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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.
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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.
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--------------------------------------------------------------------------------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.
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--------------------------------------------------------------------------------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.
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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 )
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--------------------------------------------------------------------------------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
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--------------------------------------------------------------------------------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.
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--------------------------------------------------------------------------------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.
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--------------------------------------------------------------------------------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.
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