10-Q 1 form_10-q.htm FORM 10-Q FOR 09-30-2011

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549


FORM 10-Q


[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2011


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


For the transition period from________to________


Commission File Number: 0-17170


TELVUE CORPORATION

(Exact name of registrant as specified in its charter)


DELAWARE

51-0299879

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)


16000 Horizon Way, Suite 500

 

       Mt. Laurel, New Jersey       

08054

(Address of principal executive offices)

(Zip Code)


(856) 273-8888

(Registrant’s telephone number, including area code)


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


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


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


 

Large accelerated filer [  ]

Accelerated filer [  ]

 

Non-accelerated filer [  ]

Smaller reporting company [X]

 

(Do not check if a smaller reporting company)

 


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


Number of shares of registrant’s common stock outstanding as of November 9, 2011: 48,778,144 shares.




TELVUE CORPORATION


INDEX


 

 

PAGE

 

 

NO.

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.  Financial Statements

 

 

 

 

 

Condensed Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010

3

 

 

 

 

Condensed Statements of Operations (unaudited) for the three months ended September 30, 2011 and September 30, 2010

4

 

 

 

 

Condensed Statements of Operations (unaudited) for the nine months ended September 30, 2011 and September 30, 2010

5

 

 

 

 

Condensed Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and September 30, 2010

6

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

7

 

 

 

 

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

12

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

21

 

 

 

 

Item 4.  Controls and Procedures

21

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

 

Item 6.  Exhibits

22

 

 

 

SIGNATURES

22

 

 

 

EXHIBIT INDEX

23


- 2 -



PART I — FINANCIAL INFORMATION


Item 1. Financial Statements.


TELVUE CORPORATION

CONDENSED BALANCE SHEETS


 

 

September 30, 2011

 

December 31, 2010

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

86,097

 

$

185,954

 

Accounts receivable – trade, net of allowance for doubtful accounts of
$16,932 at September 30, 2011 and $11,587 at December 31, 2010

 

 

829,650

 

 

567,763

 

Receivable – other

 

 

35,532

 

 

 

Inventory

 

 

349,152

 

 

388,059

 

Prepaid expenses

 

 

24,045

 

 

16,298

 

TOTAL CURRENT ASSETS

 

 

1,324,476

 

 

1,158,074

 

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT

 

 

6,905,331

 

 

7,054,384

 

Less accumulated depreciation

 

 

6,617,329

 

 

6,671,853

 

PROPERTY AND EQUIPMENT, NET

 

 

288,002

 

 

382,531

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

 

10,916

 

 

19,665

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,623,394

 

$

1,560,270

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable – trade

 

$

412,149

 

$

309,056

 

Accrued expenses

 

 

150,759

 

 

107,786

 

Deferred service revenue

 

 

639,790

 

 

534,707

 

Other liabilities

 

 

1,455

 

 

1,995

 

TOTAL CURRENT LIABILITIES

 

 

1,204,153

 

 

953,544

 

 

 

 

 

 

 

 

 

LINES OF CREDIT – MAJORITY STOCKHOLDER

 

 

20,000,000

 

 

18,500,000

 

 

 

 

 

 

 

 

 

NOTE PAYABLE – MAJORITY STOCKHOLDER

 

 

541,000

 

 

541,000

 

 

 

 

 

 

 

 

 

ACCRUED INTEREST – MAJORITY STOCKHOLDER

 

 

4,405,196

 

 

3,667,793

 

 

 

 

 

 

 

 

 

REDEEMABLE CONVERTIBLE PREFERRED STOCK,
$1 par value, 6,900,000 shares authorized, no shares outstanding

 

 

 

 

 

TOTAL LIABILITIES

 

 

26,150,349

 

 

23,662,337

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

Common stock, $.01 par value, 100,000,000 shares authorized,
48,778,144 and 48,674,144 shares issued and outstanding at
September 30, 2011 and December 31, 2010, respectively

 

 

487,782

 

 

486,742

 

Additional paid-in capital

 

 

4,886,688

 

 

4,883,228

 

Accumulated deficit

 

 

(29,901,425

)

 

(27,472,037

)

 

 

 

(24,526,955

)

 

(22,102,067

)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

$

1,623,394

 

$

1,560,270

 


See the accompanying unaudited notes which are an integral part of these condensed financial statements.


