We have audited the accompanying consolidated balance sheets of NeuLion, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NeuLion, Inc. as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NeuLion, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2017 expressed an unqualified opinion thereon.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
1.
Nature of Operations
NeuLion, Inc. (“NeuLion” or the “Company”) is a leading provider of enterprise digital video solutions with the mission to deliver and enable the highest quality live and on-demand digital video content experiences anywhere and on any device. Our flagship solution, the NeuLion Digital Platform, is a proprietary, cloud-based, fully integrated, turnkey solution that enables the delivery and monetization of digital video content. Through the Company’s comprehensive solution suite, including the NeuLion Digital Platform, the NeuLion CE and the MainConcept technologies, NeuLion empowers the entire video ecosystem.
The Company is headquartered in Plainview, New York and was domesticated under Delaware law on November 30, 2010. The Company’s common stock is listed on the Toronto Stock Exchange (“TSX”) under the symbol NLN.
2. Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements reflect the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). As at December 31, 2016, the Company had an 11.8% equity interest in KyLin TV, Inc. (2015 – 11.8%). This investment is accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates made by management include the determination of the useful lives of long-lived assets, impairment of intangible assets and goodwill, assumptions used in stock-based compensation and the allowance for doubtful accounts. On an ongoing basis, management reviews its estimates to ensure they appropriately reflect changes in the Company's business and new information as it becomes available. If historical experience and other factors used by management to make these estimates do not reasonably reflect future actual results, the Company's consolidated financial position and results of operations could be materially impacted.
Revenue recognition
The Company recognizes revenue when four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. Revenue from multiple-element arrangements is allocated among separate elements based on their estimated sales prices, provided the elements have value on a stand-alone basis, there is objective and reliable evidence of sales price, the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in the Company’s control. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.
The Company earns revenue as follows:
|
(a)
|
Setup fees are charged to customers for design, setup and implementation services. Setup fees are deferred at the beginning of the service period and recognized over the term of the arrangement, which is generally three to five years.
|
|
(b)
|
Annual and/or monthly fees are charged to customers for ongoing hosting, support and maintenance. Annual and/or monthly fees are deferred at the beginning of the service period and recognized evenly over the service period.
|
|
(c)
|
Subscription revenues, which consist of recurring revenues based on the number of subscribers, are typically generated on a monthly, quarterly or annual basis and can be a fixed fee per user, a variable fee per user or a variable fee based on a percentage of the subscription price. The Company defers the appropriate portion of cash received for the services that have not yet been rendered and recognizes the revenue over the term of the subscription, which are generally between 30 days and one year. Pay-per-view revenues are deferred and recognized in the period when the content is viewed. Subscription revenues are recorded on either a gross or net basis depending on the transaction arrangement with the customer. Where subscription revenues are recorded on a gross basis, the total amount of the subscription is deferred and recognized over the subscription term and the share of revenue owing to our customer is deferred and recognized as a cost of revenue over the term of the subscription. Where subscription revenues are recorded on a net basis, only the Company’s share of revenue from the subscription is deferred and recognized over the term of the subscription. Under U.S. GAAP guidance related to reporting revenue gross as a principal versus net as an agent, the indicators used to determine whether an entity is a principal or an agent to a transaction are subject to judgment. When our assessment of the indicators leads us to conclude that we are the principal in the subscription transaction, revenue is recorded on a gross basis, the total amount of the subscription is deferred and recognized over the subscription term. When our assessment of the indicators leads us to conclude that we are the agent in the subscription transaction, only the Company’s share of revenue from the subscription is deferred and recognized over the term of the subscription.
|
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
|
(d)
|
Usage fees are charged to customers for bandwidth and storage. Usage fees are billed on a monthly or quarterly basis and are recognized as the service is being provided.
|
|
(e)
|
Licensing revenue is primarily derived from royalties paid to the Company by licensees of the Company’s intellectual property rights. Revenue in such transactions is recognized during the period in which such customers report to the Company the number of royalty-eligible units that they have shipped. Revenue from guaranteed minimum-royalty licenses is recognizable upon delivery of the technology license when no further obligations of the Company exist. In certain guaranteed minimum-royalty licenses, the Company enters into extended payment programs with customers. Revenue related to such extended payment programs is recognized at the earlier of when cash is received or when periodic payments become due to the Company. If the Company receives non-refundable advance payments from licensees that are allocable to a future contract period or could be creditable against other obligations of the licensee to it, the recognition of the related revenue is deferred until such future period or creditable obligation lapses. Royalties and other license fees are recorded net of reserves for estimated losses, and are recognized when all revenue recognition criteria have been met. The Company makes judgments as to whether collectability can be reasonably assured based on the licensee’s recent payment history unless significant and persuasive evidence exists that the customer is creditworthy. In the absence of a favorable collection history or significant and persuasive evidence that the customer is creditworthy, the Company recognizes revenue upon receipt of cash, provided that all other revenue recognition criteria have been met.
|
The Company actively polices and enforces its intellectual property, and pursues third parties who have under-reported the amount of royalties owed under a license agreement or who utilize its intellectual property without a license. As a result of these activities, from time to time, the Company may recognize royalty revenues that relate to infringements or under-reporting that occurred in prior periods. These royalty recoveries may cause revenues to be higher than expected during a particular reporting period and may not occur in subsequent periods. Differences between amounts initially recognized and amounts subsequently audited or reported as an adjustment to those amounts due from licensees, will be recognized in the period such adjustment is determined or contracted, as appropriate.
Licensing revenue is recognized gross of withholding taxes that are remitted by the Company's licensees directly to their local tax authorities. For the years ended December 31, 2016, 2015 and 2014, withholding taxes were $2,486, $3,754 and $0, respectively.
|
(f)
|
eCommerce revenues are earned through providing customers with ticketing and retail merchandising web solutions. eCommerce revenues are recorded on a net basis when the service has been provided. The Company records as revenue the portion of the fees to which it is entitled as opposed to the amount billed for tickets or retail merchandise sold.
|
|
(g)
|
Advertising revenues are earned through the insertion of advertising impressions on websites and in streaming video at a cost per thousand impressions. Advertising revenue is recognized based on the number of impressions displayed (“served”) during the period. Deferred revenue for advertising represents the timing difference between collection of advertising revenue and when the advertisements are served, which is typically between 30 and 90 days. Advertising revenues are recorded on a gross basis, whereby the total amount billed to the advertiser is recorded as revenue and the share of revenue to our customer is recorded as a cost of revenue.
|
|
(h)
|
Support revenues are earned for providing customer support to our customers’ end users. Support fees are recognized evenly over the service period.
|
|
(i)
|
Equipment revenue is generated by the sale and rental of set-top boxes (“STBs”) to content partners and/or end users to enable the end user to receive content over the Internet and display the signal on a standard television. Shipping charges are included in total equipment revenue. Revenue is recognized generally upon shipment to the customer. The customer does not have any right of return on STBs. Revenue is recognized when persuasive evidence of an arrangement exists, prices are determinable, collectability is reasonably assured and the goods or services have been delivered. If any of these criteria are not met, revenue is deferred until such time as all of the criteria are met.
|
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
Cash and cash equivalents
Cash and cash equivalents consist of cash and short-term investments, such as money market funds, that have original maturities of less than three months.
Accounts receivable
Accounts receivable are carried at original invoice amount. The Company maintains a provision for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness; past transaction history with the customer; current economic industry trends; and changes in customer payment terms. If the financial conditions of the Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. As of December 31, 2016 and 2015, the allowance for doubtful accounts was $385 and $688, respectively.
Inventory
Inventory consists of STBs, which are finished goods. Inventories are recorded at the lower of cost and net realizable value. Cost is accounted for on a first-in, first-out basis. The Company evaluates its ending inventories for estimated excess quantities and obsolescence. This evaluation includes analyses of sales levels and projections of future demand within specific time horizons. Inventories in excess of future demand are reserved. In addition, the Company assesses the impact of changing technology and market conditions on its inventory-on-hand and writes off inventories that are considered obsolete.
Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation. Expenditures for maintenance and repairs are expensed currently, while renewals and betterments that materially extend the life of an asset are capitalized. The cost of assets sold, retired or otherwise disposed of, and the related allowance for depreciation, are eliminated from the accounts, and any resulting gain or loss is recognized.
Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
|
Computer hardware
|
5 years
|
|
Computer software
|
3 years
|
|
Furniture and fixtures
|
7 years
|
|
Vehicles
|
5 years
|
|
Building
|
25 years
|
|
Leasehold improvements
|
Shorter of useful life and lease term
|
The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If these future undiscounted cash flows are less than the carrying value of the asset, then the carrying amount of the asset is written down to its fair value, based on the related estimated discounted future cash flows. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property, plant and equipment are used and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment was recorded for the years ended December 31, 2016, 2015 and 2014.
Intangible assets
Intangible assets are recorded at cost less amortization. Cost of intangible assets acquired through business combinations represents their fair market value at the date of acquisition. Amortization is calculated using the straight-line method over the estimated useful lives of the intangible assets, which are as follows:
|
Customer relationships
|
5-7 years
|
|
Developed technology
|
5 years
|
|
Trademarks
|
7 years
|
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
The Company reviews the carrying value of its definite lived intangible assets for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If these future undiscounted cash flows are less than the carrying value of the asset, then the carrying amount of the asset is written down to its fair value, based on the related estimated discounted future cash flows. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the intangible assets are used and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment was recorded for the years ended December 31, 2016, 2015 and 2014.
Goodwill
Goodwill represents the excess, at the date of acquisition, of the cost of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortized but is subject to an annual impairment test at the reporting unit level and between annual tests if changes in circumstances indicate a potential impairment. The Company performs an annual goodwill impairment test as of October 1 of each calendar year. Goodwill impairment is assessed based on a comparison of the fair value of each reporting unit to the underlying carrying value of the reporting unit’s net assets, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of the impairment loss. The second step of the impairment test involves comparing the implied fair value of the reporting unit's goodwill with its carrying amount to measure the amount of impairment loss, if any. The Company’s impairment test is based on its single operating segment and reporting unit structure. For the years ended December 31, 2016, 2015 and 2014, there was no impairment loss.
Investment in affiliate
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee’s board of directors and voting rights. Under the equity method of accounting, an investee's accounts are not reflected within the Company's consolidated balance sheets and statements of operations and comprehensive loss; however, the Company's share of the losses of the investee company is reflected under the caption “Equity in loss of affiliate” in the consolidated statements of operations and comprehensive loss. Due to KyLin TV’s accumulated losses, the Company’s investment in KyLin TV was reduced to zero as at December 31, 2008. No further charges will be recorded because the Company has no obligation to fund the losses of KyLin TV. If KyLin TV becomes profitable in the future, the Company will resume applying the equity method only after its share of that net income equals the Company’s share of net losses not recognized during the period in which the equity method was suspended.
Income taxes
Income taxes are accounted for under the provisions of ASC Topic 740, “Income Taxes Recognition” (“ASC 740”). ASC 740 requires that income tax accounts be computed using the liability method. Deferred taxes are determined based upon the estimated future tax effects of differences between the financial reporting and tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws.
ASC 740 requires an entity to recognize the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that has a greater-than-fifty-percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance for classification, interest and penalties, accounting in interim periods, disclosure, and transition. ASC 740 requires that a liability created for unrecognized tax benefits be presented as a separate liability and not combined with deferred tax liabilities or assets.
The Company operates in a number of countries worldwide. Its income tax liability is therefore a consolidation of its tax liabilities in various locations. Its tax rate is affected by the profitability of its operations in various locations, the tax rates and taxation systems of the countries in which the Company operates, its tax policies and the impact of certain tax planning strategies which have been implemented.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
To determine its worldwide tax liability, the Company makes estimates of possible tax liabilities. Tax filings, positions and strategies are subject to review under local or international tax audit and the outcomes of such reviews are uncertain. In addition, these audits generally take place years after the period in which the tax provision in question was determined and it may take a substantial amount of time before the final outcome of any audit is known. Future tax audits could result in income tax liabilities that differ materially from the amounts recorded in our financial statements.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the fourth quarter of 2015, the Company concluded that it was more likely than not that it would be able to realize the benefit of its federal and some state-related deferred tax assets in the future. The Company based this conclusion on historical and projected operating performance, as well as its expectation that operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As a result, the Company reduced the valuation allowance on a portion of its net deferred tax assets at December 31, 2015. The Company will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.
Foreign currency transactions
The functional currency of the Company is the U.S. dollar. Monetary assets and liabilities denominated in foreign currencies are re-measured into U.S. dollars at exchange rates in effect at the balance sheet dates. These transactional foreign exchange gains or losses are included in the consolidated statements of operations and comprehensive loss.
Financial instruments
The Company's financial instruments consist of cash and cash equivalents, accounts receivable, other receivables, due from/to related parties, accounts payable and accrued liabilities, which are primarily denominated in U.S. dollars. The carrying amounts of such instruments approximate their fair values principally due to the short-term nature of these items. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest rate, currency or credit risk arising from these financial instruments.
With respect to accounts receivable, the Company is exposed to credit risk arising from the potential for counterparties to default on their contractual obligations to the Company. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs credit evaluations on its customers, but generally does not require collateral to support accounts receivable. The Company establishes an allowance for doubtful accounts that corresponds with the specific credit risk of its customers, historical trends and economic circumstances.
Research and development
Costs incurred for research and development are expensed as incurred and are included in the consolidated statements of operations and comprehensive loss.
Advertising
Advertising costs are expensed as incurred and totaled $1,189, $1,303
and $430
for the years ended December 31, 2016, 2015 and 2014, respectively, and are included in selling, general and administrative expenses on the consolidated statements of operations and comprehensive loss.
Stock-based compensation and other stock-based payments
The Company accounts for all stock options and warrants using a fair value-based method. The fair value of each stock option and warrant granted to employees is estimated on the date of the grant using the Black-Scholes options pricing model and the related stock-based compensation expense is recognized over the vesting period during which an employee is required to provide service in exchange for the reward. The fair value of the warrants granted to non-employees is measured and expensed as the warrants vest.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
Restricted stock unit awards give the holder the right to one share of common stock for each vested restricted stock unit. Stock-based compensation expense is recorded based on the market value of the common stock on the grant date and recognized over the vesting period of these awards.
Deferred rent
Rent expense on non-cancellable leases containing known future scheduled rent increases is recorded on a straight-line basis over the terms of the respective leases. The difference between rent expense and rent paid is accounted for as deferred rent. Landlord construction allowances and other such lease incentives are recorded as deferred rent and are amortized on a straight-line basis as reductions to rent expense.
Segment
The Company’s CEO is its chief operating decision maker. The CEO reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region. There are no segment managers who are held accountable by the chief operating decision maker for operations, operating results, and planning for levels or components below the consolidated unit level. The Company has therefore determined that it has a single operating segment.
Recently issued accounting standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue recognition, which provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most existing revenue recognition guidance. The main principle under this guidance is that an entity should recognize revenue at the amount it expects to be entitled to in exchange for the transfer of goods or services to customers. The Company has identified the predominant changes to its accounting policies resulting from the application of this guidance and is in the process of quantifying the impact on its consolidated financial statements. The cumulative effect of the initial adoption will be reflected as an adjustment to the opening balance of retained earnings as of the date of the application of the guidance; however, the Company does not expect this guidance to have a significant impact on the Company’s consolidated financial statements on an annual basis. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.
In September 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 is effective for periods beginning after December 15, 2015, including interim periods within those fiscal years. The new guidance must be applied prospectively to adjustments to provisional amounts that occur after the effective date of the ASU, with early adoption permitted. The adoption of this standard did not have a material effect on the Company’s financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes”, which requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments. For public business entities, the amendments are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. If an entity applies the guidance prospectively, the entity should disclose in the first interim and first annual period of change the nature of and reason for the change in accounting principle and a statement that prior periods were not retrospectively adjusted. If an entity applies the guidance retrospectively, the entity should disclose in the first interim and first annual period of change the nature of and reason for the change in accounting principle and quantitative information about the effects of the accounting change on prior periods. The Company adopted this guidance on a prospective basis effective October 1, 2015.
In February 2016, the FASB issued ASU 2016-02 (“Topic 842”) new accounting guidance for leases, which supersedes previous lease guidance. Under this guidance, for all leases with terms in excess of one year, including operating leases, the Company will be required to recognize on its balance sheet a lease liability and a right-of-use asset representing its right to use the underlying asset for the lease term. The new guidance retains a distinction between finance leases and operating leases and the classification criteria is substantially similar to previous guidance. Additionally, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed. The Company is currently evaluating the impact of this guidance on its consolidated balance sheets. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
In March 2016, the FASB issued ASU 2016-09,
“
Improvements to Employee Share-Based Payment Accounting”,
which simplifies several aspects of the accounting for employee share-based payment transactions.
