This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of the Company should be read in conjunction with our unaudited consolidated financial statements and accompanying notes for the three and six months ended June 30, 2011 and 2010, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). All dollar amounts are in U.S. dollars (“US$” or “$”) unless stated otherwise. As at August 5, 2011, the Bank of Canada noon rate for conversion of United States dollars to Canadian dollars (CDN$) was US$1 to CDN$0.9843.
Our MD&A is intended to enable readers to gain an understanding of our current results and financial position. To do so, we provide information and analysis comparing the results of operations and financial position for the current period to those of the preceding comparable period. We also provide analysis and commentary that we believe is required to assess our future prospects. Accordingly, certain sections of this MD&A contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are affected by risks and uncertainties that are discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 and below in the section titled “Cautions Regarding Forward-Looking Statements” and that could have a material impact on future prospects. Readers are cautioned that actual results could vary from those forecasted in this MD&A.
Cautions Regarding Forward-Looking Statements
This MD&A contains certain forward-looking statements that reflect management’s expectations regarding our growth, results of operations, performance and business prospects and opportunities.
Statements about our future plans and intentions, results, levels of activity, performance, goals or achievements or other future events constitute forward-looking statements. Wherever possible, words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” or “potential” or the negative or other variations of these words, or similar words or phrases, have been used to identify these forward-looking statements. These statements reflect management’s current beliefs and are based on information available to management as of the date of this MD&A.
Forward-looking statements involve significant risk, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking statements. These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. Although the forward-looking statements contained in this MD&A are based upon what management believes to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this MD&A and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by law. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including: our ability to integrate the operations of TransVideo with our own; our ability to increase revenue; general economic and market segment conditions; our customers’ subscriber levels; the financial health of our customers; our ability to pursue and consummate acquisitions in a timely manner; our continued relationships with our customers; our ability to negotiate favorable terms for contract renewals; competitor activity; product capability and acceptance rates; technology changes; foreign exchange risk; interest rate risk; and credit risk. A more detailed assessment of the risks that could cause actual results to materially differ from current expectations is contained in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2010 available on www.sec.gov and www.sedar.com.
Overview
We are a leading IPTV company that provides a comprehensive suite of technology and digital services. “IPTV” refers to the distribution of streamed audio, video and other multimedia content over a broadband network. Through IPTV, we build and manage private networks for our customers that are used to deliver live and on-demand sports, international, entertainment and variety programming to subscribers and pay-per-view customers. We also offer our customers a complete web platform that includes e-commerce tools, ticketing solutions and hosting services. In addition, we stream international programming via proprietary websites targeted to specific communities. Our core business objective is to enter into agreements with companies seeking to reach target audiences through their own private networks and to provide them with complete IPTV services. These companies in turn are able to use our services to reach more consumers and to grow their brands and revenues. We also acquire the rights to certain international content from television broadcasters, which is then streamed to end users through our proprietary networks.
We believe the increasing popularity of Internet-connected devices, coupled with the accelerating worldwide adoption of broadband Internet connections, will fuel long-term growth in the number of consumers viewing IP-based content. Our short-term financial objectives are to increase revenues and to achieve positive net cash flows. Our long-term financial objective is to increase shareholder value. To achieve these objectives, we intend to grow our business with our existing customer base as well as enter into agreements with new customers.
We use the term “organic” to refer to the period-over-period changes in our revenues and expenses, excluding the revenues and expenses of TransVideo (acquisition completed October 1, 2010). This permits readers to better compare current period and prior period revenues and expenses, and to understand changes that have occurred, without regard to the effect of the acquisition of TransVideo.
Overall Performance – Three months ended June 30, 2011 vs three months ended June 30, 2010
Highlights
| | Ø | Services Revenue, which is our recurring revenue stream, increased by $2.1 million, or 32%, as compared to the prior period. |
| | Ø | Cost of Services Revenue, exclusive of depreciation and amortization, as a percentage of Services Revenue, decreased by 4%, as compared to the prior period. |
| | Ø | Non-GAAP Adjusted EBITDA (as defined below) improved by $1.8 million, or 53%, as compared to the prior period. |
Overview
Revenue for the three months ended June 30, 2011 was $10.0 million, an increase of $2.7 million, or 37%, from $7.3 million for the three months ended June 30, 2010. The revenue growth was due to the following:
| | · | organic growth of $2.3 million; and |
| | · | revenue from TransVideo of $0.4 million. |
The organic revenue growth of $2.3 million was due to an increase in our services revenue of $2.1 million and increase in our equipment revenue of $0.2 million.
