XTSE:NLN Neulion, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED 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 June 30, 2012
   
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)

Delaware
 
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 x     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
(Do not check if a smaller reporting company)
o
Smaller reporting company
x

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 August 10, 2012, there were 141,185,130 shares of the registrant’s Common Stock, $0.01 par value, outstanding.  
 


 
 

 
 
NEULION, INC.

TABLE OF CONTENTS
 
 
 
Part I.  Financial Information 
 
Page No.
     
1
     
   
 
1
     
   
 
2
     
   
 
3
     
   
 
4
     
 
5-11
     
 
 
12-23
     
24
     
24
 
 
Part II. Other Information 
 
 
     
25
   
25
   
26

 
PART I.  FINANCIAL INFORMATION

Item 1.     Financial Statements

 
NEULION, INC.

CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars, unless otherwise noted)
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
    $     $  
                 
ASSETS
               
Current
               
Cash and cash equivalents
    5,073,838       12,346,882  
Accounts receivable, net of allowance for doubtful accounts of $78,736 and $64,132,
               
   respectively
    2,170,295       3,494,077  
Other receivables
    315,457       309,764  
Inventory
    754,224       797,436  
Prepaid expenses and deposits
    1,094,573       1,189,311  
Due from related parties
    1,394,874       734,452  
Total current assets
    10,803,261       18,871,922  
Property, plant and equipment, net
    3,495,080       4,294,476  
Intangible assets, net
    5,313,514       6,609,465  
Goodwill
    11,327,626       11,327,626  
Other assets
    169,622       226,266  
Total assets
    31,109,103       41,329,755  
                 
LIABILITIES AND EQUITY
               
Current
               
Accounts payable
    7,881,085       9,597,359  
Accrued liabilities
    4,640,189       5,314,308  
Due to related parties
    10,221       13,298  
Deferred revenue
    4,727,683       6,624,693  
Total current liabilities
    17,259,178       21,549,658  
Long-term deferred revenue
    1,034,687       1,050,495  
Other long-term liabilities
    389,754       432,159  
Deferred tax liability
    516,094       299,094  
Total liabilities
    19,199,713       23,331,406  
                 
Redeemable preferred stock, net (par value: $0.01; authorized: 50,000,000; issued
               
and outstanding: 28,089,083)
               
    Class 3 Preference Shares (par value: $0.01; authorized: 17,176,818; issued and
               
    outstanding: 17,176,818)
    10,000,000       10,000,000  
    Class 4 Preference Shares (par value: $0.01; authorized: 10,912,265; issued and
               
    outstanding: 10,912,265)
    4,879,637       4,864,591  
Total redeemable preferred stock
    14,879,637       14,864,591  
                 
Stockholders' equity
               
Common stock (par value: $0.01; authorized: 300,000,000; issued and outstanding:
               
    141,185,130 and 140,012,310, respectively)
    1,411,851       1,400,122  
Additional paid-in capital
    78,171,810       77,257,524  
Promissory notes receivable
    (209,250 )     (209,250 )
Accumulated deficit
    (82,344,658 )     (75,314,638 )
Total (deficit) equity
    (2,970,247 )     3,133,758  
Total liabilities and equity
    31,109,103       41,329,755  

See accompanying notes
 

NEULION, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(unaudited)
(Expressed in U.S. dollars, unless otherwise noted)


   
          Three months
   
          Six months
 
   
          ended
   
          ended
 
   
          June 30,
   
          June 30,
 
   
2012
   
2011
   
2012
   
2011
 
 
  $     $     $     $  
                                 
Revenue
                               
Services revenue
    8,202,133       8,813,595       18,033,487       18,377,525  
Equipment revenue
    514,793       1,144,529       1,051,955       1,526,597  
      8,716,926       9,958,124       19,085,442       19,904,122  
                                 
Costs and expenses
                               
Cost of services revenue, exclusive of depreciation and
                               
amortization shown separately below
    2,676,978       3,150,377       6,724,521       6,819,188  
Cost of equipment revenue
    390,227       826,326       856,919       1,137,888  
Selling, general and administrative, including
                               
stock-based compensation
    6,082,672       6,344,930       12,509,531       13,256,343  
Research and development
    1,765,761       1,584,208       3,360,311       3,071,869  
Depreciation and amortization
    1,182,217       1,378,592       2,420,818       2,824,011  
      12,097,855       13,284,433       25,872,100       27,109,299  
Operating loss
    (3,380,929 )     (3,326,309 )     (6,786,658 )     (7,205,177 )
                                 
Other income (expense)
                               
Loss on foreign exchange
    (16,558 )     (3,796 )     (30,439 )     (41,892 )
Investment income
    1,830       6,909       4,077       20,819  
      (14,728 )     3,113       (26,362 )     (21,073 )
Net and comprehensive loss before income taxes
    (3,395,657 )     (3,323,196 )     (6,813,020 )     (7,226,250 )
Income taxes
    (90,000 )           (217,000 )      
Net and comprehensive loss
    (3,485,657 )     (3,323,196 )     (7,030,020 )     (7,226,250 )
Net loss attributable to non-controlling interest
          11,731             21,485  
Net and comprehensive loss attributable to controlling interest
    (3,485,657 )     (3,311,465 )     (7,030,020 )     (7,204,765 )
Adjustment to the carrying amount of redeemable preferred stock
          420,889             153,233  
Net and comprehensive loss attributable to NeuLion, Inc.
                               
common stockholders
    (3,485,657 )     (2,890,576 )     (7,030,020 )     (7,051,532 )
                                 
                                 
Net loss per weighted average number of shares
                               
outstanding - basic and diluted
    $(0.02 )     $(0.02 )     $(0.05 )     $(0.05 )
                                 
Weighted average number of shares
                               
outstanding - basic and diluted
    140,866,631       139,389,376       140,520,157       139,293,692  

See accompanying notes
 

NEULION, INC.

CONSOLIDATED STATEMENT OF EQUITY
(unaudited)
(Expressed in U.S. dollars, unless otherwise noted)


               
Additional
   
Promissory
   
Accumulated
   
Total
 
   
                      Common stock
   
paid-in capital
   
notes
   
deficit
   
equity
 
      #     $         $     $     $     $  
                                                 
Balance, December 31, 2011
    140,012,310       1,400,122       77,257,524       (209,250 )     (75,314,638 )     3,133,758  
                                                 
Accretion of issuance costs
                                               
     on Class 4 Preference Shares
                (15,046 )                 (15,046 )
Stock-based compensation:
                                               
    Issuance of common stock
                                               
    under Directors’
                                               
    Compensation Plan
    547,820       5,479       23,854                   29,333  
    Issuance of restricted stock
    625,000       6,250       (39,318 )                 (33,068 )
    Stock options, warrants
                                               
    and other compensation
                944,796                   944,796  
Net loss
                            (7,030,020 )     (7,030,020 )
Balance, June 30, 2012
    141,185,130       1,411,851       78,171,810       (209,250 )     (82,344,658 )     (2,970,247 )

See accompanying notes
 
 
 
 

 
NEULION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Expressed in U.S. dollars, unless otherwise noted)


