and fail to attract comparable
programming with similar audience loyalty, the attractiveness of our service to
subscribers or advertisers could decline and our business could be adversely
affected.
We
may have difficulty and incur substantial costs in scaling and adapting our
existing systems architecture to accommodate increased traffic, technology
advances or customer requirements.
Our
future success will depend on our ability to adapt to rapidly changing
technologies, to adapt our services to evolving industry standards and to
improve the performance and reliability of our services. The IPTV
industry and the Internet and the video entertainment industries in general are
characterized by rapid technological change, frequent new product innovations,
changes in customer requirements and expectations and evolving industry
standards. There is no assurance that one or more of the technologies
utilized by NeuLion will not become obsolete or that our services will be in
demand at the time they are offered. If we or our suppliers are
unable to keep pace with technological and industry changes, our business may be
unsuccessful.
In the
future, we may be required to make changes to our systems architecture or move
to a completely new architecture. To the extent that demand for our
services, content and other media offerings increases, we will need to expand
our infrastructure, including the capacity of our hardware servers and the
sophistication of our software. If we are required to switch
architectures, we may incur substantial costs and experience delays or
interruptions in our service. These delays or interruptions in our
service may cause users and customers to become dissatisfied and move to
competing providers of IPTV services. An unanticipated loss of
traffic, increased costs, inefficiencies or failures to adapt to new
technologies or user requirements and the associated adjustments to our systems
architecture could harm our operating results and financial
condition.
We depend
on third parties to develop technologies used in key elements of our IPTV
services. More advanced technologies that we may wish to use may not
be available to us on reasonable terms or in a timely
manner. Further, our competitors may have access to technologies not
available to us, which may enable these competitors to offer entertainment
products of greater interest to consumers or at more competitive
costs.
We
could suffer failures or damage due to events that are beyond our control, which
could adversely affect our brand and operating results.
Our
success as a business depends, in part, on our ability to provide consistently
high-quality video streams to our customers’ and to our own subscribers via the
NeuLion distribution infrastructure and IPTV technology on a consistent
basis. Our distribution infrastructure is susceptible to natural or
man-made disasters such as earthquakes, floods, fires, power loss and sabotage,
as well as interruptions from technology malfunctions, computer viruses and
hacker attacks. Other potential service interruptions may result from
unanticipated demands on network infrastructure, increased traffic or problems
in customer service. Our ability to control technical and customer
service issues is further limited by our dependence on our channel partners for
technical integration of the NeuLion distribution
infrastructure. Significant disruptions in the NeuLion distribution
infrastructure would likely affect the quality and continuity of our service,
could harm our goodwill and the NeuLion brand and ultimately could significantly
and negatively impact the amount of revenue we may earn from our
service. We may not carry sufficient business interruption insurance
to compensate for losses that could occur as a result of an interruption in our
services.
We depend
upon third parties for:
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the
provision of programming in connection with our service, including our
channel partners and other third-party content providers;
and
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the
availability and performance of STBs, all of which we purchase from
TransVideo and Tatung Technology.
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Any
failure by third parties to provide these services could significantly harm our
ability to conduct our business. Furthermore, financial difficulties
experienced by our third-party providers — such as bankruptcy, insolvency,
liquidation or winding up of daily operations — for any reason whatsoever could
also have negative consequences on our business.
We
operate in competitive and evolving markets.
We
operate in competitive and evolving markets locally, nationally and
globally. These markets are subject to rapid technological change and
changes in customer preferences and demand. In seeking market
acceptance, we will encounter competition for both subscribers and advertising
revenue from many sources, including other IPTV services, direct broadcast
satellite television services and digital and traditional cable systems that
carry sports and ethnic programming. Traditional cable and satellite
television already has a well-established and dominant market presence for its
services, and Internet portals, video file-sharing service providers and other
third-party providers of video content over the Internet may distribute ethnic
video content. Many of these competitors have substantially greater
financial, marketing and other resources than we do. As the IPTV
market grows (resulting from higher bandwidths, faster modems and wider
programming selections), an increasing number of Internet-based video program
offerings will be available to our current and potential
customers. In addition, our competitors, in both the traditional
satellite and cable television broadcasting and IPTV markets, could exclusively
contract with sports and ethnic content providers that are not under contract
with us, creating significant competition in both the sports and ethnic
programming and IPTV markets. Our revenue could be materially
adversely affected if we are unable to compete successfully with traditional and
other emerging providers of video programming services.
We
do not have exclusive Internet distribution rights to all of our content and the
cost of renewing such rights or obtaining such rights for new content may be
higher than expected.
Many of
NeuLion’s content and channel partner agreements give us the exclusive Internet
distribution rights to the related content and channels. If this
content or these channels are offered elsewhere on the Internet on more
attractive terms, we could lose these subscribers, which would have an adverse
effect on its results of operations.
We must
negotiate with potential partners to acquire the Internet distribution rights
for our programming. In addition, we will need to renew our
agreements with existing partners. We anticipate that, as the IPTV
market grows, license fees relating to Internet distribution rights for
programming (including sports and ethnic programming), or for the rights to
substitute advertising into the live video streamers of the content, will
increase. License fees payable under the partner agreements may be
significantly more costly to renew than anticipated.
In
addition, some of the existing partner agreements that give NeuLion exclusive
Internet distribution rights have renewal mechanisms that are tied to our
ability to generate specified revenue share amounts or specified subscriber
numbers in respect of particular channels. If we are unable to meet
these targets, then we may have to renegotiate the agreements when they come up
for renewal or may lose one or more of our exclusive
licenses. Renegotiated license fees may be more expensive than
anticipated. We may be unable to obtain our programming consistently
at a cost that is reasonable or appealing to our customers, which may adversely
affect our marketing efforts, reputation, brand and revenue.
There
is uncertainty relating to our ability to enforce our rights under our channel
and content partner agreements.
Many of
our channel and content partner agreements for ethnic programming are with
foreign entities and are governed by the laws of foreign
jurisdictions. If a partner breaches an agreement with us, then we
will incur the additional costs of determining our rights and obligations under
the agreement under applicable foreign laws and enforcing the agreement in a
foreign jurisdiction. Many of the jurisdictions to which our partner
agreements are subject do not have sophisticated and/or impartial legal systems
and we may face practical difficulties in enforcing any of our rights in such
jurisdictions. We may not be able to enforce such rights or may
determine that it would be too costly to enforce such rights. In
addition, many of our partner agreements contain arbitration provisions that
govern disputes under the agreements and there is uncertainty with respect to
the enforceability of such arbitration provisions under the laws of related
foreign jurisdictions. If a dispute were to arise under an agreement
and the related arbitration provision was not effective, then we would be
exposed to the additional costs of settling the dispute through traditional
legal avenues rather than through an arbitration process.
Our
business may be impaired by third-party intellectual property rights in the
programming content of our channel and content partners.
We rely
on our channel and content partners to secure the primary rights to redistribute
programming and other content over the Internet. There is no
assurance that our partners have successfully licensed all relevant programming
components that are necessary for Internet redistribution. Other
parties may claim certain intellectual property rights in the content that we
license from our partners. For example, our partners may not have
sufficient rights in the underlying content to license distribution rights to
their content to us, or a given partner may not identify programming that we are
not permitted to distribute in time for us to stop distribution of the offending
programming. In addition, as the IPTV market grows, advertisers may
begin to attempt to enforce intellectual property rights in advertisements
included in our partners’ programming, and we may inadvertently infringe the
intellectual property rights of such advertisers by distributing such
advertisements over the Internet or by inserting our own advertising in
replacement of such advertisements.
In the
event that our partners are in breach of the distribution rights related to
specific programming and other content, we may be required to cease distributing
or marketing the relevant content to prevent any infringement of related rights,
and may be subject to claims of damages for infringement of such
rights. We may also be required to file a claim against a given
partner if the distribution rights related to specific programming are breached,
and there is no assurance that we would be successful in any such
claim.
We
may be subject to other third-party intellectual property rights
claims.
Companies
in the Internet, technology and media industries often own large numbers of
patents, copyrights, trademarks and trade secrets and frequently enter into
litigation based on allegations of infringement or other violations of
intellectual property rights. As NeuLion faces increasing
competition, the possibility of intellectual property rights claims against us
grows. Our technologies may not be able to withstand third-party
claims or rights against their use. Intellectual property claims,
whether having merit or otherwise, could be time consuming and expensive to
litigate or settle and could divert management resources and
attention. In addition, many of our agreements with network service
providers require us to indemnify these providers for third-party intellectual
property infringement claims, which could increase our costs as a result of
defending such claims and may require that we pay the network service providers’
damages if there were an adverse ruling in any such claims.
If
litigation is successfully brought by a third party against us in respect of
intellectual property, we may be required to cease distributing or marketing
certain products or services, obtain licenses from the holders of the
intellectual property at material cost, redesign affected products in such a way
as to avoid infringing intellectual property rights or seek alternative licenses
from other third parties which may offer inferior programming, any or all of
which could materially adversely affect NeuLion’s business, financial condition
and results of operations. If those intellectual property rights are
held by a competitor, we may be unable to obtain the intellectual property at
any price, which could also adversely affect our competitive
position. An adverse determination could also prevent us from
offering its services and could require that we procure substitute products or
services. Any of these results could harm our business, financial
condition and results of operations.
We
rely on our channel and content partners to ensure intellectual property rights
compliance globally.
We are
exposed to liability risk in respect of the content that we redistribute over
the Internet, relating to both infringement of third-party rights to the content
and infringement of the laws of various jurisdictions governing the type and/or
nature of the content. We rely in large part on our channel and
content partners’ obligations under our partner agreements to advise NeuLion of
any potential or actual infringement so that we may take appropriate action if
such content is not intellectual property rights-compliant or is otherwise
obscene, defamatory or indecent. There is a risk that our partners
will not advise us in time, or at all, in respect of such content, and expose us
to liability for our redistribution of such content over the
Internet. Any alleged liability could harm our business by damaging
our reputation, requiring us to incur legal costs in defense of any such claim,
exposing us to significant awards of damages and costs and diverting
management’s attention, any of which could have an adverse effect on our
business, results of operations and financial condition.
We
rely on our partners for our content.
The
success of our B2C business depends significantly on our relationships with our
channel and content partners. We enter into partner agreements to
acquire the Internet distribution rights to sports, ethnic and other
content. Our success as a business depends on the cooperation, good
faith, programming and overall success of our partners in providing marketable
programming. Because of our dependency on our partners, should a
partner’s business suffer as a result of increased competition, increased costs
of programming, technological problems, regulatory changes, adverse effects of
litigation or other factors, our business may suffer as well.
Furthermore,
a failure by one of our partners to perform its obligations under its agreement
could have detrimental financial consequences for our business. The
agreements are for various terms and have varying provisions regarding renewal
or extension. If we are unable to renew or extend these agreements at
the conclusion of their respective terms, we may not be able to obtain
substitute programming, or substitute programming may not be comparable in
quality or cost to the existing programming, which could materially adversely
affect our business, financial condition and results of operations.
We
depend on key personnel and relationships, and the loss of their services or the
inability to attract and retain them may negatively impact our
business.
We are
dependent on key members of our senior management, including Nancy Li and G.
Scott Paterson. We have not obtained key-man insurance for any member
of senior management other than Mr. Paterson. In addition, innovation
is important to our success, and we depend on the continued efforts of our
executive officers and key employees, who have specialized technical knowledge
regarding the NeuLion distribution infrastructure and information technology
systems and significant business knowledge regarding the IPTV industry and
subscription services. The market for the services of qualified
personnel is competitive and we may not be able to attract and retain key
employees. If we lose the services of one or more of our executive
officers or key employees, or fail to attract qualified replacement personnel,
then our business and future prospects could be materially adversely
affected.
Increased
subscriber turnover could adversely affect our financial
performance.
Customer
subscriber churn has a significant financial impact on our results of
operations, and we cannot reliably predict the amount of churn that we will
experience over the long term. Given the increasingly competitive
nature of the IPTV industry, we may not be able to reduce churn without
significantly increasing our spending on customer acquisition and retention
incentives, which would have a negative effect on our earnings and free cash
flow. There can be no assurance that an increase in competition from
other IPTV providers, new technology entrants, programming theft and other
factors will not contribute to a relatively higher churn than we have
experienced historically. To the extent that our churn is greater
than currently anticipated, it may be more costly for us to acquire a sufficient
customer base to generate revenue.
Current
economic conditions have led certain consumers to reduce their spending on
non-essential items. A reduction in consumer discretionary spending
or an inability to pay for subscribed services could result in a decrease in or
loss of subscribers, which would reduce our future revenue and negatively impact
the Company's business, financial condition and results of
operations.
Increased
subscriber acquisition costs could adversely affect our financial
performance.
We
anticipate spending substantial funds on advertising and other marketing to
attract new subscribers and maintain our subscriber base. Our ability
to achieve break-even cash flows depends in part on our ability to achieve and
maintain lower subscriber acquisition costs over time. Our subscriber
acquisition costs, both in the aggregate and on a per-new-subscriber basis, may
materially increase in the future to the extent that we introduce new
promotions, whether in response to competition or otherwise. Any
material increase in subscriber acquisition or retention costs from current
levels could have a material adverse effect on our business, financial condition
and results of operations.
We
may not be successful in developing a version of our service that will gain
widespread adoption by users of alternate devices to access the
Internet.
In the
coming years, the number of individuals who access the Internet through devices
other than a personal computer, such as personal digital assistants, mobile
telephones and television set top devices, is expected to increase
dramatically. Our services are designed for rich, graphical
environments such as those available on personal and laptop
computers. The lower resolution, functionality and memory associated
with alternative devices may make the distribution of content through such
devices difficult, and we may be unsuccessful in our efforts to provide a
compelling service for users of alternative devices. If we are unable
to attract and retain a substantial number of alternative device users to its
services, we will fail to capture a sufficient share of an increasingly
important portion of the market for online media.
In
addition, we intend to introduce new services and/or functionalities to increase
our customers’ and our own subscriber bases and long-term profitability, such as
targeted advertising insertion and personal video recording. These
services are dependent on successful integration of new technologies into the
NeuLion distribution infrastructure, negotiations with third-party content and
network system providers, subscriber acceptance and the maintenance of future
technologies to support these services. If we are unsuccessful in
implementing such services, or the economic attractiveness of these services is
lower than anticipated, then our business and operating results could be
adversely affected.
Acquisitions
and strategic investments could adversely affect our operations and result in
unanticipated liabilities.
We may in
the future acquire or make strategic investments in a number of companies,
including through joint ventures. Such transactions may result in
dilutive issuances of equity securities, use of cash resources, incurrence of
debt and amortization of expenses related to intangible assets. Any
such acquisitions and strategic investments would be accompanied by a number of
risks, including:
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the
difficulty of assimilating operations and personnel of acquired companies
into our operations;
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the
potential disruption of ongoing business and distraction of
management;
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additional
operating losses and expenses of the businesses acquired or in which we
invest;
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the
difficulty of integrating acquired technology and rights into our services
and unanticipated expenses related to such
integration;
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the
potential for patent and trademark infringement claims against the
acquired company;
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the
impairment of relationships with customers and partners of the companies
we acquired or with our customers and partners as a result of the
integration of acquired operations;
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the
impairment of relationships with employees of the acquired companies or
our employees as a result of integration of new management
personnel;
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the
difficulty of integrating the acquired company’s accounting, management
information, human resources and other administrative
systems;
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in
the case of foreign acquisitions, uncertainty regarding foreign laws and
regulations and difficulty integrating operations and systems as a result
of cultural, systems and operational differences;
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the
impact of known potential liabilities or unknown liabilities associated
with the companies we acquire or in which we
invest.
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Our
failure to address or mitigate such risks in connection with future acquisitions
and strategic investments could prevent us from realizing the anticipated
benefits of such acquisitions or investments, causing us to incur unanticipated
liabilities and harming our business generally.
We
may be unable to manage rapidly expanding operations.
We are
continuing to grow and diversify our business both domestically and
internationally. As a result, we will need to expand and adapt our
operational infrastructure. If we are unable to manage our growth
effectively, it could have a material adverse effect on our business, financial
condition and results of operations. To manage growth effectively, we
must, among other things, continue to develop our internal and external sales
forces, the NeuLion distribution infrastructure capability, our customer service
operations and our information systems, maintain our relationships with content
and channel partners, effectively enter new areas of the sports and ethnic
programming markets and effectively manage the demands of day-to-day operations
in new areas while attempting to execute our business strategy and realize the
projected growth and revenue targets developed by our management. We
will also need to continue to expand, train and manage our employee base, and
our management must assume even greater levels of responsibility. If
we are unable to manage growth effectively, we may experience a decrease in
subscriber growth and an increase in subscriber churn, which could have a
material adverse effect on our financial condition, profitability and cash
flows.
Internet
transmissions may be subject to theft and malicious attacks, which could cause
us to lose subscribers and revenue.
Like all
Internet transmissions, our streaming content may be subject to interception and
malicious attack. Pirates may be able to obtain or redistribute our
programs without paying fees to us. The NeuLion distribution
infrastructure is exposed to spam, viruses, worms, spyware, denial of service or
other attacks by hackers and other acts of malice. Theft of our
content or attacks on the NeuLion distribution infrastructure would reduce
future potential revenue and increase our net subscriber acquisition
costs.
If our
security technology is compromised, it could adversely affect our ability to
contract for licenses to distribute programming over the Internet. We
use security measures intended to make theft of our content more
difficult. However, if we are required to upgrade or replace existing
security technology, the cost of such security upgrades or replacements could
have a material adverse effect on our financial condition, profitability and
cash flows. In addition, other illegal methods that compromise
Internet transmissions may be developed in the future. If we cannot
control compromises of our channels, then our revenue, net subscriber
acquisition costs, churn and ability to contract for licenses to distribute
programming over the Internet could be materially adversely
affected.
There
is no assurance that the current costs of Internet connections and network
access will not rise with increasing popularity of IPTV services, which would
adversely affect our business.
We rely
on Internet service providers for our principal connections and network access
and to stream audio and video content to subscribers. As demand for
IPTV services increases, there can be no assurance that Internet service
providers will continue to price their network access services on reasonable
terms. The distribution of streaming media requires distribution of
large content files and providers of network access may change their business
model and increase their prices significantly, which could slow the widespread
acceptance of such services. In order for our media content services
to be successful, there must be a reasonable price model in place to allow for
the continuous distribution of large streaming media files. We have
limited or no control over the extent to which any of these circumstances may
occur, and if network access prices rise significantly, then our business and
operating results would likely be adversely affected.
Our
business depends on the continued growth and maintenance of the Internet
infrastructure.
The
success and the availability of Internet-based products and services depends in
part upon the continued growth and maintenance of the Internet infrastructure
itself, including its protocols, architecture, network backbone, data capacity
and security. Spam, viruses, worms, spyware, denial of service or
other attacks by hackers and other acts of malice may affect not only the
Internet’s speed, reliability and availability but also its continued
desirability as a vehicle for commerce, information and user
engagement. If the Internet proves unable to meet the new threats and
increased demands placed upon it, our business plans, user and advertiser
relationships, site traffic and revenues could be adversely
affected.
Privacy
concerns relating to elements of our service could damage our reputation and
deter current and potential users from using our products and
services.
From time
to time, concerns may be expressed about whether our products and services
compromise the privacy of users and others. Concerns about our
collection, use or sharing of personal information or other privacy-related
matters, even if unfounded, could damage our reputation and result in a loss of
user confidence and ultimately in a loss of users, partners or advertisers,
which could adversely affect our business and operating results.
We
may have exposure to greater than anticipated tax liabilities.
We are
subject to income taxes and non-income taxes in a variety of jurisdictions, and
our tax structure is subject to review by both domestic and foreign taxation
authorities. The determination of our world-wide provision for income
taxes and other tax liabilities requires significant judgment and, in the
ordinary course of its business, there are many transactions and calculations
where the ultimate tax determination is uncertain. Although we
believe that our estimates are reasonable, the ultimate tax outcome may differ
from the amounts recorded on our consolidated financial statements and may
materially affect our financial results in the period or periods for which such
determination is made.
We
are subject to foreign business, political and economic disruption
risks.
We
contract with various entities from around the world, including in respect of
the acquisition of the Internet distribution rights to the
content. As a result, we are exposed to foreign business, political
and economic risks, which could adversely affect our financial position and
results of operations, including:
|
·
|
difficulties
in managing partner relationships from outside of a given partner’s
jurisdiction;
|
|
·
|
political
and economic instability;
|
|
·
|
less
developed infrastructures in newly industrializing
countries;
|
|
·
|
susceptibility
to interruption of channel feeds in foreign areas due to war, terrorist
attacks, medical epidemics, changes in political regimes and general
interest rate and currency
instability;
|
|
·
|
exposure
to possible litigation or claims in foreign jurisdictions;
and
|
|
·
|
competition
from foreign-based IPTV providers and the existence of protectionist laws
and business practices that favor such
providers.
|
We
rely on a limited number of key suppliers, and the inability of those key
suppliers to meet our needs could have a material adverse effect on our
business.
We have
contracted with TransVideo and Tatung Technology to provide STBs, a key product
of our operations. Our dependence on these suppliers makes our
operations vulnerable to such third parties' failure to perform adequately. If
these suppliers are unable to meet our needs, our business, financial position
and results of operations may be adversely affected. Our inability to
develop alternative sources quickly and on a cost-effective basis could
materially impair our ability to timely deliver our products to our subscribers
or operate our business. Furthermore, our suppliers may request
changes in pricing, payment terms or other contractual obligations which could
cause us to make substantial additional investments.
We
may have potential conflicts of interest with TransVideo due to common ownership
and management.
We have
entered into a commercial agreement with TransVideo, a company indirectly owned
and controlled by Charles B. Wang, Chairman of the Board of Directors of the
Company and the spouse of Nancy Li, our CEO and the founder and CEO of NeuLion
USA, pursuant to which TransVideo is, among other things, obligated to sell to
us STBs and related equipment at specified prices. The ownership
interests could create actual, apparent or potential conflicts of interest when
those individuals are faced with decisions that could have different
implications for the Company and TransVideo. Conflicts could arise between us
and TransVideo in the interpretation of or any extension or renegotiation of the
existing agreement. Furthermore, we may not be able to resolve
any potential conflicts, and, even if we do so, the resolutions may be less
favorable to us than if we were dealing with an unaffiliated
party. We do not have any agreement with TransVideo that restricts us
from purchasing our products from competitors of TransVideo.
Item
1B. Unresolved Staff Comments
As a
smaller reporting company, we are not required to include this information in
our annual report on Form 10-K.
Item
2. Properties
Description
|
Location
|
Expiration of
Lease
|
Use of
Property
|
Lease
|
Toronto,
Ontario, Canada
|
Month-to-month
|
Business
office
|
Lease
|
Shanghai,
China
|
May
2011
|
Business
office
|
Lease
|
Sanford,
Florida
|
November
2010
|
Business
office
|
Lease
|
New
York, New York
|
August
2012
|
Business
office
|
Lease
|
Plainview,
New York
|
December
2013
|
Business
office
|
Lease
|
London,
England
|
Month-to-month
|
Business
office
|
Lease
|
Centennial,
Colorado
|
Month-to-month
|
Business
office
|
Lease
|
Burnaby,
British
Columbia, Canada
|
Month-to-month
|
Business
office
|
Item
3. Legal Proceedings
There is
no litigation currently pending or threatened against us or any of our directors
in their capacity as such.
Item
4. Submission of Matters to a Vote of Security
Holders
[Removed
and Reserved.]
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
Market
Price Information
There is
no established public trading market for the Shares in the United
States. The principal established foreign public trading market for
the Shares is the Toronto Stock Exchange. The table below sets forth,
for the periods indicated, the high and low sales prices of the Shares on the
Toronto Stock Exchange, in Canadian dollars, for each full quarterly period
within the Company's two most recent fiscal years, as reported by the Toronto
Stock Exchange.
Two
Most Recent Full Financial Years
|
High
|
Low
|
2009
|
||
First
Quarter
|
$0.64
|
$0.28
|
Second
Quarter
|
$0.84
|
$0.42
|
Third
Quarter
|
$1.30
|
$0.67
|
Fourth
Quarter
|
$1.00
|
$0.61
|
2008
|
||
First
Quarter
|
$2.33
|
$0.52
|
Second
Quarter
|
$0.99
|
$0.49
|
Third
Quarter
|
$1.28
|
$0.45
|
Fourth
Quarter
|
$0.83
|
$0.22
|
Shareholders
As of
March 10, 2010, there were approximately 171 holders of record of
Shares.
Dividends
We have
paid no dividends on the Shares since our inception. At the present
time, we intend to retain earnings, if any, to finance the expansion of our
business. The payment of dividends in the future will depend on our
earnings and financial condition and on such other factors as the Board of
Directors may consider appropriate. The CBCA sets out specific tests
that a company must meet in order to declare or pay dividends. Under
Section 42 of the CBCA, a company shall not declare or pay a dividend if there
are reasonable grounds for believing that:
|
·
|
the
company is, or would after the payment be, unable to pay its liabilities
as they become due; or
|
|
·
|
the
realizable value of the company’s assets would thereby be less than the
aggregate of its liabilities and the stated capital of all
classes.
|
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table provides information as of December 31, 2009 with respect to
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance:
Equity
Compensation Plan Information
Plan Category
|
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))
|
||||
(a)
|
(b)
|
(c)
|
|||||
Equity
compensation plans approved by security holders
|
|||||||
Second
Amended and Restated Stock Option Plan
|
8,657,897
|
(1)
|
$
|
0.98
|
(1)
|
5,933,577
|
|
Restricted
Share Plan
|
6,724
|
N/A
|
0
|
||||
2006
Stock Appreciation Rights Plan
|
1,675,000
|
(2)
|
$
|
2.63
|
(2)
|
4,161,589
|
|
Directors’
Compensation Plan
|
NIL
|
(3)
|
N/A
|
(3)
|
42,063
|
||
Amended
and Restated Retention Warrants Plan
|
847,892
|
$
|
2.67
|
1,652,108
|
|||
Employee
Share Purchase Plan
|
NIL
|
(4)
|
N/A
|
N/A
|
|||
Equity
compensation plans not approved by security holders
|
|||||||
None
|
N/A
|
N/A
|
N/A
|
||||
Total
|
11,187,513
|
$
|
1.36
|
11,789,337
|
________________________
(1)
|
The
maximum number of Shares issuable upon exercise of options granted
pursuant to the Stock Option Plan shall be equal to the greater of (i)
4,000,000 Shares and (ii) 12.5% of the number of issued and outstanding
Shares from time to time. As a result, any increase in the
issued and outstanding shares will result in an increase in the available
number of Shares issuable under the Stock Option Plan, and any exercises
of options will make new grants available under the Stock Option
Plan.
|
(2)
|
The
maximum number of Shares which may be issued pursuant to the SARs Plan is
the greater of 4,150,000 or 5% of the issued and outstanding
Shares. The Shares reserved for issuance upon the exercise of
SARs that terminate, expire unexercised or are cancelled shall be
available for subsequent grants of SARs under the SARs
Plan.
|
(3)
|
Shares
are issued directly under the Directors’ Compensation Plan without
exercise of any option, warrant or
right.
|
(4)
|
We
have not implemented the ESPP since its approval by
shareholders.
|
Certain
warrants were issued by NeuLion independently of a plan. As of
December 31, 2009, these warrants could be exercised for 17,697,500 Shares at a
weighted average exercise price of $1.07. These warrants are
discussed in more detail in the section titled “SECURITIES AUTHORIZED FOR
ISSUANCE UNDER THE EQUITY COMPENSATION PLANS – Warrants” of the Proxy
Statement.
