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EX-10.10 - EXHIBIT 10.10 - NEULION, INC.ex10_10.htm
EX-32 - EXHIBIT 32 - NEULION, INC.ex32.htm
EX-31.2 - EXHIBIT 31.2 - NEULION, INC.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - NEULION, INC.ex31_1.htm
EX-21 - EXHIBIT 21 - NEULION, INC.ex21.htm
EX-10.11 - EXHIBIT 10.11 - NEULION, INC.ex10_11.htm
EX-10.8 - EXHIBIT 10.8 - NEULION, INC.ex10_8.htm
EX-4.1 - EXHIBIT 4.1 - NEULION, INC.ex4_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10-K
 
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
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)

Delaware
 
98-0469479
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
                1600 Old Country Road, Plainview, NY                
 
                         11803                         
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code  (516) 622-8300
 
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 Stock
(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
 
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
 
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   No
 

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 the 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.
 
(Check one):
 
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   No .
 
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 as of the last business day of the registrant’s most recently completed second fiscal quarter was $67,708,151.
 
As of February 27, 2017, there were 278,380,918 shares of the registrant’s common stock, $0.01 par value, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to its 2017 Annual Meeting of Stockholders, which definitive proxy statement (the “Proxy Statement”) shall be filed with the Securities and Exchange Commission (the “SEC”) within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
 

 

 
NeuLion, Inc.
 
Index to Form 10-K
 
 
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F-1
 
 
PART I

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K 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 Annual Report on Form 10-K.

Forward-looking statements involve significant risks, uncertainties and assumptions.  Although the forward-looking statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 acquisition 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.”

ITEM 1.
Business

Overview
 
NeuLion, Inc. (“NeuLion,” the “Company,” “we,” “us” or “our”) is 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 rightsholders 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 solutions also include our NeuLion consumer electronics (“CE”) technologies, which allow CE manufacturers to provide a secure, high quality video experience with premium screen resolution, up to Ultra HD/4K, across virtually all content formats, for a wide range of connected devices.  Additionally, NeuLion offers a library of high quality video compression-decompression programs, or codecs, that we license under the MainConcept brand.  Our codecs are used by leading technology companies to encode and decode audio and video files.  All three solutions comprise the entire digital video ecosystem.

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 events and linear channels we stream, the number of connected devices we enable, and 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 NeuLion technologies, including our CE software development kit, or SDK, to CE manufacturers and our MainConcept technologies to 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 and entertainment content, on mobile and other connected devices and the demand for continually improving and personalizing 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 the Americas, Europe and beyond.
 
 
On November 30, 2010, we were domesticated under Delaware law, having originally incorporated as Jump TV Inc. on January 14, 2000 under the Canada Business Corporations Act.  In July 2009, we changed our corporate name to NeuLion, Inc.  In January 2015, we consummated the acquisition of DivX, which creates, distributes, and licenses digital video technologies for PCs, smart TVs, and mobile devices.  Its subsidiary, MainConcept, provides codecs and other software products to CE manufacturers, broadcasters, video solution developers and others.  In June 2016, the Company acquired the assets of Saffron Digital.  The Saffron Digital solution, which has been integrated into the NeuLion Digital Platform, helps customers build digital video services for entertainment delivered over-the-top to Internet-connected devices.  These digital video services support advanced implementations of subscription video on demand, electronic sell-through and advertising-supported video.

We have traded on the Toronto Stock Exchange (“TSX”) since August 9, 2006.

Products and Technology

The NeuLion Digital Platform, coupled with NeuLion CE and MainConcept technologies, empower the entire video ecosystem.

NeuLion Digital Platform

NeuLion has developed its own proprietary end-to-end turnkey video distribution platform, called the NeuLion Digital Platform, that provides digital video broadcasting and distribution of live and on-demand sports and entertainment content to any connected device, and also enables the monetization of that content.  A flexible solution that spans the entire digital video workflow and supports the latest technologies, the NeuLion Digital Platform enables global content owners and rightsholders to ingest, encode, manage, deliver, monetize and analyze the performance of their live and on-demand digital video content and delivers the highest quality video, up to Ultra HD/4K, with advanced interactive features.  This product powers the digital experience for leading brands around the world.

NeuLion CE Technologies

NeuLion CE technologies empower connected devices with premium, up to Ultra HD/4K, screen resolution, secured streaming, playback and certification.  Along with offering a rigorous certification process, NeuLion works throughout the consumer electronics ecosystem to certify CE devices that enable high quality (up to Ultra HD/4K), interoperable video playback.  We license NeuLion CE technologies to some of the biggest names in consumer electronics.

MainConcept Technologies

Our MainConcept advanced media processing technologies provide video integrators with an extensive library of industry-approved digital video components, from codecs used to implement their own encoding solutions to support for next-generation standards.  These technologies provide advanced video/audio playback solutions that can be integrated into third party software applications, delivering plug-ins for a wide variety of video/audio encoding, decoding and transcoding while providing extensive audiovisual codec and format support for the video industry and third-party integrators.  Our MainConcept technologies are a leading set of video and audio codec solutions.
 
New Development
 
Next month, at the National Association of Broadcasters show in Las Vegas, Nevada, we will be demonstrating an enhancement to the NeuLion Digital Platform.  NeuLion ACE Analytics offers our customers and prospects the latest advances in data analytics.  NeuLion collects live and on demand “watch data” for the benefit of our OTT and TV Everywhere customers who have licensed the NeuLion Digital Platform.  We have been beta testing NeuLion ACE Analytics with several of our customers.  The new product will offer our customers advanced analytics dashboards that will help target and segment possible new subscriber activations for their services and also pinpoint possible subscriber churn segments.  NeuLion ACE Analytics will be made available to all NeuLion Digital Platform customers.
 
Customers

We have enterprise customers in three broad categories:  content owners and rightsholders; CE manufacturers; and video integrators.  Relationships with our content owner and rightsholder customers, which include entertainment, professional sports (both leagues and teams), college sports (both schools and conferences) and broadcaster/operator customers, generally involve entering into software license, distribution and service agreements to provide end-to-end solutions for the delivery of their content.  We license our NeuLion CE technologies to CE manufacturers to enable their devices to deliver high quality, secure consumer video experiences.  Video integrators, such as enterprise software providers, license our MainConcept technologies to enable their software and hardware solutions with advanced video and audio content processing capabilities.

Customer Dependence

For the year ended December 31, 2016, no customer accounted for 10% or more of revenue.  For the year ended December 31, 2015, the National Hockey League (“NHL”) and LG Electronics accounted for 12% and 11% of revenue, respectively.  For the year ended December 31, 2014, the NHL accounted for 18% of revenue.

As at December 31, 2016, Samsung Companies and World Surf League accounted for 15% and 13% of accounts receivable, respectively.  As at December 31, 2015, Samsung Companies and Toshiba Companies accounted for 19% and 14% of accounts receivable, respectively. 
 
In 2016, the NHL transitioned its NHL GameCenter Live digital services to a third party in connection with a media rights transaction.  We continue to provide some digital video and consulting services to the NHL.
 

Sales and Marketing
 
Our sales team is responsible for acquiring new customers and growing our relationships with existing customers.  Our sales efforts are focused on three main geographic regions:  the Americas; Europe; and Asia.  During 2016, we substantially increased our sales team headcount and expanded our offices globally.  We intend to continue to increase our sales force to allow us to pursue many of the available opportunities for growth within and outside of our existing geographic markets.
 
Our marketing activities are designed to build awareness of our solutions.  Our principal marketing programs include: participation in, and sponsorship of, trade shows and industry events; use of our website to provide information about us and our solutions; integrated digital marketing campaigns, including email, online advertising and webinars; and public relations, analyst relations and social media initiatives.
 
Competition
 
Despite the barriers to entry created by the sizable technology investment required to deliver and monetize live and on-demand interactive content to connected devices, the overall market for digital content publishing and delivery solutions is rapidly evolving and highly competitive.  Our competitors vary for each of our solutions and include companies that build, license and deploy digital video content management services such as MLB Advanced Media and Verizon Digital Media Services, point solution providers such as Brightcove, Kaltura, Ooyala and Adobe, and in-house technology teams.  We also see indirect competition from media technology companies, such as Hulu, YouTube, Netflix, Amazon and sports/entertainment networks, who develop their own technologies internally and then license content rights from content producers for distribution and monetization on their platforms.  Our prospective customers who are content owners and rightsholders may elect to license and deliver their content via these types of third-party platforms.  We also face competition from companies providing products similar to our NeuLion CE and MainConcept technologies, including digital rights management services offered by Microsoft, Verimatrix and Google.

We believe the principal factors on which we compete in our market include, and our competitive advantages are, the following:
 
·
Reduced enhancement, integration and innovation complexities;
·
Time to market;
·
Ability to drive new revenue opportunities;
·
Provision of a combination of proprietary technology and operational services;
·
Creation of meaningful experiences that engage, retain and grow viewers;
·
Breadth and depth of product functionality;
·
Superior customer service;
·
Scope of solutions that address the entire media technology ecosystem;
·
Innovation and responsiveness to new market trends; and
·
Integration with third-party applications and technologies.

We believe we compete favorably on the basis of these factors due to our deep experience in the market, and our commitment to and investment in research and development as well as our ability to provide customers of any size with complete, proprietary, integrated turnkey solutions.

Our competitors may have access to other advanced technologies and financial resources not available to us, which may enable these competitors to offer products of greater interest to consumers, acquire content rights or provide their solutions at more competitive costs.  If we are not able to compete successfully in attracting new customers or lose existing customers to our competition, our results of operations could be harmed.

Seasonality
 
The revenue associated with our sports customers is seasonal because demand for such programming corresponds to the seasons of the sports for which we stream digital video content.  As the majority of our sports contracts contain a variable revenue share or usage component, our revenues are the highest during the first and fourth quarters of the year due to most of our professional sports customers broadcasting the majority of their games during those quarters.  We expect that as we further expand into other streaming areas such as news and entertainment, and into international markets with more sports programming throughout the calendar year, the seasonal nature of our business will decrease.
 
 
Intellectual Property

Our ability to protect our intellectual property is an important factor in the success and continued growth of our business.  We protect our intellectual property through trade secrets laws, patents, copyrights, trademarks and contracts.  Some of our technology relies upon third-party licensed intellectual property and open source software.

Through the DivX transaction, we acquired over 100 U.S. and foreign patents and have many more pending patent applications in the U.S. and abroad.  Through the Saffron Digital transaction, we acquired additional pending and issued patents in the U.S., United Kingdom (“U.K.”) and European Union (“E.U.”) that support technologies relevant to our business.  The DivX and Saffron Digital transactions also added hundreds of U.S. and foreign trademark registrations to our trademark portfolio.

We have an active and robust intellectual property protection program.  We are committed to protecting our innovations and brands by filing patent and trademark applications in the United States and any other country that represents an important actual or potential commercial market.

In addition to the foregoing, we have established business procedures designed to maintain ownership and confidentiality of our proprietary information, including the use of confidentiality agreements and assignment-of-inventions agreements with employees, independent contractors, consultants and companies with which we conduct business.  We continue to seek new ways to enhance protections over our proprietary information both in the U.S. and abroad.

Research and Development
 
Our ability to compete depends in large part on our continuous commitment to research and development, as well as on our ability to continue to innovate and enhance our suite of technologies and solutions.
 
Our research and development costs primarily consist of wages and benefits for research and development department personnel, who are primarily located in China, Russia and the U.S.  Our research and development expenses were $19.9 million in the year ended December 31, 2016, $24.9 million in the year ended December 31, 2015 and $8.4 million in the year ended December 31, 2014.

