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NEULION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Expressed in U.S. dollars)

 

See accompanying notes

 

 

NEULION, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE (LOSS) INCOME

(unaudited)

(in thousands, except share and per share data)

(Expressed in U.S. dollars)

 

See accompanying notes

 

 

NEULION, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited)

(in thousands, except share data)

(Expressed in U.S. dollars)

See accompanying notes

 

 

NEULION, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

(Expressed in U.S. dollars)

See accompanying notes

 

 

NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 (in thousands, except share and per share data)

Information as at June 30, 2017 (unaudited) and for the three and six months ended

June 30, 2017 and 2016 (unaudited)

 

1. Nature of Operations

 

NeuLion, Inc. (“NeuLion” or the “Company”) is a leading provider of enterprise digital video solutions with the mission to deliver and enable the highest quality live and on-demand digital video content experiences anywhere and on any device.  Our flagship solution, the NeuLion Digital Platform, is a proprietary, cloud-based, fully integrated, turnkey solution that enables the delivery and monetization of digital video content.  Through the Company’s comprehensive solution suite, including the NeuLion Digital Platform, as well as the NeuLion consumer electronics (“CE”) and the MainConcept technologies, NeuLion empowers the entire video ecosystem.

The Company is headquartered in Plainview, New York and was domesticated under Delaware law on November 30, 2010. The Company’s common stock is listed on the Toronto Stock Exchange (“TSX”) under the symbol NLN.

 

2. Basis of Presentation and Significant Accounting Policies

 

The Company’s accounting policies are consistent with those presented in its annual consolidated financial statements as at December 31, 2016.  These interim unaudited condensed consolidated financial statements do not include all footnote disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the year ended December 31, 2016, as they appear in the Company’s Annual Report on Form 10-K.

These financial statements are prepared in conformity with U.S. GAAP, which requires management to make certain estimates that affect the reported amounts in the interim unaudited condensed 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 in consolidation.

In the opinion of management, these interim unaudited condensed 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 June 30, 2017 and December 31, 2016 and the results of operations and cash flows for the three and six months ended June 30, 2017 and 2016.  The results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the entire year.

 

The accompanying interim unaudited condensed consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the interim unaudited condensed consolidated financial statements.  As of June 30, 2017, the Company’s significant accounting policies and estimates remain unchanged from those detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, except as follows:

Assets Held for Sale

In a period where the plan of sale criteria of Accounting Standards Codification 360 “Impairment or Disposal of Long-lived Assets” are met, long-lived assets are reported as held for sale, depreciation and amortization cease, and the assets are reported at the lower of carrying value or fair value less costs to sell.

New accounting standards

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value.  This ASU defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  The new guidance must be applied on a prospective basis and is effective for periods beginning after December 15, 2016, with early adoption permitted.  The Company adopted the accounting guidance as of January 1, 2017, which did not have a material impact on the Company’s condensed consolidated financial statements.

 

 

NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 (in thousands, except share and per share data)

Information as at June 30, 2017 (unaudited) and for the three and six months ended

June 30, 2017 and 2016 (unaudited)

 

In March 2016, the FASB issued ASU 2016-09 - Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions. Under this amended guidance, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement in the period in which the awards vest or are exercised. In the statement of cash flows, excess tax benefits will be classified with other income tax cash flows in operating activities. The amended guidance also gives the option to make a policy election to account for forfeitures as they occur and increases the threshold for awards that are partially settled in cash to qualify for equity classification.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company adopted the accounting guidance as of January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements. The Company had historically estimated the number of forfeitures as part of our option valuation process and will continue to do so under the new guidance. No aspect of the guidance that requires retrospective adoption impacted the Company.

In May 2014, the FASB issued guidance on revenue recognition, which provides a single, comprehensive revenue recognition model for all contracts with customers and superseded most existing revenue recognition guidance.  The main principle under this guidance is that an entity should recognize revenue at the amount it expects to be entitled to in exchange for the transfer of goods or services to customers.  The Company has identified the predominant changes to its accounting policies resulting from the application of this guidance and in the process of quantifying the impact on its consolidated financial statements.  The cumulative effect of the initial adoption will be reflected as an adjustment to the opening balance of retained earnings as of the date of the application of the guidance. However, the Company does not expect this guidance to have a significant impact on the Company’s consolidated financial statements on an annual basis.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016.

