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NEULION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Expressed in U.S. dollars)

 

		March 31,				December 31,
		2017				2016
		(unaudited)
ASSETS
Current
Cash and cash equivalents		$	32,669			$	41,905
Accounts receivable, net of allowance for doubtful accounts of $567 and $385			17,650				14,073
Other receivables			562				791
Inventory			191				186
Prepaid expenses and deposits			3,017				3,657
Due from related parties			590				551
Total current assets			54,679				61,163
Property, plant and equipment, net			15,477				14,227
Intangible assets, net			22,762				24,495
Goodwill			13,229				13,229
Deferred tax assets			33,046				32,574
Other assets			2,620				2,686
Total assets		$	141,813			$	148,374
LIABILITIES AND EQUITY
Current
Accounts payable		$	11,127			$	11,802
Accrued liabilities			11,523				12,630
Deferred revenue			13,636				14,036
Total current liabilities			36,286				38,468
Long-term deferred revenue			1,383				2,037
Deferred rent liabilities			1,163				1,265
Deferred tax liabilities			760				1,093
Other long-term liabilities			51				112
Total liabilities			39,643				42,975
Stockholders' equity
Common stock (par value: $0.01; shares authorized: 500,000,000; shares issued:
2017: 277,812,308 and 2016: 279,050,968)			2,778				2,791
Treasury stock			(588	)			(621	)
Additional paid-in capital			166,055				167,418
Promissory notes receivable			(189	)			(189	)
Accumulated deficit			(65,886	)			(64,000	)
Total stockholders’ equity			102,170				105,399
Total liabilities and stockholders’ equity		$	141,813			$	148,374

 

See accompanying notes

 

 

NEULION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
(unaudited)
(in thousands, except share and per share data)
(Expressed in U.S. dollars)

 

 

		Three months ended March 31,
		2017				2016
Revenue		$	23,855			$	26,293
Costs and expenses
Cost of revenue, exclusive of depreciation and amortization shown separately below			4,955				4,654
Selling, general and administrative, including stock-based compensation			14,657				11,905
Research and development			4,214				4,354
Depreciation and amortization			2,410				1,974
			26,236				22,887
Operating (loss) income			(2,381	)			3,406
Other income
Gain on foreign exchange			41				294
Investment income, net			11				33
			52				327
Net and comprehensive (loss) income before income taxes			(2,329	)			3,733
Income tax benefit (expense)			443				(1,651	)
Net and comprehensive (loss) income		$	(1,886	)		$	2,082
Net (loss) income per weighted average number of shares
of common stock outstanding - basic		$	(0.01	)		$	0.01
Weighted average number of shares
of common stock outstanding - basic			277,952,433				281,827,663
Net (loss) income per weighted average number of shares
of common stock outstanding - diluted		$	(0.01	)		$	0.01
Weighted average number of shares
of common stock outstanding - diluted			277,952,433				294,537,707

 

See accompanying notes

 

 

NEULION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands, except share data)
(Expressed in U.S. dollars)

 

		Common stock								Treasury Stock								Additional				Promissory				Accumulated				Total
		Shares				Amount				Shares				Amount				paid-in capital				notes				deficit				equity
Balance, December 31, 2016			279,050,968			$	2,791				(768,800	)		$	(621	)		$	167,418			$	(189	)		$	(64,000	)		$	105,399
Cancellation of treasury shares			(768,800	)			(8	)			768,800				621				(613	)			-				-				-
Exercise of stock options			98,750				1				-				-				42				-				-				43
Stock-based compensation:
Stock options			-				-				-				-				358				-				-				358
Restricted stock units			1,475,000				15				-				-				421				-				-				436
Directors' compensation			-				-				-				-				82				-				-				82
Repurchase and cancellation of
common stock, including 468,810
shares surrendered for tax
withholdings of $309			(2,043,610	)			(21	)			-				-				(1,653	)			-				-				(1,674	)
Purchase of treasury shares			-				-				(875,000	)			(588	)			-				-				-				(588	)
Net loss			-				-				-				-				-				-				(1,886	)			(1,886	)
Balance, March 31, 2017			277,812,308			$	2,778				(875,000	)		$	(588	)		$	166,055			$	(189	)		$	(65,886	)		$	102,170

 

See accompanying notes

 

 

NEULION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
(Expressed in U.S. dollars)

 