   
          Three months
   
          Six months
 
   
          ended
   
           ended
 
   
          June 30,
   
           June 30,
 
   
2012
   
2011
   
2012
   
2011
 
    $     $     $     $  
OPERATING ACTIVITIES
                               
                                 
Net loss
    (3,485,657 )     (3,323,196 )     (7,030,020 )     (7,226,250 )
Adjustments to reconcile net loss to net cash used in
                               
operating activities
                               
Depreciation and amortization
    1,182,217       1,378,592       2,420,818       2,824,011  
Stock-based compensation
    681,445       334,183       914,869       729,397  
Deferred income taxes
    90,000             217,000        
                                 
Changes in operating assets and liabilities
                               
Accounts receivable
    691,310       (1,111,861 )     1,323,782       (1,209,429 )
Inventory
    137,704       34,220       43,212       (113,082 )
Prepaid expenses, deposits and other assets
    (24,653 )     210,308       151,382       (116,029 )
Other receivables
    (40,002 )     17,669       (5,693 )     112,034  
Due from related parties
    (456,913 )     1,053,472       (660,422 )     966,157  
Accounts payable
    (1,641,215 )     (1,105,163 )     (1,716,274 )     (1,719,345 )
Accrued liabilities
    (1,157,255 )     (613,148 )     (647,927 )     (329,882 )
Deferred revenue
    (121,742 )     (315,061 )     (1,830,053 )     (1,911,769 )
Long-term liabilities
    (22,372 )     (18,681 )     (42,406 )     (21,360 )
Due to related parties
    (6,035 )     (500 )     (3,077 )     8,849  
Cash used in operating activities
    (4,173,168 )     (3,459,166 )     (6,864,809 )     (8,006,698 )
                                 
INVESTING ACTIVITIES
                               
Purchase of property, plant and equipment
    (86,187 )     (188,465 )     (408,235 )     (487,751 )
Cash used in investing activities
    (86,187 )     (188,465 )     (408,235 )     (487,751 )
                                 
FINANCING ACTIVITIES
                               
Private placement, net
          4,903,906             4,903,906  
Cash provided by financing activities
          4,903,906             4,903,906  
                                 
Net increase (decrease) in cash and cash equivalents
                               
during the period
    (4,259,355 )     1,256,275       (7,273,044 )     (3,590,543 )
Cash and cash equivalents, beginning of period
    9,333,193       8,082,507       12,346,882       12,929,325  
Cash and cash equivalents, end of period
    5,073,838       9,338,782       5,073,838       9,338,782  
 
See accompanying notes
 
NEULION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
Information as at June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 (unaudited)

1. Nature of Operations

NeuLion, Inc. (“NeuLion” or the “Company”) is a technology service provider that delivers live and on-demand content to Internet-enabled devices.  Through the Company’s cloud-based end-to-end solution, the Company builds and manages private, interactive digital networks that enable the Company’s customers to provide a destination for their subscribers to view and interact with their content.  The Company was incorporated on January 14, 2000 under the Canada Business Corporations Act and was domesticated under Delaware law on November 30, 2010.  The Company’s common stock is listed on the Toronto Stock Exchange (“TSX”).

The Company’s core business and business model has evolved from being a provider of professional information technology services and international programming to a provider of customized, end-to-end, interactive video services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies.  Shifts in consumer behavior drive technology requirements, and our technology empowers our customers to capitalize on the growing consumer demand for viewing video content on multiple types of Internet-enabled devices.  The Company’s technology enables delivery to a range of Internet-enabled devices, including personal computers, laptops, mobile devices, gaming consoles, tablets, Internet-enabled TVs, third-party set top boxes (“STBs”), standard TV sets that have Internet-connected STBs and other Internet-enabled consumer accessories.  The Company’s platform offers an end-to-end service, which includes content management, subscriber management, digital rights management, billing services, app creation, content delivery and advertising substitution.

2. Basis of Presentation and Significant Accounting Policies

The Company’s accounting policies are consistent with those presented in our annual consolidated financial statements as at December 31, 2011.  These interim unaudited consolidated financial statements do not include all footnote disclosures required by U.S. generally accepted accounting principles (“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, 2011 as they appear in the Company’s Annual Report on Form 10-K.

These financial statements were prepared 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.

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 June 30, 2012 and December 31, 2011 and the results of operations and cash flows for the three and six months ended June 30, 2012 and 2011.
 
NEULION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
Information as at June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 (unaudited)
 
Recently issued accounting standards

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU No. 2011-05”), which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in Other Comprehensive Income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The amendments in this standard require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently in December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” (“ASU No. 2011-12”), which indefinitely defers the requirement in ASU No. 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The amendments in these standards do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU No. 2011-05 and ASU No. 2011-12 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The Company adopted ASU No. 2011-05 and ASU No. 2011-12 on January 1, 2012, and its application did not have a material impact on the Company's consolidated financial position or results of operations.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment” (“ASU No. 2011-08”), which allows entities to use a qualitative approach to test goodwill for impairment. ASU No. 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the provisions of ASU No. 2011-08 will not have a material impact on the Company's consolidated financial position or results of operations.

Advertising

Advertising costs are expensed as incurred and totaled $90,654 and $214,174 for the three and six months ended June 30, 2012, respectively (three and six months ended June 30, 2011 - $274,262 and $444,591, respectively).

3. Inventory

Inventory consists of the following:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $     $  
                 
Raw materials
    130,256       148,253  
Finished goods
    623,968       649,183  
      754,224       797,436  
 
NEULION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
Information as at June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 (unaudited)
 
 
 
4. Economic Dependence and Concentration of Credit Risk

As at June 30, 2012, one customer accounted for 18% of accounts receivable.

For the three and six months ended June 30, 2012, one customer accounted for 14% of revenue.

As at December 31, 2011, two customers accounted for 25% of accounts receivable: 11% and 14%.  For the three and six months ended June 30, 2011, one customer accounted for 14% of revenue.

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, Inc. (“KyLin TV”)

KyLin TV is an IPTV 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 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 will obtain, advertise and market all of the Company’s B2C content, in accordance with the terms of the amendment.  Accordingly, KyLin TV will now record the gross revenues from the Company’s B2C content as well as the associated license fees, whereas the Company will record 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 received for these services provided by the Company for the three and six months ended June 30, 2012 were $80,976 and $154,897, respectively (three and six months ended June 30, 2011 - $69,877 and $164,194, respectively).

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

The Company provides IT-related professional and administrative 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 $105,124 and $210,248, inclusive of taxes and utilities, is included in selling, general and administrative expense for the three and six months ended June 30, 2012, respectively (three and six months ended June 30, 2011 - $102,733 and $205,466, respectively).

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.
 
NEULION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
Information as at June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 (unaudited)
 

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

   
              Three months
   
              Six months
 
   
              ended
   
              ended
 
   
              June 30,
   
              June 30,
 
   
2012
   
2011
   
2012
   
2011
 
    $     $     $     $  
                                 
New York Islanders
    67,730       78,519       146,560       168,686  
Renaissance
    30,000       30,000       60,000       60,000  
Smile Train
    27,000       27,000       54,000       54,000  
KyLinTV
    825,924       873,753       1,313,841       1,484,300  
      950,654       1,009,272       1,574,401       1,766,986  

As at June 30, 2012 and December 31, 2011, the amounts due from (to) related parties are as follows:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
    $     $  
                 
New York Islanders
    (10,221 )     (13,298 )
Renaissance
    114        
KyLin TV
    1,394,760       734,452  
      1,384,653       721,154  

6. Loss Per Share

Basic loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding for the period, and excludes the effect of potential shares of common stock, as their inclusion would be anti-dilutive due to the losses recorded by the Company.

