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NEULION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Expressed in U.S. dollars)

		September 30,				December 31,
		2016				2015
		(unaudited)
ASSETS
Current
Cash and cash equivalents		$	69,559			$	53,413
Accounts receivable, net of allowance of doubtful accounts of $437 and $688			12,287				12,967
Other receivables			879				604
Inventory			197				199
Prepaid expenses and deposits			3,546				2,928
Due from related parties			378				304
Total current assets			86,846				70,415
Property, plant and equipment, net			6,846				6,585
Intangible assets, net			26,228				23,627
Goodwill			13,229				11,496
Deferred tax assets			30,730				30,614
Other assets			2,845				1,413
Total assets		$	166,724			$	144,150
LIABILITIES AND EQUITY
Current
Accounts payable		$	28,520			$	10,006
Accrued liabilities			12,887				10,230
Due to related parties			-				18
Deferred revenue			13,105				11,570
Total current liabilities			54,512				31,824
Long-term deferred revenue			2,503				1,067
Deferred rent liabilities			1,365				1,649
Deferred tax liabilities			1,093				1,425
Other long-term liabilities			114				127
Total liabilities			59,587				36,092
Stockholders' equity
Common stock (par value: $0.01; shares authorized: 500,000,000; shares issued and outstanding:
2016: 281,274,033 and 2015: 280,903,667)			2,813				2,809
Additional paid-in capital			168,189				167,705
Promissory notes receivable			(209	)			(209	)
Accumulated deficit			(63,656	)			(62,247	)
Total stockholders’ equity			107,137				108,058
Total liabilities and stockholders’ equity		$	166,724			$	144,150

 

NEULION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share data)

(Expressed in U.S. dollars)

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Revenue		$	23,857			$	21,901			$	74,261			$	66,259
Costs and expenses
Cost of revenue, exclusive of depreciation and amortization shown separately below			4,322				3,863				13,108				12,404
Selling, general and administrative, including stock-based compensation			13,429				11,150				38,252				32,454
Research and development			5,212				6,588				14,851				19,384
Depreciation and amortization			2,401				2,046				6,499				5,634
			25,364				23,647				72,710				69,876
Operating income (loss)			(1,507	)			(1,746	)			1,551				(3,617	)
Other income (expense)
(Loss) gain on foreign exchange			(62	)			(218	)			10				(558	)
Investment income, net			9				85				63				269
Interest on convertible note, including amortization of debt discount			-				-				-				(123	)
Gain on conversion of convertible note and revaluation of related derivative, net			-				-				-				507
			(53	)			(133	)			73				95
Net and comprehensive income (loss) before income taxes			(1,560	)			(1,879	)			1,624				(3,522	)
Income taxes			(1,155	)			(1,241	)			(3,033	)			(3,329	)
Net and comprehensive loss		$	(2,715	)		$	(3,120	)		$	(1,409	)		$	(6,851	)
Net loss per weighted average number of shares
of common stock outstanding - basic and diluted		$	(0.01	)		$	(0.01	)		$	0.00			$	(0.03	)
Weighted average number of shares
of common stock outstanding - basic and diluted			282,072,241				224,324,763				282,244,706				224,213,231

NEULION, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except share data)

(Expressed in U.S. dollars)

		Common stock								Additional				Promissory				Accumulated				Total
		Shares				Amount				paid-in capital				notes				deficit				equity
Balance, December 31, 2015			280,903,667			$	2,809			$	167,705			$	(209	)		$	(62,247	)		$	108,058
Exercise of stock options			2,235,565				22				427				-				-				449
Stock-based compensation:
Stock options			-				-				2,079				-				-				2,079
Restricted stock			1,963,000				20				1,224				-				-				1,244
Directors' compensation			145,805				1				165				-				-				166
Repurchase and cancellation of
common stock			(3,974,004	)			(39	)			(3,411	)			-				-				(3,450	)
Net loss			-				-				-				-				(1,409	)			(1,409	)
Balance, September 30, 2016			281,274,033			$	2,813			$	168,189			$	(209	)		$	(63,656	)		$	107,137

NEULION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

(Expressed in U.S. dollars)