Employees
 
As of February 27, 2017, we had 657 total employees, 552 of whom were full-time employees.  None of our employees is represented by a union or is party to a collective bargaining agreement, and we have not experienced any work stoppages.  We believe we have good relations with our employees.

Financial Information About Geographic Areas

For a discussion of total revenue and assets, based on geographic location, see Note 16 to our financial statements.  For a discussion of any risks attendant to our foreign operations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Available Information

Our website is www.neulion.com.  We encourage investors and others to use it as a way of easily finding information about us.  We promptly make available on this website, free of charge, the reports that we file with or furnish to the SEC, corporate governance information (including our Board mandate, committee charters and Code of Conduct), and select press releases and social media postings.

Executive Officers

The following sets forth information regarding our executive officers as of March 1, 2017.  The term of each officer is for one year or until a successor is elected.  Officers are normally elected annually.

Nancy Li, 59, has been our Executive Chair since June 2016.  Ms. Li was our Executive Vice Chairman from January 2015 until June 2016 and was our President and Chief Executive Officer from October 2008 through January 2015.  Ms. Li founded NeuLion USA, Inc. (“NeuLion USA”), our wholly-owned subsidiary, and was its Chief Executive Officer since its inception in December 2003 until June 2016.  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.  From 1990 to 2001, Ms. Li was Executive Vice President and Chief Technology Officer for Computer Associates (CA, Inc.’s predecessor), and prior to that held a variety of development and engineering management positions with such company.  Ms. Li is married to Charles B. Wang, a member of our Board of Directors.
 

Roy E. Reichbach, 54, has been our President and Chief Executive Officer since June 2016.  Mr. Reichbach has been President of NeuLion USA since June 2016.  He was our General Counsel and Corporate Secretary from October 2008 until June 2016 and was the General Counsel and Corporate Secretary of NeuLion USA from 2003 until June 2016.  From 2000 until October 2008, Mr. Reichbach was the General Counsel of the New York Islanders Hockey Club and was responsible for the legal affairs of the club and its affiliated real estate companies.  Mr. Reichbach was also an Alternate Governor of the New York Islanders Hockey Club on the NHL Board of Governors from 2000 until 2016.  From 1994 until 2000, Mr. Reichbach was Vice President - Legal at Computer Associates.

Tim Alavathil, 42, has been our Chief Financial Officer since February 13, 2017.  Mr. Alavathil has been Treasurer of NeuLion USA since February 13, 2017.  Mr. Alavathil was our Chief Accounting Officer from June 2016 to February 13, 2017, our Senior Vice President, Finance from November 2014 to June 2016 and our Director, Financial Reporting and Accounting from March 2006 to October 2014.  Mr. Alavathil is a licensed Chartered Public Accountant in Canada.

Alexander G. Arato, 53, has been our General Counsel since September 2016.  He was Assistant General Counsel - IP for Las Vegas Sands Corp. from May 2015 to August 2016.  From February 2000 until April 2015, he served in several legal roles, culminating in Vice President, Associate General Counsel, at CA, Inc.

Horngwei (Michael) Her, 53, has been our Chief Technology Officer since March 1, 2017.  He was our Co-Chief Technology Officer from January 2015 to March 1, 2017.  He was the Executive Vice President, Research and Development, of NeuLion from October 2008 through January 2015 and has been the Executive Vice President of Research and Development of NeuLion USA since January 2004.  From 2000 to 2003, Mr. Her ran the development team for iCan SP.  Prior to that, he served as Senior Vice President for Research & Development at Computer Associates.  He is also the co-inventor of several computer systems patents.

Ronald Nunn, 64, has been our Executive Vice President, Business Operations since October 2008 and has been 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, he 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, 57, has been our Executive Vice President, Marketplace Strategy since November 2010 and has been the Executive Vice President of Marketplace Strategy of NeuLion USA since February 2004.  Mr. Wagner was our Executive Vice President of Sales from October 2008 until November 2010.  From 2000 to 2003, he worked as the Chief Executive Officer and member of the Board of Directors of several private equity and venture capital firms, including Metiom Inc., MetaMatrix Inc., Exchange Applications Inc. and Digital Harbor Inc.  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.

ITEM 1A. 
Risk Factors

An investment in our common stock is highly speculative and involves a high degree of risk.  The following are specific and general 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.  If any of the circumstances described in these risk factors actually occurs, 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 harmed or otherwise negatively affected, the trading price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

If we are unable to retain our existing customers and grow our customer base, our business would be adversely affected.

Our growth strategy depends on retaining and increasing the number of customers utilizing the NeuLion Digital Platform.  Our customers have no obligation to renew their subscription license contracts upon expiration, and we have experienced losses of customers that elected not to renew. In addition, contracts may not be renewed on equivalent or on more profitable terms. If our customer retention rate decreases, we may need to increase the rate at which we add new customers in order to maintain and grow our revenue, which may require us to incur significantly higher sales and marketing expenses than we currently anticipate. If our customers do not renew their contracts for our services or renew on less favorable terms and we are unable to expand our customer base sufficiently to offset such losses, our revenue will grow more slowly than expected or decline, and our profitability and gross margins will be adversely impacted.

We may not realize the anticipated benefits of Ultra HD/4K video or HEVC technology.

NeuLion CE technologies afford us the opportunity to capitalize on the rapidly accelerating adoption of Ultra HD/4K video and the fast-growing online video market.  Our ability to realize these opportunities may be adversely affected by a lower adoption rate than we anticipate for Ultra HD/4K TV sets, limiting our ability to deliver the 4K content to consumers, and our customers not producing 4K content, all of which could impact our revenues.
 

High Efficiency Video Codec, or HEVC, also known as H.265, was introduced in 2013.  It is a royalty-based video compression standard that offers substantially improved video quality and bit-rate efficiency compared to previous video compression standards such as Advanced Video Coding, or AVC, also known as H.264.  We license our NeuLion HEVC technologies to our customers in exchange for royalty fees.  Key market barriers for HEVC adoption include patent licensing fragmentation as well as limited Internet browser and device support.  Similar to AVC, HEVC technology is a royalty-based technology that is protected by essential video encoding and decoding patents.  MPEGLA, HEVC Advance and other patent owners presently license these essential patents to industry participants.  Fragmentation amongst essential patent holders, resulting in multiple license models for potential HEVC licensees to consider and over-burdensome cumulative royalty rates, may delay market adoption of HEVC and limit our ability to deliver 4K-related content services and technologies to the market.  HEVC is not natively supported by Internet browsers or mobile operating systems, whereas support for AVC is universally available to date.  If support of HEVC is delayed by Internet companies and mobile device manufacturers, or if they support royalty-free alternatives instead, our customers’ ability to sell premium 4K content to mainstream subscribers will be limited, as will market demand for NeuLion HEVC technologies.  These and other market barriers may impede mass market adoption of HEVC in 2017, and adversely affect the growth we expect in the demand for Ultra HD/4K content, services and technologies provided by NeuLion.

We may have difficulty, and incur substantial costs, in scaling and adapting our existing solutions to accommodate technological advances, customer requirements or increased traffic.

Our future success depends 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 delivery of digital content over a broadband network, the Internet and the video entertainment industries in general are characterized by rapid technological change, frequent product innovations, changes in customer requirements and expectations and evolving industry standards.   If we fail to anticipate customers’ changing needs and emerging technological trends, our market share and results of operations could suffer. We must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our solutions. If we are unable to extend our core technologies into new applications and products, successfully integrate new technologies into our NeuLion Digital Platform and anticipate or respond to technological changes, the market’s acceptance of our solutions could decline and our results would suffer. Additionally, any delay in the development, production, marketing or offering of a new product or service or enhancement to an existing product or service could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenues, earnings or stock price and weakening our competitive position.

If we fail to adequately expand our direct sales force with qualified and productive persons, we may not be able to grow our business effectively.

We primarily sell our products and implementation services through our direct sales force. Our ability to add clients, to grow the subscriber base of our existing customers and to achieve revenue growth in the future will depend upon our ability to grow and develop our direct sales force and on their ability to productively sell our solutions. Identifying and recruiting qualified personnel, and training them in the use of our software, requires significant time, expense and attention. The amount of time it takes for our sales representatives to be fully trained and to become productive varies widely. In addition, if we hire sales representatives from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources. If we are unable to hire, develop and retain talented sales personnel, if our sales force becomes less efficient as it grows or if new sales representatives are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to grow our customer base and revenues, and our sales and marketing expenses may increase.

Demand for the content our customers offer to their end users may be insufficient for us to achieve and sustain profitability.

The attractiveness of our customers’ content offerings and ability to retain and grow the audiences for their programs is an important factor in their ability to sell subscriptions and advertising and depends, among other things, upon:

·
whether they offer, market and distribute high-quality programming consistent with subscribers’ preferences;
·
the marketing and pricing strategies that they employ relative to those of their competitors; and
·
subscribers’ willingness to pay subscription or pay-per-view fees to access our customers’ content.

Our customers’ content offerings may not attract or retain the anticipated number of subscribers, and some content may offend or alienate subscribers that are outside of the target audience for that content.  Our results of operations depend in part upon our ability and that of our customers to increase audience bases while maintaining preferred pricing strategies, managing costs and controlling subscriber turnover rates.
 

If we are not able to compete successfully in attracting new customers or lose existing customers to our competition, our results of operations could be harmed.

The digital content publishing and delivery solutions business is rapidly evolving and highly competitive.  Our NeuLion Digital Platform faces competition from companies that build, license and deploy digital video content management services, point solution providers, in-house technology teams and media technology companies. We also face competition from companies providing products similar to our NeuLion CE and MainConcept technologies, including digital rights management service offerings. Our competitors may have access to other advanced technologies and financial resources not available to us, which may enable these competitors to offer products of greater interest to consumers, acquire content rights or provide their solutions at more competitive costs.  If we compete unsuccessfully, our results of operations could be harmed.

Our concentrated customer base increases the potential adverse effect on us from the loss of one or more customers.

Historically, we derived a significant portion of our revenue from a limited number of customers. Although we do not anticipate that fees from a limited number of customers will continue to account for a significant percentage of our total revenue in the future, our customer concentration may cause our financial performance to fluctuate significantly from period to period based on demand for our customers’ product offerings and the corresponding usage. In addition, the loss or a material decline in the fees earned from any significant customer could have a material adverse effect on us.

We may need additional capital to fund continued growth, which may not be available on acceptable terms or at all, and could result in our business plan being limited and our business being harmed.

Our ability to increase revenue depends in part on our ability to continue growing the business and acquiring new customers, 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 infrastructure 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.  If we issue common stock, or securities convertible into common stock, in the future, such issuance will result in the then-existing stockholders 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 our current business plan may be limited, and our business, liquidity and financial condition could be harmed.

We may be unable to expand and adapt our operational infrastructure.

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.  To manage growth effectively, we must, among other things, continue to develop our global sales force, distribution infrastructure capability, customer service operations and information systems, maintain our relationships with our customers, effectively enter new markets or geographies, and 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 must also continue to expand, train and manage our employee base, and our management must assume even greater levels of responsibility.  An inability to manage growth effectively could negatively impact our financial condition, profitability and cash flows.

Our infrastructure could suffer failures or damage due to events that are beyond our control, which could harm our brand and operating results.

Our success as a business depends, in part, on our ability to provide consistently high quality digital video content streams to our customers’ viewers through the NeuLion Digital Platform.  Our infrastructure is susceptible to natural and man-made disasters such as hurricanes, earthquakes, floods, fires, power loss, sabotage, war and civil strife, as well as to interruptions from technology malfunctions, computer viruses and hacker attacks.  Our existing security measures may not adequately protect our infrastructure and the cost of any required upgrade or replacement of the security system may adversely impact our financial results. Other potential service interruptions may result from unanticipated demands on network infrastructure, increased traffic or problems in customer service.  Significant disruptions in our 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 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.

