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EX-10.1 - EX-10.1 - NEULION, INC.a09-31271_1ex10d1.htm
EX-31.2 - EX-31.2 - NEULION, INC.a09-31271_1ex31d2.htm
EX-3.1(I) - EX-3.1(I) - NEULION, INC.a09-31271_1ex3d1i.htm
EX-31.1 - EX-31.1 - NEULION, INC.a09-31271_1ex31d1.htm
EX-10.2 - EX-10.2 - NEULION, INC.a09-31271_1ex10d2.htm

 

Table of Contents

 

 

 

STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2009

 

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from            to           

 

Commission File Number:  000-53620

 

NEULION, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Canada

 

98-0469479

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1600 Old Country Road, Plainview, New York

 

11803

(Address of principal executive offices)

 

(Zip code)

 

 

 

(516) 622-8300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No  o

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer

 

Smaller reporting company x

(Do not check if a smaller reporting company) o

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

As of November 10, 2009, there were 116,554,340 shares of the registrant’s common shares, no par value, outstanding.

 

 

 



Table of Contents

 

NEULION, INC.

 

TABLE OF CONTENTS

 

 

 

Page No.

 

Part I.  Financial Information

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as at
September 30, 2009 (Unaudited) and December 31, 2008

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the
Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)

 

2

 

 

 

 

 

 

 

Consolidated Statement of Shareholders’ Equity for the
Nine Months Ended September 30, 2009 (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)

 

4

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

5

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

 

19

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

41

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

41

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

 

 

Item 6.

Exhibits

 

42

 

 

 

 

 

SIGNATURES

 

43

 

 



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.            Financial Statements.

 

NEULION, INC.

 

CONSOLIDATED BALANCE SHEETS

[Expressed in U.S. dollars, unless otherwise noted]

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

[unaudited]

 

[audited]

 

 

 

$

 

$

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current

 

 

 

 

 

Cash and cash equivalents

 

19,315,256

 

27,323,021

 

Accounts receivable, net of allowance for doubtful accounts of $132,222 and $290,538, respectively

 

1,284,570

 

2,284,242

 

Taxes receivable

 

15,040

 

983,253

 

Other receivables

 

718,475

 

227,711

 

Inventory

 

717,920

 

347,600

 

Prepaid expenses and deposits

 

1,132,328

 

1,830,260

 

Due from related parties [note 5]

 

27,000

 

324,059

 

Total current assets

 

23,210,589

 

33,320,146

 

Property, plant and equipment, net

 

5,233,335

 

6,474,989

 

Intangible assets, net

 

4,789,338

 

5,749,332

 

Goodwill

 

6,846,183

 

6,846,183

 

Other assets

 

707,660

 

1,347,032

 

Total assets

 

40,787,105

 

53,737,682

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current

 

 

 

 

 

Accounts payable

 

6,161,373

 

4,465,388

 

Accrued liabilities

 

6,334,352

 

7,595,116

 

Derivative liability [notes 2 and 11]

 

3,626,150

 

 

Due to related parties [note 5]

 

181,891

 

56,826

 

Deferred revenue

 

4,197,895

 

3,091,993

 

Total current liabilities

 

20,501,661

 

15,209,323

 

Long-term deferred revenue

 

561,819

 

638,510

 

Other long-term liabilities

 

677,717

 

876,271

 

Total liabilities

 

21,741,197

 

16,724,104

 

 

 

 

 

 

 

Contingencies [note 7]

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Share capital

 

7,073,231

 

6,762,097

 

Common shares (par value: none; authorized: unlimited; issued and outstanding: 110,537,883 and 110,084,044, respectively)

 

 

 

 

 

Additional paid-in capital [note 2]

 

54,531,364

 

56,500,258

 

Promissory notes receivable

 

(209,250

)

(209,250

)

Accumulated deficit [note 2]

 

(42,349,437

)

(26,039,527

)

Total shareholders’ equity

 

19,045,908

 

37,013,578

 

Total liabilities and shareholders’ equity

 

40,787,105

 

53,737,682

 

 

See accompanying notes

 

1



Table of Contents

 

NEULION, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

[unaudited]

[Expressed in U.S. dollars, unless otherwise noted]

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September  30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

$

 

$

 

$

 

$

 

Revenue

 

 

 

 

 

 

 

 

 

Services revenue

 

5,705,639

 

1,676,427

 

17,778,374

 

3,908,585

 

Equipment revenue

 

355,663

 

1,022,614

 

1,319,393

 

3,727,204

 

 

 

6,061,302

 

2,699,041

 

19,097,767

 

7,635,789

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of services revenue, exclusive of depreciation and amortization shown separately below

 

2,879,702

 

712,134

 

9,171,546

 

1,464,734

 

Cost of equipment revenue

 

345,136

 

822,673

 

1,191,257

 

2,969,142

 

Selling, general and administrative, including stock-based compensation [note 8]

 

7,200,976

 

2,270,857

 

21,152,982

 

5,933,585

 

Depreciation and amortization

 

1,043,902

 

245,595

 

3,095,597

 

679,583

 

 

 

11,469,716

 

4,051,259

 

34,611,382

 

11,047,044

 

Operating loss

 

(5,408,414

)

(1,352,218

)

(15,513,615

)

(3,411,255

)

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Unrealized loss on derivative [notes 2 and 11]

 

(2,229,150

)

 

(3,038,200

)

 

Gain on foreign exchange

 

57,358

 

 

104,575

 

 

Investment income

 

116,255

 

2,112

 

261,280

 

3,849

 

Equity in loss of affiliate [note 5]

 

 

(27,561

)

 

(1,006,386

)

 

 

(2,055,537

)

(25,449

)

(2,672,345

)

(1,002,537

)

Net and comprehensive loss for the period

 

(7,463,951

)

(1,377,667

)

(18,185,960

)

(4,413,792

)

 

 

 

 

 

 

 

 

 

 

Net loss per weighted average number of shares outstanding - basic and diluted [note 6]

 

$

(0.07

)

$

(0.03

)

$

(0.16

)

$

(0.10

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding - basic and diluted [note 6]

 

110,522,916

 

42,680,587

 

110,247,254

 

42,680,587

 

 

See accompanying notes

 

2



Table of Contents

 

NEULION, INC.

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

[unaudited]

[Expressed in U.S. dollars, unless otherwise noted]

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Additional

 

Promissory

 

Accumulated

 

shareholders’

 

 

 

Common

 

shares

 

paid-in capital

 

Notes

 

deficit

 

equity

 

 

 

#

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2008

 

110,084,044

 

6,762,097

 

56,500,258

 

(209,250

)

(26,039,527

)

37,013,578

 

Cumulative effect of change in accounting principle [notes 2 and 11]

 

 

 

(2,464,000

)

 

1,876,050

 

(587,950

)

Exercise of stock options for common shares

 

160,292

 

91,428

 

(18,341

)

 

 

73,087

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares on vesting of restricted share units

 

42,502

 

24,639

 

 

 

 

24,639

 

Release of common shares from escrow for services

 

 

36,909

 

 

 

 

36,909

 

Issuance of common shares under Directors’ Compensation Plan

 

251,045

 

158,158

 

 

 

 

158,158

 

Stock options and warrants

 

 

 

513,447

 

 

 

513,447

 

Net loss

 

 

 

 

 

(18,185,960

)

(18,185,960

)

Balance, September 30, 2009

 

110,537,883

 

7,073,231

 

54,531,364

 

(209,250

)

(42,349,437

)

19,045,908

 

 

See accompanying notes

 

3



Table of Contents

 

NEULION, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

[unaudited]

[Expressed in U.S. dollars, unless otherwise noted]

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

$

 

$

 

$

 

$

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net loss

 

(7,463,951

)

(1,377,667

)

(18,185,960

)

(4,413,792

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

1,043,902

 

245,595

 

3,095,597

 

679,583

 

Equity in loss of affiliate

 

 

27,561

 

 

1,006,386

 

Stock-based compensation

 

399,498

 

 

1,015,077

 

 

Unrealized loss on derivative [notes 2 and 11]

 

2,229,150

 

 

3,038,200

 

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

Accounts receivable

 

532,295

 

(22,179

)

999,672

 

1,546,791

 

Inventory

 

(426,885

)

580,000

 

(370,320

)

(51,000

)

Prepaid expenses, deposits and other assets

 

573,453

 

(340,080

)

1,337,304

 

(119,691

)

Other receivables

 

(54,173

)

 

(490,764

)

 

Deferred costs

 

 

(675,919

)

 

(660,825

)

Taxes receivable

 

992,990

 

 

968,213

 

 

Due from related parties

 

246,199

 

(2,281

)

297,059

 

172,022

 

Accounts payable

 

3,649,828

 

1,170,888

 

1,695,985

 

1,504,015

 

Accrued liabilities

 

(633,820

)

531,792

 

(1,542,688

)

1,066,130

 

Deferred revenue

 