The following table summarizes the potential shares of common stock that was outstanding as at June 30, 2012 and December 31, 2011 that was not included in the computation of diluted loss per share as their effect would have been anti-dilutive.
   
June 30,
   
December 31,
 
   
2012
   
2011
 
      #       #  
                 
Class 3 Preference Shares
    17,176,818       17,176,818  
Class 4 Preference Shares
    10,912,265       10,912,265  
Stock options
    17,110,313       15,980,375  
Stock appreciation rights
    675,000       675,000  
Warrants
    10,764,482       6,975,000  
Retention warrants
    615,550       626,750  
Restricted stock
          2,500,000  
 
NEULION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
Information as at June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 (unaudited)


 
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 where required.  Although the extent of potential costs and losses, if any, is uncertain, management believes that the ultimate resolution of such contingencies will not have an adverse effect on the consolidated financial position or results of operations of the Company.

8. Segmented Information

The Company operates as one reportable segment to provide end-to-end enterprise-level IPTV and other professional services.  Substantially all of Company’s revenues originate from, and long-lived assets are located in, the United States. 

9. Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes Recognition.”  The Company does not believe there are any uncertain tax positions under ASC 740.

The Company has not recorded an income tax benefit due to current year losses and the associated valuation allowance on the Company’s net operating losses.

10.  Redeemable Preferred Stock

The Company has 50,000,000 authorized shares of preferred stock, $0.01 par value per share, of which 17,176,818 shares have been designated as Class 3 Preference Shares and 10,912,265 have been designated as Class 4 Preference Shares.  

Class 3 Preference Shares

On September 29, 2010, the Company issued 17,176,818 Class 3 Preference Shares, at a price of CDN$0.60 per share in a private offering, for aggregate gross proceeds of $10,000,000.  Expenses related to the share issuance were $245,662.  The principal terms of the Class 3 Preference Shares are as follows:
 
Voting rights – The Class 3 Preference Shares have voting rights (one vote per share) equal to those of the Company’s common stock.

Dividend rights – The Class 3 Preference Shares carry a fixed cumulative dividend, as and when declared by our Board of Directors, of 8% per annum, accrued daily, compounded annually and payable in cash upon a liquidation event for up to five years, as well as the right to receive any dividends paid to holders of common stock.

Conversion rights – The holders of the Class 3 Preference Shares have the right to convert any or all of their Class 3 Preference Shares, at the option of the holder, at any time, into common stock on a one for one basis.  In addition, the Class 3 Preference Shares will automatically be converted into common stock in the event that the holders of a majority of the outstanding Class 3 Preference Shares consent to such conversion.  In the event of conversion to common stock, accrued but unpaid dividends shall be paid in cash and shall not increase the number of shares of common stock issuable upon such conversion.
 
NEULION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
Information as at June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 (unaudited)
 

 
Redemption rights – At any time after five years from the date of issuance, the holders of a majority of the Class 3 Preference Shares may elect to have the Company redeem the Class 3 Preference Shares for an amount equal to CDN$0.60 per Class 3 Preference Share plus all accrued and unpaid dividends (the “Class 3 Redemption Amount”). At any time after five years from the date of issuance, the Company may, at its option, redeem the Class 3 Preference Shares for an amount equal to CDN$0.60 per Class 3 Preference Share plus all accrued and unpaid dividends.

On June 7, 2011, stockholders of the Company approved a resolution to amend the Company’s Certificate of Incorporation to change the Redemption Amount (as defined in the Certificate of Incorporation) of the Class 3 Preference Shares from CDN$0.60 to US$0.58218 per share, plus all accrued and unpaid dividends thereon.

Liquidation entitlement – In the event of any liquidation, dissolution or winding up of the Company, the holders of the Class 3 Preference Shares shall be entitled to receive, in preference to the holders of common stock, an amount equal to the aggregate Class 3 Redemption Amount.

Other provisions – There will be proportional adjustments for stock splits, stock dividends, recapitalizations and the like.

Accounting for Class 3 Preference Shares

If certain criteria are met, companies must bifurcate conversion options from their host instruments and account for them as free-standing derivative instruments.  The Company has evaluated the conversion option on the Class 3 Preference Shares and determined that the embedded conversion option should not be bifurcated.  Additionally, the Company analyzed the conversion feature and determined that the effective conversion price was higher than the market price at the date of issuance; therefore, no beneficial conversion feature was recorded.  The Company has classified the Class 3 Preference Shares as temporary equity because they are redeemable upon the occurrence of an event that is not solely within the control of the issuer.  As noted above, the holders of the Class 3 Preference Shares may demand redemption at any time after five years from the date of issuance.  As the redemption amount was originally denominated in Canadian dollars, the Company re-measured the redeemable preferred stock amount recorded in the consolidated balance sheet each period, based on prevailing exchange rates.  The resulting adjustment, along with the accretion of the issuance costs, was recorded in stockholders’ equity.

As a result of the aforementioned change in the Class 3 Redemption Amount, from CDN$0.60 to US$0.58218 per share, the Company adjusted the carrying amount of the Class 3 Preference Shares on June 7, 2011 to US$10,000,000.

Class 4 Preference Shares

On June 29, 2011, the Company issued 10,912,265 Class 4 Preference Shares, at a price of $0.4582 per share in a private offering, for aggregate gross proceeds of $5,000,000.  Expenses related to the share issuance were $150,454.  The principal terms of the Class 4 Preference Shares are as follows:
 
Voting rights – The Class 4 Preference Shares have voting rights (one vote per share) equal to those of the Company’s common stock.

Dividend rights – The Class 4 Preference Shares carry a fixed cumulative dividend at a rate of 8% per annum to be paid as and when declared by the Company’s Board of Directors.  Notwithstanding the foregoing, such dividends are automatically payable in cash upon a liquidation event or redemption by the Company for up to five years.
 
NEULION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
Information as at June 30, 2012 and for the three and six months ended
June 30, 2012 and 2011 (unaudited)
 

 
Conversion rights – The holders of the Class 4 Preference Shares have the right to convert any or all of their Class 4 Preference Shares, at the option of the holder, at any time, into common stock on a one for one basis.  In addition, the Class 4 Preference Shares will automatically be converted into common stock in the event that the holders of a majority of the outstanding Class 4 Preference Shares consent to such conversion.  In the event of conversion to common stock, declared and accrued, but unpaid dividends shall be paid in shares of common stock based on a conversion price equal to the trading price of the common stock at the close of business on the last trading day prior to the date of conversion.

Redemption rights – At any time after five years from the date of issuance, the holders of a majority of the Class 4 Preference Shares may elect to have the Company redeem the Class 4 Preference Shares for an amount equal to $0.4582 per Class 4 Preference Share plus all declared and accrued, but unpaid, dividends (the “Class 4 Redemption Amount”).  At any time after five years from the date of issuance, the Company may, at its option, redeem the Class 4 Preference Shares for an amount equal to $0.4582 per Class 4 Preference Share plus all accrued and unpaid dividends.

Liquidation entitlement – In the event of any liquidation, dissolution or winding up of the Company, the holders of the Class 4 Preference Shares shall be entitled to automatically receive, in preference to the holders of common stock and Class 3 Preference Shares, an amount equal to $0.4582 per Class 4 Preference Share plus all accrued and unpaid dividends.

Other provisions – There will be proportional adjustments for stock splits, stock dividends, recapitalizations and the like.

