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NEULION, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2014 and 2013, which have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). All dollar amounts are in U.S. dollars ("US$" or "$") unless stated otherwise. As at May 2, 2014 the Bank of Canada noon rate for conversion of United States dollars to Canadian dollars ("CDN$") was US$1 to CDN$1.0973. 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, 2013 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 at the date of this Quarterly Report on Form 10-Q. Forward-looking statements involve significant risk, uncertainties and assumptions. 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 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 the Annual Report on Form 10-K for the year-ended December 31, 2013. Overview NeuLion is a technology service provider that specializes in the digital video broadcasting, distribution and monetization of live and on-demand content to Internet-enabled devices. Through our cloud-based end-to-end solution, we build and manage interactive digital networks that enable our customers to provide a destination for their viewers 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 TSX under the symbol NLN and traded on the OTCBB in the United States under the symbol NEUL. Our core business and business model have evolved from being a provider of professional information technology services and international programming to a provider of customized, end-to-end, interactive content services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies. With a fundamental shift in the way media is now being consumed, technological advancements are affecting how, when and where consumers connect to content. Our technology enables our customers to capitalize on the growing consumer demand for viewing interactive content on multiple types of Internet-enabled devices by enabling the delivery of content to a range of these devices, such as PCs, smartphones and tablets, and by also providing our customers with a technology platform to manage their content. Our cloud-based technology platform offers a variety of digital technology and services, including content ingestion, live encoding, live video editing, advertising insertion and management, pay flow and premium content payment support, video player software development kits, multi-platform device delivery, content management, subscriber management, digital rights management, billing services, app development, website design, analytics and reporting. 9 -------------------------------------------------------------------------------- Table of Contents Key Performance Indicators Q1 2014 Q1 2013 % LTM 2014 (1) LTM 2013 (2) (million) (million) change (million) (million) Total Revenue $13.5 $11.9 13% $48.7 $40.5 Revenue by Category of Customer: (3) Pro Sports $6.3 $5.6 13% $21.6 $15.4 College Sports $3.8 $3.0 27% $13.4 $11.2 TV Everywhere $2.9 $2.7 7% $11.5 $10.9 Revenue by Type: (4) Recurring $12.6 $11.0 15% $45.4 $36.8 Non-recurring $ 0.9 $ 0.9 0% $ 3.3 $ 3.7 Non-GAAP Adjusted Gross 74% 71% 3% 73% 69% Margin % (5) Non-GAAP Adjusted EBITDA (6) $2.0 $1.0 100% $4.5 $(0.4) Consolidated Net Income $1.1 $(0.3) - $(0.9) $(6.8) (Loss) (1) Last twelve months ending March 31, 2014. (2) Last twelve months ending March 31, 2013. (3) Excludes equipment revenue. (4) Recurring revenues include variable fees earned from subscriptions, usage, advertising, eCommerce and support fees in addition to fixed fees charged to our customers on a monthly, quarterly or annual basis for ongoing hosting, support and maintenance. Non-recurring revenues include setup fees for design, setup and implementation services and equipment revenue. (5) We report non-GAAP Adjusted Gross Margin % 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 Gross Margin % represents consolidated operating income (loss) plus depreciation and amortization, research and development expenses and selling, general and administrative expenses divided by total revenue. 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. Reconciliations are provided below. (6) We report non-GAAP 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. Non-GAAP Adjusted EBITDA represents net income (loss) before interest, income taxes, depreciation and amortization, stock-based compensation, unrealized gain/loss on derivatives, investment income, non-controlling interests, discounts on convertible notes 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. Reconciliations are provided below. 10-------------------------------------------------------------------------------- Table of Contents Overall Performance - Three months ended March 31, 2014 vs three months ended March 31, 2013 Total revenue for the three months ended March 31, 2014 was $13.5 million, an increase of $1.6 million, or 13%, compared to $11.9 million for the three months ended March 31, 2013. The increase in total revenue was primarily attributable to an increase in revenue in our College Sports category of customer of $0.8 million and Pro Sports category of customer of $0.7 million. Our non-GAAP Adjusted Gross Margin % (as defined above and reconciled below) was 74% for the three months ended March 31, 2014, compared with 71% for the three months ended March 31, 2013. The 3% improvement in non-GAAP Adjusted Gross Margin % was primarily due to decreased bandwidth costs. Our non-GAAP Adjusted EBITDA (as defined above and reconciled below) was $2.0 million for the three months ended March 31, 2014, compared with $1.0 million for the three months ended March 31, 2013. The $1.0 million improvement in non-GAAP Adjusted EBITDA was due to an increase in revenue of $1.6 million offset by increases in cost of revenues of $0.1 million and selling, general and administrative expenses, excluding stock-based compensation, and research and development expenses of $0.5 million. Our consolidated net income for the three months ended March 31, 2014 was $1.1 million, or income of $0.01 per basic and $0.00 per diluted share of common stock, compared with a net loss of $0.3 million, or a loss of $0.00 per basic and diluted share of common stock, for the three months ended March 31, 2013. The improvement of $1.4 million was primarily attributable to the items discussed in the three paragraphs above. |