TMCnet News
TELVUE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. All forward-looking statements involve risks and uncertainty, including, without limitation, TelVue's ability to obtain sufficient cash to continue its operations, TelVue's ability to continue its growth strategy, increases in costs of labor and employee benefits, general market conditions, competition and similar matters discussed in TelVue's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in this Quarterly Report on Form 10-Q. These forward-looking statements may include declarations regarding the Company's belief or current expectations of management, such as statements including the words "budgeted," "anticipate," "project," "estimate," "expect," "may," "believe," "potential," "approximately" and similar statements are intended to be among the statements that are forward-looking statements. Because such statements reflect the reality of risk and uncertainty that is inherent in the Company's business, actual results may differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of the date this report was filed with the Securities and Exchange Commission. Readers are advised that the Company undertakes no obligation to release publicly any revisions to the forward-looking statements to reflect events or circumstances after the date hereof or to reflect unanticipated events or developments. To the extent that the information presented in this Quarterly Report on Form 10-Q discusses financial projections, information or expectations about the Company's products or markets, or otherwise makes statements about future events, such statements are forward-looking. The Company is making these forward-looking statements in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such information should not be regarded as a representation by TelVue or any other person that the Company's objectives and plans will be achieved. OVERVIEW OF COMPANY TelVue is a broadcast technology company that specializes in playback, automation, workflow and multi-screen delivery solutions for public, education and government ("PEG") television stations; cable, telephone company ("Telco") and satellite television providers; K-12 and higher education institutions; professional broadcasters and media companies. TelVue delivers local programming to over thirty million homes nationwide; powers over 1,500 PEG and campus television channels; provides leased access and local origination solutions to over seventy five Multi System Operators ("MSOs") including eight of the top ten, and the nation's largest telephone company; and delivers on-campus local channels to over one million students on college campuses nationwide. TelVue was incorporated as a Delaware corporation on November 26, 1986. Until December 30, 1988, TelVue was a wholly owned subsidiary of Science Dynamics Corporation ("Science"). On that date, TelVue's shares of common stock were distributed to Science's shareholders of record as of December 30, 1988, on the basis of three shares of TelVue's common stock for each share of Science's common stock then outstanding. - 11 - -------------------------------------------------------------------------------- TelVue operates two business segments. The first segment, TelVue Products and Services ("TPS"), includes equipment such as the TelVue Princeton® broadcast and storage servers, and encoding and transcoding workstations, the TelVue HyperCaster™ Internet Protocol (IP) broadcast server, and services such as WEBUS®, TelVue CloudCast™ and TelVue Connect™. TelVue Princeton® consists of high performance digital video systems, servers, and software that support capture, storage, manipulation and play-out of digital media in multiple popular formats. The TelVue HyperCaster™ server models for cable, Telco and professional broadcasters supports streaming cable standard (MPEG-2 Transport) and advanced video codecs (AVC/H.264) used increasingly in the industry for bandwidth savings for both standard and high-definition channels as well as new technologies such as 3D-TV. TelVue Turbo™ Workflow Accelerator is a scalable workflow application that streamlines publishing videos to TelVue CloudCast™ from any TelVue broadcast server. CampusOneHD™ provides an all-in-one video solution for campuses including local, high-definition television channels, digital signage and life safety, and streaming and Video-on-Demand. WEBUS® is a broadcast digital signage system for displaying a fully automated TV station-like display on a cable system access channel using computer-based digital technology. TelVue CloudCast™ is a live streaming and Video-on-Demand service for integrating video on the Internet. Additionally, TelVue CloudCast™ allows broadcasters to deliver 24x7 linear channels including live programming via both multi-screen Internet streaming and traditional broadcast delivery without the need to own or operate a facility with traditional broadcast equipment. TelVue Connect™ is a cloud-based, multi-user contribution, transcoding, scheduling and distribution application that simplifies broadcast channel management. TelVue Connect™ allows operators to avoid the cost and time investment in dedicated facilities and equipment for on-premise media drop-off and encoding and outsources the entire process to the cloud. TelVue is currently marketing its products and services to cable and Telco MSOs, municipal governments, K-12 school districts, higher education