		Nine months ended September 30,
		2016				2015
OPERATING ACTIVITIES
Net loss		$	(1,409	)		$	(6,851	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			6,499				5,634
Stock-based compensation			3,489				1,843
Amortization of debt discount			-				123
Gain on revaluation of convertible note derivative			-				(507	)
Deferred income taxes			(112	)			215
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable			680				15,838
Income tax receivable			-				4,318
Other receivables			(275	)			166
Inventory			2				75
Prepaid expenses, deposits and other assets			(1,997	)			(2,076	)
Due from related parties			(74	)			(181	)
Accounts payable			18,514				7,734
Accrued liabilities			2,321				(1,540	)
Deferred revenue			2,971				(972	)
Deferred rent liability			(284	)			(171	)
Long-term liabilities			(13	)			(56	)
Due to related parties			(18	)			166
Cash provided by operating activities			30,294				23,758
INVESTING ACTIVITIES
Acquisition of Saffron Digital Limited			(9,000	)			-
Cash acquired from acquisition of DivX Corporation			-				9,718
Purchase of property, plant and equipment			(2,147	)			(1,172	)
Cash (used in) provided by investing activities			(11,147	)			8,546
FINANCING ACTIVITIES
Repurchases of common stock			(3,450	)			-
Proceeds from exercise of stock options			449				843
Proceeds from exercise of broker units			-				19
Cash (used in) provided by financing activities			(3,001	)			862
Net increase in cash and cash equivalents, during the period			16,146				33,166
Cash and cash equivalents, beginning of period			53,413				25,898
Cash and cash equivalents, end of period		$	69,559			$	59,064
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	2,826			$	2,783
Supplemental disclosure of non-cash activities:
Par value of shares of common stock issued upon exercise of cashless warrants		$	-			$	19
Accretion of issuance costs on Class 4 Preference Shares		$	-			$	23
Issuance of shares of common stock upon acquisition of DivX Corporation		$	-			$	58,521
Issuance of convertible note upon acquisition of DivX Corporation		$	-			$	27,000

Prepaid expenses and deposits		$	53
Property, plant and equipment			14
Intangible assets			7,200
Goodwill			1,733
Net assets acquired		$	9,000

					Useful Life
	Amount				(years)
Developed technology		$	3,900		5
Customer relationships			3,300		5
		$	7,200

2016		$	360
2017			1,440
2018			1,440
2019			1,440
2020			1,440
Thereafter			600
		$	6,720

Cash		$	9,718
Accounts receivable			7,094
Contracts receivable			16,668
Income tax receivable			4,317
Other receivables			247
Prepaid expenses			1,342
Deferred tax asset			384
Other assets			334
Property and equipment, net			3,592
Intangible assets			28,500
Goodwill			169
Accounts payable			(721	)
Accrued liabilities			(5,560	)
Deferred revenue			(3,000	)
Deferred tax liability			(2,154	)
Deferred rent liability			(1,912	)
Net assets acquired		$	59,018

						Useful Life
		Amount				(years)
Developed technology		$	14,400			5
Customer relationships			9,400			5
Trademarks			4,700			7
		$	28,500

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
Total revenue		$	23,857			$	21,901			$	74,261			$	68,498
Net loss		$	(2,715	)		$	(3,120	)		$	(1,409	)		$	(9,075	)
Loss per share – basic and diluted		$	(0.01	)		$	(0.01	)		$	0.00			$	(0.04	)

		Three months ended September 30,								Nine months ended September 30,
		2016				2015				2016				2015
KyLin TV		$	90			$	121			$	274			$	459
New York Islanders			69				71				209				221
Renaissance			30				30				90				90
Smile Train			24				24				72				72
		$	213			$	246			$	645			$	842

		As of
		September 30,				December 31,
		2016				2015
Renaissance		$	-			$	(18	)
KyLin TV			378				304
		$	378			$	286

		September 30,
		2016				2015
Class 3 Preference Shares			-				17,176,818
Class 4 Preference Shares			-				10,912,265
Stock options – Amended and Restated 2012 Omnibus Securities and Incentive Plan			23,779,350				21,817,795
Restricted stock – Amended and Restated 2012 Omnibus Securities and Incentive Plan			9,240,500				4,500,000
Stock options – Fourth Amended and Restated Stock Option Plan			2,058,750				4,895,300
Warrants			1,924,741				1,924,741
			37,003,341				61,226,919

