Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2009**

 

**or**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from           to          **

 

**Commission File Number:  000-53620**

 

**NEULION,INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Canada**                                                      | ** ** | **None**                              |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of

incorporation or organization) |       | (I.R.S. Employer

Identification No.) |
|                                                            |       |                                  |
| **1600  Old Country Road, Plainview, New York**                 | ** ** | **11803**                             |
| (Address of principal executive offices)                        |       | (Zip code)                            |

 

**(516)622-8300**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted 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 registrantwas required to submit and post such files). Yes oNo o

 

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

 

| Large  accelerated filer o                                               |   | Accelerated  filer o        |
|--------------------------------------------------------------------------|--------|-----------------------------|
|                                                                     |   |                        |
| Non-accelerated  filer o

(Do not check if  a smaller reporting company) |   | Smaller  reporting companyx |

 

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

 

As of July 15, 2009,there were 114,197,789 shares of the registrant’s common shares, no par value,outstanding.

 

 

 

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**NEULION, INC.**

 

**TABLE OF CONTENTS**

 
| ** **                                    | ** **                                                                                                                         | **Page No.** |
|-----------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|-------------------|
| ** **                                    | ** **                                                                                                                         |
| **Part I.   Financial Information** | 3                                                                                                                                  |
|                                          |                                                                                                                               |              |
| Item 1.                                       | Financial Statements                                                                                                               | 3                 |
|                                          |                                                                                                                               |              |
|                                          | Consolidated  Balance Sheets as at March 31, 2009 (Unaudited) and December 31,  2008                                     | 3                 |
|                                          |                                                                                                                               |              |
|                                          | Consolidated  Statements of Operations and Comprehensive Loss for the Three Months Ended  March 31, 2009 and 2008 (Unaudited) | 4                 |
|                                          |                                                                                                                               |              |
|                                          | Consolidated  Statement of Shareholders’ Equity for the Three Months Ended March 31,  2009 (Unaudited)                   | 5                 |
|                                          |                                                                                                                               |              |
|                                          | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2009 and  2008 (Unaudited)                        | 6                 |
|                                          |                                                                                                                               |              |
|                                          | Notes to Consolidated Financial Statements                                                                                         | 7                 |
|                                          |                                                                                                                               |              |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        | 22                |
|                                          |                                                                                                                               |              |
| Item 3.                                       | Quantitative  and Qualitative Disclosures about Market Risk                                                                        | 40                |
|                                          |                                                                                                                               |              |
| Item 4.                                       | Controls and  Procedures                                                                                                           | 40                |
|                                          |                                                                                                                               |              |
| **Part II.  Other Information**          | 41                                                                                                                                 |
|                                          |                                                                                                                               |              |
| Item 6.                                       | Exhibits                                                                                                                           | 41                |
|                                          |                                                                                                                               |
| SIGNATURES                                    | 42                                                                                                                                 |

 

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Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.    FinancialStatements.**

 

**NEULION,INC.**

 

**CONSOLIDATED BALANCE SHEETS**

[Expressed in U.S. dollars, unless otherwise noted]

 
| ** **                                                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                  | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                  | ** ** | **[unaudited]**    | ** ** | **[audited]**         | ** ** |
| ** **                                                                                                                  | ** ** | **$**              | ** ** | **$**                 | ** ** |
| ** **                                                                                                                  | ** ** | ** **         | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                  |       |               |       |                  |       |
| **Current**                                                                                                                 |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                  |       | 21,567,868         |       | 27,323,021            |       |
| Accounts  receivable, net of allowance for doubtful accounts of $266,758 and $290,538,  respectively                        |       | 1,851,373          |       | 2,284,242             |       |
| Taxes  receivable                                                                                                           |       | 975,747            |       | 983,253               |       |
| Other  receivables                                                                                                          |       | 404,426            |       | 227,711               |       |
| Inventory                                                                                                                   |       | 383,220            |       | 347,600               |       |
| Prepaid  expenses and deposits                                                                                              |       | 1,301,616          |       | 1,830,260             |       |
| Due  from related parties*[note 5]*                                                                                         |       | 625,679            |       | 324,059               |       |
| **Total current assets**                                                                                                    |       | 27,109,929         |       | 33,320,146            |       |
| Property,  plant and equipment, net                                                                                         |       | 6,162,710          |       | 6,474,989             |       |
| Intangible  assets, net                                                                                                     |       | 5,429,334          |       | 5,749,332             |       |
| Goodwill                                                                                                                    |       | 6,846,183          |       | 6,846,183             |       |
| Other  assets                                                                                                               |       | 1,778,891          |       | 1,347,032             |       |
| **Total assets**                                                                                                            |       | 47,327,047         |       | 53,737,682            |       |
| ** **                                                                                                                  |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                               |       |               |       |                  |       |
| **Current**                                                                                                                 |       |               |       |                  |       |
| Accounts  payable                                                                                                           |       | 3,239,331          |       | 4,465,388             |       |
| Accrued  liabilities                                                                                                        |       | 7,502,050          |       | 7,595,116             |       |
| Derivative  liability*[notes 2  and 11]*                                                                               |       | 1,064,800          |       | —                |       |
| Due  to related parties*[note 5]*                                                                                           |       | 300,407            |       | 56,826                |       |
| Deferred  revenue                                                                                                           |       | 2,975,963          |       | 3,091,993             |       |
| **Total current liabilities**                                                                                               |       | 15,082,551         |       | 15,209,323            |       |
| Long-term  deferred revenue                                                                                                 |       | 617,156            |       | 638,510               |       |
| Other  long-term liabilities                                                                                                |       | 773,632            |       | 876,271               |       |
| **Total liabilities**                                                                                                       |       | 16,473,339         |       | 16,724,104            |       |
| ** **                                                                                                                  |       |               |       |                  |       |
| Contingencies*[note 7]*                                                                                                     |       |               |       |                  |       |
|                                                                                                                        |       |               |       |                  |       |
| **Shareholders’ equity**                                                                                               |       |               |       |                  |       |
| Share  capital                                                                                                              |       | 6,774,155          |       | 6,762,097             |       |
| Common  shares (par value: none; authorized: unlimited; issued and outstanding:  110,100,289 and 110,084,044, respectively) |       |               |       |                  |       |
| Additional  paid-in capital*[note 2]*                                                                                       |       | 54,246,158         |       | 56,500,258            |       |
| Promissory  notes receivable                                                                                                |       | (209,250           | )          | (209,250              | )          |
| Accumulated  deficit*[note 2]*                                                                                              |       | (29,957,355        | )          | (26,039,527           | )          |
| **Total shareholders’ equity**                                                                                         |       | 30,853,708         |       | 37,013,578            |       |
| **Total liabilities and shareholders’ equity**                                                                         |       | 47,327,047         |       | 53,737,682            |       |

 

*Seeaccompanying notes*

 

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**NEULION, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE LOSS**

[unaudited]

[Expressed in U.S. dollars, unless otherwise noted]

 
| ** **                                                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                                                     | ** ** | **$**                                            | ** ** | **$** | ** ** |
| ** **                                                                                     | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Revenue**                                                                                    |       |                                             |       |   |   |
| Services  revenue                                                                              |       | 6,034,330                                        |       | 874,577 |   |
| Equipment  revenue                                                                             |       | 539,696                                          |       | 1,075,043 |   |
| Total  Revenue                                                                                 |       | 6,574,026                                        |       | 1,949,620 |   |
|                                                                                           |       |                                             |       |   |   |
| **Costs and Expenses**                                                                         |       |                                             |       |   |   |
| Cost  of services revenue, exclusive of depreciation and amortization shown  separately below  |       | 3,383,879                                        |       | 284,101 |   |
| Cost  of equipment revenue                                                                     |       | 460,604                                          |       | 861,280 |   |
| Selling,  general and administrative, including stock-based compensation*[note 8]*        |       | 7,173,340                                        |       | 1,638,455 |   |
| Depreciation  and amortization                                                                 |       | 1,014,681                                        |       | 195,063 |   |
|                                                                                           |       | 12,032,504                                       |       | 2,978,899 |   |
|                                                                                           |       |                                             |       |   |   |
| **Operating loss**                                                                             |       | (5,458,478                                       | )          | (1,029,279 | ) |
| ** **                                                                                     |       |                                             |       |   |   |
| **Other income (expense)**                                                                     |       |                                             |       |   |   |
| Unrealized  loss on derivative*[notes 2 and 11]*                                          |       | (476,850                                         | )          | — |   |
| Gain  on foreign exchange                                                                      |       | 44,226                                           |       | — |   |
| Investment  income                                                                             |       | 97,224                                           |       | 815 |   |
| Equity  in loss of affiliate*[note 5]*                                                    |       | —                                           |       | (457,682 | ) |
|                                                                                           |       | (335,400                                         | )          | (456,867 | ) |
| **Net and comprehensive loss for the period**                                                  |       | (5,793,878                                       | )          | (1,486,146 | ) |
| ** **                                                                                     |       |                                             |       |   |   |
| Net  loss per weighted average number of shares outstanding - basic and diluted*[note 6]* |       | $                                                | (0.05      | ) | $ | (0.03 | ) |
|                                                                                           |       |                                             |       |   |   |
| Weighted  average number of shares outstanding - basic and diluted *[note 6]*                  |       | 110,089,579                                      |       | 42,680,587 |   |
|                                                                                                |            |                                                  |            |  |  |  |  |

 

*Seeaccompanying notes*

 

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**NEULION, INC.**

 

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

[unaudited]

[Expressed in U.S. dollars, unless otherwise noted]

 
| ** **                                                             | ** ** | **Common shares** | ** ** | **Additional   paid-in  capital** | ** ** | **Promissory  Notes** | ** ** | **Accumulated  deficit** | ** ** | **Total  shareholders’  equity** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------|------------|-----------------------|------------|--------------------------|------------|---------------------------------------|------------|
| ** **                                                             | ** ** | **#**                  | ** ** | **$**                             | ** ** | **$**                 | ** ** | **$**                    | ** ** | **$**                                 | ** ** | **$** | ** ** |
| ** **                                                             | ** ** | ** **             | ** ** | ** **                        | ** ** | ** **            | ** ** | ** **               | ** ** | ** **                            | ** ** | ** ** | ** ** |
| **Balance, December 31, 2008**                                    |       | 110,084,044            |       | 6,762,097                         |       | 56,500,258            |       | (209,250                 | )          | (26,039,527                           | )          | 37,013,578 |   |
| Cumulative  effect of change in accounting principle*[notes 2 and 11]* |       | —                 |       | —                            |       | (2,464,000            | )          | —                   |       | 1,876,050                             |       | (587,950 | ) |
| Issuance  of common shares for RSUs                                    |       | 16,245                 |       | 5,846                             |       | —                |       | —                   |       | —                                |       | 5,846 |   |
| Release  of common shares from escrow for services                     |       | —                 |       | 6,212                             |       | —                |       | —                   |       | —                                |       | 6,212 |   |
| Stock-based  compensation                                              |       | —                 |       | —                            |       | 209,900               |       | —                   |       | —                                |       | 209,900 |   |
| Net  loss                                                              |       | —                 |       | —                            |       | —                |       | —                   |       | (5,793,878                            | )          | (5,793,878 | ) |
| **Balance, March 31, 2009**                                       |       | 110,100,289            |       | 6,774,155                         |       | 54,246,158            |       | (209,250                 | )          | (29,957,355                           | )          | 30,853,708 |   |

 

*See accompanying notes*

 

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**NEULION,INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

[unaudited]

[Expressed in U.S. dollars, unless otherwise noted]