institutions, and other broadcasters as a means of lowering cost, simplifying operations, and improving the quality of their video channels. TPS products include: TelVue Princeton® Digital Broadcaster B100 TelVue Princeton® Digital Broadcaster B3000 TelVue Princeton® Digital Video Archive Server S3000F TelVue Princeton® Encoding Workstation C500W TelVue Princeton® Encoding and Transcoding Workstation T7500E TelVue HyperCaster™ TelVue Turbo™ Workflow Accelerator CampusOneHD™ High-Definition Broadcast Platform TelVue ProVue™ Professional HD IP Broadcast Decoder TPS services include: WEBUS® Automated broadcast digital signage display on TV Channel WEBUS Inside™ WEBUS® integrated within TelVue Princeton® Servers WEBLINX® Automated WEBUS® message display on websitesVideoActives™ Real time, dynamic video content for channels TelVue CloudCast™ Live, linear and on-demand Internet streaming and hosted broadcasting TelVue Connect™ Cloud video service for multi-user content contribution and scheduling TelVue's second and legacy business segment is the marketing and service company, which sells automatic number identification ("ANI") telecommunication services to the cable television industry. The ANI service permits cable and satellite television companies to process special ordering services without the attendant, high manpower requirements, or extensive physical plant and facilities that are otherwise required. TelVue provides the ANI service through the equipment it purchases. TelVue's equipment for providing the ANI service nationwide is located at TelVue's National Data Center in Philadelphia, Pennsylvania. TelVue serves cable television systems across the United States via trunk lines and data circuits that it currently leases from Qwest. TelVue believes it receives a favorable trunk usage rate from Qwest. TelVue expects continued loss of its subscriber base for the ANI service as digital, interactive two-way services are offered by cable, satellite, and broadband service providers for Video-on-Demand and as other video streaming options become more prevalent in the industry. In September 2012, TelVue completed a reduction in staff that it estimates will eliminate in excess of $500,000 in annual operating costs. TelVue will continue to evaluate additional expense reductions and look for sources of capital to continue to fund its operations. - 12 - --------------------------------------------------------------------------------NEW PRODUCTS AND SERVICES In the second quarter of 2012, TelVue launched the TelVue ProVue™, the first professional native Internet Protocol ("IP") video decoder that is designed to seamlessly switch between changing video formats, including SD and HD, MPEG-2 and H.264 at resolutions up to 1080p. TelVue ProVue™ is suited for a variety of applications including IP broadcast video decoding, HD/SD and digital/analog simulcast, multicast, point-to-point and full integration with the TelVue HyperCaster™ broadcast server. The Company expects the TelVue ProVue™ to help capture a greater portion of the HD broadcast market share as hyperlocal and community broadcasters begin to upgrade their infrastructures to HD broadcast. Also in the second quarter of 2012, TelVue launched a new tool to allow cable and Telco operators to broaden the range of their content by aggregating programming via the Internet for video-on-demand ("VOD") services. The TelVue Connect™ has been extended to support descriptive information about programming, known as metadata, in the industry-specific CableLabs® Asset Distribution Interface standard. This metadata can be captured and passed to the operator's VOD system to populate the on-demand program guide. The new metadata feature allows cable and Telco operators to easily aggregate content from multiple contributors for their on-demand offerings. It also gives contributors a browser-based "drag-and-drop" solution for program submission from anywhere. TelVue Connect™ automatically converts the submitted programming to the format required by cable and Telco VOD services, supporting both traditional and IP-based systems. This new extension of TelVue Connect™ allows TelVue to expand sales to cable and Telco operators beyond solutions for broadcast channel origination to include VOD workflow. Hyperlocal content such as sports continues to gain in popularity and can be an important differentiator for operator's VOD offerings. TelVue also launched full support of automated Electronic Program Guide ("EPG") data publishing and transfers between the TelVue Princeton® and TelVue HyperCaster™ lines of digital broadcast servers and the Minerva iTVFusion 5.3 TVoIP platform, which is the leading software solutions for the delivery of television services to IP connected devices. The automation of EPG data publishing and transfer gives local origination and leased access channel timely and updated entries in the program guide, making it easier to promote local programming making it more accessible to DVR recording. The TelVue automated EPG data publishing and transfer feature eliminates the need to enter program guide data manually. Operators can also import the EPG data directly to the Minerva platform without incurring any additional fees, such as custom data charges, from their primary EPG data provider. In the third quarter of 2012, TelVue launched the second generation of its popular TelVue HyperCaster™ B100 IP Broadcast Server. The second generation HyperCaster