Our net loss attributable to common stockholders for the three months ended June 30, 2011 was $2.9 million, or a loss of $0.02 per basic and diluted share of common stock, compared with a net loss of $5.7 million, or a loss of $0.05 per basic and diluted share of common stock, for the three months ended June 30, 2010. The improvement in net loss attributable to common stockholders of $2.8 million, or 49%, was due to the following:
| | · | an increase in total revenue of $2.7 million; |
| | · | a decrease in stock-based compensation of $1.0 million (non-cash item); and |
| | · | an adjustment to the carrying amount of Class 3 Preference Shares of $0.4 million for the three months ended June 30, 2011 (non-cash item). |
offset by the following:
| | · | an increase in cost of revenue, exclusive of depreciation and amortization of $0.8 million; |
| | · | an increase in selling, general and administrative expenses, excluding stock-based compensation of $0.1 million; |
| | · | an increase in depreciation and amortization of $0.1 million (non-cash item); and |
| | · | an unrealized gain on derivative of $0.3 million for the three months ended June 30, 2010 (non-cash item). |
Our non-GAAP Adjusted EBITDA loss (as defined below) was $1.6 million for the three months ended June 30, 2011, compared with $3.4 million for the three months ended June 30, 2010. The improvement in non-GAAP Adjusted EBITDA loss was due to the impact of the items noted in the net loss discussion above.
We report non-GAAP Adjusted EBITDA loss because it is a key measure used by management to evaluate our results and make strategic decisions about the Company, including potential acquisitions. Non-GAAP Adjusted EBITDA loss represents net loss before interest, income taxes, depreciation and amortization, stock-based compensation, unrealized gain/loss on derivatives, investment income, non-controlling interests and foreign exchange gain/loss. This measure does not have any standardized meaning prescribed by U.S. GAAP and therefore is unlikely to be comparable to the calculation of similar measures used by other companies, and should not be viewed as an alternative to measures of financial performance or changes in cash flows calculated in accordance with U.S. GAAP.
The reconciliation from consolidated net loss to non-GAAP Adjusted EBITDA loss is as follows:
| | | Three months ended, | |
| | | June 30, | |
| | | 2011 | | | 2010 | |
| | | $ | | | $ | |
| | | | | | | | | |
| Net loss | | | (3,323,196 | ) | | | (5,731,101 | ) |
| | | | | | | | | |
| Depreciation and amortization | | | 1,378,592 | | | | 1,285,325 | |
| Stock-based compensation | | | 334,183 | | | | 1,345,359 | |
| Unrealized gain on derivative | | | 0 | | | | (319,000 | ) |
| Investment income and foreign exchange gain/loss | | | (3,113 | ) | | | (29,282 | ) |
| | | | | | | | | |
| Non-GAAP Adjusted EBITDA loss | | | (1,613,534 | ) | | | (3,448,699 | ) |
Overall Performance – Six months ended June 30, 2011 vs six months ended June 30, 2010
Highlights
| | Ø | Services Revenue, which is our recurring revenue stream, increased by $4.2 million, or 30%, as compared to the prior period. |
| | Ø | Cost of Services Revenue, exclusive of depreciation and amortization, as a percentage of Services Revenue, decreased by 5%, as compared to the prior period. |
| | Ø | Non-GAAP Adjusted EBITDA (as defined below) improved by $2.8 million, or 43%, as compared to the prior period. |
Overview
Revenue for six months ended June 30, 2011 was $19.9 million, an increase of $4.8 million, or 32%, from $15.1 million for the six months ended June 30, 2010. The revenue growth was due to the following:
| | · | organic growth of $4.2 million; and |
| | · | revenue from TransVideo of $0.6 million. |
The organic revenue growth of $4.2 million was due to an increase in our services revenue.