Accounting for Class 4 Preference Shares

If certain criteria are met, companies must bifurcate conversion options from their host instruments and account for them as free-standing derivative instruments.  The Company has evaluated the conversion option on the Class 4 Preference Shares and determined that the embedded conversion option should not be bifurcated.  Additionally, the Company analyzed the conversion feature and determined that the effective conversion price was higher than the market price at the date of issuance; therefore, no beneficial conversion feature was recorded.  The Company has classified the Class 4 Preference Shares as temporary equity because they are redeemable upon the occurrence of an event that is not solely within the control of the issuer.  
 
 
 
 
 
 
 
Item 2.  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 consolidated financial statements and accompanying notes for the three and six months ended June 30, 2012 and 2011, 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 10, 2012, the Bank of Canada noon rate for conversion of United States dollars to Canadian dollars (“CDN$”) was US$1 to CDN$0.9916.
 
Our MD&A is intended to enable readers to gain an understanding of our current results and financial position.  To do so, we provide information and analysis comparing the results of operations and financial position for the current 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 year ended December 31, 2011 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 may 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 at the date of this MD&A.

Forward-looking statements involve significant risks, 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, we cannot assure readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by law. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including: our ability to develop and execute on our business plan, including further diversifying our customer base; continuing to invest in and expand our sports-related business; our ability to increase revenue; general economic and market segment conditions; our customers’ subscriber levels; the financial health of our customers;  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.  A more detailed assessment of the risks that could cause actual results to materially differ from current expectations is contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011, which is available on www.sec.gov and www.sedar.com.
 
Overview
 
NeuLion is a technology service provider delivering live and on-demand content to Internet-enabled devices.  Through our cloud-based end-to-end solution, we build and manage private, interactive digital networks that enable our customers to provide a destination for their subscribers to view and interact with their content.  We were incorporated on January 14, 2000 under the Canada Business Corporations Act and were domesticated under Delaware law on November 30, 2010.  Our common stock is listed on the Toronto Stock Exchange (“TSX”).
 
Our core business and business model has evolved from being a provider of professional information technology services and international programming to a provider of customized, end-to-end, interactive video services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies.  Shifts in consumer behavior drive technology requirements, and our technology empowers our customers to capitalize on the growing consumer demand for viewing video content on multiple types of Internet-enabled devices.  Our technology enables delivery to a range of Internet-enabled devices, including personal computers, laptops, mobile devices, gaming consoles, tablets, Internet-enabled TVs, third-party set top boxes (“STBs”), standard TV sets that have Internet-connected STBs and other Internet-enabled consumer accessories.  Our platform offers an end-to-end service, which includes content management, subscriber management, digital rights management, billing services, app creation, content delivery and advertising substitution.
 
Overall Performance – Three months ended June 30, 2012 vs three months ended June 30, 2011
 
Highlights
 
 
Ø
Total revenue decreased by $1.3 million, or 13%, as compared to the same period a year ago.
     
 
Ø
Services revenue decreased by $0.6 million, or 7%, as compared to the same period a year ago.
     
 
Ø
Cost of services revenue, exclusive of depreciation and amortization, improved by 3%, as a percentage of services revenue, as compared to the same period a year ago.
     
 
Ø
Non-GAAP Adjusted EBITDA Loss (as defined below) improved by $0.1 million, or 6%, as compared to the same period a year ago.
 
Overview
 
Total revenue for the three months ended June 30, 2012 was $8.7 million, a decrease of $1.3 million, or 13%, from $10.0 million for the three months ended June 30, 2011.  The change was a result of a decrease in services revenue of $0.6 million and a decrease in equipment revenue of $0.7 million.
 
The $0.6 million decrease in services revenue was primarily a result of a decrease in revenues from the Company’s business-to-consumer (“B2C”) business.

The $0.7 million decrease in equipment revenue was primarily a result of a decrease in purchases from an existing customer.
 
Our net loss attributable to common stockholders for the three months ended June 30, 2012 was $3.5 million, or a loss of $0.02 per basic and diluted share of common stock, compared with a net loss of $2.9 million, or a loss of $0.02 per basic and diluted share of common stock, for the three months ended June 30, 2011.  The change in net loss attributable to common stockholders of $0.6 million, or 21%, was due to the following:
 
 
·
a decrease in total revenue of $1.3 million;
 
·
an increase in stock-based compensation of $0.3 million (non-cash item);
 
·
an increase in research and development costs of $0.2 million;
 
·
an adjustment to the carrying amount of redeemable preferred stock of $0.4 million for the three months ended June 30, 2011 (non-cash item); and
 
·
an increase in deferred income taxes of $0.1 million (non-cash item).

offset by the following:
 
 
·
a decrease in cost of revenue of $0.9 million;
 
·
a decrease  in selling, general and administrative expenses, excluding stock-based compensation of $0.6 million; and
 
·
a decrease in depreciation and amortization of $0.2 million (non-cash item).

 Our non-GAAP Adjusted EBITDA Loss (as defined below) was $1.5 million for the three months ended June 30, 2012, compared with $1.6 million for the three months ended June 30, 2011.  The improvement in non-GAAP Adjusted EBITDA Loss was due to the impact of the items noted in the net loss discussion above.  
 
We report non-GAAP Adjusted EBITDA Loss because it is a key measure used by management to evaluate our results and make strategic decisions about the Company, including potential acquisitions.  Non-GAAP Adjusted EBITDA Loss represents net loss before interest, income taxes, depreciation and amortization, stock-based compensation, unrealized gain/loss on derivatives, investment income, non-controlling interests and foreign exchange gain/loss.   This measure does not have any standardized meaning prescribed by U.S. GAAP and therefore is unlikely to be comparable to the calculation of similar measures used by other companies, and should not be viewed as an alternative to measures of financial performance or changes in cash flows calculated in accordance with U.S. GAAP.
 
 
The reconciliation from net loss to non-GAAP Adjusted EBITDA Loss is as follows:
 
   
              Three months ended,
 
   
              June 30,
 
   
2012
   
2011
 
    $     $  
                 
Consolidated net loss on a GAAP basis
    (3,485,657 )     (3,323,196 )
                 
Depreciation and amortization
    1,182,217       1,378,592  
Stock-based compensation
    681,445       334,183  
Income taxes
    90,000       0  
Interest income and foreign exchange loss
    14,728       (3,113 )
                 
Non-GAAP Adjusted EBITDA Loss
    (1,517,267 )     (1,613,534 )
 

Overall Performance – Six months ended June 30, 2012 vs six months ended June 30, 2011
 
Highlights
 
 
Ø
Total revenue decreased by $0.8 million, or 4%, as compared to the same period a year ago.
     
 
Ø
Services revenue decreased by $0.4 million, or 2%, as compared to the same period a year ago.
     
 
Ø
Cost of services revenue, exclusive of depreciation and amortization, remained constant, as a percentage of services revenue, as compared to the same period a year ago.
     
 
Ø
Non-GAAP Adjusted EBITDA Loss (as defined below) improved by $0.2 million, or 5%, as compared to the same period a year ago.
 
Overview
 
Total revenue for the six months ended June 30, 2012 was $19.1 million, a decrease of $0.8 million, or 4%, from $19.9 million for the six months ended June 30, 2011.  The change was a result of a decrease in services revenue of $0.4 million and a decrease in equipment revenue of $0.4 million.
 