	Three months ended September 30,																Nine months ended September 30,
	2016								2015								2016								2015
North America		$	15,807				66	%		$	14,312				65	%		$	49,056				66	%		$	44,517				67	%
Asia			5,104				21	%			5,280				24	%			16,317				22	%			14,380				22	%
Europe			2,543				11	%			1,444				7	%			6,791				9	%			4,617				7	%
Australia			403				2	%			865				4	%			2,097				3	%			2,745				4	%
		$	23,857				100	%		$	21,901				100	%		$	74,261				100	%		$	66,259				100	%

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of the Company should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2016 and 2015, 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 October 31, 2016, the Bank of Canada noon rate for conversion of United States dollars to Canadian dollars (“CDN$”) was US$1 to CDN$1.3403.

 

Our MD&A is intended to enable readers to gain an understanding of our current operating results and financial position. To do so, we provide information and analysis comparing the results of operations and financial position for the current period to those of the preceding comparable period. We also provide analysis and commentary that we believe is required to assess our 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 Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and below in the section titled “Cautions Regarding Forward-Looking Statements,” and that 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 that reflect management’s expectations regarding our growth, results of operations, performance and business prospects and opportunities.

 

Statements about our future plans and intentions, results, levels of activity, performance, goals, 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 available to management as of the date of this Quarterly Report on Form 10-Q.

 

Forward-looking statements involve significant risk, uncertainties and assumptions. Although the forward-looking statements contained in this MD&A are based upon what management believes to be reasonable assumptions, we 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 Quarterly Report on Form 10-Q and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by law. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including: our ability to derive anticipated benefits from the acquisitions of DivX Corporation (“DivX”) and Saffron Digital Limited (“Saffron Digital”); our ability to realize some or all of the anticipated benefits of our partnerships; our ability to increase revenue; general economic and market segment conditions; our customers’ subscriber levels and financial health; our ability to pursue and consummate acquisitions in a timely manner; our continued relationships with our customers; our ability to negotiate favorable terms for contract renewals; competitor activity; product capability and acceptance rates; technology changes; regulatory changes; foreign exchange risk; interest rate risk; and credit risk. These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. A more detailed assessment of the risks that could cause actual results to materially differ from current expectations is contained in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

On June 23, 2016, the United Kingdom (“UK”) held a referendum in which voters approved an exit from the European Union (“EU”), commonly referred to as “Brexit.”  The referendum is non-binding; however, if passed into law, negotiations would begin to determine the future terms of the UK’s relationship with the EU, including the terms of trade between those two entities.  While the future effects of Brexit are unknown, the announcement that the referendum had passed caused significant volatility in global stock markets and currency exchange rate fluctuations, and it is possible that these will reoccur from time to time and that there will be increased legal and regulatory complexities in relation to Brexit.  We do not anticipate at this time that Brexit will have a material impact on our business.

  

    

Overview

 

We are a leading provider of enterprise digital video solutions with the mission to deliver and enable the highest quality live and on-demand digital video content experiences anywhere and on any device.  Our flagship solution, the NeuLion Digital Platform, is a proprietary, cloud-based, fully integrated, turnkey solution that enables the delivery and monetization of digital video content.

 

Enterprises throughout the entire digital video ecosystem use our solutions to better grow, engage and monetize their customer bases. The NeuLion Digital Platform offers content owners and rights holders a highly-configurable and scalable suite of digital technologies, together with services for back-end content preparation, management, secure delivery and monetization, in an end-to-end solution that addresses the complexities associated with successfully streaming and marketing their content.  Our comprehensive solution suite also includes our DivX video solution that allows consumer electronics (“CE”) manufacturers to provide a secure, high-quality video experience and premium screen resolution, up to Ultra HD/4K, across virtually all content formats, for a wide range of connected devices.

 

We primarily generate revenue by offering the NeuLion Digital Platform on a subscription license basis. Our revenue is generated from fees determined by the number of channels through which we deliver our customers’ content, the number of events we stream and the number of connected devices we enable, as well as from variable fees determined by the volume of digital video content we deliver and/or the end user revenue generated by our customers.  We also generate revenue from licensing our DivX video solution to CE manufacturers, video solution developers and others.