B100 enhances the usability and reliability of the B100 line of broadcast servers, which have already proven to be easy to use, reliable, and affordable solutions for the broadcast industry. New features include a 32 GB Solid State Drive for the operating system for speed and reliability, twice as much RAM, a 4-core central processing unit for faster processing, and a front panel display for easier configuration. The new platform also supports twice as much broadcast throughput for higher quality or more channel capacity. Also in the third quarter of 2012, TelVue launched the version 4 of its TelVue CloudCast™ online video player with new features including social media tools to post videos to the popular Facebook and Twitter services, and improved analytics to provide clients with a better understanding of who's watching what to maximize viewership, and return on investment. TelVue also expanded its TelVue CloudCast™ hosted broadcasting capability to support the capture of live streaming events to a file for archive and Video-on-Demand playback. This feature is especially important for live sporting events. CRITICAL ACCOUNTING POLICIES In presenting its financial statements in conformity with accounting principles generally accepted in the United States, TelVue is required to make certain estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions the Company is required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of TelVue's control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it will likely result in a material adverse impact to TelVue's results of operations, financial position and liquidity. TelVue believes that the estimates and assumptions used when preparing its financial statements were the most appropriate at that time. Presented below are those accounting policies that TelVue believes require subjective and complex judgments that could potentially affect reported results. - 13 - --------------------------------------------------------------------------------Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. An area that requires estimates and assumptions is the valuation allowances on deferred tax assets. Revenue Recognition In accordance with accounting principles generally accepted in the United States, TelVue recognizes revenues related to TelVue Princeton®, TelVue HyperCaster™, TelVue ProVue™ and other equipment upon shipment of the equipment to its customers. Revenues related to its WEBUS®, TelVue CloudCast™ and TelVue Connect™ services are recognized on a monthly basis, being amortized over the term of the agreement. TelVue also sells annual product maintenance plans covering equipment support and application upgrades. Revenues for the product maintenance plans are deferred and are recognized on a straight-line basis in subsequent periods. Revenue related to TelVue's ANI service is recognized in the month the service is provided. Stock-Based Compensation TelVue accounts for stock-based compensation in accordance with the fair value recognition method. The Company uses a Black-Scholes option-pricing valuation model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them ("expected term"), the estimated volatility of TelVue's common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation. The above listing is not intended to be a comprehensive list of all TelVue's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in their application. See TelVue's audited financial statements and notes thereto included in its Annual Report on Form 10-K which contains accounting policies and other disclosures required by accounting principles generally accepted in the United States. RESULTS OF OPERATIONS: The following discussion deals with the increase in operating loss for the three and nine months ended September 30, 2012, when compared to the same period of 2011, and the reasons for the changes. TelVue further discusses the continued loss of its subscriber base for the ANI service, when comparing the three and nine months ended September 30, 2012 to the three and nine months ended September 30, 2011. TelVue also discusses the changes in TPS revenue and expenses. - 14 - -------------------------------------------------------------------------------- Detailed financial information for the three months ended September 30, 2012 and 2011 is as follows: Three Months Ended September 30, September 30, $ Change % Change 2012 2011 Fav/(Unfav) Fav/(Unfav) Revenues TelVue products and services $ 1,127,507 $ 920,501 $ 207,006 22.5 ANI services 105,842 168,365 (62,523 ) (37.1 ) Cost of Revenues TelVue products and services 545,625 468,177 (77,448 ) (16.5 ) ANI services 23,618 27,394 3,776 13.8 Operating Expenses Selling and marketing TelVue products and services 483,977 265,706 (218,271 ) (82.1 ) ANI services - - - - General and administrative TelVue products and services 856,400 787,454 (68,946 ) (8.8 ) ANI services 14,243 25,376 11,133 43.9 Depreciation TelVue products and services 64,644 61,266 (3,378 ) (5.5 ) ANI services - 3,866 3,866 100.0 Operating Loss (755,158 ) (550,373 ) (204,785 ) (37.2 ) Other Income (Expense) 875 (256,637 ) 257,512 100.3 Net Loss $ (754,283 ) $ (807,010 ) $ 52,727 6.5 Detailed financial information for the nine months ended September 30, 2012 and 2011 is as follows: Nine Months Ended September 30, September 30, $ Change % Change 2012 2011 Fav/(Unfav) Fav/(Unfav) Revenues TelVue products and services $ 2,939,296 $ 2,798,826 $ 140,470 