1,117,483

 

102,640

 

1,029,211

 

147,893

 

Long-term liabilities

 

(43,523

)

 

(198,554

)

 

Due to related parties

 

(224,698

)

(190,919

)

125,065

 

(728,953

)

Cash provided by (used in) operating activities

 

1,937,748

 

49,431

 

(7,186,903

)

148,559

 

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(362,108

)

(182,918

)

(893,949

)

(1,237,176

)

Cash used in investing activities

 

(362,108

)

(182,918

)

(893,949

)

(1,237,176

)

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Capital contributions

 

 

1,750,000

 

 

2,600,000

 

Proceeds from exercise of stock options

 

6,087

 

 

73,087

 

 

Cash provided by financing activities

 

6,087

 

1,750,000

 

73,087

 

2,600,000

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents during the period

 

1,581,727

 

1,616,513

 

(8,007,765

)

1,511,383

 

Cash and cash equivalents, beginning of period

 

17,733,529

 

503,334

 

27,323,021

 

608,464

 

Cash and cash equivalents, end of period

 

19,315,256

 

2,119,847

 

19,315,256

 

2,119,847

 

 

See accompanying notes

 

4



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

1. Nature of Operations

 

On June 4, 2009, NeuLion, Inc. changed its name to NeuLion USA Inc. (“NeuLion USA”).  On July 13, 2009, JumpTV Inc. changed its name to NeuLion, Inc. (“NeuLion” or the “Company”).  In conjunction with the name change, the stock symbol was changed from “JTV” to “NLN”.  This Quarterly Report on Form 10-Q reflects the name changes described above as they are effective as of the date of filing this report.

 

On October 20, 2008, NeuLion USA, a Delaware corporation, completed a merger with a subsidiary of NeuLion, a Canadian corporation (the “Merger”), that was accounted for as a reverse takeover.  As a result of the Merger, NeuLion USA became the legal subsidiary of NeuLion, and NeuLion was required to register its common shares in the United States under the Securities and Exchange Act of 1934, as amended.  On June 8, 2009, its Registration Statement on Form 10 became effective.

 

These interim unaudited consolidated financial statements for the three and nine months ended September 30, 2009 and 2008, and as at September 30, 2009 and December 31, 2008 are issued under the name of the legal acquirer in the Merger (NeuLion) but are deemed to be a continuation of the accounting acquirer (NeuLion USA).  These financial statements reflect the assets, liabilities and results of operations of NeuLion USA, the accounting acquirer, and only include the assets, liabilities and results of operations of NeuLion, the legal acquirer, subsequent to the reverse takeover on October 20, 2008 (the “Acquired Business”).

 

The Company’s primary business is working with content partners to develop end-to-end solutions for multimedia IPTV services.

 

2. Basis of Presentation and Significant Accounting Policies

 

The Company’s accounting polices are consistent with those presented in our annual consolidated financial statements as at December 31, 2008, except for the adoption, effective January 1, 2009, of Accounting Standards Codification Topic 815-40, “Derivatives and Hedging” (“ASC 815-40”), described below.  These interim unaudited consolidated financial statements do not include all note disclosures required by generally accepted accounting principles (“GAAP”) in the U.S. for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements, including the notes thereto, in the 2008 annual financial statements.

 

The preparation of these financial statements is in conformity with U.S. GAAP, which requires management to make certain estimates that affect the reported amounts in the interim unaudited consolidated financial statements, and the disclosures made in the accompanying notes. Despite the Company’s intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.  All significant intercompany transactions and accounts have been eliminated on consolidation.

 

Note 12 reconciles the Company’s interim unaudited consolidated financial statements from U.S. GAAP to Canadian GAAP.

 

In the opinion of management, these interim unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly the Company’s financial position as at September 30, 2009 and December 31, 2008 and the results of operations and cash flows for the three and nine-month periods ended September 30, 2009 and 2008.

 

Recently Issued Accounting Standards

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as Accounting Standards Codification Topic 105, “Generally Accepted Accounting Principles” (“ASC 105”) as the single source of authoritative non-governmental U.S. GAAP. ASC 105 does not change current U.S. GAAP, but is intended to

 

5



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place (the “Codification”). On the effective date of ASC 105, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The provisions of ASC 105 are effective for interim and annual periods ending after September 15, 2009. We adopted ASC 105 in the third quarter of 2009. This pronouncement had no effect on our consolidated financial position, results of operations or cash flows, but impacted our financial reporting process by replacing all references to pre-Codification standards with references to the applicable Codification topic.

 

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 amends guidance included within ASC Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement.  The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation.  ASU 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are also permitted. The Company is currently evaluating the impact of adopting the provisions of ASU 2009-13.

 

In May 2009, the FASB issued ASC Topic 855, “Subsequent Events” (“ASC 855”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This statement sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements.  ASC 855 also requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  This statement is effective for interim or annual reporting periods ending after June 15, 2009.  The Company adopted ASC 855 during the second quarter of 2009.  The adoption of ASC 855 did not have a material impact on our interim consolidated financial statements or related footnotes.

 

In April 2009, the FASB issued ASC Topic 825, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825”), to require disclosures about fair value of financial instruments for interim and annual reporting periods of publicly traded companies.  This interpretation is effective for interim reporting periods ending after June 15, 2009. The Company adopted ASC 825 during the second quarter of 2009.  The adoption of ASC 825 did not have a material impact on our interim consolidated financial statements or related footnotes.

 

Effective January 1, 2009, the Company adopted ASC 815-40.  One of the conclusions reached under ASC 815-40 was that an equity-linked financial instrument would not be considered indexed to the entity’s own stock if the strike price is denominated in a currency other than the issuer’s functional currency.  The conclusion reached under ASC 815-40 clarified the accounting treatment for these and certain other financial instruments.  ASC 815-40 specifies that a contract would not be treated as a derivative if it met the following conditions:  (a) indexed to the Company’s own stock; and (b) classified in shareholders’ equity in the Company’s statement of financial position.

 

As a result, the Company’s outstanding warrants denominated in Canadian dollars as detailed in note 11 are not considered to be indexed to our own stock because the exercise price is denominated in Canadian dollars and our functional currency is United States dollars and therefore have been treated as derivative financial instruments and recorded at their fair value as a liability.  All other outstanding convertible instruments are considered to be indexed to our own stock, because their exercise price is denominated in the same currency as our functional currency, and are included in shareholders’ equity.

 

6



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

Advertising

 

Advertising costs are expensed as incurred and totaled $313,602 and $794,033 for the three and nine months ended September 30, 2009, respectively [three and nine months ended September 30, 2008 - $22,328 and $71,525, respectively].

 

Comparative Information

 

The Company has reclassified certain prior period information to conform with the current period’s presentation.

 

3.  Business Combination

 

On October 20, 2008, the Company completed the Merger.  Under the terms of the Merger, NeuLion issued 49,577,427 common shares which represented approximately the entire issued and outstanding shares of NeuLion prior to closing, to the securityholders of NeuLion USA, in exchange for their NeuLion USA securities.  The common shares of the Company are referred to herein as “Shares” or individually as a “Share.”

 

Pro forma

 

The results of operations for NeuLion and NeuLion USA have been included in the Company’s consolidated statements of operations since the completion of the Merger on October 20, 2008.   The following unaudited pro forma financial information presents the combined results of NeuLion USA and NeuLion as if the Merger had occurred at the beginning of 2008:

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

$

 

$

 

$

 

$

 

 

 

[unaudited

 

[unaudited

 

[unaudited

 

[unaudited

 

 

 

actual]

 

pro forma]

 

actual]

 

pro forma]

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

6,061,302

 

6,637,283

 

19,097,767

 

18,782,540

 

Cost of services revenue, exclusive of depreciation and amortization shown separately below

 

(2,879,702

)

(3,563,851

)

(9,171,546

)

(11,759,684

)

Cost of equipment revenue

 

(345,136

)

(822,673

)

(1,191,257

)

(2,969,142

)

Selling, general and administrative, including stock-based compensation [i]

 

(7,200,976

)

(9,496,727

)

(21,152,982

)

(33,037,211

)

Impairment of goodwill [ii]

 

 

 

 

(47,882,317

)

Impairment of long-lived assets [iii]

 

 

(4,771,251

)

 

(4,945,037

)

Depreciation and amortization [iv]

 

(1,043,902

)

(909,800

)

(3,095,597

)

(2,663,640

)

Operating loss

 

(5,408,414

)

(12,927,019

)

(15,513,615

)

(84,474,491

)

Net loss

 

(7,463,951

)

(12,754,899

)

(18,185,960

)

(84,725,495

)

Net loss per weighted average number of shares outstanding — basic and diluted

 

(0.07

)

(0.30

)

(0.16

)

(1.99

)

 


[i] In accordance with ASC 718, these amounts represent stock-based compensation for the Company’s stock options, restricted share units, stock appreciation rights, warrants and retention warrants.