Canadian
Exchange Controls and Other Limitations on Security Holders
To our
knowledge, there are no governmental laws, decrees, regulations or other
legislation in Canada which may affect the import or export of capital by us,
or, except as described below, the remittance of dividends, interest or other
payments to a non-resident holder of our securities. We are a
corporation existing under the federal corporate laws of Canada; such laws
restrict corporations from declaring or paying dividends on any class of its
shares where there are reasonable grounds for believing that the corporation is,
or would be after the payment, unable to pay its liabilities as they become due,
or the realizable value of the corporation’s assets would thereby be less than
the aggregate of its liabilities and stated capital of all classes of
shares. There is no limitation imposed by Canadian law or by our
charter or other constating documents on the right of a non-Canadian to hold or
vote Shares, other than in the possible application of the Investment Canada Act
(Canada) to the extent that a non-Canadian acquires control of us.
Certain
Canadian Federal Income Tax Consequences
The
following is a brief description of the principal Canadian federal income tax
considerations under the Income Tax Act (Canada) (the
“Canadian Tax Act”), as of the date hereof, generally applicable to a holder of
Shares in respect of holding and disposing of its Shares (other than a
disposition to us) where, at all relevant times for purposes of the Canadian Tax
Act and any applicable income tax treaty or convention, such holder (i) holds
its Shares as capital property, (ii) deals at arm’s length and is not affiliated
with us, (iii) is not resident, nor deemed to be resident, in Canada, and (iv)
does not use or hold and is not deemed to use or hold Shares in connection with
carrying on a business in Canada (a “Non-Canadian Shareholder”).
Special
rules, which are not discussed in this summary, may apply to a Non-Canadian
Shareholder that is an insurer carrying on business in Canada and elsewhere or
an authorized foreign bank. Such holders should consult their own tax
advisors.
This
summary does not apply in respect of a disposition of Shares to us and assumes
that, at all relevant times, NeuLion will be a resident of Canada for purposes
of the Canadian Tax Act and the Shares will be listed on the Toronto Stock
Exchange.
This
summary is based on the provisions of the Canadian Tax Act and the regulations
thereunder (the “Regulations”) in force on the date hereof and the current
administrative policies and practices of the Canada Revenue Agency (“CRA”)
published in writing by the CRA prior to the date hereof. This
summary takes into account all specific proposals to amend the Canadian Tax Act
and the Regulations which have been publicly announced by or on behalf of the
Minister of Finance (Canada) prior to the date hereof (the “Proposed
Amendments”) and assumes that all such Proposed Amendments will be enacted in
their present form. No assurance can be given that the Proposed
Amendments will be enacted in the form proposed, if at all. This
summary does not otherwise take into account or anticipate any changes in law,
whether by judicial, governmental or legislative decision or action, or changes
in the administrative policies and practices of the CRA.
This
summary is of a general nature only and is not intended to be, nor should it be
construed to be, legal or tax advice or representations to any particular
Non-Canadian Shareholder. This summary is not exhaustive of all possible
Canadian federal income tax considerations applicable to a Non-Canadian
Shareholder in respect of its Shares. The income or other tax
consequences will vary depending on a Non-Canadian Shareholder’s particular
circumstances, including the country or other jurisdiction in which such holder
resides or carries on business. This summary does not take into
account provincial, territorial or foreign income tax legislation or
considerations which may differ materially from those described
herein. Non-Canadian Shareholders should consult their own legal and
tax advisors with respect to the tax consequences to them based on their
particular circumstances.
Dividends
on the Shares
Dividends
paid or credited, or deemed to be paid or credited, on the Shares to a
Non-Canadian Shareholder will be subject to withholding tax under the Canadian
Tax Act at a rate of 25%, subject to reduction under the provisions of an
applicable tax treaty or convention.
For
example, under the Canada-United States Income Tax Convention, as amended (the
“U.S. Convention”) the withholding tax rate is generally reduced to 15% in
respect of a dividend paid to a person who is the beneficial owner of the
dividend and who is resident in the United States for purposes of the U.S.
Convention. Where a Non-Canadian Shareholder is a fiscally
transparent entity within the meaning of the U.S. Convention (for example, a
U.S. limited liability company that is disregarded for U.S. tax purposes) a
reduced rate of withholding tax may be available based on a look-through
approach described under the U.S. Convention. Subject to certain
detailed rules in the U.S. Convention, the benefits of the U.S. Convention (such
as reduced rates of withholding tax) are only available to qualifying persons
(the “LOB constraints”), as defined in the U.S. Convention. A
“qualifying person” for this purpose generally includes a person which is a
resident of the United States for purposes of the U.S. Convention which is a
natural person or a company whose principal and other classes of shares are
listed and primarily and regularly traded on a recognized stock
exchange. Non-Canadian Shareholders seeking to rely on the U.S.
Convention should consult their tax advisors concerning the applicability of tax
treaty benefits and the LOB constraints, having regard to their particular
circumstances.
Under the
U.S. Convention, a dividend paid to certain tax-exempt entities that are
resident in the United States may be exempt from Canadian withholding tax levied
in respect of dividends paid on the Shares. Such tax-exempt entities
should consult their own tax advisors.
A
Non-Canadian Shareholder should consult its own tax advisors regarding its
ability to claim foreign tax credits with respect to any Canadian withholding
tax.
Dispositions
of Shares
A
Non-Canadian Shareholder will not be subject to tax under the Canadian Tax Act
in respect of any capital gain realized on the disposition of its Shares, unless
the Shares constitute or are deemed to constitute “taxable Canadian property”
(as defined in the Canadian Tax Act) to the Shareholder and the Non-Canadian
Shareholder is not otherwise entitled to relief under the terms of any
applicable tax treaty.
In general, provided the
Shares are listed on a “designated stock exchange” (which currently includes the
Toronto Stock Exchange), the Shares will not constitute “taxable Canadian
property” of a Non-Canadian Shareholder so long as: (i) such Non-Canadian
Shareholder has not, either alone or in combination with persons with whom the
holder does not deal at arm’s length, owned (or had an option to acquire) 25% or
more of the issued shares of any class or series of the capital stock of NeuLion
at any time within the 60-month period preceding the disposition, and
(ii) more than 50% of the fair market value of the common share was derived
directly or indirectly from one or any combination of (A) real or immovable
property situated in Canada, (B) Canadian resource properties, (C) timber
resource properties, and (D) options in respect of, or interests in, or for
civil law rights in, property described in any of subparagraphs (ii)(A) to (C),
whether or not the property exists. In addition, in certain
circumstances the Shares may be deemed to be taxable Canadian property under the
Canadian Tax Act.
Subject
to an exemption pursuant to an applicable tax treaty or convention, a
Non-Canadian Shareholder will be subject to tax under the Canadian Tax Act in
respect of a capital gain realized on the disposition of the Shares where the
Shares are taxable Canadian property. Such Non-Canadian Shareholder
will realize a capital gain (or capital loss) equal to the amount by which the
proceeds of disposition for such Shares, net of any reasonable costs of
disposition, exceed (or are less than) the adjusted cost base of such Shares to
the Non-Canadian Shareholder. A Non-Canadian Shareholder will be
required to include one-half of the amount of any resulting capital gain (a
“taxable capital gain”) in income, and will be required to deduct one-half of
the amount of any resulting capital loss (an “allowable capital loss”) against
taxable capital gains realized in the year of disposition. Allowable
capital losses not deducted in the taxation year in which they are realized may
be carried back and deducted in any of the three preceding years, or carried
forward and deducted in any following year, against taxable capital gains
realized in such years, to the extent and under the circumstances specified in
the Canadian Tax Act.
Under the
U.S. Convention, a person who is resident in the United States for purposes of
the U.S. Convention who realizes a capital gain on a disposition of shares which
do not derive their value principally from real property situated in Canada is
generally exempt from tax in respect of the capital gain under the Canadian Tax
Act. These provisions are subject to the LOB constraints (described
above).
Non-Canadian
Shareholders to whom the Shares constitute taxable Canadian property should
consult their own tax advisors.
Other
Limitations on Security Holders
Canadian
law imposes regulatory requirements when a non-Canadian acquires control of a
Canadian business that depends on the dollar amount of the transaction and the
nature of the acquired business. Pursuant to the Investment Canada Act, a
non-Canadian acquiring control of a Canadian business must deliver a
“notification” of such investment to the applicable minister (the
“Notification”), unless the acquisition is subject to review and
approval. The investment is generally reviewable and
subject to approval if the total asset value of the Canadian business, control
of which is being acquired, is greater than $312 million (as of the date hereof)
or greater than $5 million if the Canadian business is a “cultural business”,
within the meaning of the Investment Canada
Act. To the extent that an acquisition of control of a
Canadian business that carries on certain cultural business activities is not
reviewable, the Minister of Canadian Heritage may, nonetheless, within 21 days
of the receipt of a Notification, seek an order requiring the investor to apply
for review and seek approval of the acquisition.
An
acquisition of control is approved under the Investment Canada Act if the
applicable minister is satisfied (or is deemed to be satisfied) that the
acquisition is likely to be of net benefit to Canada.
Repurchases
of Equity Securities
None.
Recent
Sales of Unregistered Securities
The
following sets forth information regarding securities sold by us but not
registered under the Securities Act during the fiscal year ended December 31,
2009, and that were not reported in our quarterly reports on Form 10-Q or
current reports on Form 8-K filed with the SEC during that period:
1. On
August 17, 2009, the Company granted to an employee residing in the United
States, 40,000 stock options to purchase 40,000 Shares under the Company's
Second Amended and Restated Stock Option Plan, as amended, with an exercise
price of $0.88 per share. The stock options vest in equal increments over
48 months beginning with the month after August 17, 2009. The Company
offered and sold the stock options in reliance on the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as amended
(the “Securities Act”).
2. On
November 1, 2009, the Company granted to an employee of the Company residing
outside the United States 500,000 stock options to purchase 500,000 Shares
pursuant to the Company's Second Amended and Restated Stock Option Plan, as
amended, with an exercise price of $0.67 per share. The stock options vest
in equal increments over 48 months beginning with the month after November 1,
2009. The Company offered and sold the stock options in reliance on the
exemption from registration set forth in Section 4(2) of the
Securities.
3. On
November 2, 2009, a former employee of the Company residing within the United
States exercised 6,875 stock options to purchase 6,875 Shares, with an exercise
price of $0.60 per share and 6,250 stock options to purchase 6,250 Shares with
an exercise price of $0.47 per share, for aggregate gross proceeds to the
Company of $7,063. The Company offered and sold the Shares in reliance on the
exemption from the registration requirements of the Securities Act afforded by
Rule 701 promulgated thereunder.
4. On
December 16, 2009, a consultant of the Company residing within the United States
exercised 7,500 stock options to purchase 7,500 Shares, with an exercise price
of $0.60 per share and 6,500 stock options to purchase 6,500 Shares with an
exercise price of $0.47 per share, for aggregate gross proceeds to the Company
of $7,555. The Company offered and sold the Shares in reliance on the exemption
from the registration requirements of the Securities Act afforded by Rule 701
promulgated thereunder.
5. On
December 21, 2009, the Company issued Shares, without registration under the
Securities Act to non-management directors in payment pursuant to the Company’s
Directors’ Compensation Plan of their semi-annual directors’ fees for the
six-month period ended December 31, 2009 in the following aggregate
amounts:
John
R. Anderson
|
39,830 | |||
Gabriel
A. Battista
|
15,254 | |||
Shirley
Strum Kenny
|
30,508 | |||
David
Kronfeld
|
33,898 | |||
Charles
B. Wang
|
37,288 | |||
Total
|
156,778 |
The
aggregate value of the 156,778 Shares issued to Dr. Kenny and Messrs. Anderson,
Battista, Kronfeld and Wang was $92,499 on the date of issuance. The Company
sold these Shares pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act and Regulation D promulgated thereunder. This
issuance qualified for exemption from registration under the Securities Act
because (i) each of the directors was an accredited investor at the time of the
sale, (ii) the Company did not engage in any general solicitation or advertising
in connection with the sale, and (iii) each of the directors received restricted
securities.
6. Between
October 1, 2009 and December 31, 2009, the Company issued 9,996 Shares to two
former employees and one former consultant as restricted share units vested
pursuant to the Company’s Restricted Share Plan. Under the Restricted Share
Plan, the restricted share units vest in equal monthly increments on the last
day of each month and are valued on the date of issuance. The aggregate value
attributable to the Shares issued during that period was $6,992. The Company
issued the Shares to the two former employees residing outside the United States
in reliance on Regulation S adopted under the Securities Act. The Company issued
the Shares to the one former consultant residing within the United States in
reliance on the exemption from registration set forth in Section 4(2) of the
Securities Act for transactions not involving any public offering.
Information
regarding other securities sold by us but not registered under the Securities
Act during the fiscal year ended December 31, 2009 has been previously included
in our quarterly reports on Form 10-Q for the periods ended March 31, 2009,
June 30, 2009 and September 30, 2009 and in current reports on Form
8-K filed with the SEC on October 6, 2009 and November 2, 2009.
Item
6. Selected Financial Data
As a
smaller reporting company, we are not required to include this information in
our annual report on Form 10-K.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
On
June 4, 2009, the company then known as NeuLion, Inc. changed its name to
NeuLion USA, Inc. (“NeuLion USA”). On July 13, 2009, JumpTV Inc.
changed its name to NeuLion, Inc. (the “Company” or “NeuLion”). In
conjunction with the name change, NeuLion’s stock symbol on the Toronto Stock
Exchange was changed from “JTV” to “NLN”. This Item
7 reflects these name changes.
The
following Management's Discussion & Analysis (“MD&A”) of NeuLion’s
financial condition and results of operations, prepared as of March 16, 2010,
should be read in conjunction with the Company's audited consolidated financial
statements and accompanying notes for the years ended December 31, 2009 and
2008, which have been prepared in accordance with United States generally
accepted accounting principles (“U.S. GAAP”). All dollar
amounts are in U.S. dollars (“US$” or “$”) unless stated
otherwise. As at March 10, 2010, the Bank of Canada noon rate for
conversion of United States dollar to Canadian dollars was US$1 to
CDN$1.0243.
Effective
October 20, 2008, NeuLion completed a merger (the “Merger”) with NeuLion USA, a
Delaware corporation, that was accounted for as a reverse
takeover. NeuLion USA is an Internet Protocol television company that
provides a comprehensive suite of technology and services to content owners and
aggregators. As a result of the Merger, NeuLion USA became the legal
subsidiary of NeuLion, and NeuLion was required to register its common shares in
the United States under Section 12 of the Securities Exchange Act of 1934, as
amended. On June 8, 2009, NeuLion’s Registration Statement on Form 10
became effective. The common shares of NeuLion are referred to herein
as “Shares,” or each individually as a “Share.”
Effective
October 31, 2009, NeuLion consummated the acquisition of 100% of the outstanding
securities of Interactive Netcasting Systems Inc. ("INSINC"), a corporation
organized under the federal laws of Canada that is a provider of sports,
government and entertainment webcasting services. Under the terms of
the acquisition, shareholders of INSINC received consideration consisting of
6,000,012 Shares of the Company, CDN$2.5 million in cash, 1 million Share
purchase warrants to acquire Shares at US$1.35 per Share and 500,000 Share
purchase warrants to acquire Shares at US$1.80 per Share. Both series
of warrants are exercisable for a period of 2 years.
Our
MD&A is intended to enable readers to gain an understanding of NeuLion's
current results and financial position. To do so, we provide
information and analysis comparing the results of operations and financial
position for the current year to those of the preceding comparable
year. We also provide analysis and commentary that we believe is
required to assess the Company's future prospects. Accordingly,
certain sections of this report contain forward-looking statements that are
based on current plans and expectations. These forward-looking
statements are affected by risks and uncertainties that are discussed in
NeuLion’s annual report on Form 10-K (the “10-K”), and below in the section
titled “Cautions Regarding Forward-Looking Statements”, and could have a
material impact on future prospects. Readers are cautioned that
actual results could vary from those forecasted in this MD&A.
Cautions
Regarding Forward-Looking Statements
This
MD&A contains certain forward-looking statements, which reflect management’s
expectations regarding the Company’s growth, results of operations, performance
and business prospects and opportunities.
Statements
about the Company’s future plans and intentions, results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. Wherever possible, words such as "may,"
"will," "should," "could," "expect," "plan," "intend," "anticipate," "believe,"
"estimate," "predict," or "potential" or the negative or other variations of
these words, or similar words or phrases, have been used to identify these
forward-looking statements. These statements reflect management’s
current beliefs and are based on information currently available to management
as at the date hereof.
Forward-looking
statements involve significant risk, uncertainties and
assumptions. Many factors could cause actual results, performance or
achievements to differ materially from the results discussed or implied in the
forward-looking statements. These factors should be considered
carefully and readers should not place undue reliance on the forward-looking
statements. Although the forward-looking statements contained in this
MD&A are based upon what management believes to be reasonable assumptions,
the Company cannot assure readers that actual results will be consistent with
these forward-looking statements. These forward-looking statements
are made as of the date of this MD&A, and the Company assumes no obligation
to update or revise them to reflect new events or circumstances, except as
required by law. Many factors could cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements that may be expressed or implied by
such forward-looking statements, including: general economic and market segment
conditions; competitor activity; product performance; capability and acceptance;
international risk and currency exchange rates; and technology
changes. More detailed assessment of the risks that could cause
actual results to materially differ from current expectations is contained
herein and in the "Risk Factors" section of the 10-K.
MERGER
AND REVERSE TAKE-OVER
On
October 20, 2008, the Company completed the Merger with NeuLion
USA. Under the terms of the Merger, NeuLion issued 49,577,427 Shares
directly, as well as 1,840,097 Shares subject to a performance escrow relating
to a prior acquisition, which represented approximately the entire issued and
outstanding Shares of NeuLion prior to closing, to the securityholders of
NeuLion USA in exchange for their NeuLion USA
securities. The escrow Shares were subsequently cancelled
in September 2009. Pursuant to the Merger, the Company also issued
5,000,000 warrants to purchase Shares, fully vested and exercisable for two
years at US$0.63 per Share, and 2,700,000 employee stock options to purchase
Shares, vesting in equal monthly amounts over 48 months and exercisable for five
years at US$0.60 per Share, to employees of NeuLion USA who became employees of
the Company.
On
October 20, 2008, AvantaLion LLC, an entity controlled by Charles B. Wang, the
Chairman of the Board of Directors of the Company and the spouse of Nancy Li,
our CEO and the founder and CEO of NeuLion USA, purchased 10,000,000 units from
NeuLion's treasury at a price of CDN$1.00 per unit. Each unit (a "Unit")
consists of one Share, one-half of one Series A Share purchase warrant and
one-half of one Series B Share purchase warrant. Each whole Series A Share
purchase warrant is exercisable at CDN$1.25, and each whole Series B Share
purchase warrant is exercisable at CDN$1.50, in each case for a period of two
years from the date of grant. G. Scott Paterson, our Vice Chairman, also
purchased 1,000,000 Units on the same terms. The aggregate gross proceeds from
the sale of Units were Cdn$11.0 million or US$9.2 million.
In
accordance with Accounting Standards Codification Topic 805 (“ASC 805”),
“Business Combinations” the Company has determined that NeuLion USA was the
accounting acquirer and accordingly has accounted for the Merger as a reverse
takeover. Therefore, the financial statements and this MD&A for
the years ended December 31, 2009 and 2008 reflect the assets, liabilities and
results of operations of NeuLion USA, the accounting acquirer, and only include
the assets, liabilities and results of operations of NeuLion, the legal
acquirer, subsequent to the reverse takeover on October 20, 2008 (the “Acquired
Business”). This MD&A is issued under the name of the legal
acquirer (NeuLion), but is deemed to be a continuation of the accounting
acquirer (NeuLion USA).
ACQUISITION
OF INSINC
Effective
October 31, 2009, the Company completed the acquisition of
INSINC. INSINC is based in Burnaby, British Columbia, Canada, and has
20 employees. INSINC offers a range of software tools for streaming
video content over the Internet. Its largest clients are in the area of sports,
including the Western Hockey League (“WHL”), Ontario Hockey League (“OHL”),
Central Hockey League (“CHL”), British Columbia Hockey League (“BCHL”), Central
Canadian Hockey League (“CCHL”), Alberta Junior Hockey League (“AJHL”), the
Central Junior Hockey League (“CJHL”) and the Canadian Football League
(“CFL”).
INSINC
also provides services within the government and entertainment broadcasting
sectors with clients including Business News Network (“BNN”), CTV News Channel,
Rogers Sportsnet, TVG Networks, The Canadian Press, the Canadian Ministry of
Justice, the BC Ministry of Education, and the Legislative Assemblies of British
Columbia and Newfoundland and Labrador, among others.
Under
the terms of the acquisition, shareholders of INSINC received consideration
consisting of 6,000,012 Shares of the Company, CDN $2.5 million in cash, 1
million Share purchase warrants to acquire Shares at USD $1.35 per Share and
500,000 Share purchase warrants to acquire Shares at USD $1.80 per
Share. Both series of warrants are exercisable for a period of 2
years.
The
aggregate purchase price of $6,694,293 represents the fair
value of 6,000,012 Shares issued of $4,035,043 (determined using the market
price of the Shares at the time of issuance), cash in the amount of $2,320,500
and the fair value of the Share purchase warrants in the amount of $338,750
(determined using the Black-Scholes-Merton model).
The
preliminary fair values of the assets acquired are as follows:
Balance
Sheet Data:
|
|||
October
31,
|
|||
2009
|
|||
$ | |||
Cash
|
344,371 | ||
Accounts
receivable
|
306,551 | ||
Prepaid
expenses and deposits
|
92,351 | ||
Other
receivables
|
338,504 | ||
Fixed
assets
|
739,690 | ||
Accounts
payable and accrued liabilities
|
(1,171,884 | ) | |
Long-term
liabilities
|
(120,000 | ) | |
Deferred
revenue
|
(125,815 | ) | |
Intangible
assets - contractual agreements
|
5,180,000 | ||
Intangible
assets - tradename
|
95,000 | ||
Goodwill
|
1,015,525 | ||
Total
|
6,694,293 |
As noted
above, the purchase price allocation of the tangible and intangible assets is
preliminary and may be adjusted as a result of obtaining additional information
regarding preliminary estimates of fair values made at the date of
purchase.
INSINC
recorded revenues of CDN $5.6 million, EBITDA of CDN$0.4 million and net income
of CDN$0.3 million for the year ended December 31, 2008.
The
results of operations for INSINC for fiscal 2009 have been included in the
Company’s consolidated statements of operations from the October 31, 2009
effective date of the acquisition to December 31, 2009 and are summarized
below.
Income
Statement Data:
|
|||
Year
ended
|
|||
31-Dec-09
|
|||
$ | |||
Total
revenue
|
575,347 | ||
Total
cost of revenue
|
(238,309 | ) | |
Total
selling, general and adminstrative costs
|
(264,816 | ) | |
Depreciation
and amortization
|
(8,965 | ) | |
Loss
on foreign exchange
|
(6,169 | ) | |
Net
income
|
57,088 |
OVERVIEW
The
Company is a leading Internet Protocol (“IP”) television company, providing
end-to-end IPTV services. “IPTV” refers to the distribution over an IP network
of streamed audio, video and other multimedia content, similar to television
programming content, using industry-standard streaming protocols. We build and
manage private networks for content owners and aggregators (our content
partners) that are used to stream content to multiple platforms through
browser-based devices. That content includes live and on-demand sports and
international and variety programming, which we then deliver to subscribers and
pay-per-view customers for viewing on Internet-connected browser-based devices
such as personal computers, laptops and mobile devices and on standard
television sets through Internet-connected set top boxes
(“STBs”). NeuLion’s main business objective is to enter into
agreements with companies seeking their own private networks to reach target
audiences and to provide complete IPTV services to these companies. We also
acquire the rights to certain sports and international content from television
broadcasters (our channel partners), which we then stream to end users through
our own private networks.
Our
business model has evolved from a professional IT services and international
programming provider to an end-to-end provider of the following IPTV
services. By “end-to-end provider of IPTV services,” we mean that we
provide the following services:
|
·
|
content
management - encoding of various digital and analog TV and video
formats;
|
|
·
|
subscriber
management - managing subscriber access and control of subscriber
accounts;
|
|
·
|
digital
rights management — preserving the integrity of the content and protecting
it from unauthorized access;
|
|
·
|
billing
services - enabling customers to view subscription accounts, providing
pay-per-view transactional billing and payment
processing;
|
|
·
|
delivery
- delivering streamed audio, video and other multimedia content anywhere,
anytime through the Company’s IPTV service and infrastructure;
and
|
|
·
|
advertising
insertion.
|
On
January 7, 2010, the Company announced that it had signed a multi-year
partnership to distribute certain DISH Network L.L.C. (“DISH Network”)
international channels using NeuLion's IPTV platform. The partnership
with NeuLion enhances DISH Network's international programming offerings by
providing consumers without access to satellite TV the ability to enjoy select
DISH Network international channels through IPTV.
Customer
Relationships
We have
two types of relationships: business-to-business (“B2B”) and
business-to-consumer (“B2C”).
B2B
relationships have been our primary focus in the past and are expected to be the
focus in the future. A B2B relationship is focused on providing an
end-to-end solution to a customer to enable that customer to provide its
content, by way of an IPTV platform built for that customer, to its end users.
B2B customers typically aggregate the content, negotiate the licensing rights
and directly market the availability of the content. This customer avails itself
of the full services of the Company in delivery to its end users. This type of
relationship is typical in the professional and college sports properties and in
our agreements with international and broad-based content
providers.
Our B2C
relationships are individual consumer oriented. We have signed distribution
agreements with our channel partners and content providers in exchange for
revenue share or royalty payments to such providers. We then market the content
on one (or more) of the proprietary targeted websites that we have developed
which are focused on a specific diaspora community, as well as on the general
Company website for purchase by an end user. We often aggregate the content into
bundles or packages of similar interest (e.g. Talfazat for the Middle East
community; TV-Desi for the South Asian community). We incur marketing expenses
in promoting the availability of such content.
The
United States and Canada are the principal markets in which our sales
occur.
Products
and Services
Sports
programming
Through
our comprehensive end-to-end IPTV solution, we provide our sports programming
content partners with the ability to deliver live and on-demand content. We
maintain distribution and technology services agreements with leading
professional and collegiate sports properties as well
as with the sports network ESPN. Amongst professional sports
leagues, NeuLion counts the National Football League (NFL), the National Hockey
League (NHL) and the American Hockey League (AHL). Through our recent
acquisition of Interactive Netcasting Systems Inc. (“INSINC”), a provider of
sports, government and entertainment webcasting services, we expanded our
portfolio of sports content partners to include the Western Hockey League (WHL),
the Ontario Hockey League (OHL), the Central Hockey League (CHL), the British
Columbia Hockey League (BCHL), the Central Canadian Hockey League (CCHL), the
Alberta Junior Hockey League (AJHL), the Central Junior Hockey League (CJHL) and
the Canadian Football League (CFL).
We also
operate our own portfolio of sports-oriented websites, including Cycling.tv,
CollegeSportsDirect.com and selected World Cup soccer properties. On the
collegiate level, we are the premier partner for National Collegiate Athletic
Association (NCAA) colleges and universities, with agreements in place with
approximately 170 colleges, universities or related sites.