5.0 ANI services 347,992 522,788 (174,796 ) (33.4 ) Cost of Revenues TelVue products and services 1,483,942 1,551,887 67,945 4.4 ANI services 74,966 88,616 13,650 15.4 Operating Expenses Selling and marketing TelVue products and services 1,362,656 818,119 (544,537 ) (66.6 ) ANI services - - - - General and administrative TelVue products and services 3,202,734 2,257,032 (945,702 ) (41.9 ) ANI services 65,810 96,888 31,078 32.1 Depreciation TelVue products and services 178,957 190,077 11,120 5.9 ANI services 9,073 11,149 2,076 18.6 Operating Loss (3,090,850 ) (1,692,154 ) (1,398,696 ) (82.7 ) Other Income (Expense) (248,144 ) (737,234 ) 489,090 66.3 Net Loss $ (3,338,994 ) $ (2,429,388 ) $ (909,606 ) (37.4 ) - 15 - --------------------------------------------------------------------------------Additional financial information by reporting segment for the three and nine months ended September 30, 2012 and 2011 is as follows: TelVue products and services ANI services Three months ended September 30, 2012 2011 2012 2011 Operating income/(loss) $ (823,139 ) $ (662,102 ) $ 67,981 $ 111,729 Other income/(expense) $ 875 $ (222,770 ) $ - $ (33,867 ) Net income/(loss) $ (822,264 ) $ (884,872 ) $ 67,981 $ 77,862 Capital expenditures $ 26,105 $ 24,727 $ - $ - TelVue products and services ANI services Nine months ended September 30, 2012 2011 2012 2011 Operating income/(loss) $ (3,288,993 ) $ (2,018,289 ) $ 198,143 $ 326,135 Other income/(expense) $ (228,222 ) $ (639,918 ) $ (19,922 ) $ (97,316 ) Net income/(loss) $ (3,517,215 ) $ (2,658,207 ) $ 178,221 $ 228,819 Capital expenditures $ 261,225 $ 106,697 $ - $ - Revenues TelVue's 2012 third quarter revenues increased 13.3% from $1,088,866 in the same period in 2011 to $1,233,349. The increase was driven by growth in the TPS segment with a partial offset from continued contraction of the legacy ANI business segment. For the nine months ended September 30, 2012, TelVue revenues were down 1.0% from $3,321,614 to $3,287,288 reflecting a weaker first quarter overall in 2012. TPS segment revenue in the third quarter of 2012 grew by 22.5% from $920,501 to $1,127,507 due to growth in the cable/Telco and healthcare verticals, and expansion of cloud-based service sales. TPS revenues for the nine months ended September 30, 2012 rose 5.0% to $2,939,296 from $2,798,826 in the same period in 2011. TPS revenues growth was also due in part to a) 80.0% and 89.2% increases in revenue from sales of TelVue CloudCast™ hosted broadcast services for the three and nine month periods ended September 30, 2012, as Internet video and broadband TV continue to gain in popularity; and b) 8.2% and 16.3% increase in three and twelve month maintenance service revenue, as TelVue's equipment footprint continues to grow. Legacy ANI segment third quarter revenue contracted 37.1% from $168,365 in 2011 to $105,842 in 2012 due to continued migration of the customer base to alternate technologies. For the nine months ended September 30, 2012, ANI segment revenue decreased 33.4% from $522,788 in the same period in 2011 to $347,992, for reasons cited above. There were expected decreases of $1,045 and $2,568 in pay-per-view revenue for the three and nine months ended September 30, 2012, respectively, when compared to the same period of 2011, and decreases of $7,040 and $8,514 in pay-per-view plus revenue for the three and nine months ended September 30, 2012, respectively, when compared to the three and nine months ended September 30, 2011. These decreases were mainly due to a reduction in the number of subscribers served during these periods when compared to 2011 (as discussed below). Additionally, there were decreases in feature revenue of $23,137 and $49,742, decreases of $16,920 and $33,205 in data link revenue and decreases of $4,889 and $13,749 in program number revenue for the three and nine months ended September 30, 2012, respectively, when compared to the three and nine months ended September 30, 2011, primarily due to a decline in the number of ANI subscribers. As of September 30, 2012, the ANI service was serving approximately 700,000 full-time cable subscribers compared to approximately one million full-time cable subscribers as of September 30, 2011. During the nine months ended September 30, 2012, there were 108,000 ANI subscriber cancellations and no new additions. The subscriber decline is the result of cable operators moving to two-way digital services which limit the number of analog pay-per-view channels available for content and allow the cable operator's customers to order digital pay-per-view or video on demand via the set top box, eliminating the need for the TelVue ANI service. Management believes the long-term effects of deployment of digital two-way service will continue to negatively impact the TelVue ANI service. As a result of the cable and satellite subscriber cancellations noted above, TelVue expects to continue to experience a decrease in its revenue and operating income indefinitely for its ANI segment. While consolidated revenues in the first half of 2012 fell, sales orders for the nine months ended September 30, 2012 for the Company's focal products (TPS broadcast servers and hosted services) rose by 23.5 % over the comparable period in 2011. Sales orders included a 33% increase in TelVue Care maintenance contracts. Sales orders during the nine months ended September 30, 2012 also included a $278,000 two-year contract for TelVue CloudCast™ hosted