Failure to comply with privacy and data security laws and regulations could result in liability to us, damage our reputation and harm our business, and deter current and potential users from using our solutions.

We are required to comply with U.S. state, federal and international laws governing the privacy, security, use, disclosure and transfer of personal information.  In the ordinary course of business, we collect, use, disclose and transfer data supplied by our customers’ subscribers, which may include personal information.  If we fail to comply with applicable laws, regulations, guidance, standards or best practices, or become subject to claims or allegations that we have violated the same, we could be exposed to civil sanctions and criminal penalties, legal claims, negative publicity and a loss of confidence in us by our customers, which could materially and adversely affect our business, financial condition and results of operations.
 

Increased regulation of data collection, use, disclosure and transfer practices, including new laws (in the United States, the E.U. and other countries from which we collect data), self-regulation, or findings under existing laws, which limit our ability to collect, use, disclose or transfer data, could increase our costs of compliance with such regulations, restrict our ability to provide our services and expand our operations, and have an adverse effect on our business.  We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols for personal information imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. Such laws, standards and regulations are evolving and subject to potentially differing interpretations, and federal and state legislative and regulatory bodies may expand current or enact new laws or regulations regarding privacy matters.  We are unable to predict what additional legislation, standards, or regulation in the area of privacy of personal information could be enacted or its effect on our operations and business.  These risks may increase as we continue to expand our operations internationally.

Our reputation and relationships with customers would be harmed if their subscribers’ data, particularly billing data, were to be accessed by unauthorized persons.

We maintain personal data regarding our customers’ subscribers, including names and, in many cases, mailing addresses, and we take measures to protect against unauthorized access to subscriber data.  If, despite these measures, we experience any unauthorized access of subscriber data, customers may elect to not continue to work with us, we could face legal claims, and our business could be adversely affected.  Similarly, recent well-publicized cases of unauthorized access to consumer data could lead to general public loss of confidence in the use of the Internet for commercial transactions, which could adversely affect our business. The cost of remediating and responding to an incident of unauthorized access to subscriber data, particularly credit card or other billing data, could be substantial and may not be covered by insurance. Additionally, in Europe, the regulatory impact of a data breach and the fines imposed by regulators can be significant, and requirements to notify the regulators and data subjects of the breach may result in negative publicity.

The costs of network access may rise, which could negatively impact our profitability.

We rely on Internet providers for our principal connections and network access to stream digital video content to our customers’ viewers.  As demand for digital content continues to increase, we cannot assure you that Internet providers will continue to price their network access services on reasonable terms.  As the delivery of digital content and large content files increases, providers of network access may change their business model and increase their prices significantly.  In order for our solutions to be successful, there must be a reasonable price model in place to allow for the continuous delivery of digital video content.  To the extent that Internet providers implement usage-based pricing, institute bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses.  If a content distribution network ceases to be available to us, we would be forced to build our own at substantial cost, which could materially and adversely impact our business model.

Our business depends on continued and unimpeded access to the Internet at non-discriminatory prices.  Internet access providers and Internet service providers may be able to block, limit, degrade or charge for access to certain of our solutions, or otherwise engage in discriminatory practices, which could lead to additional expenses and the loss of users.

Our solutions depend on the ability of our customers’ viewers to access the Internet, and certain of our customers’ products require significant bandwidth to work effectively.  Currently, this access is provided by companies that have significant and increasing market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies and mobile communications companies.  Some of these providers may take measures that could degrade, disrupt or increase the cost of user access by restricting or prohibiting the use of their infrastructure to support or facilitate offerings, or by charging increased fees to provide offerings, while others, including some of the largest providers of broadband Internet access services, may refrain from engaging in such behavior.  If broadband service providers impose restrictions on bandwidth and service delivery, this may adversely impact our download speeds or ability to deliver content over those facilities, or impose significant fees upon us, end users or other fees that could impact the cost of our services to end users, or the costs of utilizing content delivery networks.  Actions by broadband Internet access providers may also result in limitations on access to our services, a loss of existing users, or increased costs to us, our users or our customers, thereby impairing our ability to attract new users, or limiting our opportunities and models for revenue and growth, impact our profitability or otherwise negatively affect our business.

Our dependence on third parties could adversely impact our business.

We maintain strategic relationships with third parties to support certain product functionality. If we are unsuccessful in establishing or maintaining these strategic relationships, our ability to compete in the marketplace, to reach new customers and geographies or to grow our revenues could be impaired and our operating results could suffer.
 

Our business is affected by ever-changing regulations in the United States and in the foreign jurisdictions in which we and our customers do business.

The regulations to which we and our customers are subject within the United States and abroad continue to evolve as the use and regulation of the Internet matures.  The primary regulatory risks we face in our operations involve changes to existing regulations related to:

·
Network neutrality –Any weakening of network neutrality laws in the jurisdictions in which we deliver content may make our services less attractive to our customers, raise our costs or otherwise impede our business plans and could adversely impact our results of operations.
·
Non-broadcaster status – Broadcasters are generally subject to numerous requirements regarding ownership, licensing, the timing and content of programming and commercial advertising and, in some jurisdictions, the amount of foreign versus domestically produced programming.  If regulatory changes were to subject us to these types of broadcaster requirements in a given jurisdiction, we could be subject to burdensome licensing requirements and have compliance obligations that would expose us to risks and expenses that may adversely impact our results of operations.
·
Content and advertising distributed over the Internet – With a very limited exception, we are not subject to requirements regarding the content, format or advertising contained in our clients’ video programming that we distribute.  However, if regulatory requirements similar to those imposed on on-air broadcasters (such as obligations to provide captioning, scramble signals, or regulate the volume of commercials) were to be imposed on us or our clients, we might have to change our services or acquire equipment to meet these requirements, and we might incur expenses in order to provide such services.
·
Privacy/data protection – We are subject to evolving regulations related to our customers’ and their viewers’ data.  For example, new E.U. laws set to come into force in May 2018 under the E.U. General Data Protection Regulation and e-Privacy Regulation will extend data protection obligations to online platforms such as ours.  Compliance with these regulations may be complex, and could expose us to risks and expenses that may adversely impact our results of operations.

Our business may be impaired by third-party intellectual property rights in the programming content of our customers.

We are exposed to liability risk in respect of the content that our customers distribute over the Internet, relating to infringement of third-party rights to the content and violation of the laws of various jurisdictions governing the type and/or nature of the content.  We rely in large part on our customers’ obligations under our agreements to ensure intellectual property rights compliance globally, including securing the primary rights to distribute programming and other content over the Internet, and to advise us of any potential or actual infringement so that we may take appropriate action if such content is not compliant with intellectual property rights or is otherwise obscene, defamatory or indecent. In the event that our customers are in breach of the rights related to specific programming and other content, they may be required to cease distributing or marketing the relevant content to prevent any infringement of related rights, and we may be subject to claims of damages for infringement of such rights.  There can be no assurances that any indemnification provisions in our contracts would be adequate, or would otherwise protect us from any such liabilities or damages with respect to any particular 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 we face 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 our customers 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 customers’ losses if there were an adverse ruling in any such claim.

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 that may offer inferior programming or technology, any or all of which could hurt our 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, which could also negatively impact our competitive position.  Any of these results could harm our business, financial condition and results of operations.
 

We rely on software and services licensed from other parties.  The loss of software or services from third parties could increase our costs and limit the features available in our solutions.

Components of our NeuLion CE technologies include various types of software and services licensed from unaffiliated parties.  If any of the software or services we license from others, or functional equivalents thereof, were either no longer available to us or no longer offered on commercially reasonable terms, we would be required to either redesign our services and products to function with software or services available from other parties or develop these components ourselves.  In either case, the transition to a new service provider or an internally-developed solution could result in increased costs and delays in the release of new service and product offerings.  Furthermore, we might be forced to temporarily limit the features available in our solutions.  If we fail to maintain or renegotiate any of these licenses, we could face significant delays and diversion of resources in attempting to license and integrate functional equivalents.

We depend on key personnel, 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.  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 our distribution infrastructure and the NeuLion Digital Platform as well as significant business knowledge regarding the digital video industry.  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 other key employees, or fail to attract qualified replacement personnel, then our business and future prospects could be harmed.

We may have exposure to greater than anticipated tax liabilities.

We are subject to income and other 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 our 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 around the world, including in respect of the acquisition of rights to distribute digital video content, and have offices in a number of foreign countries.  As a result, we are exposed to foreign business, political and economic risks, including:

·
political and economic instability;
·
whether the U.K will pass into law the June 2016 referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit,” and the future terms of the U.K.’s relationship with the E.U., including the terms of trade between those two entities;
·
less developed infrastructures in newly industrializing countries;
·
susceptibility to interruption of 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 technology service providers, and the existence of protectionist laws and business practices that favor such entities.

If any of these risks are realized, it could hurt our business, financial position and results of operations.

Our business may also be adversely affected by global economic conditions and other risks associated with operating internationally.

Our current and future development opportunities partly relate to geographical areas outside of North America.  There are a number of risks inherent in international business activities, including:

·
government policies concerning the import and export of goods and services;
·
government-imposed sanctions policies prohibiting commerce and transactions with certain persons, countries or regions;
·
potentially adverse tax consequences;
·
limits on repatriation of earnings;
·
the burdens of complying with a wide variety of foreign laws;
·
nationalization;
·
potential social, labor, political and economic instability; and
·
local laws and practices that favor local companies, including business practices that we are prohibited from engaging in by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations.
 
 
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 are 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.

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, customer and advertiser relationships, site traffic and revenues could be harmed.

Risks Associated with Our Capital Stock

Members of our Board of Directors and management team have the ability to substantially influence our direction and policies and their interests may be adverse to the interests of our other stockholders.

Nancy Li and Charles B. Wang, who are spouses and our Executive Chair and a member of our Board of Directors, respectively, beneficially own in the aggregate approximately 28% of our issued and outstanding capital stock.  In addition, David Kronfeld and James R. Hale, two of our directors, beneficially own approximately 14% and 23%, respectively, of our issued and outstanding capital stock.  By virtue of their holdings and membership on our Board of Directors, these individuals can substantially influence the election of directors, our management and our affairs and may make it difficult for us to consummate corporate transactions such as mergers, consolidations or the sale of all or substantially all of our assets that may be favorable from our standpoint or that of our other stockholders.  In addition, this significant concentration of ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders.  This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other stockholders.

A member of our Board of Directors has ownership interests in entities with which we do business that may result in conflicts of interest that may not be resolved in a manner most favorable to us or that of our other stockholders.

Mr. Wang, a member of our Board of Directors, owns several entities with which we do business.  If such ownership interests result in conflicts of interest, they may not be resolved in a manner most favorable to us or that of our other stockholders.

The market price of our common stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance.

Our stock price may experience substantial volatility as a result of a number of factors, including:

·
variations in our anticipated or actual operating results;
·
loss of a large customer or our inability to increase sales to existing customers or attract new customers;
·
announcement of new or enhanced solutions or products by us or our competitors;
·
litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
·
variations in our competitors’ results of operations and changes in the competitive landscape generally;
·
changes and conditions in the digital video content market and related industries;
·
governmental regulation and legislation;
·
sales or potential sales of substantial amounts of our common stock;
·
change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations; and
·
unusual events such as significant acquisitions, divestitures, litigation, general socio-economic, regulatory, political or market conditions and other factors, including factors unrelated to our operating performance.

Many of these factors are beyond our control. The stock markets in general, and the market for technology companies in particular, have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market price of our common stock, regardless of our actual operating performance.
 

We have never paid and do not intend to pay cash dividends on our common stock.