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

In June 2016, the FASB issued ASU 2016-13 – Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale (AFS) debt securities through an allowance account. The update also requires certain incremental disclosures. These amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and disclosures.

In August 2016, FASB issued ASU 2016-15 – Classification of Certain Cash Receipts and Cash Payments, amended guidance which clarifies how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The new guidance is intended to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and disclosures.

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

In January 2017, the FASB issued ASU 2017-04 – Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and disclosures.

 

 

NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 (in thousands, except share and per share data)

Information as at June 30, 2017 (unaudited) and for the three and six months ended

June 30, 2017 and 2016 (unaudited)

In May 2017, the FASB issued ASU 2017-09 – Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This guidance was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, to a change to the terms and conditions of a share-based payment award. This guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and disclosures.

3. Business Combination

The Saffron Digital solution, which has been integrated into the NeuLion Digital Platform, helps customers build digital video services for entertainment delivered over-the-top to Internet-connected devices.  These digital video services support advanced implementations of subscription video on demand, electronic sell-through and advertising-supported video.

The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates.

In connection with this transaction, the Company incurred no acquisition-related expenses during the three and six months ended June 30, 2017 (acquisition-related expenses during each of the three and six months ended June 30, 2016 was $102).

The total purchase price for Saffron Digital has been allocated as follows:

 

 

The following are the identifiable intangible assets acquired and their respective useful lives as of the acquisition date, as determined based on valuations:

The fair value of the intangible assets has been estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted-average cost of capital.

 

 

NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 (in thousands, except share and per share data)

Information as at June 30, 2017 (unaudited) and for the three and six months ended

June 30, 2017 and 2016 (unaudited)

 

4. Economic Dependence and Concentration of Credit Risk

 

For the three and six months ended June 30, 2017, no one customer represented more than 10% of revenue.  For the three months ended June 30, 2016, no one customer represented more than 10% of revenue.  For the six months ended June 30, 2016, the National Hockey League (“NHL”) accounted for 25% of revenue.

 

As at June 30, 2017, NBA Media Ventures (“NBA”) and Samsung Companies accounted for 27% of accounts receivable:  15% and 12%, respectively.  As at December 31, 2016, Samsung Companies and World Surf League accounted for 28% of accounts receivable: 15% and 13%, respectively.

 

As at June 30, 2017, the Sky UK and the Ultimate Fighting Championship (“UFC”) accounted for 45% of accounts payable: 30% and 15%, respectively.  As at December 31, 2016, the UFC and the NBA accounted for 50% of accounts payable: 37% and 13%.

The Company maintains cash and cash equivalents with various major financial institutions which at times are in excess of the amount insured by the FDIC. As of June 30, 2017, approximately 36% and 64% of the Company’s cash and cash equivalents were held in accounts with US and foreign banks, respectively.

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:

KyLin TV

 

KyLin TV is an IPTV company that is controlled by Charles B. Wang, a member of the Board of Directors and the husband of the Executive Chair of the Company.  On June 1, 2008, the Company entered into an agreement with KyLin TV to build and deliver the setup and back office operations for KyLin TV’s IPTV service.  Effective April 1, 2012, the Company amended its agreement with KyLin TV, such that, in addition to the services previously provided, KyLin TV was appointed the exclusive distributor of the Company’s business to consumer (“B2C”) IPTV interests.  As exclusive distributor, KyLin TV obtains, advertises and markets all of the Company’s B2C content, in accordance with the terms of the amendment.  Accordingly, KyLin TV records the gross revenues from the Company’s B2C content as well as the associated license fees, whereas the Company records revenues in accordance with the revised fee schedule in the amendment.  The Company also provides, and charges KyLin TV for, administrative and general corporate support.  The amounts charged for the administrative and general corporate support services provided by the Company for the three and six months ended June 30, 2017 were $31 and $56, respectively (three and six months ended June 30, 2016 were $25 and $49, respectively), and were recorded as a recovery in selling, general and administrative expense.  