 

7



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

[ii] As at March 31, 2008, the Acquired Business’ market capitalization decreased below its carrying value.  Management considered this to be an indicator of impairment and, accordingly, as at March 31, 2008, performed a goodwill impairment test and recorded a non-cash goodwill impairment charge of $47,882,317.

 

[iii] The Acquired Business determined that the business climate had changed such that the carrying value of the Acquired Business’ long-lived assets may not be fully recoverable.  Accordingly, the Acquired Business recorded  non-cash impairment charges of $173,786 in March 2008 and $4,771,251 in September 2008.

 

[iv] In determining the pro forma amounts above, the Company made adjustments to depreciation and amortization as a result of the revised fair values of tangible and intangible assets performed as a result of the Merger.

 

4. Economic Dependence and Concentration of Credit Risk

 

For the nine months ended September 30, 2009, one customer accounted for 10% of revenue.  For the nine months ended September 30, 2008, three customers accounted for 79% of revenue as follows:  50%, 16% and 13%.  For the three months ended September 30, 2009, one customer accounted for 11% of revenue.  For the three months ended September 30, 2008, four customers accounted for 84% of revenue as follows: 42%, 17%, 15% and 10%.

 

As at December 31, 2008, one customer accounted for 25% of the accounts receivable.

 

As at September 30, 2009, one vendor accounted for 41% of accounts payable.

 

5. Related Party Transactions

 

The Company has entered into certain transactions and agreements in the normal course of operations with related parties.  Significant related party transactions are as follows:

 

TransVideo International, Ltd. (“TransVideo”)

 

TransVideo is a company controlled by the Chairman of the Board of Directors of the Company.  Set-top box (“STB”) purchases amounted to nil and $589,136 and transcoder licensing fees amounted to $6,000 and $50,000 for the three and nine months ended September 30, 2009, respectively.  STB purchases amounted to $206,000 and $2,745,000 and transcoder licensing fees amounted to $16,000 and $61,000 for the three and nine months ended September 30, 2008, respectively.  Included in cost of equipment revenue is the cost of STBs sold of $142,000 and $740,816 for the three and nine months ended September 30, 2009, respectively [three and nine months ended September 30, 2008 - $706,000 and $2,555,000, respectively].

 

KyLinTV, Inc. (“KyLinTV”)

 

KyLinTV is a company that is controlled by the Chairman of the Board of Directors of the Company.  On June 1, 2008, the Company entered into an agreement with KyLinTV to build and deliver the setup and back office operation of an IPTV service.  The Company also provides and charges KyLinTV for administrative and general corporate support.  For each of the periods presented, the amounts paid for these services provided by the Company for the three and nine months ended September 30, 2009 were $160,185 and $461,415, respectively [three and nine months ended September 30, 2008 - $188,271 and $958,114, respectively].  During the three and nine months ended September 30, 2009, the Company purchased STBs from KyLinTV in the amount of $157,500 and $307,620, respectively.  During the nine months ended September 30, 2008, the Company purchased computer equipment from KyLinTV in the amount of $620,000.

 

8



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

New York Islanders Hockey Club, LP (“New York Islanders”)

 

The Company provides IT related professional services to the New York Islanders, a professional hockey club that is owned by the Chairman of the Board of Directors of the Company.

 

Renaissance Property Associates, LLC (“Renaissance”)

 

Renaissance is a real estate management company owned by the Chairman of the Board of Directors of the Company.  In June 2009, the Company signed a sublease agreement with Renaissance for office space in Plainview, New York.  Rent expense paid by the Company to Renaissance of $99,972 and $286,809, inclusive of taxes and utilities, is included in selling, general and administrative expense for the three and nine months ended September 30, 2009, respectively.

 

Patstar, Inc. (“Patstar”)

 

Patstar is a company controlled by the Vice-Chairman of the Board Directors of the Company that receives reimbursement of expenditures on behalf of the Company.  The nature of these reimbursements relates to expenses that the Company has incurred in the normal course of business. Rent expense paid by Patstar of $991 and $2,753 is included as a recovery in selling, general and administrative expense for the three and nine months ended September 30, 2009, respectively.

 

Hawaii IPTV, LLC (“Hawaii”)

 

The Company had as an IPTV customer Hawaii, whose principals are family members of the Chairman of the Board of Directors of the Company.  Hawaii ceased operations during the third quarter of 2009.

 

The Smile Train, Inc. (“Smile Train”)

 

The Company provides IT related professional services to Smile Train, a public charity whose founder and significant benefactor is the Chairman of the Board of Directors of the Company.

 

The Company recognized revenue from related parties for the three and nine months ended as follows:

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

$

 

$

 

$

 

$

 

New York Islanders

 

89,016

 

60,000

 

300,992

 

180,000

 

Renaissance

 

39,660

 

30,000

 

99,660

 

90,000

 

Smile Train

 

27,000

 

27,000

 

81,000

 

93,000

 

Hawaii

 

10,300

 

21,759

 

41,789

 

42,993

 

KyLinTV

 

424,315

 

392,885

 

1,311,715

 

522,420

 

 

 

590,291

 

531,644

 

1,835,156

 

928,413

 

 

9



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

As at September 30, 2009 and December 31, 2008, the amounts due from (to) related parties are as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

$

 

$

 

New York Islanders

 

(1,657

)

29,189

 

Renaissance

 

 

(1,146

)

Smile Train

 

27,000

 

27,000

 

Hawaii

 

 

17,527

 

TransVideo

 

(135,889

)

(55,680

)

KyLinTV

 

(44,345

)

250,343

 

 

 

(154,891

)

267,233

 

 

Investment in affiliate — KyLinTV

 

The Company records its investment in KyLinTV using the equity method.

 

From January 1, 2008 through September 30, 2009, the Company’s equity interest in the affiliate was 17.1%.  As previously discussed, the Company also provides and charges KyLinTV for administrative and general corporate support.  Management has determined that as a result of the 17.1% equity interest combined with the services that the Company provides KyLinTV, the Company continues to have significant influence on the operating activities of KyLinTV; therefore, the Company continues to account for KyLinTV using the equity method of accounting for investment.

 

The Company’s proportionate share of the equity loss from KyLinTV has been accounted for as a charge on the Company’s consolidated statements of operations and comprehensive loss.   Due to KyLinTV’s accumulated losses, the investment had been reduced to zero as at December 31, 2008.  No further charges will be recorded as the Company has no obligation to fund the losses of KyLinTV.

 

The results of operations and financial position of the Company’s equity basis investment in KyLinTV are summarized below for the three and nine months ended September 30:

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

$

 

$

 

$

 

$

 

Condensed income statement information:

 

 

 

 

 

 

 

 

 

Net sales

 

2,047,409

 

1,851,368

 

6,003,173

 

4,574,186

 

Net loss

 

(1,302,214

)

(1,812,905

)

(4,282,112

)

(6,045,973

)

 

10



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

$

 

$

 

Condensed balance sheet information:

 

 

 

 

 

Current assets

 

1,834,646

 

927,427

 

Non-current assets

 

1,238,950

 

2,411,319

 

Total assets

 

3,073,596

 

3,338,746

 

Current liabilities

 

14,080,872

 

10,063,909

 

Non-current liabilities

 

 

 

Equity (deficiency)

 

(11,007,276

)

(6,725,163

)

Total liabilities and equity

 

3,073,596

 

3,338,746

 

 

6. Loss per Share

 

Basic loss per share is computed by dividing net loss for the period by the weighted average number of Shares outstanding for the period. Diluted loss per share is computed by dividing net loss for the period by the weighted average number of Shares outstanding and, if dilutive, potential Shares using the treasury stock method.

 

For the three and nine months ended September 30, 2009 and 2008, the Company had potential Shares which, due to the losses incurred, were considered anti-dilutive equity instruments. Accordingly, the effect of the convertible instruments detailed below for each of the periods has not been reflected in computing diluted loss per share for the three and nine months ended September 30, 2009 and 2008.

 

The following table summarizes the potential Shares that were outstanding as at September 30, 2009 and 2008 but were not included in the computation of diluted loss per share as their effect would have been anti-dilutive.

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

 

 

#

 

#

 

Stock options

 

8,286,022

 

5,559,044

 

Restricted share plan units

 

16,720

 

 

Stock appreciation rights

 

1,690,000

 

 

Warrants

 

16,197,500

 

 

Retention warrants

 

867,215

 

 

 

7.  Contingencies

 

During the ordinary course of business activities, the Company may be contingently liable for litigation and a party to claims.  Management believes that adequate provisions have been made in the accounts when required.  Although the extent of potential costs and losses, if any is uncertain, management believes that the ultimate resolution of such contingencies will not have an adverse effect on the consolidated financial position or results of operations of the Company.