We have never paid cash dividends on our common stock and we currently intend to retain future earnings, if any, to fund the development and growth of our business.  Furthermore, the terms of any future debt agreements may preclude us from paying dividends.  As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

Provisions in our certificate of incorporation, our by-laws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Provisions of our certificate of incorporation, our by-laws and Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing a change in control of our company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. These provisions include:

·
the inability of stockholders to call special meetings; and
·
the ability of our Board of Directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could include the right to approve an acquisition or other change in our control or could be used to institute a rights plan, also known as a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our Board of Directors.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the forgoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

ITEM 1B.  
Unresolved Staff Comments
 
None.

ITEM 2.
Properties
 
Our principal executive offices are currently located in a 19,200 square foot leased space in a facility in Plainview, New York.  In October 2016, we purchased, through a wholly-owned subsidiary, an approximately 50,000 square foot office building in Melville, New York.  We expect to relocate our principal executive offices to the new space in the second half of 2017.  We lease the following additional materially important properties:

Description
 
Location
 
Expiration of Lease
 
Use of Property
Lease
 
Sanford, Florida
 
November 2020
 
Business office
Lease
 
New York, New York
 
October 2018
 
Business office
Lease
 
Toronto, Ontario, Canada
 
February 2018
 
Business office
Lease
 
Burnaby, British Columbia, Canada
 
March 2019
 
Business office
Lease
 
London, England
 
December 2017
 
Business office
Lease
 
London, England
 
October 2027
 
Business office
Lease
 
Beijing, China
 
July 2018
 
Business office
Lease
 
Shanghai, China
 
June 2019
 
Business office
Lease
 
Toronto, Ontario, Canada
 
January 2018
 
Colocation/equipment
Lease
 
Slough, England
 
January 2018
 
Colocation/equipment
Lease
 
Palo Alto, California
 
January 2018
 
Colocation/equipment
Lease
 
Savage, Maryland
 
October 2017
 
Colocation/equipment
Lease
 
Bellevue, Nebraska
 
June 2017
 
Colocation/equipment
Lease
 
North Bergen, New Jersey
 
January 2018
 
Colocation/equipment
Lease
 
Hauppauge, New York
 
October 2017
 
Colocation/equipment
Lease
 
New York, New York
 
January 2018
 
Colocation/equipment
Lease
 
Dallas, Texas
 
January 2018
 
Colocation/equipment
Lease
 
San Diego, California
 
September 2019
 
Business office
Lease
 
Tomsk, Russia
 
November 2017
 
Business office
Lease
 
Aachen, Germany
 
March 2019
 
Business office
Lease
 
Seoul, Korea
 
June 2017
 
Business office
Lease
 
Tokyo, Japan
 
June 2017
 
Business office
Lease
 
Osaka, Japan
 
July 2017
 
Business office
Lease
 
Shenzhen, China
 
June 2018
 
Business office
Lease
 
Taipei, Taiwan
 
October 2017
 
Business office
 
 
ITEM 3.
Legal Proceedings
 
There are no material legal proceedings currently pending or threatened against us or, to our knowledge, any of our officers or directors in their capacity as such.

ITEM 4.
Mine Safety Disclosures

Not applicable.

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 our common stock in the United States.  The TSX is the principal established foreign public trading market for our common stock, which trades under the symbol NLN.  The table below sets forth, for the periods indicated, the high and low sales prices of our common stock on the TSX, in Canadian dollars, for each full quarterly period within the two most recent fiscal years, as reported by the TSX.

Fiscal Year
High
 
Low
 
 
       
2016
       
First Quarter
CDN$
1.16
 
CDN$
0.60
 
Second Quarter
CDN$
1.45
 
CDN$
0.82
 
Third Quarter
CDN$
1.27
 
CDN$
0.90
 
Fourth Quarter
CDN$
1.20
 
CDN$
0.82
 
 
           
Fiscal Year
High
 
Low
 
 
           
2015
           
First Quarter
CDN$
1.47
 
CDN$
0.99
 
Second Quarter
CDN$
1.72
 
CDN$
1.03
 
Third Quarter
CDN$
1.69
 
CDN$
0.56
 
Fourth Quarter
CDN$
0.87
 
CDN$
0.53
 
 
Stockholders
 
As of February 27, 2017, there were 250 holders of record of our common stock.
 
Dividends
 
We have paid no dividends on our common stock 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.

Equity Compensation Plan Information

Information about the securities authorized for issuance under our equity compensation plans is incorporated by reference from the Proxy Statement for our 2017 Annual Meeting of Stockholders.  Definitive proxy materials are expected to be filed with the SEC pursuant to Regulation 14A no later than April 30, 2017.
 

Recent Sales of Unregistered Securities
 
Information regarding other securities sold by us but not registered under the Securities Act of 1933, as amended (the “Securities Act”), during the fiscal year ended December 31, 2016 has been previously included in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2016 and June 30, 2016.

Repurchases of Equity Securities During the Fourth Quarter of the Fiscal Year Ended December 31, 2016

On March 8, 2016, we announced that our Board of Directors authorized the repurchase of up to $10 million of the Company’s shares of common stock through a normal course issuer bid (“NCIB”) for up to 14,109,057 shares of common stock.  The NCIB commenced on April 1, 2016.  Repurchases are made by a broker on our behalf in open market transactions pursuant to an automatic repurchase plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and subject to certain daily limits, and we settle with the broker after each month’s end.  The NCIB will terminate on March 31, 2017 or on such earlier date as the purchases under the NCIB are completed or as we may otherwise determine.

The table below summarizes the information about repurchases of our common stock during the quarter ended December 31, 2016 (dollar amounts are in U.S. dollars):
 
Period
 
Total Number
of Shares
Purchased
   
Weighted
Average
Price
Paid Per
Share(1)
   
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
   
Approximate
Dollar Value
of Shares
That May
Yet Be
Purchased
Under the
Plans or
Programs
 
October 1, 2016 - October 31, 2016
   
699,100
   
$
0.91
     
699,100
   
$
5,916,509
 
November 1, 2016 - November 30, 2016
   
562,300
   
$
0.73
     
562,300
   
$
5,505,850
 
December 1, 2016 - December 31, 2016
   
841,100
   
$
0.74
     
841,100
   
$
4,833,335
 
Total
   
2,102,500
             
2,102,500
         
_________________________________
(1) The weighted average price paid per share of common stock includes the cost of commissions.
 
Additional Information

In the quarter ended December 31, 2016, 309,894 shares of our common stock were surrendered by holders of vested restricted stock unit awards for tax withholding purposes.
 

Performance Graph

The following graph compares the seven-year cumulative total return to shareholders on our common stock relative to the cumulative total returns of the S&P/TSX Composite Index, the S&P/TSX Capped Information Technology Index and the S&P/TSX SmallCap Index.  An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2009 and its relative performance is tracked through December 31, 2016.  The returns shown are based on historical results and are not intended to suggest future performance.
(in Canadian dollars)
 
 
ITEM 6.
Selected Financial Data
 
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data,” and the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results.
 
 
 
NeuLion, Inc.
 
 
 
Year ended December 31,
 
 
 
2016 (1)
   
2015 (2)
   
2014
   
2013
   
2012 (3)
 
 
 
(in thousands, except per share data)
 
Consolidated Statements of Operations Data:
                             
Revenue
 
$
99,788
   
$
94,043
   
$
55,520
   
$
47,107
   
$
38,983
 
 
                                       
Costs and expenses
                                       
   Cost of revenue, exclusive of depreciation and amortization
   
18,312
     
17,775
     
13,897
     
13,279
     
13,695
 
   Selling, general and administrative, including stock-based compensation
   
52,922
     
45,672
     
27,073
     
24,290
     
23,541
 
   Research and development
   
19,903
     
24,912
     
8,381
     
7,423
     
6,673
 
   Depreciation and amortization
   
8,899
     
7,544
     
2,621
     
3,755
     
4,407
 
 
   
100,036
     
95,903
     
51,972
     
48,747
     
48,316
 
Operating income (loss)
   
(248
)
   
(1,860
)
   
3,548
     
(1,640
)
   
(9,333
)
   Other income (expense)
   
(94
)
   
(71
)
   
290
     
(361
)
   
(133
)
Net and comprehensive income (loss) before income taxes
   
(342
)
   
(1,931
)
   
3,838
     
(2,001
)
   
(9,466
)
   Income tax (benefit) expense
   
(1,411
)
   
27,847
     
(271
)
   
(277
)
   
(613
)
Net and comprehensive income (loss)
 
$
(1,753
)
 
$
25,916
   
$
3,567
   
$
(2,278
)
 
$
(10,079
)
 
                                       
Net income (loss) per common share:
                                       
   Basic
 
$
(0.01
)
 
$
0.11
   
$
0.02
   
$
(0.01
)
 
$
(0.07
)
   Diluted
 
$
(0.01
)
 
$
0.11
   
$
0.02
   
$
(0.01
)
 
$
(0.07
)
Weighted average common shares outstanding:
                                       
  Basic
   
281,690,556
     
233,489,798
     
174,645,803
     
166,663,448
     
146,899,685
 
  Diluted
   
281,690,556
     
245,346,681
     
214,711,362
     
166,663,448
     
146,899,685
 
 
                                       
Other Financial Data:
                                       
Non-GAAP Revenue(4)
 
$
100,845
   
$
109,351
   
$
55,520
   
$
47,107
   
$
38,983
 
Adjusted EBITDA(4)
   
14,390
     
24,716
     
8,413
     
3,532
     
(3,298
)
Capital expenditures (excluding acquisitions)
   
10,195
     
1,428
     
1,850
     
1,301
     
1,107
 
Cash flow provided by (used in):
                                       
  Operating activities
   
12,546
     
18,359
     
7,239
     
9,481
     
(4,787
)
  Investing activities
   
(19,195
)
   
8,290
     
(1,850
)
   
(1,301
)
   
(1,107
)
  Financing activities
   
(4,859
)
   
866
     
865
     
356
     
4,745
 
 
                                       
Consolidated Balance Sheet Data
                                       
Cash and cash equivalents
 
$
41,905
   
$
53,413
   
$
25,898
   
$
19,644
   
$
11,108
 
Current assets
   
61,163
     
70,415
     
36,287
     
27,159
     
18,153
 
Current liabilities
   
38,468
     
31,824
     
29,212
     
27,214
     
20,628
 
Working capital
   
22,695
     
38,591
     
7,075
     
(55
)
   
(2,475
)
Total assets
   
148,374
     
144,150
     
51,938
     
43,576
     
37,104
 
Total liabilities
   
42,975
     
36,092
     
31,884
     
29,392
     
23,032
 
Redeemable preferred stock
   
-
     
-
     
14,955
     
14,925
     
14,895
 
Stockholders' equity (deficit)
 
$
105,399
   
$
108,058
   
$
5,099
   
$
(740
)
 
$
(822
)
                                                           
(1) On June 3, 2016, we completed the acquisition of Saffron Digital for $9.0 million.
(2) On January 30, 2015, we completed the acquisition of DivX for consideration of 61,731,172 shares of common stock valued at approximately $59.0 million (after giving effect to the conversion of the convertible note issued at closing after receiving stockholder approval for such conversion).  On the date of acquisition, DivX had $9.7 million of cash and cash equivalents.
(3) On April 1, 2012, the Company amended its agreement with KyLin TV, such that, in addition to the services previously provided, KyLin TV was appointed the exclusive distributor of the Company’s business-to-consumer ("B2C") IPTV interests. As exclusive distributor, KyLin TV obtained, advertised and marketed all of the Company’s B2C content, in accordance with the terms of the amendment. Accordingly, KyLin TV recorded the gross revenues from the Company’s B2C content as well as the associated license fees, whereas the Company recorded revenues in accordance with the revised fee schedule in the amendment.
(4) We report non-GAAP Revenue and Adjusted EBITDA because they are key measures used by management to evaluate our results and make strategic decisions about the Company, including potential acquisitions. Non-GAAP Revenue represents GAAP revenue before purchase price accounting adjustments as a result of an acquisition. Adjusted EBITDA represents net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation, acquisition-related expenses, listing-related expenses, purchase accounting adjustments, gain on revaluation of convertible note derivative, loss on dissolution of majority-owned subsidiary, investment income/expense and foreign exchange gain/loss. This measure does not have any standardized meaning prescribed by U.S. 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 U.S. GAAP.
 