 

We believe that the proliferation of Internet-connected devices, the increasing amount of digital video content, the growth in video consumption, particularly sports, on mobile devices and the demand for continually improving and personalized viewing experiences will be the principal drivers of our growth.  As enterprises continue to struggle with the complexities of managing growing libraries of digital content, creating compelling branded user experiences and delivering those experiences across a wide range of connected devices in high-quality resolutions, our comprehensive suite of products and focus on innovation will allow us to increase revenues from existing customers and expand our customer base in North America and internationally.

 

We were incorporated as Jump TV Inc. on January 14, 2000 under the Canada Business Corporations Act. We have traded on the TSX since August 9, 2006.  In October 2008, Jump TV Inc. completed a merger with the company now known as NeuLion USA, Inc. pursuant to which it became our wholly-owned subsidiary.  The merger was accounted for as a reverse takeover.  In July 2009, our Registration Statement on Form 10 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), was declared effective by the SEC and we changed our corporate name to NeuLion, Inc.  On November 30, 2010, we were domesticated under Delaware law. On January 30, 2015, we consummated the acquisition of DivX, which creates, distributes, and licenses digital video technologies for PCs, smart TVs, and mobile devices.  MainConcept, its subsidiary, provides high-quality video compression-decompression, or codec, software libraries and products to consumer electronics manufacturers, broadcasters, video solution developers and others.  On June 3, 2016, we completed the acquisition of Saffron Digital in an all-cash asset transaction for total consideration of $9.0 million, of which $7.5 million was paid on closing and $1.5 million was paid in September 2016.

 

Key Performance Metrics

 

We regularly review a number of performance indicators, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

     

After DivX was acquired by NeuLion on January 30, 2015, the purchase price allocation on the acquisition date included an adjustment to record the fair value of assumed contractual payments due to DivX for which no or little additional obligations existed in order to receive such payments. These contractual payments are for fixed multi-year site licenses and unbilled per unit royalties for units shipped prior to the acquisition.  Prior to the acquisition, revenue relating to such transactions was recognized during the period in which such customers reported the number of royalty-eligible units that they had shipped. Revenues from annual or other license fees are recognized based on the specific terms of the license arrangement.  For instance, some of DivX’s large CE customers have entered into agreements for which they have the right to ship an unlimited number of units over a specified term for a flat fee. We record the fees associated with these arrangements on a straight-line basis over the specified term. Upon closing the acquisition of DivX, because DivX assumed no additional obligations under such contracts, these fixed payments are considered a fixed payment stream, rather than revenue and are therefore treated as accounts receivable as opposed to revenue as part of the purchase accounting.  The fair value of the remaining fixed payments due under the applicable contracts is estimated by calculating the discounted cash flows associated with such fixed payments. The reduction in revenues related to the fixed payments being treated as accounts receivable as opposed to revenues has been reflected as a non-GAAP financial measure to include the effect of the excluded revenues to allow investors and analysts to make meaningful comparisons between DivX's ongoing core business operating results and those of other companies.

 

 

We principally use pro forma revenue, in combination with non-GAAP revenue and platform revenue, as described below, to monitor the period-over-period performance of the business. Pro forma revenue reflects the combined revenue of our historical business and our acquired DivX business, adjusted as a result of purchase accounting.  Our pro forma revenue increased by 9% and 8% for the three and nine months ended September 30, 2016, respectively.

 

 

We principally use pro forma non-GAAP revenue, in combination with pro forma revenue and platform revenue, as described above and below, to monitor the period-over-period performance of the business.  Pro forma non-GAAP revenue measures the revenue of our historical business and our acquired DivX business on a combined basis without adjustment for purchase accounting.  There will be no purchase accounting adjustments to revenue in future quarters.  Our pro forma non-GAAP revenue decreased by 6% and 7% for the three and nine months ended September 30, 2016, respectively.  We expect the growth in pro forma non-GAAP revenue to be less than that in our organic revenue growth due to a decline in non-GAAP revenues generated by our DivX and MainConcept revenue streams.  Please see the reconciliation of GAAP Revenue to Pro Forma non-GAAP Revenue, below, for full details.

 

 

We expect our revenue from our NeuLion Digital Platform to grow faster than revenue from our other solutions as we add new customers and increase the variable revenue we realize from existing customers.  As a result, we expect our platform revenue to continue to grow in absolute dollars and as a percentage of revenue.  Our platform revenue grew by 14% and 9% for the three and nine months ended September 30, 2016, respectively.  Our platform revenue is seasonal, related to the timing and size of events that our customers deliver through our solution.  The fourth quarter has historically been our highest revenue quarter, but this seasonality may change as we add new customers and events.