** **
| ** **                                                              | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                              | ** ** | **$**                                            | ** ** | **$** | ** ** |
| ** **                                                              | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **OPERATING ACTIVITIES**                                                |       |                                             |       |   |   |
| Net  loss                                                               |       | (5,793,878                                       | )          | (1,486,146 | ) |
| Adjustments  to reconcile net loss to cash used in operating activities |       |                                             |       |   |   |
| Depreciation  and amortization                                          |       | 1,014,681                                        |       | 195,063 |   |
| Equity  in loss of affiliate                                            |       | —                                           |       | 457,682 |   |
| Stock-based  compensation                                               |       | 253,743                                          |       | — |   |
| Unrealized  loss on derivative*[notes 2 and 11]*                   |       | 476,850                                          |       | — |   |
|                                                                    |       |                                             |       |   |   |
| Changes  in operating assets and liabilities                            |       |                                             |       |   |   |
| Accounts  receivable                                                    |       | 432,869                                          |       | 1,130,941 |   |
| Inventory                                                               |       | (35,620                                          | )          | (655,300 | ) |
| Prepaid  expenses, deposits and other assets                            |       | 96,785                                           |       | 132,481 |   |
| Other  receivables                                                      |       | (176,715                                         | )          | — |   |
| Taxes  receivable                                                       |       | 7,506                                            |       | — |   |
| Due  from related parties                                               |       | (301,620                                         | )          | 145,523 |   |
| Accounts  payable                                                       |       | (1,226,057                                       | )          | 398,354 |   |
| Accrued  liabilities                                                    |       | (124,851                                         | )          | 443,408 |   |
| Deferred  revenue                                                       |       | (137,384                                         | )          | 207 |   |
| Long-term  liabilities                                                  |       | (102,639                                         | )          | — |   |
| Due  to related parties                                                 |       | 243,581                                          |       | (376,806 | ) |
| **Cash (used in) provided by operating activities**                     |       | (5,372,749                                       | )          | 385,407 |   |
| ** **                                                              |       |                                             |       |   |   |
| **INVESTING ACTIVITIES**                                                |       |                                             |       |   |   |
| Purchase  of property, plant and equipment                              |       | (382,404                                         | )          | (999,042 | ) |
| **Cash used in investing activities**                                   |       | (382,404                                         | )          | (999,042 | ) |
| ** **                                                              |       |                                             |       |   |   |
| **FINANCING ACTIVITIES**                                                |       |                                             |       |   |   |
| Capital  contributions                                                  |       | —                                           |       | 600,000 |   |
| **Cash provided by financing activities**                               |       | —                                           |       | 600,000 |   |
| **Net decrease in cash and cash equivalents during  the period**        |       | (5,755,153                                       | )          | (13,635 | ) |
| Cash  and cash equivalents, beginning of  period                        |       | 27,323,021                                       |       | 608,464 |   |
| **Cash and cash equivalents, end of period**                            |       | 21,567,868                                       |       | 594,829 |   |

 

*Seeaccompanying notes*

 

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**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

** **

***On June 10, 2009, NeuLion, Inc.changed its name to NeuLion USA, Inc. (“NeuLion USA”).  On July 13, 2009, JumpTV Inc. changedits name to NeuLion, Inc. (“NeuLion” or the “Company”).  In conjunction with the name change, thestock symbol was changed from “JTV” to “NLN.” This Quarterly Report on Form 10-Q reflects the name changesdescribed above as they are effective as of the date of filing this report.***

** **

***On October 20, 2008, NeuLionUSA, a Delaware corporation, completed a merger with a subsidiary of NeuLion, aCanadian corporation (the “Merger”), that was accounted for as a****reverse takeover**.  As aresult of the Merger, NeuLion USA became**the legalsubsidiary of NeuLion, and**NeuLion was required to register itscommon shares in the United States under the Securities Exchange Act of 1934,as amended.  On June 8, 2009, itsRegistration Statement on Form 10 became effective.*

** **

**1.  Nature of Operations**

** **

The interim unaudited consolidated financialstatements for the three months ended March 31, 2009 and 2008, and as at March 31,2009 and December 31, 2008 are issued under the name of the legal acquirerin the Merger (NeuLion) but are deemed to be a continuation of the accountingacquirer (NeuLion USA).  These financialstatements reflect the assets, liabilities and results of operations of NeuLionUSA, the accounting acquirer, and only include the assets, liabilities andresults of operations of NeuLion, the legal acquirer, subsequent to the reversetakeover on October 20, 2008 (the “Acquired Business”).

 

The Company’s primary business is workingwith content partners to develop end-to-end solutions for multimedia IPTVservices.

 

**2.  Basis of Presentation andSignificant Accounting Policies**

** **

The Company’s accounting polices areconsistent with those presented in our annual consolidated financial statementsas at December 31, 2008, except for EITF No. 07-5 describedbelow.  These interim unauditedconsolidated financial statements do not include all note disclosures requiredby generally accepted accounting principles (“GAAP”) in the U.S. for annualfinancial statements and therefore should be read in conjunction with theaudited consolidated financial statements, including the notes thereto, in the2008 annual financial statements.

 

The preparation of these financial statementsis in conformity with U.S. GAAP, which requires management to make certainestimates that affect the reported amounts in the interim unauditedconsolidated financial statements, and the disclosures made in the accompanyingnotes.  Despite the Company’s intentionto establish accurate estimates and use reasonable assumptions, actual resultsmay differ from these estimates.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

Note 12 reconciles the Company’s interimunaudited consolidated financial statements from U.S. GAAP to CanadianGAAP.  All significant intercompanytransactions and accounts have been eliminated on consolidation.

 

In the opinion of management, these interimunaudited consolidated financial statements contain all of the adjustments of anormal and recurring nature necessary to present fairly the Company’s financialposition as at March 31, 2009 and December 31, 2008 and the resultsof operations and cash flows for the three-month periods ended March 31,2009 and 2008.

 

**Recently issued accounting standards**

 

In December 2007, the FASB issued FAS No. 141(R),“Business Combinations” (“FAS 141(R)”), which replaces FAS No. 141 “BusinessCombinations” (“FAS 141”).  FAS 141(R) requiresthe acquiring entity in a business combination to recognize all assets acquiredand liabilities assumed in the transaction, establishes the acquisition-datefair value as the measurement objective for all assets acquired and liabilitiesassumed and requires the acquirer to disclose certain information related tothe nature and financial effect of the business combination.  FAS 141(R) also establishes principlesand requirements for how an acquirer recognizes any noncontrolling interest inthe acquiree and the goodwill acquired in a business combination.  FAS 141(R) was effective on aprospective basis for business combinations for which the acquisition date ison or after January 1, 2009.  Forany business combination that takes place subsequent to January 1, 2009,FAS 141(R) may have a material impact on our financial statements.

 

Effective January 1, 2009, the Companyadopted Emerging Issues Task Force (“EITF”) No. 07-5, “Determining Whetheran Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”.  One of the conclusions reached under EITF07-05 was that an equity-linked financial instrument would not be consideredindexed to the entity’s own stock if the strike price is denominated in a currencyother than the issuer’s functional currency. The conclusion reached under EITF07-05 clarified the accounting treatment for these and certain other financialinstruments as it related to FASB Statement No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”).  EITF 07-5 specifies that a contract thatwould otherwise meet the definition of a derivative under SFAS 133, would notbe treated as a derivative if it met the following conditions: (a) indexedto its own stock and (b) classified in stockholders’ equity in itsstatement of financial position.

 

As a result, the Company’s outstandingWarrants denominated in Canadian dollars detailed below are not considered tobe indexed to its own stock because the exercise price is denominated inCanadian dollars and our functional currency is United States dollars andtherefore have been treated as derivative financial instruments and recorded attheir fair value as 

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

a liability.  All otheroutstanding convertible instruments meet this definition and are included inshareholders’ equity.

 

·                  5,500,000 Series AWarrants exercisable at Cdn$1.25 and expire on October 20, 2010.

·                  5,500,000 Series BWarrants exercisable at Cdn$1.50 and expire on October 20, 2010.

 

The Warrants have been recorded at theirrelative fair values at issuance and will continue to be recorded at fair valueat each subsequent balance sheet date. Any change in value between reportingperiods will be recorded as other income (expense).  The Warrants will continue to be reported asa liability until such time as they are exercised or expire. The fair value ofthe Warrants is estimated using the Black-Scholes-Merton option-pricing model.On January 1, 2009, the grant date fair value of the Warrants of$2,464,000 was reallocated from additional paid in capital and a derivativeliability was recorded in the amount of $587,950 being the fair value of thewarrants on January 1, 2009 with the an adjustment to opening accumulateddeficit of $1,876,050.  As of March 31,2009, the fair value of the Warrants was determined to be $1,064,800;accordingly, the Company recorded $476,850 in other expense for the threemonths ended March 31, 2009 related to the change in the fair value of theWarrants.

 

In accordance with FASB Statement No. 154,“Accounting Changes and Error Corrections” (“FASB No. 154”), the Companyhas recorded the cumulative effect of the change in accounting principle on January 1,2009 of $1,876,050 to the opening balance of accumulated deficit as detailedabove.

 

In March 2008, the FASB issued Statementof Financial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities—an amendment of FASB Statement No. 133,”or SFAS No. 161, which required enhanced disclosures about an entity’sderivative and hedging activities and was intended to improve the transparencyof financial reporting.  SFAS No. 161applies to all derivative instruments, including bifurcated derivativeinstruments and related hedging items accounted for under SFAS No. 133 andits related interpretations.  SFAS No. 161amends and expands the disclosure requirements of SFAS No. 133 with theintent to provide users of financial statements with an enhanced understandingof: (i) how and why an entity uses derivative instruments, (ii) howderivative instruments and related hedged items are accounted for under SFAS No. 133and its related interpretations and (iii) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance and cash flows.  Theprovisions of this standard do not require disclosures for earlier periodspresented for comparative purposes at initial adoption.  SFAS No. 161 was effective for fiscalyears and interim periods beginning after November 15, 2008.  The Company adopted this new standardeffective January 1, 2009.  Therequired disclosures are included in Note 11 to the consolidated financialstatements.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

**Advertising**

 

Advertising costs are expensed as incurredand totaled $180,344 and $41,502 for the three months ended March 31, 2009and 2008, respectively.

 

**Comparative Information**

 

The Company has reclassified certain priorperiod information to conform with the current period’s presentation.

 

**3.  BusinessCombination**

** **

On October 20, 2008,the Company completed the Merger.  Underthe terms of the Merger, NeuLion issued 49,577,427 common shares and 1,840,097contingent shares, which represented approximately the entire issued andoutstanding shares of NeuLion prior to closing, to the securityholders ofNeuLion USA, in exchange for their NeuLion USA securities.  The common shares of the Company are referredto herein as “Shares,” or individually as a “Share.”

 

*Pro forma*

 

The results of operationsfor NeuLion and NeuLion USA have been included in the Company’s consolidatedstatements of operations since the completion of the Merger on October 20,2008.  The following unaudited pro formafinancial information presents the combined results of the Company and theMerger as if the Merger had occurred at the beginning of 2008:

 
| ** **                                                                                    | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                    | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                                                                                    | ** ** | **$**              | ** ** | **$**              | ** ** |
| ** **                                                                                    | ** ** | **[unaudited**     | ** ** | **[unaudited**     | ** ** |
| ** **                                                                                    | ** ** | **actual]**        | ** ** | **pro forma]**     | ** ** |
| ** **                                                                                    | ** ** | ** **         | ** ** | ** **         | ** ** |
| Total  revenue                                                                                |       | 6,574,026          |       | 5,556,179          |       |
| Cost  of services revenue, exclusive of depreciation and amortization shown  separately below |       | (3,383,879         | )          | (3,967,719         | )          |
| Cost  of equipment revenue                                                                    |       | (460,604           | )          | (861,280           | )          |
| Total  sales, general and administrative, including stock based compensation [i]              |       | (7,173,340         | )          | (11,293,989        | )          |
| Impairment  of goodwill [ii]                                                                  |       | —             |       | (47,882,317        | )          |
| Impairment  of long-lived assets [iii]                                                        |       | —             |       | (173,786           | )          |
| Depreciation  and amortization [iv]                                                           |       | (1,014,681         | )          | (856,722           | )          |
| Operating  loss                                                                               |       | (5,458,478         | )          | (59,479,634        | )          |
| Net  loss                                                                                     |       | (5,793,878         | )          | (59,602,491        | )          |
| Net  loss per weighted average number of shares outstanding — basic and diluted          |       | (0.05              | )          | (1.40              | )          |

 

----

[i] In accordance withFASB 123R, these amounts represent stock-based compensation for the Company’sstock options, restricted share units, stock appreciation rights, warrants andretention warrants.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

[ii] As at March 31,2008, the Acquired Business’ market capitalization decreased below its carryingvalue.  Management considered this to bean indicator of impairment and, accordingly, as at March 31, 2008,performed a goodwill impairment test and recorded a non-cash goodwillimpairment charge of $47,882,317.