The $0.4 million decrease in services revenue was primarily a result of a decrease in revenues from our B2C business, offset by an increase in revenues from our College Sports business.

The $0.4 million decrease in equipment revenue was a result of a decrease in purchases from an existing customer.
 
Our net loss attributable to common stockholders for the six months ended June 30, 2011 and 2012 was $7.0 million, or a loss of $0.05 per basic and diluted share of common stock.   Our non-GAAP Adjusted EBITDA Loss (as defined below) was $3.5 million for the six months ended June 30, 2012, compared with $3.7 million for the six months ended June 30, 2011.  
 
The improvement in non-GAAP Adjusted EBITDA Loss of $0.2 million, or 5%, was due to the following:
 
 
·
a decrease in cost of revenue of $0.4 million; and
 
·
a decrease  in selling, general and administrative expenses, excluding stock-based compensation of $0.9 million.
 
 
offset by the following:
 
 
·
a decrease in total revenue of $0.8 million; and
 
·
an increase in research and development expenses of $0.3 million.

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


Consolidated Statement of Operations Reconciliation:
           
   
              Six months ended,
 
   
              June 30,
 
   
2012
   
2011
 
    $     $  
                 
Consolidated net loss on a GAAP basis
    (7,030,020 )     (7,226,250 )
                 
Depreciation and amortization
    2,420,818       2,824,011  
Stock-based compensation
    914,869       729,397  
Income taxes
    217,000       0  
Interest income and foreign exchange loss
    26,362       21,073  
                 
Non-GAAP Adjusted EBITDA Loss
    (3,450,971 )     (3,651,769 )
 
Revenue
 
We earn revenue from four broad categories of customers:
 
 
·
TV Everywhere
This category represents all of our non-sports customers that own content rights, including content aggregators and distributors.  These customers include Dish Network, KyLin TV, Sky Angel, BTN2GO and the Independent Film Channel.
 
 
·
Pro Sports
This category represents all of our major, minor and junior sports league customers.  These customers include the National Football League (NFL), the National Hockey League (NHL), the National Basketball Association (NBA), Ultimate Fighting Championship (UFC), Major League Soccer (MLS) and the American Hockey League (AHL).
 
 
·
College Sports
This category represents all of our college and collegiate conference customers.  We partner with many National Collegiate Athletic Association (NCAA) schools and have agreements in place with over 150 colleges, universities and related websites.
 
 
·
Other
This category includes our B2C business, in which we market our own content directly to customers, and various consulting services.  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 B2C IPTV interests.  As exclusive distributor, KyLin TV will obtain, advertise and market all of the Company’s B2C content, in accordance with the terms of the amendment.  Accordingly, KyLin TV will now record the gross revenues from the Company’s B2C content as well as the associated license fees, whereas the Company will record revenues in accordance with the revised fee schedule in the amendment.
 
Within each of these four categories of customers, revenue is categorized as follows:
 
 
·
Services revenue, which consists of:
 
 
§
Setup fees - non-recurring and charged to customers for design, setup and implementation services.
 
 
§
Monthly/annual fees - recurring and charged to customers for ongoing hosting, support and maintenance.
 
 
§
Variable fees - recurring and earned through subscriptions, usage, advertising, support and eCommerce.
 
 
v
Subscription revenue consists of recurring revenue based on the number of subscribers.  Revenue is typically generated on a monthly, quarterly or annual basis and can be either a fixed fee per user or a variable fee based on a percentage of the subscription price.
 
v
Usage fees are charged to our customers for bandwidth and storage.
 
v
Advertising revenues are earned through the insertion of advertising impressions on websites and in streaming video at a cost per thousand impressions.
 
v
Support revenue consists of fees charged to our customers for providing customer support to their end users.
 
 
 
v
eCommerce revenues are earned through providing customers with ticketing and retail merchandising web solutions.
 
 
·
Equipment revenue, which is non-recurring, consists of the sale of STBs to content partners and/or end users and is recognized when title to a STB passes to our customer.  Shipping revenue, STB rentals and computer hardware sales are also included in equipment revenue.
 
Cost and Expenses
 
Cost of services revenue
 
Cost of services revenue primarily consists of:
 
 
·
royalty payments;
 
 
·
broadcast operating costs (teleport fees, bandwidth usage fees, colocation fees); and
 
 
·
cost of advertising revenue, which is subject to revenue shares with the content provider.
 
Cost of equipment revenue
 
Cost of equipment revenue primarily consists of purchases of STB products and parts for resale to customers.  Shipping costs are included in cost of equipment revenue.
 
Selling, general and administrative expenses, including stock-based compensation
 
Selling, general and administrative (“SG&A”) costs, including stock-based compensation, include:
 
 
·
Wages and benefits – represents compensation for our full-time and part-time employees as well as fees for consultants who we use from time to time;
 
 
·
Stock-based compensation – represents the estimated fair value of our options, warrants and stock appreciation rights (“Convertible Securities”) for financial accounting purposes, prepared using the Black-Scholes-Merton model, which requires a number of subjective assumptions, including assumptions about the expected life of the Convertible Securities, risk-free interest rates, dividend rates, forfeiture rates and the future volatility of the price of our shares of common stock.   The estimated fair value of the Convertible Securities is expensed over the vesting period, which is normally four years, with the Convertible Securities vesting in equal amounts each month.  However, our 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 corporate marketing activities (B2B) and marketing campaigns for various sports and international properties (B2C), that pre-existed the new distribution agreement with KyLin TV.  These initiatives entail both online and traditional expenditures and include search engine marketing, digital media purchases, e-mail and social media marketing, grassroots and event marketing, print and radio advertising, and reseller/affiliate sales channels; 
 
 
·
Professional fees – represents legal, accounting, and public and investor relations expenses; and
 
 
·
Other SG&A expenses represents travel expenses, rent, office supplies, corporate IT services, credit card processing fees and other general operating expenses.
 
Research and development
 
Research and development costs primarily consist of wages and benefits for research and development department personnel.

 
RESULTS OF OPERATIONS
 
Comparison of Three Months Ended June 30, 2012 to Three Months Ended June 30, 2011
 
Our consolidated financial statements for the three months ended June 30, 2012 and 2011 have been prepared in accordance with U.S. GAAP.  A comparison of our results of operations for the three months ended June 30, 2012 and 2011 is as follows:
 
   
2012
   
2011
   
Change
    $     $       %  
Revenue
                     
   Services revenue
    8,202,133       8,813,595       -7%  
   Equipment revenue
    514,793       1,144,529       -55%  
      8,716,926       9,958,124       -12%  
                         
Costs and expenses
                       
   Cost of services revenue, exclusive of depreciation
                       
      and amortization shown separately below
    2,676,978       3,150,377       -15%  
   Cost of equipment revenue
    390,227       826,326       -53%  
   Selling, general and administrative,  including
                       
      stock-based compensation
    6,082,672       6,344,930       -4%  
   Research and development
    1,765,761       1,584,208       11%  
   Depreciation and amortization
    1,182,217       1,378,592       -14%  
      12,097,855       13,284,433       -9%  
Operating loss
    (3,380,929 )     (3,326,309 )     2%  
                         
Other income (expense)
                       