- 3 -



TELVUE CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)


 

 

Three Months Ended
September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

TelVue products and services

 

$

942,336

 

$

648,387

 

ANI services

 

 

168,365

 

 

201,371

 

 

 

 

1,110,701

 

 

849,758

 

 

 

 

 

 

 

 

 

COST OF REVENUES

 

 

 

 

 

 

 

TelVue products and services

 

 

490,012

 

 

408,133

 

ANI services

 

 

27,394

 

 

28,273

 

TOTAL COST OF REVENUES

 

 

517,406

 

 

436,406

 

GROSS MARGIN

 

 

593,295

 

 

413,352

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

Selling and marketing

 

 

265,706

 

 

293,221

 

General and administrative

 

 

812,830

 

 

528,556

 

Depreciation and amortization

 

 

65,132

 

 

251,050

 

 

 

 

1,143,668

 

 

1,072,827

 

OPERATING LOSS

 

 

(550,373

)

 

(659,475

)

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

Interest income

 

 

70

 

 

 

Interest expense-related party

 

 

(256,707

)

 

(229,420

)

TOTAL OTHER INCOME (EXPENSE)

 

 

(256,637

)

 

(229,420

)

LOSS BEFORE INCOME TAXES

 

 

(807,010

)

 

(888,895

)

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(807,010

)

$

(888,895

)

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET LOSS PER COMMON SHARE

 

$

(.02

)

$

(.02

)

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

BASIC AND DILUTED

 

 

48,778,144

 

 

48,571,155

 


See the accompanying unaudited notes which are an integral part of these condensed financial statements.


- 4 -



TELVUE CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)


 

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

TelVue products and services

 

$

2,877,825

 

$

2,012,981

 

ANI services

 

 

522,788

 

 

696,038

 

 

 

 

3,400,613

 

 

2,709,019

 

 

 

 

 

 

 

 

 

COST OF REVENUES

 

 

 

 

 

 

 

TelVue products and services

 

 

1,630,886

 

 

1,030,832

 

ANI services

 

 

88,616

 

 

96,904

 

TOTAL COST OF REVENUES

 

 

1,719,502

 

 

1,127,736

 

GROSS MARGIN

 

 

1,681,111

 

 

1,581,283

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

Selling and marketing

 

 

818,119

 

 

948,870

 

General and administrative

 

 

2,353,920

 

 

1,715,690

 

Depreciation and amortization

 

 

201,226

 

 

791,724

 

 

 

 

3,373,265

 

 

3,456,284

 

OPERATING LOSS

 

 

(1,692,154

)

 

(1,875,001

)

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

Interest income

 

 

169

 

 

 

Interest expense-related party

 

 

(737,403

)

 

(662,699

)

TOTAL OTHER INCOME (EXPENSE)

 

 

(737,234

)

 

(662,699

)

LOSS BEFORE INCOME TAXES

 

 

(2,429,388

)

 

(2,537,700

)

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(2,429,388

)

$

(2,537,700

)

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET LOSS PER COMMON SHARE

 

$

(.05

)

$

(.05

)

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

BASIC AND DILUTED

 

 

48,734,041

 

 

48,564,849

 


See the accompanying unaudited notes which are an integral part of these condensed financial statements.


- 5 -



TELVUE CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)


 

 

Nine Months Ended
September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net loss

 

$

(2,429,388

)

$

(2,537,700

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

201,226

 

 

791,724

 

Accrued interest - majority stockholder

 

 

737,403

 

 

662,699

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable – trade

 

 

(261,887

)

 

426,006

 

Receivable – other

 

 

(35,532

)

 

 

Inventory

 

 

38,907

 

 

(136,212

)

Prepaid expenses

 

 

(7,747

)

 

(14,566

)

Other assets

 

 

8,749

 

 

 

Accounts payable – trade

 

 

103,093

 

 

(207,400

)

Accrued expenses

 

 

42,973

 

 

22,632

 

Deferred service revenue

 

 

105,083

 

 

(6,701

Other liabilities

 

 

(540

)

 

(394

)

NET CASH USED IN OPERATING ACTIVITIES

 

 

(1,497,660

)

 

(999,912

)

 

 

 

 

 

 

 

 

CASH FLOWS USED IN INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(106,697

)

 

(49,103

)

 

 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from line of credit – majority stockholder

 

 

1,500,000

 

 

1,100,000

 

Issuance of common stock

 

 

4,500

 

 

999

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

1,504,500

 

 

1,100,999

 

 

 

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(99,857

)

 

51,984

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

185,954

 

 

112,213

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

86,097

 

$

164,197

 


See the accompanying unaudited notes which are an integral part of these condensed financial statements.