Our net loss attributable to common stockholders for the six months ended June 30, 2011 was $7.0 million, or a loss of $0.05 per basic and diluted share of common stock, compared with a net loss of $9.2 million, or a loss of $0.08 per basic and diluted share of common stock, for the six months ended June 30, 2010. The improvement in net loss attributable to common stockholders of $2.2 million, or 24%, was due to the following:
| | · | an increase in total revenue of $4.8 million; |
| | · | a decrease in stock-based compensation of $0.8 million (non-cash item); and |
| | · | an adjustment to the carrying amount of Class 3 Preference Shares of $0.2 million for the six months ended June 30, 2011 (non-cash item). |
offset by the following:
| | · | an increase in cost of revenue, exclusive of depreciation and amortization of $1.0 million; |
| | · | an increase in selling, general and administrative expenses, excluding stock-based compensation of $1.0 million; |
| | · | an increase in depreciation and amortization of $0.3 million (non-cash item); and |
| | · | an unrealized gain on derivative of $1.3 million for the six months ended June 30, 2010 (non-cash item). |
Our non-GAAP Adjusted EBITDA loss was $3.7 million for the six months ended June 30, 2011, compared with $6.4 million for the six months ended June 30, 2010. The improvement in non-GAAP Adjusted EBITDA loss was due to the impact of the items noted in the net loss discussion above.
The reconciliation from consolidated net loss to non-GAAP Adjusted EBITDA loss is as follows:
| | | Six months ended, | |
| | | June 30, | |
| | | 2011 | | | 2010 | |
| | | $ | | | $ | |
| | | | | | | | | |
| Net loss | | | (7,226,250 | ) | | | (9,242,903 | ) |
| | | | | | | | | |
| Depreciation and amortization | | | 2,824,011 | | | | 2,562,290 | |
| Stock-based compensation | | | 729,397 | | | | 1,552,616 | |
| Unrealized gain on derivative | | | 0 | | | | (1,318,900 | ) |
| Investment income and foreign exchange loss | | | 21,073 | | | | (2,059 | ) |
| | | | | | | | | |
| Non-GAAP Adjusted EBITDA loss | | | (3,651,769 | ) | | | (6,448,956 | ) |
OPERATIONS
Revenue
We earn revenue in two broad categories:
(i) Services revenue, which includes:
| | · | Subscriber revenue, which consists primarily of subscription, pay-per view and operations fees revenues and is recognized over the period of service or usage; |
| | · | eCommerce revenue, which consists of advertising, merchandise, donor and ticketing revenues and is recognized as the service is performed; and |
| | · | Technology revenue, which consists of set-up and transcoder revenue and is recognized over the life of the contract. |
| (ii) | Equipment revenue, which consists of the sale and rental of set top boxes (“STBs”) to content partners and/or end users and is recognized when title to an STB passes to the customer. Shipping revenue is included in equipment revenue. |
Cost of services revenue
Cost of services revenue primarily consists of:
| | ● | Cost of subscriber revenue, which consists of: |
| | · | network operating costs; |
| | · | bandwidth usage fees; and |
| | ● | Cost of eCommerce revenue, which consists of: |
| | · | merchandising, donor and ticketing revenues, which have minimal associated costs as revenue is booked on a net basis; and |
| | · | cost of advertising revenue, which is subject to revenue shares with the content provider. |
| | ● | Cost of technology revenue, which consists of: |
| | · | transcoder licenses purchased from third parties; and |
| | · | maintenance costs for transcoders. |
Cost of equipment revenue
Cost of equipment revenue primarily consists of purchases of STB products and parts for resale to customers. Shipping costs are included in cost of equipment revenue.
Selling, general and administrative expenses, including stock-based compensation
Selling, general and administrative (“SG&A”) costs, including stock-based compensation, include:
| | ● | Wages and benefits – represents compensation for our full-time and part-time employees as well as fees for consultants who we use from time to time; |
| | · | Stock-based compensation – represents the estimated fair value of our options, warrants and stock appreciation rights (“Convertible Securities”) for financial accounting purposes, prepared using the Black-Scholes-Merton model; |
| | · | Marketing – represents expenses for both global and local marketing initiatives that focus on various target sports properties and ethnic communities and include online and traditional marketing expenditures, search engine marketing and search engine optimization; |
| | · | Professional fees – represents legal, accounting and recruiting fees; and |
| | · | Other SG&A expenses – represents travel expenses, rent, office supplies, corporate IT services, credit card processing fees and other general operating expenses. |
RESULTS OF OPERATIONS
Comparison of Three Months Ended June 30, 2011 to Three Months Ended June 30, 2010
Our consolidated financial statements for the three months ended June 30, 2011 and 2010 have been prepared in accordance with U.S. GAAP.