 

   

Cost of revenue consists principally of bandwidth costs paid in connection with our delivery of digital video content, and to a lesser extent, license fees paid to certain customers for whom we recognize revenue on a gross basis.  We use cost of revenue as a percent of revenue, together with adjusted EBITDA, to measure the operating performance of our business.  Historically, we have been able to reduce our cost of revenue as a percent of revenue as we have increased the digital video content we deliver on the NeuLion Digital Platform and as a result of the acquisition of DivX.  Our cost per unit of bandwidth decreases as we deliver more digital video content.  Our cost of revenue as a percentage of revenue going forward will also be effected by our revenue mix.

 

 

We monitor pro forma adjusted EBITDA, together with cost of revenue as a percent of revenue, to measure the operating performance of our business.  We expect adjusted EBITDA to improve over time as we grow our revenue and improve our operating performance, but adjusted EBITDA as a percent of revenue will vary based on the timing of revenue and expenses.  Refer to Reconciliation of GAAP Net Loss to Pro Forma Adjusted EBITDA, below, for full details.

 

 

 

  

We report Pro Forma Non-GAAP Revenue and Pro Forma Adjusted EBITDA because they are key measures used by management to evaluate our results and make strategic decisions about the Company, including potential acquisitions. Pro Forma Non-GAAP Revenue represents GAAP revenue as if the acquisition of DivX occurred at the beginning of the period and before purchase price accounting adjustments as a result of the acquisition of DivX. Pro Forma Adjusted EBITDA represents net income (loss) as if the acquisition of DivX occurred at the beginning of the period before interest, income taxes, depreciation and amortization, stock-based compensation, acquisition-related expenses, purchase accounting adjustments, gain on revaluation of convertible note derivative, investment income and foreign exchange gain/loss. These measures do not have any standardized meaning prescribed by U.S. GAAP and therefore are 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 U.S. GAAP.

        

  

COMPONENTS OF OPERATING RESULTS

We operate in one segment. Our chief operating decision-maker reviews our operating results on an aggregate basis and manages our operations as a single operating segment.

Revenue

 

We generate a majority of our revenue by offering the NeuLion Digital Platform on a subscription license basis. Revenue from the NeuLion Digital Platform is generated from fees determined by the number of channels through which we deliver our customers’ content, the number of events we stream and the number of connected devices we enable, as well as from variable fees determined by the volume of digital video content we deliver and/or the end user revenue generated by our customers.  We also generate revenue from licensing our DivX video solution to CE manufacturers, video solution developers and others.

 

Our contracts with customers typically have a length between two years and five years and are generally on an exclusive basis.  We recognize recurring fees in the period in which services are provided and when collection of fees is reasonably assured and the amount of fees is fixed or determinable.

 

Our platform revenue is seasonal and is based significantly on the timing and size of events that our customers deliver through our solution.  The fourth quarter has historically been our highest revenue quarter, but this seasonality may change as we add new customers and events.

 

Cost and Expenses

 

Cost of revenue

 

Cost of revenue consists principally of bandwidth costs paid in connection with our distribution of digital video content and, to a lesser extent, license fees paid for which we recognize revenue on a gross basis.  Cost of revenue excludes amortization and depreciation and labor costs.

 

Our cost of revenue as a percentage of revenue going forward will depend primarily on our revenue mix.

Selling, general and administrative expenses, including stock-based compensation

 

Selling, general and administrative expenses, including stock-based compensation, or SG&A expenses, include wages and benefits, stock-based compensation, facilities expenses, professional fees, marketing costs, travel expenses, rent, office supplies, corporate IT services, credit card processing fees and other general operating expenses. Historically, approximately 65% of SG&A has consisted of wages and benefits for our employees.

We expect SG&A expenses to increase in absolute dollars as we add personnel, increase our spending on sales and marketing and grow our business; however, we expect SG&A expenses to decline as a percent of revenue over time.

Research and development

 

Research and development expenses consist primarily of wages and benefits for research and development personnel.  Historically, approximately 90% of research and development expenses has consisted of wages and benefits for our employees.

        

   

We expect research and development expenses to increase in absolute dollars as we continue to add personnel to enhance and grow our solutions; however, we expect research and development expenses to decline as a percent of revenue over time.