   Loss on foreign exchange
    (16,558 )     (3,796 )     336%  
   Interest income
    1,830       6,909       -74%  
      (14,728 )     3,113       -573%  
Net and comprehensive loss before income taxes
    (3,395,657 )     (3,323,196 )     2%  
   Income taxes
    (90,000 )     -       -  
Net and comprehensive loss
    (3,485,657 )     (3,323,196 )     5%  
   Net loss attributable to non-controlling interest
    -       11,731       -100%  
Net loss and comprehensive loss attributable to controlling interest
    (3,485,657 )     (3,311,465 )     5%  
   Adjustment to the carrying amount of redeemable preferred stock
    -       420,889       -100%  
Net and comprehensive loss attributable to NeuLion, Inc. common stockholders
    (3,485,657 )     (2,890,576 )     21%  
 
Revenue
 
Services revenue
 
Services revenue decreased from $8.8 million for the three months ended June 30, 2011 to $8.2 million for the three months ended June 30, 2012.  Services revenue includes revenue from TV Everywhere, Pro Sports, College Sports and Other customers and is comprised of set-up fees, annual/monthly fees and variable fees.  Period-over-period variances in each sector are detailed below: 
 
TV Everywhere
 
Revenue from TV Everywhere customers increased from $2.3 million for the three months ended June 30, 2011 to $2.6 million for the three months ended June 30, 2012.  The $0.3 million increase was a result of an increase in monthly/annual fees of $0.2 million and variable subscription fees of $0.1 million.
 
 
Pro Sports
 
Revenue from Pro Sports customers decreased from $3.2 million for the three months ended June 30, 2011 to $2.6 million for the three months ended June 30, 2012.  The $0.6 million decrease was the result of a decrease in set up fees of $0.4 million and a decrease in variable usage fees of $0.2 million.
 
College Sports
 
Revenue from College Sports customers increased from $2.2 million for the three months ended June 30, 2011 to $2.4 million for the three months ended June 30, 2012.  The $0.2 million increase was the result of an increase in variable subscription fees of $0.1 million and variable advertising fees of $0.1 million.

Other
 
Revenue from Other customers decreased from $1.1 million for the three months ended June 30, 2011 to $0.6 million for the three months ended June 30, 2012.  The $0.5 million change primarily resulted from a decrease in variable subscription fees, as a result of our amended agreement with KyLin TV, discussed previously.
 
Equipment revenue
 
Equipment revenue decreased from $1.2 million for the three months ended June 30, 2011 to $0.5 million for the three months ended June 30, 2012.  The $0.7 million change was due to a decrease in purchases by an existing customer.  Over 85% of our equipment revenue is generated from our TV Everywhere customers.
 
Costs and Expenses
 
Cost of services revenue
 
Cost of services revenue decreased from $3.2 million for the three months ended June 30, 2011 to $2.7 million for the three months ended June 30, 2012.  Cost of services revenue as a percentage of services revenue improved from 36% for the three months ended June 30, 2011 to 33% for the three months ended June 30, 2012.  The 3% improvement (as a percentage of services revenue) primarily relates to the amendment we signed with KyLin TV discussed previously.
 
Cost of equipment revenue
 
Cost of equipment revenue decreased from $0.8 million for the three months ended June 30, 2011 to $0.4 million for the three months ended June 30, 2012.  Cost of equipment revenue as a percentage of equipment revenue increased from 72% for the three months ended June 30, 2011 to 76% for the three months ended June 30, 2012.  
 
Selling, general and administrative, including stock-based compensation
 
Selling, general and administrative, including stock-based compensation, decreased from $6.3 million for the three months ended June 30, 2011 to $6.1 million for the three months ended June 30, 2012.  The individual variances are as follows:
 
 
·
Wages and benefits decreased from $4.4 million for the three months ended June 30, 2011 to $4.0 million for the three months ended June 30, 2012.  The $0.4 million decrease was a result of the amendment we signed with KyLin TV discussed previously.
 
 
·
Stock-based compensation expense increased from $0.3 million for the three months ended June 30, 2011 to $0.7 million for the three months ended June 30, 2012.  The increase of $0.4 million was due to the issuance of approximately two million fully vested warrants to a consulting firm during the three months ended June 30, 2012.
  
 
·
Marketing expenses decreased from $0.3 million for the three months ended June 30, 2011 to $0.1 million for the three months ended June 30, 2012.  The $0.2 million decrease was a result of the amendment we signed with KyLin TV discussed previously.
 
 
·
Professional fees decreased from $0.5 million for the three months ended June 30, 2011 to $0.4 million for the three months ended June 30, 2012.   
 
 
·
Other SG&A expenses increased from $0.8 million for the three months ended June 30, 2011 to $0.9 million for the three months ended June 30, 2012.    
 
 
Research and development
 
 Research and development costs increased from $1.6 million for the three months ended June 30, 2011 to $1.8 million for the three months ended June 30, 2012.   The $0.2 million increase was a result of an increase in employees.

Depreciation and amortization
 
Depreciation and amortization decreased from $1.4 million for the three months ended June 30, 2011 to $1.2 million for the three months ended June 30, 2012.   The $0.2 million decrease was the result of fixed assets being fully depreciated subsequent to June 30, 2011.
  
 Comparison of Six Months Ended June 30, 2012 to Six Months Ended June 30, 2011
 
Our consolidated financial statements for the six months ended June 30, 2012 and 2011 have been prepared in accordance with U.S. GAAP.  A comparison of our results of operations for the six months ended June 30, 2012 and 2011 is as follows:
 
   
2012
   
2011
   
Change
 
      $     $       %  
Revenue
                     
   Services revenue
    18,033,487       18,377,525       -2%  
   Equipment revenue
    1,051,955       1,526,597       -31%  
      19,085,442       19,904,122       -4%  
                         
Costs and expenses
                       
   Cost of services revenue, exclusive of depreciation
                       
      and amortization shown separately below
    6,724,521       6,819,188       -1%  
   Cost of equipment revenue
    856,919       1,137,888       -25%  
   Selling, general and administrative,  including
                       
      stock-based compensation
    12,509,531       13,256,343       -6%  
   Research and development
    3,360,311       3,071,869       9%  
   Depreciation and amortization
    2,420,818       2,824,011       -14%  
      25,872,100       27,109,299       -5%  
Operating loss
    (6,786,658 )     (7,205,177 )     -6%  
                         
Other income (expense)
                       
   Loss on foreign exchange
    (30,439 )     (41,892 )     -27%  
   Interest income
    4,077       20,819       -80%  
      (26,362 )     (21,073 )     25%  
Net and comprehensive loss before income taxes
    (6,813,020 )     (7,226,250 )     -6%  
   Income taxes
    (217,000 )     -       -  
Net and comprehensive loss
    (7,030,020 )     (7,226,250 )     -3%  
   Net loss attributable to non-controlling interest
    -       21,485       -100%  
Net and comprehensive loss attributable to controlling interest
    (7,030,020 )     (7,204,765 )     -2%  
   Adjustment to the carrying amount of redeemable preferred stock
    -       153,233       -100%  
Net and comprehensive loss attributable to NeuLion, Inc. common stockholders
    (7,030,020 )     (7,051,532 )     0%  
 
Revenue
 
Services revenue
 
Services revenue decreased from $18.4 million for the six months ended June 30, 2011 to $18.0 million for the six months ended June 30, 2012.  Services revenue includes revenue from TV Everywhere, Pro Sports, College Sports and Other customers and is comprised of set-up fees, annual/monthly fees and variable fees.  Period-over-period variances in each sector are detailed below:  

 
TV Everywhere
 
Revenue from TV Everywhere customers increased from $4.6 million for the six months ended June 30, 2011 to $5.1 million for the six months ended June 30, 2012.  The $0.5 million increase was a result of an increase in monthly/annual fees of $0.3 million and in variable subscription fees of $0.2 million.
 
