Neulion (NEUL) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2013
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____ to _____

Commission File Number:  000-53620

NEULION, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	98-0469479
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1600 Old Country Road, Plainview, New York	11803
(Address of principal executive offices)	(Zip Code)

(516) 622-8300

(Registrant’s Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  x

As of November 5, 2013, there were 168,996,694 shares of the registrant’s Common Stock, $0.01 par value, outstanding.  
 

NEULION, INC.

TABLE OF CONTENTS

	Part I.  Financial Information	Page No.
Item 1.	Condensed Consolidated Financial Statements	1
	Condensed Consolidated Balance Sheets as of
	September 30, 2013 (unaudited) and December 31, 2012	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the
	Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	2
	Condensed Consolidated Statement of Equity for the
	Nine Months Ended September 30, 2013 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the
	Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5-12
Item 2.	Management’s Discussion and Analysis of Financial	13-27
	Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
	Part II. Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	29
SIGNATURES		30

PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

NEULION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	September 30,			December 31,
	2013			2012
	(unaudited)
	$			$
ASSETS
Current
Cash and cash equivalents		21,293,816			11,108,107
Accounts receivable, net of allowance for doubtful accounts of $118,358 and $85,882		3,789,115			4,193,949
Other receivables		282,738			348,891
Inventory		356,729			416,541
Prepaid expenses and deposits		1,375,192			1,185,051
Due from related parties		271,439			899,967
Total current assets		27,369,029			18,152,506
Property, plant and equipment, net		3,446,623			3,446,648
Intangible assets, net		2,067,975			4,015,301
Goodwill		11,327,626			11,327,626
Other assets		98,326			161,913
Total assets		44,309,579			37,103,994
LIABILITIES AND EQUITY
Current
Accounts payable		16,591,677			9,813,237
Accrued liabilities		5,528,629			4,766,668
Due to related parties		—			12,282
Deferred revenue		7,621,129			5,715,102
Convertible note, net of discount		—			320,560
Total current liabilities		29,741,435			20,627,849
Long-term deferred revenue		691,164			1,134,075
Other long-term liabilities		293,442			357,852
Deferred tax liability		1,169,422			911,978
Total liabilities		31,895,463			23,031,754
Redeemable preferred stock, net (par value: $0.01; authorized: 50,000,000; issued
and outstanding: 28,089,083)
Class 3 Preference Shares (par value: $0.01; authorized, issued and outstanding:
17,176,818)		10,000,000			10,000,000
Class 4 Preference Shares (par value: $0.01; authorized, issued and outstanding:
10,912,265)		4,917,252			4,894,683
Total redeemable preferred stock		14,917,252			14,894,683
Stockholders' deficit
Common stock (par value: $0.01; authorized: 300,000,000; issued and outstanding:
168,321,684 and 164,207,147, respectively)		1,683,217			1,642,072
Additional paid-in capital		84,766,624			83,138,137
Promissory notes receivable		(209,250	)		(209,250	)
Accumulated deficit		(88,743,727	)		(85,393,402	)
Total stockholders’ deficit		(2,503,136	)		(822,443	)
Total liabilities and stockholders’ deficit		44,309,579			37,103,994

See accompanying notes

1

NEULION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(unaudited)

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

	Three months						Nine months
	ended						ended
	September 30,						September 30,
	2013			2012			2013			2012
	$			$			$			$
Revenue
Services revenue		9,867,846			8,806,275			32,299,003			26,839,762
Equipment revenue		159,020			552,444			664,042			1,604,399
		10,026,866			9,358,719			32,963,045			28,444,161
Costs and expenses
Cost of services revenue, exclusive of depreciation and
amortization shown separately below		2,556,131			2,439,307			8,844,715			9,163,829
Cost of equipment revenue		91,296			452,475			438,515			1,309,394
Selling, general and administrative, including
stock-based compensation		6,051,191			5,826,413			17,989,383			18,335,942
Research and development		1,887,379			1,609,622			5,460,126			4,969,934
Depreciation and amortization		990,083			1,144,043			2,987,272			3,564,861
		11,576,080			11,471,860			35,720,011			37,343,960
Operating loss		(1,549,214	)		(2,113,141	)		(2,756,966	)		(8,899,799	)
Other income (expense)
Loss on foreign exchange		(42,744	)		(13,312	)		(89,949	)		(43,750	)
Interest, net		2,094			1,749			(4,351	)		5,826
Amortization of discount on convertible note		—			—			(233,769	)		—
		(40,650	)		(11,563	)		(328,069	)		(37,924	)
Net and comprehensive loss before income taxes		(1,589,864	)		(2,124,704	)		(3,085,035	)		(8,937,723	)
Income taxes		(160,000	)		(62,000	)		(265,290	)		(279,000	)
Net and comprehensive loss		(1,749,864	)		(2,186,704	)		(3,350,325	)		(9,216,723	)
Net loss per weighted average number of shares
outstanding - basic and diluted	$	(0.01	)	$	(0.02	)	$	(0.02	)	$	(0.07	)
Weighted average number of shares
outstanding - basic and diluted		167,842,903			142,423,319			165,698,517			141,159,175

See accompanying notes

2

NEULION, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited)

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

					Additional			Promissory			Accumulated			Total
	Common stock				paid-in capital			Notes			deficit			deficit
		#	$		$			$			$			$
Balance, December 31, 2012		164,207,147		1,642,072		83,138,137			(209,250	)		(85,393,402	)		(822,443	)
Accretion of issuance costs
on Class 4 Preference Shares		—		—		(22,569	)		—			—			(22,569	)
Conversion of convertible note		2,841,600		28,416		539,906			—			—			568,322
Exercise of broker warrants		8,000		80		1,600			—			—			1,680
Exercise of subscriber warrants		113,468		1,134		(1,134	)		—			—			—
Stock-based compensation:
Issuance of common stock
under Directors’
Compensation Plan		151,469		1,515		72,235			—			—			73,750
Issuance of unrestricted stock
under 2012 Omnibus Securities
and Incentive Plan		1,000,000		10,000		444,396			—			—			454,396
Stock options, warrants
and other compensation		—		—		594,053			—			—			594,053
Net loss		—		—		—			—			(3,350,325	)		(3,350,325	)
Balance, September 30, 2013		168,321,684		1,683,217		84,766,624			(209,250	)		(88,743,727	)		(2,503,136	)