 

Key Trends and Factors That May Impact Our Performance

 

We believe that there are many factors that will continue to affect our ability to sustain and increase both revenue and profitability and impact the nature and amount of our expenditures, including:

 

·

Market acceptance of our services.  We compete in markets where the value of certain aspects of our services is still in the process of market acceptance.  We believe that our future growth depends in part on the continued and increasing acceptance and realization of the value of our service offerings.

 

·

Technological change.  Our success depends in part on our ability to keep pace with technological changes in and evolving industry standards applicable to our service offerings and to successfully develop, launch, and drive demand for new and enhanced, innovative, high-quality solutions that meet or exceed customer needs.

 

·

Technology spending.  Our growth and results depend in part on general economic conditions and the pace and level of technology spending by potential customers to take their content digital.

 

In addition, in June 2016, we completed the acquisition of Saffron Digital.  The integration of the two companies will impact our future revenues, expenses and operating results.

RESULTS OF OPERATIONS

 

Comparison of Three Months Ended September 30, 2016 to Three Months Ended September 30, 2015 (unaudited)

 

Our condensed consolidated financial statements for the three months ended September 30, 2016 and 2015 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows (amounts in thousands):

 

Revenue

 

Revenue increased to $23.9 million for the three months ended September 30, 2016 from $21.9 million for the three months ended September 30, 2015.  The $2.0 million improvement was the result of an increase in revenues from our NeuLion Digital Platform.

       

  

Cost of Revenue

  

Cost of revenue increased to $4.3 million for the three months ended September 30, 2016 from $3.9 million for the three months ended September 30, 2015.  Cost of revenue as a percentage of revenue was 18% for both the three months ended September 30, 2015 and 2016.

 

Selling, general and administrative expenses, including stock-based compensation

 

Selling, general and administrative expenses, including stock-based compensation, increased by $2.3 million, or 20%, from $11.1 million for the three months ended September 30, 2015, to $13.4 million for the three months ended September 30, 2016.  The individual variances are as follows:

 

• Wages and benefits increased from $7.1 million for the three months ended September 30, 2015 to $8.2 million for the three months ended September 30, 2016.   The $1.1 million increase was primarily the result of severance payments paid during the quarter and the acquisition of Saffron Digital.

 

• Stock-based compensation increased from $0.9 million for the three months ended September 30, 2015 to $1.4 million for the three months ended September 30, 2016.  The $0.5 million increase was primarily the result of additional stock option and restricted stock unit grants.

• Professional fees were $1.0 million for both the three months ended September 30, 2015 and 2016.  

 

• Office facilities expenses increased from $0.5 million for the three months ended September 30, 2015 to $0.8 million for the three months ended September 30, 2016.  The $0.3 million increase was primarily the result of facility costs associated with the acquisition of Saffron Digital.

• Other SG&A expenses increased from $1.6 million for the three months ended September 30, 2015 to $2.0 million for the three months ended September 30, 2016.  Other SG&A expenses include travel expenses, rent, office supplies, corporate IT services, credit card processing fees and other general operating expenses.

 

Research and development

Research and development costs decreased from $6.6 million for the three months ended September 30, 2015 to $5.2 million for the three months ended September 30, 2016.  The $1.4 million decrease was primarily a result of a reduction in headcount due to redundancy associated with the acquisition of DivX.

 

Depreciation and amortization

 

Depreciation and amortization increased from $2.0 million for the three months ended September 30, 2015 to $2.4 million for the three months ended September 30, 2016.  The $0.4 million increase was primarily the result of amortization of intangibles associated with the acquisition of Saffron Digital.

Income taxes

The tax provision was $1.2 million for both the three months ended September 30, 2015 and 2016.  The provision for income taxes during 2016 is primarily comprised of current and deferred tax expense in the U.S. and in profitable cost-plus foreign jurisdictions, and foreign withholding taxes. The difference between the tax provision and the expected statutory rate is primarily due to losses in foreign jurisdictions without tax benefit and non-deductible expenses.  The provision for income taxes during 2015 is primarily comprised of current and deferred tax expense in profitable cost-plus foreign jurisdictions, changes in deferred tax liabilities that cannot be offset by deferred tax assets, and foreign withholding taxes.