		Three months ended March 31,
		2017				2016
OPERATING ACTIVITIES
Net (loss) income		$	(1,886	)		$	2,082
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization			2,410				1,974
Stock-based compensation			875				754
Deferred income taxes			(805	)			750
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable			(3,577	)			1,604
Other receivables			229				(352	)
Inventory			(5	)			18
Prepaid expenses, deposits and other assets			706				268
Due from related parties			(39	)			(2	)
Accounts payable			(675	)			(448	)
Accrued liabilities			(1,074	)			(192	)
Deferred revenue			(1,054	)			2,611
Deferred rent liability			(102	)			(95	)
Long-term liabilities			(61	)			(13	)
Due to related parties			-				(16	)
Cash (used in) provided by operating activities			(5,058	)			8,943
INVESTING ACTIVITIES
Purchase of property, plant and equipment			(1,927	)			(884	)
Cash used in investing activities			(1,927	)			(884	)
FINANCING ACTIVITIES
Repurchases of common stock			(2,294	)			-
Proceeds from exercise of stock options			43				44
Cash (used in) provided by financing activities			(2,251	)			44
Net (decrease) increase in cash and cash equivalents, during the period			(9,236	)			8,103
Cash and cash equivalents, beginning of the period			41,905				53,413
Cash and cash equivalents, end of the period		$	32,669			$	61,516
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	118			$	916
Non-cash financing activity:
Treasury purchases of common stock settled in April 2017		$	588			$	-

 

See accompanying notes

 

 

On June 3, 2016, the Company completed the acquisition of Saffron Digital Limited (“Saffron Digital”), operating in the United Kingdom, in an all-cash asset transaction for total consideration of $9,000, of which $7,500 was paid on closing and $1,500 was paid in September 2016.

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NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in U.S. dollars, unless otherwise noted)

 (in thousands, except share and per share data)

Information as at March 31, 2017 and for the three months ended

March 31, 2017 and 2016 (unaudited)

 

 

 

9. Share Repurchase Program

On March 8, 2016, the Company announced that its Board of Directors authorized the repurchase of up to $10 million of the Company’s shares of common stock over the next 12 months through a normal course issuer bid (“NCIB”) for up to 14,109,057 shares of common stock.  On March 24, 2016, the Company announced that it had received the TSX’s approval to commence the NCIB, and that the NCIB would commence on April 1, 2016.

In December 2016, a broker on behalf of the Company purchased 768,800 shares of the Company’s common stock at a total cost of $621.  The Company settled with the broker and cancelled these shares in January 2017.

In January and February 2017, a broker on behalf of the Company purchased 1,574,800 shares of the Company’s common stock at a total cost of $1,364.  The Company settled with the broker and cancelled these shares prior to March 31, 2017.

In March 2017, a broker on behalf of the Company purchased 875,000 shares of the Company’s common stock at a total cost of $588.  The Company settled with the broker and cancelled these shares in April 2017.

The share repurchase program expired per its terms on March 31, 2017.

 

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of the Company should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2017 and 2016, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).  All dollar amounts are in U.S. dollars (“US$” or “$”) unless stated otherwise.  As at May 4, 2017, the Bank of Canada daily exchange rate for conversion of United States dollars to Canadian dollars (“CDN$”) was US$1 to CDN$1.3743.

 

Our MD&A is intended to enable readers to gain an understanding of our current operating results and financial position. To do so, we provide information and analysis comparing the results of operations and financial position for the current period to those of the preceding comparable period. We also provide analysis and commentary that we believe is required to assess our future prospects. Accordingly, certain sections of this report contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are affected by risks and uncertainties that are discussed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (“Annual Report”), and below in the section titled “Cautions Regarding Forward-Looking Statements,” and that could have a material impact on future prospects. Readers are cautioned that actual results could vary from those forecasted in this MD&A.

 

Cautions Regarding Forward-Looking Statements

 

This MD&A contains certain forward-looking statements that reflect management’s expectations regarding our growth, results of operations, performance and business prospects and opportunities.

 

Statements about our future plans and intentions, results, levels of activity, performance, goals, achievements or other future events constitute forward-looking statements. Wherever possible, words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict” or “potential,” or the negative or other variations of these words, or similar words or phrases, have been used to identify these forward-looking statements. These statements reflect management’s current beliefs and are based on information available to management as of the date of this Quarterly Report on Form 10-Q (“Quarterly Report”).

 

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

 

Overview

 

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.