See accompanying notes

3

NEULION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

	Three months						Nine months
	ended						ended
	September 30,						September 30,
	2013			2012			2013			2012
	$			$			$			$
OPERATING ACTIVITIES
Net loss		(1,749,864	)		(2,186,704	)		(3,350,325	)		(9,216,723	)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization		990,083			1,144,043			2,987,272			3,564,861
Amortization of discount on convertible note		—			—			233,769			—
Stock-based compensation		717,765			350,865			1,072,601			1,265,734
Income taxes		160,000			62,000			257,444			279,000
Changes in operating assets and liabilities
Accounts receivable		(987,453	)		(684,258	)		404,834			639,524
Inventory		(49,114	)		109,330			59,812			152,542
Prepaid expenses, deposits and other assets		(386,742	)		(129,452	)		(126,554	)		21,930
Other receivables		67,666			(123,102	)		66,153			(128,795	)
Due from related parties		474,003			255,230			628,528			(405,192	)
Accounts payable		10,064,504			6,778,547			6,778,448			5,062,273
Accrued liabilities		444,788			351,431			825,552			(296,497	)
Deferred revenue		2,814,583			1,838,064			1,463,116			8,011
Long-term liabilities		(20,450	)		(12,948	)		(64,410	)		(55,354	)
Due to related parties		(13,467	)		4,829			(12,282	)		1,752
Cash provided by operating activities		12,526,302			7,757,875			11,223,958			893,066
INVESTING ACTIVITIES
Purchase of property, plant and equipment		(640,998	)		(422,483	)		(1,039,929	)		(830,718	)
Cash used in investing activities		(640,998	)		(422,483	)		(1,039,929	)		(830,718	)
FINANCING ACTIVITIES
Exercise of broker warrants		840			—			1,680			—
Convertible note		—			545,628			—			545,628
Private placement, net		—			4,299,932			—			4,299,932
Cash provided by financing activities		840			4,845,560			1,680			4,845,560
Net increase in cash and cash equivalents,
during the period		11,886,144			12,180,952			10,185,709			4,907,908
Cash and cash equivalents, beginning of period		9,407,672			5,073,838			11,108,107			12,346,882
Cash and cash equivalents, end of period		21,293,816			17,254,790			21,293,816			17,254,790

See accompanying notes

4

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

1. Nature of Operations

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

The Company’s core business and business model have evolved from NeuLion being a provider of professional information technology services and international programming to being a provider of customized, end-to-end, interactive video services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies.  With a fundamental shift in the way media is now being consumed, technological advancements are affecting how, when and where consumers connect to content. NeuLion’s technology empowers its customers to capitalize on the growing consumer demand for viewing video content on multiple types of Internet-enabled devices by enabling delivery to a range of equipment, including personal computers, laptops, mobile devices, gaming consoles, tablets, Internet-enabled TVs, third-party set top boxes (“STBs”), standard TV sets that have Internet-connected devices and other similar consumer accessories.  The Company’s platform offers an end-to-end service, which includes content management, subscriber management, digital rights management, billing services, app creation, content delivery and advertising solutions.

2. Basis of Presentation and Significant Accounting Policies

The Company’s accounting policies are consistent with those presented in its annual consolidated financial statements as at December 31, 2012.  These interim unaudited condensed consolidated financial statements do not include all footnote disclosures required by U.S. generally accepted accounting principles (“GAAP”) for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the year ended December 31, 2012 as they appear in the Company’s Annual Report on Form 10-K.

These financial statements were prepared in conformity with U.S. GAAP, which requires management to make certain estimates that affect the reported amounts in the interim unaudited condensed consolidated financial statements, and the disclosures made in the accompanying notes. Despite the Company’s intention to establish accurate estimates and use reasonable assumptions, actual results may differ from these estimates.  All significant intercompany transactions and accounts have been eliminated on consolidation.

In the opinion of management, these interim unaudited condensed consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly the Company’s financial position as at September 30, 2013 and December 31, 2012 and the results of operations and cash flows for the three and nine months ended September 30, 2013 and 2012.  The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the entire year.

Advertising

Advertising costs are expensed as incurred and totaled $62,429 and $229,062 for the three and nine months ended September 30, 2013, respectively (three and nine months ended September 30, 2012 - $86,461 and $300,635, respectively), and are included in selling, general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss.

5

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

3. Inventory

Inventory consists of the following:

	September 30,		December 31,
	2013		2012
	$		$
Raw materials		99,299		113,322
Finished goods		257,430		303,219
		356,729		416,541

4. Economic Dependence and Concentration of Credit Risk

For the three months ended September 30, 2013, two customers accounted for 27% of revenue: 17% and 10%, respectively.  For the nine months ended September 30, 2013, one customer accounted for 21% of revenue.   For the three and nine months ended September 30, 2012, one customer accounted for 16% and 14% of revenue, respectively.

As at September 30, 2013, one customer accounted for 12% of accounts receivable.  As at December 31, 2012, two customers accounted for 37% of accounts receivable:  24% and 13%, respectively.

As of September 30, 2013, three customers accounted for 80% of accounts payable: 41%, 24% and 15%, respectively.  As at December 31, 2012, two customers accounted for 53% of accounts payable:  36% and 17%, respectively.

As of September 30, 2013, approximately 89% 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 an A3 rating from Moody’s. The Company believes that these U.S. financial institutions are secure notwithstanding the current global economy and that we will be able to access the remaining balance of bank deposits. The Company’s investment policy is to invest in low-risk short-term investments which are primarily term deposits. The Company has not had a history of any defaults on these term deposits, nor does the Company expect any in the future given the short term maturity of these investments.

5. Related Party Transactions

The Company has entered into certain transactions and agreements in the normal course of operations with related parties.  Significant related party transactions are as follows:

KyLin TV, Inc. (“KyLin TV”)

KyLin TV is an IPTV company that is controlled by the Chairman of the Board of Directors of the Company.  On June 1, 2008, the Company entered into an agreement with KyLin TV to build and deliver the setup and back office operations for KyLin TV’s IPTV service.  Effective April 1, 2012, the Company amended its agreement with KyLin TV, such that, in addition to the services previously provided, KyLin TV was appointed the exclusive distributor of the Company’s business to consumer (“B2C”) IPTV interests.  As exclusive distributor, KyLin TV 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, and 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 three and nine months ended September 30, 2013 were $49,900 and $223,523, respectively (three and nine months ended September 30, 2012 - $80,702 and $235,598, respectively), and are recorded as a recovery in selling, general and administrative expense on the condensed consolidated statements of operations and comprehensive loss.

6

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

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 owned by the Chairman of the Board of Directors of the Company.

Renaissance Property Associates, LLC (“Renaissance”)

The Company provides IT-related professional services to Renaissance, a real estate management company owned by the Chairman of the Board of Directors of the Company.  In June 2009, the Company signed a sublease agreement with Renaissance for office space in Plainview, New York.  Rent expense paid by the Company to Renaissance of $107,586 and $322,758, inclusive of taxes and utilities, is included in selling, general and administrative expense on the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2013, respectively (three and nine months ended September 30, 2012 - $105,124 and $315,372).