 

11



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

 

8.  Stock Option and Stock-Based Compensation Plans

 

The following table shows the breakdown of total stock-based compensation expense included in the interim consolidated statement of operations:

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants

 

160,232

 

 

513,447

 

 

Restricted share plan units

 

8,870

 

 

24,639

 

 

Stock appreciation rights

 

171,014

 

 

241,174

 

 

Directors’ compensation

 

40,750

 

 

198,908

 

 

Escrowed shares

 

18,632

 

 

36,909

 

 

 

 

399,498

 

 

1,015,077

 

 

 

On May 27, 2009, an employee of the Company exercised 50,000 stock options with an exercise price of $0.64 for gross proceeds to the Company of $32,000.

 

On June 27, 2009, an employee of the Company exercised 100,000 stock options with an exercise price of $0.35 for gross proceeds to the Company of $35,000.

 

On June 30, 2009, the Company issued 251,045 Shares to current and former non-management directors of the Company as compensation pursuant to the Directors’ Compensation Plan.

 

On September 11, 2009, an employee of the Company exercised 8,750 stock options with exercise prices of $0.47 and $0.64 for gross proceeds to the Company of $5,175.

 

On September 17, 2009, an employee of the Company exercised 1,542 stock options with exercise prices of $0.47 and $0.70 for gross proceeds to the Company of $912.

 

9.  Segmented Information

 

The Company operates as one reportable segment: to provide full end-to-end enterprise-level IPTV and other professional services.  The majority of the Company’s revenues and long-lived assets are in the United States.

 

10.  Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740, “Income Taxes Recognition” (“ASC 740”).  There were no accrued interest and penalties associated with uncertain tax positions as of September 30, 2009.

 

As of December 31, 2008, the Company had unrecognized tax benefits of $28.0 million.  Other than additional losses, there has been no significant change in unrecognized tax benefits through September 30, 2009.  Our effective tax rate is zero due to current year losses and the associated valuation allowance on the Company’s net operating losses.

 

12



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

11. Derivative Instruments

 

The Company’s only derivative instruments are 11,000,000 warrants, the exercise price for which are denominated in a currency other than the Company’s functional currency, as follows:

 

·                  5,500,000 Series A warrants exercisable at Cdn$1.25 and expire on October 20, 2010.

·                  5,500,000 Series B warrants exercisable at Cdn$1.50 and expire on October 20, 2010.

 

These warrants have been recorded at their relative fair values at issuance and will continue to be recorded at fair value at each subsequent balance sheet date.  Any change in value between reporting periods will be recorded as other income (expense).  These warrants will continue to be reported as a liability until such time as they are exercised or expire.  The fair value of these warrants is estimated using the Black-Scholes-Merton option-pricing model.

 

As of January 1, 2009, the grant date fair value of these warrants in the amount of $2,464,000 was reallocated from additional paid-in-capital and a derivative liability was recorded in the amount of $587,950, being the fair value of the warrants on January 1, 2009 offset by an adjustment to accumulated deficit of $1,876,050.

 

As of September 30, 2009 and June 30, 2009, the fair value of the warrants was determined to be $3,626,150 and $1,397,000, respectively; accordingly, the Company recorded $2,229,150 and $3,038,200 in other expense for the three and nine months ended September 30, 2009, respectively, related to the change in the fair value of these warrants.  There is no cash flow impact for these derivatives until the warrants are exercised.  If these warrants are exercised, the Company will receive the proceeds from the exercise at the current exchange rate at the time of exercise.

 

12. Reconciliation of U.S. GAAP to Canadian GAAP

 

The consolidated financial statements of the Company are prepared in U.S. dollars in accordance with U.S. GAAP. The following adjustments and disclosures would be required in order to present these consolidated financial statements in accordance with Canadian GAAP:

 

Income Statement Items using Canadian GAAP

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

NET LOSS USING UNITED STATES GAAP

 

(7,463,951

)

(1,377,667

)

(18,185,960

)

(4,413,792

)

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

Adjustment for stock based compensation on SARs [i]

 

126,495

 

 

194,207

 

 

Adjustment for unrealized loss on derivative [ii]

 

2,229,150

 

 

3,038,200

 

 

NET LOSS USING CANADIAN GAAP

 

(5,108,306

)

(1,377,667

)

(14,953,553

)

(4,413,792

)

NET AND COMPREHENSIVE LOSS PER SHARE USING CANADIAN GAAP - basic and diluted

 

$

(0.05

)

$

(0.03

)

$

(0.14

)

$

(0.10

)

 

13



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

Balance Sheet Items using Canadian GAAP

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

U.S.

 

Canadian

 

U.S.

 

Canadian

 

 

 

GAAP

 

GAAP

 

GAAP

 

GAAP

 

 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities [i]

 

6,334,352

 

6,123,546

 

7,595,116

 

7,579,517

 

Derivative liability [ii]

 

3,626,150

 

 

 

 

Total current liabilities [i] and [ii]

 

20,501,661

 

16,664,705

 

15,209,323

 

15,192,724

 

Total liabilities [i] and [ii]

 

21,741,197

 

17,904,241

 

16,724,104

 

16,707,505

 

Accumulated deficit [i] and [ii]

 

(42,349,437

)

(38,512,481

)

(26,039,527

)

(26,022,928

)

Total shareholders’ equity [i] and [ii]

 

19,045,908

 

22,882,864

 

37,013,578

 

37,030,177

 

 

Cash Flows Items using Canadian GAAP

 

 

 

Three months

 

Nine months

 

 

 

ended

 

ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2009

 

2009

 

2009

 

 

 

U.S.

 

Canadian

 

U.S.

 

Canadian

 

 

 

GAAP

 

GAAP

 

GAAP

 

GAAP

 

 

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Net loss [i] and [ii]

 

(7,463,951

)

(5,108,306

)

(18,185,960

)

(14,953,553

)

Stock-based compensation [i]

 

399,498

 

273,003

 

1,015,077

 

820,870

 

Unrealized loss on derivative [ii]

 

2,229,150

 

 

3,038,200

 

 

 

There were no material differences in cash flow items using Canadian GAAP for the three and nine months ended September 30, 2008.

 

Areas of material difference between Canadian GAAP and U.S. GAAP and their impact on the consolidated financial statements are as follows:

 

[i]   Stock Appreciation Rights (“SARs”)

 

·                  Under U.S. GAAP, the Company recognizes a liability and compensation expense for the fair value of the SARs on each reporting date.

 

·                  Under Canadian GAAP, the Company recognizes a liability and compensation expense for the “in the money” value of the SARs on each reporting date.

 

[ii]   Derivative Liability

 

·                  CICA Handbook Section 3861, Financial Instruments — Disclosure and Presentation, establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them.  The revisions change the accounting for certain financial instruments that have liability and equity characteristics.

 

14



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

·                  Under U.S. GAAP, the Company recognizes a derivative liability on the consolidated balance sheets for the fair value of all convertible instruments with an exercise price denominated in a currency other than the Company’s functional currency.  The Company fair values this liability on each reporting date with the corresponding entry to unrealized gain (loss) on derivative on the consolidated statement of operations.

 

·                  Under Canadian GAAP, the Company fair values these convertible instruments on the grant date and includes them within additional paid in capital on the consolidated balance sheets.  The Company does not recognize any changes in fair value.

 

In addition, recent Canadian GAAP accounting pronouncements that may impact the Company’s disclosure requirements are as follows:

 

CICA Handbook Section 1535 — Capital Disclosures

 

The Company manages the following accounts in regards to capital management:

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

$

 

$

 

Shareholders’ equity

 

 

 

 

 

Share capital

 

7,073,231

 

6,762,097

 

Additional paid in capital

 

54,531,364

 

56,500,258

 

Promissory note receivable

 

(209,250

)

(209,250

)

Accumulated deficit

 

(42,349,437

)

(26,039,527

)

 

 

19,045,908

 

37,013,578

 

 

(The figures in the table above are presented in accordance with U.S. GAAP.)

 

The Company’s outstanding share capital is comprised of Shares.  At September 30, 2009, an unlimited number of Shares were authorized and 110,537,883 (December 2008 - 110,084,044) Shares were issued and outstanding. Approximately 60% of the Shares are held by insiders, and the remaining Shares are widely held.  Further information on the Company’s outstanding share capital is provided in note 8 of the Company’s annual consolidated financial statements.

 

At September 30, 2009, a total of 8,286,022 stock options, 16,720 restricted share units, 16,197,500 warrants, 867,215 retention warrants and 1,690,000 SARs were outstanding, which convertible securities cumulatively represented approximately 24% of the Company’s issued and outstanding share capital. Pursuant to guidelines set by the Company’s respective equity plans:

 

·                  The maximum number of Shares available for issuance upon exercise of stock options is limited to the greater of 12.5% of the issued and outstanding Shares and 4,000,000;

 

·                  The maximum number of Shares that may be issued pursuant to awards of restricted share units is 1,000,000;

 

·                  The maximum number of Shares available for issuance pursuant to the exercise of retention warrants is limited to 2,500,000; and

 

15



Table of Contents

 

NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

·                  The maximum number of Shares available for issuance pursuant to the exercise of SARs is limited to the greater of 5% of the issued and outstanding Shares and 4,150,000.