Under this amended guidance, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in the income statement in the period in which the awards vest or are exercised. In the statement of cash flows, excess tax benefits will be classified with other income tax cash flows in operating activities. The amended guidance also gives the option to make a policy election to account for forfeitures as they occur and increases the threshold for awards that are partially settled in cash to qualify for equity classification. The Company expects that the adoption of this guidance will introduce volatility into the Company’s income tax provision, which will be impacted by the timing of employee exercises and changes in the Company’s stock price. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which (i) significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model; and (ii) provides for recording credit losses on available-for-sale (AFS) debt securities through an allowance account. The update also requires certain incremental disclosures. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and disclosures.
In August 2016, FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” amended guidance which clarifies how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The new guidance is intended to reduce the existing diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” amended guidance on the accounting for income taxes, which eliminates the exception in existing guidance which defers the recognition of the tax effects of intra-entity asset transfers other than inventory until the transferred asset is sold to a third party. Rather, the amended guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual reporting period. The Company is currently assessing the impact of this guidance on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business,” which clarifies the definition of a business and assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contribute to the ability to create an output. The amended guidance also narrows the definition of outputs by more closely aligning it with how outputs are described in FASB guidance for revenue recognition. This guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment.” This guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the amended guidance, a goodwill impairment charge will now be recognized for the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017.
3. Business Combinations
(i) Saffron Digital Limited (“Saffron Digital”)
On June 3, 2016, the Company completed the acquisition of Saffron Digital, operating in the United Kingdom, in an all-cash asset transaction for total consideration of $9,000, of which $7,500 was paid on closing and $1,500 was paid in September 2016.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
The Saffron Digital solution, which has been integrated into the NeuLion Digital Platform, helps customers build digital video services for entertainment delivered over-the-top to Internet-connected devices. These digital video services support advanced implementations of subscription video on demand, electronic sell-through and advertising-supported video.
The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Standards Codification 805
—
Business Combinations
. Accordingly, the results of operations of Saffron Digital have been included in the accompanying consolidated financial statements since the date of the acquisition. The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon the respective estimates of fair value as of the date of the acquisition and are based on assumptions that the Company’s management believes are reasonable given the information currently available.
The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates.
In connection with this transaction, the Company incurred $109, $0 and $0 of acquisition-related expenses during the years ended December 31, 2016, 2015 and 2014, respectively that are included in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss.
The total purchase price for Saffron Digital has been allocated as follows:
|
Prepaid expenses and deposits
|
|
$
|
53
|
|
|
Property, plant and equipment
|
|
|
14
|
|
|
Intangible assets
|
|
|
7,200
|
|
|
Goodwill
|
|
|
1,733
|
|
|
Net assets acquired
|
|
$
|
9,000
|
|
The following are the identifiable intangible assets acquired and their respective useful lives, as determined based on valuations:
|
|
|
|
|
|
Useful Life
|
|
|
|
|
Amount
|
|
|
(years)
|
|
|
Developed technology
|
|
$
|
3,900
|
|
|
5
|
|
|
Customer relationships
|
|
|
3,300
|
|
|
5
|
|
|
|
|
$
|
7,200
|
|
|
|
|
|
The fair value of the intangible assets has been estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted-average cost of capital.
(ii) DivX Corporation (“DivX”)
On January 30, 2015, the Company completed the acquisition of 100% of the outstanding securities of DivX Corporation (“DivX”) for total consideration of $59,018. The Company also assumed an earn-out liability based on the achievement of certain revenue milestones over the three-year period following March 31, 2014. On January 30, 2015, management valued the earn-out liability at zero due to the historical performance and forecast of DivX. On closing, the Company issued 35,890,216 shares of common stock of the Company valued at $31,905 on the issuance date and a $27,000 two-year convertible promissory note (the “Note”). At the Company’s Annual Meeting of Stockholders on June 4, 2015, the Company’s stockholders approved the conversion of the Note. Upon such approval, the Note principal of $27,000 automatically converted into 25,840,956 shares of common stock.
The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Standards Codification 805
—
Business Combinations
. Accordingly, the results of operations of DivX have been included in the accompanying consolidated financial statements since the date of the acquisition. The purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based upon the respective estimates of fair value as of the date of the acquisition and are based on assumptions that the Company’s management believes are reasonable given the information currently available.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
The process for estimating the fair values of identifiable intangible assets and certain tangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates.
In connection with this transaction, the Company incurred approximately $0, $360 and $806, of acquisition-related expenses during the years ended December 31, 2016, 2015 and 2014, respectively that are included in selling, general and administrative expenses, in the consolidated statements of operations and comprehensive income.
The total purchase price for DivX has been allocated as follows:
|
Cash
|
|
$
|
9,718
|
|
|
Accounts receivable
|
|
|
7,094
|
|
|
Contracts receivable
|
|
|
16,668
|
|
|
Income tax receivable
|
|
|
4,317
|
|
|
Other receivables
|
|
|
247
|
|
|
Prepaid expenses
|
|
|
1,342
|
|
|
Deferred tax asset
|
|
|
384
|
|
|
Other assets
|
|
|
334
|
|
|
Property and equipment, net
|
|
|
3,592
|
|
|
Intangible assets
|
|
|
28,500
|
|
|
Goodwill
|
|
|
169
|
|
|
Accounts payable
|
|
|
(721
|
)
|
|
Accrued liabilities
|
|
|
(5,560
|
)
|
|
Deferred revenue
|
|
|
(3,000
|
)
|
|
Deferred tax liability
|
|
|
(2,154
|
)
|
|
Deferred rent liability
|
|
|
(1,912
|
)
|
|
Net assets acquired
|
|
$
|
59,018
|
|
The following are the identifiable intangible assets acquired and their respective useful lives, as determined based on valuations:
|
|
|
|
|
|
Useful Life
|
|
|
|
|
Amount
|
|
|
(years)
|
|
|
Developed technology
|
|
$
|
14,400
|
|
|
5
|
|
|
Customer relationships
|
|
|
9,400
|
|
|
5
|
|
|
Trademarks
|
|
|
4,700
|
|
|
7
|
|
|
|
|
$
|
28,500
|
|
|
|
|
|
The fair value of the intangible assets has been estimated using the income approach in which the after-tax cash flows are discounted to present value. The cash flows are based on estimates used to price the transaction, and the discount rates applied were benchmarked with reference to the implied rate of return from the transaction model as well as the weighted-average cost of capital.
Contracts Receivable
The purchase price allocation includes estimated contracts receivable of $16,668, which are attributable to an adjustment to record the fair value of assumed contractual payments due to DivX for which no additional obligation exists in order to receive such payments. These contractual payments are for fixed multi-year site licenses and guaranteed minimum-royalty licenses.
DivX’s revenue is primarily derived from royalties paid by licensees to acquire intellectual property rights. Revenue in such transactions is recognized during the period in which such customers reported the number of royalty-eligible units that they have shipped. As the first royalty reports received from customers post-acquisition were for shipments made prior to the acquisition, these amounts did not meet the requirements for the Company to recognize the revenue; however, the cash payments associated with these reports will be received by the Company.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
In certain multi-year site licenses and guaranteed minimum-royalty licenses, DivX, under previous ownership, entered into extended payment programs. Revenue related to such extended payment programs was recognized at the earlier of when cash was received or when periodic payments became due. In each case, the payment terms extend over the term of the multi-year license, and the remaining contractual payments that existed at the acquisition date will be received by the Company. As the Company assumed no additional obligations under such contracts, these payments are considered a fixed payment stream, rather than revenue. This fixed payment stream is accounted for as an element of accounts receivable and included as part of the acquisition accounting.
The fair value of the remaining payments due under the applicable contracts is estimated by calculating the discounted cash flows associated with such future billings. Although the Company has not recognized revenue as it collects the corresponding site license payments under these pre-acquisition contracts, the Company has recognized interest income at the discount rate of the contract receivable. Interest income recognized during the years ended December 31, 2016, 2015 and 2014 was $0, $343 and $0, respectively.