Smile Train, Inc. (“Smile Train”)

The Company provides IT-related professional services to Smile Train, a public charity whose founder and significant benefactor is the Chairman of the Board of Directors of the Company.

The Company recognized revenue from related parties as follows:

	Three months				Nine months
	ended				ended
	September 30,				September 30,
	2013		2012		2013		2012
	$		$		$		$
New York Islanders		79,296		72,853		234,520		219,412
Renaissance		30,000		30,000		90,000		90,000
Smile Train		24,000		27,000		72,000		81,000
KyLinTV		468,538		579,644		1,553,955		1,894,054
		601,834		709,497		1,950,475		2,284,466

7

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

As at September 30, 2013 and December 31, 2012, the amounts due from (to) related parties are as follows:

	September 30,		December 31,
	2013		2012
	$		$
New York Islanders		121		(12,282	)
Renaissance		738		2,992
KyLin TV		270,580		896,975
		271,439		887,685

6. Loss Per Share

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

The following table summarizes the potential shares of common stock that were outstanding as at September 30, 2013 and December 31, 2012 but not included in the computation of diluted loss per share as their effect would have been anti-dilutive.

	September 30,		December 31,
	2013		2012
		#		#
Class 3 Preference Shares		17,176,818		17,176,818
Class 4 Preference Shares		10,912,265		10,912,265
Stock options – 2012 Omnibus Securities and Incentive Plan		14,268,000		415,000
Stock options – Second Amended and Restated Stock Option Plan		16,027,542		16,502,500
Stock appreciation rights		475,000		675,000
Warrants		20,455,569		19,383,269
Retention warrants		—		236,550

7. Contingencies

During the ordinary course of business activities, the Company may be contingently liable for litigation and a party to claims.  Management believes that adequate provisions have been made in the accounts where required.  Although the extent of potential costs and losses, if any, is uncertain, management believes that the ultimate resolution of such contingencies will not have an adverse effect on the consolidated financial position or results of operations of the Company.

8. Segmented Information

The Company operates, as one operating segment, to deliver live and on-demand content to Internet-enabled devices.  Substantially all of Company’s revenues are generated and long-lived assets are located in the United States.

8

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

9. Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes Recognition.”  The Company does not believe there are any uncertain tax provisions under ASC 740.  The Company’s federal and state tax returns remain open to IRS audit for the year 2011.  The IRS has completed its audit for the year ended November 30, 2010 with no significant findings.

The Company has recorded a valuation allowance against the income tax benefit generated by the current period loss.  All previously recognized deferred tax assets and net operating losses have been reduced by a valuation allowance.

Differences between the income tax expense reported in the statement of operations and comprehensive loss and income tax benefit based on statutory income tax rates are attributable to non-deductible expenses, state taxes and current period increases in the valuation allowance.

10.  Redeemable Preferred Stock

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

Class 3 Preference Shares

On September 29, 2010, the Company issued 17,176,818 Class 3 Preference Shares, at a price of CDN$0.60 per share in a private offering, for aggregate gross proceeds of $10,000,000.  Expenses related to the share issuance were $245,662.  The principal terms of the Class 3 Preference Shares are as follows:

Voting rights – The Class 3 Preference Shares have voting rights (one vote per share) equal to those of the Company’s common stock.

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

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

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

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

9

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

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

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

Accounting for Class 3 Preference Shares

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

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

Class 4 Preference Shares

On June 29, 2011, the Company issued 10,912,265 Class 4 Preference Shares, at a price of $0.4582 per share in a private offering, for aggregate gross proceeds of $5,000,000.  Expenses related to the share issuance were $150,454.  The principal terms of the Class 4 Preference Shares are as follows:

Voting rights – The Class 4 Preference Shares have voting rights (one vote per share) equal to those of the Company’s common stock.

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

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

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

10

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

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

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

Accounting for Class 4 Preference Shares

If certain criteria are met, companies must bifurcate conversion options from their host instruments and account for them as free-standing derivative instruments.  The Company has evaluated the conversion option on the Class 4 Preference Shares and determined that the embedded conversion option should not be bifurcated.  Additionally, the Company analyzed the conversion feature and determined that the effective conversion price was higher than the market price at the date of issuance; therefore, no beneficial conversion feature was recorded.  The Company has classified the Class 4 Preference Shares as temporary equity because they are redeemable upon the occurrence of an event that is not solely within the control of the issuer.  

11.  Private Placement and Convertible Note

On September 25, 2012, the Company completed a private placement for aggregate gross proceeds of approximately $4.6 million.  The Company sold an aggregate of 22,782,674 units at CDN$0.20 each (the “Units”), with each Unit consisting of one share of common stock and one-half of one common stock purchase warrant (“Warrant”) with each full Warrant entitling the holder thereof to purchase one share of common stock at US$0.30 for thirty (30) months following closing (the “Offering”).  The Vice Chairman of our Board of Directors purchased 1,745,000 Units in the Offering for CDN$349,000.  The Chairman of our Board of Directors purchased 2,334,500 Units in the Offering for CDN$466,900 and loaned the Company CDN$533,100 (evidenced by a convertible note in the amount of $545,628).  Upon receipt of stockholder approval, all outstanding principal and any accrued and unpaid interest owing on the convertible note will automatically convert into shares of common stock at a rate of US$0.20 per share (the “Conversion Shares”) and the number of Warrants equal to one-half of the number of Conversion Shares. If stockholder approval is not received, all principal and interest (calculated (but not compounded) daily and payable in arrears at a rate of 6% per annum) will be paid on the maturity date, September 25, 2013.

The agent for a portion of the subscriptions, received from the Company a cash commission equal to 8% of the gross proceeds of the offering (excluding proceeds arising from Units purchased by the Chairman and Vice Chairman noted above) and broker warrants (“Broker Warrants”) equal to 4% of the number of Units issued in the Offering.  Each Broker Warrant is exercisable for one Unit at an exercise price of US$0.21 per Broker Warrant (“Broker Unit”) at any time prior to the 30 month anniversary of the closing date of the Offering.  Each Broker Unit consists of one share of common stock and one-half of a Warrant, and each full Warrant entitles the holder thereof to purchase one share of common stock at US$0.30 for 30 months following the closing date of the Offering.

At the Company’s Annual Meeting of Stockholders on June 5, 2013, the Company’s stockholders approved the conversion of the convertible note held by the Chairman.  Upon such approval, the loan principal of $545,628 plus accrued interest of $22,692 automatically converted into 2,841,600 shares of common stock and 1,420,800 Warrants.