broadcasting, for which revenue will be recognized in - 16 - --------------------------------------------------------------------------------equal monthly amounts over the contract term as service is provided by the Company. It is anticipated that approximately $34,500 of this TelVue CloudCast™ contract will be recognized during the fourth quarter of 2012, with approximately $139,000 recognized in 2013 and approximately $86,000 in 2014. TelVue expects to continue to expand in the cable, Telco, and professional broadcast markets and also believes the Company will resume growth in the PEG and education markets as the economy continues to recover. Additionally, the Company expects to begin to develop direct sales to Media companies as the Company continues to invest in development and marketing of its new cloud video services. In general, new product and service introductions have been concentrated in the area cloud services - for which the company recognizes revenue over contract periods which range from 12 to 24 months. In general cloud services entail monthly or quarterly billing to and payment by customers. If cloud services become an increasing portion of the Company's business, as expected we anticipate a decline in revenue and cash flow volatility as compared with equipment sales. Operating Expenses and Income Overall TelVue's third quarter operating loss increased from $550,373 in 2011 to $755,158 in 2012. This increase was driven by i) an increase both in research & development and in marketing and sales spending in the TPS segment, - in particular associated with TelVue CloudCast™ services; and ii) continued contraction in ANI operating income. For the nine months through September 30, 2012, the Company's operating loss increased to $3,090,850 from $1,692,154 for the same period in 2011. The TPS segment had operating losses of $823,139 and $3,288,993 for the three and nine months ended September 30, 2012, compared to operating losses of $662,102 and $2,018,289 for the three and nine months ended September 30, 2011, respectively, primarily due to an increase in sales and marketing and research and development expenses (reflected in a higher G&A line), offset by an increase in TPS segment revenue and a decrease in cost of sales expenses. The ANI segment had operating income of $67,981 and $198,143 for the three and nine months ended September 30, 2012, compared to $111,729 and $326,135 for the three and nine months ended September 30, 2011. The decrease in operating income for the ANI segment was mainly a result of an anticipated decrease in ANI revenue, offset by a change in the allocation of expenses whereby, based on the segment's percentage of total forecasted revenues for the year, 8% of certain expenses were allocated to the ANI segment for the three and nine months ended September 30, 2012, compared to an allocation percentage of 13% for the same periods of 2011. In early September 2012, TelVue implemented a new organizational structure which enabled it to reduce operating expenses. TelVue estimates that the reduction in operating expenses, which are not expected to compromise performance or capabilities, will exceed $500,000 per year. Cost of Revenues Total cost of revenues increased by $73,672 for the three months ended September 30, 2012, when compared to the three months ended September 30, 2011. Total cost of revenues decreased by $81,595 for the nine months ended September 30, 2012, when compared to the nine months ended September 30, 2011. Cost of revenues for the TPS segment increased $77,448 for the three months ended September 30, 2012, when compared to the three months ended September 30, 2011, primarily as a result of higher sales of TPS equipment, offset by lower consulting expenses. Cost of revenues for the TPS segment decreased $67,945 for the nine months ended September 30, 2012, when compared to the nine months ended September 30, 2011, primarily as a lower consulting expenses partially offset by higher expenses related to Internet bandwidth purchased for use with TelVue's cloud-based services. ANI cost of revenues decreased $3,776 and $13,650 for the three and nine months ended September 30, 2012, respectively, when compared to the same period of 2011, primarily due to a favorable variance in compensation expense, in addition to savings in telecommunications expenses when comparing these periods. This decrease is not proportionate with the decrease in ANI revenue, as there are fixed expenses, whereas certain revenue components are based on usage. Selling and Marketing Expenses Total selling and marketing expenses, which are entirely attributed to the TPS segment, increased $218,271 and $544,537 for the three and nine months ended September 30, 2012, respectively, when compared to the three and nine months ended September 30, 2011. This increase was primarily the result of higher compensation expenses related to an increase in the sales and marketing staffing by four employees, when comparing the three and nine months ended September 30, 2012 to the three and nine months ended September 30, 2011. Additionally, the Company incurred expenses of approximately $35,000 related to an outside public relations company contracted during the first 6 months of 2012 (and impacting expenses for the first nine month period through September 30) to assist in the development of the cable and Telco markets, while there was no comparable expenditure during the same period