 

New York Islanders Hockey Club, L.P. (“New York Islanders”)

 

The Company provides IT-related professional services and administrative services to the New York Islanders, a professional hockey club of which Mr. Wang is a minority owner.

 

Renaissance Property Associates, LLC (“Renaissance”)

 

The Company provides IT-related professional services to Renaissance, a real estate management company owned by Mr. Wang.  In June 2009, the Company signed a sublease agreement with Renaissance for office space in Plainview, New York.  The sublease agreement expires in December 2019. Rent expense paid by the Company to Renaissance for the three and six months ended June 30, 2017 of $169 and $339, respectively (three and six months ended June 30, 2016 of $118 and $225, respectively), inclusive of taxes and utilities, is included in selling, general and administrative expense. Additionally, the Company engaged Renaissance to provide real estate consulting services. The expense related to these services was $64 for each of the three and six months ended June 30, 2017 (expense during each of the three and six months ended June 30, 2016 was zero).

 

 

NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 (in thousands, except share and per share data)

Information as at June 30, 2017 (unaudited) and for the three and six months ended

June 30, 2017 and 2016 (unaudited)

 

Smile Train, Inc. (“Smile Train”)

 

The Company provides IT-related professional services to Smile Train, a public charity whose founder and significant benefactor is Mr. Wang.

The Company recognized revenue from related parties as follows:

 

 

 

6. (Loss) Earnings Per Share

 

Basic (loss) earnings per share is computed by dividing net (loss) income for the period by the weighted average number of shares of common stock outstanding for the period. Diluted (loss) earnings per share is computed by dividing net (loss) income for the period by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of restricted stock units, stock options and warrants.

The following table presents the calculation of basic and diluted (loss) earnings per share for the three and six months ended June 30, 2017 and 2016.

 

 

The following table summarizes the potential common stock equivalents for the three and six months ended June 30, 2017 and 2016 that were not included in the computation of diluted (loss) income per share, because to do so would have been antidilutive.

 

 

7. Geographic Information

 

The Company’s assets and operations are located primarily in the United States. The Company operates in one segment. The Company’s chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region.  There are no segment managers who are held accountable by the chief operating decision maker for operations, operating results, and planning for levels or components below the consolidated unit level.  The Company has therefore determined that it has a single operating segment.  Total revenue from customers, based on the location of the customers, was as follows:

 

 

NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 (in thousands, except share and per share data)

Information as at June 30, 2017 (unaudited) and for the three and six months ended

June 30, 2017 and 2016 (unaudited)

Total property and equipment, categorized by the location of the assets, was as follows:

 

 

 

 

8. Income Taxes

The tax (benefit) provision for the three and six months ended June 30, 2017 was $108 and $(335), respectively, compared to $227 and $1,878 for the three and six months ended June 30, 2016. Each quarter the Company updates its estimate of the annual effective tax rate and records adjustments as necessary.  The annual provision for income taxes is primarily comprised of current and deferred tax expense in the U.S. and in profitable cost-plus foreign jurisdictions, and foreign withholding taxes.  The difference between the annual tax provision and the expected statutory rate is primarily due to losses in foreign jurisdictions without tax benefit and non-deductible tax expenses.

As of June 30, 2017, the Company continues to maintain a valuation allowance to offset certain foreign and state deferred income tax assets, as realization of such assets does not meet the more-likely-than-not threshold.

The Company does not believe there are any material uncertain tax positions under Accounting Standards Codification 740, “Income Taxes”.

9. Share Repurchase Program

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

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

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

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

 

 

NEULION, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 (in thousands, except share and per share data)

Information as at June 30, 2017 (unaudited) and for the three and six months ended

June 30, 2017 and 2016 (unaudited)

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

10. Assets Held for Sale

The net book value of the assets held for sale consisted of the following:

 

11. Contingencies

During the ordinary course of its business activities, the Company may be contingently liable for litigation and a party to claims. Management believes that adequate provisions have been made where required for such contingencies. 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, results of operations or cash flows of the Company.