 

We monitor our revenue from our NeuLion Digital Platform because we expect it to grow faster than revenue from our other solutions as we add new customers and increase the variable revenue we realize from existing customers.  As a result, we expect our platform revenue to grow in absolute dollars and as a percentage of revenue.  Our platform revenue decreased by 14% for the three months ended March 31, 2017 compared to the prior comparable period.  Our platform revenue is seasonal, related to the timing and size of events that our customers deliver through our solution.  The fourth quarter has historically been our highest revenue quarter, but this seasonality may change as we add new customers and events.

 

 

 

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

 

 

We monitor adjusted EBITDA, together with cost of revenue as a percentage 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 percentage of revenue will vary based on the timing of revenue and expenses.  Refer to Reconciliation of GAAP Net (Loss) Income to Adjusted EBITDA, below, for full details.

 

 

We report Adjusted EBITDA because it is a key measure used by management to evaluate our results and make strategic decisions about the Company, including potential acquisitions. Adjusted EBITDA represents net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation, purchase accounting adjustments, investment income 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 a similar measure 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 from the NeuLion Digital Platform is generated from fees determined by the number of channels through which we deliver our customers’ content, the number of events we stream and the number of connected devices we enable, as well as from variable fees determined by the volume of digital video content we deliver and 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, video solution developers and others.

 

 

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 percentage 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 percentage 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:

 

 

 

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 March 31, 2017 to Three Months Ended March 31, 2016 (unaudited)

 

Our condensed consolidated financial statements for the three months ended March 31, 2017 and 2016 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows (amounts in thousands):

Revenue

 

Revenue decreased to $23.9 million for the three months ended March 31, 2017 from $26.3 million for the three months ended March 31, 2016.  The $2.4 million decrease was primarily the result of loss of National Hockey League-related revenues in the amount of $4.3 million.

Cost of Revenue

  

Cost of revenue increased to $5.0 million for the three months ended March 31, 2017 from $4.7 million for the three months ended March 31, 2016.  Cost of revenue as a percentage of revenue increased from 18% for the three months ended March 31, 2016 to 21% for the three months ended March 31, 2017.

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

 

Selling, general and administrative expenses, including stock-based compensation, increased by $2.8 million, or 23%, from $11.9 million for the three months ended March 31, 2016, to $14.7 million for the three months ended March 31, 2017.  The individual variances are as follows:

 

 

 

Research and development

Research and development costs decreased from $4.4 million for the three months ended March 31, 2016 to $4.2 million for the three months ended March 31, 2017.

 

Depreciation and amortization

 

Depreciation and amortization increased from $2.0 million for the three months ended March 31, 2016 to $2.4 million for the three months ended March 31, 2017.  The $0.4 million increase was primarily the result of amortization of intangibles associated with the acquisition of Saffron Digital.

Income taxes

The tax (benefit) provision for the three month period ended March 31, 2017 was $(0.4) million, compared to $1.7 million for the three month period ended March 31, 2016. The annual provision for income taxes during 2017 and 2016 is primarily comprised of current and deferred tax expense in the U.S. and in profitable cost-plus foreign jurisdictions, and foreign withholding taxes. The difference between the annual tax provision and the expected statutory rate is primarily due to losses in foreign jurisdictions without tax benefit.

The Company does not believe there are any material uncertain tax provisions under ASC 740.

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $32.7 million at March 31, 2017.  During the three months ended March 31, 2017, cash used to fund operating activities was $5.1 million, which included cash of $6.0 million from changes in operating assets and liabilities. Cash used in investing activities included $1.9 million to purchase fixed assets, which was primarily related to the buildout of our European headquarters in London.  Cash used in financing activities included $2.3 million used for repurchases of our common stock.

As of March 31, 2017, our principal sources of liquidity included cash and cash equivalents of $32.7 million and trade accounts receivable of $17.7 million, offset by $11.1 million in accounts payable and $11.5 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.

 

The Company maintains cash and cash equivalents with various major financial institutions which at times are in excess of the amount insured by FDIC. As of March 31, 2017, approximately 64% and 36% of the Company’s cash and cash equivalents were held in accounts with US and foreign banks, respectively.

 

 

Off Balance Sheet Arrangements

 

We did not have any off balance sheet arrangements as of March 31, 2017.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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Item 6.

Exhibits

 

#	Management contract or compensatory plan or arrangements

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