in 2011. - 17 - --------------------------------------------------------------------------------General and Administrative Expenses Total general and administrative expenses increased by $57,813 and $914,624 for the three and nine months ended September 30, 2012, respectively, when compared to the three and nine months ended September 30, 2011. TPS general and administrative expenses increased $68,946 and $945,702 for the three and nine months ended September 30, 2012, respectively, when compared to the three and nine months ended September 30, 2011. This increase was related to additional spending on research and development activities for TelVue's emerging cloud-based video services including contracting the services of outside firms to accelerate feature development. The bulk of the research and development expenditures (which were included in general and administrative) were under a contract with a development firm that has now been terminated because we have completed our goals under the contract and developed an in-house capability with full-time employees at significantly lower expense. We incurred executive search fees of approximately $79,000 related to the hiring of seven new engineering employees during the nine months ended September 30, 2012, done in anticipation of a planned phasing out of the development contract. There was also an increase in legal and accounting fees of approximately $50,000 during the nine months ended September 30 2012, related to the debt conversion transaction. ANI general and administrative expenses decreased $11,133 and $31,078 for the three and nine months ended September 30, 2012, respectively, when compared to the three and nine months ended September 30, 2011, primarily as a result of a change in allocation percentages, where a lower percentage of expenses are being allocated to the ANI segment. Depreciation Expense TelVue purchased $261,225 of equipment during the nine months ended September 30, 2012 compared to $106,697 purchased during the nine months ended September 30, 2011. All of the equipment purchased during the nine months ended September 30, 2012 and 2011 was for equipment related to the TPS segment and primarily for infrastructure for TelVue Connect™ and TelVue CloudCast™ cloud video services. Depreciation expense decreased $488 and $13,196 for the three and nine months ended September 30, 2012, respectively, when compared to the three and nine months ended September 30, 2011, as a result of prior capital purchases reaching the end of their depreciable lives. Other Income (Expense) Total other expense decreased by $257,512 and $489,090 for the three and nine months ended September 30, 2012, when compared to the three and nine months ended September 30, 2011. This decrease was attributed to no longer accruing interest expense related to the balance on the outstanding lines of credit notes, which are discussed more extensively in Liquidity and Capital Resources, in addition to increased interest income related to a higher cash balance as of September 30, 2012, when compared to the balance as of September 30, 2011. Income Taxes No provision for federal and state income taxes was required for the three and nine months ended September 30, 2012 and 2011 due to the Company's operating losses and increased deferred tax asset valuation allowance. The valuation allowances were recorded due to the uncertainty as to whether future net income would be generated that would utilize TelVue's net operating loss carry-forward. TelVue's federal net operating loss carry-forward was approximately $24,400,000 on a tax-reporting basis as of September 30, 2012 (see Note 4 of TelVue's accompanying condensed financial statements). Net Loss TelVue had net losses of $754,283 and $3,338,994 for the three and nine months ended September 30, 2012, respectively, compared to net losses of $807,010 and $2,429,388 for the three and nine months ended September 30, 2011. The increase in net loss was primarily due to higher development expenses and revenue decreases, partially offset by lower interest expense, during the three and nine months ended September 30, 2012 when compared to the three and nine months ended September 30, 2011. - 18 - --------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES: Going Concern The condensed financial statements presented in this Quarterly Report on Form 10-Q have been prepared on a "going concern" basis, which assumes that TelVue will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations. As shown in the accompanying condensed financial statements, the Company incurred a net loss of $3,338,994 during the nine months ended September 30, 2012, and as of that date, the Company's total stockholders' deficit was $3,023,520. The Company borrowed an additional $5,000,000 against its line of credit in January and February 2012, which was converted to convertible preferred stock in March 2012, when all other borrowings and accrued interest due to the majority stockholder were also converted to common stock (as disclosed in Note 5), leaving the Company with no debt and $1,413,060 of cash and cash equivalents at September 30, 2012. TelVue continues to execute its modified business plan to focus on equipment and services sales to the cable, telephone company ("Telco"), professional, community and Internet broadcast markets, and believes it has sufficient cash to fund operating and capital requirements for at least one