Ethnic/international
and specialty programming
The
Company also offers what is referred to in the industry as “ethnic television,”
which the Company defines as programming directed at a specific diaspora
community, as determined by a shared nationality, language or culture, and
generally excluding communities for which English is the primary language. We
have license agreements directly with channel partners representing
approximately 185 channels in 55 countries that give NeuLion rights to stream,
predominantly on an exclusive world-wide basis, the channel partners’ live
linear television feeds over the public Internet using our proprietary private
networks such as Talfazat and TV-Desi.
Our
subsidiary, INSINC, also distributes government and entertainment content. Its
clients in those industries include Business News Network (BNN), CTV News
Channel, Rogers Sportsnet, TVG Networks, The Canadian Press, the Canadian
Ministry of Justice, the BC Ministry of Education, and the Legislative
Assemblies of British Columbia and Newfoundland and Labrador, among
others.
We also
have relationships with other specialty programming customers such as Sky Angel
U.S. LLC, which streams faith-based programming.
Services
Our
suite of technology and other services is directed at the entire spectrum of
content aggregation and delivery. Our services include:
|
·
|
content
ingestion;
|
|
·
|
web
site design and hosting;
|
|
·
|
live
and on-demand streaming of content on multiple
platforms;
|
|
·
|
billing
services;
|
|
·
|
facilitating
online merchandise sales;
|
|
·
|
mobile
features (streaming highlights, alerts, wallpaper and ring
tones);
|
|
·
|
online
ticketing;
|
|
·
|
auction
engine (jerseys, tickets);
|
|
·
|
social
networking;
|
|
·
|
customer
and fan support; and
|
|
·
|
marketing
and advertising sales.
|
Distribution
Methods
We
distribute content through two primary methods:
|
·
|
Internet-connected
browser-based devices such as personal computers, laptops and mobile
devices; and
|
|
·
|
standard
television sets through use of our Internet-connected
STBs.
|
Both of
our distribution methods take advantage of an open IPTV network, the public
Internet. As a result, content delivered by NeuLion is available globally and is
potentially unlimited in breadth.
Revenue
We earn
revenue in two broad categories: services revenue and equipment
revenue. Services revenue includes subscriber revenue, eCommerce
revenue and technology services revenue. Equipment revenue includes
the sale and shipping of STBs. Our revenue streams are described in
detail in Item 7- Management’s Discussion & Analysis under the caption
“OPERATIONS”.
Competition
New
technologies and entrants could have a material adverse effect on the demand for
NeuLion’s IPTV offerings. For example, fixed line telecommunications and mobile
telephony companies who offer or plan to offer video services may be competitors
of NeuLion. Together with other industry observers, we have witnessed and expect
to continue to witness the launch of various closed network IPTV services around
the world. As they strive to maintain and grow their customer bases, fixed line
telecommunications companies will likely see closed network IPTV as a central
element of a “triple-play” strategy that will package telephone, television and
Internet services in a single offering. Moreover, certain IPTV service providers
have an internal IP distribution strategy whereby they make their live linear
feeds, as well as repurposed content, available through their own websites on a
paid basis or free advertisement-supported basis.
We also
face competition from other online content providers who offer sports,
entertainment, and/or international programming. In addition, there are multiple
operators of pirated video content who stream content for which they have not
received consent from the legal and beneficial owners of such content.
Furthermore, there are multiple front-end providers that provide a menu of links
to streaming video content via websites on the Internet. These
“bootleggers” and front-end providers have varying menus of ethnic content and
offer such content at varying degrees of streaming quality.
We may
also be placed at a competitive disadvantage to the extent that other video
providers are able to offer programming of higher technical quality than we can.
While we expect to continue to improve the technical quality of our products and
services and offer our video content at increasingly higher streaming speeds, we
cannot assure you that we will be able to compete effectively with other video
providers.
To
distinguish our product line from our competitors’ offerings, we seek to be a
“one-stop shopping” source for our customers. Our suite of technology and other
services, discussed above, is directed at the entire spectrum of content
aggregation and delivery. Many companies in our markets offer far narrower
choices of services than we offer. For example, some content providers deliver
only their own content, while we offer the content of multiple providers. Or, an
agency may provide only online ticketing services, while we also provide related
online shopping and fan networking. We also provide the STBs used to view our
content on a television set. We strive to meet every customer’s needs at every
level and partner with them across product lines and extensions.
Overall
Performance - Overview
The
Company uses the term “organic” to refer to the period-over-period changes in
its revenues and expenses, excluding the revenues and expenses of the Acquired
Business and INSINC. This permits readers to better compare current
year and prior year revenues and expenses, and to understand changes that have
occurred, without regard to the effect of the Merger or the acquisition of
INSINC.
Year
ended December 31, 2009
Revenue for fiscal 2009 was $28.1 million, up 110% from
$13.4 million in fiscal 2008. The revenue growth of $14.7 million was
due to an increase in services revenue of $16.9 million, offset by a
decrease in our equipment revenue of $2.2 million. The revenue
growth was due to the following:
|
·
|
organic
growth of $3.3 million;
|
|
·
|
increase
in revenue from the Acquired Business of $10.8 million (2008 revenue was
from the date of the Merger on October 20, 2008 to December 31, 2008);
and
|
|
·
|
revenue
from INSINC of $0.6 million (revenue included in 2009 was from the October
31, 2009 effective date of the acquisition to December 31,
2009).
|
The
organic increase in services revenue is consistent with the increasing scope of
operations. As the number of subscribers increases, there is a
cumulative effect of increasing subscriber revenue on a quarter over quarter
basis. The decrease in equipment revenue is a result of the uneven
nature of this revenue stream – customers often place large single orders made
to meet minimum order requirements, to manage the lead time between ordering and
shipping and to minimize the related shipping costs. The lead time on
new orders is approximately 12 weeks from placing an order to receipt of
goods. The purchase by customers of STBs is a leading indicator of
future subscriptions.
Our net
loss for fiscal 2009 was $19.6 million, or a loss of
$0.18 per basic and
diluted Share, compared with a net loss of $11.6 million, or a loss of $0.21 per
basic and diluted Share, in fiscal 2008. The increase in net loss of
$8.0 million was
due to the following:
|
·
|
Increase
in organic loss of $2.6 million (excluding
non-operating expenses);
|
|
·
|
Increase
in loss in the Acquired Business of $4.8 million, excluding
non-operating expenses (2008 loss was from the date of the Merger on
October 20, 2008 to December 31, 2008);
and
|
|
·
|
Increase
in non-operating expenses of $0.6 million (detailed below in the Net Loss
to EBITDA reconciliation).
|
On a pro
forma basis (excluding INSINC), as if the Merger had occurred on January 1,
2008, revenue increased from $25.7 million to $27.5 million. Our
net loss for fiscal 2008 (excluding INSINC) was $92.5 million or a loss of
$0.90 per basic and
diluted Share. The improvement in net loss of $72.9 million on a pro forma
basis was due to the following:
|
·
|
Increase
in organic loss of $2.6 million (excluding non-operating
expenses);
|
|
·
|
Reduction
in net loss in the Acquired Business of $20.4 million due to cost
reductions in most areas of the business (excluding non-operating
expenses); and
|
|
·
|
Reduction
in non-operating expenses of $55.1 million (detailed below in the Net Loss
to EBITDA reconciliation).
|
Our
non-GAAP Adjusted EBITDA loss was $13.9 million in fiscal 2009 compared with a
non-GAAP Adjusted EBITDA loss of $6.6 million in fiscal
2008. The increase in non-GAAP Adjusted EBITDA loss is due to the
cash impact of the items noted above. On a pro forma basis, our
non-GAAP Adjusted EBITDA loss decreased from a loss of $31.6 million in fiscal 2008
to a loss of $13.9 million in fiscal
2009. This decrease is due to cost reductions in most areas of the
Acquired Business offset by the increased organic costs.
The
Company reports non-GAAP Adjusted EBITDA loss because it is a key measure used
by management to evaluate the results of the Company and make strategic
decisions about the Company. Non-GAAP Adjusted EBITDA loss represents
net loss before interest, income taxes, depreciation and amortization,
stock-based compensation, impairment of long-lived assets, unrealized loss on
derivatives, equity in loss of affiliate, investment income and foreign exchange
gain. This measure does not have any standardized meaning
prescribed by generally accepted accounting principles (“GAAP”) and therefore is
unlikely to be comparable to the calculation of similar measures used by other
companies, and should not be viewed as an alternative to measures of financial
performance or changes in cash flows calculated in accordance with
GAAP.
The
reconciliation from net loss to non-GAAP Adjusted EBITDA loss is as
follows:
|
Years
ended,
|
|||||||||||
Pro
forma
|
||||||||||||
2009
|
2008
|
2008
|
||||||||||
(excl.
INSINC)
|
||||||||||||
$ | $ | $ | ||||||||||
Net
loss
|
(19,640,921 | ) | (11,637,260 | ) | (92,459,364 | ) | ||||||
Add
back:
|
||||||||||||
Impairment
of goodwill
|
- | - | 47,882,317 | |||||||||
Impairment
of long-lived assets
|
- | 1,036,993 | 5,982,030 | |||||||||
Depreciation
and amortization
|
4,141,117 | 1,572,492 | 3,602,169 | |||||||||
Stock-based
compensation
|
1,167,789 | 1,848,906 | 3,374,767 | |||||||||
Unrealized
loss on derivative
|
801,350 | - | - | |||||||||
Equity
in loss of affiliate
|
- | 1,006,386 | 1,006,386 | |||||||||
Investment
income and foreign exchange gain
|
(362,070 | ) | (395,768 | ) | (998,753 | ) | ||||||
Non-GAAP
Adjusted EBITDA loss
|
(13,892,735 | ) | (6,568,251 | ) | (31,610,448 | ) |
OPERATIONS
Revenue
The
Company earns revenue in two broad categories:
|
(i)
|
Services revenue, which
includes:
|
|
·
|
Subscriber
revenue, which is recognized over the period of service or
usage;
|
|
·
|
eCommerce
revenue, which is recognized as the service is performed;
and
|
|
·
|
Technology
revenue, which consists of the set up and transcoder revenue and is
recognized over the life of the
contract.
|
|
(ii)
|
Equipment revenue,
which is recognized when title of the STB passes to the
customer.
|
While
our revenues have increased due to the organic growth in our existing business,
the Merger and the acquisition of INSINC, we are currently uncertain as to the
long-term impact of the downturn in the global economy on our
business.
Cost
and Expenses
Cost
of services revenue
Cost of
services revenue primarily consists of:
|
·
|
Cost
of subscriber revenue, which consists of
:
|
|
·
|
royalty
payments
|
|
·
|
network
operating costs
|
|
·
|
bandwidth
usage fees
|
|
·
|
colocation
fees
|
|
·
|
Cost
of eCommerce revenue, which consists
of:
|
|
·
|
merchandising,
donor and ticket sales, which has no associated cost – revenue is booked
on a net basis
|
|
·
|
cost
of advertising revenue is subject to revenue shares with the content
provider
|
|
·
|
Cost
of technology services revenue, which consists
of:
|
|
·
|
third
party transcoder software purchased
|
|
·
|
maintenance
costs for transcoders
|
Cost
of equipment revenue
Equipment
revenue consists of the sale of STBs to content partners and/or end users to
enable the end user to receive the content over the Internet and display the
signal on a television. Cost of equipment revenue primarily
consists of purchases from TransVideo International, Ltd. (“Transvideo”) and
Tatung Technology Incorporation of the products and parts for resale to
customers. Shipping revenue and costs are included in equipment
revenue and cost of equipment revenue, respectively.
Selling,
general and administrative expenses, including stock-based
compensation
Selling,
general and administrative (“SG&A”) costs, including stock-based
compensation, include:
|
·
|
Wages and benefits –
represents compensation for the Company's full-time and part-time
employees as well as fees for consultants who are used by the Company from
time to time;
|
|
·
|
Stock-based
compensation – we estimate the fair value of our options, warrants
and stock appreciation rights (“Convertible Securities”) for financial
accounting purposes using the Black-Scholes-Merton model, which requires a
number of subjective assumptions, including the expected life of the
Convertible Securities, risk-free interest rate, dividend rate, forfeiture
rate and future volatility of the price of our Shares. We
expense the estimated fair value over the vesting period of the
Convertible Securities. The vesting period is normally over a
four-year period, vesting in an equal amount each month; however, the
Board of Directors has the discretion to grant options with different
vesting periods;
|
|
·
|
Marketing –
represents expenses for both
global and local marketing programs that focus on various target sports
properties and ethnic communities. These initiatives include
both on-line and off-line marketing expenditures. These
expenditures also include search engine marketing and search engine
optimization;
|
|
·
|
Professional fees –
represents legal, accounting and recruiting fees;
and
|
|
·
|
Other SG&A expenses
–
represents travel expenses, rent, office supplies, corporate IT
services, credit card processing fees and other general operating
expenses.
|
Equity
in loss of affiliate
From
January 1, 2008 through December 31, 2009, the Company's equity interest in
KyLinTV was 17.1%. KyLinTV is a company that is controlled by the
Chairman of the Board of Directors of the Company. The Company also
provides and charges KyLinTV for administrative and general corporate
support. Management has determined that as a result of the 17.1%
equity interest combined with the services that the Company provides KyLinTV,
the Company continues to have significant influence on the operating activities
of KyLinTV; therefore the Company continues to account for KyLinTV using the
equity method of accounting for investment.
The
Company’s proportionate share of the equity loss from KyLinTV has been accounted
for as a charge on the Company's consolidated statements of operations and
comprehensive loss. Due to KyLinTV’s accumulated losses, the
investment had been reduced to zero as at December 31, 2008. No
further charges will be recorded as the Company has no obligation to fund the
losses of KyLinTV.
On February 26, 2010, a group of
investors invested $10.0 million in KyLinTV for 15.1% of its equity, which
reduced the Company’s equity interest in KyLinTV to 12.2%. Of the
total $10.0 million investment, $1.0 million was invested by AvantaLion LLC, a
company controlled by the Chairman of the Board of Directors of the
Company.
SELECTED
ANNUAL INFORMATION
The selected consolidated financial information set out
below for the three years ended December 31, 2009, 2008 and 2007 and as at
December 31, 2009, 2008 and 2007 has been derived from the Company’s audited
consolidated financial statements and accompanying notes posted on www.sedar.com
and at www.sec.gov. Readers should read the following
information in conjunction with those statements and related
notes.
|
Years
ended,
|
|||||||||||
December
31,
2009
|
December
31,
2008
|
December
31,
2007
|
||||||||||
$ | $ | $ | ||||||||||
Consolidated Statement
of Operations Data:
|
||||||||||||
Revenue
|
28,093,677 | 13,443,339 | 7,810,711 | |||||||||
Cost
of sales
|
(14,387,152 | ) | (7,639,149 | ) | (5,504,254 | ) | ||||||
Selling,
general and administrative expenses,
including
stock based compensation
|
(28,767,049 | ) | (14,221,347 | ) | (4,210,357 | ) | ||||||
Net
loss for the year
|
(19,640,921 | ) | (11,637,260 | ) | (4,515,759 | ) | ||||||
Basic
and diluted loss per share
|
(0.18 | ) | (0.21 | ) | (0.11 | ) |
|
As
at,
|
|||||||||||
December
31,
2009
|
December
31,
2008
|
December
31,
2007
|
||||||||||
$ | $ | $ | ||||||||||
Consolidated Balance
Sheet Data:
|
||||||||||||
Cash
and cash equivalents
|
12,957,679 | 27,323,021 | 608,464 | |||||||||
Total
assets
|
40,269,163 | 53,737,682 | 7,211,951 | |||||||||
Non-current
liabilities
|
1,197,521 | 1,514,781 | 544,199 | |||||||||
Total
liabilities
|
17,998,829 | 16,724,104 | 3,965,018 | |||||||||
Share
capital
|
11,260,415 | 6,762,097 | 68,871 | |||||||||
Total
shareholders' equity
|
22,270,334 | 37,013,578 | 3,246,933 |
The
Company’s business model has evolved from a professional IT services and
international programming provider to fiscal 2007, where it began to pursue the
objective of being an end-to-end provider of IPTV services. Fiscal
2007 revenue increased to $7.8 million, which included $1.3 million in services
revenue and $6.5 million in equipment revenue. Fiscal 2007 included
the sale of $6.4 million in equipment revenue to two customers as these
customers launched their IPTV strategies. These two customers
accounted for 85% of total revenue. Cost of sales increased by $5.0
million, primarily for cost of equipment revenue, which is a lower margin
component of the Company’s business. The increase in loss was due to
expanding operations and continued investment in research and
development. Losses were funded by our CEO.
Fiscal
2008 included the acquisition of the Acquired Business, described
above. In fiscal 2008 revenue increased to $13.4 million, which
included $9.5 million in services revenue and $3.9 million in equipment
revenue. Of the $13.4 million, the Merger described above contributed
$3.3 million in revenue. The balance of the revenue growth (“organic
growth”) was growth in services revenue, offset by a decline in equipment
revenue. Services revenue is primarily recurring revenue; subscriber
growth provides a baseline of revenue that continues to grow month over month,
albeit with some seasonality impact depending on the sports
season. The continuous trend over the past three years has been
increasing services revenue from operating as an end-to-end IPTV service
provider. In fiscal 2008 costs continued to scale with the
growth in the existing business, and then were accelerated through the Merger
(for example, the Company experienced increased wages due to the increased
headcount and increased travel expenses due to having multiple
offices). Net loss increased to $11.6 million due to growth in
operations, the additional operating costs acquired in the Merger, and costs
related to non-cash stock-based compensation. Losses prior to the
Merger were funded by a capital contribution in 2008 of $2.6 million by our
CEO. Included in the Merger was cash from the Acquired Business
of $22.9 million, which increased the Company’s cash balance to $27.3 million at
December 31, 2008.
In fiscal
2009 revenue increased to $28.1 million, which included $26.5 million in
services revenue and $1.6 million in equipment revenue. Of the total
revenue growth of $14.7 million, the Acquired Business contributed $10.8 million
in revenue, while INSINC contributed $0.6 million in revenue. The
balance of the organic growth occurred in services revenue, offset by a decline
in equipment revenue. Net loss increased from $11.6 million in 2008
to $19.4 million in 2009, primarily due to the inclusion of the Acquired
Business for 12 months in 2009 as opposed to 2 months in 2008. The
Company is currently reviewing its operating structure to maximize revenue
opportunities, further reduce costs and achieve profitability.
RESULTS
OF OPERATIONS
Comparison
of Fiscal Year Ended December 31, 2009 to Fiscal Year Ended December 31,
2008
Our
consolidated financial statements for our fiscal years ended December 31, 2009
and 2008 have been prepared in accordance with U.S. GAAP. Included in
note 17 of the
financial statements is the reconciliation
between our consolidated financial statements prepared in accordance with U.S.
GAAP and Canadian GAAP.
2009
|
2008
|
Change
|
||||||||||
$ | $ | % | ||||||||||
Revenue
|
||||||||||||
Services
revenue
|
26,464,400 | 9,542,689 | 177 | % | ||||||||
Equipment
revenue
|
1,629,277 | 3,900,650 | -58 | % | ||||||||
Total
Revenue
|
28,093,677 | 13,443,339 | 109 | % | ||||||||
Costs
and expenses
|
||||||||||||
Cost
of services revenue, exclusive of depreciation
|
||||||||||||
and
amortization shown separately below
|
12,850,002 | 4,519,062 | 184 | % | ||||||||
Cost
of equipment revenue
|
1,537,150 | 3,120,087 | -51 | % | ||||||||
Selling,
general and administrative, including
|
||||||||||||
stock-based
compensation
|
28,767,049 | 14,221,347 | 102 | % | ||||||||
Depreciation
and amortization
|
4,141,117 | 1,572,492 | 163 | % | ||||||||
Impairment
of long-lived assets
|
- | 1,036,993 | - | |||||||||
47,295,318 | 24,469,981 | 93 | % | |||||||||
Operating
loss
|
(19,201,641 | ) | (11,026,642 | ) | 74 | % | ||||||
Other
income (expense)
|
||||||||||||
Unrealized
loss on derivative
|
(801,350 | ) | - | - | ||||||||
Gain
on foreign exchange
|
68,245 | 265,720 | -74 | % | ||||||||
Investment
income
|
293,825 | 130,048 | 126 | % | ||||||||
Equity
in loss of affiliate
|
- | (1,006,386 | ) | - | ||||||||
(439,280 | ) | (610,618 | ) | -28 | % | |||||||
Net
and comprehensive loss for the year
|
(19,640,921 | ) | (11,637,260 | ) | 69 | % |
Revenue
Services
revenue
Services
revenue includes revenue from subscribers, eCommerce and technology
services. Services revenue increased from $9.5 million for the year
ended December 31, 2008 to $26.5 million for the year
ended December 31, 2009. The increase was due to the organic growth
in services revenue, the effect of the Merger on October 20, 2008 and the
acquisition of INSINC effective October 31, 2009. The organic growth in our
services revenue was $5.6 million. The
growth in the Acquired Business comprised $10.8 million, and INSINC
comprised $0.6 million, of total services revenue.
Subscriber
revenue increased from $7.0 million for the year
ended December 31, 2008 to $18.5 million for the year
ended December 31, 2009. The increase was due to the growth in
subscribers, the effect of the Merger on October 20, 2008 and the acquisition of
INSINC effective October 31, 2009. The organic growth in our subscriber revenue
was $4.5 million resulting from $4.0 million in revenue
growth from our existing customers coupled with $0.5 million in revenue
generated from 15 new customers. The growth in the Acquired Business
was $6.7 million
and INSINC comprised $0.3 million of total subscriber revenue for the
year.
eCommerce
revenue increased from $0.9 million for the year ended December 31, 2008 to
$3.9 million for
the year ended December 31, 2009. The Acquired Business comprised all
of eCommerce revenue for the year.
Technology
services revenue increased from $1.6 million for the year
ended December 31, 2008 to $4.1 million for the year
ended December 31, 2009. The increase was due to organic growth in
technology services revenue, the effect of the Merger on October 20, 2008, and
the October 31, 2009 effective date of the acquisition of
INSINC. As new customers begin streaming video or develop their
user interface, we earn technology services revenue. This revenue is
recognized over the life of the contractual relationship. The organic
growth in our technology services revenue was $1.0 million. The
growth in the Acquired Business was $1.2 million. INSINC comprised
$0.3 million of
total technology services revenue for the year.
Equipment
revenue
Equipment
revenue decreased from $3.9 million for the year
ended December 31, 2008 to $1.6 million for the year
ended December 31, 2009. The decrease in equipment revenue is a
result of the uneven nature of the revenue stream; customers often place large
single orders to meet minimum order requirements to manage the lead time between
ordering and shipping and to minimize the related shipping costs. The
lead time on new orders is approximately 12 weeks from order to
receipt. The timing of specific orders is not consistent period over
period. We sell our STBs to customers, who in turn sell or give them
to new users, and we sell directly to users. The demand for STBs is
driven by new subscribers and the level of inventory carried by our
customers. Our customers do not have the right of return on purchased
STBs. Initial orders by new customers and new users will impact the
trend of STB revenues. The Company expects STB revenue to have a much
slower growth rate than services revenue. Services revenue is
recurring revenue whereas STB revenue is earned on new customers and/or new
subscribers.
Costs
and Expenses
Cost
of services revenue
Cost of
services revenue increased from $4.5 million, or 47%, of
services revenue for the year ended December 31, 2008 to $12.8 million or 49% of
services revenue for the year ended December 31, 2009. This increase
was due to the costs associated with increased revenue, the effect of the Merger
on October 20, 2008 and the acquisition of INSINC effective October 31,
2009. Cost of services revenue for the Acquired Business increased by
$5.9 million. INSINC comprised $0.3 million of total costs
of services revenue for the year.
Organic
cost of services revenue increased from $2.5 million or 39.7% of services
revenue for the year ended December 31, 2008 to $4.6 million or 39.0% of
services revenue for the year ended December 31, 2009. The $2.1
million increase was a result of additional costs relating to co-location and
network fees in support of increased revenue. The 0.7%
improvement (as a percentage of services revenue) primarily relates to
negotiated lower rates on bandwidth costs.
Cost
of equipment revenue
Cost of
equipment revenue decreased from $3.1 million for the year
ended December 31, 2008 to $1.5 million for the year
ended December 31, 2009 on lower revenue. Cost of equipment revenue
is directly variable with changes in equipment revenue. Cost of
equipment revenue as a percentage of equipment revenue increased from 80% for
the year ended December 31, 2008 to 94% for the year ended December 31, 2009 due
to increased shipping costs related to TV-Desi and Talfazat rental STBs that
generate no equipment revenue.
Selling,
general and administrative, including stock-based compensation
Selling,
general and administrative, including stock-based compensation, increased from
$14.2 million for
the year ended December 31, 2008 to $28.8 million for the year ended
December 31, 2009. The Acquired Business accounted for $9.1 million of the total
increase, INSINC accounted for $0.3 million and the remaining increase of $5.2
million relates to the organic increase. The individual
variances are due to the
following:
|
·
|
Wages
and benefits increased from $8.8 million for the year ended December 31,
2008 to $20.0 million for the year ended December 31, 2009. The
Acquired Business accounted for $6.5 million of the total increase of
$11.2 million in wages and benefits for the year. The organic increase of
$4.5 million was primarily related to the increase in employees to support
the increased revenue and the Merger with the Acquired
Business. In conjunction with the Merger, the Company added
senior management and provided market level compensation for the
CEO. INSINC comprised $0.2 million of total wages and benefits
for the year.
|
|
·
|
Stock-based
compensation expense decreased from $1.8 million for the year ended
December 31, 2008 to $1.2 million for the year ended December 31,
2009. This decrease was the result of 5 million fully vested
warrants being issued in the prior
year.
|
|
·
|
Marketing
expenses increased from a $0.4 million for the year ended December 31,
2008 to $1.1 million for the year ended
December 31, 2009. The Acquired
Business accounted for $0.5 million of the total increase of $0.7 million in marketing expenses for the
year. The Acquired Business is more of a business-to-consumer
focused business and incurs higher marketing expenses including search
engine marketing and search engine optimization on the
Internet.
|
|
·
|
Professional
fees increased from $1.2 million for the year ended December 31, 2008 to
$1.7 million for the year ended December 31, 2009. The increase
was primarily related to professional fees incurred in connection with the
acquisition of INSINC.
|
|
·
|
Other
SG&A expenses increased from $2.0 million for the
year ended December 31, 2008 to $4.8 million for the year ended
December 31, 2009. The Acquired
Business accounted for $2.3 million of the total increase of $2.8 million for the year. The organic
increase of $0.5 million was primarily related to increases in bank and
processing fees and corporate systems costs of $0.4
million.
|
Equity
in loss of affiliate
Equity in
loss of our affiliate, KyLinTV, decreased from $1.0 million for the year ended
December 31, 2008 to zero for the year
ended December 31, 2009. The decrease is as a result of the
cumulative losses exceeding the full value of the Company’s investment in
2008. Due to KyLinTV’s accumulated losses, the investment had been
reduced to zero at December 31, 2008. The Company still owns its
equity position in the affiliate; however, the Company is not required to fund
any additional losses, and as such no further charges will be
incurred.
Depreciation
and amortization
Depreciation
and amortization increased from $1.5 million for the year
ended December 31, 2008 to $4.1 million for the year ended December 31,
2009. The increase was due to amortization on assets acquired
in the Merger ($1.9 million) and
amortization of the intangible assets acquired in the acquisition of
INSINC.