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

 

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of the Company should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three and six months ended June 30, 2017 and 2016, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).  All dollar amounts are in U.S. dollars (“US$” or “$”) unless stated otherwise.  As at August 1, 2017, the Bank of Canada daily exchange rate for conversion of United States dollars to Canadian dollars (“CDN$”) was US$1 to CDN$1.2514.

 

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

 

Cautions Regarding Forward-Looking Statements

 

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

 

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

 

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

 

 

Overview

 

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

 

 

Key Performance Metrics

 

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

 

 

We monitor our revenue from our NeuLion Digital Platform because we expect it to grow faster than revenue from our other solutions as we add new customers and increase the variable revenue we realize from existing customers. As a result, we expect our platform revenue to grow in absolute dollars and as a percentage of revenue. Our platform revenue grew 4% for the three months ended June 30, 2017 and decreased 6% for the six months ended June 30, 2017, compared to the prior comparable period. NeuLion Digital Platform revenue is seasonal, related to the timing and size of events that our customers deliver through our solution. The fourth quarter has historically been our highest revenue quarter, but this seasonality may change as we add new customers and events.

 

 

 

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

 

 

We monitor Adjusted EBITDA, together with cost of revenue as a percentage of revenue, to measure the operating performance of our business.  We expect Adjusted EBITDA to improve over time as we grow our revenue and improve our operating performance, but Adjusted EBITDA as a percentage of revenue will vary based on the timing of revenue and expenses.  Refer to Reconciliation of Net (Loss) Income to Adjusted EBITDA, below, for full details.

 

 

We report Adjusted EBITDA because it is a key measure used by management to evaluate our results and make strategic decisions about the Company, including potential acquisitions. Adjusted EBITDA represents net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation, acquisition-related expenses, purchase accounting adjustments, investment income and foreign exchange gain/loss. This measure does not have any standardized meaning prescribed by U.S. GAAP and therefore is unlikely to be comparable to the calculation of a similar measure used by other companies, and should not be viewed as an alternative to measures of financial performance or changes in cash flows calculated in accordance with U.S. GAAP.

COMPONENTS OF OPERATING RESULTS

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

Revenue

 

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

 

 

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

 

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

 

Cost and Expenses

 

Cost of revenue

 

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

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

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

 

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

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

Research and development

 

Historically, approximately 90% of our research and development expenses have consisted of wages and benefits for research and development personnel.

 

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

 

Key Trends and Factors That May Impact Our Performance

 

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

 

·

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

 

·

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

 

·

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

 

 

In June 2016, we completed the acquisition of Saffron Digital.  The integration of this acquisition has impacted and will continue to impact revenues, expenses and operating results.

RESULTS OF OPERATIONS

 

Comparison of Three Months Ended June 30, 2017 to Three Months Ended June 30, 2016 (unaudited)

 

Our condensed consolidated financial statements for the three months ended June 30, 2017 and 2016 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows (amounts in thousands):

 

Revenue

 

Revenue decreased to $23.9 million for the three months ended June 30, 2017 from $24.1 million for the three months ended June 30, 2016.  The $0.2 million decrease consisted of a $1.2 million decrease in our CE revenue stream, offset by an increase of $0.6 and $0.4 million from our NeuLion Digital Platform and MC MainConcept revenue streams, respectively. The $0.6 million increase in our NeuLion Digital Platform revenue was the result of strong organic growth, partially offset by a decrease in National Hockey League-related revenues in the amount of $1.5 million.

Cost of Revenue

  

Cost of revenue decreased to $4.0 million for the three months ended June 30, 2017 from $4.1 million for the three months ended June 30, 2016.  Cost of revenue as a percentage of revenue remained constant at 17% for each of the three months ended June 30, 2017 and 2016.

 

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

 

Selling, general and administrative expenses, including stock-based compensation, increased by $1.9 million, or 15%, from $12.9 million for the three months ended June 30, 2016, to $14.8 million for the three months ended June 30, 2017.  The individual variances are as follows:

 

 

·

Wages and benefits remained constant at $8.1 million for each of the three month periods ended June 30, 2016 and 2017.