11

NEULION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Information as at September 30, 2013 and for the three and nine months ended

September 30, 2013 and 2012 (unaudited)

Accounting for Convertible Note

If certain criteria are met, companies must bifurcate conversion options from their host instruments and account for them as free-standing derivative instruments.  The Company analyzed the conversion feature on the convertible note and determined that the embedded conversion feature did not require bifurcation; however, the effective conversion price was lower than the market price at the date of issuance; therefore, a beneficial conversion feature was recorded.  Additionally, the Company bifurcated the fair value of the warrants from the convertible note.  The discount on the note created by the beneficial conversion feature and the fair value of the warrants was amortized into interest expense over the term when the convertible note was converted.  The Company classified the convertible note as a current liability because it was convertible within a year.  On June 5, 2013, upon conversion, the Company reclassified the note from a current liability to equity.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of the Company should be read in conjunction with our condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2013 and 2012, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). All dollar amounts are in U.S. dollars (“US$” or “$”) unless stated otherwise. As at November 5, 2013 the Bank of Canada noon rate for conversion of United States dollars to Canadian dollars (“CDN$”) was US$1 to CDN$1.0448.

Our MD&A is intended to enable readers to gain an understanding of our current results and financial position. To do so, we provide information and analysis comparing the results of operations and financial position for the current period to those of the preceding comparable period. We also provide analysis and commentary that we believe is required to assess our future prospects. Accordingly, certain sections of this report contain forward-looking statements that are based on current plans and expectations. These forward-looking statements are affected by risks and uncertainties that are discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 and below in the section titled “Cautions Regarding Forward-Looking Statements” and that could have a material impact on future prospects. Readers are cautioned that actual results could vary from those forecasted in this MD&A.

Cautions Regarding Forward-Looking Statements

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

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

Forward-looking statements involve significant risk, uncertainties and assumptions. Although the forward-looking statements contained in this MD&A are based upon what management believes to be reasonable assumptions, we cannot assure readers that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by law. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including: our ability to realize some or all of the anticipated benefits of our partnerships; our ability to increase revenue; general economic and market segment conditions; our customers’ subscriber levels and financial health; our ability to pursue and consummate acquisitions in a timely manner; our continued relationships with our customers; our ability to negotiate favorable terms for contract renewals; competitor activity; product capability and acceptance rates; technology changes; regulatory changes; foreign exchange risk; interest rate risk; and credit risk. These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. A more detailed assessment of the risks that could cause actual results to materially differ from current expectations is contained in Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012, which is available on www.sec.gov and www.sedar.com.

Overview

NeuLion is a technology service provider that specializes in the distribution and monetization of live and on-demand digital video content to Internet-enabled devices.  Through our cloud-based end-to-end solution, we build and manage interactive digital networks that enable our customers to provide a destination for their subscribers to view and interact with their content.  We were incorporated on January 14, 2000 under the Canada Business Corporations Act and were domesticated under Delaware law on November 30, 2010. Our common stock is listed on the Toronto Stock Exchange (“TSX”) under the symbol NLN.

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Our core business and business model have evolved from NeuLion being a provider of professional information technology services and international programming to being a provider of customized, end-to-end interactive, video services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies. With a fundamental shift in the way media is now being consumed, technological advancements are affecting how, when and where consumers connect to content.  NeuLion’s technology empowers our customers to capitalize on the growing consumer demand for viewing video content on multiple types of Internet-enabled devices by enabling delivery to a range of equipment, including personal computers, laptops, mobile devices, gaming consoles, tablets, Internet-enabled TVs, third-party set top boxes (“STBs”), standard TV sets that have Internet-connected devices, and other similar consumer accessories. Our platform offers an end-to-end service, which includes content management, subscriber management, digital rights management, billing services, app creation, content delivery and advertising solutions.

Overall Performance – Three months ended September 30, 2013 vs three months ended September 30, 2012

Highlights

Ø Total revenue increased by $0.7 million, or 7%, from $9.3 million for the three months ended September 30, 2012 to $10.0 million for the three months ended September 30, 2013.

Ø Cost of revenue, as a percentage of revenue, exclusive of depreciation and amortization, improved by 5%, from 31% for the three months ended September 30, 2012 to 26% for the three months ended September 30, 2013.

Ø Non-GAAP Adjusted EBITDA (as defined below) improved by $0.8 million, from $(0.6) million for the three months ended September 30, 2012 to $0.2 million for the three months ended September 30, 2013.

Overview

Total revenue for the three months ended September 30, 2013 was $10.0 million, an increase of $0.7 million, or 7%, from $9.3 million for the three months ended September 30, 2012. The improvement was primarily attributable to an increase in revenue in our Pro Sports category of customers.

Our consolidated net loss for the three months ended September 30, 2013 was $1.8 million, or a loss of $0.01 per basic and diluted share of common stock, compared with a net loss of $2.2 million, or a loss of $0.02 per basic and diluted share of common stock, for the three months ended September 30, 2012. The improvement in consolidated net loss of $0.4 million was due to the following:

• an increase in total revenue of $0.7 million;

• a decrease in cost of revenue of $0.2 million;

• a decrease in selling, general and administrative expenses, excluding stock-based compensation, of $0.1 million; and

• a decrease in depreciation and amortization of $0.2 million (non-cash item).

offset by the following:

• an increase in stock-based compensation of $0.4 million (non-cash item);

• an increase in research and development expenses of $0.3 million; and

• an increase in income taxes of $0.1 million (non-cash item).

Our non-GAAP Adjusted EBITDA (as defined below) was $0.2 million for the three months ended September 30, 2013, compared with $(0.6) million for the three months ended September 30, 2012. The improvement in non-GAAP Adjusted EBITDA was due to the impact of the items noted in the net loss discussion above.

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

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

	Three months ended
	September 30,
	2013			2012
		$			$
Consolidated net loss on a GAAP basis		(1,749,864	)		(2,186,704	)
Depreciation and amortization		990,083			1,144,043
Stock-based compensation		717,765			350,865
Income taxes		160,000			62,000
Interest and foreign exchange		40,650			11,563
Non-GAAP Adjusted EBITDA		158,634			(618,233	)

Overall Performance – Nine months ended September 30, 2013 vs nine months ended September 30, 2012

Highlights

Ø Total revenue increased by $4.5 million, or 16%, from $28.5 million for the nine months ended September 30, 2012 to $33.0 million for the nine months ended September 30, 2013.

Ø Cost of revenue, as a percentage of revenue, exclusive of depreciation and amortization, improved by 9%, from 37% for the nine months ended September 30, 2012 to 28% for the nine months ended September 30, 2013.

Ø Non-GAAP Adjusted EBITDA (as defined below) improved by $5.4 million, from $(4.1) million for the nine months ended September 30, 2012 to $1.3 million for the nine months ended September 30, 2013.