Unaudited Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of operations of the Company and DivX, on a pro forma basis, as though the Company had acquired DivX on January 1, 2014. The pro forma information for all periods presented also includes the effects of business combination accounting resulting from the acquisition, including amortization charges from acquired intangibles assets.
|
|
|
Year ended December 31,
|
|
|
|
|
2015
|
|
2014
|
|
|
Total revenue
|
|
$
|
96,282
|
|
|
$
|
81,751
|
|
|
Net income (loss)
|
|
$
|
23,691
|
|
|
$
|
(21,878
|
)
|
|
Income (loss) per share – basic and diluted
|
|
$
|
0.10
|
|
|
$
|
(0.10
|
)
|
4. Property, Plant and Equipment
The details of property, plant and equipment and the related accumulated depreciation are set forth below:
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,628
|
|
|
$
|
-
|
|
|
$
|
2,628
|
|
|
Building
|
|
|
4,700
|
|
|
|
31
|
|
|
|
4,669
|
|
|
Computer hardware
|
|
|
16,526
|
|
|
|
12,655
|
|
|
|
3,871
|
|
|
Computer software
|
|
|
5,248
|
|
|
|
4,769
|
|
|
|
479
|
|
|
Vehicles
|
|
|
61
|
|
|
|
40
|
|
|
|
21
|
|
|
Furniture and fixtures
|
|
|
897
|
|
|
|
582
|
|
|
|
315
|
|
|
Leasehold improvements
|
|
|
2,976
|
|
|
|
1,192
|
|
|
|
1,784
|
|
|
Construction in progress
|
|
|
460
|
|
|
|
-
|
|
|
|
460
|
|
|
|
|
$
|
33,496
|
|
|
$
|
19,269
|
|
|
$
|
14,227
|
|
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
|
Cost
|
|
|
depreciation
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer hardware
|
|
$
|
15,036
|
|
|
$
|
11,317
|
|
|
$
|
3,719
|
|
|
Computer software
|
|
|
4,721
|
|
|
|
4,513
|
|
|
|
208
|
|
|
Vehicles
|
|
|
61
|
|
|
|
36
|
|
|
|
25
|
|
|
Furniture and fixtures
|
|
|
839
|
|
|
|
430
|
|
|
|
409
|
|
|
Leasehold improvements
|
|
|
2,827
|
|
|
|
603
|
|
|
|
2,224
|
|
|
|
|
$
|
23,484
|
|
|
$
|
16,899
|
|
|
$
|
6,585
|
|
Depreciation expense for the years ended December 31, 2016, 2015 and 2014 was $2,568
,
$2,265 and $1,378, respectively.
5. Goodwill and Intangible Assets
The net carrying amount of goodwill is set forth below:
|
Balance – December 31, 2013 and 2014
|
|
$
|
11,327
|
|
|
Acquisition of DivX
|
|
|
169
|
|
|
Balance – December 31, 2015
|
|
$
|
11,496
|
|
|
Acquisition of Saffron Digital
|
|
|
1,733
|
|
|
Balance – December 31, 2016
|
|
$
|
13,229
|
|
The details of intangible assets and the related accumulated amortization are set forth below:
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
|
Cost
|
|
|
amortization
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
24,203
|
|
|
$
|
15,446
|
|
|
$
|
8,757
|
|
|
Developed technology
|
|
|
19,900
|
|
|
|
7,575
|
|
|
|
12,325
|
|
|
Trademarks
|
|
|
4,995
|
|
|
|
1,582
|
|
|
|
3,413
|
|
|
|
|
$
|
49,098
|
|
|
$
|
24,603
|
|
|
$
|
24,495
|
|
|
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Net book
|
|
|
|
|
Cost
|
|
|
amortization
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
20,903
|
|
|
$
|
13,121
|
|
|
$
|
7,782
|
|
|
Developed technology
|
|
|
16,000
|
|
|
|
4,240
|
|
|
|
11,760
|
|
|
Trademarks
|
|
|
4,995
|
|
|
|
910
|
|
|
|
4,085
|
|
|
|
|
$
|
41,898
|
|
|
$
|
18,271
|
|
|
$
|
23,627
|
|
Amortization expense for the years ended December 31, 2016, 2015 and 2014 was $6,332
,
$5,279 and $2,365, respectively. The weighted-average life remaining on these intangible assets as of December 31, 2016 is 3.6 years.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
Based on the amount of intangible assets subject to amortization, the Company's estimated amortization expense over the next five years and thereafter is as follows:
|
2017
|
|
$
|
6,917
|
|
|
2018
|
|
|
6,871
|
|
|
2019
|
|
|
6,871
|
|
|
2020
|
|
|
2,508
|
|
|
2021
|
|
|
1,272
|
|
|
Thereafter
|
|
|
56
|
|
|
|
|
$
|
24,495
|
|
6. Economic Dependence and Concentration of Credit Risk
For the year ended December 31, 2016, no one customer accounted for more than 10% of revenues. For the year ended December 31, 2015, the National Hockey League (“NHL”) and LG Electronics accounted for 23% of revenues: 12% and 11%, respectively. For the year ended December 31, 2014, the NHL accounted for 18% of revenues. No other customers accounted for more than 10% of revenues in 2016, 2015 and 2014.
As at December 31, 2016, Samsung Companies and World Surf League accounted for 28% of accounts receivable: 15% and 13%, respectively. As at December 31, 2015, Samsung Companies and Toshiba Companies accounted for 33% of accounts receivable: 19% and 14%, respectively.
As at December 31, 2016, the Ultimate Fighting Championship (“UFC”) and the National Basketball Association (“NBA”) accounted for 50% of accounts payable: 37% and 13%. As at December 31, 2015, the UFC and the NBA accounted for 51% of accounts payable: 37% and 14%, respectively. As at December 31, 2014, the NHL and the UFC accounted for 59% of accounts payable: 49% and 10%, respectively.
As at December 31, 2016, approximately 49% of the Company’s cash and cash equivalents were held in accounts with U.S. banks that received a BBB+ rating from Standard and Poor’s and a Baa1 rating from Moody’s. As at December 31, 2015, approximately 39% of the Company’s cash and cash equivalents were held in accounts with U.S. banks that received a AA- rating from Standard and Poor’s and an AA1 rating from Moody’s, and 26% of the Company’s cash and cash equivalents were held in accounts with a U.S. bank that received a BBB+ rating from Standard and Poor’s and an Baa1 rating from Moody’s. At December 31, 2014, approximately 83% of the Company’s cash and cash equivalents were held in accounts with a U.S. bank that received a BBB+ rating from Standard and Poor’s and an A3 rating from Moody’s.
7.
Related Party Transactions
The Company has entered into certain transactions and agreements in the normal course of operations with related parties. Significant related party transactions are as follows:
KyLin TV
KyLin TV is an IPTV company that is controlled by Charles B. Wang, a member of the Board of Directors of the Company. On June 1, 2008, the Company entered into an agreement with KyLin TV to build and deliver the setup and back office operations for KyLin TV’s IPTV service. Effective April 1, 2012, the Company amended its agreement with KyLin TV, such that, in addition to the services previously provided, KyLin TV was appointed the exclusive distributor of the Company’s business to consumer (“B2C”) IPTV interests. As exclusive distributor, KyLin TV obtains, advertises and markets all of the Company’s B2C content, in accordance with the terms of the amendment. Accordingly, KyLin TV records the gross revenues from the Company’s B2C content as well as the associated license fees, whereas the Company records revenues in accordance with the revised fee schedule in the amendment. The Company also provides and charges KyLin TV for administrative and general corporate support. For each of the periods presented, the amounts charged for these services provided by the Company for the years ended December 31, 2016, 2015 and 2014 were $97, $118 and $123, respectively, and were recorded as a recovery in selling, general and administrative expense. Additionally, the Company purchased STBs from KyLin TV. For each of the periods presented, the amounts paid for this equipment for the years ended December 31, 2016, 2015 and 2014 were $0, $0 and $46, respectively.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
New York Islanders Hockey Club, L.P. (“New York Islanders”)
The Company provides IT-related professional services and administrative services to the New York Islanders, a professional hockey club that is minority-owned by Mr. Wang.
Renaissance Property Associates, LLC (“Renaissance”)
The Company provides IT-related professional services to Renaissance, a real estate management company owned by Mr. Wang. In June 2009, the Company signed a sublease agreement with Renaissance for office space in Plainview, New York. The sublease agreement expires in December 2019. Rent expense paid by the Company to Renaissance of $565, $430 and $430,
inclusive of taxes and utilities, is included in selling, general and administrative expense for each of the years ended December 31, 2016, 2015 and 2014.
Smile Train, Inc. (“Smile Train”)
The Company provides IT-related professional services to Smile Train, a public charity whose founder and significant benefactor is Mr. Wang.