Unrealized
loss on derivative
Unrealized
loss on derivative increased from zero for the year ended December 31, 2008 to
$0.8 million for the year ended December 31,
2009. The increase was due to the adoption of ASC 815-40,
effective January 1, 2009, which required the Company to record at fair value
all convertible securities denominated in a currency other than the Company’s
functional currency. On January 1, 2009, the grant date fair value of
warrants denominated in Canadian dollars of $2.5 million was reallocated from
additional paid-in capital and a derivative liability was recorded in the amount
of $0.6 million with an adjustment to opening accumulated deficit of $1.9
million. The difference between the fair value at January 1, 2009 of
$0.6 million and
the fair value at December 31, 2009 of $1.4 million resulted in an
unrealized loss on derivative of $0.8 million.
These
warrants have been recorded at their relative fair values at issuance,
determined using the Black-Scholes-Merton model, and will continue to be
recorded at fair value at each subsequent balance sheet date. Any
change in value between reporting periods will be recorded as other income
(expense). These warrants will continue to be reported as a liability
until such time as they are exercised or expire.
Impairment
of long-lived assets
Long-lived assets must be tested for recoverability
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. For the Company, long-lived assets include
intangible and capital assets. Ongoing negative developments in the
general economic climate would be considered an event that would be a possible
indicator of impairment. An impairment loss is recognized as
the difference between fair value and carrying amount when the carrying amount
of a long-lived asset is not recoverable and exceeds its fair
value. The fair value of the intangible assets acquired in the Merger
was determined on October 20, 2008; therefore, management believed the fair
value of the assets acquired in the Merger is consistent with the carrying
amount at December 31, 2008. The Company tested the fair value of the
non-Merger long-lived assets as at December 31, 2008 and determined that the
carrying value of such capital assets exceeded their fair value by $1.0
million. Accordingly, the Company recorded a non-cash impairment
charge of $1.0 million during 2008. No such charges were recorded in
2009.
SELECTED
UNAUDITED QUARTERLY FINANCIAL INFORMATION
AND
REVIEW OF FOURTH QUARTER PERFORMANCE
The
following tables set out selected consolidated unaudited financial information
for each of the last eight quarters with the last one being the most recent
quarter ended December 31, 2009. In the opinion of management, this
information has been prepared on the same basis as the audited consolidated
financial statements as filed on www.sedar.com
and www.sec.gov,
and all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with the audited consolidated
financial statements and the notes to those statements. The operating
results for any quarter should not be relied upon as any indication of any
future period.
Included
in Note 17 of the financial statements is the reconciliation
between our consolidated financial statements prepared in accordance with U.S.
GAAP and Canadian GAAP.
2009
|
2008
|
|||||||
Q4
|
Q3
|
Q2
|
Q1
|
Q4
|
Q3
|
Q2
|
Q1
|
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Income
Statement Data:
|
||||||||
Revenue
|
8,995,911
|
6,061,302
|
6,462,438
|
6,574,026
|
5,807,550
|
2,699,041
|
2,987,128
|
1,949,620
|
Cost
of revenue
|
4,024,35
|
3,224,838
|
3,293,481
|
3,844,483
|
3,205,272
|
1,534,807
|
1,753,689
|
1,145,381
|
Net
loss for the period
|
(1,454,962)
|
(7,463,951)
|
(4,928,130)
|
(5,793,878)
|
(7,223,468)
|
(1,377,667)
|
(1,549,979)
|
(1,486,146)
|
Basic
and diluted loss per share
|
(0.01)
|
(0.07)
|
(0.04)
|
(0.05)
|
(0.13)
|
(0.03)
|
(0.04)
|
(0.03)
|
Comparison
of Three Months Ended December 31, 2009 to Three Months Ended December 31,
2008
Revenue
Services
revenue
Services
revenue includes revenue from subscribers, eCommerce and technology
services. Services revenue increased from $5.6 million for the three
months ended December 31, 2008 to $8.7 million for the three
months ended December 31, 2009. The increase is a combination of the
organic growth in services revenue and the effect of the Merger on October 20,
2008. The organic growth in our services revenue was $1.5 million. The
growth in the Acquired Business was $1.0 million. INSINC comprised
$0.6 million of
total services revenue for the period.
Subscriber
revenue increased from $4.0 million for the three
months ended December 31, 2008 to $6.0 million for the three
months ended December 31, 2009. The increase is a combination of the
growth in subscribers, the effect of the Merger on October 20, 2008 and the
acquisition of INSINC effective October 31, 2009. The organic growth in our
subscriber revenue was $1.4 million resulting from
$1.2 in revenue from existing customers and $0.2 million in revenue generated
from 14 new customers. The growth in the Acquired Business was $0.3 million. INSINC
comprised $0.3 million of total subscriber revenue for the period.
eCommerce
revenue increased from $0.8 million for the three months ended December 31, 2008
to $1.4 million for
the three months ended December 31, 2009. The Acquired Business
comprised all of eCommerce revenue for the period.
Technology
services revenue increased from $0.8 million for the three
months ended December 31, 2008 to $1.3 million for the three
months ended December 31, 2009. The increase is a combination of the
organic growth in technology services revenue, the effect of the Merger on
October 20, 2008 and the effect of the acquisition of INSINC effective October
31, 2009. As new customers begin streaming video or develop their user
interface, we earn technology services revenue. This revenue is
recognized over the life of the contractual relationship. The organic
growth in our technology services revenue was $0.1 million. The
growth in the Acquired Business was $0.1 million. INSINC
comprised $0.3 million of total technology services revenue for the
period.
Equipment
revenue
Equipment
revenue increased from $0.2 million for the three
months ended December 31, 2008 to $0.3 million for the three
months ended December 31, 2009. The increase in equipment revenue is
a result of the uneven nature of the revenue stream.
Costs
and Expenses
Cost
of services revenue
Cost of
services revenue increased from $3.0 million or 54% of
services revenue for the three months ended December 31, 2008 to $3.7 million or 43% of
services revenue for the three months ended December 31, 2009. This
increase was a combination of the costs associated with increased revenue and
the acquisition of INSINC effective October 31, 2009. INSINC
comprised $0.3 million of the total cost of services revenue for the
period.
Organic
cost of services revenue increased from $1.0 million or 42% for the
three months ended December 31, 2008 to $1.4 million or 36% for the
three months ended December 31, 2009. The $0.4 million increase was a
result of additional costs relating to colocation and network fees in support of
increased revenue. The 6% improvement (as a percentage of
services revenue) primarily relates to negotiated lower rates on bandwidth
costs.
Cost
of equipment revenue
Cost of
equipment revenue increased from $0.2 million for the three
months ended December 31, 2008 to $0.3 million for the three
months ended December 31, 2009 on increased revenue. Cost of
equipment revenue is directly variable with changes in equipment
revenue.
Selling,
general and administrative, including stock-based compensation
Selling,
general and administrative, including stock-based compensation, decreased from
$8.3 million for
the three months ended December 31, 2008 to $7.6 million for the three months
ended December 31, 2009. The individual variances are due to the following:
|
·
|
Wages and benefits increased from $4.3 million for the three months ended December 31,
2008 to $5.3 million for the three months ended December 31,
2009. The organic increase of $0.8 million was
primarily related to the increase in employees to support the increased
revenue and the Merger with the Acquired Business. In
conjunction with the Merger, the Company added senior management and
provided market level compensation for the CEO. INSINC comprised $0.2 million of total
wages and benefits for the
period.
|
|
·
|
Stock-based
compensation expense decreased from $1.8 million for the three months
ended December 31, 2008 to $0.2 million for the three
months ended December 31, 2009. This decrease was the result of
5 million fully vested warrants being issued in the prior
period.
|
|
·
|
Marketing
expenses were $0.3 million for the three months ended December 31, 2008
and 2009.
|
|
·
|
Professional fees decreased from $0.6 million for the three
months ended December 31, 2008 to $0.5 million for the three months ended
December 31, 2009.
|
|
·
|
Other
SG&A expenses were $1.3 million for the
three months ended December 31, 2008 and
2009.
|
Depreciation
and amortization
Depreciation
and amortization increased from $0.9 million for the three
months ended December 31, 2008 to $1.1 million for the three months ended December 31,
2009. The increase was due to amortization of the intangible
assets acquired in the acquisition of INSINC.
Unrealized
gain on derivative
Unrealized
gain on derivative increased from zero for the three months ended December 31,
2008 to $2.2 million for the three months
ended December 31, 2009. The increase was due to the adoption
of ASC 815-40. The difference between the fair value at September 30,
2009 of $3.6 million and the fair
value at December 31, 2009 of $1.4 million resulted in an
unrealized gain on derivative of $2.2 million.
Impairment
of long-lived assets
As
described above, the Company recorded a non-cash long-lived asset impairment
charge of $1.0 million during the three
months ended December 31, 2008. There were no such comparable amounts
recorded in the current period.
LIQUIDITY
AND CAPITAL RESOURCES
During the year ended December 31,
2009, the Company’s cash position decreased by $14.4 million. The
Company used $11.7 million to fund operations, which included working capital
changes of $1.8 million, $1.2 million to purchase
fixed assets and $1.6 million to acquire INSINC.
As of December 31, 2009, our principal
sources of liquidity included cash and cash equivalents of $13.0 million and trade
accounts receivable of $1.8 million. We do not have
a credit facility.
At December 31, 2009, approximately 79%
of our cash and cash equivalents were held in interest bearing bank accounts
with a U.S. bank that received an A- rating by Standard and Poors and an A2
rating by Moody’s and 7% of our cash and cash equivalents were held in bank
accounts with two of the top five Canadian commercial banks. The
Company believes that these U.S. and Canadian financial institutions are secure
notwithstanding the current global economy and that we will be able to access
the remaining balance of bank deposits as these deposits are with large
reputable banks. Our investment policy is to invest in low-risk
short-term investments which are primarily term deposits. We have not
had a history of any defaults on these term deposits, nor do we expect any in
the future given the short term to maturity of these investments.
The Company’s business is still
in the early stages, with only a few years of operating history. From
the Company’s inception, it has incurred substantial net losses and has an
accumulated deficit of $43.8 million; management expects these losses to
continue in the short term. The Company continues to review its
operating structure to maximize revenue opportunity, further reduce costs and
achieve profitability. Based on our current business plan and
internal forecasts, and considering the risks that are present in the current
global economy, we believe that our cash on hand will be sufficient to meet our
working capital and operating cash requirements for the next twelve months,
which will include expenditures of significant funds for marketing, building its
subscriber management systems, programming and website development, maintaining
adequate video streaming and database software, pursuing and maintaining channel
distribution agreements with its channel partners, fees relating to acquiring
and maintaining Internet streaming rights to its content and the construction
and maintenance of the Company’s delivery infrastructure and office
facilities. Cash from operations could be affected by various risks
and uncertainties, including, but not limited to, the risks detailed herein or
incorporated by reference in our 10-K in the section titled “Risk
Factors.” If our actual cash needs are greater than forecasted and if
cash on hand is insufficient to meet our working capital and cash requirements
for the next twelve months, we will require outside capital in addition to cash
flow from operations in order to fund our business. Our short operating
history, our current lack of profitability and the prolonged upheaval in the
capital markets could each or all be factors that might negatively impact our
ability to obtain outside capital on reasonable terms, or at all. If we
were ever unable to obtain needed capital, we would reevaluate and reprioritize
our planned capital expenditures and operating activities. We cannot
assure you, however, that we will ultimately be able to generate sufficient
revenue or reduce our costs in the anticipated time frame to become profitable
and have sustainable cash flows.
Working
Capital Requirements
The net working capital at December 31,
2009 was $1.3 million, a decrease of
$16.8 million from the December 31, 2008 net working capital of $18.1 million.
The decreased working capital is primarily due to funding operations of $11.7
million and the fair value of the derivative liability of $1.4 million on
December 31, 2009 (which is a non-cash liability).
Current assets at December 31, 2009
were $17.8 million, a decrease of $15.5 million from the
December 31, 2008 balance of $33.3 million. The change is primarily due to a
decrease in our cash and cash equivalents of $14.4 million.
Current liabilities at December 31,
2009 were $16.8 million, an increase of
$1.6 million from
the December 31, 2008 balance of $15.2 million. The change is
primarily due to the fair value of the derivative liability of $1.4 million
(which is a non-cash liability).
Cash
Flows
Summary
Balance Sheet Data:
December
31,
|
|||||||
2009
|
2008
|
||||||
$ | $ | ||||||
Current
Assets
|
|||||||
Cash
and cash equivalents
|
12,957,679 | 27,323,021 | |||||
Accounts
receivable, net
|
1,809,147 | 2,284,242 | |||||
Taxes
receivable
|
35,334 | 983,253 | |||||
Other
receivables
|
821,834 | 227,711 | |||||
Inventory
|
928,592 | 347,600 | |||||
Prepaid
expenses and deposits
|
966,101 | 1,830,260 | |||||
Due
from related parties
|
246,992 | 324,059 | |||||
Total
current assets
|
17,765,679 | 33,320,146 | |||||
Current
Liabilities
|
|||||||
Accounts
payable
|
5,383,518 | 4,465,388 | |||||
Accrued
liabilities
|
5,822,385 | 7,595,116 | |||||
Derivative
liability
|
1,389,300 | - | |||||
Due
to related parties
|
298,595 | 56,826 | |||||
Deferred
revenue
|
3,907,510 | 3,091,993 | |||||
Total
current liabilities
|
16,801,308 | 15,209,323 | |||||
Working
capital ratio
|
1.06 | 2.19 |
Comparative
Summarized Cash Flows
Year
Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
$ | $ | |||||||
Cash
used in operating activities
|
(11,692,709 | ) | (5,614,501 | ) | ||||
Cash
(used in) provided by investing activities
|
(2,760,337 | ) | 20,294,983 | |||||
Cash
provided by financing activities
|
87,704 | 12,034,075 |
Operating
activities
Cash used in operating activities for the year ended
December 31, 2009 was $11.7 million. Changes in net cash used in
operating activities reflect the net loss of $19.6 million for the year, less:
|
·
|
non-cash items in the amount of $6.1 million, which relates to stock-based compensation,
depreciation and amortization and unrealized loss on derivative;
and
|
|
·
|
changes in operating assets and liabilities of
$1.8 million.
|
Investing
activities
Cash used in investing activities for the year ended
December 31, 2009 was $2.8 million. These funds were used to acquire
INSINC ($1.6 million) and to purchase fixed assets ($1.2
million).
Financing
activities
Cash provided by financing activities was
$0.1 million for the year ended December 31, 2009. The
funds were received from stock option and retention warrant
exercises.
Off-Balance
Sheet Arrangements
The
Company did not have any off-balance sheet arrangements as of December 31,
2009.
Contractual
Obligations and Commitments
The following table summarizes the
Company’s contractual commitments as at December 31, 2009, and the effect those
commitments are expected to have on liquidity and cash flow in future
periods:
Total
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
|
Operating
leases
|
8,004,585
|
1,702,605
|
1,190,740
|
1,151,882
|
1,128,252
|
790,076
|
2,041,030
|
Operating
lease recovery (1)
|
(5,243,520)
|
(667,177)
|
(667,177)
|
(682,518)
|
(703,996)
|
(703,996)
|
(1,818,656)
|
Minimum
guarantees (2)
|
4,042,389
|
1,911,913
|
910,476
|
835,000
|
385,000
|
0
|
0
|
Capital
lease obligations
|
125,989
|
116,408
|
9,581
|
0
|
0
|
0
|
0
|
Long-term
liabilties
|
244,739
|
122,194
|
63,292
|
0
|
0
|
0
|
59,253
|
7,174,182
|
3,185,943
|
1,506,912
|
1,304,364
|
809,256
|
86,080
|
281,627
|
|
(1)
The Company has signed a sublease for its Toronto office which offsets the
operating lease commitment.
|
|||||||
(2)
Minimum guarantees of payments to content providers for licensing of
content and/or minimum performance
payments.
|
Financial
Instruments
The
Company's financial instruments are comprised of cash and cash equivalents,
accounts receivable, other receivables, taxes receivable, deposits, accounts
payable, accrued liabilities, amounts due to/from related parties, and deferred
revenue.
Fair
value of financial instruments
Fair
value of a financial instrument is defined as the amount for which the
instrument could be exchanged in a current transaction between willing
parties. The estimated fair value of our financial instruments
approximates their carrying value due to the short maturity term of these
financial instruments.
Risks
associated with financial instruments
[i]
Foreign exchange risk
The
Company is exposed to foreign exchange risk as a result of transactions in
currencies other than its functional currency of the United States
dollar. The majority of the Company’s revenues are transacted in U.S.
dollars, whereas a portion of its expenses are transacted in U.S. or Canadian
dollars. The Company does not use derivative instruments to hedge
against foreign exchange risk.
[ii]
Interest rate risk
The
Company is exposed to interest rate risk on its invested cash and cash
equivalents and its short-term investments. The interest rates on
these instruments are based on the bank's rate and therefore are subject to
change with the market. The Company does not use derivative financial
instruments to reduce its interest rate risk.
[iii]
Credit risk
The
Company sells its services to a variety of customers under various payment terms
and therefore is exposed to credit risk. The Company has adopted
policies and procedures designed to limit this risk. The maximum
exposure to credit risk at the reporting date is the carrying value of
receivables. The Company establishes an allowance for doubtful
accounts that represents its estimate of incurred losses in respect of accounts
receivable.
RELATED
PARTY TRANSACTIONS
The
Company has entered into certain transactions and agreements in the normal
course of operations with related parties. Significant related party
transactions are as follows:
TransVideo
TransVideo is a company that is
controlled by the Chairman of the Board of Directors of the Company that designs
and sells equipment and technology for IPTV content delivery. STB
purchases amounted to $1,029,136 and $2,745,000 and transcoder licensing fees
amounted to $8,000 and
$125,000 for the years
ended December 31, 2009 and 2008, respectively. Included in cost of
equipment revenue is the cost of STBs sold of $937,204 and $2,816,490 for the years ended December 31,
2009 and 2008, respectively.
KyLinTV
KyLinTV is an IPTV company that is
controlled by the Chairman of the Board of Directors of the
Company. On June 1, 2008, the Company entered into an agreement with
KyLinTV to build and deliver the setup and back office operation of an IPTV
service. The Company also provides and charges KyLinTV for
administrative and general corporate support. For each of the periods
presented, the amounts received for these services provided by the Company for
the years ended December 31, 2009 and 2008 were $645,722 and $1,233,353,
respectively. During the year ended December 31, 2008, the Company
purchased computer equipment from KyLinTV in the amount of
$620,000.
New
York Islanders Hockey Club, L.P. (“New York Islanders”)
The
Company provides IT-related professional services to the New York Islanders, a
professional hockey club that is owned by the Chairman of the Board of Directors
of the Company.
Renaissance
Property Associates, LLC (“Renaissance”)
Renaissance is a real estate
management company owned by the Chairman of the Board of Directors of the
Company. In June 2009, the Company signed a sublease agreement with
Renaissance for office space in Plainview, New York. Rent expense
paid by the Company to Renaissance of $388,975 and zero, inclusive of taxes and
utilities, is included in selling, general and administrative expense for the
years ended December 31, 2009 and 2008, respectively.
Patstar,
Inc. (“Patstar”)
Patstar, an investment holding
company, is controlled by the Vice Chairman of the Board of Directors of the
Company. Rent expense paid to the Company by Patstar of $3,649
and $2,596 is included as a recovery in
selling, general and administrative expense for the years ended December 31,
2009 and 2008, respectively.
Hawaii
IPTV, LLC (“Hawaii”)
The
Company had an IPTV customer, Hawaii, an IPTV company, whose principals are
family members of the Chairman of the Board of Directors of the
Company. Hawaii ceased operations during the third quarter of
2009.
The
Smile Train, Inc. (“Smile Train”)
The
Company provides IT-related professional services to Smile Train, a public
charity whose founder and significant benefactor is the Chairman of the Board of
Directors of the Company.
The
Company recognized revenue from related parties for the years ended December 31
as follows:
December
31,
|
December
31,
|
|||
2009
|
2008
|
|||
$
|
$
|
|||
New York Islanders
|
395,681
|
296,451
|
||
Renaissance
|
140,580
|
120,000
|
||
Smile Train
|
108,000
|
120,000
|
||
Hawaii
|
41,789
|
57,577
|
||
KyLinTV
|
1,755,985
|
920,550
|
||
2,442,035
|
1,514,578
|
As at December 31, 2009 and 2008, the
amounts due from (to) related parties are as follows:
December
31,
|
December
31,
|
|||
2009
|
2008
|
|||
$
|
$
|
|||
New York Islanders
|
(304
|
)
|
29,189
|
|
Renaissance
|
—
|
(1,146
|
)
|
|
Smile Train
|
—
|
27,000
|
||
Hawaii
|
—
|
17,527
|
||
TransVideo
|
(298,291
|
)
|
(55,680
|
)
|
KyLinTV
|
246,992
|
250,343
|
||
(51,603
|
)
|
267,233
|
Investment
in Affiliate – KyLinTV
The
Company records its investment in KyLinTV using the equity method.
From
January 1, 2008 through December 31, 2009, the Company's equity interest in the
affiliate was 17.1%. As previously discussed, the Company also
provides and charges KyLinTV for administrative and general corporate
support. Management has determined that as a result of the 17.1%
equity interest combined with the services that the Company provides KyLinTV,
the Company continues to have significant influence on the operating activities
of KyLinTV; therefore, the Company continues to account for its investment in
KyLinTV using the equity method of accounting for investment.
The
Company’s proportionate share of the equity loss from KyLinTV has been accounted
for as a charge on the Company's consolidated statements of operations and
comprehensive loss. Due to KyLinTV’s accumulated losses, the
investment had been reduced to zero as at December 31, 2008. No
further charges will be recorded as the Company has no obligation to fund the
losses of KyLinTV.
The
results of operations and financial position of the Company's equity basis
investment in KyLinTV are summarized below for the years ended December
31:
Year
ended,
|
Year
ended,
|
|||
December
31,
|
December
31,
|
|||
2009
|
2008
|
|||
$
|
$
|
|||
Condensed income statement
information:
|
||||
Net sales
|
8,127,760
|
6,568,101
|
||
Net loss
|
(5,604,118
|
)
|
(8,148,974
|
)
|
December
31,
|
December
31,
|
|||
2009
|
2008
|
|||
$
|
$
|
|||
Condensed balance sheet
information:
|
||||
Current assets
|
1,924,891
|
927,427
|
||
Non-current assets
|
913,977
|
2,411,319
|
||
Total assets
|
2,838,868
|
3,338,746
|
||
Current liabilities
|
15,168,149
|
10,063,909
|
||
Non-current
liabilities
|
—
|
—
|
||
Equity (deficiency)
|
(12,329,281
|
)
|
(6,725,163
|
)
|
Total liabilities and
equity
|
2,838,868
|
3,338,746
|
On
February 26, 2010, a group of investors invested $10.0 million in KyLinTV for
15.1% of its equity, which reduced the Company’s equity interest in KyLinTV to
12.2%. Of the total $10.0 million investment, $1.0 million was
invested by AvantaLion LLC, a company controlled by the Chairman of the Board of
Directors of the Company.
CRITICAL
ACCOUNTING ESTIMATES
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
consistently applied throughout all periods. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to inventory allowances, bad debts,
long-lived assets, goodwill, income taxes, contingencies and litigation, the
determination of the useful lives of long-lived assets, allocation of the
purchase price for acquisitions and the assumptions used in determining the fair
value of stock options and warrants. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements:
Business
Combinations
We allocate the purchase price to
tangible assets, intangible assets, and liabilities based on fair values, with
the excess of purchase price being allocated to goodwill.
In 2009, our acquisition of INSINC
resulted in the allocation of a portion of the purchase price to acquired
intangible assets. In order to determine the fair value of these intangible
assets, we make estimates and judgments based on assumptions about the future
expected cash flows. We also make estimates about the useful life of those
acquired intangible assets. Should different conditions prevail, we could record
write-downs of intangible assets or changes in the estimate of useful life of
those intangible assets, which would result in changes to amortization
expense.
Acquired definite lived intangible
assets are initially recorded at fair value based on the present value of the
estimated cash flows of the assets acquired and are amortized over the future
income producing period, which we consider to be the useful life, on a
straight-line basis, which approximates the pattern in which we expect to
generate economic benefits from the asset.
Goodwill
Goodwill
is subject to an annual impairment test or on a more frequent basis if
necessary. Goodwill is tested for impairment at the beginning of the
fourth quarter of each fiscal year. We also test for impairment more
frequently if events or circumstances warrant. The Company as a whole
is considered one reporting unit. If we determine that our carrying
value exceeds our fair value, we compare the implied fair value of the goodwill
(determined as the excess fair value over the fair value assigned to our other
assets and liabilities) to the carrying amount of goodwill. If the
carrying value of goodwill were to exceed the implied fair value of goodwill, an
impairment loss would be recognized.
At
October 1, 2009, we determined that there had been no impairment of
goodwill. At December 31, 2009 we determined that no event existed
between October 1, 2009 and December 31, 2009 such that goodwill needed to be
tested further.
Long-Lived
Assets
We
amortize our long-lived assets over the estimated useful life of the
asset. We evaluate all of our long-lived assets, excluding goodwill,
periodically for impairment when events or changes in facts and circumstances
indicate that their carrying value may not be recoverable. Events or
changes in facts and circumstances can include a significant adverse change in
the business climate, strategic change in business direction, decline or
discontinuance of a product line or service, a reduction in our customer base or
a restructuring. If one of these events or circumstances indicates that the
carrying value of an asset may not be recoverable, or that our estimated
amortization period was not appropriate, we would record an impairment charge
against our long lived assets. The amount of impairment would be
measured as the difference between the carrying value and the fair value of the
impaired asset as calculated using a net realizable value
methodology. An impairment charge would be recorded as an operating
expense in the period of the impairment and as a reduction in the carrying value
of that asset.
At
December 31, 2009, we determined that no events or changes in facts existed such
that a further analysis for impairment was required.
Stock-based
Compensation and Other Stock-Based Payments
We
estimate the fair value of our options, warrants, restricted share units and
stock appreciation rights for financial accounting purposes using the
Black-Scholes-Merton model, which requires a number of subjective assumptions,
including the expected life of the Convertible Securities, risk-free interest
rate, dividend rate, forfeiture rate, future volatility of the price of our
Shares and vesting period. The use of subjective assumptions could materially
affect the fair value estimate.
For a
period of time prior to our initial public offering (“IPO”) in August 2006,
there was no active market for our Shares. Since we have been public
for less than the vesting period of our Convertible Securities, we do not
consider the volatility of our Share price to be representative of the estimated
future volatility when computing the fair value of options granted. Accordingly,
until such time that a representative volatility can be determined based on our
Share price, we will use a blended rate of our own Share price volatility for
the period we have been public and the average of three similar companies for
the pre-IPO period. We estimate the risk-free interest rate based on
the Federal Reserve Rate. Since we do not have a sufficient history
relating to options granted and exercised subsequent to our IPO, we base our
estimate of the expected life of the Convertible Security using the simplified
method based on the period for which our Convertible Securities vest or four
years. Our Convertible Securities vest on a monthly basis; therefore we have
estimated our forfeiture rate at zero, as actual forfeitures are known and
recorded on a timely basis.
The fair
values of the Convertible Securities issued are being recognized as compensation
expense over the applicable vesting period, which for the majority of
Convertible Securities is four years.