Overview

Total revenue for the nine months ended September 30, 2013 was $33.0 million, an increase of $4.5 million, or 16%, from $28.5 million for the nine months ended September 30, 2012. The improvement was primarily attributable to an increase in revenue in our Pro Sports category of customers.

Our consolidated net loss for the nine months ended September 30, 2013 was $3.4 million, or a loss of $0.02 per basic and diluted share of common stock, compared with a net loss of $9.2 million, or a loss of $0.07 per basic and diluted share of common stock, for the nine months ended September 30, 2012. The improvement in consolidated net loss of $5.8 million was due to the following:

• an increase in total revenue of $4.5 million;

• a decrease in cost of revenue of $1.2 million;

• a decrease in selling, general and administrative expenses, excluding stock-based compensation, of $0.1 million;

• a decrease in stock-based compensation of $0.2 million (non-cash item); and

• a decrease in depreciation and amortization of $0.6 million (non-cash item).

offset by the following:

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• an increase in research and development expenses of $0.5 million; and

• a discount on convertible note of $0.3 million for the nine months ended September 30, 2013 (non-cash item).

Our non-GAAP Adjusted EBITDA (as defined below) was $1.3 million for the nine months ended September 30, 2013, compared with $(4.1) million for the nine months ended September 30, 2012. The improvement in non-GAAP Adjusted EBITDA was due to the impact of the items noted in the net loss discussion above.

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

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

	Nine months ended
	September 30,
	2013			2012
		$			$
Consolidated net loss on a GAAP basis		(3,350,325	)		(9,216,723	)
Depreciation and amortization		2,987,272			3,564,861
Stock-based compensation		1,072,601			1,265,734
Discount on convertible note		233,769			0
Income taxes		265,290			279,000
Interest and foreign exchange		94,300			37,924
Non-GAAP Adjusted EBITDA		1,302,907			(4,069,204	)

OPERATIONS

Revenue

We earn revenue from four broad categories of customers:

• Pro Sports

This category contains all of our major, minor and junior sports league customers. These customers include the National Football League (NFL), the National Hockey League (NHL), the National Basketball Association (NBA), Ultimate Fighting Championship (UFC), Major League Soccer (MLS) and the American Hockey League (AHL).

• College Sports

This category contains all of our college and collegiate conference customers. We partner with many National Collegiate Athletic Association (NCAA) schools and conferences and have agreements in place with over 150 colleges, universities and related websites.  These customers include the University of North Carolina, Louisiana State University, Texas A&M University and Duke University.

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• TV Everywhere

This category contains all of our channel video distributors and operators, networks and programmers and studios and content aggregators. These customers include Independent Film Channel, Univision, China Network Television (a new media agency of China Central Television), Sky Angel, Rogers, Outdoor Channel, TVG Network, CBC, Zon Multimedia, Cablevision MSG Varsity, Shaw Communications, Big Ten Network and KyLin TV.

• Other Customers

This category includes our B2C business, in which we market our own content directly to customers, and various consulting services. Effective April 1, 2012, the Company amended its agreement with KyLin TV, such that, in addition to the services previously provided, KyLin TV was appointed the exclusive distributor of the Company’s B2C IPTV interests. As exclusive distributor, KyLin TV obtains, advertises and markets most 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 expense, and the Company records revenues in accordance with the revised fee schedule in the amendment.

Within each of these four categories of customers, revenue is categorized as follows:

• Services revenue, which consists of:

• Setup fees - non-recurring and charged to customers for design, setup and implementation services.

• Monthly/annual fees - recurring and charged to customers for ongoing hosting, support and maintenance.

• Variable fees - recurring and earned through subscriptions, usage, advertising, support, eCommerce and other.

§ Subscription revenue consists of recurring revenue based on the number of subscribers. Revenue is typically generated on a monthly, quarterly or annual basis and can be either a fixed fee per user or a variable fee based on a percentage of the subscription price.

§ Usage fees are charged to customers for bandwidth and storage.

§ Advertising revenues are earned through the insertion of advertising impressions on websites and in streaming video at a cost per thousand impressions.

§ Support revenue consists of fees charged to our customers for providing customer support to their end users.

§ eCommerce revenues are earned through providing customers with ticketing and retail merchandising web solutions.

§ Other revenue consists of fees charged to customers that do not fall into any one of the categories described above.

• Equipment revenue, which is non-recurring, consists of the sale of STBs to content partners and/or end users and is recognized when title to a STB passes to our customer. Shipping revenue, STB rentals and computer hardware sales are also included in equipment revenue.  With the proliferation of connected devices, such as iPad, iPhone, Android tablets and phones, gaming devices and connected TVs, we expect equipment revenue to continue to decrease going forward.

Cost and Expenses

Cost of services revenue

Cost of services revenue primarily consists of:

• revenue share payments;

• broadcast operating costs (teleport fees, bandwidth usage fees, colocation fees); and

• cost of advertising revenue, which is subject to revenue shares with the content provider.

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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”) expenses, including stock-based compensation, include:

• Wages and benefits – represents compensation for our full-time and part-time employees as well as fees for consultants we use from time to time;

• Stock-based compensation – represents the estimated fair value of our options, warrants and stock appreciation rights (“Convertible Securities”) for financial accounting purposes, prepared using the Black-Scholes-Merton model, which requires a number of subjective assumptions, including assumptions about the expected life of the Convertible Securities, risk-free interest rates, dividend rates, forfeiture rates and the future volatility of the price of our shares of common stock. The estimated fair value of the Convertible Securities is expensed over the vesting period, which is normally four years, with the Convertible Securities vesting in equal amounts each year. However, our Board of Directors has the discretion to grant options with different vesting periods;

• Professional fees – represents legal, accounting, and public and investor relations expenses; and

• Other SG&A expenses – represents travel expenses, rent, office supplies, corporate IT services, credit card processing fees, marketing and other general operating expenses.

Research and development

Research and development costs (“R&D”) primarily consist of wages and benefits for R&D department personnel.