The Company recognized revenue from related parties as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Islanders
|
|
$
|
280
|
|
|
$
|
292
|
|
|
$
|
311
|
|
|
Renaissance
|
|
|
120
|
|
|
|
120
|
|
|
|
120
|
|
|
Smile Train
|
|
|
96
|
|
|
|
96
|
|
|
|
90
|
|
|
KyLinTV
|
|
|
363
|
|
|
|
553
|
|
|
|
847
|
|
|
|
|
$
|
859
|
|
|
$
|
1,061
|
|
|
$
|
1,368
|
|
The amounts due from (to) related parties are as follows:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
New York Islanders
|
|
$
|
103
|
|
|
$
|
(18
|
)
|
|
Renaissance
|
|
|
26
|
|
|
|
-
|
|
|
KyLin TV
|
|
|
422
|
|
|
|
304
|
|
|
|
|
$
|
551
|
|
|
$
|
286
|
|
Investment in affiliate – KyLin TV
The Company records its investment in KyLin TV using the equity method.
From January 1, 2008 through February 26, 2010, the Company’s equity interest in KyLin TV was 17.1%. On February 26, 2010, a group of private investors invested $10.0 million in KyLin TV, which reduced the Company’s equity interest to 11.8%. Of the total $10.0 million investment, $1.0 million was invested by AvantaLion LLC, a company controlled by Mr. Wang. Management has determined that, as a result of the 11.8% equity interest combined with the services that the Company provides KyLin TV, the Company continues to have significant influence on the operating activities of KyLin TV; therefore, the Company continues to account for its investment in KyLin TV using the equity method. As previously discussed, the Company also provides and charges KyLin TV for administrative and general corporate support.
The Company’s proportionate share of the equity loss from KyLin TV has been accounted for as a charge on the Company's consolidated statements of operations and comprehensive loss. Due to KyLin TV’s accumulated losses, the investment was reduced to zero as at December 31, 2008. No further charges will be recorded as the Company has no obligation to fund the losses of KyLin TV. If KyLin TV becomes profitable in the future, the Company will resume applying the equity method only after its share of that net income equals the Company’s share of net losses not recognized during the period the equity method was suspended. From 2008 through 2016, the Company’s share of cumulative losses in KyLin TV that have not been recognized as of December 31, 2016 was $4,519.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
8. 401(k) Profit Sharing Plan
The Company sponsors a 401(k) Profit Sharing Plan to provide retirement and incidental benefits to its eligible employees. Employees may contribute a percentage of their annual compensation through salary reduction, subject to certain qualifications and Internal Revenue Code limitations. The Company provides for voluntary matching contributions up to certain limits. Matching contributions vest immediately.
For the years ended December 31, 2016, 2015 and 2014, the Company made aggregate matching contributions of $1,021, $912 and $485, respectively.
9. Convertible Note
On January 30, 2015, the Company completed the acquisition of 100% of the outstanding securities of DivX for total consideration of $59,018. On closing, the Company issued 35,890,216 shares of common stock of the Company valued at $31,905 on the issuance date and a $27,000 two-year convertible promissory Note. Upon receiving shareholder approval on June 4, 2015, the Note automatically converted into 25,840,956 shares of the Company’s common stock. The Company recorded a gain of $610 for the year ended December 31, 2015 related to the conversion of the Note.
Accounting for the Note
If certain criteria are met, companies must bifurcate certain embedded features from their host instruments and account for them as free-standing derivative instruments. The Company evaluated the noteholder’s right to receive a cash payment for any positive intrinsic value in the Company’s stock at the maturity date of the Note and determined that the embedded cash settlement option should be bifurcated. The Company determined that the fair value of the derivative liability on the acquisition date was $713 and on June 4, 2015 (prior to conversion) was $816, and accordingly recorded a net gain of $507 for the year ended December 31, 2015, on the consolidated statements of operations and comprehensive income (loss) to reflect the change in fair value of the derivative liability immediately prior to conversion and the conversion of the convertible note. The Company’s determination of the fair value of the derivative liability was based on a 90% probability that the Note would be converted by June 30, 2015. If that probability was reduced, the fair value of derivative liability would be higher. The Company recorded $123 of interest expense on the amortization of the debt discount for the year ended December 31, 2015. 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.
10. Redeemable Preferred Stock
On November 19, 2015, the Company executed a Conversion and Settlement Agreement (the “Agreement”) with the holders of its Class 3 and Class 4 Preference Shares (collectively, the “Preference Shares”), whereby these holders agreed to convert their Preference Shares for shares of common stock of the Company on a 1-to-1 basis and for aggregate consideration totaling $4,058. The consideration of $4,058 was paid in the form of 8,176,210 shares of common stock of the Company (the “Additional Shares”), with the number of shares received calculated based on the five-day volume weighted average price of the Company’s common stock immediately prior to conversion.
The holders of the 17,176,818 issued and outstanding Class 3 Preference Shares received in the aggregate an equal number of shares of the Company’s common stock as well as 5,737,691 Additional Shares as payment for accumulated dividends. The holders of the 10,912,265 issued and outstanding Class 4 Preference Shares received in the aggregate an equal number of shares of the Company’s common stock as well as 2,438,519 Additional Shares as payment for accumulated dividends. The Company issued a total of 36,265,293 shares of its common stock.
The holders of the Class 3 Preference Shares were JK&B Capital V Special Opportunities Fund, L.P. (“JK&B Special Opp.”) and JK&B Capital V, L.P. (“JK&B Capital”), both of which are controlled by Company director David Kronfeld, and The Gabriel A. Battista Revocable Trust Under a Trust Declaration dated August 22, 2006, which is controlled by Company director Gabriel A. Battista. The holders of the Class 4 Preference Shares were JK&B Special Opp. and JK&B Capital. Mr. Wang, a member of the Board of Directors of the Company, has a pecuniary interest of 85% in, but does not exercise control over, JK&B Special Opp. Mr. Wang is married to Nancy Li, the Executive Chair and a director of the Company.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
As a result of the transaction, the Company currently has no Preference Shares issued and outstanding.
11. Stock Option and Stock-Based Compensation Plans
The total stock-based compensation expense included in the Company’s consolidated statement of operations for the years ended December 31, 2016, 2015
and 2014
was $4,573, $2,702 and $1,438, respectively.
(i) Amended and Restated NeuLion, Inc. 2012 Omnibus Securities and Incentive Plan (the “New Plan”)
The New Plan applies to all grants of distribution equivalent rights, incentive stock options, non-qualified stock options, performance share awards, performance unit awards, restricted stock awards, restricted stock unit awards, stock appreciation rights, tandem stock appreciation rights and unrestricted stock awards (“equity securities”) to directors, officers, employees and consultants of the Company or any entity controlled by the Company. The exercise price for any new security granted under the New Plan is determined by the closing price of the Company’s common stock on the trading day prior to the grant date. If the security is granted on a pre-determined basis, the exercise price is determined using the five-day volume weighted average price of the Company's common stock on the Toronto Stock Exchange immediately prior to the date of grant. In all cases the exercise price may not be less than fair market value. Securities are exercisable during a period established at the time of their grant provided that such period will expire no later than five years after the date of grant, subject to early termination of the option in the event the holder of the option dies or ceases to be a director, officer or employee of the Company or ceases to provide ongoing management or consulting services to the Company or entity controlled by the Company. The maximum number of shares of common stock issuable upon exercise of securities granted pursuant to the New Plan is 50,000,000 shares of common stock.