We
determine the fair value of our restricted share units based on our Share price
on the date the Shares are issued. Restricted share units give the
holder the right to Share for each vested restricted share
unit. These awards vest on a monthly basis over the vesting period,
which is four years. Stock-based compensation expense related to
restricted share units is recorded based on the market value of the Shares when
the Shares are issued, which generally coincides with the vesting period of
these awards.
Stock
appreciation rights give the holder the right to elect either to receive cash in
an amount equal to the excess of the quoted market price over the stock
appreciation right price or to receive Shares equal to the fair value of the
Shares less the exercise price divided by the market value of the Shares from
treasury or receive Shares by making a cash payment equal to the exercise
price. The Board of Directors has discretionary authority to accept
or reject a cash payment request in whole or in part. Stock-based
compensation expense is calculated as the fair value of all vested stock
appreciation rights on each reporting date, and is classified as a current
liability on the consolidated balance sheets. If the holder elects to
purchase Shares, the liability is credited to additional paid in
capital.
Stock-based
compensation expense is reported in our Consolidated Statements of Operations
and Comprehensive Loss within Selling, General and Administrative
Expenses.
Accounts
Receivable
Accounts
receivable are carried at original invoice amount. The Company
maintains a provision for estimated losses resulting from the inability of its
customers to make required payments. Management considers the following factors
when determining the collectability of specific customer accounts: customer
credit-worthiness; past transaction history with the customer; current economic
industry trends; and changes in customer payment terms. If the financial
conditions of the Company's customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be
required.
Inventory
Inventory
consists of STBs and is recorded at the lower of cost and net realizable value
and consists of finished goods. Cost is accounted for on a first-in, first-out
basis. The Company evaluates its ending inventories for estimated excess
quantities and obsolescence. This evaluation includes analyses of sales levels
and projections of future demand within specific time horizons. Inventories in
excess of future demand are reserved. In addition, the Company assesses the
impact of changing technology and market conditions on its inventory-on-hand and
writes off inventories that are considered obsolete.
Amortization
Policies and Useful Lives
The
Company amortizes the cost of property, plant and equipment and intangible
assets over the estimated useful service lives of these items. The
determinations of estimated useful lives of these long-lived assets involve
considerable judgment. In determining these estimates, the Company takes into
account industry trends and company specific factors including changing
technologies and expectations for the in-service period of these assets. On an
annual basis, the Company reassesses its existing estimates of useful lives to
ensure they match the anticipated life of the technology from a revenue
producing perspective. If technological change happens more quickly than
anticipated, the Company might have to shorten its estimate of the useful life
of certain equipment which could result in higher amortization expense in future
periods or an impairment charge to write down the value of this
equipment.
Taxes
We have
tax loss carryforwards available to offset future taxable income of $93.4
million as of December 31, 2009 that expire between the tax years 2010 and
2029, and have not been
fully audited by relevant authorities. We have not recorded a financial
statement benefit for these attributes as we have no history of
profitability. To the extent we use tax loss carryforwards
subsequent to 2009, we expect to record the benefit as a reduction in income tax
expense.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued guidance now codified
as ASC Topic 105, “Generally Accepted Accounting Principles” (“ASC 105”) as the
single source of authoritative non-governmental U.S. GAAP. ASC 105 does not
change current U.S. GAAP, but is intended to simplify user access to all
authoritative U.S. GAAP by providing all authoritative literature related to a
particular topic in one place (the “Codification”). On the effective date of ASC
105, the Codification superseded all then-existing non-SEC accounting and
reporting standards, and all other non-grandfathered non-SEC accounting
literature not included in the Codification became non-authoritative. The
provisions of ASC 105 are effective for interim and annual periods ending after
September 15, 2009. The Company adopted ASC 105 in the third quarter of 2009.
This pronouncement had no effect on our consolidated financial position, results
of operations or cash flows, but impacted the financial reporting process by
replacing all references to pre-Codification standards with references to the
applicable Codification topic.
Effective January 1, 2009, the Company adopted ASC
Topic 805-10, “Business Combinations” (“ASC 805”). ASC 805 requires
the acquiring entity in a business combination to recognize all assets acquired
and liabilities assumed in the transaction, establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities
assumed and requires the acquirer to disclose certain information related to the
nature and financial effect of the business combination.
ASC
805 also establishes principles and requirements for how an acquirer recognizes
any non-controlling interest in the acquiree and the goodwill acquired in a
business combination.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 amends guidance included
within ASC Topic 605-25 to require an entity to use an estimated selling price
when vendor-specific objective evidence or acceptable third party evidence does
not exist for any products or services included in a multiple element
arrangement. The arrangement consideration should be allocated among
the products and services based upon their relative selling prices, thus
eliminating the use of the residual method of allocation. ASU 2009-13
also requires expanded qualitative and quantitative disclosures regarding
significant judgments made and changes in applying this guidance. ASU 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early
adoption and retrospective application are also permitted. The Company is
currently evaluating the impact of adopting the provisions of ASU
2009-13.
Effective January 1, 2009, the Company adopted ASC
Topic 815-40, “Derivatives and
Hedging” (“ASC 815-40”). One of the conclusions reached under
ASC 815-40 was that an equity-linked financial instrument would not be
considered indexed to the entity’s own stock if the strike price is denominated
in a currency other than the issuer’s functional currency. The
conclusion reached under ASC 815-40 clarified the accounting treatment for these
and certain other financial instruments. ASC 815-40 specifies that a
contract would not be treated as a derivative if it met the following
conditions: (a) indexed to the Company’s own stock; and (b)
classified in shareholders’ equity in the Company’s statement of financial
position. The Company’s outstanding warrants denominated in Canadian
dollars as detailed in note 17 are not considered to be indexed to its own stock
because the exercise price is denominated in Canadian dollars and the Company’s
functional currency is United States dollars. Therefore, these
warrants have been treated as derivative financial instruments and recorded at
their fair value as a liability. All other outstanding convertible
securities are considered to be indexed to the Company’s stock, because their
exercise price is denominated in the same currency as the Company’s functional
currency, and are included in shareholders’ equity.
In February 2008, the Canadian Institute of
Chartered Accountants (“CICA”) issued new Handbook Section 3064, Goodwill and
Intangible Assets, which replaces Section 3062, Goodwill and
Other Intangible Assets, and Section 3450, Research and
Development Costs. The new standard addresses when an
internally developed intangible asset meets the criteria for recognition as an
asset. The section also issued amendments to Section 1000, Financial
Statement Concepts. These changes were effective for fiscal
years beginning on or after October 1, 2008, with earlier adoption permitted,
and have been adopted by the Company effective January 1, 2009. The
objectives of the changes are to reinforce a principles-based approach to the
recognition of costs as assets and to clarify the application of the concept of
matching revenues and expenses in Section 1000. Collectively, these
changes bring Canadian practice closer to International Financial Reporting
Standards (“IFRS”) by eliminating the practice of recognizing as assets a
variety of start-up, pre-production and similar costs that do not meet the
definition and recognition criteria of an asset. There was no
material effect on the Company’s consolidated financial statements as a result
of adopting CICA Handbook Section 3064.
In February 2008, the CICA Accounting
Standards Board confirmed that the changeover to IFRS from Canadian GAAP will be
required for publicly accountable enterprises, effective for the interim and
annual financial statements relating to fiscal years beginning on or after
January 1, 2011. The Company became an SEC issuer effective June 8,
2009 and expects to continue to use U.S. GAAP until the date that IFRS is
implemented in the United States, which is currently estimated to occur no
sooner than 2014.
Effective
January 1, 2009 the Company adopted CICA Handbook Section 1582 “Business
Combinations” which replaces Section 1581. This standard establishes the
principles and requirements of the acquisition method for business combination
and related disclosures and applies prospectively to business combinations for
which the acquisition date.
Effective
January 1, 2009, the Company adopted CICA Handbook Section 1601 “Consolidated
Financial Statements” and section 1602 “Non-controlling Interest” which replace
Section 1600. Section 1601 establishes standards for the preparation of
consolidated financial statements. Section 1602 provides guidance on accounting
for a non-controlling interest in a subsidiary in consolidated financial
statements subsequent to a business combination. The
adoption of Sections 1582, 1601, and 1602 did not materially impact the
Company's consolidated financial statements as the provisions of these standards
are substantially similar to the Company's accounting in
accordance
with U.S.
GAAP.
OUTSTANDING
SHARE DATA
The
Company had total Shares outstanding as at March 10, 2010 of
116,744,404. In addition, as at such date the Company had
28,617,125 outstanding options,
SARs, restricted share units, warrants and retention warrants, which are each
exchangeable for one Share upon exercise.
DISCLOSURE
CONTROLS AND CONTROLS OVER FINANCIAL REPORTING
Evaluation
of Disclosure Controls and Procedures:
The Company maintains appropriate
disclosure controls and procedures and internal controls over financial
reporting (each as defined in National Instrument 52-109, Certification of Disclosure in
Issuers' Annual and Interim Filings (“NI 52-109”) of the Canadian
Securities Administrators) to ensure that information disclosed externally is
complete, reliable and timely. The Company's Chief Executive Officer and Chief
Financial Officer evaluated, or caused an evaluation under their direct
supervision of, the design and operating effectiveness of the Company's
disclosure controls and procedures (“DC&P”) and internal controls over
financial reporting (“ICFR”) as at December 31, 2009, and have concluded that
such DC&P and ICFR were appropriately designed and were operating
effectively, except as outlined below. See “Limitation on scope of
design” below.
Limitation
on Scope of Design:
We have limited the scope of design of
our internal controls and procedures and internal controls over financial
reporting to exclude controls, policies and procedures of INSINC, which was
acquired effective October 31, 2009. The chart below presents the
summary financial information of INSINC.
Balance
Sheet Data:
|
Income
Statement Data:
|
|||
December
31
|
Year
ended
|
|||
2009
|
31-Dec-09
|
|||
$
|
$
|
|||
Current
assets
|
503,564
|
Total
revenue
|
575,347
|
|
Long-term
assets
|
186,133
|
Total
cost of revenue
|
238,309
|
|
Current
liabilities
|
653,657
|
Net
income for the year
|
57,088
|
|
Long-term
liabilities
|
120,000
|
The scope limitation is in accordance
with section 3.3(1)(b) of NI 52-109 to which this MD&A relates, which allows
an issuer to limit its design of DC&P and ICFR to exclude controls, policies
and procedures of a business that the issuer acquired not more than 365 days
prior to the end of the fiscal period.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
As a
smaller reporting company, we are not required to include this information in
our annual report on Form 10-K.
Item
8. Financial Statements and Supplementary
Data
Financial
statements are attached hereto beginning with page F-1.
Item
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Ernst
& Young LLP (Canada) served as auditors of NeuLion from October 2005 to May
2009. At the Annual and Special Meeting of Shareholders held in May 2009, our
shareholders appointed Ernst & Young (US) as our auditors for the fiscal
year 2009 and authorized the Board to fix the remuneration of the
auditors.
Item
9A(T). Controls and Procedures
Disclosure
Controls and Procedures
Our
principal executive officer and principal financial officer, with the assistance
of other members of our management, have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end
of the period covered by this annual report on Form 10-K. Based upon
such evaluation, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures are effective as of
the end of the period covered by this annual report on Form 10-K.
Management’s
Report on Internal Control Over Financial Reporting
This
annual report on Form 10-K does not include a report of management’s assessment
regarding internal control over financial reporting or an attestation report of
our registered public accounting firm due to a transition period established by
rules of the SEC for newly public companies.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers, and Corporate
Governance
The
information required by this item is incorporated herein by reference to the
section titled “PARTICULAR OF MATTERS TO BE ACTED UPON – Election of Directors”
of the Proxy Statement for the 2010 Annual and Special Meeting of the
Shareholders. The information required by this item regarding
executive officers is incorporated herein by reference to the section titled
“BUSINESS-Executive Officers” under Item 1 hereof. Definitive
proxy materials will be filed with the SEC pursuant to Regulation 14A no later
than April 30, 2010.
Item
11. Executive Compensation
The
information required by this item is incorporated herein by reference to the
section titled “STATEMENT OF EXECUTIVE COMPENSATION” of the Proxy Statement for
the 2010 Annual and Special Meeting of the Shareholders. Definitive
proxy materials will be filed with the SEC pursuant to Regulation 14A no later
than April 30, 2010.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
information required by this item related to securities authorized for issuance
under our equity compensation plans is incorporated herein by reference to the
section titled “SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS” under Item 5 of this annual report on Form 10-K.
The
information required by this item related to security ownership of certain
beneficial owners is incorporated herein by reference to the section titled
“SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” of the Proxy
Statement for the 2010 Annual and Special Meeting of the
Shareholders. Definitive proxy materials will be filed with the SEC
pursuant to Regulation 14A no later than April 30, 2010.
Item
13. Certain Relationships and Related Transactions, and Directors
Independence
The
information required by this item is incorporated herein by reference to the
sections titled “INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS” and
“BOARD OF DIRECTORS – Independence of Directors” of the Proxy Statement for the
2010 Annual and Special Meeting of the Shareholders. Definitive proxy
materials will be filed with the SEC pursuant to Regulation 14A no later than
April 30, 2010.
Item
14. Principal Accountant Fees and Services
The
information required by this item is incorporated herein by reference to the
section titled “AUDIT COMMITTEE MATTERS – Services Performed by the Independent
Registered Public Accountants” of the Proxy Statement for the 2010 Annual and
Special Meeting of the Shareholders. Definitive proxy materials will
be filed with the SEC pursuant to Regulation 14A no later than April 30,
2010.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)
|
(1)
|
Financial
Statements
Consolidated
Balance Sheets
Consolidated
Statements of Operations and Comprehensive Loss
Consolidated
Statements of Shareholders’ Equity
Consolidated
Statements of Cash Flows
|
|
(2)
|
Financial
Statement Schedules
None.
|
(b)
|
Exhibits
|
The
following Exhibits are filed as part of this report
Exhibit
No. |
Description
|
2.1
|
Acquisition
Agreement, dated as of October 5, 2009, by and among
NeuLion, Inc., Interactive Netcasting Systems Inc. and Hugh
Dobbie, Jr. (portions of this exhibit have been omitted pursuant to a
request for confidential treatment on file with the Securities and
Exchange Commission) (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2009)
|
3.1(i)
|
Articles
of Incorporation, as amended (incorporated by reference to
Exhibit 3.1(i) to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2009)
|
3.1(ii)
|
Amended
By-law No. 1 (incorporated by reference to Exhibit 3.1(ii) to
the Company’s Registration Statement on Form 10, Filed April 9,
2009)
|
4
|
Form
of stock specimen (incorporated by reference to Exhibit 4 to the
Company’s Registration Statement on Form 10, Filed April 9,
2009)
|
9.1
|
Voting
Trust Agreement, dated as of October 20, 2008, among Charles B. Wang,
Nancy Li, AvantaLion LLC, Jianbing Duan, Computershare Trust Company of
Canada and JumpTV Inc. (incorporated by reference to Exhibit 9 to the
Company’s Registration Statement on Form 10, Filed April 9,
2009)
|
9.2
|
Voting
Support Agreement, dated as of October 5, 2009, by and among
NeuLion, Inc., Hugh Dobbie, Jr. and Dowco Computer Systems Ltd.
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2009)
|
10.1
#
|
Employment
Agreement, dated as of June 1, 2006, between JumpTV Inc. and G. Scott
Paterson (incorporated by reference to Exhibit 10.1 to the Company’s
Registration Statement on Form 10, Filed April 9, 2009)
|
10.2
#
|
Employment
Agreement, dated as of February 11, 2008, between JumpTV Inc. and
Blair Baxter (incorporated by reference to Exhibit 10.2 to the
Company’s Registration Statement on Form 10, Filed April 9,
2009)
|
10.3
#
|
Amendment,
dated March 31, 2008, to Employment Agreement between JumpTV Inc. and
Blair Baxter (incorporated by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form 10, Filed April 9,
2009)
|
Exhibit
No. |
Description
|
10.4
#
|
Termination
Letter, dated September 9, 2008, between JumpTV Inc. and Blair Baxter
(incorporated by reference to Exhibit 10.4 to the Company’s
Registration Statement on Form 10, Filed April 9, 2009)
|
10.5
#
|
Agreement
for Services, dated February 23, 2009, between JumpTV Inc. and Blair
Baxter (incorporated by reference to Exhibit 10.5 to the Company’s
Registration Statement on Form 10, Filed April 9, 2009)
|
10.6
#
|
Termination
Letter, dated as of June 27, 2008, between JumpTV Inc. and Jordan
Banks (incorporated by reference to Exhibit 10.7 to the Company’s
Registration Statement on Form 10, Filed April 9, 2009)
|
10.7
#
|
Termination
Letter, dated October 14, 2008, between JumpTV Inc. and Nadezda Usina
(incorporated by reference to Exhibit 10.9 to the Company’s
Registration Statement on Form 10, Filed April 9, 2009)
|
10.8
#
|
Termination
Fact Sheet/Separation Agreement, dated September 23, 2008, between
JumpTV Inc. and William Stephen (incorporated by reference to
Exhibit 10.11 to the Company’s Registration Statement on Form 10,
Filed April 9, 2009)
|
10.9
#
|
Second
Amended and Restated Stock Option Plan, as amended, and form of option
agreement (incorporated by reference to Exhibit 10.28 to Amendment
No. 1 to the Company’s Registration Statement on Form 10, Filed June 2,
2009)
|
10.10
#
|
2006
Stock Appreciation Rights Plan, as amended (incorporated by reference to
Exhibit 10.29 to Amendment No. 1 to the Company’s Registration
Statement on Form 10, Filed June 2, 2009)
|
10.11
#
|
Amended
and Restated Retention Warrants Plan, as amended, and form of retention
warrant agreement (incorporated by reference to Exhibit 10.30 to
Amendment No. 1 to the Company’s Registration Statement on Form 10, Filed
June 2, 2009)
|
10.12
#
|
Restricted
Share Plan and form of award agreement (incorporated by reference to
Exhibit 10.15 to the Company’s Registration Statement on Form 10, Filed
April 9, 2009)
|
10.13
#
|
Amended
and Restated Directors’ Compensation Plan, as amended (incorporated by
reference to Exhibit 10.31 to Amendment No. 1 to the Company’s
Registration Statement on Form 10, Filed June 2, 2009)
|
10.14
#
|
Employee
Share Purchase Plan (incorporated by reference to Exhibit 10.17 to the
Company’s Registration Statement on Form 10, Filed April 9,
2009)
|
10.15
#
|
Form of
Rights Agreement under the 2006 Stock Appreciation Rights Plan
(incorporated by reference to Exhibit 10.18 to the Company’s Registration
Statement on Form 10, Filed April 9, 2009)
|
10.16
|
Contract
for Services, dated as of June 1, 2008, between KyLinTV, Inc.
and NeuLion, Inc. (portions of this exhibit have been omitted
pursuant to a request for confidential treatment on file with the
Securities and Exchange Commission) (incorporated by reference to
Exhibit 10.19 to Amendment No. 3 to the Company’s
Registration Statement on Form 10, Filed June 23, 2009)
|
10.17
|
Software
License and Product Distribution Agreement, dated as of September 29,
2006, between NeuLion, Inc. and TransVideo International Ltd.
(portions of this exhibit have been omitted pursuant to a request for
confidential treatment on file with the Securities and Exchange
Commission) (incorporated by reference to Exhibit 10.20 to Amendment
No. 3 to the Company’s Registration Statement on Form 10, Filed June
23, 2009)
|
Exhibit
No. |
Description
|
10.18
|
Amendment,
dated as of July 1, 2008, to Software and Product Distribution
Agreement between NeuLion, Inc. and TransVideo International Ltd.
(portions of this exhibit have been omitted pursuant to a request for
confidential treatment on file with the Securities and Exchange
Commission) (incorporated by reference to Exhibit 10.21 to the Company’s
Registration Statement on Form 10, Filed April 9, 2009)
|
10.19
|
License
Agreement, dated as of June 1, 2006, between NeuLion, Inc. and
ABS-CBN Global Limited (portions of this exhibit have been omitted
pursuant to a request for confidential treatment on file with the
Securities and Exchange Commission) (incorporated by reference to
Exhibit 10.22 to Amendment No. 3 to the Company’s
Registration Statement on Form 10, Filed June 23, 2009)
|
10.20
|
Contract
for Services, dated as of June 22, 2007, between Sky Angel U.S., LLC
and NeuLion, Inc. (portions of this exhibit have been omitted
pursuant to a request for confidential treatment on file with the
Securities and Exchange Commission) (incorporated by reference to
Exhibit 10.23 to the Company’s Registration Statement on Form 10,
Filed June 23, 2009)
|
10.21
|
Contract
for Services, dated as of June 25, 2007, between NHL Interactive
CyberEnterprises, LLC and NeuLion, Inc. (portions of this exhibit
have been omitted pursuant to a request for confidential treatment on file
with the Securities and Exchange Commission) (incorporated by reference to
Exhibit 10.24 to Amendment No. 3 to the Company’s
Registration Statement on Form 10, Filed June 23, 2009)
|
10.22
|
Amendment
to Contract for Services Agreement, dated as of August 1, 2008,
between NHL Interactive CyberEnterprises, LLC and NeuLion, Inc.
(portions of this exhibit have been omitted pursuant to a request for
confidential treatment on file with the Securities and Exchange
Commission) (incorporated by reference to Exhibit 10.25 to the Company’s
Registration Statement on Form 10, Filed April 9, 2009)
|
10.23*
|
Contract
for Products and Services, dated January 4, 2010, between NeuLion, Inc.,
NeuLion USA, Inc. and DISH Network L.L.C. (portions of this
exhibit have been omitted pursuant to a request for confidential treatment
on file with the Securities and Exchange Commission)
|
21*
|
Subsidiaries
|
31.1*
|
Certification
of the Chief Executive Officer (Principal Executive Officer) pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as
amended
|
31.2*
|
Certification
of the Chief Financial Officer (Principal Financial Officer) pursuant to
Rule 13a-14(a) of the Securities Exchange Act, as
amended
|
32*
|
Certification
of the Chief Executive Officers pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
* Filed
herewith
#
Management contract or compensatory plan or arrangements
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEULION,
INC.
|
||
March
17, 2010
|
By:
|
/s/
Nancy Li
|
Name: Nancy
Li
|
||
Title: Chief
Executive Officer
|
||
(Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Capacity
|
Date
|
|
/s/ Charles B.
Wang
|
Chairman
of the Board
|
March
17, 2010
|
|
Charles B. Wang
|
and
Director
|
||
/s/ Nancy Li
|
Chief
Executive Officer
|
March
17, 2010
|
|
Nancy Li
|
and
Director (Principal
|
||
Executive
Officer)
|
|||
/s/ G. Scott
Paterson
|
Vice
Chairman of the Board
|
March
17, 2010
|
|
G. Scott Paterson
|
and
Director
|
||
/s/ Arthur J.
McCarthy
|
Chief
Financial Officer
|
March
17, 2010
|
|
Arthur J. McCarthy
|
(Principal
Financial Officer)
|
||
/s/ Roy E.
Reichbach
|
General
Counsel, Corporate
|
March
17, 2010
|
|
Roy E. Reichbach
|
Secretary
and Director
|
||
/s/ John R.
Anderson
|
Director
|
March
17, 2010
|
|
John R. Anderson
|
|||
|
Director
|
|
|
Gabriel A. Battista
|
|||
/s/ Shirley Strum
Kenny
|
Director
|
March
17, 2010
|
|
Shirley Strum Kenny
|
|||
/s/ David
Kronfeld
|
Director
|
March
17, 2010
|
|
David Kronfeld
|
NeuLion,
Inc.
INDEX
TO FINANCIAL STATEMENTS
Page
|
|
F-2 | |
Financial Statements:
|
|
Consolidated Balance Sheets |
F-3
|
F-4
|
|
F-5 | |
F-6
|
|
F-7
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
NeuLion,
Inc.
We have
audited the accompanying consolidated balance sheets of NeuLion, Inc. (the
“Company”) as of December 31, 2009 and 2008, and the related consolidated
statements of operations and comprehensive loss, shareholders' 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. We were not engaged to perform an
audit of the Company's 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, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of NeuLion, Inc. at
December 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.
As
discussed in Note 2 to the consolidated financial statements, the Company
adopted the guidance issued in Financial Accounting Standards Board (“FASB”)
Statement No. 141(R), “Business Combinations” (codified in FASB Accounting
Standards Codification (“ASC”) Topic 805, “Business Combinations”) and Emerging
Issues Task Force 07-5, “Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entity's Own Stock” (codified in FASB ASC Topic 815-40) on
January 1, 2009.
/s/ Ernst & Young LLP
Jericho,
New York
March 17,
2010
NEULION,
INC.