(Unaudited)
| | | 2011 | | 2010 | | Change | |
| | | $ | | $ | | | % | |
| Revenue | | | | | | | | | |
| Services revenue | | | 8,813,595 | | | 6,692,792 | | | 32 | % |
| Equipment revenue | | | 1,144,529 | | | 565,943 | | | 102 | % |
| Total Revenue | | | 9,958,124 | | | 7,258,735 | | | 37 | % |
| | | | | | | | | | | |
| Costs and expenses | | | | | | | | | | |
| Cost of services revenue, exclusive of depreciation | | | | | | | | | | |
| and amortization shown separately below | | | 3,150,377 | | | 2,650,266 | | | 19 | % |
| Cost of equipment revenue | | | 826,326 | | | 540,192 | | | 53 | % |
| Selling, general and administrative, including | | | | | | | | | | |
| stock-based compensation | | | 7,929,138 | | | 8,862,335 | | | -11 | % |
| Depreciation and amortization | | | 1,378,592 | | | 1,285,325 | | | 7 | % |
| | | | 13,284,433 | | | 13,338,118 | | | 0 | % |
| Operating loss | | | (3,326,309 | ) | | (6,079,383 | ) | | -45 | % |
| | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | |
| Unrealized gain on derivative | | | - | | | 319,000 | | | - | |
| Gain (loss) on foreign exchange | | | (3,796 | ) | | 20,176 | | | -119 | % |
| Investment income | | | 6,909 | | | 9,106 | | | -24 | % |
| | | | 3,113 | | | 348,282 | | | -99 | % |
| Net and comprehensive loss | | | (3,323,196 | ) | | (5,731,101 | ) | | -42 | % |
| Net loss attributable to non-controlling interest | | | 11,731 | | | - | | | - | |
| Net loss attributable to controlling interest | | | (3,311,465 | ) | | (5,731,101 | ) | | -42 | % |
| Adjustment to the carrying amount of redeemable preferred stock | | | 420,889 | | | - | | | - | |
| Net and comprehensive loss attributable to NeuLion, Inc. common stockholders | | | (2,890,576 | ) | | (5,731,101 | ) | | -50 | % |
Revenue
Services revenue
Services revenue includes revenue from subscribers, eCommerce and technology services. Services revenue increased from $6.7 million for the three months ended June 30, 2010 to $8.8 million for the three months ended June 30, 2011. The $2.1 million increase was due to organic growth. The organic growth was a result of $0.3 million of revenue from new customers coupled with $1.8 million from existing customers.
Subscriber revenue increased from $4.5 million for the three months ended June 30, 2010 to $5.6 million for the three months ended June 30, 2011. The $1.1 million increase was due to organic growth. The organic growth was a result of $0.1 million of revenue from new customers coupled with $1.0 million from existing customers.
eCommerce revenue decreased from $0.8 million for the three months ended June 30, 2010 to $0.7 million for the three months ended June 30, 2011. The $0.1 million decrease was a result of a decrease in merchandising revenue.
Technology revenue increased from $1.4 million for the three months ended June 30, 2010 to $2.5 million for the three months ended June 30, 2011. The $1.1 million increase was due to organic growth. The organic growth was a result of $0.2 million of revenue from new customers coupled with $0.9 million from existing customers.
Equipment revenue
Equipment revenue increased from $0.6 million for the three months ended June 30, 2010 to $1.2 million for the three months ended June 30, 2011. The $0.6 million increase was a result of $0.4 million in revenue from TransVideo and $0.2 million from organic growth. The organic growth of $0.2 million was due to an increase in purchases from an existing customer.
Costs and Expenses
Cost of services revenue
Cost of services revenue increased from $2.7 million for the three months ended June 30, 2010 to $3.2 million for the three months ended June 30, 2011. Cost of services revenue as a percentage of services revenue decreased from 40% for the three months ended June 30, 2010 to 36% for the three months ended June 30, 2011. The 4% improvement (as a percentage of services revenue) primarily relates to negotiated lower rates on bandwidth costs.
Cost of equipment revenue
Cost of equipment revenue increased from $0.5 million for the three months ended June 30, 2010 to $0.8 million for the three months ended June 30, 2011. Cost of equipment revenue as a percentage of equipment revenue decreased from 95% for the three months ended June 30, 2010 to 72% for the three months ended June 30, 2011. The 23% improvement (as a percentage of equipment revenue) was a result of purchasing STBs at a cheaper cost that occurred upon the acquisition of TransVideo.