year. The Company has made significant product development investment from the fourth quarter of 2011 through the third quarter of 2012 in new cloud video services including TelVue Connect™ and TelVue CloudCast™. While initial releases of these new services were previously available and sold to clients on a limited basis, full commercial availability launched during the second quarter of 2012. As such, the Company has only begun to recognize revenue from these new services, and expects cloud video service revenue to become an important growth area for the Company in the coming year and beyond. Additionally, the launch of the TelVue ProVue™ Professional HD IP Broadcast Decoder in the second quarter of 2012 combined with the TelVue HyperCaster™ IP broadcast server provides broadcasters a solution for High-Definition workflows that can also leverage modern IP networks. The Company believes there is an increasing number of both High-Definition and IP-centric broadcast opportunities in our core markets, and expects to see further growth from these opportunities. Funding of Operations Since November 1989, TelVue has funded its expansion and operating deficit from the proceeds of the sale of shares of TelVue's common stock and preferred stock to Mr. Lenfest, TelVue's majority stockholder, and from loans from Mr. Lenfest. As of December 31, 2011, TelVue had entered into nine Lines of Credit Notes (the "Notes") with Mr. Lenfest in the aggregate principal amount of $25,400,000. In addition to these borrowings, during January 1995, Mr. Lenfest purchased from Science Dynamics Corporation, TelVue's non-interest bearing note in the amount of $541,000 (the "Science Note"). The most recent of the Notes was entered into on December 22, 2011 (the "2012 Note"). In January and February 2012, the Company borrowed the maximum $5,000,000 under the 2012 Note. On January 11, 2012, TelVue executed a Debt Conversion Agreement with Mr. Lenfest. At a Special Meeting of Stockholders on March 12, 2012, the stockholders of the Company authorized and approved the Debt Conversion Agreement and the transactions contemplated thereby ("the Conversion Transactions"). The Company consummated the Conversion Transactions on March 16, 2012. $20,941,000 of the principal amount of the Notes and Science Note, plus $4,921,082 of accrued but unpaid interest thereon through March 16, 2012, was converted into 369,458 shares of the Company's Common Stock (as adjusted for the reverse stock split disclosed in Note 6), at a conversion price of $70.00 per share. The remaining $5,000,000 of the principal amount of the Notes was converted into 14,285.714 shares of the Company's Series A Convertible Preferred Stock. The Conversion Transactions, as discussed above, included the authorization of 22,500 shares of a new series of preferred stock of TelVue designated as Series A Convertible Preferred Stock, which is convertible into common stock at a fixed price at the option of the holder or upon certain contingent triggering events. From the date of issuance, dividends at the rate per annum of $14.00 per share shall accrue on the Series A Convertible Preferred Stock, and shall be cumulative. Accruing dividends shall be payable only when, as and if declared by the Board of Directors, and the Company shall be under no obligation to pay such accruing dividends, except upon liquidation, dissolution, winding up or other deemed liquidation event to the extent there are assets available for distribution, or redemption by the Company. The accruing dividends shall be payable in either cash or shares of Series A Preferred Stock as determined by the Company, and in preference to any cash dividends to common stockholders. Because the issued and outstanding Series A Convertible Preferred Stock is held by the majority stockholder who has control over redemption through representation on the Company's Board of Directors, it is considered redeemable and classified as temporary equity in the condensed balance sheet. As of September 30, 2012, undeclared dividends on outstanding preferred stock amounted to $108,494. The authorized but unissued class of redeemable convertible preferred stock that existed prior to the Conversion Transactions was retired as part of the Conversion Transactions. - 19 - -------------------------------------------------------------------------------- In order to complete the Conversion Transactions, the Company increased the authorized number of shares of common stock to 600,000,000. Subsequent to the consummation of the Conversion Transactions, the Company completed a 1-for-200 reverse stock split which became effective on March 22, 2012. As a result of the reverse stock split, all common stock share amounts have been retrospectively adjusted in these financial statements. As a result of receiving the additional investment of $5,000,000 from Mr. Lenfest and consummating the Conversion Transactions, TelVue no longer has any outstanding indebtedness and believes that it has adequate working capital to meet its cash flow needs for at least the next twelve months. Cash and Cash Flows TelVue had negative cash flow from operating activities of $3,494,676 for the nine months ended September 30, 2012, compared to $1,497,660 for the nine months ended September 30, 2011. The decrease in cash flow compared to 2011 was primarily due to a higher net loss for the nine months ended September 30, 2012 when compared to the nine months ended September 