CONSOLIDATED
BALANCE SHEETS
[Expressed
in U.S. dollars, unless otherwise noted]
As at
December 31,
|
||||||
2009 | 2008 | |||||
$ | $ | |||||
ASSETS
|
||||||
Current
|
||||||
Cash
and cash equivalents
|
12,957,679 | 27,323,021 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $129,550 and
$290,538,
|
||||||
respectively [note
2]
|
1,809,147 | 2,284,242 | ||||
Taxes
receivable
|
35,334 | 983,253 | ||||
Other
receivables
|
821,834 | 227,711 | ||||
Inventory
|
928,592 | 347,600 | ||||
Prepaid
expenses and deposits
|
966,101 | 1,830,260 | ||||
Due
from related party [note
7]
|
246,992 | 324,059 | ||||
Total current
assets
|
17,765,679 | 33,320,146 | ||||
Property,
plant and equipment, net [note
5]
|
5,754,255 | 6,474,989 | ||||
Intangible
assets, net [notes 3 and
6]
|
9,542,071 | 5,749,332 | ||||
Goodwill
[notes 3 and
6]
|
6,757,194 | 6,846,183 | ||||
Other
assets
|
449,964 | 1,347,032 | ||||
Total
assets
|
40,269,163 | 53,737,682 | ||||
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
||||||
Current
|
||||||
Accounts
payable
|
5,383,518 | 4,465,388 | ||||
Accrued
liabilities
|
5,822,385 | 7,595,116 | ||||
Derivative
liability [note
16]
|
1,389,300 | — | ||||
Due
to related parties [note
7]
|
298,595 | 56,826 | ||||
Deferred
revenue
|
3,907,510 | 3,091,993 | ||||
Total current
liabilities
|
16,801,308 | 15,209,323 | ||||
Long-term
deferred revenue
|
469,191 | 638,510 | ||||
Other
long-term liabilities
|
728,330 | 876,271 | ||||
Total
liabilities
|
17,998,829 | 16,724,104 | ||||
Shareholders'
equity
|
||||||
Share
capital [note
9]
|
11,260,415 | 6,762,097 | ||||
Common shares (par value: none; authorized: unlimited; issued and
outstanding:
|
||||||
116,731,794 and 110,084,044, respectively)
|
||||||
Additional
paid-in capital
|
55,023,567 | 56,500,258 | ||||
Promissory
notes receivable
|
(209,250 | ) | (209,250 | ) | ||
Accumulated
deficit
|
(43,804,398 | ) | (26,039,527 | ) | ||
Total shareholders'
equity
|
22,270,334 | 37,013,578 | ||||
Total liabilities and
shareholders' equity
|
40,269,163 | 53,737,682 |
See accompanying
notes
NEULION,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
COMPREHENSIVE LOSS
[Expressed
in U.S. dollars, unless otherwise noted]
Years
ended December 31,
|
|||||||
2009
|
2008
|
||||||
$
|
$
|
||||||
Revenue
|
|||||||
Services revenue
|
26,464,400 | 9,542,689 | |||||
Equipment revenue
|
1,629,277 | 3,900,650 | |||||
28,093,677 | 13,443,339 | ||||||
Costs and
Expenses
|
|||||||
Cost of services revenue, exclusive of
depreciation and
|
12,850,002 | 4,519,062 | |||||
amortization shown separately
below
|
|||||||
Cost of equipment revenue
|
1,537,150 | 3,120,087 | |||||
Selling, general and administrative, including
stock-based compensation [note
10]
|
28,767,049 | 14,221,347 | |||||
Depreciation and
amortization
|
4,141,117 | 1,572,492 | |||||
Impairment of long-lived
assets
|
— | 1,036,993 | |||||
47,295,318 | 24,469,981 | ||||||
Operating
loss
|
(19,201,641 | ) | (11,026,642 | ) | |||
Other income
(expense)
|
|||||||
Unrealized loss on derivative [note
16]
|
(801,350 | ) | — | ||||
Gain on foreign exchange
|
68,245 | 265,720 | |||||
Investment income
|
293,825 | 130,048 | |||||
Equity in loss of
affiliate
|
— | (1,006,386 | ) | ||||
(439,280 | ) | (610,618 | ) | ||||
Net and comprehensive loss for
the year
|
(19,640,921 | ) | (11,637,260 | ) | |||
Net
loss per weighted average number of shares
|
|||||||
outstanding
- basic and diluted [note
11]
|
$(0.18 | ) | $(0.21 | ) | |||
Weighted
average number of shares
|
|||||||
outstanding
- basic and diluted [note
11]
|
111,314,653 | 55,995,297 |
See accompanying
notes
NEULION,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
[Expressed
in U.S. dollars, unless otherwise noted]
Total
|
|||||||||||||||||||||||
Additional
|
Promissory
|
Accumulated
|
shareholders'
|
||||||||||||||||||||
Common shares |
paid-in
capital
|
Notes
|
deficit
|
equity
|
|||||||||||||||||||
#
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||||
Balance, December 31,
2007
|
44,018,383 | 68,871 | 17,580,329 | — | (14,402,267 | ) | 3,246,933 | ||||||||||||||||
Capital
contribution
|
— | — | 2,600,000 | — | — | 2,600,000 | |||||||||||||||||
Exercise
of stock options
|
5,559,044 | 8,698 | 419,927 | (209,250 | ) | — | 219,375 | ||||||||||||||||
49,577,427 | 77,569 | 20,600,256 | (209,250 | ) | (14,402,267 | ) | 6,066,308 | ||||||||||||||||
Issuance
of shares in connection
|
|||||||||||||||||||||||
with
merger
|
49,490,372 | (77,569 | ) | 31,615,091 | — | — | 31,537,522 | ||||||||||||||||
Private
placement
|
11,000,000 | 6,750,700 | 2,464,000 | — | — | 9,214,700 | |||||||||||||||||
Issuance
of common shares for
|
|||||||||||||||||||||||
RSUs
|
16,245 | 6,518 | — | — | — | 6,518 | |||||||||||||||||
Release
of common shares from
|
— | 4,879 | — | — | — | 4,879 | |||||||||||||||||
escrow
for services
|
|||||||||||||||||||||||
Stock-based
compensation
|
— | — | 1,820,911 | — | — | 1,820,911 | |||||||||||||||||
Net
loss
|
— | — | — | — | (11,637,260 | ) | (11,637,260 | ) | |||||||||||||||
Balance, December 31,
2008
|
110,084,044 | 6,762,097 | 56,500,258 | (209,250 | ) | (26,039,527 | ) | 37,013,578 | |||||||||||||||
Cumulative
effect of change in
|
|||||||||||||||||||||||
accounting
principle [notes
2
|
|||||||||||||||||||||||
and 16]
|
— | — | (2,464,000 | ) | — | 1,876,050 | (587,950 | ) | |||||||||||||||
Exercise
of stock options for
|
|||||||||||||||||||||||
common
shares
|
187,417 | 115,831 | (28,127 | ) | — | — | 87,704 | ||||||||||||||||
Issuance
of common shares on
|
|||||||||||||||||||||||
acquisition
of Interactive
|
|||||||||||||||||||||||
Netcasting
Systems Inc.
|
|||||||||||||||||||||||
(“INSINC”)
[note
3[i]]
|
6,000,012 | 4,048,442 | 325,351 | — | — | 4,373,793 | |||||||||||||||||
Stock-based
compensation:
|
|||||||||||||||||||||||
Issuance
of common shares on
|
|||||||||||||||||||||||
vesting of restricted share units
|
52,498 | 31,631 | — | — | — | 31,631 | |||||||||||||||||
Release of common shares from
|
|||||||||||||||||||||||
escrow
for services
|
— | 51,757 | — | — | — | 51,757 | |||||||||||||||||
Issuance
of common shares under
|
|||||||||||||||||||||||
Directors’
Compensation Plan
|
407,823 | 250,657 | — | — | — | 250,657 | |||||||||||||||||
Stock
options and warrants
|
— | — | 690,085 | — | — | 690,085 | |||||||||||||||||
Net
loss
|
— | — | — | — | (19,640,921 | ) | (19,640,921 | ) | |||||||||||||||
Balance, December 31,
2009
|
116,731,794 | 11,260,415 | 55,023,567 | (209,250 | ) | (43,804,398 | ) | 22,270,334 |
See
accompanying notes
[Expressed
in U.S. dollars, unless otherwise noted]
Years
ended December 31,
|
|||||||
2009
|
2008
|
||||||
$
|
$
|
||||||
OPERATING
ACTIVITIES
|
|||||||
Net
loss
|
(19,640,921 | ) | (11,637,260 | ) | |||
Adjustments
to reconcile net loss to cash used in operating
activities
|
|||||||
Depreciation and amortization [notes 5 and
6]
|
4,141,117 | 1,572,492 | |||||
Equity in loss of affiliate
|
— | 1,006,386 | |||||
Stock-based compensation [note
10]
|
1,167,789 | 1,848,906 | |||||
Unrealized loss on derivative [notes 2 and
16]
|
801,350 | — | |||||
Impairment of long-lived assets
|
— | 1,036,993 | |||||
Changes
in operating assets and liabilities
|
|||||||
Accounts receivable
|
848,375 | 1,943,307 | |||||
Inventory
|
(580,992 | ) | (24,100 | ) | |||
Prepaid expenses, deposits and other assets
|
1,832,496 | 191,621 | |||||
Other receivables
|
(701,145 | ) | 4,441 | ||||
Taxes receivable
|
966,367 | 37,398 | |||||
Due from related parties
|
77,067 | (135,204 | ) | ||||
Accounts payable
|
275,907 | (306,999 | ) | ||||
Accrued liabilities
|
(1,364,330 | ) | 604,465 | ||||
Deferred revenue
|
510,383 | 244,846 | |||||
Long-term liabilities
|
(267,941 | ) | 41,833 | ||||
Due to related parties
|
241,769 | (2,043,626 | ) | ||||
Cash used in operating
activities
|
(11,692,709 | ) | (5,614,501 | ) | |||
INVESTING
ACTIVITIES
|
|||||||
Purchase
of property, plant and equipment
|
(1,198,432 | ) | (1,443,438 | ) | |||
Acquisition
of INSINC, net of cash of $344,371 [note
3[i]]
|
(1,561,905 | ) | — | ||||
Acquisition
of NeuLion, Inc.
|
— | 21,738,421 | |||||
Cash (used in) provided by
investing activities
|
(2,760,337 | ) | 20,294,983 | ||||
FINANCING
ACTIVITIES
|
|||||||
Capital
contributions
|
— | 2,600,000 | |||||
Private
placement
|
— | 9,214,700 | |||||
Proceeds
from exercise of stock options
|
87,704 | 219,375 | |||||
Cash provided by financing
activities
|
87,704 | 12,034,075 | |||||
Net (decrease) increase in cash
and cash equivalents during the year
|
(14,365,342 | ) | 26,714,557 | ||||
Cash
and cash equivalents, beginning of year
|
27,323,021 | 608,464 | |||||
Cash and cash equivalents, end
of year
|
12,957,679 | 27,323,021 |
See
accompanying notes
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
1. Nature of
Operations
On
October 20, 2008, the company now known as NeuLion USA, Inc. (“NeuLion USA”)
completed a merger (the “Merger”) with the company then known as NeuLion, Inc.
(“NeuLion” or the “Company”) that was accounted for as a reverse
takeover. As a result of the Merger, NeuLion USA became the legal
subsidiary of NeuLion, and NeuLion was required to register its common shares
(the “Shares”) in the United States under the Securities and Exchange Act of
1934, as amended. On June 8, 2009, NeuLion’s Registration Statement
on Form 10 became effective.
On June
4, 2009, the company now known as NeuLion, Inc., a Delaware corporation and
wholly-owned subsidiary of the company then known as JumpTV Inc., a Canadian
corporation, changed its name to NeuLion USA. On July 13, 2009,
JumpTV Inc. changed its name to NeuLion. In conjunction with the name
change, NeuLion’s stock symbol was changed from “JTV” to “NLN” on the Toronto
Stock Exchange. This Annual Report on Form 10-K reflects these name
changes.
These
consolidated financial statements for the years ended December 31, 2009 and
2008, and as at December 31, 2009 and 2008 are issued under the name of the
legal acquirer in the Merger (NeuLion) but are deemed to be a continuation of
the accounting acquirer (NeuLion USA). These financial statements
reflect the assets, liabilities and results of operations of NeuLion USA, the
accounting acquirer, and only include the assets, liabilities and results of
operations of NeuLion, the legal acquirer, subsequent to the reverse takeover on
October 20, 2008 (the “Acquired Business”).
The
Company’s primary business is to build and manage private networks for content
owners and aggregators (the Company’s content partners) that are used to stream
content to multiple platforms through browser-based devices. That
content includes live and on-demand sports and international and variety
programming, which the Company then delivers to subscribers and pay-per-view
customers for viewing on Internet-connected browser-based devices such as
personal computers, laptops and mobile devices and on standard television sets
through Internet-connected set top boxes (“STBs”). The Company also
acquires the rights to certain sports and international content from television
broadcasters (our channel partners), which the Company then streams to end users
through the Company's own private networks.
2.
Basis of Presentation and Significant Accounting Policies
The
accompanying consolidated financial statements include all of our wholly-owned
subsidiaries and have been prepared in accordance with United States generally
accepted accounting principles (“U.S. GAAP”). See Note 17 for
reconciliation of U.S. GAAP to Canadian generally accepted accounting principles
(“Canadian GAAP”). The Company also has an investment in KyLinTV,
Inc. ("KyLinTV") in which, as at December 31, 2009, it had a 17.1% equity
interest (2008 – 17.1%). KyLinTV is accounted for using the equity
method of accounting.
Use of estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could differ
from those estimates. Significant estimates made by management
include the determination of the useful lives of long-lived assets, impairment
of intangible assets and goodwill, inventory obsolescence, assumptions used in
stock-based compensation and the allowance for doubtful accounts. On
an ongoing basis, management reviews its estimates to ensure they appropriately
reflect changes in the Company's business and new information as it becomes
available. If historical experience and other factors used by management to make
these estimates do not reasonably reflect future actual results, the Company's
consolidated financial position and results of operations could be materially
impacted.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Revenue
recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, prices are
determinable, collectability is reasonably assured and the goods or services
have been delivered. If any of these criteria are not met, revenue is
deferred until such time as all of the criteria are met.
For
arrangements with multiple elements, the Company allocates revenue to each
element using the residual method; this allocation is based on vendor specific
objective evidence ("VSOE") of fair value of the undelivered items. VSOE is
based on the price that the Company charges for the undelivered element based on
the sales price of each element when sold on a standalone basis. In
addition, the Company defers the portion of the arrangement fee equal to the
fair value of the undelivered elements until they are delivered.
The
Company, at the request of one customer, has entered into a "bill and hold"
arrangement. The Company accounts for its bill and hold revenue
arrangement consistent with the provisions of Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, “Revenue
Recognition,” and recognizes revenue when the risk of ownership has passed to
the customer and a fixed commitment to purchase the goods is
received. The Company does not retain any specific performance
obligations such that the earning process is not complete and ordered goods are
segregated from the Company's inventory and not subject to fulfilling other
orders. Inventory consists of finished goods. For the
years ended December 31, 2009 and 2008, the Company recognized zero and
$2,500,000 in revenue associated with this arrangement,
respectively.
The
Company earns revenue as follows:
[i] Services
Revenue:
Subscriber
revenue
Subscriber
revenue consists of recurring revenue based on subscriber usage, bandwidth usage
fees for the Company infrastructure and/or technology usage fees based on the
number of subscribers. The subscriber revenue is typically generated
on a monthly, quarterly or annual basis and can be either a fixed fee per user
or a variable fee measured by bandwidth use or as a percentage of end user
pricing. Revenue is recognized over the term of the
subscription. The Company defers the appropriate portion of cash
received for which services have not yet been rendered and recognizes the
revenue over the term of the subscription, which is generally between thirty
days and one year. Pay-per-view revenues are deferred and recognized
in the period when the content is viewed.
eCommerce
revenue
eCommerce
revenue consists of the Company’s services provided to its content providers
which include software applications for merchandising (i.e. sale of
merchandise), ticketing for a content provider’s events and management of a
content provider’s donor efforts. Included in eCommerce revenue is
advertising revenue earned through the insertion of advertising impressions on
websites and in streaming video at a cost per thousand
impressions. Advertising revenue is recognized based on the number of
impressions displayed (“served”) during the period. Deferred revenue
for eCommerce represents the timing difference between collection of advertising
revenue and when the advertisements are served which is typically between thirty
and ninety days.
Technology
revenue
Technology
revenue consists of the setup and maintenance services the Company provides such
as website (Internet) or console (STB) design, user interface optimization and
streaming configuration. Included in technology revenue is the
licensing of the technology required to convert, compress and transmit video
signals to the Company’s content distribution network and ultimately to end
users. Revenue is recognized as the service is
performed. Deferred revenue on technology fees is as
follows:
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
[a] Setup
fees are deferred at the beginning of the service period and recognized over the
term of the arrangement, which is generally three to five years.
[b]
Maintenance fees are deferred at the beginning of the maintenance period and are
recognized in revenue over the term of the maintenance service, which is
generally one year.
[c]
Licensing fees for software are deferred at the beginning of the service period
and recognized over the term of the arrangement, which is generally three to
five years.
[ii]
Equipment revenue
Equipment
revenue consists of the sale of STBs to content partners and/or end users to
enable the end user to receive the content over the internet and display the
signal on a standard television. Shipping charges are included in
total equipment revenue. Revenue is recognized generally upon
shipment to the customer. The customer does not have any right of
return on STBs.
Cash
and cash equivalents
Cash and
cash equivalents consist of cash and short-term investments, such as money
market funds, that have maturities of less than three months.
Accounts
receivable
Accounts
receivable are carried at original invoice amount. The Company
maintains a provision for estimated losses resulting from the inability of its
customers to make required payments. Management considers the following factors
when determining the collectability of specific customer accounts: customer
credit-worthiness, past transaction history with the customer, current economic
industry trends and changes in customer payment terms. If the financial
conditions of the Company's customers were to deteriorate, adversely affecting
their ability to make payments, additional allowances would be
required. As of December 31, 2009 and 2008, the allowance for
doubtful accounts was $129,550 and $290,538, respectively.
Inventory
Inventory
consists of STBs, which are finished goods and are recorded at the lower of cost
and net realizable value. Cost is accounted for on a first-in, first-out basis.
The Company evaluates its ending inventories for estimated excess quantities and
obsolescence. This evaluation includes analyses of sales levels and projections
of future demand within specific time horizons. Inventories in excess of future
demand are reserved. In addition, the Company assesses the impact of changing
technology and market conditions on its inventory-on-hand and writes off
inventories that are considered obsolete. As at December 31, 2009 and 2008, the
Company’s inventory reserves were zero and $9,700, respectively.
Property,
plant and equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Expenditures for maintenance and repairs are expensed currently, while renewals
and betterments that materially extend the life of an asset are capitalized. The
cost of assets sold, retired or otherwise disposed of, and the related allowance
for depreciation, are eliminated from the accounts, and any resulting gain or
loss is recognized.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Depreciation
is provided using the straight-line method over the estimated useful lives of
the assets, which are as follows:
Computer
hardware
|
5
years
|
Computer
software
|
3
years
|
Furniture
and fixtures
|
7
years
|
Leasehold
improvements
|
Shorter
of useful life and lease
term
|
The
Company reviews the carrying value of property, plant and equipment for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. If these future undiscounted cash
flows are less than the carrying value of the asset, then the carrying amount of
the asset is written down to its fair value, based on the related estimated
discounted future cash flows. The factors considered by management in performing
this assessment include current operating results, trends and prospects, the
manner in which the property, plant and equipment is used and the effects of
obsolescence, demand, competition and other economic factors. Based on this
assessment, there was an impairment loss of zero
and $1,036,993 for the years ended December 31, 2009 and 2008, respectively.
Intangible
Assets
Intangible
assets are recorded at cost less amortization. Cost for intangible
assets acquired through business combinations represents their fair market value
at the date of acquisition. Amortization is calculated using the
straight-line method over the estimated useful lives of the intangible assets
which are as follows:
Customer relationships | 5 years |
Trademarks | 1 year |
The
Company reviews the carrying value of its definite lived intangible assets for
impairment whenever events and circumstances indicate that the carrying value of
an asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. If these future undiscounted cash
flows are less than the carrying value of the asset, then the carrying amount of
the asset is written down to its fair value, based on the related estimated
discounted future cash flows. The factors considered by management in performing
this assessment include current operating results, trends and prospects, the
manner in which the intangible assets are used and the effects of obsolescence,
demand, competition and other economic factors. Based on this assessment, no
impairment was recorded for the years ended December 31, 2009 and 2008.
Goodwill
Goodwill
represents the excess, at the date of acquisition, of the cost of an acquired
business over the fair value of the identifiable assets acquired and liabilities
assumed. Goodwill is not amortized but is subject to an annual impairment test
at the reporting unit level and between annual tests if changes in circumstances
indicate a potential impairment. The Company performs an annual
goodwill impairment test as of October 1 of each calendar
year. Goodwill impairment is assessed based on a comparison of the
fair value of each reporting unit to the underlying carrying value of the
reporting unit's net assets, including goodwill. If the carrying value of the
reporting unit exceeds its fair value, the Company performs the second step of
the goodwill impairment test to determine the amount of the impairment loss. The
second step of the impairment test involves comparing the implied fair value of
the reporting unit's goodwill with its carrying amount to measure the amount of
impairment loss, if any. The Company's impairment test was based on its single
operating segment and reporting unit structure. For the years ended
December 31, 2009 and 2008, there was no impairment loss.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]December
31, 2009
Investee
companies that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of accounting.
Whether or not the Company exercises significant influence with respect to an
investee depends on an evaluation of several factors including, among others,
representation on the investee's board of directors and voting rights. Under the
equity method of accounting, an investee's accounts are not reflected within the
Company's consolidated balance sheets and statements of operations and
comprehensive loss; however, the Company's share of the losses of the investee
company is reflected in the caption "Equity in loss of affiliate" in the
consolidated statements of operations and comprehensive loss. Due to
KyLinTV’s accumulated losses, the investment had been reduced to zero at
December 31, 2008. No further charges will be recorded as the Company
has no obligation to fund the losses of KyLinTV.
Deferred
transcoder costs
Deferred
transcoder costs represent the unamortized costs of licensing fees incurred
related to the setup of new channels for NeuLion's customers. These
costs are being recognized as a charge to the consolidated statements of
operations and comprehensive loss consistent with the related revenue over the
remaining initial contractual term between NeuLion and its customers, which
typically ranges from three to five years. Deferred transcoder costs
are included in other assets on the consolidated balance sheet.
Income
taxes
Income
taxes are accounted for under the provisions on ASC Topic 740, “Income Taxes
Recognition” (“ASC 740”). ASC 740 requires that income tax accounts be computed
using the liability method. Deferred taxes are determined based upon the
estimated future tax effects of differences between the financial reporting and
tax reporting bases of assets and liabilities given the provisions of currently
enacted tax laws.
ASC 740
requires an entity to recognize the financial statement impact of a tax position
when it is more likely than not that the position will be sustained upon
examination. If the tax position meets the more-likely-than-not recognition
threshold, the tax effect is recognized at the largest amount of the benefit
that has greater than a fifty percent likelihood of being realized upon ultimate
settlement.
ASC 740 also provides guidance for
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. ASC 740 requires that a liability created for
unrecognized tax benefits be presented as a separate liability and not combined
with deferred tax liabilities or assets.
The
Company operates in a number of countries worldwide. The income tax liability is
therefore a consolidation of the tax liabilities in various locations. The tax
rate is affected by the profitability of operations in various locations, tax
rates and taxation systems of the countries in which the Company operates its
tax policies and the impact of certain tax planning strategies which have been
implemented.
To
determine the worldwide tax liability the Company makes estimates of possible
tax liabilities. Tax filings, positions and strategies are subject to review
under local or international tax audit and the outcomes of such reviews are
uncertain. In addition, these audits generally take place years after the period
in which the tax provision in question was provided and it may take a
substantial amount of time before the final outcome of any audit is known.
Future tax audits could differ materially from the amounts recorded in our
financial statements.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]December
31, 2009
A
valuation allowance is recorded to reduce deferred tax assets to the amount that
is more likely than not to be realized. The Company has recorded substantial tax
losses over the years, therefore a full valuation allowance has been recorded
against all net deferred tax assets.
Foreign
currency translation
The
functional currency of the Company is the U.S. dollar. Monetary
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars at exchange rates in effect at the balance sheet dates, and
non-monetary assets and liabilities in foreign currencies are translated at
exchange rates in effect on the date of the transaction. These
transactional foreign exchange gains or losses are included in the consolidated
statements of operations and comprehensive loss.
Financial
instruments
The
Company's financial instruments consist of cash and cash equivalents, accounts
receivable, other receivables, due from/to related parties, accounts payable and
accrued liabilities which are primarily denominated in U.S.
dollars. The carrying amount of such instruments approximates their
fair values principally due to the short term nature of these
items. Unless otherwise noted, it is management's opinion that the
Company is not exposed to significant interest rate, currency or credit risk
arising from these financial instruments.
The
Company is exposed to credit risk with respect to accounts receivable arising
from the potential for counterparties to default on their contractual
obligations to the Company. The Company controls credit risk through
credit approvals, credit limits and monitoring procedures. The Company performs
credit evaluations on its customers, but generally does not require collateral
to support accounts receivable. The Company establishes an allowance
for doubtful accounts that corresponds with the specific credit risk of its
customers, historical trends and economic circumstances.
Advertising
Advertising
costs are expensed as incurred and totaled $1,138,400 and $366,756 for the years
ended December 31, 2009 and 2008, respectively.
Stock-based
compensation and other stock-based payments
The
Company accounts for all stock options and warrants using a fair value-based
method. The fair value of each stock option and warrant granted is
estimated on the date of the grant using the Black-Scholes-Merton option pricing
model and the related stock-based compensation expense is recognized over the
vesting period. The fair value of stock options, retention warrants
and warrants granted to employees is measured at the date of the
grant. The fair value of the warrants granted to non-employees is
measured as the warrants vest. The offsetting entry is an increase to
additional paid-in capital for an amount equal to the stock-based compensation
expense related to the issuance of stock options. Upon exercise, the proceeds of
the options and warrants together with the fair value recorded in additional
paid-in capital are reclassified to share capital.
Stock
appreciation rights give the holder the right to elect to either receive cash in
an amount equal to the excess of the quoted market price over the stock
appreciation right price or to receive Shares equal to the fair value of the
Shares less the exercise price divided by the market value of the Shares from
treasury or receive Shares by making a cash payment equal to the exercise
price. The Board of Directors has discretionary authority to accept
or reject a cash payment request in whole or in part. Stock-based
compensation expense is calculated as the fair value of the vested portion of
the stock appreciation rights outstanding, with ongoing measurement of the
outstanding liability at each reporting date. The liability is
classified as a current liability on the consolidated balance
sheets. If the holder elects to purchase Shares, the liability is
credited to additional paid-in capital.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]December
31, 2009
Recently
issued accounting standards
In June
2009, the FASB issued guidance now codified as ASC Topic 105, “Generally
Accepted Accounting Principles” (“ASC 105”) as the single source of
authoritative non-governmental U.S. GAAP. ASC 105 does not change current U.S.
GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by
providing all authoritative literature related to a particular topic in one
place (the “Codification”). On the effective date of ASC 105, the Codification
superseded all then-existing non-SEC accounting and reporting standards, and all
other non-grandfathered non-SEC accounting literature not included in the
Codification became non-authoritative. The provisions of ASC 105 are effective
for interim and annual periods ending after September 15, 2009. The Company
adopted ASC 105 in the third quarter of 2009. This pronouncement had no effect
on our consolidated financial position, results of operations or cash flows, but
impacted the financial reporting process by replacing all references to
pre-Codification standards with references to the applicable Codification
topic.
Effective
January 1, 2009, the Company adopted ASC Topic 805-10, “Business Combinations”
(“ASC 805”).
ASC 805 requires the acquiring
entity in a business combination to recognize all assets acquired and
liabilities assumed in the transaction, establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed and requires the acquirer to disclose certain information related to the
nature and financial effect of the business combination.
ASC
805 also establishes principles and requirements for how an acquirer recognizes
any non-controlling interest in the acquiree and the goodwill acquired in a
business combination.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 amends guidance included
within ASC Topic 605-25 to require an entity to use an estimated selling price
when vendor specific objective evidence or acceptable third party evidence does
not exist for any products or services included in a multiple element
arrangement. The arrangement consideration should be allocated among
the products and services based upon their relative selling prices, thus
eliminating the use of the residual method of allocation. ASU 2009-13
also requires expanded qualitative and quantitative disclosures regarding
significant judgments made and changes in applying this guidance. ASU 2009-13 is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early
adoption and retrospective application are also permitted. The Company is
currently evaluating the impact of adopting the provisions of ASU
2009-13.
Effective
January 1, 2009, the Company adopted ASC Topic 815-40, “Derivatives and Hedging”
(“ASC 815-40”). One of the conclusions reached under ASC 815-40 was
that an equity-linked financial instrument would not be considered indexed to
the entity’s own stock if the strike price is denominated in a currency other
than the issuer’s functional currency. The conclusion reached under
ASC 815-40 clarified the accounting treatment for these and certain other
financial instruments. ASC 815-40 specifies that a contract would not
be treated as a derivative if it met the following conditions: (a)
indexed to the Company’s own stock; and (b) classified in shareholders’ equity
in the Company’s statement of financial position. The Company’s
outstanding warrants denominated in Canadian dollars as detailed in note 16 are
not considered to be indexed to its own stock because the exercise price is
denominated in Canadian dollars and the Company’s functional currency is United
States dollars. Therefore, these warrants have been treated as
derivative financial instruments and recorded at their fair value as a
liability. All other outstanding convertible instruments are
considered to be indexed to the Company’s stock, because their exercise price is
denominated in the same currency as the Company’s functional currency, and are
included in shareholders’ equity.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]December
31, 2009
Comparative
Information
We have
reclassified certain prior year information to conform with the current year’s
presentation.