Selling, general and administrative expenses, including stock-based compensation
Selling, general and administrative expenses, including stock-based compensation, decreased from $8.9 million for the three months ended June 30, 2010 to $7.9 million for the three months ended June 30, 2011. The total decrease of $1.0 million was due to an organic decrease of $1.4 million and an increase of $0.4 million from TransVideo. The individual variances are as follows:
| | · | Wages and benefits increased from $5.0 million for the three months ended June 30, 2010 to $5.8 million for the three months ended June 30, 2011. Wages and benefits were $0.3 million for TransVideo. The organic increase of $0.5 million was due to an increase in employees. |
| | · | Stock-based compensation expense decreased from $1.3 million for the three months ended June 30, 2010 to $0.3 million for the three months ended June 30, 2011. The decrease was a result of a modification of 5,000,000 incentive warrants which resulted in an expense of $1.1 million in the prior period offset by additional compensation relating to a consultant’s fees and restricted stock. |
| | · | Marketing expenses were $0.3 million for the three months ended June 30, 2010 and 2011. |
| | · | Professional fees decreased from $1.0 million for the three months ended June 30, 2010 to $0.5 million for the three months ended June 30, 2011. The decrease was a result of legal and valuation services incurred on the acquisition of TransVideo in the prior period. |
| | · | Other SG&A expenses decreased from $1.3 million for the three months ended June 30, 2010 to $1.0 million for the three months ended June 30, 2011. The $0.3 million decrease was primarily due to a decrease in bank and processing fees. |
Depreciation and amortization
Depreciation and amortization increased from $1.3 million for the three months ended June 30, 2010 to $1.4 million for the three months ended June 30, 2011. The $0.1 million increase was due to the amortization of TransVideo’s acquired fixed and intangible assets.
Unrealized gain on derivative
Unrealized gain on derivative decreased from a gain of $0.3 million for the three months ended June 30, 2010 to $0 for the three months ended June 30, 2011. We adopted ASC 815-40 effective January 1, 2009, which required us to record at fair value all Convertible Securities denominated in a currency other than our functional currency.
These warrants were recorded at their relative fair values at issuance, determined using the Black-Scholes-Merton model. Any change in value between reporting periods was recorded as other income (expense).
These warrants expired on October 20, 2010.
Comparison of Six Months Ended June 30, 2011 to Six Months Ended June 30, 2010
Our consolidated financial statements for the six months ended June 30, 2011 and 2010 have been prepared in accordance with U.S. GAAP.
(Unaudited)
| | | 2011 | | 2010 | | Change | |
| | | $ | | $ | | | % | |
| Revenue | | | | | | | | | |
| Services revenue | | | 18,377,525 | | | 14,155,691 | | | 30 | % |
| Equipment revenue | | | 1,526,597 | | | 947,539 | | | 61 | % |
| Total Revenue | | | 19,904,122 | | | 15,103,230 | | | 32 | % |
| | | | | | | | | | | |
| Costs and expenses | | | | | | | | | | |
| Cost of services revenue, exclusive of depreciation | | | | | | | | | | |
| and amortization shown separately below | | | 6,819,188 | | | 6,014,674 | | | 13 | % |
| Cost of equipment revenue | | | 1,137,888 | | | 894,881 | | | 27 | % |
| Selling, general and administrative, including | | | | | | | | | | |
| stock-based compensation | | | 16,328,212 | | | 16,195,247 | | | 1 | % |
| Depreciation and amortization | | | 2,824,011 | | | 2,562,290 | | | 10 | % |
| | | | 27,109,299 | | | 25,667,092 | | | 6 | % |
| Operating loss | | | (7,205,177 | ) | | (10,563,862 | ) | | -32 | % |
| | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | |
| Unrealized gain on derivative | | | - | | | 1,318,900 | | | - | |
| Loss on foreign exchange | | | (41,892 | ) | | (28,952 | ) | | 45 | % |
| Investment income | | | 20,819 | | | 31,011 | | | -33 | % |
| | | | (21,073 | ) | | 1,320,959 | | | -102 | % |
| Net and comprehensive loss | | | (7,226,250 | ) | | (9,242,903 | ) | | -22 | % |
| Net loss attributable to non-controlling interest | | | 21,485 | | | - | | | - | |
| Net loss attributable to controlling interest | | | (7,204,765 | ) | | (9,242,903 | ) | | -22 | % |
| Adjustment to the carrying amount of redeemable preferred stock | | | 153,233 | | | - | | | - | |
| Net and comprehensive loss attributable to NeuLion, Inc. common stockholders | | | (7,051,532 | ) | | (9,242,903 | ) | | -24 | % |
Revenue
Services revenue
Services revenue includes revenue from subscribers, eCommerce and technology services. Services revenue increased from $14.2 million for the six months ended June 30, 2010 to $18.4 million for the six months ended June 30, 2011. The $4.2 million increase was due to organic growth. The organic growth was a result of $0.6 million of revenue from new customers coupled with $3.6 million from existing customers.