 
The following tables set forth reconciliations of GAAP revenue to Non-GAAP revenue and consolidated net income (loss) to Adjusted EBITDA for each period included herein:

 
Reconciliation of GAAP Total Revenue to Non-GAAP Total Revenue:
                 
GAAP Total Revenue
 
$
99,788
   
$
94,043
   
$
55,520
   
$
47,107
   
$
38,983
 
Revenue excluded due to purchase accounting
   
1,057
     
15,308
     
-
     
-
     
-
 
Non-GAAP Total Revenue
 
$
100,845
   
$
109,351
   
$
55,520
   
$
47,107
   
$
38,983
 
 
                                       
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
                                       
Consolidated net income (loss)
 
$
(1,753
)
 
$
25,916
   
$
3,567
   
$
(2,278
)
 
$
(10,079
)
Purchase price accounting adjustments - revenue
   
1,057
     
15,308
     
-
     
-
     
-
 
Depreciation and amortization
   
8,899
     
7,544
     
2,621
     
3,755
     
4,407
 
Stock-based compensation
   
4,573
     
2,702
     
1,438
     
1,417
     
1,627
 
Acquisition-related expenses
   
109
     
359
     
806
     
-
     
-
 
Listing-related expenses
   
-
     
663
     
-
     
-
     
-
 
Discount on convertible note
   
-
     
-
     
-
     
233
     
78
 
Interest on convertible note, including amortization of debt discount
   
-
     
123
     
-
     
-
     
-
 
Loss (gain) on revaluation of convertible note derivative
   
-
     
(507
)
   
-
     
-
     
-
 
Income tax (benefit) expense
   
1,411
     
(27,847
)
   
271
     
277
     
613
 
Investment income and foreign exchange gain (loss)
   
94
     
455
     
(290
)
   
128
     
56
 
Adjusted EBITDA
 
$
14,390
   
$
24,716
   
$
8,413
   
$
3,532
   
$
(3,298
)
 
 
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read this discussion together with the consolidated financial statements and other consolidated financial information included in this Annual Report on Form 10-K .
 
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 audited consolidated financial statements and accompanying notes for the years ended December 31, 2016, 2015 and 2014, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).  All dollar amounts are in U.S. dollars (“U.S.$” or “$”) unless stated otherwise.  As at February 24, 2017, the Bank of Canada noon rate for conversion of United States dollars to Canadian dollars (“CDN$”) was U.S.$1 to CDN$1.3104.
 
Our MD&A is intended to enable readers to gain an understanding of our 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 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 this Annual Report on Form 10-K 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.
 
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 rightsholders 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 solutions also include our NeuLion CE technologies, which allow CE manufacturers to provide a secure, high quality video experience with premium screen resolution, up to Ultra HD/4K, across virtually all content formats, for a wide range of connected devices. Additionally, we offer a library of high quality video compression-decompression programs, or codecs, that we license under the MainConcept brand. Our codecs are used by leading technology companies to encode and decode audio and video files. All three solutions comprise the entire digital video ecosystem.
 
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 events and linear channels we stream, the number of connected devices we enable, and 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 NeuLion technologies, including our CE SDK to CE manufacturers and our MainConcept technologies to video solution developers and others.
 
Key Performance Metrics
 
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.
 
 
Since DivX was acquired by NeuLion on January 30, 2015, the purchase price allocation 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 in 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. The Company records 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 were considered a fixed payment stream, 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 was 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.
 
 
3 months ended December 31,
   
12 months ended December 31,
 
 
 
2016
   
2015
   
% change
   
2016
   
2015
   
% change
 
1.  Revenue - Pro Forma (amounts in millions)
 
$
25.5
   
$
27.8
    -8%
 
 
$
99.8
   
$
96.3
    4%
 
                                                 
Revenue (GAAP) as reported
 
$
25.5
   
$
27.8
           
$
99.8
   
$
94.1
         
Revenue (GAAP) DivX (prior to acquisition)
 
$
0.0
   
$
0.0
           
$
0.0
   
$
2.2
         
 
We principally use pro forma revenue, in combination with non-GAAP revenue and NeuLion Digital Platform (“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 decreased 8% and increased 4% for the three months and year ended December 31, 2016, respectively.
 
 
 
3 months ended December 31,
   
12 months ended December 31,
 
 
 
2016
   
2015
   
% change
   
2016
   
2015
   
% change
 
2.  Pro Forma Revenue - non-GAAP (amounts in millions)
 
$
25.6
   
$
31.4
    -18 %
 
 
$
100.8
   
$
112.8
    -11%
 
                                                 
Revenue (GAAP) as reported
 
$
25.5
   
$
27.8
           
$
99.8
   
$
94.1
         
Revenue (GAAP) DivX (prior to acquisition)
 
$
0.0
   
$
0.0
           
$
0.0
   
$
2.2
         
Revenue due to purchase accounting adjustment
 
$
0.1
   
$
3.6
           
$
1.0
   
$
16.5
         
 
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.  Our pro forma non-GAAP revenue decreased 18% and 11% for the three months and year ended December 31, 2016, respectively.  The decline in pro forma non-GAAP revenue is lower than our organic revenue growth due to a decline in revenues in our CE and MainConcept revenue streams.  Refer to reconciliation of non-GAAP Revenue to U.S. GAAP Revenue, below, for full details.
 
 
 
3 months ended December 31,
   
12 months ended December 31,
 
 
 
2016
   
2015
   
% change
   
2016
   
2015
   
% change
 
3.  Revenue - NeuLion Digital Platform (amounts in millions)
 
$
17.5
   
$
19.8
     
-12%
 
 
$
67.9
   
$
66.1
     
3%
 
We monitor our revenue from our NeuLion Digital Platform because we expect it to grow faster than our 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 decreased 12% and increased 3% for the three months and year ended December 31, 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.
 
 
 
 
3 months ended December 31,
   
12 months ended December 31,
 
 
 
2016
   
2015
   
2016
   
2015
 
4.  Pro Forma Cost of Revenue as a % of Pro Forma non-
GAAP Revenue (1)
   
20%
   
17%
 
   
18%
 
   
16%
 
 
(1)
Figures for the three months ended December 31, 2015 and 2016 and for the year ended December 31, 2016 are actual results.
 
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.  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 depend primarily on our revenue mix.
 
 
 
3 months ended December 31,
   
12 months ended December 31,
 
 
 
2016
   
2015
   
% change
   
2016
   
2015
   
% change
 
5.  Pro Forma Adjusted EBITDA (1) (amounts in millions)
 
$
1.7
   
$
8.8
     
-81%
 
 
$
14.4
   
$
24.8
     
-42%
 
(1)
Figures for the three months ended December 31, 2015 and 2016 and for the year ended December 31, 2016 are actual results.
 
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 Consolidated Net Income (Loss) to Pro Forma Adjusted EBITDA for full details.
 
 
 
Year ended December 31,
 
   
2016
   
2015
   
2014
 
6.  Petabytes Streamed
   
333
     
307
     
227
 
 
We measure the amount of digital video content we stream in petabytes. We monitor petabytes streamed to measure the performance of both our variable revenues as well as our operating leverage in terms of cost of revenue from the NeuLion Digital Platform.  As we stream more petabytes, our variable revenues increase while our cost of revenue as a percentage of revenue decreases.
 
 
Reconciliation of GAAP Revenue to Pro Forma Non-GAAP Revenue (in thousands):
                               
 
                                   
 
 
Organic
   
DivX
   
Consolidated
 
Three months ended December 31,
 
2016
   
2015
   
2016
   
2015
   
2016
   
2015
 
 
                                   
GAAP Revenue
 
$
17,481
   
$
19,774
   
$
8,047
   
$
8,010
   
$
25,528
   
$
27,784
 
 
                                               
Revenue excluded due to purchase accounting
   
-
     
-
     
42
     
3,572
     
42
     
3,572
 
 
                                               
Pro Forma Non-GAAP Revenue
 
$
17,481
   
$
19,774
   
$
8,089
   
$
11,582
   
$
25,570
   
$
31,356
 
 
                                               
 
 
Organic
   
DivX
   
Consolidated
 
Year ended December 31,
   
2016
     
2015
     
2016
     
2015
     
2016
     
2015
 
 
                                               
GAAP Revenue
 
$
67,875
   
$
66,088
   
$
31,914
   
$
27,955
   
$
99,789
   
$
94,043
 
 
                                               
Pro forma adjustment
   
-
     
-
     
-
     
2,239
     
-
     
2,239
 
 
                                               
Pro Forma GAAP Revenue
 
$
67,875
   
$
66,088
   
$
31,914
   
$
30,194
   
$
99,789
   
$
96,282
 
 
                                               
Revenue excluded due to purchase accounting
   
-
     
-
     
1,057
     
16,509
     
1,057
     
16,509
 
 
                                               
Pro Forma Non-GAAP Revenue
 
$
67,875
   
$
66,088
   
$
32,971
   
$
46,703
   
$
100,846
   
$
112,791
 
 

 
Reconciliation of GAAP Net Income (Loss) to Pro Forma Adjusted EBITDA (in thousands):
 
 
           
 
 
Consolidated
 
Three months ended December 31,
 
2016
   
2015
 
 
           
Consolidated Net Income (Loss) on a GAAP Basis
 
$
(344
)
 
$
32,766
 
 
               
Revenue excluded due to purchase accounting
   
42
     
3,572
 
Depreciation and amortization
   
2,400
     
1,910
 
Stock-based compensation
   
1,085
     
859
 
Acquisition-related expenses
   
7
     
-
 
Listing-related expenses
   
-
     
663
 
Income tax (benefit) expense
   
(1,622
)
   
(31,176
)
Investment income (expense) and foreign exchange loss
   
167
     
166
 
 
               
Pro Forma Adjusted EBITDA
 
$
1,735
   
$
8,760
 
 
               
 
 
Consolidated
 
Year ended December 31,
   
2016
     
2015
 
 
               
Consolidated Net Income (Loss) on a GAAP Basis
 
$
(1,753
)
 
$
25,916
 
 
               
Pro forma adjustment
   
0
     
(2,225
)
 
               
Consolidated Net Income (Loss) on a Pro Forma GAAP Basis
 
$
(1,753
)
 
$
23,691
 
 
               
Revenue excluded due to purchase accounting
   
1,057
     
16,509
 
Depreciation and amortization
   
8,899
     
8,077
 
Stock-based compensation
   
4,573
     
2,702
 
Acquisition-related expenses
   
109
     
359
 
Listing-related expenses
   
-
     
663
 
Gain on revaluation of convertible note derivative
   
-
     
(507
)
Income tax (benefit) expense
   
1,411
     
(27,234
)
Investment income (expense) and foreign exchange loss
   
94
     
516
 
 
               
Pro Forma Adjusted EBITDA
 
$
14,390
   
$
24,776
 



We report non-GAAP Revenue and Adjusted EBITDA because they are key measures used by management to evaluate our results and make strategic decisions about the Company, including potential acquisitions. Non-GAAP Revenue represents U.S. GAAP revenue before purchase price accounting adjustments as a result of an acquisition. Adjusted EBITDA represents net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation, acquisition-related expenses, listing-related expenses, purchase accounting adjustments, gain on revaluation of convertible note derivative, investment income/expense and foreign exchange gain/loss. This measure does not have any standardized meaning prescribed by U.S. 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 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 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 the end user revenue generated by our customers.  In addition, we generate revenue from the NeuLion CE technologies through software license agreements with CE manufacturers.
 