3. Business
Combinations
[i] Interactive Netcasting
Systems Inc. (“INSINC”)
On
October 31, 2009, the Company consummated the acquisition of 100% of the
outstanding securities of INSINC. Under the terms of the acquisition
agreement, shareholders of INSINC received consideration consisting of 6,000,012
Shares of the Company, CDN$2.5 million in cash, 1,000,000 Share purchase
warrants to acquire Shares at US$1.35 per share and 500,000 Share purchase
warrants to acquire Shares at US$1.80 per share. Both series of
warrants are exercisable for a period of 2 years. In addition, the
Company incurred approximately $515,000 of direct transaction
costs.
INSINC's
core business is to provide live and archived video sports, government and
entertainment content to audiences online with integrated pay-per-view and
commerce transaction processing.
The
purchase price of $6,694,293 represents the fair
value of 6,000,012 of Shares issued of $4,035,043, cash in the amount of
$2,320,500 and the fair value of the Share purchase warrants in the amount of
$338,750.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition. The Company is
obtaining third party valuations of certain intangible assets and evaluating
certain liabilities and assets, thus the allocation of the purchase price is
preliminary.
As
at October 31, 2009
|
||||
Cash
|
$
|
344,371
|
||
Other
current assets
|
737,406
|
|||
Property,
plant and equipment
|
739,690
|
|||
Intangible
assets
|
5,275,000
|
|||
Goodwill
|
1,015,525
|
|||
Total
assets
|
8,111,992
|
|||
Current
liabilities
|
(1,297,699
|
)
|
||
Long-term
liabilities
|
(120,000
|
)
|
||
Net
assets acquired, net of cash
|
|
$
|
6,694,293
|
Of the
$5,275,000 of
acquired intangible assets, $95,000 was assigned to the INSINC brand, and
$5,180,000 was assigned to customer relationships. None of the
intangible assets are expected to be deductible for tax purposes.
All of
the $1,015,525 of goodwill was assigned to the Company as a whole as the company
operates in one segment. The goodwill is not expected to be
deductible for tax purposes.
As noted
above, the purchase price allocation of the tangible and intangible assets is
preliminary and may be adjusted as a result of obtaining additional information
regarding preliminary estimates of fair values made at the date of
purchase.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Pro
forma
The
results of operations for NeuLion and INSINC have been included in the Company’s
consolidated statements of operations since the effectiveness of the acquisition
on October 31, 2009. The following unaudited pro forma financial information
presents the combined results of the Company and the acquisition as if the
acquisition had occurred at the beginning of 2008:
Unaudited
Pro Forma
|
||||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$
|
$
|
|||||||
Total
revenue
|
31,429,239 | 18,668,330 | ||||||
Total
cost of services revenue, exclusive of depreciation
and
|
||||||||
amortization shown separately below
|
(14,712,545 | ) | (7,705,373 | ) | ||||
Total
cost of equipment revenue
|
(1,537,150 | ) | (3,120,087 | ) | ||||
Total
sales, general and administrative
|
(28,971,112 | ) | (13,695,033 | ) | ||||
Stock-based
compensation
|
(1,167,789 | ) | (1,848,906 | ) | ||||
Impairment
of long-lived assets
|
— | (1,036,993 | ) | |||||
Depreciation
and amortization
|
(5,315,560 | ) | (3,130,535 | ) | ||||
Operating
loss
|
(20,274,917 | ) | (11,868,597 | ) | ||||
Net
loss
|
(20,714,197 | ) | (12,479,215 | ) | ||||
Net
loss per weighted average number of shares
|
||||||||
outstanding – basic and diluted
|
(0.18 | ) | (0.20 | ) |
In
determining the pro forma amounts above, the Company made adjustments to
depreciation and amortization as a result of the revised fair values of tangible
and intangible assets performed as a result of the acquisition.
[ii]
NeuLion
On
October 20, 2008, NeuLion completed the Merger with NeuLion
USA. Under the terms of the Merger, NeuLion issued 49,577,427 Shares,
which represented approximately the entire issued and outstanding shares of
NeuLion prior to closing, to the securityholders of NeuLion USA, in exchange for
their NeuLion USA securities.
In
accordance with ASC Topic 805, “Business Combinations” (“ASC 805”), the Company
determined that NeuLion USA was the accounting acquirer and accordingly has
accounted for the Merger as a reverse take-over.
The
purchase price of $33,186,247 represents the fair value of 49,577,427 Shares
issued ($31,656,119), the fair value of vested equity instruments ($515,364) and
direct transaction costs ($1,014,764).
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
The
following table summarizes the final fair values of the assets acquired and
liabilities assumed at the date of acquisition.
As
at October 20, 2008
|
|||
Cash
|
$ | 22,884,683 | |
Current
assets
|
5,038,462 | ||
Property,
plant and equipment
|
5,046,405 | ||
Other
long-term assets
|
1,040,516 | ||
Intangible
assets
|
6,000,000 | ||
Goodwill
|
5,741,669 | ||
Total
assets
|
45,751,735 | ||
Current
liabilities
|
(11,731,050 | ) | |
Other
long-term liabilities
|
(834,438 | ) | |
Net
assets acquired
|
$ | 33,186,247 |
Of the
$6,000,000 of acquired intangible assets, $100,000 was assigned to the JumpTV
brand, and $5,900,000 was assigned to customer relationships. None of
the intangible assets are expected to be deductible for tax
purposes
All of
the $5,741,669 of goodwill was assigned to the Company as a whole as the company
operates in one segment. The goodwill is not expected to be
deductible for tax purposes.
Pro
forma
The
results of operations for NeuLion and NeuLion USA (the accounting acquirer) have
been included in the Company’s consolidated statements of operations since the
completion of the Merger on October 20, 2008. The following
unaudited pro forma financial information presents the combined results of the
Company and the Merger as if the Merger had occurred at the
beginning of 2008:
Unaudited
Pro Forma
|
||||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$ | $ | |||||||
[actual]
|
[pro
forma]
|
|||||||
Total
revenue
|
28,093,677 | 25,708,760 | ||||||
Total
cost of services revenue, exclusive of depreciation
and
|
||||||||
amortization shown separately below
|
(12,850,002 | ) | (15,716,125 | ) | ||||
Total
cost of equipment revenue
|
(1,537,150 | ) | (3,120,087 | ) | ||||
Total
sales, general and administrative
|
(27,599,260 | ) | (38,482,996 | ) | ||||
Stock-based
compensation [a]
|
(1,167,789 | ) | (3,374,767 | ) | ||||
Impairment
of goodwill [b]
|
— | (47,882,317 | ) | |||||
Impairment
of long-lived assets [c]
|
— | (5,982,030 | ) | |||||
Depreciation
and amortization [d]
|
(4,141,117 | ) | (3,602,169 | ) | ||||
Operating
loss
|
(19,201,641 | ) | (92,451,731 | ) | ||||
Net
loss
|
(19,640,921 | ) | (92,459,364 | ) | ||||
Net
loss per weighted average number of shares
|
||||||||
outstanding
– basic and diluted
|
(0.18 | ) | (0.90 | ) |
[a] In
accordance with ASC 718, these amounts represent stock-based compensation for
the Company’s stock options, restricted share units, stock appreciation rights,
warrants and retention warrants.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
[b] As at
March 31, 2008, the Company's market capitalization decreased below the carrying
value of the Company. Management considered this to be an indicator
of impairment, and accordingly, performed a goodwill impairment test and
recorded a non-cash goodwill impairment charge of $47,882,317.
[c] As at
December 31, 2008, the Company determined that the business climate had changed
such that the carrying value of the Company’s long-lived assets may not be fully
recoverable. Accordingly, the Company recorded non-cash impairment
charges of $4,945,037 prior to the Merger and $1,036,993 subsequent to the
Merger.
[d] In
determining the pro forma amounts above, the Company made adjustments to
depreciation and amortization as a result of the revised fair
values of tangible and intangible assets performed as a result of the
acquisition.
4.
Economic Dependence and Concentration of Credit Risk
For the
year ended December 31, 2008, three customers accounted for 54% of revenue as
follows: 32%, 12% and 10%.
As at
December 31, 2008, one customer accounted for 25% of the accounts
receivable.
There
were no comparable amounts recorded in 2009.
5.
Property, Plant and Equipment
The
details of property and equipment and the related accumulated depreciation are
set forth below:
December 31, 2009 | ||||||||||||||||
Accumulated
|
Non-cash
|
Net
book
|
||||||||||||||
Cost
|
amortization
|
Impairment
|
value
|
|||||||||||||
$
|
$
|
$
|
$
|
|||||||||||||
Computer
hardware
|
6,752,515 | 2,428,478 | 978,720 | 3,345,317 | ||||||||||||
Computer
software
|
4,649,297 | 2,319,488 | — | 2,329,809 | ||||||||||||
Furniture
and fixtures
|
186,617 | 49,215 | 58,273 | 79,129 | ||||||||||||
Leasehold
improvements
|
6,471 | 6,471 | — | — | ||||||||||||
11,594,900 | 4,803,652 | 1,036,993 | 5,754,255 | |||||||||||||
December 31, 2008 | ||||||||||||||||
Accumulated
|
Non-cash
|
Net
book
|
||||||||||||||
Cost
|
amortization
|
Impairment
|
value
|
|||||||||||||
$
|
$
|
$
|
$
|
|||||||||||||
Computer
hardware
|
5,655,658 | 1,101,877 | 978,720 | 3,575,061 | ||||||||||||
Computer
software
|
3,812,944 | 1,003,139 | — | 2,809,805 | ||||||||||||
Furniture
and fixtures
|
184,062 | 35,666 | 58,273 | 90,123 | ||||||||||||
Leasehold
improvements
|
6,471 | 6,471 | — | — | ||||||||||||
9,659,135 | 2,147,153 | 1,036,993 | 6,474,989 |
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
ASC Topic
360, “Property, Plant and Equipment” (“ASC 360”), requires that a long-lived
asset be tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. An
impairment loss is recognized as the difference between fair value and carrying
amount when the carrying amount of a long-lived asset is not recoverable and
exceeds its fair value. The Company determined that during the year
ended December 31, 2008 the business climate had changed such that the carrying
value of the Company’s property, plant and equipment may not be fully
recoverable. Accordingly, the Company recorded a non-cash impairment
charge of $1,036,993 for the year ended December 31, 2008. There were
no such comparable amounts in the current year.
Depreciation
expense for the years ended December 31, 2009 and 2008 was $2,658,856 and $1,321,824,
respectively.
6.
Goodwill and Intangible Assets
The
change in the net carrying amount of goodwill is set forth below:
$
|
||||
Balance
– December 31, 2007
|
—
|
|||
Acquisition
of NeuLion
|
6,846,183
|
|||
Balance
– December 31, 2008
|
6,846,183
|
|||
Acquisition
of INSINC
|
1,015,525
|
|||
Final
purchase price adjustment for NeuLion
|
(1,104,514
|
)
|
||
Balance
– December 31, 2009
|
6,757,194
|
The
details of intangible assets and the related accumulated amortization are set
forth below:
December 31, 2009 | ||||||||||||
Accumulated
|
Net
book
|
|||||||||||
Cost
|
amortization
|
value
|
||||||||||
$
|
$
|
$
|
||||||||||
Customer
relationships
|
11,080,000 | 1,617,096 | 9,462,904 | |||||||||
Trademarks
|
195,000 | 115,833 | 79,167 | |||||||||
11,275,000 | 1,732,929 | 9,542,071 | ||||||||||
December 31, 2008 | ||||||||||||
Accumulated
|
Net
book
|
|||||||||||
Cost
|
amortization
|
value
|
||||||||||
$
|
$
|
$
|
||||||||||
Customer
relationships
|
5,900,000 | 231,084 | 5,668,916 | |||||||||
Trademarks
|
100,000 | 19,584 | 80,416 | |||||||||
6,000,000 | 250,668 | 5,749,332 |
Amortization
expense for the years ended December 31, 2009 and 2008 was $1,482,261 and $250,668,
respectively.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Based on
the amount of intangible assets subject to amortization, the Company's estimated
amortization expense over the next five years is as follows:
$
|
||||
2010
|
2,328,524 | |||
2011
|
2,216,000 | |||
2012
|
2,216,167 | |||
2013
|
1,984,916 | |||
2014
|
796,631 |
7. Related Party
Transactions
The
Company has entered into certain transactions and agreements in the normal
course of operations with related parties. Significant related party
transactions are as follows:
TransVideo
International, Ltd. (“TransVideo”)
TransVideo
is a company controlled by the Chairman of the Board of Directors of the Company
that designs and sells equipment and technology for IPTV content delivery. STB
purchases amounted to $1,029,136 and $2,745,000 and transcoder licensing fees
amounted to $78,000 and
$125,000 for the years
ended December 31, 2009 and 2008, respectively. Included in cost of equipment
revenue is the cost of STBs sold of $937,204 and $2,816,490 for the years ended December
31, 2009 and 2008, respectively.
KyLinTV
KyLinTV
is an IPTV company that is controlled by the Chairman of the Board of Directors
of the Company. On June 1, 2008, the Company entered into an
agreement with KyLinTV to build and deliver the setup and back office operation
of an IPTV service. The Company also provides and charges KyLinTV for
administrative and general corporate support. For each of the periods
presented, the amounts received for these services provided by the Company for
the years ended December 31, 2009 and 2008 were $645,722 and $1,233,353,
respectively. During the year ended December 31, 2008, the Company
purchased computer equipment from KyLinTV in the amount of
$620,000.
New
York Islanders Hockey Club, LP (“New York Islanders”)
The
Company provides IT related professional services to the New York Islanders, a
professional hockey club that is owned by the Chairman of the Board of Directors
of the Company.
Renaissance
Property Associates, LLC (“Renaissance”)
Renaissance
is a real estate management company owned by the Chairman of the Board of
Directors of the Company. In June 2009, the Company signed a sublease
agreement with Renaissance for office space in Plainview, New
York. Rent expense paid by the Company to Renaissance of
$388,975 and zero,
inclusive of taxes and utilities, is included in selling, general and
administrative expense for the years ended December 31, 2009 and 2008,
respectively.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Patstar,
Inc. (“Patstar”)
Patstar,
an investment holding company, is controlled by the Vice Chairman of the Board
of Directors of the Company. Rent expense paid to the Company by
Patstar of $3,649 and $2,596 is included as a
recovery in selling, general and administrative expense for the years ended
December 31, 2009 and 2008, respectively.
Hawaii
IPTV, LLC (“Hawaii”)
The
Company had an IPTV customer, Hawaii, an IPTV company, whose principals are
family members of the Chairman of the Board of Directors of the
Company. Hawaii ceased operations during the third quarter of
2009.
The Smile Train, Inc. (“Smile Train”)
The
Company provides IT related professional services to Smile Train, a public
charity whose founder and significant benefactor is the Chairman of the Board of
Directors of the Company.
The
Company recognized revenue from related parties for the years ended December 31
as follows:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$
|
$
|
|||||||
New
York Islanders
|
395,681 | 296,451 | ||||||
Renaissance
|
140,580 | 120,000 | ||||||
Smile
Train
|
108,000 | 120,000 | ||||||
Hawaii
|
41,789 | 57,577 | ||||||
KyLinTV
|
1,755,985 | 920,550 | ||||||
2,442,035 | 1,514,578 |
As at
December 31, 2009 and 2008, the amounts due from (to) related parties are as
follows:
December
31,
|
December
31,
|
|||||||
2009 | 2008 | |||||||
$ | $ | |||||||
New
York Islanders
|
(304 | ) | 29,189 | |||||
Renaissance
|
— | (1,146 | ) | |||||
Smile
Train
|
— | 27,000 | ||||||
Hawaii
|
— | 17,527 | ||||||
TransVideo
|
(298,291 | ) | (55,680 | ) | ||||
KyLinTV
|
246,992 | 250,343 | ||||||
(51,603 | ) | 267,233 |
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Investment
in affiliate – KyLinTV
The
Company records its investment in KyLinTV using the equity method.
From
January 1, 2008 through December 31, 2009, the Company's equity interest in the
affiliate was 17.1%. As previously discussed, the Company also
provides and charges KyLinTV for administrative and general corporate
support. Management has determined that as a result of the 17.1%
equity interest combined with the services that the Company provides KyLinTV,
the Company continues to have significant influence on the operating activities
of KyLinTV; therefore, the Company continues to account for its investment in
KyLinTV using the equity method of accounting for investment.
The
Company’s proportionate share of the equity loss from KyLinTV has been accounted
for as a charge on the Company's consolidated statements of operations and
comprehensive loss. Due to KyLinTV’s accumulated losses, the
investment had been reduced to zero as at December 31, 2008. No
further charges will be recorded as the Company has no obligation to fund the
losses of KyLinTV.
The
results of operations and financial position of the Company's equity basis
investment in KyLinTV are summarized below for the years ended December
31:
Year
ended,
|
Year
ended,
|
|||||||
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$
|
$
|
|||||||
Condensed
income statement information:
|
||||||||
Net
sales
|
8,127,760 | 6,568,101 | ||||||
Net
loss
|
(5,604,118 | ) | (8,148,974 | ) |
December
31,
|
December
31,
|
|||||||
2009 | 2008 | |||||||
$ | $ | |||||||
Condensed
balance sheet information:
|
||||||||
Current
assets
|
1,924,891 | 927,427 | ||||||
Non-current
assets
|
913,977 | 2,411,319 | ||||||
Total
assets
|
2,838,868 | 3,338,746 | ||||||
Current
liabilities
|
15,168,149 | 10,063,909 | ||||||
Non-current
liabilities
|
— | — | ||||||
Equity
(deficiency)
|
(12,329,281 | ) | (6,725,163 | ) | ||||
Total
liabilities and equity
|
2,838,868 | 3,338,746 |
On
February 26, 2010, a group of investors invested $10.0 million in KyLinTV for
15.1% of its equity, which reduced the Company’s equity interest in KyLinTV to
12.2%. Of the total $10.0 million investment, $1.0 million was
invested by AvantaLion LLC, a company controlled by the Chairman of the Board of
Directors of the Company.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
8.
401(K) Profit Sharing Plan
The
Company sponsors a 401(k) Profit Sharing Plan to provide retirement and
incidental benefits for its eligible employees. Employees may contribute a
percentage of their annual compensation through salary reduction, subject to
certain qualifications and Internal Revenue Code limitations. The Company
provides for voluntary matching contributions up to certain limits. Matching
contributions vest over five years.
For the
years ended December 31, 2009 and 2008, the Company made aggregate net matching
contributions of $436,716 and $113,000, respectively.
9.
Share Capital
Share
capital consists of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$
|
$
|
|||||||
Authorized
|
||||||||
Unlimited
common shares, voting, no par value, discretionary
non-
|
||||||||
cumulative dividend
|
||||||||
Unlimited
Class 1 preference shares, non-voting, no par value,
|
||||||||
discretionary partly cumulative or non-cumulative
dividends
|
||||||||
Unlimited
Class 2 preference shares, non-voting, no par value,
|
||||||||
discretionary partly cumulative or non-cumulative
dividends
|
||||||||
Issued and
outstanding
|
||||||||
Common
shares
|
||||||||
December 31, 2009: Issued and outstanding:
116,731,794
|
||||||||
(December 31, 2008: Issued and outstanding:
110,084,044)
|
11,260,415 | 6,762,097 |
During
the year ended December 31, 2009, the Company completed the following
issuances:
Date
|
# | $ | ||||||
Balance
– December 31, 2008
|
110,084,044 | 6,762,097 | ||||||
Exercise
of stock options and retention warrants
|
187,417 | 115,831 | ||||||
Issuance
of Shares in connection with acquisition [note
3[i]]
|
6,000,012 | 4,048,442 | ||||||
Issuance
of restricted share units
|
52,498 | 31,631 | ||||||
Issuance
of Shares pursuant to Directors’ Compensation Plan
|
407,823 | 250,657 | ||||||
Release
of Shares from escrow for services
|
— | 51,757 | ||||||
Balance
– December 31, 2009
|
116,731,794 | 11,260,415 |
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
10.
Stock Option and Stock-Based Compensation Plans
[i]
Amended and Restated Stock Option Plan [the “Plan”]
The Plan
applies to all grants of options to directors, officers, employees and
consultants of the Company or any entity controlled by the
Company. The exercise price for any new option granted under
the Plan is determined by the closing price of the Company’s Shares prior
to the grant date. If the option is granted on a pre-determined basis
the exercise price is determined using the five-day volume weighted average
price of the Company's Shares prior to the date of grant. In all
cases the exercise price is not less than fair market value. Options
are exercisable during a period established at the time of their grant provided
that such period will expire no later than five years after the date of grant,
subject to early termination of the option in the event the holder of the option
dies or ceases to be a director, officer or employee of the Company or ceases to
provide ongoing management or consulting services to the Company or entity
controlled by the Company. The maximum number of Shares issuable upon
exercise of options granted pursuant to the Plan is equal to the greater
of [i] 4,000,000 Shares; and [ii] 12.5% of the number of issued and
outstanding Shares.
A summary
of stock option activity under the Plan is as follows:
Weighted
average
|
||||||||
exercise
price
|
||||||||
# | $ | |||||||
Outstanding,
December 31, 2008
|
10,298,707 | 1.19 | ||||||
Granted
|
790,000 | 0.63 | ||||||
Exercised
|
(180,354 | ) | 0.46 | |||||
Forfeited
|
(2,250,456 | ) | 1.86 | |||||
Outstanding,
December 31, 2009
|
8,657,897 | 0.98 |
The
following table summarizes stock option information of the Plan as at December
31, 2009:
Weighted
average
|
Aggregate
|
|||||||||||||||
Exercise
|
Number
|
remaining
|
Number
|
intrinsic
|
||||||||||||
price
|
outstanding
|
contractual
life
|
exercisable
|
value
|
||||||||||||
$ | # |
[years]
|
# | $ | ||||||||||||
0.47
|
4,428,022 | 3.88 | 1,238,626 | 247,725 | ||||||||||||
0.58
|
50,000 | 3.50 | 50,000 | 4,500 | ||||||||||||
0.60
|
2,646,500 | 3.80 | 821,160 | 57,481 | ||||||||||||
0.64
|
30,000 | 3.25 | 13,121 | 394 | ||||||||||||
0.67
|
500,000 | 4.84 | 20,534 | — | ||||||||||||
0.88
|
40,000 | 4.63 | 3,723 | — | ||||||||||||
1.80
|
100,000 | 0.69 | 100,000 | — | ||||||||||||
2.50
|
175,000 | 1.24 | 171,167 | — | ||||||||||||
3.00
|
81,250 | 2.44 | 59,091 | — | ||||||||||||
4.00
|
17,500 | 1.32 | 16,111 | — | ||||||||||||
5.00
|
100,000 | 1.61 | 84,736 | — | ||||||||||||
6.05
|
450,000 | 2.27 | 243,566 | — | ||||||||||||
6.26
|
37,125 | 2.38 | 27,367 | — | ||||||||||||
6.43
|
2,500 | 1.94 | 1,915 | — | ||||||||||||
8,657,897 | 3.68 | 2,851,117 | 310,100 |
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the company’s closing stock price on the
last trading day of fiscal 2009 and the exercise price, multiplied by the number
of in-the-money options) that would have been received by the option holders had
all option holders exercised their options on December 31, 2009. The
amount changes based on the fair market value of the Company’s
Shares.
For the
year ended December 31, 2009 and 2008, $638,442 and $127,243, respectively, were
recorded for total stock-based compensation expense related to stock options
under the Plan. The weighted average exercise price of options
exercisable as at December 31, 2009 was $1.42.
The
Company estimates the fair value of stock options granted using a
Black-Scholes-Merton option pricing model. The assumptions used in determining
the fair value of stock options granted are as follows:
Years
ended December 31,
|
||||
2009
|
2008
|
|||
Weighted
average
|
||||
Exercise
price of stock options granted
|
$0.46
|
$0.51
|
||
Fair
value of stock options granted
|
$0.32
|
$0.34
|
||
Expected
volatility
|
98%
|
|
79%
|
|
Risk-free
interest rate
|
1.97%
|
2.26%
|
|
|
Expected
life [years]
|
4
|
4
|
||
Dividend
yield
|
0%
|
|
0%
|
|
The
exercise price of stock options is calculated using the five day volume weighted
average price of the Company’s Shares on the Toronto Stock Exchange preceding
the grant date. The Company estimates volatility based on a blended rate between
the Company’s historical volatility and the volatility of comparable companies.
The Company estimates the risk-free rate based on the federal reserve
rate. The Company estimates the expected life of stock options to be
four years for all option grants.
As at
December 31, 2009, there was $2,304,070 of total unrecognized compensation cost
related to non-vested stock options which is expected to be recognized over a
weighted-average period of 2.68 years.
[ii]
Restricted Share Plan
Restricted
share units give the holder the right to one Share for each vested restricted
share unit. These awards vest on a monthly basis over a 48-month
period. The maximum number of restricted shares issuable shall be no
greater than the equivalent of 1,000,000 Shares.
A
summary of restricted share activity under the restricted share plan is as
follows:
|
||||
# | ||||
Outstanding,
December 31, 2008
|
59,222 | |||
Vested
and issued for Shares
|
(52,498 | ) | ||
Outstanding,
December 31, 2009
|
6,724 |
During
the years ended December 31, 2009 and 2008, the Company recognized stock-based
compensation expense of $31,631 and $6,518, respectively, related to its
restricted share plan.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
[iii]
Warrants
The
Company granted to a channel partner 7,500 warrants with an expiry of five years
from the date of issuance at an exercise price of $6.00 per
warrant. For the years ended December 31, 2009 and 2008, no
compensation expense was recognized related to these warrants as the total fair
value of these warrants were previously recorded as part of the purchase price
of a previous acquisition. These warrants expire on April 27,
2011.
The
Company granted, as part of an acquisition, 10,000 warrants at an exercise price
of $6.00 per warrant. Each warrant is exercisable into one Share,
vest immediately and expires on May 31, 2011. The fair value of these
warrants, in the amount of $229, was included in the purchase price of the
Acquired Business.
In
connection with the Company obtaining broadcast rights from a channel partner,
the Company granted 100,000 warrants with an exercise price of $6.23 to
purchase Shares of the Company. For the years ended December 31, 2009
and 2008, the Company expensed $920 and $182, respectively. These
warrants expire on November 30, 2011.
The
Company granted 50,000 warrants to a television manufacturer. The
exercise price of these warrants will be determined based on meeting certain
milestones. As at December 31, 2009, these milestones have not been
met, therefore the measurement date has not occurred. Accordingly,
for the years ended December 31, 2009 and 2008, no compensation expense was
recognized related to these warrants. Each warrant is exercisable
into one cShare of the Company, vests over four years and expires on
August 3, 2012.
The
Company issued 30,000 warrants to a sports media broadcaster at an exercise
price of $2.20 per warrant. Each warrant is exercisable into one
Share of the Company, vests immediately and expires on November 5,
2017. The fair value of these warrants in the amount of $7,341 was
included as part of the purchase price of the Acquired Business.
On
October 20, 2008, AvantaLion LLC, an entity controlled by Charles B. Wang, the
Chairman of the Company, purchased 10,000,000 units from the Company’s treasury
at a price of Cdn$1.00 per unit. Each unit (a "Unit") consists of one (1) Share
and one-half of one Series A Share purchase warrant and one-half of one Series B
Share purchase warrant. Each whole Series A Share purchase warrant is
exercisable at Cdn$1.25, and each whole Series B Share purchase warrant is
exercisable at Cdn$1.50, in each case for a period of two years from the date of
grant. G. Scott Paterson, Vice Chairman of the Company, also
purchased 1,000,000 Units on the same terms. The aggregate gross proceeds from
the sale of Units were Cdn$11 million. Refer to Note 16 for further
information.