30, 2011. Additionally, there were higher expenses paid related to increased development activities and higher legal fees related to the debt conversion transaction during the nine months ended September 30, 2012, when compared to the same period of 2011. TelVue had a cash balance of $1,413,060 as of September 30, 2012, compared to a balance of $86,097 as of September 30, 2011, primarily due to the $5,000,000 investment received from Mr. Lenfest in connection with the 2012 Note, which was subsequently converted to TelVue Series A Convertible Preferred Stock. TelVue believes that this cash balance is adequate to satisfy it working capital needs for at least the next twelve months as it grows its business. In September 2012, TelVue lowered operating expenses through a reduction in staffing of positions not deemed essential to its operations. The reductions will eliminate in excess of $500,000 annually from operating costs. The Company has identified further expense reductions of approximately $300,000 - $400,000 annually which it does not believe would impact the key functional areas of product development or sales and marketing, and will be finalizing decisions on the adoption these expense reductions prior to December 31, 2012. In addition to expense controls, TelVue expects to reduce its accounts receivable balance by $100,000 - $120,000 over the next four months through tighter controls and the adoption of sales terms with late payment penalties, which have not been a standard part of its terms of business to-date. The Company is actively looking for bank funding of working capital. Prior to January 1, 2013, TelVue expects to have a revolving line of credit in place which it expects will provide up to approximately $250,000 in funds. TelVue believes that the above steps, in conjunction with continued sales growth from cloud services, will provide it with sufficient funds to operate for the next 12 months. However, there can be no assurance that the Company will be able to obtain this line of credit on feasible terms. In this event, if anticipated sales growth from new products and services is not achieved, the consequence for the Company's liquidity and its ability to operate would be adverse. Accounts Receivable-Trade and Allowance for Doubtful Accounts As of September 30, 2012, TelVue had a net accounts receivable-trade balance of $806,478, compared to $666,074 as of December 31, 2011. The increase was primarily due to slower cash collections, in addition to timing of the fulfillment of equipment orders for the nine months ended September 30, 2012. Management reviews and assesses the status of customer accounts on a regular basis and had established a bad debt reserve in the amount of $62,700 and $29,194 as of September 30, 2012 and December 31, 2011, respectively. The increase in bad debt reserve was the result of a somewhat more conservative approach in conjunction with specific account reviews, and an increase in receivables balance. Based on the diversity of account types, the reserve is estimated based on experience and periodic reviews. TelVue's days of sales in average accounts receivable was 64 days at September 30, 2012, compared to 53 days at December 31, 2011. TelVue will from time to time offer sales incentives and/or discounts to its TelVue Princeton® and HyperCaster™ customers. The Company has not changed its credit terms with its customers for its TPS services or ANI service. A 2% cash, 1% net 15 days discount is offered for payments related to TelVue Princeton® and HyperCaster™ equipment purchases. - 20 - --------------------------------------------------------------------------------Prepaid Expenses As of September 30, 2012, TelVue had a prepaid expense balance of $77,696, compared to a balance of $14,930 as of December 31, 2011. This increase was primarily the result of paying in-full for the Company's business insurance policies during the nine months ended September 30, 2012. The expense related to these policies is recognized evenly over the policy period. Accounts Payable-Trade As of September 30, 2012, TelVue had an accounts payable-trade balance of $224,089, compared to a balance of $595,310 as of December 31, 2011. The decrease was primarily a result of the paying of outside development consultants and legal fees that were in the accounts payable-trade balance as of December 31, 2011. Accrued Expenses As of September 30, 2012, TelVue had an accrued expense balance of $193,761, compared to a balance of $264,589 as of December 31, 2011. The decrease was primarily due to a lower expense accrual than at December 31, 2011 related to contracted development consultants and legal and accounting fees, offset by a higher accrual for employee paid time off, as it is earned and accrued evenly throughout the year, while most employee vacations are taken in the second half of the year. Deferred Service Revenue As of September 30, 2012, TelVue had a deferred service revenue balance of $775,154, compared to a balance of $648,202 as of December 31, 2011. The increase was primarily due to increased sales of TPS equipment support and other services, for which the revenue is deferred and recognized over the contract period. OFF-BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements at September 30, 2012 that had or are reasonably likely to have, a current or future effect on TelVue's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to TelVue's interests. |