Our contracts with customers are typically between two years and five years long.  Our contracts 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 to certain customers for whom we recognize revenue on a gross basis.  Cost of revenue excludes amortization and depreciation and labor costs.

We expect cost of revenue to increase in absolute dollars as revenue increases; however, we expect cost of revenue as a percentage of revenue to decrease for the foreseeable future. 

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, acquisition-related 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 primarily consist of wages and benefits for research and development personnel.  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 and evolving industry standards in 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 January 2015, we completed the acquisition of DivX and in June 2016, we completed the acquisition of Saffron Digital.  The integration of these acquisitions has impacted our current and will impact our future revenues, expenses and operating results.

RESULTS OF OPERATIONS
 
Comparison of Three Months Ended December 31, 2016 to Three Months Ended December 31, 2015
 
Our consolidated financial statements for the three months ended December 31, 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):
 
 
3 months ended December 31,
 
 
 
2016
   
2015
 
 
           
Revenue
 
$
25,528
   
$
27,784
 
 
               
Costs and expenses
               
   Cost of revenue, exclusive of depreciation and
               
       amortization shown separately below
   
5,204
     
5,371
 
   Selling, general and administrative, including
               
      stock-based compensation
   
14,671
     
13,218
 
   Research and development
   
5,052
     
5,528
 
   Depreciation and amortization
   
2,400
     
1,910
 
 
   
27,327
     
26,027
 
Operating income (loss)
   
(1,799
)
   
1,757
 
   Other expense
   
(167
)
   
(166
)
Net and comprehensive income (loss) before income taxes
   
(1,966
)
   
1,591
 
   Income tax benefit
   
1,622
     
31,176
 
Net and comprehensive income (loss)
 
$
(344
)
 
$
32,767
 
 
Revenue
 
Revenue decreased to $25.5 million for the three months ended December 31, 2016 from $27.8 million for the three months ended December 31, 2015.  The $2.3 million decrease was primarily the result of loss of NHL-related revenues in the amount of $4.5 million.

Costs of Revenue
  
Cost of revenue decreased to $5.2 million for the three months ended December 31, 2016 from $5.4 million for the three months ended December 31, 2015.  Cost of revenue as a percentage of revenue increased from 19% for the three months ended December 31, 2015 to 20% for the three months ended December 31, 2016.
 
Selling, general and administrative expenses, including stock-based compensation
 
Selling, general and administrative expenses, including stock-based compensation, increased by $1.5 million, or 11%, from $13.2 million for the three months ended December 31, 2015 to $14.7 million for the three months ended December 31, 2016.  The individual variances are as follows:
 
• Wages and benefits increased from $8.4 million for the three months ended December 31, 2015 to $8.9 million for the three months ended December 31, 2016. The $0.5 million increase was primarily a result of an increase in employees as a result of the acquisition of Saffron Digital and an increase in headcount in our sales team.
 
 
• Stock-based compensation increased from $0.9 million for the three months ended December 31, 2015 to $1.1 million for the three months ended December 31, 2016.  The $0.2 million increase was the result of stock option and restricted stock unit award grants.

• Professional fees increased from $1.0 million for the three months ended December 31, 2015 to $1.4 million for the three months ended December 31, 2016.  The $0.4 million increase was primarily the result of the recruitment expenses incurred to increase our sales force and fees incurred to certify our IT processes.

• Travel increased from $0.3 million for the three months ended December 31, 2013 to $0.6 million for the three months ended December 31, 2016.  The $0.3 million increase was primarily the result of the acquisition of Saffron Digital and our increased sales force.

 • Listing-related expenses decreased from $0.7 million for the three months ended December 31, 2015 to $0 for the three months ended December 31, 2016.  The $0.7 million decrease was primarily the result of costs associated with our pursuit of a U.S. exchange listing that we decided to put on hold during the three months ended December 31, 2015.

• Other SG&A expenses increased from $1.9 million for the three months ended December 31, 2015 to $2.7 million for the three months ended December 31, 2016.  The primary reason for the increase was the acquisition of Saffron Digital.  Other SG&A expenses include rent, office supplies, corporate IT services, credit card processing fees and other general operating expenses.
 
Research and development

Research and development costs decreased from $5.5 million for the three months ended December 31, 2015 to $5.1 million for the three months ended December 31, 2016.  The decrease of $0.4 million was primarily a result of a decrease in headcount in response to redundancies identified through the acquisition of DivX.
 
Depreciation and amortization
 
Depreciation and amortization increased from $1.9 million for the three months ended December 31, 2015 to $2.4 million for the three months ended December 31, 2016.  The $0.5 million increase was due to acquisition of Saffron Digital.

Income taxes

During the fourth quarter of 2015, we concluded that it was more likely than not that we would be able to realize the benefit of our federal deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as well as our expectation that operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As a result, we reduced the valuation allowance on a portion of our net deferred tax assets at December 31, 2015, which resulted in a $31.2 million benefit to our tax provision in 2015.  In 2016, our tax benefit of $1.6 million mainly relates to foreign income and withholding taxes less federal and state deferred income tax expense.
 
 
Comparison of Year Ended December 31, 2016 to Year Ended December 31, 2015
 
Our consolidated financial statements for the year ended December 31, 2016 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows (in thousands):
 
 
 
Year ended December 31,
 
 
 
2016
   
2015
 
 
           
Revenue
 
$
99,788
   
$
94,043
 
 
               
Costs and expenses
               
   Cost of revenue, exclusive of depreciation and
               
       amortization shown separately below
   
18,312
     
17,775
 
   Selling, general and administrative, including
               
      stock-based compensation
   
52,922
     
45,672
 
   Research and development
   
19,903
     
24,912
 
   Depreciation and amortization
   
8,899
     
7,544
 
 
   
100,036
     
95,903
 
Operating loss
   
(248
)
   
(1,860
)
   Other expense
   
(94
)
   
(71
)
Net and comprehensive loss before income taxes
   
(342
)
   
(1,931
)
   Income taxes
   
(1,411
)
   
27,847
 
Net and comprehensive income (loss)
 
$
(1,753
)
 
$
25,916
 

Revenue
 
Revenue increased to $99.8 million for the year ended December 31, 2016 from $94.0 million for the year ended December 31, 2015.  The $5.8 million improvement was the result of an increase in CE and MainConcept revenues of $4.0 million and platform revenues of $1.8 million.

Costs of Revenue
  
Cost of revenue increased to $18.3 million for the year ended December 31, 2016 from $17.8 million for the year ended December 31, 2015.  Cost of revenue as a percentage of revenue improved from 19% for the year ended December 31, 2015 to 18% for the year ended December 31, 2016.
 
Selling, general and administrative expenses, including stock-based compensation
 
Selling, general and administrative expenses, including stock-based compensation, increased by $7.2 million, or 16%, from $45.7 million for the year ended December 31, 2015 to $52.9 million for the year ended December 31, 2016.  The individual variances are as follows:
 
• Wages and benefits increased from $29.3 million for the year ended December 31, 2015 to $33.5 million for the year ended December 31, 2016. The $4.2 million increase was primarily a result of the acquisition of DivX in January 2015 and of Saffron Digital in June 2016, and an increase in sales headcount.
 
• Stock-based compensation increased from $2.7 million for the year ended December 31, 2015 to $4.6 million for the year ended December 31, 2016.  The $1.9 million increase was the result of stock option and restricted stock unit award grants.

• Professional fees increased from $3.5 million for the year ended December 31, 2015 to $4.2 million for the year ended December 31, 2016.  The $0.7 million increase was primarily the result of the recruitment expenses incurred to increase our sales force and fees incurred to certify our IT processes.
 
• Acquisition-related expenses decreased from $0.3 million for the year ended December 31, 2015 to $0.1 million for the year ended December 31, 2016.  The $0.2 million decrease was the result of incurring fewer expenses in connection with the acquisition of Saffron Digital in 2016 versus than with that of DivX in 2015.

• Listing-related expenses decreased from $0.7 million for the year ended December 31, 2015 to $0 for the year ended December 31, 2016.  The $0.7 million decrease was primarily the result of costs associated with our pursuit of a U.S. exchange listing that we decided to put on hold during the year ended December 31, 2015.
 
 
• Other SG&A expenses increased from $9.2 million for the year ended December 31, 2015 to $10.5 million for the year ended December 31, 2016.   Other SG&A expenses include travel expenses, rent, office supplies, corporate IT services, marketing, credit card processing fees and other general operating expenses.  The increase was primarily the result of the acquisitions of DivX in January 2015 and Saffron Digital in June 2016.
 
Research and development

Research and development costs decreased from $24.9 million for the year ended December 31, 2015 to $19.9 million for the year ended December 31, 2015.  The $5.0 million decrease was primarily the result of a reduction in headcount in response to redundancies identified through the acquisition of DivX.
 
Depreciation and amortization
 
Depreciation and amortization increased from $7.5 million for the year ended December 31, 2015 to $8.9 million for the year ended December 31, 2016.  The $1.4 million increase was due to the amortization of intangibles as a result of the acquisitions of DivX and Saffron Digital.

Income taxes

During the fourth quarter of 2015, we concluded that it was more likely than not that we would be able to realize the benefit of our federal deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as well as our expectation that operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As a result, we reduced the valuation allowance on a portion of our net deferred tax assets at December 31, 2015, which resulted in a $27.8 million benefit to our tax provision in 2015.  In 2016, our tax expense of $1.4 million mainly relates to foreign income and withholding taxes less federal and state deferred income tax expense.
 
 
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
 
Our consolidated financial statements for the year ended December 31, 2015 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows (in thousands):
 
 
 
Year ended December 31,
 
 
 
2015 (1)
   
2014
 
 
           
Revenue
 
$
94,043
   
$
55,520
 
 
               
Costs and expenses
               
   Cost of revenue, exclusive of depreciation and
               
       amortization shown separately below
   
17,775
     
13,897
 
   Selling, general and administrative, including
               
      stock-based compensation
   
45,672
     
27,073
 
   Research and development
   
24,912
     
8,381
 
   Depreciation and amortization
   
7,544
     
2,621
 
 
   
95,903
     
51,972
 
Operating income (loss)
   
(1,860
)
   
3,548
 
   Other income (expense)
   
(71
)
   
290
 
Net and comprehensive income (loss) before income taxes
   
(1,931
)
   
3,838
 
   Income tax benefit (expense)
   
27,847
     
(271
)
Net and comprehensive income (loss)
 
$
25,916
   
$
3,567
 
                                                                 
               
(1) Results for DivX are for the period from February 1, 2015 to December 31, 2015.
 

Revenue
 
Revenue increased to $94.1 million for the year ended December 31, 2015 from $55.5 million for the year ended December 31, 2014.  The $38.6 million improvement was primarily the result of the acquisition of DivX, which accounted for $28.0 million of revenue during the year.  The organic improvement of $10.6 million, or 19%, was primarily the result of an increase in revenue from fixed license fees of $5.3 million and variable usage fees of $4.6 million.

Costs of Revenue
  
Cost of revenue increased to $17.8 million for the year ended December 31, 2015 from $13.9 million for the year ended December 31, 2014.  Cost of revenue as a percentage of revenue improved from 25% for the year ended December 31, 2014 to 19% for the year ended December 31, 2015. The six percentage point improvement (as a percentage of revenue) primarily resulted from the acquisition of DivX and improved broadcast operating costs.
 