[iii] The Companydetermined that the business climate had changed such that the carrying valueof the Company’s long-lived assets may not be fully recoverable.  Accordingly, the Company recorded a non-cashimpairment charge of $173,786.

[iv] In determining the pro forma amounts above, the Company madeadjustments to depreciation and amortization as a result of the revised fairvalues of tangible and intangible assets performed as a result of the acquisition.

 

**4.  EconomicDependence and Concentration of Credit Risk**

** **

For the three months ended March 31,2009, one customer accounted for 12% of revenue.  For the three months ended March 31,2008, three customers accounted for 81% of revenue as follows:  47%, 18% and 16%.

 

As at March 31, 2009, one customeraccounted for 41% of the accounts receivable. As at December 31, 2008, one customer accounted for 25% of theaccounts receivable.

 

The Company is economically dependent uponTransVideo International, Ltd. (“TransVideo”), a related party (Note 5), toprovide set top boxes (“STBs”) used by the Company’s customers.

 

**5**.  RelatedParty Transactions

** **

The Company has enteredinto certain transactions and agreements in the normal course of operationswith related parties.  Significantrelated party transactions are as follows:

 

*TransVideo*

 

STB purchases amounted to$395,280 and $633,000 and transcoder licensing fees amounted to $28,000 and$15,000 for the three months ended March 31, 2009 and 2008, respectively.  Included in cost of sales is the amountincurred from TransVideo of $369,160 and $677,700 for the three months ended March 31,2009 and 2008, respectively.

 

*Patstar, Inc.*(“Patstar”)

 

Rent expense paid byPatstar of $891****is included as a recovery in selling,general and administrative expense for the three months ended March 31,2009.

 

*KyLinTV, Inc.*(“KyLinTV”)

 

KyLinTV is an IPTVservice provider that is controlled by Chairman of the Board of Directors ofthe Company.  The Company also providesKyLinTV with administrative and 

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

general corporatesupport.  On June 1, 2008, theCompany entered into an agreement with KyLinTV to build and deliver the setup andback office operation of an IPTV service.

 

The Company recognizedrevenue from related parties for each of the periods ended March 31 asfollows:

 
| ** **                                                            | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                            | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                                                            | ** ** | **$**              | ** ** | **$**              | ** ** |
| ** **                                                            | ** ** | ** **         | ** ** | ** **         | ** ** |
| New  York Islanders Hockey Club L.P. (“New York Islanders”) |       | 60,000             |       | 60,000             |       |
| Renaissance  Property Associates, LLC (“Renaissance”)       |       | 30,000             |       | 30,000             |       |
| The  Smile Train Inc. (“Smile Train”)                       |       | —             |       | 39,000             |       |
| Hawaii  IPTV, LLC (“Hawaii”)                                |       | 16,471             |       | 9,393              |       |
| KyLinTV                                                               |       | 401,485            |       | —             |       |
|                                                                  |       | 507,956            |       | 138,393            |       |

 

The Company also provides KyLinTV withadministrative and general corporate support. For each of the periods presented, the amounts paid for these servicesprovided by the Company for the three months ended March 31, 2009 and 2008were $150,615****and $386,148, respectively.  Additionally, during the three months ended March 31,2009, the Company purchased STBs from KyLinTV in the amount of $54,090.

 

As at March 31, 2009 and December 31, 2008, the amounts duefrom (to) related parties are as follows:

 
| ** **          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|--------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **          | ** ** | **$**              | ** ** | **$**                 | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **            | ** ** |
| New  York Islanders |       | 61,921             |       | 29,189                |       |
| Renaissance         |       | 71                 |       | (1,146                | )          |
| Smile  Train        |       | 27,000             |       | 27,000                |       |
| Hawaii              |       | 1,070              |       | 17,527                |       |
| TransVideo          |       | (300,407           | )          | (55,680               | )          |
| KyLinTV             |       | 534,726            |       | 250,343               |       |
| Patstar             |       | 891                |       | —                |       |
|                |       | 325,272            |       | 267,233               |       |

 

**Investment in affiliate — KyLinTV**

** **

The Company records itsinvestment in KyLinTV using the equity method.

 

FromJanuary 1, 2008 through March 31, 2009, the Company’s equity interestin the affiliate was 17.1%.  Aspreviously discussed, the Company also provides KyLinTV with administrative andgeneral corporate support.  Managementhas determined that as a result of the 17.1% equity interest combined with theservices that NeuLion USA provides KyLinTV, the Company continues to havesignificant influence on the operating activities of KyLinTV, 

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

thereforethe Company continues to account for KyLinTV using the equity method ofaccounting for investment.

 

TheCompany’s proportionate share of the equity loss from KyLinTV has beenaccounted for as a charge on the Company’s consolidated statements ofoperations and comprehensive loss.  Due to KyLinTV’s accumulated losses, theinvestment has been reduced to zero as at December 31, 2008.  No further charges will be recorded as theCompany has no obligation to fund the losses of KyLinTV.

 

The results of operationsand financial position of the Company’s equity basis investment in KyLinTV aresummarized below for the three months ended March 31:

 
| ** **                               | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                               | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                               | ** ** | **$**              | ** ** | **$**              | ** ** |
| ** **                               | ** ** | ** **         | ** ** | ** **         | ** ** |
| Condensed  income statement information: |       |               |       |               |       |
| Net  sales                               |       | 1,955,083          |       | 1,272,710          |       |
| Net  loss                                |       | (1,480,781         | )          | (1,910,781         | )          |

 
| ** **                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                            | ** ** | **$**              | ** ** | **$**                 | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** **            | ** ** |
| Condensed  balance sheet information: |       |               |       |                  |       |
| Current  assets                       |       | 1,261,557          |       | 927,427               |       |
| Non-current  assets                   |       | 2,042,614          |       | 2,411,319             |       |
| Total  assets                         |       | 3,304,171          |       | 3,338,746             |       |
| Current  liabilities                  |       | 11,510,116         |       | 10,063,909            |       |
| Non-current  liabilities              |       | —             |       | —                |       |
| Equity  (deficiency)                  |       | (18,205,945        | )          | (6,725,163            | )          |
| Total  liabilities and equity         |       | 3,304,171          |       | 3,338,746             |       |

** **

**6.  Loss per Share**

** **

Basic loss per share iscomputed by dividing net loss for the period by the weighted average number ofShares outstanding for the period. Diluted loss per share is computed by dividing net loss for the periodby the weighted average number of Shares outstanding and, if dilutive,potential Shares using the treasury stock method.

 

For the three monthsended March 31, 2009 and 2008, the Company had potential Shares which, dueto the losses incurred, were considered anti-dilutive equity instruments.  Accordingly, the effect of stock options foreach of the periods has not been reflected in computing diluted loss per sharefor the three months ended March 31, 2009 and 2008.

 

13

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

The following tablesummarizes the potential Shares that were outstanding as at March 31, 2009and 2008 but were not included in the computation of diluted loss per share astheir effect would have been anti-dilutive.

 
| ** **                            | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                            | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                            | ** ** | **#**              | ** ** | **#**              | ** ** |
| ** **                            | ** ** | ** **         | ** ** | ** **         | ** ** |
| Stock  options                        |       | 8,952,995          |       | 5,559,044          |       |
| Restricted  share plan units          |       | 42,977             |       | —             |       |
| Stock  appreciation rights            |       | 1,843,741          |       | —             |       |
| Warrants                              |       | 16,197,500         |       | —             |       |
| Retention  warrants                   |       | 1,088,531          |       | —             |       |
| Contingent  performance consideration |       | 3,680,194          |       | —             |       |

 

**7.  Contingencies**

 

Duringthe ordinary course of business activities, the Company may be contingentlyliable for litigation and a party to claims. Management believes that adequate provisions have been made in theaccounts where required.  Although theextent of potential costs and losses, if any is uncertain, management believesthat the ultimate resolution of such contingencies will not have an adverseeffect on the consolidated financial position or results of operations of theCompany.

 

**8.  Stock Option and Stock-Based CompensationPlans**

 

The following table showsthe breakdown total stock-based compensation expense included in the interimconsolidated statement of operations:

 
| ** **                   | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                   | ** ** | **$**              | ** ** | **$**              | ** ** |
|                         |       |               |       |               |       |
| Stock  options and warrants  |       | 194,702            |       | —             |       |
| Restricted  share plan units |       | 5,846              |       | —             |       |
| Stock  appreciation rights   |       | 31,785             |       | —             |       |
| Retention  warrants          |       | 15,198             |       | —             |       |
| Escrowed  shares             |       | 6,212              |       | —             |       |
|                         |       | 253,743            |       | —             |       |

 

On March 31, 2009,the Company granted 100,000 stock options to an employee of the Company with anexercise price of $0.35 that vested immediately and expire on June 29,2009.

 

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**NEULION,INC.**

** **

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

**9.  Segmented Information**

 

The Company operates as one reportable segment— to provide full end-to-end enterprise-level IPTV and other professionalservices.  Substantially all of theCompany’s revenues and long-lived assets are in the United States.

 

**10.  Income Taxes**

 

On January 1, 2007,the Company adopted the provisions of Financial Accounting Standards BoardInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN 48”), which clarifies the accounting foruncertainty recognized in income taxes recognized in a company’s financialstatements in accordance with Statement of Financial Accounting Standards No. 109,*Accounting for Income Taxes*.  The adoption of FIN 48 did not impact ourconsolidated financial conditions, results of operations or cash flows.  There were no accrued interest and penaltiesassociated with uncertain tax positions as of March 31, 2009.

 

As of December 31,2008, the Company had unrecognized tax benefits of $28.0 million.  There has been no significant change inunrecognized tax benefits through March 31, 2009.  Due to the existence of valuation allowances,future changes in our unrecognized tax benefits will not impact our effectivetax rate.  The Company does not expect theirunrecognized tax benefits to change significantly over the next twelve months.

 

**11.  DerivativeInstruments**

 

TheCompany’s only derivative instruments are 11,000,000 Warrants which aredenominated in a currency other than the Company’s functional currency are asfollows:

 

·                  5,500,000 Series A Warrants exercisable at Cdn$1.25 and expire on October 20,2010.

·                  5,500,000 Series B Warrants exercisable at Cdn$1.50 and expire on October 20,2010.

 

The Warrants have beenrecorded at their relative fair values at issuance and will continue to berecorded at fair value at each subsequent balance sheet date. Any change invalue between reporting periods will be recorded as other income(expense).  The Warrants will continue tobe reported as a liability until such time as they are exercised or expire. Thefair value of the Warrants is estimated using the Black-Scholes-Mertonoption-pricing model.

 

As of January 1,2009, the grant date fair value of the Warrants in the amount of $2,464,000 wasreallocated from additional paid in capital and a derivative liability wasrecorded in the amount of $587,950 being the fair value of the warrants on January 1,2009 offset by an adjustment to accumulated deficit of $1,876,050.