 

·

Stock-based compensation decreased from $1.4 million for the three months ended June 30, 2016 to $1.1 million for the three months ended June 30, 2017. The $0.3 million decrease was primarily the result of certain grants of stock-based compensation being fully vested and recognized prior to June 30, 2017.

 

 

·

Professional fees increased from $0.9 million for the three months ended June 30, 2016 to $1.3 million for the three months ended June 30, 2017.  The $0.4 million increase was primarily the result of higher recruitment fees associated with the increased salesforce and increased consulting expenses associated with certain professional compliance requirements.

 

·

Travel expenses increased from $0.4 million for the three months ended June 30, 2016 to $0.6 million for the three months ended June 30, 2017. The $0.2 million increase was primarily the result of expenses associated with the increase in headcount in our sales team.

 

·

Office facilities expenses increased from $0.6 million for the three months ended June 30, 2016 to $1.0 million for the three months ended June 30, 2017.  The $0.4 million increase was primarily the result of facility costs associated with the acquisition of Saffron Digital and the opening of our new European headquarters in London.

 

·

Other SG&A expenses, including office supplies, corporate IT services, credit card processing fees and other general operating expenses, increased from $1.5 million for the three months ended June 30, 2016 to $2.7 million for the three months ended June 30, 2017. The increase in Other SG&A expenses primarily relates to the acquisition of Saffron Digital.

 

Research and development

Research and development costs decreased from $5.3 million for the three months ended June 30, 2016 to $5.0 million for the three months ended June 30, 2017.

 

Depreciation and amortization

 

Depreciation and amortization increased from $2.1 million for the three months ended June 30, 2016 to $2.5 million for the three months ended June 30, 2017.  The $0.4 million increase was primarily the result of amortization of intangibles associated with the acquisition of Saffron Digital.

Income taxes

The tax provision for the three month period ended June 30, 2017 was $0.1 million, compared to $0.2 million for the three month period ended June 30, 2016. The annual provision for income taxes during 2017 and 2016 is primarily comprised of current and deferred tax expense in the U.S. and in profitable cost-plus foreign jurisdictions, and foreign withholding taxes. The difference between the annual tax provision and the expected statutory rate is primarily due to losses in foreign jurisdictions without tax benefit.

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

 

 

Comparison of Six Months Ended June 30, 2017 to Six Months Ended June 30, 2016 (unaudited)

 

Our condensed consolidated financial statements for the six months ended June 30, 2017 and 2016 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows (amounts in thousands):

 

Revenue

 

Revenue decreased to $47.7 million for the six months ended June 30, 2017 from $50.4 million for the six months ended June 30, 2016. The $2.7 million decrease consisted of a $1.9 million decrease in our NeuLion Digital Platform revenue and a $0.8 million decrease in our CE revenue stream. The $1.9 million decrease in our NeuLion Digital Platform revenue was the result of a decrease in National Hockey League-related revenues in the amount of $5.6 million, partially offset by strong organic growth.

Cost of Revenue

  

Cost of revenue increased to $8.9 million for the six months ended June 30, 2017 from $8.8 million for the six months ended June 30, 2016.  Cost of revenue as a percentage of revenue increased from 17% for the six months ended June 30, 2016 to 19% for the six months ended June 30, 2017.

 

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

 

Selling, general and administrative expenses, including stock-based compensation, increased by $4.7 million, or 19%, from $24.8 million for the six months ended June 30, 2016, to $29.5 million for the six months ended June 30, 2017.  The individual variances are as follows:

 

·

Wages and benefits increased from $16.3 million for the six months ended June 30, 2016 to $17.2 million for the six months ended June 30, 2017.  The $0.9 million increase was primarily the result of an increase in employees due to the acquisition of Saffron Digital and an increase in headcount in our sales team.

 

·

Stock-based compensation decreased from $2.2 million for the six months ended June 30, 2016 to $2.0 million for the six months ended June 30, 2017. The $0.2 million decrease was primarily the result of certain grants of stock-based compensation being fully vested and recognized prior to June 30, 2017.

 

·

Professional fees increased from $1.7 million for the six months ended June 30, 2016 to $2.5 million for the six months ended June 30, 2017.  The $0.8 million increase was primarily the result of increased legal fees, higher recruitment fees associated with the increased salesforce and increased consulting expenses associated with certain professional compliance requirements.