 

The Company is in compliance with these guidelines.

 

The Company’s objective in managing capital is to ensure a sufficient liquidity position to finance its revenue growth, general and administrative expenses, working capital and capital expenditures.

 

In order to maintain or adjust its capital structure, the Company may issue new shares and/or purchase shares for cancellation pursuant to normal course issuer bids.

 

To finance its activities, the Company has relied on revenue growth and capital contributions.

 

The Company’s policy is to maintain a minimal level of debt.  At this time the Company has not utilized debt facilities as part of its capital management program nor has it paid dividends to its shareholders.

 

The capital management objectives for the period ended September 30, 2009 remained the same as those of the previous fiscal period.

 

The Company is not subject to any externally imposed capital requirements.

 

CICA Handbook Sections 3862 and 3863 — Financial Instruments — Disclosures and Presentation

 

The Company’s financial instruments are comprised of cash and cash equivalents, accounts receivable, other receivables, accounts payable, other accrued liabilities and amounts due to/from related party.

 

The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties.

 

The fair value of assets and liabilities were as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

$

 

$

 

 

 

 

 

 

 

Financial Assets

 

 

 

 

 

Held-for-Trading

 

 

 

 

 

Cash and cash equivalents

 

19,315,256

 

27,323,021

 

Loans and Receivables

 

 

 

 

 

Accounts receivable

 

1,284,570

 

2,284,242

 

Other receivables

 

718,475

 

227,711

 

Due from related parties

 

27,000

 

324,059

 

Financial Liabilities

 

 

 

 

 

Other Financial Liabilities

 

 

 

 

 

Accounts payable

 

6,161,373

 

4,465,388

 

Accrued liabilities

 

6,334,352

 

7,595,116

 

Due to related parties

 

181,891

 

56,826

 

 

All fair values denoted above approximate their carrying values due to their short term nature and/or variable interest rates.

 

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NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

Risk management is primarily the responsibility of the Company’s corporate finance function.  Significant risks are regularly monitored and actions are taken, when appropriate, according to the Company’s approved policies, established for that purpose.  In addition, as required, these risks are reviewed with the Company’s Board of Directors.

 

Foreign Exchange Risk

 

The Company is exposed to foreign exchange risk as a result of transactions in currencies other than its functional currency of the United States dollar.  The majority of the Company’s revenues are transacted in U.S. dollars, whereas a portion of its expenses are transacted in U.S. or Canadian dollars.  The Company does not use derivative instruments to hedge against foreign exchange risk.

 

Interest Rate Risk

 

The Company is exposed to interest rate risk on its invested cash and cash equivalents and its short-term investments.  The interest rates on these instruments are based on the banks’ applicable rate and therefore are subject to change with the market.  The Company does not use derivative financial instruments to reduce its interest rate risk.

 

Credit Risk

 

The Company sells its services to a variety of customers under various payment terms and therefore is exposed to credit risk.  The Company has adopted policies and procedures designed to limit this risk.  The maximum exposure to credit risk at the reporting date is the carrying value of receivables.  The Company establishes an allowance for doubtful accounts that represents its estimate of incurred losses in respect of accounts receivable.  The Company believes that the concentration of credit risk is limited due to the Company’s primary source of revenues to date being subscription revenues, for which monies are received in advance principally through credit cards.

 

There is no significant credit risk related to the Company’s cash and cash equivalents and short-term investments. Credit risk is managed through conducting financial and other assessments of these investments on an ongoing basis.

 

The following table sets out details of the age of accounts receivable that are outstanding and related allowance for doubtful accounts:

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

$

 

$

 

 

 

 

 

 

 

Current

 

750,923

 

1,697,271

 

31-60 days

 

201,073

 

287,070

 

61-90 days

 

140,828

 

105,525

 

Over 90 days

 

323,968

 

484,914

 

Less: Allowance for doubtful accounts

 

(132,222

)

(290,538

)

Total accounts receivable, net

 

1,284,570

 

2,284,242

 

 

The carrying amount of accounts receivable is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of operations and comprehensive loss.  When a receivable balance is considered uncollectible, it is written off against the allowance for accounts receivable. Subsequent recoveries of amounts previously written off are credited against operating expenses in the consolidated statements of operations and comprehensive loss.

 

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NEULION, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in U.S. dollars, unless otherwise noted]

Information as at September 30, 2009 and for the three and nine months ended

September 30, 2009 and 2008 is unaudited

 

Recent Accounting Pronouncements

 

In February 2008, the Canadian Institute of Chartered Accountants (“CICA”) issued new Handbook Section 3064, Goodwill and Intangible Assets, which replaces Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs.  The new standard addresses when an internally developed intangible asset meets the criteria for recognition as an asset.  The section also issued amendments to Section 1000, Financial Statement Concepts.  These changes are effective for fiscal years beginning on or after October 1, 2008, with earlier adoption permitted, and have been adopted by the Company effective January 1, 2009.  The objectives of the changes are to reinforce a principle-based approach to the recognition of costs as assets and to clarify the application of the concept of matching revenues and expenses in Section 1000.  Collectively, these changes bring Canadian practice closer to International Financial Reporting Standards (“IFRS”) by eliminating the practice of recognizing as assets a variety of start-up, pre-production and similar costs that do not meet the definition and recognition criteria of an asset.  There was no material effect on the Company’s interim consolidated financial statements as a result of adopting CICA Handbook Section 3064.

 

In February 2008, the CICA Accounting Standards Board confirmed that the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises, effective for the interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011.  The Company became an SEC issuer effective June 8, 2009 and expects to continue to use U.S. GAAP until the date that IFRS is implemented in the United States, which is currently estimated to occur no sooner than 2014.

 

13. Subsequent Event

 

We evaluated subsequent events through November 10, 2009 when the financial statements were issued.

 

On October 31, 2009, NeuLion consummated the acquisition of 100% of the outstanding securities of Interactive Netcasting Systems Inc. (“INSINC”), a leading provider of sports webcasting services.  Under the terms of the acquisition, shareholders of INSINC received consideration consisting of 6 million common shares of the Company, Cdn $2.5 million in cash, 1 million common share purchase warrants to acquire common shares at USD $1.35 per share and 500,000 common share purchase warrants to acquire common shares at USD $1.80 per share.  Both series of warrants are exercisable for a period of 2 years.

 

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Item 2.            Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

On June 4, 2009, NeuLion, Inc. changed its name to NeuLion USA, Inc. (“NeuLion USA”).  On July 13, 2009, JumpTV Inc. changed its name to NeuLion, Inc. (the “Company” or “NeuLion”).  In conjunction with the name change, the stock symbol was changed from “JTV” to “NLN”.  This MD&A reflects the name changes described above.

 

The following Management’s Discussion & Analysis (“MD&A”) of NeuLion’s financial condition and results of operations, prepared as of November 10, 2009, should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2009 and 2008, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).  For additional information and details, readers are referred to the Company’s Annual Audited Financial Statements, Annual Information Form (“AIF”) and MD&A for 2008 which can be found on www.sedar.com and its Form 10 filed on http://www.sec.gov/edgar.shtml.  All dollar amounts are in U.S. dollars (“US$” or “$”) unless stated otherwise.

 

On October 20, 2008, NeuLion USA, a Delaware corporation, completed a merger with a subsidiary of NeuLion (the “Merger”) that was accounted for as a reverse takeover.  As a result of the Merger, NeuLion USA became the legal subsidiary of NeuLion, and NeuLion was required to register its common shares in the United States under Section 12 of the Securities Exchange Act of 1934, as amended.  On June 8, 2009, its Registration Statement on Form 10 became effective.

 

On October 31, 2009, NeuLion consummated the acquisition of 100% of the outstanding securities of Interactive Netcasting Systems Inc. (“INSINC”), a leading provider of sports webcasting services.  Under the terms of the acquisition, shareholders of INSINC received consideration consisting of 6 million common shares of the Company, Cdn $2.5 million in cash, 1 million common share purchase warrants to acquire common shares at USD $1.35 per share and 500,000 common share purchase warrants to acquire common shares at USD $1.80 per share.  Both series of warrants are exercisable for a period of 2 years.

 

Our MD&A is intended to enable readers to gain an understanding of NeuLion’s current results and financial position.  To do so, we provide information and analysis comparing the results of operations and financial position for the current three and nine-month periods to those of the preceding comparable three and nine-month periods.  We also provide analysis and commentary that we believe is required to assess the Company’s future prospects.  Accordingly, certain sections of this report contain forward-looking statements that are based on current plans and expectations.  These forward-looking statements are affected by risks and uncertainties that are discussed in the AIF and Form 10, and could have a material impact on future prospects.  Readers are cautioned that actual results could vary.