 

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**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

As of March 31,2009, the fair value of the Warrants was determined to be $1,064,800;accordingly, the Company recorded $476,850 in other expense for the threemonths ended March 31, 2009 related to the change in the fair value of theWarrants.  There is no cash flow impactfor these derivates until the Warrants are exercised.  If the Warrants are exercised, the Companywill receive the proceeds from the exercise at the current exchange rate at thetime of exercise.

 

**12.  Reconciliationof U.S. GAAP to Canadian GAAP**

 

The consolidatedfinancial statements of the Company are prepared in U.S. dollars in accordancewith United States GAAP. The following adjustments and disclosures would berequired in order to present these consolidated financial statements inaccordance with Canadian GAAP:

 

**Income Statement Items usingCanadian GAAP**

** **
| ** **                                                                    | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                                                                    | ** ** | **$**              | ** ** | **$**              | ** ** |
|                                                                          |       |               |       |               |       |
| NET  LOSS USING UNITED STATES GAAP                                            |       | (5,793,878         | )          | (1,486,146         | )          |
| Add:                                                                          |       |               |       |               |       |
| Adjustment  for stock based compensation on SARS[i]                           |       | 31,785             |       | —             |       |
| Adjustment  for unrealized loss on derivative [ii]                            |       | 476,850            |       | —             |       |
| NET  LOSS USING CANADIAN GAAP                                                 |       | (5,285,243         | )          | (1,486,146         | )          |
|                                                                          |       |               |       |               |       |
| NET  AND COMPREHENSIVE LOSS PER SHARE USING CANADIAN GAAP - basic and diluted |       | $                  | (0.05      | )                  | $          | (0.03 | ) |
|                                                                               |            |                    |            |                    |            |  |  |

** **

**Balance Sheet Items usingCanadian GAAP**

** **
| ** **                                    | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **U.S.**                | ** ** | **Canadian**               | ** ** | **U.S.** | ** ** | **Canadian** | ** ** |
| ** **                                    | ** ** | **GAAP**                | ** ** | **GAAP**                   | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| ** **                                    | ** ** | **$**                   | ** ** | **$**                      | ** ** | **$** | ** ** | **$** | ** ** |
|                                          |       |                    |       |                       |       |   |   |   |   |
| Accrued  liabilities [i]                      |       | 7,502,050               |       | 7,453,666                  |       | 7,595,116 |   | 7,579,517 |   |
| Derivative  liability [ii]                    |       | 1,064,800               |       | —                     |       | — |   | — |   |
| Total  current liabilities [i] and [ii]       |       | 15,082,551              |       | 13,969,367                 |       | 15,209,323 |   | 15,192,724 |   |
| Total  liabilities [i] and [ii]               |       | 16,473,339              |       | 15,360,155                 |       | 16,724,104 |   | 16,707,505 |   |
| Accumulated  deficit [i] and [ii]             |       | (29,957,355             | )          | (29,432,121                | )          | (26,039,527 | ) | (26,022,928 | ) |
| Total  shareholders’ equity [i] and [ii] |       | 30,853,708              |       | 31,378,942                 |       | 37,013,578 |   | 37,030,177 |   |

 

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**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

**Cash Flows Items usingCanadian GAAP**

** **
| ** **                          | ** ** | **March 31, 2009** | ** ** | **March 31, 2008** | ** ** |
|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **U.S.**                | ** ** | **Canadian**            | ** ** | **U.S.** | ** ** | **Canadian** | ** ** |
| ** **                          | ** ** | **GAAP**                | ** ** | **GAAP**                | ** ** | **GAAP** | ** ** | **GAAP** | ** ** |
| ** **                          | ** ** | **$**                   | ** ** | **$**                   | ** ** | **$** | ** ** | **$** | ** ** |
|                                |       |                    |       |                    |       |   |   |   |   |
| Net  loss [i] and [ii]              |       | (5,793,878              | )          | (5,285,243              | )          | (1,486,146 | ) | (1,486,146 | ) |
| Stock-based  compensation [i]       |       | 253,743                 |       | 221,958                 |       | — |   | — |   |
| Unrealized  loss on derivative [ii] |       | 476,850                 |       | —                  |       | — |   | — |   |

 

Areas of material difference between CanadianGAAP and U.S. GAAP and their impact on the consolidated financial statementsare as follows:

 

**[i]   Stock Appreciation Rights (“SARS”)**

** **

**On January 1, 2007, the Company adopted, on a modifiedprospective basis, Canadian Institute of Chartered Accountants (“CICA”)Handbook Section 3870, *Stock-Based Compensationand Other Stock Based Payments,* for new awards granted on or afterthis date under the Company’s stock appreciation rights plan.**

** **

**Under U.S. GAAP, the Company recognizes a liability andcompensation expense for the fair value of the SARS on each reporting date.**

** **

**Under Canadian GAAP, the Company recognizes a liability andcompensation expense for the “in the money” value of the SARS on each reportingdate.**

** **

**[ii]   Derivative Liability**

** **

CICAHandbook Section 3861, *Financial Instruments —Disclosure and Presentation*, establishes standards for presentationof financial instruments and non-financial derivatives, and identifies theinformation that should be disclosed about them.  The revisions change the accounting forcertain financial instruments that have liability and equity characteristics.

 

**Under U.S. GAAP, the Company recognizes a derivativeliability on the consolidated balance sheets for the fair value of allconvertible instruments with an exercise price denominated in a currency otherthan the Company’s functional currency. The Company fair values this liability on each reporting date with thecorresponding entry to unrealized gain (loss) on derivative on the consolidatedstatement of operations.**

** **

**Under Canadian GAAP, the Company fair values theseconvertible instruments on the grant date and includes them within additional paidin capital on the consolidated balance sheets. The Company does not recognize any changes in fair value.**

 

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**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 
| [iii] | In addition,  recent Canadian GAAP accounting pronouncements that may impact the Company’s financial position and  results of operations and disclosure requirements are as follows: |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***CICA Handbook Section 1535 —Capital Disclosures***

** **

The Company manages thefollowing accounts in regards to capital management:

 
| ** **                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                    | ** ** | **$**              | ** ** | **$**                 | ** ** |
|                          |       |               |       |                  |       |
| **Shareholders’ equity** |       |               |       |                  |       |
| Share  capital                |       | 6,774,155          |       | 6,762,097             |       |
| Additional  paid in capital   |       | 54,246,158         |       | 56,500,258            |       |
| Promissory  note receivable   |       | (209,250           | )          | (209,250              | )          |
| Accumulated  deficit          |       | (29,957,355        | )          | (26,039,527           | )          |
|                          |       | 30,853,708         |       | 37,013,578            |       |

 

(thefigures in the table above are in accordance with U.S. GAAP)

 

TheCompany’s outstanding share capital is comprised of Shares. At March 31,2009, an unlimited number of Shares were authorized and 110,100,289 (December 2008- 110,084,044) Shares were issued and outstanding. Approximately 60%****of the Shares are held by insiders, and the remainingShares are widely held. Further information on the Company’s outstanding sharecapital is provided in Note 8 of these consolidated financial statements.

 

AtMarch 31, 2009, a total of 8,952,995 stock options were outstanding,42,977 restricted share units, 16,197,500 warrants, 1,088,531 retentionwarrants and 1,843,741 SARS, which convertible securities cumulativelyrepresented 27% of the Company’s issued and outstanding share capital. Pursuantto guidelines set by the Company’s respective equity plans, stock option grantsare limited to the greater of 12.5% of the issued and outstanding Sharesoutstanding and 4,000,000, restricted share unit grants have been fullygranted, retention warrants are limited to 2,500,000 and SARS grants arelimited to the greater of 5% of the issued and outstanding Shares and4,150,000.  The Company is in compliancewith these guidelines.

 

TheCompany’s objective in managing capital is to ensure a sufficient liquidityposition to finance its revenue growth, general and administrative expenses,working capital and capital expenditures.

 

Inorder to maintain or adjust its capital structure, the Company may issue newShares and/or purchase Shares for cancellation pursuant to normal course issuerbids.

 

Tofinance its activities, the Company has relied on revenue growth and capitalcontributions.

 

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**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

TheCompany’s policy is to maintain a minimal level of debt.  At this time the Company has not utilizeddebt facilities as part of its capital management program nor has it paiddividends to its shareholders.

 

The capital managementobjectives for the period ended March 31, 2009 remained the same as thoseof the previous fiscal period.

 

The Company is notsubject to any externally imposed capital requirements.

 

***CICA Handbook Sections 3862 and3863 — Financial Instruments — Disclosures and Presentation***

** **

The Company’s financialinstruments are comprised of cash and cash equivalents, short-term investments,accounts receivable, interest receivable, other receivables, accounts payable,other accrued liabilities, amounts due to/from related party, notes payable andobligations under capital lease.

 

The fair value of afinancial instrument is defined as the amount at which the instrument could beexchanged in a current transaction between willing parties.

 

The fair value of assetsand liabilities were as follows:

 
| ** **                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                   | ** ** | **$**              | ** ** | **$**                 | ** ** |
|                         |       |               |       |                  |       |
| Financial  Assets            |       |               |       |                  |       |
| Held-for-Trading             |       |               |       |                  |       |
| Cash  and cash equivalents   |       | 21,567,868         |       | 27,323,021            |       |
| Loans  and Receivables       |       |               |       |                  |       |
| Accounts  receivable         |       | 1,851,373          |       | 2,284,242             |       |
| Other  receivables           |       | 404,426            |       | 227,711               |       |
| Due  from related parties    |       | 625,679            |       | 324,059               |       |
| Financial  Liabilities       |       |               |       |                  |       |
| Other  Financial Liabilities |       |               |       |                  |       |
| Accounts  payable            |       | 3,239,331          |       | 4,465,388             |       |
| Accrued  liabilities         |       | 7,502,050          |       | 7,595,116             |       |
| Due  to related parties      |       | 300,407            |       | 56,826                |       |

 

All fair values denotedabove approximate their carrying values due to their short term nature and/orvariable interest rates.

 

Risk management isprimarily the responsibility of the Company’s corporate finance function.  Significant risks are regularly monitored andactions are taken, when appropriate, according to the Company’s approvedpolicies, established for that purpose. In addition, as required, these risks are reviewed with the Company’s Boardof Directors.

 

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**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

Foreign Exchange Risk

 

The Company is exposed toforeign exchange risk as a result of transactions in currencies other than itsfunctional currency of the United States dollar.  The majority of the Company’s revenues aretransacted in U.S. dollars, whereas the majority of expenses are transacted inU.S. or Canadian dollars.  The Companydoes not use derivative instruments to hedge against foreign exchange risk.

 

Interest Rate Risk

 

The Company is exposed tointerest rate risk on its invested cash and cash equivalents and its short-terminvestments.  The interest rates on theseinstruments are based on the banks’ applicable prime rate and therefore aresubject to change with the market.  TheCompany does not use derivative financial instruments to reduce its interestrate risk.

 

Credit Risk

 

The Company sells itsservices to a variety of customers under various payment terms and therefore isexposed to credit risk.  The Company hasadopted policies and procedures designed to limit this risk.  The maximum exposure to credit risk at thereporting date is the carrying value of receivables.  The Company establishes an allowance fordoubtful accounts that represents its estimate of incurred losses in respect ofaccounts receivable.  The Companybelieves that the concentration of credit risk is limited due to the Company’sprimary source of revenues to date being subscription revenues, for which moniesare received in advance principally through credit cards.

 

There is no significantcredit risk related to the Company’s cash and cash equivalents and short-terminvestments. Credit risk is managed through conducting financial and otherassessments of these investments on an ongoing basis.