Selling, general and administrative expenses, including stock-based compensation
 
Selling, general and administrative expenses, including stock-based compensation, increased by $18.6 million, or 69%, from $27.1 million for the year ended December 31, 2014 to $45.7 million for the year ended December 31, 2015.  Selling, general and administrative expenses, including stock-based compensation, excluding expenses associated with the acquisition of DivX were $31.4 million, an increase of 16%.  The individual variances are as follows:
 
• Wages and benefits increased from $18.5 million for the year ended December 31, 2014 to $29.3 million for the year ended December 31, 2015. DivX accounted for $8.9 million of wages and benefits.  The remaining $1.9 million increase was primarily a result of salary increases and bonuses.
 
• Stock-based compensation increased from $1.4 million for the year ended December 31, 2014 to $2.7 million for the year ended December 31, 2015.  The $1.3 million increase was the result of stock option and restricted stock unit award grants.

• Professional fees increased from $1.6 million for the year ended December 31, 2014 to $3.5 million for the year ended December 31, 2015.  The $1.9 million increase was primarily the result of transaction expenses relating to the acquisition of DivX.
 
 
• Marketing expenses increased from $0.4 million for the year ended December 31, 2014 to $1.3 million for the year ended December 31, 2015.  The $0.9 million increase was primarily the result of the acquisition of DivX.

• Acquisition-related expenses decreased from $0.8 million for the year ended December 31, 2014 to $0.3 million for the year ended December 31, 2015.  The $0.5 million decrease was the result of a greater portion of the transaction expenses relating to the acquisition of DivX being incurred in 2014 than in 2015.

• Listing-related expenses increased from $0 for the year ended December 31, 2014 to $0.7 million for the year ended December 31, 2015.  The $0.7 million increase was primarily the result of legal and accounting fees incurred to commence the process of listing our common stock in the U.S.

• Other SG&A expenses increased from $4.4 million for the year ended December 31, 2014 to $7.9 million for the year ended December 31, 2015.  DivX accounted for $2.9 million of Other SG&A expenses.  Other SG&A expenses include travel expenses, rent, office supplies, corporate IT services, marketing, credit card processing fees and other general operating expenses.
 
Research and development

Research and development costs increased from $8.4 million for the year ended December 31, 2014 to $24.9 million for the year ended December 31, 2015.  DivX accounted for $15.5 million of research and development costs.  The remaining $1.0 million increase was primarily a result of salary increases and bonuses.
 
Depreciation and amortization
 
Depreciation and amortization increased from $2.6 million for the year ended December 31, 2014 to $7.5 million for the year ended December 31, 2015.  The $4.9 million increase was due to the amortization of intangibles as a result of the acquisition of DivX.

Income taxes

During the fourth quarter of 2015, we concluded that it was more likely than not that we would be able to realize the benefit of our federal deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as well as our expectation that operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As a result, we reduced the valuation allowance on a portion of our net deferred tax assets at December 31, 2015, which resulted in a $27.8 million benefit to our tax provision in 2015.  In 2014, our tax expense of $0.3 million relates to changes in federal and state deferred income tax expense.

 
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.
 
In January 2015, we completed the acquisition of DivX and in June 2016, we completed the acquisition of Saffron Digital, both of which have impacted our current and will impact 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 additional business activity during that quarter. We expect SG&A expenses to increase in absolute dollars as we add personnel, and increase our spending on sales and on marketing and growing 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 $41.9 million at December 31, 2016.  During the year ended December 31, 2016, we generated $12.5 million from operating activities, which included cash of $3.1 million from changes in operating assets and liabilities. Cash used in financing activities included $4.9 million, primarily for the repurchases of our common stock.  Cash used in investing activities included $9.0 million for the acquisition of Saffron Digital and $10.2 million used to purchase fixed assets, of which $7.3 million was used to purchase an office building to serve as our future headquarters in New York.
 
As of December 31, 2016, our principal sources of liquidity included cash and cash equivalents of $41.9 million and trade accounts receivable of $14.1 million, offset by $11.8 million in accounts payable and $12.6 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 December 31, 2016, approximately 49% of our cash and cash equivalents were held in accounts with a U.S. bank that received a BBB+ rating from Standard and Poor’s and an Baa1 rating from Moody’s. The Company believes that this U.S. financial institution is secure notwithstanding the current global economy 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 December 31, 2016 was $22.7 million, a decrease of $15.9 million from the December 31, 2015 net working capital of $38.6 million. Our working capital ratios at December 31, 2016 and December 31, 2015 were 1.6 and 2.2, respectively. Included in current liabilities at December 31, 2016 and December 31, 2015 are approximately $14.0 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 decreases in current assets of $9.2 million and increases in current liabilities of $6.6 million.
 
Current assets at December 31, 2016 were $61.2 million, a decrease of $9.2 million from the December 31, 2015 balance of $70.4 million.  The change was primarily due to a decrease of $11.5 million in cash and cash equivalents offset by increases of $1.1 million increase in accounts receivable and $0.7 million in prepaid expenses and deposits.
 
Current liabilities at December 31, 2016 were $38.5 million, an increase of $6.6 million from the December 31, 2015 balance of $31.8 million. The increase was due to increases of $1.8 million in accounts payable, $2.4 million in accrued liabilities and $2.5 million in deferred revenue.
   
Off Balance Sheet Arrangements
 
The Company did not have any off balance sheet arrangements as of December 31, 2016.
 
Financial Instruments
 
Our financial instruments are comprised of cash and cash equivalents, accounts receivable, other receivables, deposits, accounts payable, accrued liabilities and amounts due to/from related parties.
 
 
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.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument might change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we might enter into exchange rate hedging arrangements to manage the risks described below.
 
Foreign exchange risk
 
We are exposed to foreign exchange risk as a result of transactions in currencies other than our functional currency, the United States dollar. The majority of our revenues and expenses are transacted in U.S. dollars. We do not use derivative instruments to hedge against foreign exchange risk.
 
Interest rate risk
 
We are exposed to interest rate risk on our invested cash and cash equivalents and our short-term investments. The interest rates on these instruments are based on bank rates and therefore are subject to change with the market. We do not use derivative financial instruments to reduce our interest rate risk.
 
Credit risk
 
We sell our services to a variety of customers under various payment terms and therefore are exposed to credit risk. We have 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. We establish an allowance for doubtful accounts that represents our estimate of incurred losses in respect of accounts receivable.
 
Contractual Obligations and Commitments
 
We have multiple leases for facilities and equipment.  As of December 31, 2016, we had no outstanding capital leases.  Future minimum annual payments over the next five years and thereafter (exclusive of taxes, insurance and maintenance costs) under these commitments as of December 31, 2016 are as follows:
 
   
Operating Leases
   
Minimum
       
   
Gross
   
Recovery
   
Net
   
Guarantees
   
Total
 
2017
 
$
3,788
   
$
(931
)
 
$
2,857
   
$
5,542
   
$
8,399
 
2018
   
2,966
     
(1
)
   
2,965
     
694
     
3,659
 
2019
   
3,117
     
-
     
3,117
     
203
     
3,320
 
2020
   
1,873
     
-
     
1,873
     
-
     
1,873
 
2021
   
1,310
     
-
     
1,310
     
-
     
1,310
 
   
$
13,054
   
$
(932
)
 
$
12,122
   
$
6,439
   
$
18,561
 
 
We periodically enter into contracts with customers in which we guarantee our customer a minimum amount of revenue share for services we provide under the contract.  The minimum guarantees shown above primarily relate to (i) these minimum fixed revenue guarantees that we have committed to our customers over the next three years and (ii) minimum fixed bandwidth fee commitments with certain vendors over the next 12 to 18 months.  As at December 31, 2016, we believe that the future commitments are probable. 
 
 
We have subleased one of our Toronto offices, which is expected to generate a total recovery of $0.4 million over the next year.  On February 12, 2017, we entered into a sublease agreement for our San Diego office, effective January 1, 2018, which is expected to generate a total recovery of $1.6 million over two years beginning on January 1, 2018.
 
Rent expense for the years ended December 31, 2016 and 2015 was $2.5 million and $2.0 million, respectively, which includes rent paid to Renaissance, a related party, in the amount of $0.6 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively.
 
During the ordinary course of our business activities, we may be contingently liable for litigation and a party to claims.  Management believes that adequate provisions have been made 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 our consolidated financial position or results of operations.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in conformity with U.S. GAAP, which 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 as well as the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates to ensure they appropriately reflect changes in our business and new information as it becomes available. If historical results and other factors used by management to make these estimates do not reasonably predict future actual results, our consolidated financial position and results of operations could be materially impacted.
 
We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
Revenue recognition
 
We earn revenue as follows:

(a)
Setup fees are charged to customers for design, setup and implementation services.  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)
Annual and/or monthly fees are charged to customers for ongoing hosting, support and maintenance.  Annual hosting fees are deferred at the beginning of the service period and recognized evenly over the service period.

(c)
Subscription revenue consists of recurring revenue based on the number of subscribers. The subscriber revenue is typically generated on a monthly, quarterly or annual basis and can be a fixed fee per user, a variable fee per user or a variable fee based on a percentage of the subscription price.  We defer the appropriate portion of cash received for the services that have not yet been rendered and recognize the revenue over the term of the subscription, which is generally between 30 days and one year. Pay-per-view revenues are deferred and recognized in the period when the content is viewed. Subscription revenues are recorded on either a gross or net basis depending on the transaction arrangement with the customer. Where subscription revenues are recorded on a gross basis, the total amount of the subscription is deferred and recognized over the subscription term. Where subscription revenues are recorded on a net basis, only our share of revenue from the subscription is deferred and recognized over the term of the subscription.  Under U.S. GAAP guidance related to reporting revenue gross as a principal versus net as an agent, the indicators used to determine whether an entity is a principal or an agent to a transaction are subject to judgment. When our assessment of the indicators leads us to conclude that we are the principal in the subscription transaction, revenue is recorded on a gross basis, the total amount of the subscription is deferred and recognized over the subscription term and the share of revenue to our customer is deferred and recognized as a cost of revenue over the term of the subscription. When our assessment of the indicators leads us to conclude that we are the agent in the subscription transaction, only our share of revenue from the subscription is deferred and recognized over the term of the subscription.
 
 
(d)
Usage fees are charged to customers for bandwidth and storage.  Usage fees are billed on a monthly or quarterly basis and are recognized as the service is being provided.

(e)
Licensing revenue is primarily derived from royalties paid to us by licensees of our intellectual property rights. Revenue in such transactions is recognized during the period in which such customers report to us the number of royalty-eligible units that they have shipped. Revenue from guaranteed minimum-royalty licenses is recognizable upon delivery of the technology license when we have no further obligations. In certain guaranteed minimum-royalty licenses, we enter into extended payment programs with customers. Revenue related to such extended payment programs is recognized at the earlier of when cash is received or when periodic payments become due to us. If we receive non-refundable advance payments from licensees that are allocable to a future contract period or could be creditable against other obligations of the licensee to it, the recognition of the related revenue is deferred until such future period or creditable obligation lapses. Royalties and other license fees are recorded net of reserves for estimated losses, and are recognized when all revenue recognition criteria have been met. We make judgments as to whether collectability can be reasonably assured based on the licensee’s recent payment history unless significant and persuasive evidence exists that the customer is creditworthy. In the absence of a favorable collection history or significant and persuasive evidence that the customer is creditworthy, we recognizes revenue upon receipt of cash, provided that all other revenue recognition criteria have been met.

We actively police and enforce our intellectual property, and pursue third parties who have under-reported the amount of royalties owed under a license agreement or who utilize our intellectual property without a license. As a result of these activities, from time to time, the Company may recognize royalty revenues that relate to infringements or under-reporting that occurred in prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts due from licensees, will be recognized in the period such adjustment is determined or contracted, as appropriate.