[a]
Stock Options
A summary of stock option activity under the New Plan is as follows:
|
|
|
#
|
|
|
Weighted average
|
|
|
|
|
of options
|
|
|
exercise price
|
|
|
Outstanding, December 31, 2013
|
|
|
14,193,000
|
|
|
|
0.44
|
|
|
Granted
|
|
|
3,979,500
|
|
|
|
0.95
|
|
|
Exercised
|
|
|
(193,255
|
)
|
|
|
0.43
|
|
|
Forfeited
|
|
|
(714,750
|
)
|
|
|
0.47
|
|
|
Outstanding, December 31, 2014
|
|
|
17,264,495
|
|
|
|
0.56
|
|
|
Granted
|
|
|
5,283,750
|
|
|
|
1.01
|
|
|
Exercised
|
|
|
(310,000
|
)
|
|
|
0.51
|
|
|
Forfeited
|
|
|
(749,150
|
)
|
|
|
0.92
|
|
|
Outstanding, December 31, 2015
|
|
|
21,489,095
|
|
|
|
0.66
|
|
|
Granted
|
|
|
4,133,200
|
|
|
|
0.64
|
|
|
Exercised
|
|
|
(785,245
|
)
|
|
|
0.41
|
|
|
Forfeited
|
|
|
(1,623,600
|
)
|
|
|
0.93
|
|
|
Outstanding, December 31, 2016
|
|
|
23,213,450
|
|
|
|
0.65
|
|
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
The following table summarizes information regarding stock options granted under the New Plan as at December 31, 2016:
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Number
|
|
|
remaining
|
|
|
Number
|
|
|
intrinsic
|
|
|
|
price
|
|
|
outstanding
|
|
|
contractual life
|
|
|
exercisable
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.39
|
|
|
|
349,000
|
|
|
|
6.2
|
|
|
|
261,750
|
|
|
$
|
164
|
|
|
|
$
|
0.44
|
|
|
|
10,768,500
|
|
|
|
6.6
|
|
|
|
8,076,375
|
|
|
|
4,523
|
|
|
|
$
|
0.48
|
|
|
|
900,000
|
|
|
|
1.6
|
|
|
|
675,000
|
|
|
|
342
|
|
|
|
$
|
0.59
|
|
|
|
2,920,950
|
|
|
|
8.9
|
|
|
|
730,238
|
|
|
|
789
|
|
|
|
$
|
0.69
|
|
|
|
160,000
|
|
|
|
9.9
|
|
|
|
-
|
|
|
|
27
|
|
|
|
$
|
0.78
|
|
|
|
100,000
|
|
|
|
9.6
|
|
|
|
-
|
|
|
|
8
|
|
|
|
$
|
0.80
|
|
|
|
10,000
|
|
|
|
9.9
|
|
|
|
-
|
|
|
|
1
|
|
|
|
$
|
0.85
|
|
|
|
645,000
|
|
|
|
9.6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
$
|
0.94
|
|
|
|
5,554,500
|
|
|
|
8.4
|
|
|
|
2,121,500
|
|
|
|
-
|
|
|
|
$
|
1.02
|
|
|
|
350,000
|
|
|
|
8.4
|
|
|
|
87,500
|
|
|
|
-
|
|
|
|
$
|
1.03
|
|
|
|
400,000
|
|
|
|
2.4
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
$
|
1.16
|
|
|
|
1,055,500
|
|
|
|
2.8
|
|
|
|
263,875
|
|
|
|
-
|
|
|
|
|
|
|
|
|
23,213,450
|
|
|
|
7.0
|
|
|
|
12,416,238
|
|
|
$
|
5,860
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016. The amount changes based on the fair market value of the Company’s common stock.
For the years ended December 31, 2016, 2015 and 2014, $2,627, $1,334 and $838, respectively, were recorded for total stock-based compensation expense related to stock options under the New Plan.
The Company estimates the fair value of stock options granted using a Black-Scholes-Merton option pricing model.
The assumptions used in determining the fair value of stock options granted are as follows:
|
|
|
Year ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
|
|
|
|
Exercise price of stock options granted
|
|
$
|
0.64
|
|
|
$
|
1.01
|
|
|
$
|
0.95
|
|
|
Fair value of stock options granted
|
|
$
|
0.55
|
|
|
$
|
0.85
|
|
|
$
|
0.64
|
|
|
Expected volatility
|
|
|
96
|
%
|
|
|
98
|
%
|
|
|
87
|
%
|
|
Risk-free interest rate
|
|
|
1.01
|
%
|
|
|
1.4
|
%
|
|
|
2.16
|
%
|
|
Expected life (years)
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The exercise price of stock options granted on a pre-determined basis is calculated using the five-day volume weighted average price of the Company’s common stock on the Toronto Stock Exchange preceding the grant date. The Company estimates volatility based on the Company’s historical volatility. The Company estimates the risk-free rate based on the Federal Reserve rate. The Company currently estimates the expected life of its stock options to be seven years.
As at December 31, 2016, there was $7,576 of total unrecognized compensation cost related to non-vested stock options under the New Plan, which is expected to be recognized over a weighted-average period of three years.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
[b] Restricted Stock Unit Awards (“RSU Awards”)
Shares of our common stock issuable upon the future vesting of RSU Awards are referred to in this section as “Underlying Shares.”
Effective May 18, 2015, the Company granted 3,300,000 RSU Awards to various members of Company management, which awards vest in four equal annual installments commencing on the first anniversary of the effective grant date. The first increment of 825,000 RSU Awards vested and the Underlying Shares were issued on May 18, 2016. The total grant date fair value of the remaining Underlying Shares, in the amount of $1,440, will be recognized evenly over the remaining vesting period.
On August 24, 2015, the Company granted 1,200,000 RSU Awards to various members of Company management and employees, which awards were subject to vesting over several months. 62,000 Underlying Shares were forfeited prior to the vesting date of the RSU Awards. The remaining 1,138,000 RSU Awards vested and the Underlying Shares were issued on January 19, 2016. The total grant date fair value of the Underlying Shares, net of the forfeitures, in the amount of $575, was recognized evenly over the vesting period.
Effective March 7, 2016, the Company granted 5,975,000 RSU Awards to various senior employees of the Company, which awards vest in four equal annual installments commencing on the first anniversary of the effective grant date. During the year ended December 31, 2016, 75,000 Underlying Shares were forfeited prior to the vesting date of the RSU Awards. The total grant date fair value of the Underlying Shares, net of the forfeitures, in the amount of $2,684, will be recognized evenly over the remaining vesting period.
Effective August 8, 2016, the Company granted 490,000 RSU Awards to various senior employees of the Company, which awards vest in four equal annual installments commencing on the first anniversary of the effective grant date. During the year ended December 31, 2016, 150,000 Underlying Shares were forfeited prior to the vesting date of the RSU Awards. The total grant date fair value of the Underlying Shares, net of the forfeitures, in the amount of $264, will be recognized evenly over the remaining vesting period.
Effective September 6, 2016, the Company granted 100,000 RSU Awards to a member of the Company’s management, which awards vest in four equal annual installments commencing on the first anniversary of the effective grant date. The total grant date fair value of the Underlying Shares, in the amount of $89, will be recognized evenly over the remaining vesting period.
For the years ended December 31, 2016, 2015 and 2014, $1,700, $985 and $0, respectively, were recorded for total stock-based compensation expense related to RSU Awards.
(ii) Fourth Amended and Restated Stock Option Plan (the “Old Plan”)
The Old Plan applied to all grants of options to directors, officers, employees and consultants of the Company or any entity controlled by the Company. The exercise price for any option granted under the Old Plan was determined by the closing price of the Company’s common stock on the trading day prior to the grant date. If the option was granted on a pre-determined basis, the exercise price was determined using the five-day volume weighted average price of the Company's common stock on the Toronto Stock Exchange immediately prior to the date of grant. In all cases the exercise price was not less than fair market value. Options were exercisable during a period established at the time of their grant provided that such period will expire no later than five years after the date of grant, subject to early termination of the option in the event the holder of the option dies or ceases to be a director, officer or employee of the Company or ceases to provide ongoing management or consulting services to the Company or entity controlled by the Company. The maximum number of shares of common stock issuable upon the exercise of options granted pursuant to the Old Plan was equal to the greater of (i) 4,000,000 shares of common stock and (ii) 12.5% of the number of issued and outstanding shares of common stock. Since the adoption of the New Plan, no options have been or will be issued under the Old Plan.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
A summary of stock option activity under the Old Plan is as follows:
|
|
|
#
|
|
|
Weighted average
|
|
|
|
|
of options
|
|
|
exercise price
|
|
|
Outstanding, December 31, 2013
|
|
|
10,074,500
|
|
|
|
0.40
|
|
|
Exercised
|
|
|
(2,026,262
|
)
|
|
|
0.51
|
|
|
Forfeited
|
|
|
(156,063
|
)
|
|
|
0.10
|
|
|
Outstanding, December 31, 2014
|
|
|
7,892,175
|
|
|
|
0.38
|
|
|
Exercised
|
|
|
(2,981,875
|
)
|
|
|
0.49
|
|
|
Forfeited
|
|
|
(47,000
|
)
|
|
|
0.56
|
|
|
Outstanding, December 31, 2015
|
|
|
4,863,300
|
|
|
|
0.31
|
|
|
Exercised
|
|
|
(2,495,050
|
)
|
|
|
0.41
|
|
|
Forfeited
|
|
|
(329,500
|
)
|
|
|
0.36
|
|
|
Outstanding, December 31, 2016
|
|
|
2,038,750
|
|
|
|
0.18
|
|
The following table summarizes information regarding stock options granted under the Old Plan as at December 31, 2016:
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Number
|
|
|
remaining
|
|
|
Number
|
|
|
intrinsic
|
|
|
|
price
|
|
|
outstanding
|
|
|
contractual life
|
|
|
exercisable
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.18
|
|
|
|
2,038,750
|
|
|
|
0.4
|
|
|
|
2,038,750
|
|
|
$
|
1,386
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2016. The amount changes based on the fair market value of the Company’s common stock.