Subscriber revenue increased from $9.5 million for the six months ended June 30, 2010 to $11.8 million for the six months ended June 30, 2011. The $2.3 million increase was due to organic growth. The organic growth was a result of $0.3 million of revenue from new customers coupled with $2.0 million from existing customers.
eCommerce revenue decreased from $1.8 million for the six months ended June 30, 2010 to $1.6 million for the 6 months ended June 30, 2011. The $0.2 million decrease was a result of a decrease in merchandising revenue.
Technology revenue increased from $2.9 million for the six months ended June 30, 2010 to $5.0 million for the six months ended June 30, 2011. The $2.1 million increase was due to organic growth. The organic growth was a result of $0.3 million of revenue from new customers coupled with $1.8 million from existing customers.
Equipment revenue
Equipment revenue increased from $0.9 million for the six months ended June 30, 2010 to $1.5 million for the six months ended June 30, 2011. The $0.6 million increase was due to revenue from TransVideo.
Costs and Expenses
Cost of services revenue
Cost of services revenue increased from $6.0 million for the six months ended June 30, 2010 to $6.8 million for the six months ended June 30, 2011. Cost of services revenue as a percentage of services revenue decreased from 42% for the six months ended June 30, 2010 to 37% for the six months ended June 30, 2011. The 5% improvement (as a percentage of services revenue) primarily relates to negotiated lower rates on bandwidth costs.
Cost of equipment revenue
Cost of equipment revenue increased from $0.9 million for the six months ended June 30, 2010 to $1.1 million for the six months ended June 30, 2011. Cost of equipment revenue as a percentage of equipment revenue decreased from 94% for the six months ended June 30, 2010 to 75% for the six months ended June 30, 2011. The 19% improvement (as a percentage of equipment revenue) was a result of purchasing STBs at a cheaper cost that occurred upon the acquisition of TransVideo.
Selling, general and administrative expenses, including stock-based compensation
Selling, general and administrative expenses, including stock-based compensation, increased from $16.2 million for the six months ended June 30, 2010 to $16.3 million for the six months ended June 30, 2011. The total increase of $0.1 million was due to an organic decrease of $0.8 million and an increase of $0.9 million from TransVideo. The individual variances are as follows:
| | · | Wages and benefits increased from $10.3 million for the six months ended June 30, 2010 to $11.7 million for the six months ended June 30, 2011. Wages and benefits were $0.6 million for TransVideo. The organic increase of $0.8 million was due to an increase in employees. |
| | · | Stock-based compensation expense decreased from $1.6 million for the six months ended June 30, 2010 to $0.7 million for the six months ended June 30, 2011. The decrease of $0.9 was a result of a modification of 5,000,000 incentive warrants which resulted in an expense of $1.1 million in the prior period offset by additional compensation relating to a consultant’s fees and restricted stock. |
| | · | Marketing expenses decreased from $0.6 million for the six months ended June 30, 2010 to $0.4 million for the six months ended June 30, 2011. The decrease was the result of marketing expenses incurred for our subsidiary Talfazat in the prior period. |
| | · | Professional fees decreased from $1.4 million for the six months ended June 30, 2010 to $0.9 million for the six months ended June 30, 2011. The decrease was a result of legal and valuation services incurred on the acquisition of TransVideo in the prior period. |
| | · | Other SG&A expenses increased from $2.3 million for the six months ended June 30, 2010 to $2.6 million for the six months ended June 30, 2011. TransVideo comprised $0.3 million of the total other SG&A expenses increase for the period. |
Depreciation and amortization
Depreciation and amortization increased from $2.6 million for the six months ended June 30, 2010 to $2.8 million for the six months ended June 30, 2011. The $0.2 million increase was due to the amortization of TransVideo’s acquired fixed and intangible assets.
Unrealized gain on derivative
Unrealized gain on derivative decreased from a gain of $1.3 million for the six months ended June 30, 2010 to $0 for the six months ended June 30, 2011. We adopted ASC 815-40 effective January 1, 2009, which required us to record at fair value all Convertible Securities denominated in a currency other than our functional currency.