     

  

At December 31, 2015, based on the weight of available evidence, including profitability in recent periods and the availability of expected future taxable income, we concluded that it is more likely than not that the benefits of federal deferred income tax assets will be realized. Accordingly, we reduced the valuation allowances on our federal and some state deferred income tax assets.  As of September 30, 2016, we continue to maintain a valuation allowance to offset certain foreign and state deferred income tax assets, as realization of such assets does not meet the more-likely-than-not threshold.

Comparison of Nine Months Ended September 30, 2016 to Nine Months Ended September 30, 2015 (unaudited)

 

Our condensed consolidated financial statements for the nine months ended September 30, 2016 and 2015 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows (amounts in thousands):

 

(1) Results for the nine months ended September 30, 2015 include only eight months of DivX as the acquisition occurred on January 30, 2015.

Revenue

 

Revenue increased to $74.3 million for the nine months ended September 30, 2016 from $66.3 million for the nine months ended September 30, 2015.  The $8.0 million improvement was primarily the result of an increase in revenues from our NeuLion Digital Platform of $4.1 million and from our CE and MainConcept revenue streams of $3.9 million.  Revenue for the nine months ended September 30, 2015 includes only eight months of CE and MainConcept revenue as the acquisition of DivX occurred on January 30, 2015.

Cost of Revenue

  

Cost of revenue increased to $13.1 million for the nine months ended September 30, 2016 from $12.4 million for the nine months ended September 30, 2015.  Cost of revenue as a percentage of revenue improved from 19% for the nine months ended September 30, 2015 to 18% for the nine months ended September 30, 2016.

 

Selling, general and administrative expenses, including stock-based compensation

 

Selling, general and administrative expenses, including stock-based compensation, increased by $5.8 million, or 18%, from $32.5 million for the nine months ended September 30, 2015, to $38.3 million for the nine months ended September 30, 2016.  The increase was primarily the result of the acquisition of DivX on January 30, 2015, whose results are only included for eight months in the prior period versus nine months in the current period and the acquisition of Saffron Digital on June 3, 2016.  The individual variances are as follows:

 

• Wages and benefits increased from $21.0 million for the nine months ended September 30, 2015 to $24.6 million for the nine months ended September 30, 2016.  The increase was primarily the result of the acquisitions of DivX that occurred on January 30, 2015 and Saffron Digital that occurred on June 3, 2016.

      

 • Stock-based compensation increased from $1.8 million for the nine months ended September 30, 2015 to $3.5 million for the nine months ended September 30, 2016.  The $1.7 million increase was primarily the result of additional stock option and restricted stock unit grants.

• Professional fees increased from $2.4 million for the nine months ended September 30, 2015 to $2.9 million for the nine months ended September 30, 2016.  

 

• Office facilities expenses increased from $1.5 million for the nine months ended September 30, 2015 to $1.9 million for the nine months ended September 30, 2016.  The increase was primarily the result of the facility costs incurred as a result of the acquisitions of DivX that occurred on January 30, 2015 and Saffron Digital that occurred on June 3, 2016.

• Other SG&A expenses decreased from $5.8 million for the nine months ended September 30, 2015 to $5.4 million for the nine months ended September 30, 2016.  Other SG&A expenses include travel expenses, rent, office supplies, corporate IT services, credit card processing fees and other general operating expenses.

 

Research and development

Research and development costs decreased from $19.4 million for the nine months ended September 30, 2015 to $14.9 million for the nine months ended September 30, 2016.  The $4.5 million decrease was primarily a result of a reduction in headcount due to redundancy associated with the acquisition of DivX.

 

Depreciation and amortization

 

Depreciation and amortization increased from $5.6 million for the nine months ended September 30, 2015 to $6.5 million for the nine months ended September 30, 2016.  The increase was primarily the result of amortization of intangibles associated with the acquisitions of DivX that occurred on January 30, 2015 and Saffron Digital that occurred on June 3, 2016.

Income taxes

The tax provision for the nine months ended September 30, 2016 was $3.0 million, compared to $3.3 million for the nine months ended September 30, 2015.  The provision for income taxes during 2016 is primarily comprised of current and deferred tax expense in the U.S. and in profitable cost-plus foreign jurisdictions, and foreign withholding taxes. The difference between the tax provision and the expected statutory rate is primarily due to losses in foreign jurisdictions without tax benefit and non-deductible expenses.  The provision for income taxes during 2015 is primarily comprised of current and deferred tax expense in profitable cost-plus foreign jurisdictions, changes in deferred tax liabilities that cannot be offset by deferred tax assets, and foreign withholding taxes.