Pro Sports
 
 Revenue from Pro Sports customers decreased from $6.5 million for the six months ended June 30, 2011 to $6.3 million for the six months ended June 30, 2012.  The $0.2 million decrease was the result of a decrease in revenues from set-up fees.
 
College Sports
 
Revenue from College Sports customers increased from $5.0 million for the six months ended June 30, 2011 to $5.2 million for the six months ended June 30, 2012.  The $0.2 million increase was a result of an increase in variable subscription fees.
 
Other
 
Revenue from Other customers decreased from $2.3 million for the six months ended June 30, 2011 to $1.4 million for the six months ended June 30, 2012.  The $0.9 million change primarily resulted from a decrease in variable subscription fees, as a result of our amended agreement with KyLin TV, discussed previously.
 
Equipment revenue
 
Equipment revenue decreased from $1.5 million for the six months ended June 30, 2011 to $1.1 million for the six months ended June 30, 2012.  The $0.4 million change was due to a decrease in purchases by an existing customer.  Over 85% of our equipment revenue is generated from our TV Everywhere customers.
 
Costs and Expenses
 
Cost of services revenue
 
Cost of services revenue decreased from $6.8 million for the six months ended June 30, 2011 to $6.7 million for the six months ended June 30, 2012.  Cost of services revenue as a percentage of services revenue remained constant at 37% for the six months ended June 30, 2011 and 2012.  
 
Cost of equipment revenue
 
Cost of equipment revenue decreased from $1.1 million for the six months ended June 30, 2011 to $0.9 million for the six months ended June 30, 2012.  Cost of equipment revenue as a percentage of equipment revenue increased from 75% for the six months ended June 30, 2011 to 81% for the six months ended June 30, 2012.  
 
Selling, general and administrative, including stock-based compensation
 
Selling, general and administrative, including stock-based compensation, decreased from $13.3 million for the six months ended June 30, 2011 to $12.5 million for the six months ended June 30, 2012.  The individual variances are as follows:
 
 
·
Wages and benefits decreased from $8.9 million for the six months ended June 30, 2011 to $8.4 million for the three months ended June 30, 2012.  The $0.5 million decrease was a result of the amendment we signed with KyLin TV, discussed previously.
 
 
·
Stock-based compensation expense increased from $0.7 million for the six months ended June 30, 2011 to $0.9 million for the six months ended June 30, 2012.  The increase of $0.2 million was due to the issuance of approximately two million fully vested warrants to a consulting firm during the three months ended June 30, 2012 offset by stock issued to a consultant and restricted stock issued during the three months ended June 30, 2011.
  
 
·
Marketing expenses decreased from $0.4 million for the six months ended June 30, 2011 to $0.2 million for the six months ended June 30, 2012.  The $0.4 million decrease was a result of the amendment we signed with KyLin TV, discussed previously.
 
 
·
Professional fees were $0.9 million for the six months ended June 30, 2011 and 2012.   
 
 
 
·
Other SG&A expenses decreased from $2.4 million for the six months ended June 30, 2011 to $2.1 million for the six months ended June 30, 2012.  The $0.3 million decrease was primarily a result of a decrease in travel. 
 
Research and development
 
Research and development costs increased from $3.1 million for the six months ended June 30, 2011 to $3.4 million for the six months ended June 30, 2012.    The $0.3 million increase was a result of an increase in employees.
 
Depreciation and amortization
 
Depreciation and amortization decreased from $2.8 million for the six months ended June 30, 2011 to $2.4 million for the six months ended June 30, 2012.   The $0.4 million decrease was the result of fixed assets being fully depreciated subsequent to June 30, 2011.
  
LIQUIDITY AND CAPITAL RESOURCES
 
Our cash position was $5.1 million at June 30, 2012.  For the six months ended June 30, 2012, we used $6.9 million to fund operations, which included cash inflows from changes in operating assets and liabilities of $3.4 million.   Additionally, we spent $0.4 million to purchase fixed assets.
 
As of June 30, 2012, our principal sources of liquidity included cash and cash equivalents of $5.1 million and trade accounts receivable of $2.2 million.  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 the next twelve months.
 
At June 30, 2012, approximately 67% of our cash and cash equivalents were held in accounts with U.S. banks that received a BBB+ rating from Standard and Poor’s and an A3 rating from Moody’s.  The Company believes that these U.S. financial institutions are secure notwithstanding the current global economy and that we will be able to access the remaining balance of bank deposits.  Our investment policy is to invest in low-risk short-term investments which are primarily term deposits.  We have not had a history of any defaults on these term deposits, nor do we expect any in the future given the short term to maturity of these investments.
 
 Our business as currently operated is still in its early stages, with only a few years of operating history.  Our core business and business model has evolved from being a provider of professional information technology services and international programming to a provider of customized, end-to-end interactive, video services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies.  From our inception, we have incurred substantial net losses and have an accumulated deficit of $82.4 million; however, our non-GAAP Adjusted EBITDA Losses (as previously defined) have continuously improved period-over-period and management expects this trend to continue.  We continue to review our operating structure in an attempt to maximize revenue opportunities, further reduce costs and achieve profitability.  Based on our current business plan and internal forecasts, and considering the risks that are present in the current global economy, we believe that our cash on hand will be sufficient to meet our working capital and operating cash requirements for the next twelve months.  However, we will require expenditures of significant funds for marketing, building our subscriber management systems, programming and website development, maintaining adequate video streaming and database software, pursuing and maintaining channel distribution agreements with our channel partners, fees relating to acquiring and maintaining Internet streaming rights to our content and the construction and maintenance of our delivery infrastructure and office facilities.  Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in our Annual Report on Form 10-K for the fiscal year December 31, 2011.  If our actual cash needs are greater than forecasted and if cash on hand is insufficient to meet our working capital and cash requirements for the next twelve months, we will require outside capital in addition to cash flow from operations in order to fund our business.  Our short operating history, our current lack of profitability and the prolonged upheaval in the capital markets could each or all be factors that might negatively impact our ability to obtain outside capital on reasonable terms, or at all.  If we were ever unable to obtain needed capital, we would reevaluate and reprioritize our planned capital expenditures and operating activities.  We cannot assure you that we will ultimately be able to generate sufficient revenue or reduce our costs in the anticipated time frame to become profitable and have sustainable net positive cash flows. 
 
Working Capital Requirements
 
Our net working capital deficit at June 30, 2012 was $(6.5) million, a decrease of $3.8 million from the December 31, 2011 net working capital deficit of $(2.7) million.  Our working capital ratios at June 30, 2012 and December 31, 2011 were 0.63 and 0.88, respectively.  Included in current liabilities at June 30, 2012 and December 31, 2011 are approximately $4.7 million and $6.6 million, respectively, of liabilities (deferred revenue) that we do not anticipate settling in cash.  Excluding these liabilities, our working capital ratios at June 30, 2012 and December 31, 2011 were 0.86 and 1.26, respectively.
 
 
The change in working capital was primarily due to a decrease in current assets of $8.1 million offset by a decrease in current liabilities of $4.3 million.
 