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RESULTS OF OPERATIONS

Comparison of Three Months Ended September 30, 2013 to Three Months Ended September 30, 2012

Our condensed consolidated financial statements for the three months ended September 30, 2013 and 2012 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows:

	2013			2012		��	Change
		$		$					%
Revenue
Services revenue		9,867,846			8,806,275			12	%
Equipment revenue		159,020			552,444			-71	%
		10,026,866			9,358,719			7	%
Costs and expenses
Cost of services revenue, exclusive of depreciation
and amortization shown separately below		2,556,131			2,439,307			5	%
Cost of equipment revenue		91,296			452,475			-80	%
Selling, general and administrative,  including
stock-based compensation		6,051,191			5,826,413			4	%
Research and development		1,887,379			1,609,622			17	%
Depreciation and amortization		990,083			1,144,043			-13	%
		11,576,080			11,471,860			1	%
Operating loss		(1,549,214	)		(2,113,141	)		-27	%
Other income (expense)
Foreign exchange		(42,744	)		(13,312	)		221	%
Interest		2,094			1,749			20	%
		(40,650	)		(11,563	)		252	%
Net and comprehensive loss before income taxes		(1,589,864	)		(2,124,704	)		-25	%
Income taxes		(160,000	)		(62,000	)		158	%
Net and comprehensive loss		(1,749,864	)		(2,186,704	)		-20	%

Revenue

Services revenue

Services revenue increased from $8.8 million for the three months ended September 30, 2012 to $9.9million for the three months ended September 30, 2013. Services revenue includes revenue from TV Everywhere, pro sports, college sports and other customers and is comprised of set-up fees, annual/monthly fees and variable fees. Variances in each sector are detailed below:

	Period end,				Year-end,
		Q3 2013		Q3 2012		2012		2011		2010
Services Revenue
Pro Sports	$	3.8	$	3.2	$	13.5	$	12.6	$	7.0
College Sports	$	2.9	$	2.6	$	10.9	$	10.6	$	10.8
TV Everywhere	$	2.9	$	2.7	$	10.6	$	9.1	$	8.5
Other (B2C)	$	0.1	$	0.1	$	1.2	$	3.1	$	3.9
Other (Consulting)	$	0.2	$	0.2	$	1.0	$	1.2	$	1.3
Total Services Revenue	$	9.9	$	8.8	$	37.2	$	36.6	$	31.5

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Pro Sports

Revenue from Pro Sports customers increased from $3.2 million for the three months ended September 30, 2012 to $3.8 million for the three months ended September 30, 2013. The $0.6million improvement was the result of an increase in revenues from variable subscription fees of $0.4million, monthly/annual fees of $0.1million and variable support fees of $0.1million.

College Sports

Revenue from College Sports customers increased from $2.6million for the three months ended September 30, 2012 to $2.9 million for the three months ended September 30, 2013. The $0.3million increase was primarily a result of an increase in variable eCommerce fees of $0.1million, monthly/annual fees of $0.1million and variable advertising of $0.1 million.

TV Everywhere

Revenue from TV Everywhere customers increased from $2.7million for the three months ended September 30, 2012 to $2.9million for the three months ended September 30, 2013. The $0.2 million increase was primarily a result of an increase in revenues from variable usage fees.

Other – B2C

Revenue from B2C customers was $0.1 million for the three months ended September 30, 2012 and 2013.

Other – Consulting

Revenue from consulting customers was $0.2 million for the three months ended September 30, 2012 and 2013.

Equipment revenue

Equipment revenue decreased from $0.5 million for the three months ended September 30, 2012 to $0.1million for the three months ended September 30, 2013. The $0.4million decrease was due to a decrease in STB purchases by existing customers.  Over 85% of our equipment revenue is generated from our TV Everywhere customers.

Costs and Expenses

Cost of services revenue

Cost of services revenue increased from $2.4 million for the three months ended September 30, 2012 to $2.6million for the three months ended September 30, 2013. Cost of services revenue as a percentage of services revenue decreased from 28% for the three months ended September 30, 2012 to 26% for the three months ended September 30, 2013. The 2% improvement (as a percentage of services revenue) primarily resulted from having negotiated lower rates on bandwidth costs.

Cost of equipment revenue

Cost of equipment revenue decreased from $0.5 million for the three months ended September 30, 2012 to $0.1million for the three months ended September 30, 2013. Cost of equipment revenue as a percentage of equipment revenue decreased from 82% for the three months ended September 30, 2012 to 57% for the three months ended September 30, 2013.

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SG&A expenses, including stock-based compensation

SG&A expenses, including stock-based compensation, increased from $5.8 million for the three months ended September 30, 2012 to $6.1million for the three months ended September 30, 2013. The variances are as follows:

• Wages and benefits increased from $4.0million for the three months ended September 30, 2012 to $4.1million for the three months ended September 30, 2013.

• Stock-based compensation expense increased from $0.3million for the three months ended September 30, 2012 to $0.7million for the three months ended September 30, 2013.  The $0.4 million increase was the result of the issuance of one million shares of unrestricted stock to various employees during the quarter.

• Professional fees decreased from $0.5 million for the three months ended September 30, 2012 to $0.3 million for the three months ended September 30, 2013.   The $0.2 million decrease was the result of a decrease in recruitment-related expenses.

• Other SG&A expenses were $1.0 million for the three months ended September 30, 2012 and 2013.

Research and development

Research and development costs increased from $1.6 million for the three months ended September 30, 2012 to $1.9million for the three months ended September 30, 2013.  The $0.3million change was a result of an increase in R&D personnel.

Depreciation and amortization

Depreciation and amortization decreased from $1.1 million for the three months ended September 30, 2012 to $0.9million for the three months ended September 30, 2013.  The $0.2 million decrease was the result of certain fixed assets becoming fully depreciated subsequent to September 30, 2012.

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RESULTS OF OPERATIONS

Comparison of Nine Months Ended September 30, 2013 to Nine Months Ended September 30, 2012

Our condensed consolidated financial statements for the nine months ended September 30, 2013 and 2012 have been prepared in accordance with U.S. GAAP. A comparison of our results of operations for those periods is as follows:

	2013			2012			Change
		$		$					%
Revenue
Services revenue		32,299,003			26,839,762			20	%
Equipment revenue		664,042			1,604,399			-59	%
		32,963,045			28,444,161			16	%
Costs and expenses
Cost of services revenue, exclusive of depreciation
and amortization shown separately below		8,844,715			9,163,829			-3	%
Cost of equipment revenue		438,515			1,309,394			-67	%
Selling, general and administrative,  including
stock-based compensation		17,989,383			18,335,942			-2	%
Research and development		5,460,126			4,969,934			10	%
Depreciation and amortization		2,987,272			3,564,861			-16	%
		35,720,011			37,343,960			-4	%
Operating loss		(2,756,966	)		(8,899,799	)		-69	%
Other income (expense)
Foreign exchange		(89,949	)		(43,750	)		106	%
Interest		(4,351	)		5,826			-
Discount on convertible note		(233,769	)		-			-
		(328,069	)		(37,924	)		765	%
Net and comprehensive loss before income taxes		(3,085,035	)		(8,937,723	)		-65	%
Income taxes		(265,290	)		(279,000	)		-5	%
Net and comprehensive loss		(3,350,325	)		(9,216,723	)		-64	%

Revenue

Services revenue

Services revenue increased from $26.8 million for the nine months ended September 30, 2012 to $32.3million for the nine months ended September 30, 2013. Services revenue includes revenue from TV Everywhere, pro sports, college sports and other customers and is comprised of set-up fees, annual/monthly fees and variable fees. Variances in each sector are detailed below:

	Period end,				Year-end,
		Q3 2013		Q3 2012		2012		2011		2010
Services Revenue
Pro Sports	$	14.2	$	9.6	$	13.5	$	12.6	$	7.0
College Sports	$	8.7	$	7.7	$	10.9	$	10.6	$	10.8
TV Everywhere	$	8.3	$	7.7	$	10.6	$	9.1	$	8.5
Other (B2C)	$	0.4	$	1.1	$	1.2	$	3.1	$	3.9
Other (Consulting)	$	0.7	$	0.7	$	1.0	$	1.2	$	1.3
Total Services Revenue	$	32.3	$	26.8	$	37.2	$	36.6	$	31.5

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Pro Sports

Revenue from Pro Sports customers increased from $9.6 million for the nine months ended September 30, 2012 to $14.2 million for the nine months ended September 30, 2013. The $4.6 million improvement was the result of an increase in revenues from variable usage fees of $2.4 million, variable subscription fees of $1.0 million, monthly/annual fees of $0.5 million, variable support/professional fees of $0.6 million and setup fees of $0.1 million.

College Sports

Revenue from College Sports customers increased from $7.7million for the nine months ended September 30, 2012 to $8.7 million for the nine months ended September 30, 2013. The $1.0 million improvement was primarily a result of an increase in variable subscription fees of $0.3 million, monthly/annual fees of $0.3 million and eCommerce fees of $0.2 million.

TV Everywhere

Revenue from TV Everywhere customers increased from $7.7 million for the nine months ended September 30, 2012 to $8.3 million for the nine months ended September 30, 2013. The $0.6 million improvement was primarily a result of an increase in revenues from variable usage fees.

Other – B2C

Revenue from B2C customers decreased from $1.1 million for the nine months ended September 30, 2012 to $0.4 million for the nine months ended September 30, 2013. The $0.7 million decrease in revenuewas primarily attributable to a change in the agreement with KyLin TV, pursuant to which KyLinTV became the exclusive distributor of the Company’s B2C IPTV interests effective April 1, 2012.

Other – Consulting

Revenue from consulting customers was $0.7 million for the nine months ended September 30, 2012 and 2013.

Equipment revenue

Equipment revenue decreased from $1.6 million for the nine months ended September 30, 2012 to $0.7 million for the nine months ended September 30, 2013. The $0.9 million change was due to a decrease in STB purchases by existing customers.  Over 85% of our equipment revenue is generated from our TV Everywhere customers.

Costs and Expenses

Cost of services revenue

Cost of services revenue decreased from $9.2 million for the nine months ended September 30, 2012 to $8.8 million for the nine months ended September 30, 2013. Cost of services revenue as a percentage of services revenue decreased from 34% for the nine months ended September 30, 2012 to 27% for the nine months ended September 30, 2013. The 7% improvement (as a percentage of services revenue) primarily resulted from the amendment we signed with KyLin TV discussed previously, and our having negotiated lower rates on bandwidth costs.

Cost of equipment revenue

Cost of equipment revenue decreased from $1.3 million for the nine months ended September 30, 2012 to $0.4 million for the nine months ended September 30, 2013. Cost of equipment revenue as a percentage of equipment revenue decreased from 82% for the nine months ended September 30, 2012 to 66% for the nine months ended September 30, 2013.

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

Selling, general and administrative expenses, including stock-based compensation, decreased from $18.3 million for the nine months ended September 30, 2012 to $18.0 million for the nine months ended September 30, 2013. The variances are as follows:

• Wages and benefits increased from $12.4million for the nine months ended September 30, 2012 to $12.8 million for the nine months ended September 30, 2013.  The $0.4 million change was a result of an increase in employees.

• Stock-based compensation expense decreased from $1.3million for the nine months ended September 30, 2012 to $1.1 million for the nine months ended September 30, 2013.  The $0.2 million decrease was a result of certain stock options being fully recognized during the three months ended December 31, 2012.

• Professional fees decreased from $1.4 million for the nine months ended September 30, 2012 to $0.9 million for the nine months ended September 30, 2013.  The $0.5 million decrease was primarily the result of a change in accountants subsequent to March 31, 2012, a decrease in recruitment-related expenses and the settlement of a lawsuit that concluded during the nine months ended September 30, 2012.

• Other SG&A expenses were $3.2 million for the nine months ended September 30, 2012 and 2013.

Research and development

Research and development costs increased from $5.0 million for the nine months ended September 30, 2012 to $5.5 million for the nine months ended September 30, 2013.  The $0.5 million change was the result of an increase in R&D personnel.

Depreciation and amortization

Depreciation and amortization decreased from $3.6 million for the nine months ended September 30, 2012 to $3.0 million for the nine months ended September 30, 2013.  The $0.6 million decrease was the result of certain fixed assets becoming fully depreciated subsequent to December 31, 2012.

LIQUIDITY AND CAPITAL RESOURCES

Our cash position was $21.3 million at September 30, 2013. During the nine months ended September 30, 2013, we generated $11.2 million from operations, which included cash inflows from changes in operating assets and liabilities of $10.0 million. Additionally, we spent $1.0 million to purchase fixed assets.

As of September 30, 2013, our principal sources of liquidity included cash and cash equivalents of $21.3 million and trade accounts receivable of $3.8 million. We closed a $4.7million private placement on September 25, 2012; we are using the net proceeds from this private placement 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 working capital and capital expenditure requirements for at least the next twelve months.

At September 30, 2013, approximately 89% of our cash and cash equivalents were held in accounts with U.S. banks that received a BBB+ rating from Standard and Poor’s and an A3 rating from Moody’s. The Company believes that these U.S. financial institutions are secure notwithstanding the current global economy and that we will be able to access the remaining balance of bank deposits. Our investment policy is to invest in low-risk short-term investments which are primarily term deposits. We have not had a history of any defaults on these term deposits, nor do we expect any in the future given the short term maturity of these investments.