These warrants were recorded at their relative fair values at issuance, determined using the Black-Scholes-Merton model. Any change in value between reporting periods was recorded as other income (expense).
These warrants expired on October 20, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position was $9.3 million at June 30, 2011. During the six month period ended June 30, 2011, we used $8.0 million to fund operations, which included changes in operating assets and liabilities of $4.3 million. Additionally, we spent $0.5 million to purchase fixed assets and received net proceeds of $4.9 million from a private placement of Class 4 Preference Shares.
As of June 30, 2011, our principal sources of liquidity included cash and cash equivalents of $9.3 million and trade accounts receivable of $3.6 million. We closed a $5.0 million private placement of our Class 4 Preference Shares on June 29, 2011; we intend to use these funds for general working capital purposes. We continue to closely monitor our cash balances to ensure that we have sufficient cash on hand to meet our operating needs. Management believes that we have sufficient liquidity to meet our operating cash, working capital and capital expenditure requirements for the next twelve months.
At June 30, 2011, approximately 69% of our cash and cash equivalents were held in accounts with a U.S. bank that received an BBB+ rating from Standard and Poor’s and an A3 rating from Moody’s, and 10% of our cash and cash equivalents were held in bank accounts with two of the top five Canadian commercial banks. We believe that these U.S. and Canadian financial institutions are secure notwithstanding the current global economy and that we will be able to access the remaining balance of bank deposits. Our investment policy is to invest in low-risk short-term investments, which are primarily term deposits. We have not had a history of any defaults on these term deposits, nor do we expect any in the future given the short term to maturity of these investments.
Our business as currently operated is still in its early stages, with only a few years of operating history. In 2006, our business model evolved from providing professional information technology services and international programming to providing end-to-end IPTV services for a wide range of professional and collegiate sports properties, entertainment networks and international clients. From our inception, we have incurred substantial net losses and have an accumulated deficit of $68.2 million; management expects these losses to continue in the short term. We continue to review our operating structure to maximize revenue opportunities, further reduce costs and achieve profitability. Based on our current business plan and internal forecasts, and considering the risks that are present in the current global economy, we believe that our cash on hand will be sufficient to meet our operating cash, working capital and capital expenditure requirements for the next twelve months. However, we will require expenditures of significant funds for marketing, building our subscriber management systems, programming and website development, maintaining adequate video streaming and database software, pursuing and maintaining channel distribution agreements with our channel partners, fees relating to acquiring and maintaining Internet streaming rights to our content and the construction and maintenance of our delivery infrastructure and office facilities. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed herein or incorporated by reference in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 in Item 1A, “Risk Factors.” If our actual cash needs are greater than forecasted and if cash on hand is insufficient to meet our operating cash, working capital and capital expenditure requirements for the next twelve months, we will require outside capital in addition to cash flow from operations in order to fund our business. Our short operating history, our current lack of profitability and the prolonged upheaval in the capital markets could each or all be factors that might negatively impact our ability to obtain outside capital on reasonable terms, or at all. If we were ever unable to obtain needed capital, we would reevaluate and reprioritize our planned capital expenditures and operating activities. We cannot assure you that we will ultimately be able to generate sufficient revenue or reduce our costs in the anticipated time frame to become profitable and have sustainable net positive cash flows.
Working Capital Requirements
Our net working capital at June 30, 2011 was $2.2 million, a increase of $0.8 million from the December 31, 2010 net working capital of $1.4 million. Included in current liabilities at June 30, 2011 and December 31, 2010 are approximately $4.5 million and $6.4 million, respectively, of liabilities (deferred revenue) that we do not anticipate settling in cash. Excluding these liabilities, our working capital ratios at June 30, 2011 and December 31, 2010 were 1.76 and 1.72, respectively.
The change in working capital was primarily due to a decrease in current assets and current liabilities of $3.2 million and $4.0 million, respectively.
Current assets at June 30, 2011 were $15.6 million, a decrease of $3.2 million from the December 31, 2010 balance of $18.8 million. The decrease was primarily due to a $3.6 million decrease in cash and cash equivalents.
Current liabilities at June 30, 2011 were $13.4 million, a decrease of $4.0 million from the December 31, 2010 balance of $17.4 million. The change was due to a decrease in deferred revenue of $1.9 million and a decrease in accounts payable of $1.7 million.