- 6 -



TELVUE CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)


1.  BASIS OF PRESENTATION


Summary Financial Information and Results of Operations


The accompanying unaudited condensed financial statements of TelVue Corporation (“TelVue” or the “Company”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of the Company’s management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position as of September 30, 2011 and December 31, 2010 and the results of operations and cash flows for the three and nine months ended September 30, 2011 and 2010 have been included.  Operating results for the three and nine month periods ended September 30, 2011 are not necessarily indicative of results that may be expected for any other interim period or the full fiscal year ending December 31, 2011. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”). Information included in the Condensed Balance Sheet as of December 31, 2010 has been derived from the Company’s audited financial statements for the year ended December 31, 2010 included in the 2010 Form 10-K.


Going Concern and Management’s Plan


The accompanying financial statements of TelVue have been prepared on the basis of generally accepted accounting principles applicable to a “going concern,” 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 $2,429,388 during the nine months ended September 30, 2011, and as of that date, the Company's total liabilities exceeded its total assets by $24,526,955. Those factors, as well as the Company's reliance on financing from its majority stockholder, H.F. (Gerry) Lenfest (as discussed in Note 5), raise substantial doubt about the Company's ability to continue as a going concern. Management of the Company secured an additional line of credit of $1,500,000 on December 13, 2010, of which $400,000 remains available at September 30, 2011, and has modified its business plan to focus on equipment sales to the cable, telephone company ("Telco") and professional broadcast markets. Funding TelVue's future operating and capital requirements will depend on numerous factors including, but not limited to, the success of the modified business plan and TelVue receiving continued financial support from Mr. Lenfest, which he has not committed to provide at this time, or seeking other alternatives. While management is working toward mitigating the adverse conditions and events which raise doubt about the validity of the going concern assumption used in preparing the accompanying financial statements, there can be no assurance that management will be successful. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.


Use of Estimates


The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an ongoing basis, TelVue evaluates estimates, including those related to impairment of long-lived assets and allowance for doubtful accounts.  TelVue bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions; however, TelVue believes that its estimates, including those for the above described items, are reasonable.

 

Areas that require estimates and assumptions include valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities and sales returns, and valuation allowances on deferred tax assets.


Reclassification


Certain prior period amounts are reclassified to conform with the current year’s presentation.


- 7 -



Intangible Assets


Intangible assets are reviewed for impairment annually, or more frequently if impairment indicators arise.  As of December 31, 2010, management determined that all intangible assets were impaired, and the Company recorded a non-cash impairment charge of $2,639,246.


2.  SUPPLEMENTAL CASH FLOW INFORMATION


No income taxes or interest were paid during the nine months ended September 30, 2011 or 2010.


3.  LOSS PER COMMON SHARE


Basic loss per common share is computed by dividing net loss, after deduction of preferred stock dividends, when applicable, by the weighted average number of shares of outstanding common stock.  Diluted loss per common share is computed by dividing net loss, after the deduction of preferred stock dividends, when applicable, by the weighted average number of shares of outstanding common stock adjusted to include incremental common shares that would have been outstanding if potentially dilutive common shares had been issued. Common equivalent shares are excluded from the computation in periods in which they have an antidilutive effect. Because of the net loss available to common stockholders for the three and nine months ended September 30, 2011 and 2010, no potential common shares were included in the computation of a diluted per share amount since such potential common shares would not have a dilutive effect.  The computations of diluted net income per share as of September 30, 2011 and December 31, 2010 exclude the shares underlying approximately nine million out-of-the-money options, because their inclusion would have been antidilutive for the periods presented.


4.  CORPORATE INCOME TAXES


The Company uses the asset and liability method of accounting for income taxes. This method requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Differences between financial reporting and tax bases arise most frequently from differences in timing of income and expense recognition. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year.