For the years ended December 31, 2016, 2015 and 2014, $35
,
$185 and $421, respectively, were recorded for total stock-based compensation expense related to options issued under the Old Plan.
The Company estimates the fair value of options granted using a Black-Scholes-Merton option pricing model.
No options were granted under the Old Plan during the years ended December 31, 2016, 2015 and 2014.
As at December 31, 2016, there was $0 of total unrecognized compensation cost related to these options.
(iii) Warrants
On May 9, 2012, the Company granted 1,894,741 warrants to a merchant bank that were fully vested upon the merchant bank signing an engagement letter with the Company for various consulting services. The fair value of these warrants, in the amount of $373,264, was included in selling, general and administrative, including stock-based compensation, on the Company’s consolidated statement of operations and comprehensive loss in 2012. Additionally, the Company granted 1,894,741 warrants to the merchant bank that are exercisable if the merchant bank achieves certain performance targets. In accordance with ASC Topic 505-50, “Equity-Based Payments to Non-Employees,” the Company has not recorded any expense for the years ended December 31, 2016, 2015 and 2014 as the performance targets have not been met and are not probable of being met. These warrants expire on May 9, 2022.
On September 25, 2012, the Company completed a private placement for aggregate gross proceeds of approximately $4.6 million. The agent for a portion of the subscriptions received from the Company a commission equal to 748,127 broker warrants (4% of the number of the units issued in the offering). Each broker warrant was exercisable for one broker unit at an exercise price of U.S.$0.21 per warrant at any time prior to the 30-month anniversary of the closing date of the offering. Each broker unit consisted of one share of common stock and one-half of a warrant, and each full warrant entitled the holder thereof to purchase one share of common stock at U.S.$0.30 for 30 months following the closing date of the Offering. During the year ended December 31, 2015, all remaining subscriber warrants and broker warrants were either exercised or forfeited. No warrants remained outstanding at December 31, 2016.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
The total stock-based compensation expense related to warrants during the years ended December 31, 2016, 2015 and 2014 was $0.
A summary of the warrant activity is as follows:
|
|
|
#
|
|
|
Weighted average
|
|
|
|
|
of warrants
|
|
|
exercise price
|
|
|
Outstanding, December 31, 2013
|
|
|
11,952,269
|
|
|
$
|
0.28
|
|
|
Exercised
|
|
|
(6,993,063
|
)
|
|
|
0.29
|
|
|
Outstanding, December 31, 2014
|
|
|
4,959,206
|
|
|
$
|
0.27
|
|
|
Exercised
|
|
|
(2,967,465
|
)
|
|
|
0.3
|
|
|
Forfeited
|
|
|
(67,000
|
)
|
|
|
0.51
|
|
|
Outstanding, December 31, 2015 and 2016
|
|
|
1,924,741
|
|
|
$
|
0.25
|
|
The fair value of warrants was determined using the Black-Scholes-Merton option pricing model.
The following table summarizes the warrant information as at December 31, 2016:
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Number
|
|
|
remaining
|
|
|
Number
|
|
|
intrinsic
|
|
|
|
price
|
|
|
outstanding
|
|
|
contractual life
|
|
|
exercisable
|
|
|
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.22
|
|
|
|
1,894,741
|
|
|
|
5.4
|
|
|
|
1,894,741
|
|
|
$
|
1,213
|
|
|
|
$
|
2.20
|
|
|
|
30,000
|
|
|
|
0.8
|
|
|
|
30,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
1,924,741
|
|
|
|
5.3
|
|
|
|
1,924,741
|
|
|
$
|
1,213
|
|
No warrants were granted during the years ended December 31, 2016, 2015 or 2014.
(iv) Directors’ Compensation Plan (“Directors’ Plan”)
Non-management directors of the Company receive a minimum of 50%, and may elect to receive a greater portion, of their fees in common stock. The number of shares of common stock to be issued to non-management directors is determined by dividing the dollar value of the fees by the closing price of the common stock on the relevant payment date. The maximum number of shares of common stock available to be issued by the Company under the Directors’ Plan is 5,000,000.
During the year ended December 31, 2016, the Company issued 268,239
shares of
common stock with a fair value of $210 as payment of fees and retainers due to non-management directors. During the year ended December 31, 2015, the Company issued 290,575
shares of
common stock with a fair value of $198 as payment of fees and retainers due to non-management directors. During the year ended December 31, 2014, the Company issued 156,226 shares of common stock with a fair value of $179
as payment of fees and retainers due to non-management directors.
12. Promissory Notes Receivable
On October 17, 2008, prior to its merger with NeuLion, Inc., NeuLion USA, Inc. loaned employees an aggregate of $209 through promissory notes to exercise stock options. The promissory notes bear interest at 3.16% per annum and were repayable on October 17, 2013. The Company extended the repayment of the promissory notes from October 17, 2013 to October 17, 2017. During the year ended December 31, 2016, an employee repaid $20 plus interest.
13. Earnings Per Share
Basic earnings per share is computed by dividing net income for the year by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed by dividing net income for the year by the weighted average number of shares of common stock outstanding adjusted for the dilutive effect of preferred stock, restricted stock units, stock options and warrants.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
The following table presents the calculation of basic and diluted earnings per share for the years ended December 31, 2016, 2015 and 2014.
|
|
|
Year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Net income (loss)
|
|
$
|
(1,753
|
)
|
|
$
|
25,916
|
|
|
$
|
3,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used in calculating basic EPS
|
|
|
281,690,556
|
|
|
|
233,489,798
|
|
|
|
174,645,803
|
|
|
Effect of dilutive preferred stock, restricted stock units,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options and warrants
|
|
|
-
|
|
|
|
11,856,883
|
|
|
|
40,065,559
|
|
|
Weighted average shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used in calculating diluted EPS
|
|
|
281,690,556
|
|
|
|
245,346,681
|
|
|
|
214,711,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
|
$
|
0.02
|
|
The following table summarizes the securities convertible into common stock that were outstanding as at December 31, 2016 and were not included in the computation of diluted income per share because to do so would have been antidilutive.
|
|
Year ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
|
|
|
|
Class 3 Preference Shares
|
|
-
|
|
|
Class 4 Preference Shares
|
|
-
|
|
|
Options – Amended and Restated NeuLion, Inc. 2012 Omnibus Securities and Incentive Plan
|
|
23,213,450
|
|
|
Restricted Stock Units – Amended and Restated NeuLion, Inc. 2012 Omnibus Securities and Incentive Plan
|
|
8,815,000
|
|
|
Options – Fourth Amended and Restated Stock Option Plan
|
|
2,038,750
|
|
|
Warrants
|
|
1,924,741
|
|
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
14. Supplemental Cash Flow Information
For each of the years presented, the Company did not pay any cash interest expense.
15. Commitments and Contingencies
Commitments
The Company has multiple leases for facilities and equipment. As of December 31, 2016, the Company had no outstanding capital leases. Future minimum annual payments over the next five years and thereafter (exclusive of taxes, insurance and maintenance costs) under these commitments as of December 31, 2016 are as follows:
|
|
|
Operating Leases
|
|
|
|
|
Gross
|
|
|
Recovery
|
|
|
Net
|
|
|
2017
|
|
$
|
3,788
|
|
|
$
|
(931
|
)
|
|
$
|
2,857
|
|
|
2018
|
|
|
2,966
|
|
|
|
(1
|
)
|
|
|
2,965
|
|
|
2019
|
|
|
3,117
|
|
|
|
-
|
|
|
|
3,117
|
|
|
2020
|
|
|
1,873
|
|
|
|
-
|
|
|
|
1,873
|
|
|
2021
|
|
|
1,310
|
|
|
|
-
|
|
|
|
1,310
|
|
|
|
|
$
|
13,054
|
|
|
$
|
(932
|
)
|
|
$
|
12,122
|
|
The Company periodically enters into contracts with customers and vendors in which the Company guarantees (i) a customer a minimum amount of revenue share for services the Company provides under the contract or (ii) a vendor a minimum fixed bandwidth fee commitment. As at December 31, 2016, the total amount of these guarantees are $6,439 payable over the next 3 years as follows: 2017: $5,542; 2018: $694; and 2019: $203. The Company believes that the future commitments are probable.