 

The following table setsout details of the age of accounts receivable that are outstanding and relatedallowance for doubtful accounts:

 
| ** **                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                            | ** ** | **$**              | ** ** | **$**                 | ** ** |
|                                  |       |               |       |                  |       |
| Current                               |       | 1,181,875          |       | 1,697,271             |       |
| 31-60 days                            |       | 402,425            |       | 287,070               |       |
| 61-90 days                            |       | 132,648            |       | 105,525               |       |
| Over 90 days                          |       | 401,183            |       | 484,914               |       |
| Less: Allowance for doubtful accounts |       | (266,758           | )          | (290,538              | )          |
| Total accounts receivable, net        |       | 1,851,373          |       | 2,284,242             |       |

 

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**NEULION,INC.**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**[Expressedin U.S. dollars, unless otherwise noted]**

**Informationas at March 31, 2009 and for the three months ended**

**March 31, 2009 and 2008is unaudited**

 

The carrying amount ofaccounts receivable is reduced through the use of an allowance account and theamount of the loss is recognized in the consolidated statements of operationsand comprehensive loss.  When areceivable balance is considered uncollectible, it is written off against theallowance for accounts receivable. Subsequent recoveries of amounts previouslywritten off are credited against operating expenses in the consolidated statementsof operations and comprehensive loss.

 

***Recent Accounting Pronouncements***

** **

In February 2008, the CICA issued new Handbook Section 3064, *Goodwill and Intangible Assets*, whichreplaces Section 3062, *Goodwill and OtherIntangible Assets*, and Section 3450, *Research andDevelopment Costs*. The new standard addresses when an internallydeveloped intangible asset meets the criteria for recognition as an asset. Thesection also issued amendments to Section 1000, *FinancialStatement Concepts*. These changes are effective for fiscal yearsbeginning on or after October 1, 2008, with earlier adoption permitted,and have been adopted by the Company effective January 1, 2009. Theobjectives of the changes are to reinforce a principle-based approach to therecognition of costs as assets and to clarify the application of the concept ofmatching revenues and expenses in Section 1000. Collectively, thesechanges bring Canadian practice closer to International Financial ReportingStandards (“IFRS”) by eliminating the practice of recognizing as assets avariety of start-up, pre-production and similar costs that do not meet thedefinition and recognition criteria of an asset. There was no material effecton the Company’s interim consolidated financial statements as a result ofadopting CICA Handbook Section 3064.

 

InFebruary 2008, the CICA Accounting Standards Board confirmed that thechangeover to IFRS from Canadian GAAP will be required for publicly accountableenterprises, effective for the interim and annual financial statements relatingto fiscal years beginning on or after January 1, 2011.  As the Company is in the process of filing aUS registration statement to become an SEC issuer, the Company expects tocontinue to use US GAAP until the implementation date in the United States —currently estimated as no sooner than 2014.

 

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**Item 2.****          ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following Management’sDiscussion & Analysis (“MD&A”) of the Company’s financialcondition and results of operations should be read in conjunction with theCompany’s unaudited consolidated financial statements and accompanying notesfor the three months ended March 31, 2009 and 2008, which have beenprepared in accordance with U.S. GAAP. All dollar amounts are in U.S. dollars (“US$” or “$”) unless statedotherwise.

 

On October 20, 2008,NeuLion completed the Merger with NeuLion USA, which was (as described later inthis MD&A) a reverse takeover for accounting purposes.  Therefore, this MD&A is for the threemonths ended March 31, 2009 and 2008 and as at March 31, 2009 and December 31,2008, reflects the assets, liabilities and results of operations of NeuLionUSA, the accounting acquirer, and only includes the assets, liabilities andresults of operations of NeuLion, the legal acquirer, subsequent to the reversetakeover on October 20, 2008.  ThisMD&A is issued under the name of the legal acquirer (NeuLion), but isdeemed to be a continuation of the accounting acquirer (NeuLion USA).

 

Our MD&A is intendedto enable readers to gain an understanding of the Company’s current results andfinancial position.  To do so, we provideinformation and analysis comparing the results of operations and financialposition for the current period to those of the preceding comparablethree-month period.  We also provideanalysis and commentary that we believe is required to assess the Company’sfuture prospects.  Accordingly, certainsections of this report contain forward-looking statements that are based oncurrent plans and expectations.  Theseforward-looking statements are affected by risks and uncertainties that arediscussed in Item 1A of the Company’sRegistration Statement on Form 10 and could have a material impacton future prospects.  Readers arecautioned that actual results could vary.

 

**Cautions regardingforward-looking statements**

 

This MD&A containscertain forward-looking statements, which reflect management’s expectationsregarding the Company’s growth, results of operations, performance and businessprospects and opportunities.

 

Statements about the Company’sfuture plans and intentions, results, levels of activity, performance, goals orachievements 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-lookingstatements.  These statements reflectmanagement’s current beliefs and are based on information currently availableto management as at the date hereof.

 

Forward-looking statementsinvolve significant risk, uncertainties and assumptions.  Many factors could cause actual results,performance or achievements to differ materially from the results discussed orimplied in the forward-looking statements. These factors should be 

 

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considered carefully andreaders should not place undue reliance on the forward-looking statements.  Although the forward-looking statementscontained in this MD&A are based upon what management believes to bereasonable assumptions, the Company cannot assure readers that actual resultswill be consistent with these forward-looking statements.  These forward-looking statements are made asof the dates of this MD&A, and the Company assumes no obligation to updateor revise them to reflect new events or circumstances, except as required bylaw.  Many factors could cause the actualresults, performance or achievements of the Company to be materially differentfrom any future results, performance or achievements that may be expressed orimplied by such forward-looking statements, including: general economic andmarket segment conditions, competitor activity, product capability andacceptance, international risk and currency exchange rates and technologychanges.  More detailed assessment of therisks that could cause actual results to materially differ from currentexpectations is contained in Item 1A of the Company’s Registration Statement onForm 10.

 

**Merger and Reverse Take-Over**

 

On October 20, 2008,the Company completed the Merger with NeuLion USA, an end-to-end IPTV serviceprovider of live and on-demand sports, international and religious programmingover the Internet to computers and/or through STBs to televisions.  Under the terms of the Merger, NeuLion issued49,577,427 Shares directly, as well as 1,840,097 Shares subject to aperformance escrow relating to a prior acquisition, which representedapproximately the entire issued and outstanding Shares of NeuLion prior toclosing, to the securityholders of NeuLion USA in exchange for their NeuLionUSA securities.  Pursuant to the Merger, NeuLion also issued 5,000,000 warrants, fully vested and exercisable for twoyears at $0.63, and 2,700,000 employee stock options, vesting in equal monthlyamounts over 48 months and exercisable for five years at $0.60, to employees ofNeuLion USA who became employees of the Company.

 

On October 20, 2008,AvantaLion LLC (“AvantaLion”), an entity controlled by Charles B. Wang, ourChairman and the spouse of Nancy Li, our CEO and the founder and CEO of NeuLionUSA, purchased 10,000,000 units from NeuLion’s treasury at a price of Cdn$1.00per unit. Each unit (a “Unit”) consists of one Share, one-half of one Sharepurchase warrant exercisable at Cdn$1.25 and one-half of one Share purchasewarrant exercisable at Cdn$1.50.  Thewarrants partially comprising the Units are exercisable for a period of twoyears from the date of issuance.  G.Scott Paterson, our Vice Chairman, also purchased 1,000,000 Units on the sameterms.  The aggregate gross proceeds fromthe sale of Units (the “Private Placement”) were Cdn$11.0 million or US$9.2million.

 

In accordance with FAS 141,the Company has determined that NeuLion USA was the accounting acquirer andaccordingly has accounted for the Merger as a reverse takeover.  Therefore, the financial statements and thisMD&A for the three months ended March 31, 2009 and 2008 reflect theassets, liabilities and results of operations of NeuLion USA, the accountingacquirer, and only include the assets, liabilities and results of operations ofthe Acquired Business subsequent to the reverse takeover on October 20,2008.  This MD&A is issued under thename of the legal acquirer (NeuLion), but is deemed to be a continuation of theaccounting acquirer (NeuLion USA).

 

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**Overview**

 

The Company is an IPTV service and technology providerthat builds and manages private networks for companies interested in reachingspecific target audiences.  The Companyprovides an end-to-end IPTV service of live and on-demand sports, internationaltelevision content and family programming. “IPTV” refers to the distribution over an IP network of streamed audio,video and other multimedia content, similar to television programming content,using industry standard streaming protocols.

 

This end-to-end enterprise technology solution enablesthe distribution of IPTV content to subscribers and pay-per-view customers forviewing on multiple platforms, including Internet-connected browser-baseddevices such as personal computers, laptops and mobile devices and standardtelevision sets through Internet-connected STBs.

 

The Company’s business model has evolved from itsinception as a professional services provider to, in fiscal 2006, an end-to-endprovider of the following IPTV services:

 

·                                         content management — encoding of variousdigital and analog TV and video formats

·                                         subscriber management — managingsubscriber access and control of subscriber accounts

·                                         digital rights management — preservingthe integrity of the content and protecting it from unauthorized access

·                                         billing services — enabling customers toview subscription accounts, providing pay-per-view transactional billing,payment processing and advertising insertion

·                                         delivery — delivering streamed audio,video and other multimedia content anywhere, anytime through NeuLion’s IPTVservice and infrastructure

 

This evolution commenced in 2006 and is the one of thereasons for the increase in revenue, cost of sales and expenses over the years.

 

Through the acquisition of the Acquired Business on October 20,2008, the Company has expanded its portfolio of content from professionalsports (the National Hockey League and the National Football League),international content (Chinese programming through KyLinTV) and faith-basedprogramming (Sky Angel) to include college sports, cycling events, soccerevents and additional international channels.

 

The Company’s success is dependent upon severalfactors, including securing contractual relationships, maintaining technologicaladvantage in a rapidly changing industry and efficiently operating thedistribution network.

 

***Operating Performance***

 

TheCompany uses the term “organic” to refer to period-over-period changes in itsrevenues and expenses, excluding the revenues and expenses of the AcquiredBusiness.  This 

 

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permitsreaders to better compare current year and prior year revenues and expenses,and to understand changes that have occurred, without regard to the effect ofthe Merger.

 

Revenue for three monthsended March 31, 2009 was $6.6****million, up247% from $1.9 million for the three months ended March 31, 2008.  The revenue growth of $4.7 million was due toan increase in services revenue of $5.2 million and was offset by a decrease inour equipment revenue of $0.5 million. In part, the revenue growth is due to the acquisition of the AcquiredBusiness, which contributed $3.6 million of the growth.  The organic increase (excluding the resultsof the Acquired Business) in services revenue is consistent with the increasingscope of operations.  As the number ofsubscribers increases, there is a cumulative effect of increasing subscriberrevenue on a month over month basis.  Thedecrease in equipment revenue is a result of the uneven nature of this revenuestream — customers often place large single orders made to meet minimum orderrequirements, to manage the lead time between ordering and shipping and tominimize the related shipping costs.  Thelead time on new orders is approximately 12 weeks from order to receipt.  The purchase by customers of STBs is a leadingindicator of future subscriptions.  On apro forma basis, as described in Note 3 of the financial statements, revenueincreased from $5.6 million to $6.6 million due to organic growth.

 

Our net loss for thethree months ended March 31, 2009 was $5.8****million,or a loss of $0.05 per fully diluted Share, compared with a net loss of $1.5million or a loss of $0.03****per basic andfully diluted Share for the three months ended March 31, 2008.  The increase in net loss of $4.3 million wasdue to the following:

 

·                                          Increase in organic loss of $1.3 million

·                                          Net loss in the Acquired Business of $2.0million

·                                          Increased non-cash expenses of $1.0million (detailed below in the net loss to non-GAAP Adjusted EBITDAreconciliation)

 

On a pro forma basis (asif the Merger had occurred on January 1, 2008), our net loss for the threemonths ended March 31, 2008 was $59.6 million or a loss of $1.40 per fullydiluted Share.  The decrease in net lossof $53.8 million was due to the following:

 

·                                          Increase in organic loss of $1.3 million

·                                          Reduction/elimination of impairment ofgoodwill and long-lived assets of $48.1 million

·                                          Reduction in net loss in the AcquiredBusiness of $6.8 million

·                                          Reduction in non-cash expenses of $0.2million

 

The Company reportsnon-GAAP Adjusted EBITDA loss because it is a key measure used by management toevaluate the results of the Company and make strategic decisions about theCompany.  Non-GAAP Adjusted EBITDA lossrepresents net loss before interest, income taxes, depreciation andamortization, stock-based compensation, impairment of long-lived assets,unrealized loss on derivatives, equity in loss of affiliate, investment incomeand foreign exchange gain.  This measuredoes not have any standardized meaning prescribed by GAAP and therefore is unlikelyto be comparable to the calculation of similar measures used by other 

 

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companies, and should notbe viewed as an alternative to measures of financial performance or changes incash flows calculated in accordance with GAAP.