Cash Flows
Summary Balance Sheet Data:
| | | June 30, | | | December 31, | |
| | | 2011 | | | 2010 | |
| | | $ | | | $ | |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | | 9,338,782 | | | | 12,929,325 | |
| Accounts receivable, net | | | 3,566,272 | | | | 2,356,843 | |
| Other receivables | | | 184,120 | | | | 296,154 | |
| Inventory | | | 1,059,862 | | | | 946,780 | |
| Prepaid expenses and deposits | | | 1,112,498 | | | | 1,014,703 | |
| Due from related parties | | | 295,619 | | | | 1,261,776 | |
| Total Current Assets | | | 15,557,153 | | | | 18,805,581 | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable | | | 3,691,809 | | | | 5,504,489 | |
| Accrued liabilities | | | 5,150,781 | | | | 5,431,217 | |
| Due to related parties | | | - | | | | 26 | |
| Deferred revenue | | | 4,527,985 | | | | 6,432,445 | |
| Total Current Liabilities | | | 13,370,575 | | | | 17,368,177 | |
| | | | | | | | | |
| Working Capital Ratio | | | 1.16 | | | | 1.08 | |
Comparative Summarized Cash Flows
| | | Three months ended | | | Six months ended | |
| | | June 30 | | | June 30 | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | |
| Cash used in operating activities | | | (3,459,166 | ) | | | (3,718,391 | ) | | | (8,006,698 | ) | | | (8,594,499 | ) |
| Cash used in investing activities | | | (188,645 | ) | | | (525,847 | ) | | | (487,751 | ) | | | (824,132 | ) |
| Cash provided by financing activities | | | 4,903,906 | | | | 24,958 | | | | 4,903,906 | | | | 32,155 | |
Operating activities
Cash used in operating activities for the six months ended June 30, 2011 was $8.0 million. Changes in net cash used in operating activities reflect the consolidated net loss of $7.2 million for the period, less:
| | · | non-cash items in the amount of $3.5 million, related to stock-based compensation and depreciation and amortization; and |
| | · | changes in operating assets and liabilities of $4.3 million. |
Investing activities
Cash used in investing activities for the six months ended June 30, 2011 was $0.5 million. These funds were used to purchase fixed assets.
Financing activities
Cash provided by financing activities was $4.9 million for the six months ended June 30, 2011. These funds were received from a private placement of Class 4 Preference Shares.
Recently Issued Accounting Standard
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 amends guidance included within ASC Topic 605-25 to require an entity to use an estimated selling price when vendor-specific objective evidence or acceptable third-party evidence does not exist for any products or services included in a multiple-element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are also permitted. The Company adopted ASU 2009-13 on January 1, 2011, and its application did not have a material impact on the Company’s interim consolidated financial statements.
Off Balance Sheet Arrangements
The Company did not have any off balance sheet arrangements as of June 30, 2011.
Not applicable to smaller reporting companies.
In connection with the preparation of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, our management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
During our most recent fiscal quarter, no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
1. On June 20, 2011, the Company issued shares of common stock, without registration under the Securities Act of 1933, as amended (the “Securities Act”), to non-management directors pursuant to the Company’s Directors’ Compensation Plan as compensation for their services for the first half of 2011 in the following aggregate amounts:
The aggregate value of the 232,031 shares of common stock issued to Dr. Kenny and Messrs. Anderson, Battista, Kronfeld and Wang was $74,250 on the date of issuance. The Company sold these shares pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act and Regulation D promulgated there under. This issuance qualified for exemption from registration under the Securities Act because (i) each of the directors was an accredited investor at the time of the sale, (ii) the Company did not engage in any general solicitation or advertising in connection with the sale, and (iii) each of the directors received restricted securities.
2. On June 20, 2011, the Company issued 305,753 shares of common stock, without registration under the Securities Act, to a consultant of the Company residing within the United States pursuant to a consulting agreement. The aggregate value attributable of the 305,753 shares of common stock was $97,841 on the date of issuance. The Company issued the shares of common stock to the consultant in reliance on the exemption from the registration of the Securities Act afforded by Section 4(2) of the Securities Act. Note: Rule 701 is only available to issuers that are not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act.
Information regarding other securities sold by us but not registered under the Securities Act during the period ended June 30, 2011 has been included in our Current Report on Form 8-K filed with the SEC on July 1, 2011.
The exhibits listed below are filed as part of this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized.