The provisions for income tax from continuing operations for the three months ended September 30, 2011 and 2010 consisted of the following components:


 

 

2011

 

2010

 

Current

 

 

 

 

 

 

 

Federal

 

$

 

$

 

State

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Federal

 

 

265,000

 

 

242,000

 

State

 

 

72,000

 

 

66,000

 

 

 

 

337,000

 

 

308,000

 

Valuation allowance increase

 

 

(337,000

)

 

(308,000

)

 

 

 

 

 

 

Total

 

$

 

$

 


- 8 -



The provisions for income tax from continuing operations for the nine months ended September 30, 2011 and 2010 consisted of the following components:


 

 

2011

 

2010

 

Current

 

 

 

 

 

 

 

Federal

 

$

 

$

 

State

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

 

 

 

 

 

Federal

 

 

710,000

 

 

688,000

 

State

 

 

192,000

 

 

188,000

 

 

 

 

902,000

 

 

876,000

 

Valuation allowance increase

 

 

(902,000

)

 

(876,000

)

 

 

 

 

 

 

Total

 

$

 

$

 


No provision for federal and state income taxes was required for the three and nine months ended September 30, 2011 and 2010 due to the Company’s operating losses and increased deferred tax asset valuation allowance.  The valuation allowance was 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 $15,700,000 on a tax-reporting basis as of September 30, 2011. The carry-forward begins to expire on December 31, 2024.


The Company is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions.  The Company is no longer subject to U.S. federal income tax examinations for years before 2007 and state income tax examinations before 2006.  However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward, and make adjustments up to the amount of the net operating loss carry forward amount.  The Company is not currently under Internal Revenue Service tax examination or under examination by any state jurisdictions.


5.  NOTES PAYABLE AND LINES OF CREDIT – MAJORITY STOCKHOLDER


Since 1989, TelVue has funded its expansion and operating deficit from the proceeds of the sale of shares of TelVue’s common stock and Class A Redeemable Convertible Preferred Stock to Mr. Lenfest, TelVue’s majority stockholder, and from loans from Mr. Lenfest.


As of September 30, 2011, TelVue had entered into eight Line of Credit Notes (the “Notes”) with Mr. Lenfest.  The purpose of these Notes is to fund expansion and operating deficits.  Under the terms of these Notes, TelVue may borrow, from time to time, up to the maximum principal amount of the Notes. The minimum advance under these Notes is $100,000 and the interest rate on the Notes is equal to the prime rate plus one percent (1%). As of September 30, 2011 and December 31, 2010, the effective interest rate was 4.25%. These Notes contain customary events of default, including, among others, non-payment of principal and interest, dissolution or liquidation, and if TelVue is involved in certain insolvency proceedings. In the event of a default, all of the obligations of TelVue under the Notes may be declared immediately due and payable. These Notes are unsecured and expire six years from the date of the first advance, unless extended or renewed.


- 9 -



The following table summarizes the activity related to the outstanding Notes as of September 30, 2011 and December 31, 2010:


As of September 30, 2011

 

 

 

 

 

 

 

 

 

Maximum

 

 

Amount

Accrued

Note

 

Principal

Maturity

 

Borrowed @

Interest @

Description

Date

Amount

Date

 

9/30/2011

9/30/2011

 

 

 

 

 

 

 

2005 Note

4/27/2005

$  3,800,000

1/1/2016

*

$  3,800,000

$1,275,109

2006 Note

11/3/2006

10,000,000

12/26/2012

 

10,000,000

2,585,386

2007 Note

12/21/2007

2,300,000

5/5/2014

 

2,300,000

332,812

2009 Q1 Note

3/2/2009

400,000

3/3/2015

 

400,000

45,669

2009 Q2 Note

6/8/2009

500,000

6/9/2015

 

500,000

49,522

2009 Q3 Note

10/5/2009

400,000

10/14/2015

 

400,000

33,353

2010 Note

12/8/2009

1,500,000

3/16/2016

 

1,500,000

72,055

2011 Note

12/13/2010

1,500,000

5/2/2017

 

1,100,000

11,290

 

 

 

 

 

 

 

 

 

$20,400,000

 

 

$20,000,000

$4,405,196


* On March 23, 2011, the Company and Mr. Lenfest agreed to extend the maturity date of the 2005 Note to January 1, 2016.  No other terms of the 2005 Note were amended.