 

Our non-GAAP AdjustedEBITDA loss was $4.2 million for the three months ended March 31, 2009compared with a non-GAAP Adjusted EBITDA loss of $0.8 million from the threemonths ended March 31, 2008.  Theincrease is non-GAAP Adjusted EBITDA is due to the cash impact of the itemsnoted above.  On a pro forma basis, ournon-GAAP Adjusted EBITDA decreased from a loss of $9.8 million to a loss of$4.2 million for the three months ended March 31, 2009.  This decrease is due to cost reductions inmost areas of the Acquired Business offset by the increased organic costs.  The reconciliation from net loss to non-GAAPAdjusted EBITDA loss is as follows:

 
| ** **                                   | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                   | ** ** | ** **                            | ** ** | ** ** | ** ** | **Pro forma** | ** ** |
| ** **                                   | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **$**                                 | ** ** | **$** | ** ** | **$** | ** ** |
|                                         |       |                                  |       |   |   |   |   |
| Net  loss for the period                     |       | (5,793,878                            | )          | (1,486,146 | ) | (59,602,491 | ) |
|                                         |       |                                  |       |   |   |   |   |
| Add  back:                                   |       |                                  |       |   |   |   |   |
| Impairment  of goodwill                      |       | —                                |       | — |   | 47,882,317 |   |
| Impairment  of long-lived assets             |       | —                                |       | — |   | 173,786 |   |
| Depreciation  and amortization               |       | 1,014,681                             |       | 195,063 |   | 856,722 |   |
| Stock-based  compensation                    |       | 253,743                               |       | — |   | 792,936 |   |
| Unrealized  loss on derivative               |       | 476,850                               |       | — |   | — |   |
| Equity  in loss of affiliate                 |       | —                                |       | 457,682 |   | 457,682 |   |
| Investment  income and foreign exchange gain |       | (141,450                              | )          | (815 | ) | (334,825 | ) |
|                                         |       |                                  |       |   |   |   |   |
| Non-GAAP  Adjusted EBITDA loss               |       | (4,190,054                            | )          | (834,216 | ) | (9,773,873 | ) |

 

**Operations**

 

TheCompany uses the term “organic” to refer to period-over-period changes in itsrevenues and expenses, excluding the revenues and expenses of the AcquiredBusiness.  This permits readers to bettercompare current year and prior year revenues and expenses, and to understandchanges that have occurred, without regard to the effect of the Merger.

 

***Revenue***

 

The Company earns revenue in four broadcategories:

 

·                                          Subscriberrevenue, which is recognized over the period of service or usage.

·                                          eCommercerevenue, which is recognized as the service is performed.

·                                          Technologyservices revenue, which consists of set up and transcoder revenue and isrecognized over the life of the contract.

·                                          Equipmentrevenue, which is recognized when title of the STB passes to the customer.

 

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Servicerevenue includes subscriber revenue, eCommerce revenue and technology servicesrevenue.  While our revenues have beengrowing due to the organic growth in our existing business and the Merger, weare uncertain as to how our revenues will be impacted by the current downturnin the global economy.

 

***Costs and Expenses***

 

Costof services revenue primarily consists of:

 

·                                          Cost ofSubscriber revenue consists of three primary components:

·                  Royalty payments

·                  Network operating costs

·                  Bandwidth usage fees

 

·                                          Cost ofeCommerce revenue consists of:

·                  Merchandising, donor andticket sales, which has no associated cost — revenue is booked on a net basis

·                  Cost of Advertising revenueis subject to revenue shares with the content provider

 

·                                          Cost ofTechnology services revenue consists of:

·                  Third-party transcodersoftware purchased

·                  Maintenance costs fortranscoders

 

Costof Equipment revenue consists of the sale of STBs to content partners and/orend users to enable the end user to receive the content over the Internet anddisplay the signal on a television.  Costof equipment revenues primarily consists of purchases from TransVideo of theproducts and parts for resale to customers. Shipping revenue and costs are included in equipment revenue and cost ofequipment revenue, respectively.

 

***Selling, General and Administrative expenses***

 

Selling,general and administrative (“SG&A”) costs include:

 

·                                          *Wagesand benefits* — represents compensation for the Company’sfull-time and part-time employees as well as fees for consultants who are usedby the Company from time to time;

 

·                                          *Marketing—*represents**expenses for both global andlocal marketing programs that focus on various target sports properties andethnic communities.  These initiativesinclude both on-line and off-line marketing expenditures.  These expenditures also include search enginemarketing and search engine optimization;

 

·                                          *Professionalfees* — represents legal, recruiting and accounting fees; and

 

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·                                          *OtherSG&A expenses****—***representsexpenses for travel expenses, rent, office supplies, corporate IT services,credit card processing fees and other general operating expenses.

 

***Stock-based compensation***

 

Weestimate the fair value of our options, warrants, retention warrants, awardsunder our restricted share plan and SARS (collectively, “Convertible Securities”)for financial accounting purposes using the Black-Scholes-Merton model, whichrequires a number of subjective assumptions, including the expected life of theConvertible Securities, risk-free interest rate, dividend rate, forfeiturerate, future volatility of the price of our Shares and vesting period. Based onthe estimated fair value of the Convertible Securities, we expense theestimated fair value over the vesting period of the ConvertibleSecurities.  The vesting period isnormally over a four year period, vesting in an equal amount each month;however, the Board of Directors has the discretion to grant options withdifferent vesting periods.

 

***Equity Losses of Affiliate***

 

From January 1,2008 through March 31, 2009, the Company’s equity interest in KyLinTV was17.1%.  The Company provides KyLinTV withadministrative and general corporate support. Management has determined that as a result of the 17.1% equity interestcombined with the services that the Company provides KyLinTV, the Companycontinues to have significant influence on the operating activities of KyLinTV;therefore, the Company continues to account for KyLinTV using the equity methodof accounting for its investment.

 

The Company’sproportionate share of the applicable equity loss from KyLinTV has beenaccounted for as a charge on the Company’s consolidated statements ofoperations and comprehensive loss.  In2008 the cumulative losses were equal to the total value of the equity interestand no further losses have been recorded. No further charges will berecorded as the Company has no obligation to fund the losses of KyLinTV.  The Company retains its 17.1% interestin KyLinTV.

 

**Resultsof Operations**

 

### ***Comparison of Three Months Ended March 31, 2009 toThree Months Ended March 31, 2008***

### ** **

### **Our interim consolidatedfinancial statements for our three months ended March 31, 2009 and 2008have been prepared in accordance with U.S. generally accepted accountingprinciples.  Included in Note 10**of the financialstatementsis thereconciliation between our consolidated financial statements prepared inaccordance with U.S. generally accepted accounting principles and Canadiangenerally accepted accounting principles.

 

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| ** **                                                                  | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Change** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                  | ** ** | **$**      | ** ** | **$**      | ** ** | **%**      | ** ** |
| **Revenue**                                                                 |       |       |       |       |       |       |       |
| Services  revenue                                                           |       | 6,034,330  |       | 874,577    |       | 590        | %          |
| Equipment  revenue                                                          |       | 539,696    |       | 1,075,043  |       | -50        | %          |
| Total  Revenue                                                              |       | 6,574,026  |       | 1,949,620  |       | 237        | %          |
|                                                                        |       |       |       |       |       |       |       |
| **Costs and expenses**                                                      |       |       |       |       |       |       |       |
| Cost  of services revenue, exclusive of depreciation shown separately below |       | 3,383,879  |       | 284,101    |       | 1091       | %          |
| Cost  of equipment revenue                                                  |       | 460,604    |       | 861,280    |       | -47        | %          |
| Selling,  general and administrative, including stock based compensation    |       | 7,173,340  |       | 1,638,455  |       | 338        | %          |
| Depreciation  and amortization                                              |       | 1,014,681  |       | 195,063    |       | 420        | %          |
|                                                                        |       | 12,032,504 |       | 2,978,899  |       | 304        | %          |
| **Operating loss**                                                          |       | (5,458,478 | )          | (1,029,279 | )          | 430        | %          |
|                                                                        |       |       |       |       |       |       |       |
| **Other income (expense)**                                                  |       |       |       |       |       |       |       |
| Unrealized  loss on derivative                                              |       | (476,850   | )          | —     |       | —     |       |
| Gain  on foreign exchange                                                   |       | 44,226     |       | —     |       | —     |       |
| Investment  income                                                          |       | 97,224     |       | 815        |       | 11829      | %          |
| Equity  loss in affiliate                                                   |       | —     |       | (457,682   | )          | -100       | %          |
|                                                                        |       | (335,400   | )          | (456,867   | )          | -27        | %          |
| **Net and comprehensive loss for the period**                               |       | (5,793,878 | )          | (1,486,146 | )          | 290        | %          |

### ** **

### ***Revenue***

### ** **

*ServicesRevenue*

 

Servicesrevenue includes revenue from subscribers, eCommerce and technologyservices.  Services revenue increasedfrom $0.9 million for the three months ended March 31, 2008 to $6.0million for the three months ended March 31, 2009.  The increase is a combination of the organicgrowth in services revenue and the effect of the Merger on October 20,2008. The organic growth in our services revenue was $1.5 million.  The Acquired Business comprised $3.6****million of total services revenue for the quarter.

 

Subscriberrevenue increased from $0.5 million for the three months ended March 31,2008 to $4.0 million for the three months ended March 31, 2009.  The increase is a combination of the growthin subscribers and the effect of the Merger on October 20, 2008. Theorganic growth in our subscriber revenue was $1.1 million.  The organic increase was a result of $0.6million in revenue generated from 19 new customers and $0.5 million in revenuegenerated from 7 existing customers.  Theincrease in revenue is due to the recurring revenue effect of adding new users,while still retaining existing users. The Acquired Business comprised $2.4****million oftotal subscriber revenue for the period.

 

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eCommercerevenue increased from zero for the three months ended March 31, 2008 to$0.9 million for the three months ended March 31, 2009.  The Acquired Business comprised all ofeCommerce revenue for the period.

 

Technologyservices revenue increased from $0.4 million for the three months ended March 31,2008 to $1.1 million for the three months ended March 31, 2009.  The increase is a combination of the growthin technology services revenue and the effect of the Merger on October 20,2008. The organic growth in our technology services revenue was $0.3million.   As new customers beginstreaming video or develop their user interface, we earn technology servicesrevenue.  This revenue is recognized overthe life of the contractual relationship. The Acquired Business comprised $0.4****million oftotal technology services revenue for the period.

 

### ***Equipment Revenue***

### ** **

Equipmentrevenue decreased from $1.1 million for the three months ended March 31,2008 to $0.5 million for the three months ended March 31, 2009.  The decrease was primarily related to thedecrease in STBs purchased by one customer.

 

### ***Costs and Expenses***

### ** **

*Cost ofServices Revenue*

 

Costof services revenue increased from $0.3 million for the three months ended March 31,2008 to $3.4 million for the three months ended March 31, 2009.  This increase was a combination of the costsassociated with increased revenue and the effect of the Merger on October 20,2008.  The Acquired Business comprised$2.1 million of total costs of services revenue for the period.