 

·

Travel expenses increased from $0.8 million for the six months ended June 30, 2016 to $1.1 million for the six months ended June 30, 2017. The $0.3 million increase was primarily the result of expenses associated with the increase in headcount in our sales team.

 

 

·

Office facilities expenses increased from $1.1 million for the six months ended June 30, 2016 to $1.7 million for the six months ended June 30, 2017.  The $0.6 million increase was primarily the result of facility costs associated with the acquisition of Saffron Digital and the opening of our new European headquarters in London.

 

·

Other SG&A expenses, including office supplies, corporate IT services, credit card processing fees and other general operating expenses, increased from $2.7 million for the six months ended June 30, 2016 to $5.0 million for the six months ended June 30, 2017. The increase in Other SG&A expenses primarily relates to the acquisition of Saffron Digital.

 

Research and development

Research and development costs decreased from $9.6 million for the six months ended June 30, 2016 to $9.2 million for the six months ended June 30, 2017.

 

Depreciation and amortization

 

Depreciation and amortization increased from $4.1 million for the six months ended June 30, 2016 to $4.9 million for the six months ended June 30, 2017.  The $0.8 million increase was primarily the result of amortization of intangibles associated with the acquisition of Saffron Digital.

Income taxes

The tax (benefit) provision for the six month period ended June 30, 2017 was $(0.3) million, compared to $1.9 million for the six month period ended June 30, 2016. The annual provision for income taxes during 2017 and 2016 is primarily comprised of current and deferred tax expense in the U.S. and in profitable cost-plus foreign jurisdictions, and foreign withholding taxes. The difference between the annual tax provision and the expected statutory rate is primarily due to losses in foreign jurisdictions without tax benefit.

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash position was $25.1 million at June 30, 2017.  During the six months ended June 30, 2017, cash used to fund operating activities was $10.8 million, which included cash of $12.0 million from changes in operating assets and liabilities. Cash used in investing activities included $3.2 million to purchase fixed assets, which was primarily related to the buildout of our European headquarters in London.  Cash used in financing activities included $2.9 million used for repurchases of our common stock.

 

As of June 30, 2017, our principal sources of liquidity included cash and cash equivalents of $25.1 million and trade accounts receivable of $17.8 million, offset by $12.0 million in accounts payable and $9.2 million in accrued liabilities.  We continue to closely monitor our cash balances to ensure that we have sufficient cash on hand to meet our operating needs. Management believes that we have sufficient liquidity to meet our working capital and capital expenditure requirements for at least the next 12 months.

In June 2017, the Company listed for sale its office building located in Melville, New York (the “property”). The Company believes it is probable that the property will be sold within one year and that the final selling price, less the cost to sell, will equal or exceed the carrying value of the property. As of June 30, 2017, the carrying value of the property was $7.2 million.

 

The Company maintains cash and cash equivalents with various major financial institutions which at times are in excess of the amount insured by the FDIC. As of June 30, 2017, approximately 36% and 64% of the Company’s cash and cash equivalents were held in accounts with US and foreign banks, respectively.

   

Off Balance Sheet Arrangements

 

We did not have any off balance sheet arrangements as of June 30, 2017.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our market risk disclosures set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 (“Form 10-K”) have not changed materially.  For a discussion of our exposure to market risk, refer to the disclosure set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the Form 10-K.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to the company’s management as appropriate to allow timely decisions regarding required disclosure.

Our Chief Executive Officer, being our principal executive officer, and Chief Financial Officer, being our principal financial officer, with the assistance of other members of our management, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter ended June 30, 2017 (the “Evaluation”).  Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective as of June 30, 2017.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2017, no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) has been identified that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The table below summarizes the information about repurchases of our common stock during the quarter ended June 30, 2017:

 

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Item 6.

Exhibits

(b)   Exhibits

The exhibits listed below are filed as part of this report.

 

*	Filed herewith.

**

Furnished herewith.  As provided in Item 601(b)(32) of Regulation S-K, this certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section.  Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference in such filing.

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.