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We are still building out our current business.  In 2006, our core business and business model evolved from providing professional information technology services and international programming to providing customized, end-to-end, interactive video services for a wide range of professional and collegiate sports properties, cable networks and operators, content owners and distributors, and telecommunication companies.  From our inception, we have incurred substantial net losses and have an accumulated deficit of $88.7 million; however, our non-GAAP Adjusted EBITDA (as previously defined) has improved period-over-period and management expects this trend to continue. We continue to review our operating structure in an attempt to maximize revenue opportunities, further reduce costs and achieve profitability. Based on our current business plan and internal forecasts, we believe that our cash on hand will be sufficient to meet our working capital and operating cash requirements for the next twelve months. However, we will require expenditures of significant funds for research and development, maintaining adequate video streaming and database software, and the construction and maintenance of our delivery infrastructure and office facilities. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in our Annual Report on Form 10-K for the year ended December 31, 2012. If our actual cash needs are greater than forecasted and if cash on hand is insufficient to meet our working capital and cash requirements for the next twelve months, we may require outside capital in addition to cash flow from operations in order to fund our business. Our short operating history and our current lack of profitability 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 September 30, 2013 was $(2.4)million, an improvement of $0.1 million from the December 31, 2012 net working capital of $(2.5) million. Our working capital ratios at September 30, 2013 and December 31, 2012 were 0.92 and 0.88, respectively.  Included in current liabilities at September 30, 2013 and December 31, 2012 are approximately $7.6 million and $6.0million, respectively, of liabilities (deferred revenue and convertible note) that we do not anticipate settling in cash.

The change in working capital was due to an increase in current assets of $9.2 million offset by an increase in current liabilities of $9.1 million.

Current assets at September 30, 2013 were $27.4 million, an increase of $9.2 million from the December 31, 2012 balance of $18.2 million.  The change was primarily due to an increase in cash and cash equivalents of $10.2 million offset by a decreases in due from related parties of $0.6 million and accounts receivable of $0.4 million.

Current liabilities at September 30, 2013 were $29.7 million, an increase of $9.1 million from the December 31, 2012 balance of $20.6 million. The change was primarily due to increases in accounts payable of $6.8 million, accrued liabilities of $0.7 million and deferred revenue of $1.9 million offset by a decrease in convertible note, net of discount, of $0.3 million.

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Summary balance sheet data:

	As at
	September 30,		December 31,
	2013		2012
		$	$
Current Assets
Cash and cash equivalents		21,293,816		11,108,107
Accounts receivable, net		3,789,115		4,193,949
Other receivables		282,738		348,891
Inventory		356,729		416,541
Prepaid expenses and deposits		1,375,192		1,185,051
Due from related parties		271,439		899,967
Total current assets		27,369,029		18,152,506
Current Liabilities
Accounts payable		16,591,677		9,813,237
Accrued liabilities		5,528,629		4,766,668
Due to related parties		-		12,282
Deferred revenue		7,621,129		5,715,102
Convertible note, net of discount		-		320,560
Total current liabilities		29,741,435		20,627,849
Working capital ratio		0.92		0.88

Cash Flows

Comparative summarized cash flows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012
		$		$				$			$
Cash provided by operating activities		12,526,302			7,757,875			11,223,958			893,066
Cash used in investing activities		(640,998	)		(422,483	)		(1,039,929	)		(830,718	)
Cash provided by financing activities		840			4,845,560			1,680			4,845,560

Operating activities

Cash provided by operating activities for the nine months ended September 30, 2013 was $11.2million. Changes in net cash provided by operating activities reflect the consolidated net loss of $3.4 million for the period:

• plus non-cash items in the amount of $4.6 million, which relates to stock-based compensation, depreciation and amortization, discount on convertible note and income taxes; and

• less changes in operating assets and liabilities of $10.0 million, which was primarily due to increases in accounts payable of $6.8 million and deferred revenue of $1.5 million.

Investing activities

Cash used in investing activities for the nine months ended September 30, 2013 was $1.0 million. These funds were used to purchase fixed assets.

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Financing activities

A nominal amount of cash was provided by financing activities for the nine months ended September 30, 2013 as a result of the exercise of 8,000 Broker Warrants at an exercise price of $0.21 per Broker Warrant.

Off Balance Sheet Arrangements

The Company did not have any off balance sheet arrangements as of September 30, 2013.

Outstanding Share Data

We had a total of 168,996,694 shares of common stock outstanding at November 5, 2013.  In addition, at such date we had outstanding, in the aggregate, 79,515,194 potential shares of common stock that were outstanding as follows:  17,176,818 Class 3 Preference Shares, 10,912,265 Class 4 Preference Shares, 30,295,542 stock options, 675,000 stock appreciation rights and 20,455,569 warrants, each of which is exchangeable for one share of common stock upon exercise or conversion.

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Item 3.                  Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4.                  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

           In connection with the preparation of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013, 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 (the “Exchange Act”).  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2013.

Changes in Internal Control over Financial Reporting

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

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PART II. OTHER INFORMATION

Item 2.                  Unregistered Sales of Equity Securities and Use of Proceeds

1.           As more fully described in Note 11 to the Company’s financial statements set forth in Item 1 of Part I hereof, on September 25, 2012, the Company completed a private placement of Units. The agent for a portion of the subscriptions, who resided outside the United States, received from the Company a cash commission and Broker Warrants, each of which is exercisable for one Broker Unit at any time prior to the 30 month anniversary of the closing date of the Offering. Each Broker Unit consists of one share of common stock and one-half of one Warrant, and each full Warrant entitles the holder thereof to purchase one share of common stock at $0.30 for 30 months following the closing date of the Offering. Between July 1, 2013 and September 30, 2013, an aggregate of 4,000 Broker Warrants were exercised, at an exercise price of $0.21 per Broker Warrant for gross proceeds of $840, to purchase 4,000 shares of common stock and 2,000 Warrants. The Company offered and sold the common stock and Warrants in reliance on the exemption from registration afforded by Regulation S under the Securities Act.

2.           Between July 1, 2013 and September 30, 2013, certain subscribers to the Company’s September 25, 2012 private placement residing outside the United States exercised an aggregate of 2,000 Warrants and received 633 shares of common stock.  Per the terms of the Warrant certificates, the Warrant exercise took place on a cashless basis, which resulted in the holder receiving the number of shares of common stock determined by dividing the “intrinsic value” of the Warrants being exercised by the “fair market value.”  The “intrinsic value” per share was determined by subtracting the exercise price of $0.30 per share from the fair market value (conversion from Canadian dollars to US dollars took place).  The “fair market value” means the average of the closing prices of the common stock of the Company from the five days immediately prior to the date on which the Company received an exercise notice from a holder.  As a result of the cashless exercise, the holder did not make any payment to the Company in connection with exercising the Warrants.  The Company offered and sold the common stock in reliance on the exemption from registration afforded by Regulation S under the Securities Act.

Item 6.                  Exhibits

(b)   Exhibits

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

Exhibit No.	Description
31.1*	Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32*	Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema Document
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document

*  Filed herewith.

** Furnished herewith.  As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act and Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act except as expressly set forth by specific reference in such filing.

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SIGNATURES

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

	NEULION, INC.
Date:  November 7, 2013	/s/ Nancy Li
	Name:  Nancy Li
	Title:  Chief Executive Officer
Date:  November 7, 2013	/s/ Arthur J. McCarthy
	Name:  Arthur J. McCarthy
	Title:  Chief Financial Officer

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