Licensing revenue is recognized gross of withholding taxes that are remitted by our licensees directly to their local tax authorities. For the years ended December 31, 2016, 2015 and 2014, withholding taxes were $2.5 million, $3.8 million and $0, respectively.

(f)  eCommerce revenues are earned through providing customers with ticketing and retail merchandising web solutions.  eCommerce revenues are recorded on a net basis when the service has been provided.  We record as revenue the portion of the fees we are entitled to as opposed to the amount billed for tickets or retail merchandise sold.

(g)
Advertising revenues are 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, or served, during the period.  Deferred revenue for advertising represents the timing difference between collection of advertising revenue and when the advertisements are served, which is typically between 30 and 90 days.   Advertising revenues are recorded on a gross basis, whereby the total amount billed to the advertiser is recorded as revenue and the share of revenue to our customer is recorded as a cost of revenue.

(h)
Support revenues are earned for providing customer support to our customers’ end users.  Support fees are recognized evenly over the service period.

(i)
Equipment revenue consists of the sale and rental of set-top boxes (“STBs”) to content partners and/or end users to enable the end user to receive 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.  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.
 
 
Allowance for doubtful accounts

We maintain a provision for estimated losses resulting from the inability of our 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 our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.
 
Property, plant and equipment
 
We review 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.
 
Intangible assets
 
We review the carrying value of our 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.

Goodwill
 
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. We perform this 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, we perform 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. Our impairment test is based on its single operating segment and reporting unit structure. For the years ended December 31, 2016, 2015 and 2014, there was no impairment loss.
 
Stock-based compensation and other stock-based payments
 
We account for all stock options and warrants using a fair value-based method.  The fair value of each stock option and warrant granted to employees 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 expected life of the option.  The fair value of the warrants granted to non-employees is measured and expensed as the warrants vest.
 
Restricted stock unit awards give the holder the right to one share of common stock for each vested restricted stock unit.  Stock-based compensation expense is recorded based on the market value of the common stock on the grant date and recognized over the vesting period of these awards.
 
Amortization policies and useful lives
 
We amortize 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, we take 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, we reassess our 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, we might have to shorten our 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
 
Income taxes are accounted for under the provisions of 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 a greater-than-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.

We operate in a number of countries worldwide.  Our income tax liability is therefore a consolidation of our tax liabilities in various locations.  Our tax rate is affected by the profitability of our operations in various locations, the tax rates and taxation systems of the countries in which we operate, our tax policies and the impact of certain tax planning strategies which have been implemented.

To determine our worldwide tax liability, we make 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 determined and it may take a substantial amount of time before the final outcome of any audit is known.  Future tax audits could result in income tax liabilities that differ materially from the amounts recorded in our financial statements.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  During the fourth quarter of 2015, we concluded that it was more likely than not that we would be able to realize the benefit of our federal and some state-related tax assets in the future. We based this conclusion on historical and projected operating performance, as well as our expectation that operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As a result, we reduced the valuation allowance on a portion of our net deferred tax assets at December 31, 2015.  The Company will continue to assess the need for a valuation allowance on the deferred tax asset by evaluating both positive and negative evidence that may exist.  Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue recognition, which provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most existing revenue recognition guidance.  The main principle under this guidance is that an entity should recognize revenue at the amount it expects to be entitled to in exchange for the transfer of goods or services to customers.  We have identified the predominant changes to our accounting policies resulting from the application of this guidance and are in the process of quantifying the impact on our consolidated financial statements.  The cumulative effect of the initial adoption will be reflected as an adjustment to the opening balance of retained earnings as of the date of the application of the guidance; however, we do not expect this guidance to have a significant impact on our consolidated financial statements on an annual basis.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.
 
 
In September 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  ASU 2015-16 is effective for periods beginning after December 15, 2015, including interim periods within those fiscal years. The new guidance must be applied prospectively to adjustments to provisional amounts that occur after the effective date of the ASU, with early adoption permitted. The adoption of this standard did not have a material effect on our financial statements and related disclosures. 

In November 2015, the FASB issued ASU 2015-17, “Income Taxes”, which requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position.  The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments.  For public business entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period.  The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.  If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively adjusted.  If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period of change the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods.  We adopted this guidance on a prospective basis effective October 1, 2015.

In February 2016, the FASB issued ASU 2016-02 (“Topic 842”) new accounting guidance for leases, which supersedes previous lease guidance. Under this guidance, for all leases with terms in excess of one year, including operating leases, we will be required to recognize on our balance sheet a lease liability and a right-of-use asset representing our right to use the underlying asset for the lease term. The new guidance retains a distinction between finance leases and operating leases and the classification criteria is substantially similar to previous guidance. Additionally, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed. We are currently evaluating the impact of this guidance on our consolidated balance sheets. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which simplifies several aspects of the accounting for employee share-based payment transactions. Under this amended guidance, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement in the period in which the awards vest or are exercised. In the statement of cash flows, excess tax benefits will be classified with other income tax cash flows in operating activities. The amended guidance also gives the option to make a policy election to account for forfeitures as they occur and increases the threshold for awards that are partially settled in cash to qualify for equity classification. We expect that the adoption of this guidance will introduce volatility into our income tax provision, which will be impacted by the timing of employee exercises and changes in our stock price. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale (AFS) debt securities through an allowance account. The update also requires certain incremental disclosures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the effect this ASU will have on our consolidated financial statements and disclosures.
 
 
In August 2016, FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” amended guidance which clarifies how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The new guidance is intended to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.
 
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” amended guidance on the accounting for income taxes, which eliminates the exception in existing guidance which defers the recognition of the tax effects of intra-entity asset transfers other than inventory until the transferred asset is sold to a third party. Rather, the amended guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual reporting period. We are currently assessing the impact of this guidance on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business,” which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment.” This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017.
 
 
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk 

We are exposed to market risk for the effect of foreign currency fluctuations, interest rate changes, and credit risk with respect to our customers.  Information relating to quantitative and qualitative disclosures about market risk is set forth below and in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
 
Foreign exchange risk

In the normal course of our business, we are exposed to market risk, primarily from changes in foreign currency exchange rates that could impact our results of operations and financial position.  We manage our exposure to these market risks through our regular operating activities.

A substantial majority of our revenue, expense and capital expenditure activities are transacted in U.S. dollars.  However, we do transact business in other currencies, primarily the Canadian dollar, the British pound, the Chinese renminbi, the Australian dollar and the Euro.  For most of these foreign currencies, we are a net payor, and, therefore, are adversely affected by a weaker U.S. dollar and benefit from a stronger U.S. dollar relative to the foreign currencies in which we transact significant amounts of business.

We are required to translate, or express in U.S. dollars, the assets and liabilities of our foreign subsidiaries that are denominated or measured in foreign currencies at the applicable year-end rate of exchange on our Consolidated Balance Sheets and income statement items of our foreign subsidiaries at the average rates prevailing during the year.  We record the resulting translation adjustment to the foreign exchange account on our Consolidated Statements of Operations and Comprehensive Income (Loss).  Foreign currency transaction gains and losses, which have historically been immaterial, are recorded on our Consolidated Statements of Operations and Comprehensive Income (Loss).  We generally do not mitigate the risks associated with fluctuating exchange rates.

For the year ended December 31, 2016, a 10% weaker U.S. dollar against the currencies of all foreign countries in which we had operations during the period would have increased our revenue by $0.4 million and decreased our pre-tax operating profit by $1.6 million.  For the year ended December 31, 2015, a 10% weaker U.S. dollar against the currencies of all foreign countries in which we had operations during the period would have increased our revenue by $1.0 million and decreased our pre-tax operating profit by $1.0 million.  A 10% stronger U.S. dollar would have resulted in proportionate decreases to our revenue and increases to our pre-tax operating profit for the years ended December 31, 2016 and 2015.

On average across our mix of international businesses, foreign currencies at December 31, 2016 were weaker against the U.S. dollar than the average foreign exchange rates that prevailed across the full year 2016. As a result, if foreign exchange rates had remained unchanged throughout 2016, the foreign exchange translation would have reduced growth as reported in U.S. dollars.  As foreign exchange rates change daily, there can be no assurance that foreign exchange rates will remain constant throughout 2017, and rates could go either higher or lower.
 
Interest rate risk
 
We are exposed to interest rate risk on our invested cash and cash equivalents. The interest rates on these instruments are based on bank rates and therefore are subject to change with the market. We do not use derivative financial instruments to reduce our interest rate risk.
 
Credit risk
 
We sell our services to a variety of customers under various payment terms and therefore are exposed to credit risk. We have 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. We establish an allowance for doubtful accounts that represents our estimate of incurred losses in respect of accounts receivable.
 
 
ITEM 8.
Financial Statements and Supplementary Data
 
Financial statements are attached hereto beginning with page F-1.  The following table sets forth selected unaudited quarterly statements of operations data for the last eight quarters.  The financial information presented for the interim periods has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for such periods.  This data should be read in conjunction with the audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.  These quarterly operating results are not necessarily indicative of our operating results to be expected for any future period.
 
(in thousands, except per share data)
 
 
                                               
 
 
Three months ended,
 
 
   
Q1 2015
     
Q2 2015
     
Q3 2015
     
Q4 2015
     
Q1 2016
     
Q2 2016
     
Q3 2016
     
Q4 2016
 
 
                                                               
Revenue
 
$
21,675
   
$
22,684
   
$
21,901
   
$
27,784
   
$
26,293
   
$
24,111
   
$
23,857
   
$
25,528
 
 
                                                               
Costs and expenses
                                                               
   Cost of revenue, exclusive of depreciation and amortization shown separately below
   
4,326
     
4,215
     
3,863
     
5,371
     
4,654
     
4,131
     
4,322
     
5,204
 
   Selling, general and administrative, including stock-based compensation
   
9,906
     
11,390
     
11,151
     
13,225
     
11,905
     
12,918
     
13,429
     
14,671
 
   Research and development
   
5,316
     
7,480
     
6,588
     
5,528
     
4,354
     
5,285
     
5,212
     
5,052
 
   Depreciation and amortization
   
1,527
     
2,061
     
2,045
     
1,911
     
1,974
     
2,125
     
2,401
     
2,400
 
 
   
21,075
     
25,146
     
23,647
     
26,035
     
22,887
     
24,459
     
25,364
     
27,327
 
Operating income (loss)
   
600
     
(2,462
)
   
(1,746
)
   
1,749
     
3,406
     
(348
)
   
(1,507
)
   
(1,799
)
   Other income (expense)
   
(223
)
   
443
     
(133
)
   
(158
)
   
327
     
(201
)
   
(53
)
   
(167
)
Net and comprehensive income (loss) before income taxes
   
377
     
(2,019
)
   
(1,879
)
   
1,591
     
3,733
     
(549
)
   
(1,560
)
   
(1,966
)
   Income tax (benefit) expense
   
(886
)
   
(1,203
)
   
(1,241
)
   
31,176
     
(1,651
)
   
(227
)
   
(1,155
)
   
1,622
 
Net and comprehensive income (loss)
 
$
(509
)
 
$
(3,222
)
 
$
(3,120
)
 
$
32,767
   
$
2,082
   
$
(776
)
 
$
(2,715
)
 
$
(344
)
 
                                                               
Net income (loss) per weighted average number of shares of common stock outstanding: 
                                                               
 
                                                               
  Basic
 
$
0.00
   
$
(0.01
)
 
$
(0.01
)
 
$
0.13
   
$
0.01
   
$
0.00
   
$
(0.01
)
 
$
0.00
 
 
                                                               
  Diluted
 
$
0.00
   
$
(0.01