  

At December 31, 2015, based on the weight of available evidence, including profitability in recent periods and the availability of expected future taxable income, we concluded that it is more likely than not that the benefits of federal deferred income tax assets will be realized. Accordingly, we reduced the valuation allowances on our federal and some state deferred income tax assets.  As of September 30, 2016, we continue to maintain a valuation allowance to offset certain foreign and state deferred income tax assets, as realization of such assets does not meet the more-likely-than-not threshold.

QUARTERLY TRENDS

 

Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are outside of our control. Our historical results should not be considered a reliable indicator of our future results of operations.

Our platform revenue is seasonal based significantly on the timing and size of events that our customers deliver through our solution.  The fourth quarter has historically been our highest revenue quarter, but this seasonality may change as we add new customers and events.

       

  

SG&A expenses are the highest in the fourth quarter, primarily as a result of additional employees needed to support the heightened business activity during that quarter. We expect SG&A expenses to increase in absolute dollars as we add personnel, increase our spending on sales and marketing and grow our business; however, we expect SG&A expenses to decline as a percent of revenue over time.

Research and development expenses have been fairly stable for most quarters presented. We expect research and development expenses to increase in absolute dollars as we continue to add personnel to enhance and grow our solutions; however, we expect research and development expenses to decline as a percent of revenue over time.

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $69.6 million at September 30, 2016.  During the nine months ended September 30, 2016, we generated $30.3 million from operating activities, which included cash of $21.8 million from changes in operating assets and liabilities. Cash used in investing activities included $9.0 million for the acquisition of Saffron Digital and $2.1 million used to purchase fixed assets.  Of that $2.1 million, $0.6 million was used to purchase a software license; we do not expect to incur a similar type cost in the near future.  Cash used in financing activities included $3.5 million used for our share repurchase program offset by $0.5 million received on the exercise of stock options.

 

On October 13, 2016, through a wholly-owned subsidiary, we purchased an approximately 50,000-square-foot office building in Melville, New York to serve as our new headquarters.  We expect to relocate to the new building from our current leased office space in Plainview, New York in the second half of 2017.  The purchase price was $7.3 million. 

As of September 30, 2016, our principal sources of liquidity included cash and cash equivalents of $69.6 million and trade accounts receivable of $12.3 million, offset by $28.5 million in accounts payable and $12.9 million in accrued liabilities.  We continue to closely monitor our cash balances to ensure that we have sufficient cash on hand to meet our operating needs. Management believes that we have sufficient liquidity to meet our working capital and capital expenditure requirements for at least the next 12 months.

 

At September 30, 2016, approximately 64% of our cash and cash equivalents were held in accounts with a U.S. bank that received an A-2 rating from Standard and Poor’s and a P-1 rating from Moody’s. We believe that this U.S. financial institution is secure and that we will be able to access the balance of our bank deposits. 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 maturity of these investments.

Working Capital Requirements

 

Our net working capital at September 30, 2016 was $32.3 million, a decrease of $6.3 million from the December 31, 2015 net working capital of $38.6 million. Our working capital ratios at September 30, 2016 and December 31, 2015 were 1.6 and 2.2, respectively. Included in current liabilities at September 30, 2016 and December 31, 2015 are approximately $13.1 million and $11.6 million, respectively, of liabilities (deferred revenue) that we do not anticipate settling in cash.

 

The change in working capital was primarily due to an increase in current assets of $16.4 million and current liabilities of $22.7 million.

 

Current assets at September 30, 2016 were $86.8 million, an increase of $16.4 million from the December 31, 2015 balance of $70.4 million.  The change was primarily due to an increase in cash and cash equivalents of $16.2 million.  We used $9.0 million to acquire Saffron Digital.

 

Current liabilities at September 30, 2016 were $54.5 million, an increase of $22.7 million from the December 31, 2015 balance of $31.8 million. The increase was primarily due to an increase in accounts payable of $18.5 million and accrued liabilities of $2.7 million.

      

     

Off Balance Sheet Arrangements

 

We did not have any off balance sheet arrangements as of September 30, 2016.

           

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