 

Organic cost of servicesrevenue increased from $0.3 million, or 32%, for the three months ended March 31,2008 to $1.2 million, or 51%, for the three months ended March 31,2009.  The increase was a result ofincreased revenue and higher costs for bandwidth due to higher usage byexisting subscribers and the costs associated with new customers.  Subscriber revenue, a component of servicesrevenue, increased as a percentage of total services revenue and has highercosts associated with it than other types of services revenue.  Management expects to maintain cost of servicesrevenue at between 50% and 60% of services revenue, excluding the AcquiredBusiness, based on the mix of service revenue and as economies of scale arerealized.

 

### ***Cost of Equipment Revenue***

### ** **

Costof equipment revenue decreased from $0.9 million for the three months ended March 31,2008 to $0.5 million for the three months ended March 31, 2009 on lowerrevenue.  Cost of equipment revenue isdirectly variable with changes in revenue.

 

Costof equipment revenue as a percentage of equipment revenue increased from 80%for the three months ended March 31, 2008 to 85% for the three monthsended March 31, 2009 due 

 

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toan increase in the proportion of revenue which was sold on a cost recoverybasis (shipping and replacement parts).

 

### ***Selling, General and Administrative Costs***

### ** **

Selling,general and administrative costs increased from $1.6 million for the threemonths ended March 31, 2008 to $7.2 million****forthe three months ended March 31, 2009. The Acquired Business increased by $3.8 million the total selling,general and administrative costs for the period.  The individual variances are due to the following:

 

·                                          Wages and benefits increased from $1.4****million for thethree months ended March 31, 2008 to $5.2 million****forthe three months ended March 31, 2009.    TheAcquired Business increased by $2.4 million the total wages and benefits forthe period. The organic increase of $1.4****millionwas primarily related to the increase in employees to support the increasedrevenue and the Merger with the Acquired Business.  In conjunction with the Merger, the Companyadded senior management and provided market level compensation for the CEO.

 

·                                          Stock-basedcompensation expense increased from zero for the three months ended March 31,2008 to $0.3 million****forthe three months ended March 31, 2009. This increase was due to the assumption of convertible instruments inconjunction with the Merger and the Company granting convertible instruments toemployees subsequent to the Merger.

 

·                                          Marketing*increased from $0.1 million for the three monthsended March 31, 2008 to $0.2* million*****for the three months ended March 31,2009. *The Acquired Business increased by $0.1 million themarketing expenses for the period.  TheAcquired Business is more of a business-to-consumer focused business and incurshigher marketing expenses including search engine marketing and search engineoptimization on the Internet.

 

·                                          Professional fees*increased from a nominal amount for the three months ended March 31, 2008to $*0.3****million*****forthe three months ended March 31, 2009. *The increase was primarily relatedto fees incurred in connection with public company reporting compliance.

 

·                                          Other SG&Aexpenses *increased from $*0.1*****million for the three months ended March 31,2008 to $1.2* million*****for the three months endedMarch 31, 2009.  The increase wasrelated to increased expenses in all categories associated with increasedoperations to support the increase in revenue*.

 

### ***Equity Losses of Affiliate***

### ** **

Equitylosses of KyLinTV decreased from $0.5 million for the three months ended March 31,2008 to zero for the three months ended March 31,2009.  The decrease is as a result of thecumulative losses exceeding the full value of the Company’s investment in2008.  Due to KyLinTV’s accumulatedlosses, the investment has been reduced to zero.  The Company still 

 

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ownsits equity position in the affiliate, however the Company is not required tofund any additional losses, and as such no further charges will be incurred.

 

### ***Depreciation and Amortization***

### ** **

Depreciation andamortization increased from $0.2 million for the three months ended March 31,2008 to $1.0 million for the threemonths ended March 31, 2009.  Theincrease was due to amortization on assets acquired in the Merger ($0.6 million) and theincreased capital assets required to support the increased revenue.

 

### ***Unrealized Loss on Derivative***

### ** **

Unrealized loss on derivative increased from zero for the three monthsended March 31, 2008 to $0.5 millionfor the three months ended March 31, 2009. The increase was due to the adoption of EITF No. 07-5, “DeterminingWhether an Instrument (or an Embedded Feature) is Indexed to an Entity’s OwnStock”, effective January 1, 2009, which required the Company to fairvalue all convertible instruments denominated in a currency other than theCompany’s functional currency.  On January 1,2009, the grant date fair value of Warrants denominated in Canadian dollars of$2.5 million was reallocated from additional paid in capital and a derivativeliability was recorded in the amount of $0.6 million with an adjustment toopening accumulated deficit of $1.9 million. The difference between the fair value at March 31, 2009 of $1.1million and January 1, 2009 of $0.6 million resulted in an unrealized losson derivative of $0.5 million.

 

**Liquidity and Capital Resources**

 

As of March 31, 2009, our principalsources of liquidity include cash and cash equivalents of $21.6 million andtrade accounts receivable of $1.9 million. We do not have a credit facility.

 

At March 31, 2009, approximately 77% ofour cash and cash equivalents are held in money market funds and another 18% ofour cash and cash equivalents are held in bank accounts with two of the topfive Canadian commercial banks.  TheCompany believes these financial institutions to be secure in the currentglobal economy.  We believe that we willbe able to access the remaining balance of bank deposits outside of Canada asthese deposits are with large reputable banks. We have and will continue to makea series of short-term investments in term deposits and commercial paper. Ourinvestment policy is to invest in low risk short-term investments which arehighly graded commercial paper and term deposits. We have not had a history ofany defaults on this commercial paper, nor do we expect any in the future giventhe grade and short term to maturity of these investments. All commercial paperon hand at March 31, 2009 have been repaid, and subsequently reinvested.

 

During 2009, based on our current businessplan, internal forecasts and considering the risks that are present in thecurrent global economy, we believe that cash on hand will be sufficient to meetour working capital and operating cash requirements for the next twelve months.The Company is still in the early stage of business.  From the Company’s inceptionit has incurred substantial net losses. The Company continues to review its operating structure to reducecosts.  Cash from operations could beaffected by various risks and uncertainties, including, but not 

 

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limited to, the risks detailed in or incorporated byreference into Item 1A of the Company’s Registration Statement on Form 10.

 

During the three months ended March 31,2009, the Company’s cash position decreased by $5.7 million.  The Company used $4.2 million to fundoperations, $1.1 million in working capital changes and $0.4 million topurchase fixed assets.

 

**Working Capital Requirements**

 

The net working capital at March 31,2009 was $12.0 million, a decrease of $6.1 million from the December 31,2008 net working capital of $18.1 million. The decreased working capital isprimarily due to funding operations and the fair value of the derivativeliability on March 31, 2009.

 

Current assets at March 31, 2009 were$27.1 million, a decrease of $6.2 million from the December 31, 2008balance of $33.3 million. The change is primarily due to a decrease in our cashand cash equivalents of $5.8 million and a decrease in prepaid expenses anddeposits of $0.5 million.

 

Current liabilities at March 31, 2009were $15.1 million, a decrease of $0.1 million from the December 31, 2008balance of $15.2 million.

 

**Cash Flows**

 

The Company’s business isstill in the early stages, with only a few years of operating history.  As at March 31, 2009, the Company hadcash and cash equivalent balances of $21.6 million.  From the Company’s inception, it hasincurred net losses and has an accumulated deficit of $30.0 million; managementexpects these losses to continue in the short term.  The Company will require expenditures ofsignificant funds for marketing, building its subscriber management systems,programming and website development, maintaining adequate video streaming anddatabase software, pursuing and maintaining channel distribution agreementswith its channel partners, fees relating to acquiring and maintaining Internetstreaming rights to its content and the construction and maintenance of theCompany delivery infrastructure and office facilities.  There is no guarantee that the Company willultimately be able to generate sufficient revenue or reduce its costs in theanticipated time frame to become profitable and have sustainable cash flows.

 

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**Summary Balance SheetData:**

** **
| ** **                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                     | ** ** | **$**              | ** ** | **$**                 | ** ** |
| **Current Assets**             |       |               |       |                  |       |
| Cash  and cash equivalents     |       | 21,567,868         |       | 27,323,021            |       |
| Accounts  receivable, net      |       | 1,851,373          |       | 2,284,242             |       |
| Taxes  receivable              |       | 975,747            |       | 983,253               |       |
| Other  receivable              |       | 404,426            |       | 227,711               |       |
| Inventory                      |       | 383,220            |       | 347,600               |       |
| Prepaid  expenses and deposits |       | 1,301,616          |       | 1,830,260             |       |
| Due  from related parties      |       | 625,679            |       | 324,059               |       |
| **Total current assets**       |       | 27,109,929         |       | 33,320,146            |       |
|                           |       |               |       |                  |       |
| **Current Liabilities**        |       |               |       |                  |       |
| Accounts  payable              |       | 3,239,331          |       | 4,465,388             |       |
| Accrued  liabilities           |       | 7,502,050          |       | 7,595,116             |       |
| Derivative  liability          |       | 1,064,800          |       | —                |       |
| Deferred  revenues             |       | 2,975,963          |       | 3,091,993             |       |
| Due  to related parties        |       | 300,407            |       | 56,826                |       |
| **Total current liabilities**  |       | 15,082,551         |       | 15,209,323            |       |
|                           |       |               |       |                  |       |
| **Working capital ratio**      |       | 1.80               |       | 2.19                  |       |

 

### **Comparative Summarized Cash Flows**

 
| ** **                                             | ** ** | **Three  months ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **$**                                   | ** ** | **$** | ** ** |
| ** **                                             | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Cash  flows provided by (used in) operating activities |       | (5,372,749                              | )          | 385,407 |   |
| Cash  flows used in investing activities               |       | (382,404                                | )          | (999,042 | ) |
| Cash  flows provided by financing activities           |       | —                                  |       | 600,000 |   |

 

### ***Operating Activities***

### ** **

Cash used in operating activities for the three monthsended March 31, 2009 was $5.4 million. Changes in net cash used in operating activities reflect the following:

 

·                                         net loss of $5.8 million for the threemonths ended; less

 

·                                         non-cash items adjusted to net loss inthe amount of $1.8 million, which relates to stock-based compensation anddepreciation and amortization; and

 

·                                         changes in working capital of $1.4million.

 

### ***Investing Activities***

### ** **

Cash used in investingactivities for the three months ended March 31, 2009 was $0.4million.  These funds were used topurchase fixed assets.

 

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### ***Financing Activities***

### ** **

Cash provided byfinancing activities was zero for the three months ended March 31, 2009.

 

In the near future, theCompany expects that it will continue to use its cash resources to fund workingcapital requirements.  The Companybelieves existing cash, cash equivalents and short-term investments will besufficient to satisfy normal working capital needs and capital expenditures forat least the next twelve months. However, the Company may sell additional equity securities to furtherenhance its liquidity position, and the sale of additional equity securitiescould result in dilution to its shareholders.

 

**Off-Balance Sheet Arrangements**

 

TheCompany did not have any off-balance sheet arrangements as of March 31,2009.

 

**Financial Instruments**

** **

 TheCompany’s financial instruments are comprised of cash and cash equivalents,accounts receivable, other receivables, taxes receivable, deposits, accountspayable, accrued liabilities, amounts due to/from related parties, and deferredrevenue.

 

***Fairvalue of financial instruments***

** **

Fair value of a financial instrument isdefined as the amount for which the instrument could be exchanged in a currenttransaction between willing parties.  Theestimated fair value of our financial instruments approximates their carryingvalue due to the short maturity term of these financial instruments.

 

***Risksassociated with financial instruments***

** **

**[i]Currency risk**

 

TheCompany’s activities that result in exposure to fluctuations in foreignexchange rates consist of its customer billings being in U.S. dollars and themajority of expenses being paid in foreign currencies.  The Company does not use derivative financialinstruments to reduce its currency risk.

 

**[ii]Interest rate risk**

 

TheCompany is exposed to interest rate risk on its invested cash and cashequivalents and its short-term investments. The interest rates on these instruments are based on the bank’s primerate and therefore are subject to change with the market.  The Company does not use derivative financialinstruments to reduce its interest rate risk.