 

Cautions regarding forward-looking statements

 

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

 

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

 

Forward-looking statements involve significant risk, uncertainties and assumptions.  Many factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking statements.  These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements.  Although the forward-looking statements contained in this MD&A are based upon what management believes to be reasonable assumptions, the Company cannot assure readers that actual

 

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results will be consistent with these forward-looking statements.  These forward-looking statements are made as of the date of this MD&A, and the Company assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law.  Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including: the integration of the businesses of the Company and its subsidiaries NeuLion USA and INSINC, our continued relationships with our channel partners, general economic and market segment conditions, competitor activity, product capability and acceptance, rates, technology changes and international risk and currency exchange.  More specific risks include that the Company, NeuLion USA and INSINC will not be able to realize some or all expected synergies due to incompatibilities in our businesses, the inability of management to bring about such synergies or a changing business environment rendering such synergies inadvisable or uneconomical.  After integrating the businesses, the suite of service offerings may not perform as expected if shifting demand moves in a direction away from our expected business model, if competitors are able to take market share away from us or if changing technology adversely impacts us.  In addition, while the Company expects its content partners and those of its subsidiaries to continue and expand their relationship with each of us, there can be no assurance that such relationships will continue as expected, or at all.  More detailed assessment of the risks that could cause actual results to materially differ from current expectations is contained in the “Risk Factors” section of the AIF and Form 10.

 

MERGER AND REVERSE TAKE-OVER

 

On October 20, 2008, the Company completed the Merger with NeuLion USA, an IPTV company that provides a comprehensive suite of technology and services to content owners and aggregators.  NeuLion USA provides an end-to-end technology solution which enables content to be monetized and streamed to multiple platforms through browser-based devices.  Content can be viewed on the computer, television through a proprietary set-top box (“STB”) and mobile devises.  Under the terms of the Merger, NeuLion issued 49,577,427 common shares directly, as well as 1,840,097 common shares subject to a performance escrow relating to a prior acquisition, which represented approximately the entire issued and outstanding common shares of NeuLion prior to closing, to the securityholders of NeuLion USA in exchange for their NeuLion USA securities.    The escrow shares were subsequently cancelled in September 2009.  The common shares of NeuLion are referred to herein as “Shares,” or each individually as a “Share.”  Pursuant to the Merger, the Company also issued 5,000,000 warrants to purchase Shares, fully vested and exercisable for two years at US$0.63 per share, and 2,700,000 employee stock options to purchase Shares, vesting in equal monthly amounts over 48 months and exercisable for five years at US$0.60 per share, to employees of NeuLion USA who became employees of the Company.

 

On October 20, 2008, AvantaLion LLC, an entity controlled by Charles B. Wang, our Chairman of the Board of Directors of the Company and the spouse of Nancy Li, our CEO and the founder and CEO of NeuLion USA, purchased 10,000,000 units from NeuLion’s treasury at a price of Cdn$1.00 per unit. Each unit (a “Unit”) consists of one Share, one-half of one Share purchase warrant exercisable at Cdn$1.25 and one-half of one Share purchase warrant exercisable at Cdn$1.50. The warrants partially comprising the Units are exercisable for a period of two years from the date of issuance. G. Scott Paterson, our Vice Chairman, also purchased 1,000,000 Units on the same terms. The aggregate gross proceeds from the sale of Units (the “Private Placement”) were Cdn$11.0 million or US$9.2 million.

 

In accordance with Accounting Standards Codification Topic 805 (“ASC 805”), “Business Combinations”, the Company has determined that NeuLion USA was the accounting acquirer and accordingly has accounted for the Merger as a reverse takeover.  Therefore, the financial statements and this MD&A for the three and nine months ended September 30, 2009 and 2008 reflect the assets, liabilities and results of operations of NeuLion USA, the accounting acquirer, and only include the assets, liabilities and results of operations of NeuLion, the legal acquirer, subsequent to the reverse takeover on October 20, 2008 (the “Acquired Business”).  This MD&A is issued under the name of the legal acquirer (NeuLion), but is deemed to be a continuation of the accounting acquirer (NeuLion USA).

 

OVERVIEW

 

The Company is an IPTV service and technology provider that builds and manages private networks for content owners and aggregators which enables content to be streamed to multiple platforms through browser based devices.  The Company provides an “end-to-end” IPTV service for its customers of live and on-demand sports, international and variety programming. “IPTV” refers to the distribution over an IP network of streamed audio, video and other multimedia content, similar to television programming content, using industry standard streaming protocols.

 

This end-to-end enterprise technology solution enables the distribution of IPTV content to subscribers and pay-per-view customers for viewing on multiple platforms, including Internet-connected browser-based devices such as personal computers, laptops and mobile devices and standard television sets through Internet-connected STBs.

 

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The Company’s business model has evolved from its inception in December 2003 as a professional services provider to becoming an end-to-end provider of the following IPTV services:

 

·                  content management — encoding of various digital and analog TV and video formats,

·                  subscriber management — managing subscriber access and control of subscriber accounts,

·                  digital rights management — preserving the integrity of the content and protecting it from unauthorized access,

·                  billing services — enabling customers to view subscription accounts, providing pay-per-view transactional billing, payment processing and advertising insertion, and

·                  delivery — delivering streamed audio, video and other multimedia content anywhere, anytime through the Company’s  IPTV service and infrastructure

 

This evolution commenced in 2006 and is one of the reasons for the increase in revenue, cost of services and equipment revenue and selling general and administrative expenses over the past 3 years.

 

Through the acquisition of the Acquired Business on October 20, 2008, the Company has expanded its portfolio of content partners from professional sports (the National Hockey League (“NHL”) and the National Football League (“NFL”)), international content (Chinese programming through KyLinTV, Inc. (“KyLinTV”)) and faith based programming (Sky Angel) to include college sports, cycling events, soccer events and additional international channels.

 

Additionally, through the consummation of the acquisition of INSINC on October 31, 2009, the Company expanded its portfolio of content partners to include the Western Hockey League (WHL), Ontario Hockey League (OHL), Central Hockey League (CHL), British Columbia Hockey League (BCHL), Central Canadian Hockey League (CCHL), Alberta Junior Hockey League (AJHL), Central Junior Hockey League (CJHL) and the Canadian Football League (CFL).  INSINC also provides its services to government and entertainment broadcasting sectors with clients including Business News Network (BNN), CTV News Channel, Rogers Sportsnet, TVG Networks, The Canadian Press, the Canadian Ministry of Justice, the BC Ministry of Education, and the Legislative Assemblies of British Columbia and Newfoundland and Labrador, among others.

 

The Company’s success is dependent upon several factors, including securing contractual relationships, maintaining technological advantage in a rapidly changing industry and efficiently and effectively operating the distribution network.

 

Revenue

 

The Company earns revenue in two areas: services revenue and equipment revenue.  Services revenue includes subscriber revenue, eCommerce revenue and technology services revenue.  Equipment revenue includes the sale and shipping of STBs.  These are described in detail in the “OPERATIONS” section.

 

Customer relationships

 

The Company has two types of customer relationships — business-to-consumer (“B2C”) and business-to-business (“B2B”).

 

The B2C relationships are more individual consumer oriented.  The Company has signed distribution agreements with individual channel or content providers in exchange for royalty payments to such providers.  The Company then markets the content on one (or more) of the targeted websites that the company has developed which are focused on a specific diaspora community (e.g. Talfazat, LLC for the Middle East community; TV-Desi, Inc. for the South Asian community), as well as on the general Company website for purchase by an end user.   The Company often aggregates the content into bundles or packages of similar interest.  The Company incurs marketing expenses in promoting the availability of the content.  The Company is in the process of migrating this group of customer relationships to a B2B relationship through partnerships and/or affiliates (partially or wholly owned) that group the content into similar interests.

 

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The B2B relationships have been the focus of the Company in the past and are expected to be the focus in the future.  A B2B relationship is focused on providing an end-to-end solution to a customer to enable that customer to provide IPTV to its end users.  This type of relationship is different than above in that the B2B customer typically aggregates the content, negotiates the licensing rights and markets directly the availability of the content.  This customer avails itself of the full services of the Company in delivery to its end users.  This type of relationship is typical in the professional and college sports properties and the Sky Angel agreement.

 

Products

 

Sports Programming

 

The Company offers live and on-demand sports content.  The Company has content and distribution agreements with leading professional and collegiate sports properties.  Amongst professional and amateur sports clients, the Company counts the NFL and the NHL as professional sports leagues and the American Hockey League, the WHL and OHL, and the CFL as amateur sports leagues.  The Company also owns IPTV rights to distribute in North America live streaming of South American Fédération Internationale de Football Association World Cup Qualifier games in 2009.  The Company also operates a portfolio of sports-oriented web sites, including Jumptv.com, Cycling.tv and CollegeSportsDirect.com.  On the collegiate landscape, the Company is the premier partner for National Collegiate Athletic Association colleges and universities, with agreements in place with approximately 170 colleges, universities or related sites.