Current assets at June 30, 2012 were $10.8 million, a decrease of $8.1 million from the December 31, 2011 balance of $18.9 million.  The decrease was primarily the result of a decrease in cash and cash equivalents of $7.3 million and a decrease in accounts receivable of $1.3 million, offset by an increase in due from related parties of $0.7 million.
 
Current liabilities at June 30, 2012 were $17.3 million, a decrease of $4.3 million from the December 31, 2011 balance of $21.6 million.  The change was due to a decrease in deferred revenue of $1.9 million, a decrease in accounts payable of $1.7 million and a decrease in accrued liabilities of $0.7 million.
 
Cash Flows
 
 
Summary balance sheet data:
 
   
As at
 
   
June 30, 
2012
   
December 31,
2011
 
    $     $  
Current Assets
               
Cash and cash equivalents
    5,073,838       12,346,882  
Accounts receivable, net
    2,170,295       3,494,077  
Other receivables
    315,457       309,764  
Inventory, net
    754,224       797,436  
Prepaid expenses and deposits
    1,094,573       1,189,311  
Due from related parties
    1,394,874       734,452  
Total current assets
    10,803,261       18,871,922  
                 
Current Liabilities
               
Accounts payable
    7,881,085       9,597,359  
Accrued liabilities
    4,640,189       5,314,308  
Due to related parties
    10,221       13,298  
Deferred revenue
    4,727,683       6,624,693  
Total current liabilities
    17,259,178       21,549,658  
                 
Working capital ratio
    0.63       0.88  
 
Comparative summarized cash flows:
 
   
               Three months ended
   
               Six months ended
 
   
               June 30
   
               June 30
 
   
2012
   
2011
   
2012
   
2011
 
    $     $     $     $  
                                 
Cash used in operating activities
    (4,173,168 )     (3,459,166 )     (6,864,809 )     (8,006,698 )
Cash used in investing activities
    (86,187 )     (188,465 )     (408,235 )     (487,751 )
Cash provided by financing activities
    -       4,903,906       -       4,903,906  

 
Operating activities
 
Cash used in operating activities for the six months ended June 30, 2012 was $6.9 million.  Changes in net cash used in operating activities reflect the consolidated net loss of $7.0 million for the period:
 
 
·
plus non-cash items in the amount of $3.5 million, which relates to stock-based compensation, depreciation and amortization, and deferred income taxes; and
 
 
·
less changes in operating assets and liabilities of $3.4 million.
 
 
Investing activities
 
Cash used in investing activities for the six months ended was $0.4 million.  These funds were used to purchase fixed assets.

Financing activities
 
No cash was provided by or used in financing activities.
 
Recently Issued Accounting Standards
 
 In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU No. 2011-05”), which improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in Other Comprehensive Income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The amendments in this standard require that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Subsequently in December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income” (“ASU No. 2011-12”), which indefinitely defers the requirement in ASU No. 2011-05 to present on the face of the financial statements reclassification adjustments for items that are reclassified from OCI to net income in the statement(s) where the components of net income and the components of OCI are presented. The amendments in these standards do not change the items that must be reported in OCI, when an item of OCI must be reclassified to net income, or change the option for an entity to present components of OCI gross or net of the effect of income taxes. The amendments in ASU No. 2011-05 and ASU No. 2011-12 are effective for interim and annual periods beginning after December 15, 2011 and are to be applied retrospectively. We adopted ASU No. 2011-05 and ASU No. 2011-12 on January 1, 2012, and its application did not have a material impact on the Company's consolidated financial position or results of operations.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment” (“ASU No. 2011-08”), which allows entities to use a qualitative approach to test goodwill for impairment. ASU No. 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of the provisions of ASU No. 2011-08 will not have a material impact on our consolidated financial position or results of operations.

Off Balance Sheet Arrangements
 
The Company did not have any off balance sheet arrangements as of June 30, 2012.

OUTSTANDING SHARE DATA
 
We had a total of 141,185,130 shares of common stock outstanding at August 10, 2012.  In addition, at such date we had outstanding, in the aggregate, 57,254,428 Class 3 Preference Shares, Class 4 Preference Shares, options, stock appreciation rights, warrants, retention warrants and restricted stock, each of which is exchangeable for one share of common stock upon exercise or conversion.
 
 
 
Item 3.                  Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4.                  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”).  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2012.

Changes in Internal Control over Financial Reporting

During our most recent fiscal quarter, 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) occurred 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.

1.          On June 20, 2012, the Company issued shares of common stock, without registration under the Securities Act of 1933, as amended (the “Securities Act”), to non-management directors pursuant to the Company’s Directors’ Compensation Plan as compensation for their services for the first half of 2012 in the following aggregate amounts:

John R. Anderson
54,503
Gabriel A. Battista
37,915
Shirley Strum Kenny
85,308
David Kronfeld
90,047
Charles B. Wang
90,047
Total
357,820

The aggregate value of the 357,820 shares of common stock issued to Dr. Kenny and Messrs. Anderson, Battista, Kronfeld and Wang was $75,500 on the date of issuance.  The Company sold these shares pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act and Regulation D promulgated there under.  This issuance qualified for exemption from registration under the Securities Act because (i) each of the directors was an accredited investor at the time of the sale, (ii) the Company did not engage in any general solicitation or advertising in connection with the sale, and (iii) each of the directors received restricted securities.

2.           On May 9, 2012 (the “Issuance Date”), the Company executed a warrant certificate in favor of Raine Advisors LLC, a consultant, for the issuance of up to 3,789,482 warrants of the Company to purchase up to such number of shares of common stock of the Company at an exercise price of $0.2201 per share.  On the Issuance Date, 1,894,741 warrants automatically vested.  The remaining 1,894,741 warrants shall vest on such date that occurs prior to the expiration date, which shall be 10 years from the Issuance Date, upon Raine’s satisfaction of certain conditions set forth in the warrant certificate.  The Company issued the warrants in reliance on an exemption from registration requirements of the Securities Act afforded by Rule 506 promulgated thereunder.

3.           On June 4, 2012, the Company granted to employees 3,000,000 stock options to purchase 3,000,000 shares of company stock of the Company under the Company’s Second Amended and Restated Stock Option Plan, as amended, with an exercise price of $0.18 per common stock.  The stock options vest over four years, in equal increments of 25%, on each anniversary of the date of the grant.  The Company offered and sold the stock options to persons residing in the United States in reliance on the exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereunder and to persons residing outside the United States in reliance on the exemption from the registration requirements of the Securities Act afforded by Regulation S thereunder.

Item 6.                  Exhibits
 
The exhibits listed below are filed as part of this report.

Exhibit No.
 
Description
     
31.1
*
Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2
*
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32
*
Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS**
 
XBRL Instance Document
     
101.SCH**
 
XBRL Taxonomy Extension Schema Document
     
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
*
Filed herewith
**
Furnished herewith.  As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific 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 in its behalf by the undersigned thereunto duly authorized.
 
     
 
NEULION, INC.
 
     
     
     
Date:  August 14, 2012
/s/ Nancy Li
 
 
Name:  Nancy Li
 
 
Title:  Chief Executive Officer
 
     
     
     
Date:  August 14, 2012
/s/ Arthur J. McCarthy
 
 
Name:  Arthur J. McCarthy
 
 
Title:  Chief Financial Officer
 
 
 
 
 
 
26

XTSE:NLN Neulion, Inc. Quarterly Report 10-Q Filling

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XTSE:NLN Neulion, Inc. Quarterly Report 10-Q Filing - 6/30/2012
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