On
October 20, 2008, the Company granted 5,000,000 fully-vested warrants with an
exercise price of $0.63 exercisable for two years to employees of the Company in
connection with the Merger.
On
October 31, 2009, the Company granted 1,000,000 Share purchase warrants to
acquire Shares at $1.35 per share and 500,000 Share purchase warrants to acquire
Shares at $1.80 per share in conjunction with the acquisition of
INSINC. Both series of warrants are exercisable for a period of 2
years. The fair value of these warrants, in the amount of $338,750,
has been included in the purchase price of INSINC.
The total
stock-based compensation expense related to warrants during the years ended
December 31, 2009 and 2008 was $920 and $1,678,896, respectively.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
A summary
of the warrant activity is as follows:
Weighted
average
|
||||||||
exercise
price
|
||||||||
# | $ | |||||||
Outstanding,
December 31, 2008
|
16,538,800 | 1.09 | ||||||
Granted
|
1,500,000 | 1.50 | ||||||
Forfeited
|
(341,300 | ) | 4.04 | |||||
Outstanding,
December 31, 2009
|
17,697,500 | 1.07 |
The fair
value of warrants was determined using the Black-Scholes-Merton option pricing
model.
The
following table summarizes the warrant information as at December 31,
2009:
Weighted
average
|
Aggregate
|
|||||||||||||||
Exercise
|
Number
|
remaining
|
Number
|
intrinsic
|
||||||||||||
Price
|
outstanding
|
contractual
life
|
exercisable
|
value
|
||||||||||||
$
|
#
|
[years]
|
#
|
$
|
||||||||||||
0.63
|
5,000,000 | 0.80 | 5,000,000 | 200,000 | ||||||||||||
1.19
|
5,500,000 | 0.80 | 5,500,000 | — | ||||||||||||
1.35
|
1,000,000 | 1.84 | 1,000,000 | — | ||||||||||||
1.43
|
5,500,000 | 0.80 | 5,500,000 | — | ||||||||||||
1.80
|
500,000 | 1.84 | 500,000 | — | ||||||||||||
2.20
|
30,000 | 7.85 | 30,000 | — | ||||||||||||
6.00
|
17,500 | 1.34 | 17,059 | — | ||||||||||||
6.23
|
100,000 | 1.92 | 77,139 | — | ||||||||||||
n/a
|
50,000 | — | — | — | ||||||||||||
17,697,500 | 0.91 | 17,624,198 | 200,000 |
The
weighted fair value of warrants granted during the years ended December 31, 2009
and 2008 was, based on the following assumptions:
Years
ended December 31,
|
||||
2009
|
2008
|
|||
Weighted
average
|
||||
Exercise
price of stock options granted
|
$1.50
|
|
$0.99
|
|
Expected
volatility
|
100%
|
85%
|
|
|
Risk-free
interest rate
|
2.28%
|
1.84%
|
|
|
Expected
life [years]
|
2
|
2
|
||
Dividend
yield
|
0%
|
0%
|
|
As at
December 31, 2009, there was $843 of total unrecognized compensation cost
related to non-vested warrants which is expected to be recognized over a
weighted-average period of 0.9 years.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
[iv]
Retention Warrant Plan ["Warrant Plan"]
The
Company’s retention warrant plan [the "Warrant Plan"] applies to all grants of
retention warrants to employees and consultants of the Company or any entity
controlled by the Company. The exercise price for any retention
warrant granted under the Warrant Plan will be determined by the five-day
average closing price of the Company's Shares prior to the date of grant but
cannot be less than such a price. Retention warrants are exercisable
during a period established at the time of their grant provided that such period
will expire no later than five years after the date of grant, subject to early
termination of the retention warrant in the event the holder of the retention
warrant dies or ceases to be an employee or consultant of the Company or ceases
to provide ongoing management or consulting services to the Company or entity
controlled by the Company. The maximum number of Shares issuable upon
exercise of retention warrants granted pursuant to the Warrant Plan is
equal to 2,500,000 Shares.
A summary
of the retention warrant activity during the year ended December 31, 2009 is as
follows:
Weighted
average
|
||||||||
exercise
price
|
||||||||
# |
$
|
|||||||
Outstanding,
December 31, 2008
|
1,350,440 | 2.68 | ||||||
Exercised
|
(7,063 | ) | 0.65 | |||||
Forfeited
|
(495,485 | ) | 2.72 | |||||
Outstanding,
December 31, 2009
|
847,892 | 2.67 |
The
following table summarizes the retention warrant information as at December 31,
2009:
Weighted
average
|
Aggregate
|
|||||||||||||||
Exercise
|
Number
|
remaining
|
Number
|
intrinsic
|
||||||||||||
price | outstanding |
contractual
life
|
exercisable
|
value
|
||||||||||||
$
|
#
|
[years]
|
$
|
$
|
||||||||||||
0.64
|
182,500 | 3.20 | 90,869 | 2,726 | ||||||||||||
0.70
|
111,642 | 3.29 | 47,047 | — | ||||||||||||
0.80
|
21,500 | 3.62 | 12,439 | — | ||||||||||||
3.86
|
532,250 | 2.64 | 313,353 | — | ||||||||||||
847,892 | 2.87 | 463,708 | 2,726 |
There
were no retention warrants granted during the years ended December 31, 2009 and
2008.
As at
December 31, 2009, there was $65,943 of total unrecognized compensation cost
related to non-vested retention warrants which is expected to be recognized over
a weighted-average period of 1.9 years.
[v] Stock
Appreciation Rights Plan ["SARS"]
The
maximum number of units that can be granted under the SARS Plan is equivalent to
the greater of 4,150,000 or 5% of the aggregate number of issued and outstanding
Shares. The exercise price shall be determined by the Board of
Directors at the time of grant but in no event shall the exercise price be lower
than the market price of the Shares at the time of the grant. Each
unit granted under the SARS Plan has a maximum life of five years from the date
of the grant. The SARS Plan provides the unitholder the right to
settle the award as follows:
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
|
[1]
|
Receive
cash compensation less the exercise price or to purchase or receive an
equivalent number of Shares, less the
exercise price;
|
|
[2]
|
In
lieu of receiving a cash settlement, the unitholder can elect to receive a
number of Shares equal to the fair value of the Shares less the exercise
price divided by the market value of the Shares from
treasury; or
|
|
[3]
|
Elect
to pay the Company the exercise price and receive Shares equal to the
number of units granted under the SARS Plan
from treasury.
|
The Board
of Directors has discretionary authority to accept or reject a cash payment
request in whole or in part.
A summary
of the SARS activity during the year ended December 31, 2009 is as
follows:
Weighted
average
|
||||||||
exercise
price
|
||||||||
# |
$
|
|||||||
Outstanding,
December 31, 2008
|
1,947,177 | 2.97 | ||||||
Forfeited
|
(272,177 | ) | 5.03 | |||||
Outstanding,
December 31, 2009
|
1,675,000 | 2.63 |
The
following table summarizes the SARS information as at December 31,
2009:
Weighted
average
|
Aggregate
|
|||||||||||||||
Exercise
|
Number
|
remaining
|
Number
|
intrinsic
|
||||||||||||
price
|
outstanding
|
contractual
life
|
exercisable
|
value
|
||||||||||||
$ | # |
[years]
|
# |
$
|
||||||||||||
0.60
|
475,000 | 3.81 | 142,077 | 9,945 | ||||||||||||
0.64
|
200,000 | 3.33 | 87,474 | 2,624 | ||||||||||||
4.00
|
1,000,000 | 1.24 | 1,000,000 | — | ||||||||||||
1,675,000 | 2.21 | 1,229,551 | 12,569 |
The
weighted fair value of stock appreciation rights granted during the year ended
December 31, 2008 was $0.05 based on the following
assumptions:
Years
ended December 31
|
||||
2009
|
2008
|
|||
Weighted
average
|
||||
Exercise
price of stock options granted
|
n/a
|
|
$0.60
|
|
Expected
volatility
|
n/a
|
79%
|
|
|
Risk-free
interest rate
|
n/a
|
2.41
|
|
|
Expected
life [years]
|
n/a
|
4
|
||
Dividend
yield
|
n/a
|
0%
|
|
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
[vi]
Directors’ Compensation Plan [“Directors’ Plan”]
Non-management
directors of the Company receive a minimum 50% of their retainers and fees in
the form of Shares and may elect to receive a greater portion of their retainers
and fees in Shares. The number of Shares to be issued to
non-management directors is determined by dividing the dollar value of the
retainers and fees by the closing price of the Shares on the relevant payment
date. The maximum number of Shares available to be issued by the
Company under the Directors’ Plan is 500,000.
During
the year ended December 31, 2009, the Company issued 407,823 Shares with a fair
value of $250,657 in regards to fees and retainers to non-management
directors. There were no comparable amounts in the prior
year.
11.
Loss per Share
Basic
loss per share is computed by dividing net loss for the period by the weighted
average number of Shares outstanding for the period. Diluted loss per share is
computed by dividing net loss for the year by the weighted average number of
Shares outstanding, and excludes the effect of dilutive potential Shares, as
their inclusion would be anti-dilutive due to the losses recorded by the
Company.
The
following table summarizes the potential Shares that were outstanding as at
December 31, 2009 and 2008 but were not included in the computation of diluted
loss per share as their effect would have been anti-dilutive. See
note 10 for additional details.
2009
|
2008
|
|||||||
# | # | |||||||
Stock
options
|
8,657,897 | 10,298,707 | ||||||
Restricted
share units
|
6,724 | 59,222 | ||||||
Stock
appreciation rights
|
1,675,000 | 1,947,177 | ||||||
Warrants
|
17,697,500 | 16,538,800 | ||||||
Retention
warrants
|
847,892 | 1,350,440 | ||||||
Contingent
performance consideration
|
— | 3,680,194 |
12.
Supplemental Cash Flow Information
For each
of the years presented, the Company did not pay any cash income taxes or cash
interest expense.
13.
Commitments and Contingencies
Commitments
The
Company has operating lease commitments for its premises in the
United States (Plainview, New York; New York, New York; and Sanford,
Florida), Canada (Toronto, Ontario and Vancouver, British Columbia) and England
(London). In addition, the Company has operating leases for certain
computer hardware and infrastructure equipment. Furthermore, the
Company has marketing and content license fee commitments to channel
partners. Future minimum annual payments over the next five years and
thereafter (exclusive of taxes, insurance and maintenance costs) under these
commitments are as follows:
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
$ | ||||
2010
|
3,185,943 | |||
2011
|
1,506,912 | |||
2012
|
1,304,364 | |||
2013
|
809,256 | |||
2014
|
86,080 | |||
Thereafter
|
281,627 | |||
7,174,182 |
Rent
expense for the years ended December 31, 2009 and 2008 was $955,420 and
$448,854, respectively.
The
Company has signed a sublease for its Toronto office, which is expected to
create a total recovery of $5,243,517.
Contingencies
During
the ordinary course of business activities, the Company may be contingently
liable for litigation and a party to claims. Management believes that
adequate provisions have been made in the accounts where
required. Although the extent of potential costs and losses, if any
is uncertain, management believes that the ultimate resolution of such
contingencies will not have an adverse effect on the consolidated financial
position or results of operations of the Company.
14.
Segmented Information
The
Company operates, as one reportable segment, to provide end-to-end
enterprise-level IPTV and other professional services. Substantially
all of Company’s revenues and long-lived assets are in the United
States.
15.
Income Taxes
The
reconciliation of income taxes computed at the Canadian statutory tax rate to
the Company’s effective income tax rate for the years ended December 31, 2009
and 2008 is as follows:
2009
|
2008
|
|||||||
$
|
$
|
|||||||
Combined
basic federal and provincial rates
|
33.0% | 33.5% | ||||||
Income
tax benefit based on statutory income tax rate
|
(6,481,504 | ) | (3,898,482 | ) | ||||
Increase
in income taxes resulting from:
|
||||||||
Non-deductible expenses and foreign rate
differential
|
409,699 | 631,824 | ||||||
Income while Company was an S Corp. and not
subject to tax
|
— | 1,597,396 | ||||||
Increase in valuation
allowance
|
6,071,805 | 1,669,262 | ||||||
Income
tax expense
|
— | — |
The
increase in valuation allowance consists of the creation of additional tax
losses which have not been recognized for accounting purposes.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Deferred
income taxes result principally from temporary differences in the recognition of
loss carry forwards and expense items for financial and income tax reporting
purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2009 and 2008 were as follows:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$
|
$
|
|||||||
Deferred
revenue
|
1,722,245 | 1,129,610 | ||||||
Property,
plant and equipment
|
2,423,828 | 1,177,388 | ||||||
Intangible
assets
|
(291,668 | ) | 426,542 | |||||
Share
issue costs
|
1,754,781 | 3,143,219 | ||||||
Net
operating losses
|
29,540,867 | 22,155,774 | ||||||
35,150,053 | 28,032,533 | |||||||
Valuation
allowance
|
(35,150,053 | ) | (28,032,533 | ) | ||||
Total
deferred tax assets
|
— | — |
The
Company has approximately $93,368,139 in non-capital tax losses available to be
applied against future years' income, which expire as follows:
$ | ||||
2010
|
198,000 | |||
2026
|
21,263,325 | |||
2027
|
25,544,598 | |||
2028
|
28,851,457 | |||
2029
|
17,510,759 | |||
93,368,139 |
Due to
the losses incurred since inception and expected future operating results, a
100% valuation allowance has been recorded against the Company's net deferred
tax assets as it is more likely than not that the future tax asset resulting
from the tax losses available for carry-forward will not be realized through the
reduction of future income tax payments.
The
Company does not have any uncertain tax provisions under ASC 740.
16.
Derivative Instruments
The
Company’s only derivative instruments are 11,000,000 warrants, the exercise
price for which are denominated in a currency other than the Company’s
functional currency, as follows:
|
·
|
5,500,000
Series A warrants exercisable at Cdn$1.25 that expire on October 20,
2010.
|
|
·
|
5,500,000
Series B warrants exercisable at Cdn$1.50 that expire on October 20,
2010.
|
These
warrants have been recorded at their relative fair values at issuance and will
continue to be recorded at fair value at each subsequent balance sheet
date. Any change in value between reporting periods will be recorded
as other income (expense). These warrants will continue to be
reported as a liability until such time as they are exercised or
expire. The fair value of these warrants is estimated using the
Black-Scholes-Merton option-pricing model.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
As of
January 1, 2009, the grant date fair value of these warrants in the amount of
$2,464,000 was reallocated from additional paid-in-capital and a derivative
liability was recorded in the amount of $587,950, being the fair value of the
warrants on January 1, 2009 offset by an adjustment to accumulated deficit of
$1,876,050.
As of
December 31, 2009, the fair value of the warrants was determined to be
$1,389,300; accordingly, the Company recorded $801,350 in other expense for the
year ended December 31, 2009, respectively, related to the change in the fair
value of these warrants. There is no cash flow impact for these
derivatives until the warrants are exercised. If these warrants are
exercised, the Company will receive the proceeds from the exercise at the
current exchange rate at the time of exercise.
17.
Reconciliation of U.S. GAAP to Canadian GAAP
The
consolidated financial statements of the Company are prepared in U.S. dollars in
accordance with U.S. GAAP. The following adjustments and disclosures would be
required in order to present these consolidated financial statements in
accordance with Canadian GAAP:
Reconciliation
to Canadian GAAP
Income
Statements Items using Canadian GAAP
2009
|
2008
|
|||||
$
|
$
|
|||||
NET
LOSS USING UNITED STATES GAAP
|
(19,640,921 | ) | (11,637,260 | ) | ||
Add
(deduct) adjustments for:
|
||||||
Adjustment
for stock based compensation on SARS[i]
|
131,343 | 16,599 | ||||
Adjustment
for unrealized loss on derivative [ii]
|
801,350 | — | ||||
NET
LOSS USING CANADIAN GAAP
|
(18,708,228 | ) | (11,620,661 | ) | ||
NET
AND COMPREHENSIVE LOSS PER SHARE
|
||||||
USING
CANADIAN GAAP - basic and diluted
|
$(0.17 | ) | $(0.21 | ) |
Balance Sheet Items using
Canadian GAAP
|
||||||||||||||||
2009 | 2008 | |||||||||||||||
U.S.
|
Canadian
|
U.S.
|
Canadian
|
|||||||||||||
GAAP
|
GAAP
|
GAAP
|
GAAP
|
|||||||||||||
$ | $ | $ | $ | |||||||||||||
Accrued
liabilities [i]
|
5,822,385 | 5,662,128 | 7,595,116 | 7,578,517 | ||||||||||||
Derivative
liability [ii]
|
1,389,300 | — | — | — | ||||||||||||
Total
current liabilities [i]
|
16,801,308 | 15,251,751 | 15,209,323 | 15,192,724 | ||||||||||||
Total
liabilities [i]
|
17,998,829 | 16,449,272 | 16,724,104 | 16,707,505 | ||||||||||||
Accumulated
deficit [i]
|
(43,804,398 | ) | (44,731,156 | ) | (26,039,527 | ) | (26,022,928 | ) | ||||||||
Total
shareholders’ equity [i]
|
22,270,334 | 23,807,576 | 37,013,578 | 37,030,177 |
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Cash
Flows Items using Canadian GAAP
2009 |
2008
|
|||||||||||||||
U.S.
|
Canadian
|
U.S.
|
Canadian
|
|||||||||||||
GAAP
|
GAAP
|
GAAP
|
GAAP
|
|||||||||||||
$
|
$
|
$
|
$
|
|||||||||||||
Net
loss [ii]
|
(19,640,921 | ) | (18,708,228 | ) | (11,637,260 | ) | (11,620,661 | ) | ||||||||
Stock-based
compensation [ii]
|
1,167,789 | 1,036,446 | 1,848,906 | 1,832,307 |
Areas of
material difference between Canadian GAAP and U.S. GAAP and their impact on the
consolidated financial statements are as follows:
[i] SARs
|
·
|
Under
U.S. GAAP, the Company recognizes a liability and compensation expense for
the fair value of the SARs on each reporting
date.
|
|
·
|
Under
Canadian GAAP, the Company recognizes a liability and compensation expense
for the “in the money” value of the SARs on each reporting
date.
|
[ii] Derivative
Liability
|
·
|
Canadian
Institute of Chartered Accountants (“CICA”) Handbook Section 3861, Financial Instruments –
Disclosure and Presentation, establishes standards for presentation
of financial instruments and non-financial derivatives, and identifies the
information that should be disclosed about them. The revisions
change the accounting for certain financial instruments that have
liability and equity
characteristics.
|
|
·
|
Under
U.S. GAAP, the Company recognizes a derivative liability on the
consolidated balance sheets for the fair value of all convertible
instruments with an exercise price denominated in a currency other than
the Company’s functional currency. The Company fair values this
liability on each reporting date with the corresponding entry to
unrealized gain (loss) on derivative on the consolidated statement of
operations.
|
|
·
|
Under
Canadian GAAP, the Company records these convertible instruments at fair
value on the grant date and includes them within additional paid in
capital on the consolidated balance sheets. The Company does
not recognize any changes in fair
value.
|
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
CICA
Handbook Section 1535 – Capital Disclosures
The
Company manages the following accounts in regards to capital
management:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$
|
$
|
|||||||
Shareholders'
equity
|
||||||||
Share
capital
|
11,260,415 | 6,762,097 | ||||||
Additional
paid in capital
|
55,023,567 | 56,500,258 | ||||||
Promissory
note receivable
|
(209,250 | ) | (209,250 | ) | ||||
Accumulated
deficit
|
(43,804,398 | ) | (26,039,527 | ) | ||||
22,270,334 | 37,013,578 |
(the
figures in the table above are in accordance with U.S. GAAP)
The
Company’s outstanding share capital is comprised of Shares. At December 31,
2009, an unlimited number of Shares were authorized and 116,731,794 (December
2008 − 110,084,044) Shares were issued and outstanding. Approximately 57% of the Shares are held
by insiders, and the remaining shares are widely held. Further information on
the Company’s outstanding share capital is provided in note 9 of these
consolidated financial statements.
At
December 31, 2009, a total of 8,657,897 stock options were
outstanding, 6,724 restricted share units,
17,697,500 warrants, 847,892 retention warrants and
1,675,000 SARs,
which convertible securities cumulatively represented 25% of the Company’s
issued and outstanding share capital. Pursuant to guidelines set by the
Company’s respective equity plans, stock option grants are limited to the
greater of 12.5% of the issued and outstanding Shares outstanding and 4,000,000,
restricted share unit grants have been fully granted, retention warrants are
limited to 2,500,000 and SARs grants are limited to the greater of 5% of the
issued and outstanding Shares and 4,150,000. The Company is currently
in compliance with these guidelines.
The
Company’s objective in managing capital is to ensure a sufficient liquidity
position to finance its revenue growth, general and administrative expenses,
working capital and capital expenditures.
In order
to maintain or adjust its capital structure, the Company may issue new shares
and/or purchase shares for cancellation pursuant to normal course issuer
bids.
To
finance its activities, the Company has relied on revenue growth and issuance of
common equity. Since inception, the Company has financed its
activities primarily through public offerings of Shares.
The
Company’s policy is to maintain a minimal level of debt. At this time
the Company has not utilized debt facilities as part of its capital management
program nor has it paid dividends to its shareholders.
The
capital management objectives for the period ended December 31, 2009 remained
the same as those of the previous fiscal year.
The
Company is not subject to any externally imposed capital
requirements.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
CICA
Handbook Sections 3862 and 3863 – Financial Instruments – Disclosures and
Presentation
The
Company's financial instruments are comprised of cash and cash equivalents,
short-term investments, accounts receivable, interest receivable, other
receivables, accounts payable, other accrued liabilities, amounts due to/from
related party, notes payable and obligations under capital lease.
The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between
willing parties.
The fair
value of assets and liabilities were as follows:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$ | $ | |||||||
Financial
Assets
|
||||||||
Held-for-Trading
|
||||||||
Cash and cash
equivalents
|
12,957,679 | 27,323,021 | ||||||
Loans and Receivables
|
||||||||
Accounts
receivable
|
1,809,147 | 2,284,242 | ||||||
Other
receivables
|
821,834 | 227,711 | ||||||
Due from related
parties
|
246,992 | 324,059 | ||||||
Financial
Liabilities
|
||||||||
Other Financial Liabilities
|
||||||||
Accounts
payable
|
5,383,518 | 4,465,388 | ||||||
Accrued
liabilities
|
5,822,385 | 7,595,116 | ||||||
Due to related
parties
|
298,595 | 56,826 |
All fair
values denoted above approximate their carrying values due to their short term
nature and/or variable interest rates.
Risk
management is primarily the responsibility of the Company’s corporate finance
function. Significant risks are regularly monitored and actions are
taken, when appropriate, according to the Company’s approved policies,
established for that purpose. In addition, as required, these risks
are reviewed with the Company’s Board of Directors.
Foreign
Exchange Risk
The
Company is exposed to foreign exchange risk as a result of transactions in
currencies other than its functional currency of the United States
dollar. The majority of the Company’s revenues are transacted in U.S.
dollars, whereas a portion of its expenses are transacted in U.S. or Canadian
dollars. The Company does not use derivative instruments to hedge
against foreign exchange risk.
Interest
Rate Risk
The
Company is exposed to interest rate risk on its invested cash and cash
equivalents. The interest rates on these instruments are based on the
banks’ applicable rate and therefore are subject to change with the
market. The Company does not use derivative financial instruments to
reduce its interest rate risk.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
Credit
Risk
The
Company sells its services to a variety of customers under various payment terms
and therefore is exposed to credit risk. The Company has adopted
policies and procedures designed to limit this risk. The maximum
exposure to credit risk at the reporting date is the carrying value of
receivables. The Company establishes an allowance for doubtful
accounts that represents its estimate of incurred losses in respect of accounts
receivable. The Company believes that the concentration of credit
risk is limited due to the Company’s primary source of revenues to date being
subscription revenues, for which monies are received in advance principally
through credit cards.
There is
no significant credit risk related to the Company's cash and cash equivalents.
Credit risk is managed through conducting financial and other assessments of
these investments on an ongoing basis.
The
following table sets out details of the age of accounts receivable that are
outstanding and related allowance for doubtful accounts:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
$
|
$
|
|||||||
Current
|
938,298 | 1,697,271 | ||||||
31-60
days
|
409,804 | 287,070 | ||||||
61-90
days
|
262,836 | 105,525 | ||||||
Over
90 days
|
327,759 | 484,914 | ||||||
Less:
Allowance for doubtful accounts
|
(129,550 | ) | (290,538 | ) | ||||
Total
accounts receivable, net
|
1,809,147 | 2,284,242 |
The
carrying amount of accounts receivable is reduced through the use of an
allowance account and the amount of the loss is recognized in the consolidated
statements of operations and comprehensive loss. When a receivable
balance is considered uncollectible, it is written off against the allowance for
accounts receivable. Subsequent recoveries of amounts previously written off are
credited against operating expenses in the consolidated statements of operations
and comprehensive loss.
In
addition, recent Canadian GAAP accounting pronouncements that may impact the
Company's financial position and results of operations and disclosure
requirements are as follows:
Recent
Accounting Pronouncements
In
February 2008, the CICA issued new Handbook Section 3064, Goodwill and Intangible
Assets, which replaces Section 3062, Goodwill and Other Intangible
Assets, and Section 3450, Research and Development
Costs. The new standard addresses when an internally developed
intangible asset meets the criteria for recognition as an asset. The
section also issued amendments to Section 1000, Financial Statement
Concepts. These changes are effective for fiscal years
beginning on or after October 1, 2008, with earlier adoption permitted, and have
been adopted by the Company effective January 1, 2009. The objectives
of the changes are to reinforce a principle-based approach to the recognition of
costs as assets and to clarify the application of the concept of matching
revenues and expenses in Section 1000. Collectively, these changes
bring Canadian practice closer to International Financial Reporting Standards
(“IFRS”) by eliminating the practice of recognizing as assets a variety of
start-up, pre-production and similar costs that do not meet the definition and
recognition criteria of an asset. There was no material effect on the
Company’s consolidated financial statements as a result of adopting CICA
Handbook Section 3064.
NEULION,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed
in U.S. dollars, unless otherwise noted]
December
31, 2009
In
February 2008, the CICA Accounting Standards Board confirmed that the changeover
to IFRS from Canadian GAAP will be required for publicly accountable
enterprises, effective for the interim and annual financial statements relating
to fiscal years beginning on or after January 1, 2011. The Company
became an SEC issuer effective June 8, 2009 and expects to continue to use U.S.
GAAP until the date that IFRS is implemented in the United States, which is
currently estimated to occur no sooner than 2014.
Effective
January 1, 2009 the Company adopted CICA Handbook Section 1582 “Business
Combinations” which replaces Section 1581. This standard establishes the
principles and requirements of the acquisition method for business combination
and related disclosures and applies prospectively to business combinations for
which the acquisition date.
Effective
January 1, 2009, the Company adopted CICA Handbook Section 1601 “Consolidated
Financial Statements” and section 1602 “Non-controlling Interest” which replace
Section 1600. Section 1601 establishes standards for the preparation of
consolidated financial statements. Section 1602 provides guidance on accounting
for a non-controlling interest in a subsidiary in consolidated financial
statements subsequent to a business combination. The
adoption of Sections 1582, 1601, and 1602 did not materially impact the
Company's consolidated financial statements as the provisions of these standards
are substantially similar to the Company's accounting in accordance with U.S.
GAAP.
F-37