 

Ethnic/International and Specialty Programming

 

The Company also offers what is referred to in the industry as “ethnic television,” which the Company defines as television directed at a specific diaspora community, as determined by a shared nationality, language or culture, and generally excluding communities for which English is the primary language.  The Company has license agreements directly with television broadcasters (referred to as “channel partners”) representing approximately 150 channels in over 40 countries that give the Company rights to stream, predominantly on an exclusive world-wide basis and generally for an initial four-year term, the channel partners’ live linear television feeds over the public Internet.

 

Distribution Methods

 

The Company distributes content through two primary distribution methods:

 

·                  Internet-connected browser-based devices such as personal computers, laptops and mobile devices; and

 

·                  Standard television through the Company’s Internet-connected STBs.

 

Both of the Company’s distribution methods take advantage of an open IPTV network, the public Internet.  As a result, content delivered by the Company is available globally and is potentially unlimited in breadth.

 

Industry and Business Trends

 

There have been no significant changes in industry and business trends from the Company’s 2008 annual MD&A.

 

Overall Performance - Overview

 

The Company uses the term “organic” to refer to the period-over-period changes in its revenues and expenses, excluding the revenues and expenses of the Acquired Business.  This permits readers to better compare current year and prior year revenues and expenses, and to understand changes that have occurred, without regard to the effect of the Merger.

 

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Three months ended September 30, 2009

 

Revenue for the three months ended September 30, 2009 was $6.1 million, up 126% from $2.7 million for the three months ended September 30, 2008.  The revenue growth of $3.4 million was due to an increase in services revenue of $4.0 million, offset by a decrease in our equipment revenue of $0.6 million.   The revenue growth is primarily attributable to the acquisition of the Acquired Business, which contributed $3.1 million of the growth.  The organic increase (excluding the results of the Acquired Business) in services revenue is consistent with the increasing scope of operations.  As the number of subscribers increases, there is a cumulative effect of increasing subscriber revenue on a quarter over quarter basis.  The decrease in equipment revenue is a result of the uneven nature of this revenue stream — customers often place large single orders made to meet minimum order requirements, to manage the lead time between ordering and shipping and to minimize the related shipping costs.  The lead time on new orders is approximately 12 weeks from placing an order to receipt of goods.  The purchase by customers of STBs is a leading indicator of future subscriptions.  On a pro forma basis, as described in note 3 of the financial statements, revenue decreased from $6.6 million to $6.1 million due to a decline in revenue in the Acquired Business of $0.8 million, offset by organic growth of $0.3 million.

 

Our net loss for the three months ended September 30, 2009 was $7.5 million, or a loss of $0.07 per basic and diluted share, compared with a net loss of $1.4 million or a loss of $0.03 per basic and diluted share for the three months ended September 30, 2008.  The increase in net loss of $6.1 million was due to the following:

 

·                  Increase in organic loss of $1.1 million (excluding non-operating expenses)

·                  Net loss in the Acquired Business of $1.8 million (excluding non-operating expenses)

·                  Increased non-operating expenses of $3.2 million which includes an increase of $2.2 million in unrealized loss on derivative (detailed below in the Net Loss to EBITDA reconciliation)

 

On a pro forma basis (as if the merger had occurred on January 1, 2008), our net loss for the three months ended September 30, 2008 was $12.8 million or a loss of $0.30 per basic and diluted share.   The improvement in net loss of $5.3 million on a pro forma basis was due to the following:

 

·                  Increase in organic loss of $1.1 million (excluding non-operating expenses)

·                  Reduction in net loss in the Acquired Business of $3.8 million due to cost reductions in most areas of the business (excluding non-operating expenses)

·                  Reduction in non-operating expenses of $2.6 million which includes an increase of $2.2 million in unrealized loss on derivative (detailed below in the Net Loss to EBITDA reconciliation)

 

Our non-GAAP Adjusted EBITDA loss was $4.0 million for the three months ended September 30, 2009 compared with a non-GAAP Adjusted EBITDA loss of $1.1 million from the three months ended September 30, 2008.  The increase in non-GAAP Adjusted EBITDA loss is due to the cash impact of the items noted above.  On a pro forma basis, our non-GAAP Adjusted EBITDA loss decreased from a loss of $6.7 million for the three months ended September 30, 2008 to a loss of $4.0 million for the three months ended September 30, 2009.  This decrease is due to cost reductions in most areas of the Acquired Business offset by the increased organic costs.

 

The Company reports Non-GAAP Adjusted EBITDA loss because it is a key measure used by management to evaluate the results of the Company and make strategic decisions about the Company.  Non-GAAP Adjusted EBITDA loss represents net loss before interest, income taxes, depreciation and amortization, stock-based compensation, impairment of long-lived assets, unrealized loss on derivatives, equity in loss of affiliate, investment income and foreign exchange gain.   This measure does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to the calculation of similar measures used by other companies, and should not be viewed as an alternative to measures of financial performance or changes in cash flows calculated in accordance with GAAP.

 

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The reconciliation from net loss to non-GAAP Adjusted EBITDA loss is as follows:

 

 

 

Three months ended September 30,

 

 

 

 

 

 

 

Pro forma

 

 

 

2009

 

2008

 

2008

 

 

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Net loss for the period

 

(7,463,951

)

(1,377,667

)

(12,754,899

)

 

 

 

 

 

 

 

 

Add back:

 

 

 

 

 

 

 

Impairment of long-lived assets

 

 

 

4,771,251

 

Depreciation and amortization

 

1,043,902

 

245,595

 

909,800

 

Stock-based compensation

 

399,498

 

 

570,591

 

Unrealized loss on derivative

 

2,229,150

 

 

 

Equity in loss of affiliate

 

 

27,561

 

27,561

 

Investment income and foreign exchange gain

 

(173,613

)

(2,112

)

(199,681

)

 

 

 

 

 

 

 

 

Non-GAAP Adjusted EBITDA loss

 

(3,965,014

)

(1,106,623

)

(6,675,377

)

 

Nine months ended September 30, 2009

 

Revenue for the nine months ended September 30, 2009 was $19.1 million, up 151% from $7.6 million for the nine months ended September 30, 2008.  The revenue growth of $11.5 million was primarily due to an increase in services revenue of $13.9 million and was offset by a decrease in our equipment revenue of $2.4 million.   The revenue growth is due to the acquisition of the Acquired Business, which contributed $9.9 million of the growth coupled with an organic increase of $1.6 million.  The organic increase (excluding the results of the Acquired Business) in services revenue is consistent with the increasing scope of operations.  As the number of subscribers increases, there is a cumulative effect of increasing subscriber revenue on a quarter over quarter basis.  The decrease in equipment revenue is a result of the uneven nature of this revenue stream — customers often place large single orders made to meet minimum order requirements, to manage the lead time between ordering and shipping and to minimize the related shipping costs.  The lead time on new orders is approximately 12 weeks from order to receipt.  The purchase by customers of STBs is a leading indicator of future subscriptions.  On a pro forma basis, as described in note 3 of the financial statements, revenue increased from $18.8 million to $19.1 million due to organic growth.

 

Our net loss for the nine months ended September 30, 2009 was $18.2 million, or a loss of $0.16 per basic and diluted share, compared with a net loss of $4.4 million or a loss of $0.10 per basic and diluted share for the nine months ended September 30, 2008.  The increase in net loss of $13.8 million was due to the following:

 

·                  Increase in organic loss of $2.9 million (excluding non-operating expenses)

·                  Net loss in the Acquired Business of $5.8 million (excluding non-operating expenses)

·                  Increased non-operating expenses of $5.1 million which includes an increase of $3.0 million in unrealized loss on derivative (detailed below in the Net Loss to EBITDA reconciliation)

 

On a pro forma basis (as if the merger had occurred on January 1, 2008), our net loss for the nine months ended September 30, 2008 was $84.7 million or a loss of $1.99 per basic and diluted share.   The improvement in net loss of $66.5 million on a pro forma basis was due to the following:

 

·                  Increase in organic loss of $2.9 million (excluding non-operating expenses)

·                  Elimination of impairment of goodwill and long-lived assets of $52.8 million

·                  Reduction in net loss in the Acquired Business of $18.4 million due to cost reductions in most areas of the business (excluding non-operating expenses)

·                  Increase in non-operating expenses of $1.8 million which includes an increase of $3.0 million in unrealized loss on derivative (detailed below in the Net Loss to EBITDA reconciliation)

 

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Our non-GAAP Adjusted EBITDA loss was $11.4 million for the nine months ended September 30, 2009 compared with a non-GAAP Adjusted EBITDA loss of $2.7 million from the nine months ended September 30, 2008.  The increase is non-GAAP Adjusted EBITDA loss is due to the cash impact of the items noted above.  On a pro forma basis, our non-GAAP Adjusted EBITDA loss decreased from a loss of $26.9 million for the nine months ended September 30, 2008 to a loss of $11.4 million for the nine months ended September 30, 2009.  This decrease is due to cost reductions in most areas of the Acquired Business offset by the increased organic costs as noted above.  The reconciliation from net loss to non-GAAP Adjusted EBITDA loss is as follows:

 

 

 

Nine months ended September 30,

 

 

 

 

 

 

 

Pro forma

 

 

 

2009

 

2008

 

2008

 

 

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Net loss for the period

 

(18,185,960

)

(4,413,792

)

(84,725,495

)

 

 

 

 

 

 

 

 

Add back:

 

 

 

 

 

 

 

Impairment of goodwill

 

 

 

47,882,317

 

Impairment of long-lived assets

 

 

 

4,945,037

 

Depreciation and amortization

 

3,095,597

 

679,583

 

2,663,640

 

Stock-based compensation

 

1,015,077

 

 

2,110,810

 

Unrealized loss on derivative

 

3,038,200

 

 

 

Equity in loss of affiliate

 

 

1,006,386

 

1,006,386

 

Investment income and foreign exchange gain

 

(365,855

)

(3,849

)

(755,382

)

 

 

 

 

 

 

 

 

Non-GAAP Adjusted EBITDA loss

 

(11,402,941

)

(2,731,672

)

(26,872,687

)

 

OPERATIONS

 

Revenue

 

The Company earns revenue in four broad categories:

 

·                  Subscriber revenue, which is recognized over the period of service or usage.

·                  eCommerce revenue, which is recognized as the service is performed.

·                  Technology services revenue, which consists of the set up and transcoder revenue and is recognized over the life of the contract.

·                  Equipment revenue, which is recognized when title of the STB passes to the customer.

 

While our revenues have been growing due to the organic growth in our existing business and the Merger, we are uncertain as to how our revenues will be impacted by the current downturn in the global economy.

 

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Table of Contents

 

Cost and Expenses

 

Cost of Services Revenue

 

Cost of services revenue primarily consists of:

 

·                  Cost of Subscriber revenue, which consists of three primary components:

·                  Royalty payments

·                  Network operating costs

·                  Bandwidth usage fees

·                  Colocation fees

·                  Cost of eCommerce revenue, which consists of:

·                  Merchandising, donor and ticket sales, which has no associated cost — revenue is booked on a net basis

·                  Cost of advertising revenue is subject to revenue shares with the content provider

·                  Cost of Technology services revenue, which consists of:

·                  Third party transcoder software purchased

·                  Maintenance costs for transcoders

 

Cost of Equipment Revenue

 

Equipment revenue consists of the sale of STBs to content partners and/or end users to enable the end user to receive the content over the Internet and display the signal on a television.   Cost of equipment revenue primarily consists of purchases from TransVideo International, Ltd. (“TransVideo”) and Tatung Technology Incorporation of the products and parts for resale to customers.  Shipping revenue and costs are included in equipment revenue and cost of equipment revenue, respectively.

 

Selling, General and Administrative Expenses, including Stock-Based Compensation

 

Selling, general and administrative (“SG&A”) costs include:

 

·                  Wages and benefits — represents compensation for the Company’s full-time and part-time employees as well as fees for consultants who are used by the Company from time to time;

·                  Stock-based compensation — we estimate the fair value of our options, warrants and stock appreciation rights (“Convertible Securities”) for financial accounting purposes using the Black-Scholes-Merton model, which requires a number of subjective assumptions, including the expected life of the Convertible Securities, risk-free interest rate, dividend rate, forfeiture rate and future volatility of the price of our Shares.  We expense the estimated fair value over the vesting period of the Convertible Securities.  The vesting period is normally over a four year period, vesting in an equal amount each month; however, the Board of Directors has the discretion to grant options with different vesting periods.

·                  Marketing — represents expenses for both global and local marketing programs that focus on various target sports properties and ethnic communities.  These initiatives include both on-line and off-line marketing expenditures.  These expenditures also include search engine marketing and search engine optimization;

·                  Professional fees — represents legal, recruiting and accounting fees; and

·                  Other SG&A expenses represents expenses for travel expenses, rent, office supplies, corporate IT services, credit card processing fees and other general operating expenses.

 

Equity in Loss of Affiliate

 

From January 1, 2008 through September 30, 2009, the Company’s equity interest in KyLinTV was 17.1%.  KyLinTV is a company that is controlled by the Chairman of the Board of Directors of the Company.  The Company also provides and charges KyLinTV for administrative and general corporate support.  Management has determined that as a result of the 17.1% equity interest combined with the services that the Company provides KyLinTV, the Company

 

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Table of Contents

 

continues to have significant influence on the operating activities of KyLinTV, therefore the Company continues to account for KyLinTV using the equity method of accounting for investment.

 

The Company’s proportionate share of the equity loss from KyLinTV has been accounted for as a charge on the Company’s consolidated statements of operations and comprehensive loss.   Due to KyLinTV’s accumulated losses, the investment had been reduced to zero as at December 31, 2008.  No further charges will be recorded as the Company has no obligation to fund the losses of KyLinTV.

 

SELECTED INTERIM INFORMATION

 

The selected interim consolidated financial information set out below for the eight most recently completed quarters has been derived from the Company’s unaudited interim consolidated financial statements and accompanying notes posted on www.sedar.com.  Readers should read the following information in conjunction with those statements and related notes.

 

 

 

2009

 

2008

 

2007

 

 

 

Q3

 

Q2

 

Q1

 

Q4

 

Q3

 

Q2

 

Q1

 

Q4

 

 

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

6,061,302

 

6,462,438

 

6,574,026

 

5,807,550

 

2,699,041

 

2,987,128

 

1,949,620

 

5,284,485

 

Cost of revenue

 

3,224,838

 

3,293,481

 

3,844,483

 

3,205,272

 

1,534,807

 

1,753,689

 

1,145,381

 

3,822,315

 

Net loss for the period

 

(7,463,951

)

(4,928,130

)

(5,793,878

)

(7,223,468

)

(1,377,667

)

(1,549,979

)

(1,486,146

)

(164,690

)

Basic and diluted loss per share

 

(0.07

)

(0.04

)

(0.05

)

(0.13

)

(0.03

)

(0.04

)

(0.03

)

0.00

 

 

The selected interim information for the periods from Q4 2007 to Q3 2008 represents income statement data for NeuLion USA, excluding the Acquired Business.  For the periods from Q4 2008 (subsequent to October 20, 2008) to Q3 2009, the selected interim information represents income statement data for NeuLion including the Acquired Business.

 

The Q4 2007 revenue includes $4.6 million of equipment revenue which is significantly higher than comparable periods.  The sale of STBs quarter over quarter is very uneven in nature.  The Company expected STB revenue to have a much slower growth rate than services revenue.  Services revenue is a recurring revenue stream whereas STB revenue is earned on new customers and/or subscribers.

 

The Q4 2008 net loss includes a non-cash impairment charge of $1.0 million.  This non-cash impairment charge was not incurred in the comparative periods.

 

The Q1 2009, Q2 2009 and Q3 2009 net losses include a non-cash loss on derivative charge of $0.5 million, $0.3 million and $2.2 million, respectively.  These non-cash losses on derivative were not incurred in comparative periods.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

Comparison of Three Months Ended September 30, 2009 to Three Months Ended September 30, 2008

 

Our interim consolidated financial statements for our three months ended September 30, 2009 and 2008 have been prepared in accordance with U.S. GAAP.  Included in note 12 of the financial statements is the reconciliation between our consolidated financial statements prepared in accordance with U.S. GAAP and Canadian GAAP.

 

 

 

2009

 

2008

 

Change

 

 

 

$

 

$

 

%

 

Revenue

 

 

 

 

 

 

 

Services revenue

 

5,705,639

 

1,676,427

 

240

%

Equipment revenue

 

355,663

 

1,022,614

 

-65

%

Total Revenue

 

6,061,302

 

2,699,041

 

125

%

 

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

 

 

Cost of services revenue, exclusive of depreciation and amortization shown separately below

 

2,879,702

 

712,134

 

304

%

Cost of equipment revenue

 

345,136

 

822,673

 

-58

%

Selling, general and administrative, including stock-based compensation

 

7,200,976

 

2,270,857

 

217

%

Depreciation and amortization

 

1,043,902

 

245,595

 

325

%

 

 

11,469,716

 

4,051,259

 

183

%

Operating loss

 

(5,408,414

)

(1,352,218

)

300

%

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

Unrealized loss on derivative

 

(2,229,150

)

 

 

Gain on foreign exchange

 

57,358

 

 

 

Investment income

 

116,255

 

2,112

 

5404

%

Equity in loss of affiliate

 

 

(27,561

)

-100

%

 

 

(2,055,537

)

(25,449

)

7977

%

Net and comprehensive loss for the period

 

(7,463,951

)

(1,377,667

)

442