 

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**[iii]Credit Risk**

 

TheCompany sells its services to a variety of customers under various paymentterms and therefore is exposed to credit risk. The Company has adopted policies and procedures designed to limit thisrisk.  The maximum exposure to creditrisk at the reporting date is the carrying value of receivables.  The Company establishes an allowance fordoubtful accounts that represents its estimate of incurred losses in respect ofaccounts receivable.  The Companybelieves that the concentration of credit risk is limited due to the Company’sprimary source of revenues to date being the sale of STBs, for which 50% ofmonies are received in advance of shipment.

 

**RelatedParty Transactions**

 

***Certain Relationships and Related Transactions***

 

The Company has entered intotransactions and agreements in the normal course of operations with relatedparties.  Significant related partytransactions are as follows:

 

*TransVideo*

 

Set top box purchases amountedto $395,280 and $633,000 and transcoder licensing fees amounted to $28,000 and$15,000 for the three months ended March 31, 2009 and 2008, respectively.Included in cost of sales is the amount incurred from TransVideo of $369,160and $677,700 for the three months ended March 31, 2009 and 2008,respectively.

 

*Patstar*

 

Rent expense paid by Patstar of$891 is included as a recovery in selling, general and administrative expensefor the three months ended March 31, 2009.

 

*KyLinTV*

 

KyLinTV is an IPTV serviceprovider that is controlled by Chairman of the Board of Directors of theCompany.  The Company also providesKyLinTV with administrative and general corporate support.  On June 1, 2008, the Company enteredinto an agreement with KyLinTV to build and deliver the setup and back officeoperation of an IPTV service.

 

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The Company recognizedrevenue from related parties for the periods ended March 31 as follows:

 
| ** **          | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|---------------------|------------|--------------------|------------|--------------------|------------|
| ** **          | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **          | ** ** | **$**              | ** ** | **$**              | ** ** |
| New  York Islanders |       | 60,000             |       | 60,000             |       |
| Renaissance         |       | 30,000             |       | 30,000             |       |
| Smile  Train        |       | —             |       | 39,000             |       |
| Hawaii              |       | 16,471             |       | 9,393              |       |
| KyLinTV             |       | 401,485            |       | —             |       |
|                |       | 507,956            |       | 138,393            |       |

 

TheCompany also provides KyLinTV with administrative and general corporatesupport.  The amounts paid for these servicesprovided by theCompany for the three months ended March 31, 2009 and 2008 were $150,615****and $386,148, respectively.  Additionally, during the three months ended March 31, 2009, theCompany purchased STBs from KyLinTV in the amount of $54,090.

 

As at March 31, 2009and December 31, 2008, the amounts due from (to) related parties are asfollows:

 
| ** **          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------|------------|--------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **          | ** ** | **$**              | ** ** | **$**                 | ** ** |
| New  York Islanders |       | 61,921             |       | 29,189                |       |
| Renaissance         |       | 71                 |       | (1,146                | )          |
| Smile Train         |       | 27,000             |       | 27,000                |       |
| Hawaii              |       | 1,070              |       | 17,527                |       |
| TransVideo          |       | (300,407           | )          | (55,680               | )          |
| KyLinTV             |       | 534,726            |       | 250,343               |       |
| Patstar             |       | 891                |       | —                |       |
|                |       | 325,272            |       | 267,233               |       |

 

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***Investmentin affiliate — KyLinTV***

** **

The results of operationsand financial position of the Company’s equity basis investment in KyLinTV aresummarized below for the three months ended March 31:

 
| ** **                               | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                               | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                               | ** ** | **$**              | ** ** | **$**              | ** ** |
| Condensed  income statement information: |       |               |       |               |       |
| Net  sales                               |       | 1,955,083          |       | 1,272,710          |       |
| Net  loss                                |       | (1,480,781         | )          | (1,910,781         | )          |

 
| ** **                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                           | ** ** | **$**              | ** ** | **$**                 | ** ** |
| Condensed balance sheet information: |       |               |       |                  |       |
| Current assets                       |       | 1,261,557          |       | 927,427               |       |
| Non-current assets                   |       | 2,042,614          |       | 2,411,319             |       |
| Total assets                         |       | 3,304,171          |       | 3,338,746             |       |
| Current liabilities                  |       | 11,510,116         |       | 10,063,909            |       |
| Non-current liabilities              |       | —             |       | —                |       |
| Equity  (deficiency)                 |       | (18,205,945        | )          | (6,725,163            | )          |
| Total  liabilities and equity        |       | 3,304,171          |       | 3,338,746             |       |

 

On January 1, 2008, theCompany’s equity interest in KyLinTV was 17.1%. As previously discussed, the Company also provides KyLinTV withadministrative and general corporate support. Management has determined that as a result of the 17.1% equity interestcombined with the services that the Company provides KyLinTV, the Companycontinues to have significant influence on the operating activities of KyLinTV;therefore the Company continues to account for KyLinTV using the equity methodof accounting for investment.

 

 The Company’s proportionate share of the equity loss from KyLinTV hasbeen accounted for as a charge on the Company’s consolidated statements ofoperations and comprehensive loss.  Dueto KyLinTV’s accumulated losses, the investment has been reduced to zero.  No further charges will be recorded as theCompany has no obligation to fund these losses.

 

**Recently Issued Accounting Pronouncements**

 

In December 2007,the FASB issued FAS 141(R), which replaces FAS 141.  FAS 141(R) requires the acquiring entityin a business combination to recognize all assets acquired and liabilitiesassumed in the transaction, establishes the acquisition-date fair value as themeasurement objective for all assets acquired and liabilities assumed andrequires the acquirer to disclose certain information related to the nature andfinancial effect of the business combination. FAS 141(R) also establishesprinciples and requirements for how an acquirer recognizes any noncontrollinginterest in the acquiree and the goodwill acquired in a business combination.FAS 141(R) was effective on a prospective basis for business combinationsfor which the acquisition date is on or after January 1, 2009. For anybusiness combination that takes place subsequent to January 1, 2009, FAS141(R) may have a material impact on our financial statements.

 

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Effective January 1,2009, the Company adopted EITF No. 07-5, “Determining Whether anInstrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”.  One of the conclusions reached under EITF07-05 was that an equity-linked financial instrument would not be consideredindexed to the entity’s own stock if the strike price is denominated in acurrency other than the issuer’s functional currency. The conclusion reachedunder EITF 07-05 clarified the accounting treatment for these and certain otherfinancial instruments as it related to FASB Statement No. 133, “Accountingfor Derivative Instruments and Hedging Activities” (“SFAS 133”). EITF 07-5specifies that a contract that would otherwise meet the definition of aderivative under SFAS 133, would not be treated as a derivative if it met thefollowing conditions: (a) indexed to its own stock and (b) classifiedin stockholders’ equity in its statement of financial position.

 

As a result, the Company’soutstanding Warrants denominated in Canadian dollars detailed below are notconsidered to be indexed to its own stock and therefore have been treated asderivative financial instruments and recorded at their fair value as aliability.  All other outstandingconvertible instruments meet this definition and are included in shareholders’equity.

 

·                  5,500,000 Series A Warrantsexercisable at Cdn$1.25 and expire on October 20, 2010.

·                  5,500,000 Series B Warrantsexercisable at Cdn$1.50 and expire on October 20, 2010.

 

The Warrants have beenrecorded at their relative fair values at issuance and will continue to be recordedat fair value at each subsequent balance sheet date. Any change in valuebetween reporting periods will be recorded as other income (expense).  The Warrants will continue to be reported asa liability until such time as they are exercised or expire. The fair value ofthe Warrants is estimated using the Black-Scholes-Merton option-pricing model.On January 1, 2009, the grant date fair value of the Warrants of$2,464,000 was reallocated from additional paid in capital and a derivativeliability was recorded in the amount of $587,950 being the fair value of thewarrants on January 1, 2009 with the adjustment to opening accumulateddeficit of $1,876,050.  As of March 31,2009, the fair value of the Warrants was determined to be $1,064,800;accordingly, we recorded $476,850 in other expense for the three monthsended March 31, 2009 related to the change in the fair value of theWarrants.

 

In accordance with FASB No. 154,“Accounting Changes and Error Corrections,” the Company has recorded thecumulative effect of the change in accounting principle on January 1, 2009of $1,876,050 to the opening balance of accumulated deficit as detailed above.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASBStatement No. 133,” or FAS 161 which required enhanceddisclosures about an entity’s derivative and hedging activities and wasintended to improve the transparency of financial reporting.  SFAS No. 161 applies to all derivativeinstruments, including bifurcated derivative instruments and related hedgingitems accounted for under SFAS No. 133 and its related interpretations.SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133with the intent to provide users of financial statements with an enhancedunderstanding of: (i) how and why an entity uses derivative instruments, (ii) howderivative instruments and related hedged items are accounted for under SFAS No. 133and its related interpretations and (iii) how derivative instruments andrelated hedged items affect an entity’s financial position, 

 

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financialperformance and cash flows. The provisions of this standard do not requiredisclosures for earlier periods presented for comparative purposes at initialadoption. SFAS No. 161 was effective for fiscal years and interim periodsbeginning after November 15, 2008. The Company adopted this new standardeffective January 1, 2009. The adoption of this new standard required thedisclosure related to derivative and hedging activities in the Company’sconsolidated financial statements.  The requireddisclosures are included in Note 11 to the consolidated financial statements.

 

In February 2008, the CICA AccountingStandards Board confirmed that the changeover to IFRS from Canadian generallyaccepted accounting principles will be required for publicly accountableenterprises, effective for the interim and annual financial statements relatingto fiscal years beginning on or after January 1, 2011.  As the Company will be a “reporting company”under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),upon the effectiveness of the Registration Statement on Form 10, itexpects to continue to use U.S. GAAP until the IFRS implementation date in theUnited States — currently estimated as no sooner than 2014.

 

**Item 3.**    **Quantitative and Qualitative Disclosures About MarketRisk**

 

Not required.

 

**Item 4.**    **Controls and Procedures**

 

The Company’s principalexecutive officer and principal financial officer, with the assistance of othermembers of the Company’s management, have evaluated the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (assuch term is defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act) as of the end of the period covered by this quarterlyreport.  Based upon such evaluation, theCompany’s principal executive officer and principal financial officer haveconcluded that the Company’s disclosure controls and procedures are effectiveas of the end of the period covered by this quarterly report.

 

During our most recentfiscal quarter, there has not occurred any change in our internal control overfinancial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 6.  Exhibits.**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                   |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(i)           | *          | Articles of Incorporation,  as amended                                                                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                              |
| 31.1             | *          | Certification of principal  executive officer of the Company, pursuant to Securities Exchange Act  Rule 13a-14(a)                                                                                                                            |
|             |       |                                                                                                                                                                                                                                              |
| 31.2             | *          | Certification of principal  financial officer of the Company, pursuant to Securities Exchange Act  Rule 13a-14(a)                                                                                                                            |
|             |       |                                                                                                                                                                                                                                              |
| 32.1             | *          | Certifications pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The  Sarbanes-Oxley Act of 2002, signed by the principal executive officer of the  Company and the principal financial officer of the Company |

 

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*Filed herewith

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed in its behalf by the undersigned thereuntoduly authorized.

 
|                           |                                 |
|--------------------------------|--------------------------------------|
|                           | **NEULION,  INC.**                   |
|                           |                                 |
|                           |                                 |
| Date:  July 21, 2009 | /s/ Nancy Li                    |
|                           | Name:  Nancy Li                 |
|                           | Title:  Chief Executive Officer |
|                           |                                 |
|                           |                                 |
| Date:  July 21, 2009 | /s/ Arthur J.  McCarthy         |
|                           | Name:  Arthur J. McCarthy       |
|                           | Title:  Chief Financial Officer |

 

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