The Company has subleased one of its Toronto offices, which is expected to generate a total recovery of $416 over the next year.
On February 12, 2017, the Company entered into a sublease for its San Diego office, effective January 1, 2018, which is expected to generate a total recovery of $1,643 over two years beginning on January 1, 2018.
Contingencies
During the ordinary course of its business activities, the Company may be contingently liable for litigation and a party to claims. Management believes that adequate provisions have been made where required for such contingencies. Although the extent of potential costs and losses, if any, is uncertain, management believes that the ultimate resolution of such contingencies will not have an adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
16. Geographic Information
The Company’s assets and operations are located primarily in the United States. The Company operates in one segment. The Company’s chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region. There are no segment managers who are held accountable by the chief operating decision maker for operations, operating results, and planning for levels or components below the consolidated unit level. The Company has therefore determined that it has a single operating segment. Total revenue from customers, based on the location of the customers, was as follows:
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
|
|
|
Year ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
65,395
|
|
|
|
66
|
%
|
|
$
|
64,146
|
|
|
|
68
|
%
|
|
$
|
51,418
|
|
|
|
93
|
%
|
|
Asia
|
|
|
21,502
|
|
|
|
22
|
%
|
|
|
20,100
|
|
|
|
21
|
%
|
|
|
436
|
|
|
|
0
|
%
|
|
Europe
|
|
|
10,358
|
|
|
|
10
|
%
|
|
|
6,249
|
|
|
|
7
|
%
|
|
|
2,568
|
|
|
|
5
|
%
|
|
Australia
|
|
|
2,533
|
|
|
|
2
|
%
|
|
|
3,548
|
|
|
|
4
|
%
|
|
|
1,098
|
|
|
|
2
|
%
|
|
|
|
$
|
99,788
|
|
|
|
100
|
%
|
|
$
|
94,043
|
|
|
|
100
|
%
|
|
$
|
55,520
|
|
|
|
100
|
%
|
As at December 31, 2016 and 2015, property and equipment at locations outside the U.S. was not material.
17. Income Taxes
The domestic and international components of income (loss) before provision for income taxes are presented as follows:
|
|
|
Year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
2,890
|
|
|
$
|
(2,475
|
)
|
|
$
|
4,405
|
|
|
Foreign
|
|
|
(3,232
|
)
|
|
|
544
|
|
|
|
(567
|
)
|
|
Total income (loss) before income taxes
|
|
$
|
(342
|
)
|
|
$
|
(1,931
|
)
|
|
$
|
3,838
|
|
Income tax expense (benefit) consists of the following:
|
|
|
Year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
324
|
|
|
|
67
|
|
|
|
-
|
|
|
Foreign
|
|
|
3,379
|
|
|
|
4,457
|
|
|
|
-
|
|
|
Total current
|
|
$
|
3,703
|
|
|
$
|
4,524
|
|
|
$
|
-
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,244
|
)
|
|
|
(32,534
|
)
|
|
|
254
|
|
|
State
|
|
|
(716
|
)
|
|
|
468
|
|
|
|
17
|
|
|
Foreign
|
|
|
(332
|
)
|
|
|
(305
|
)
|
|
|
-
|
|
|
Total deferred
|
|
|
(2,292
|
)
|
|
|
(32,371
|
)
|
|
|
271
|
|
|
Income tax expense (benefit)
|
|
$
|
1,411
|
|
|
$
|
(27,847
|
)
|
|
$
|
271
|
|
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
The Company is subject to income and other taxes in a variety of jurisdictions, including the United States, Canada, and various state jurisdictions. A reconciliation of income taxes computed at the United States statutory rate to the Company's effective income tax rate is shown below.
|
|
|
Year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
Combined basic federal rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
Income tax (benefit) based on statutory income tax rate
|
|
$
|
(119
|
)
|
|
$
|
(676
|
)
|
|
$
|
1,343
|
|
|
Increase in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses, state and foreign taxes
|
|
|
2,033
|
|
|
|
496
|
|
|
|
(49
|
)
|
|
Change in valuation allowance
|
|
|
(503
|
)
|
|
|
(27,667
|
)
|
|
|
(1,023
|
)
|
|
Income tax expense (benefit)
|
|
$
|
1,411
|
|
|
$
|
(27,847
|
)
|
|
$
|
271
|
|
Deferred income taxes result principally from temporary differences in the recognition of loss carry-forwards and expense items for financial and income tax reporting purposes. Significant components of the Company’s deferred tax assets as of December 31, 2016 and 2015 were as follows:
|
|
|
As of,
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Non-current deferred tax assets
|
|
|
|
|
|
|
|
Accrued expenses and deferred revenue
|
|
$
|
3,345
|
|
|
$
|
3,430
|
|
|
Intangible assets and goodwill
|
|
|
-
|
|
|
|
-
|
|
|
Stock options
|
|
|
510
|
|
|
|
385
|
|
|
Net operating losses
|
|
|
26,149
|
|
|
|
28,543
|
|
|
Credits
|
|
|
11,034
|
|
|
|
8,097
|
|
|
Other
|
|
|
1,093
|
|
|
|
1,466
|
|
|
Valuation allowance
|
|
|
(5,826
|
)
|
|
|
(6,330
|
)
|
|
Total non-current deferred tax assets
|
|
$
|
36,305
|
|
|
$
|
35,591
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilties
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
(2,154
|
)
|
|
$
|
(2,078
|
)
|
|
Intangible assets and goodwill
|
|
|
(2,469
|
)
|
|
|
(4,312
|
)
|
|
Foreign earnings
|
|
|
(201
|
)
|
|
|
(12
|
)
|
|
Total non-current deferred tax liabilities
|
|
$
|
(4,824
|
)
|
|
$
|
(6,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset
|
|
$
|
31,481
|
|
|
$
|
29,189
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability attributable to foreign jurisdictions
|
|
|
1,093
|
|
|
|
1,425
|
|
|
Amount attributable to US domestic
|
|
$
|
32,574
|
|
|
$
|
30,614
|
|
As at December 31, 2016, the Company had federal and state net operating loss carryforwards of approximately $63,119 and $39,828, respectively. The federal and state net operating losses do not include approximately $20,056 and $14,867, respectively, related to tax goodwill amortization that will not be realized for financial reporting purposes until the Company is able to take a tax benefit for those deductions. The federal and state net operating losses begin to expire in 2024 and 2017, respectively. As at December 31, 2016, the Company had federal and state research and development credit carryforwards of approximately $210 and $86, respectively. The federal research and development credit begins to expire in 2033. The state research and development credit carries forward indefinitely. As at December 31, 2016, the Company had a foreign tax credit carryforward of approximately $10,834. The Company had foreign net operating loss carryforwards of approximately $11,826. Our ability to utilize our federal tax attribute carryforwards have been limited by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), which imposes an annual limit on the ability of a corporation that undergoes an ''ownership change'' to use its tax attribute carryforwards to reduce its liability. An ownership change is generally defined as a greater than 50% increase in equity ownership by 5% shareholders in any three-year period.
NEULION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in U.S. dollars, unless otherwise noted)
(in thousands, except share and per share data)
As at December 31, 2015, based on the weight of available evidence, including profitability in recent periods and the availability of expected future taxable income, the Company concluded that it is more likely than not that the benefits of federal and some state-related deferred income tax assets will be realized. Accordingly, the Company reduced the valuation allowances on its federal gross deferred income tax assets. The Company continues to maintain a valuation allowance to offset foreign and certain state deferred tax assets, as realization of such assets do not meet the more-likely-than-not threshold. The net change in the total valuation allowance was a decrease of $(504) and an increase of $39,105 for the year ended December 31, 2016 and December 31, 2015, respectively.
The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes Recognition.” The Company does not believe there are any material uncertain tax provisions under ASC 740. The Company is subject to federal and state income tax, as well as income tax in various foreign jurisdictions in which the Company operates. The Company’s federal and state tax returns remain open and subject to potential government audit for the years 2013, 2014 and 2015. However, to the extent allowed by law the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carryforward amount.
F-31