As of December 31, 2010

 

 

 

 

 

 

 

 

 

Maximum

 

 

Amount

Accrued

Note

 

Principal

Maturity

 

Borrowed @

Interest @

Description

Date

Amount

Date

 

12/31/2010

12/31/2010

 

 

 

 

 

 

 

2005 Note

4/27/2005

$  3,800,000

11/23/2011

*

$  3,800,000

$1,116,596

2006 Note

11/3/2006

10,000,000

12/26/2012

 

10,000,000

2,192,301

2007 Note

12/21/2007

2,300,000

5/5/2014

 

2,300,000

250,580

2009 Q1 Note

3/2/2009

400,000

3/3/2015

 

400,000

31,750

2009 Q2 Note

6/8/2009

500,000

6/9/2015

 

500,000

32,357

2009 Q3 Note

10/5/2009

400,000

10/14/2015

 

400,000

19,818

2010 Note

12/8/2009

1,500,000

3/16/2016

 

1,100,000

24,391

2011 Note

12/13/2010

1,500,000

 

 

 

 

 

 

 

 

 

 

$20,400,000

 

 

$18,500,000

$3,667,793


* On March 23, 2011, the Company and Mr. Lenfest agreed to extend the maturity date of the 2005 Note to January 1, 2016.  No other terms of the 2005 Note were amended.


In addition to the borrowings noted above, in January 1995, Mr. Lenfest purchased from Science Dynamics Corporation, TelVue’s unsecured non-interest bearing note in the amount of $541,000 (the “Science Note”). The Science Note was originally issued by TelVue to Science and was payable December 31, 1996.  The maturity date of the Science Note had been extended by TelVue and Mr. Lenfest on a yearly basis.  On June 16, 2005, the members of the Board of Directors of TelVue and Mr. Lenfest extended the maturity date of the Science Note to January 1, 2011.  On March 23, 2011, the members of the Board of Directors of TelVue and Mr. Lenfest further extended the maturity date of the Science Note to January 1, 2016.


6.  RELATED PARTY TRANSACTIONS


See Note 5, included herein, for information of related party transactions between TelVue and its majority stockholder.


- 10 -



7.  FINANCIAL DATA BUSINESS SEGMENTS


The Company 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 and services such as WEBUS® and PEG.TV. 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 Princeton® HyperCaster builds on previous TelVue Internet Protocol Television server models for cable, Telco and professional markets by adding new support for streaming 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. 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. PEG.TV is a live streaming and Video-on-Demand service for integrating video on the Internet. TelVues second business segment is the marketing and service company which sells automatic number identification (“ANI”) telecommunication services to the cable television industry.  


Summarized financial information by reporting segment for each of the nine months ended September 30, 2011 and 2010, is as follows:


Nine months ended September 30, 2011

 

TPS

 

ANI

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,877,825

 

$

522,788

 

$

3,400,613

 

Depreciation and amortization

 

 

190,077

 

 

11,149

 

 

201,226

 

Operating income/(loss)

 

 

(2,018,289

)

 

326,135

 

 

(1,692,154

)

Other income/(expense)

 

 

(639,918

)

 

(97,316

)

 

(737,234

)

Net income/(loss)

 

 

(2,658,207

)

 

228,819

 

 

(2,429,388

)

Capital expenditures

 

 

106,697

 

 

 

 

106,697

 


Nine months ended September 30, 2010

 

TPS

 

ANI

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,012,981

 

$

696,038

 

$

2,709,019

 

Depreciation and amortization

 

 

692,964

 

 

98,760

 

 

791,724

 

Operating income/(loss)

 

 

(2,255,679

)

 

380,678

 

 

(1,875,001

)

Other income/(expense)

 

 

(552,227

)

 

(110,472

)

 

(662,699

)

Net income/(loss)

 

 

(2,807,906

)

 

270,206

 

 

(2,537,700

)

Capital expenditures

 

 

49,103

 

 

 

 

49,103

 


- 11 -



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


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, 2010 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” 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 and workflow solutions for public, education and government (“PEG”) television stations; cable, Telco and satellite television providers; K-12 and higher education institutions; and professional broadcasters. TelVue delivers local programming to over thirty million homes nationwide; powers over 1,000 PEG television channels; provides leased access and local origination solutions to eight of the top ten Multi System Operators (“MSOs”) 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.


TelVue operates two business segments. The first segment, TPS, includes equipment such as the TelVue Princeton® broadcast and storage servers, and encoding and transcoding workstations and services such as WEBUS® and PEG.TV.  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 Princeton® HyperCaster builds on previous TelVue Internet Protocol Television server models for cable, Telco and professional markets by adding new support for streaming 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.


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.  PEG.TV is a live streaming and Video-on-Demand service for integrating video on the Internet. TelVue Turbo Workflow Accelerator is a scalable workflow application that streamlines publishing videos to PEG.TV from any TelVue Princeton® 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. TelVue CloudCast allows broadcasters to deliver 24x7 linear channels including live programming via both Internet streaming and traditional broadcast delivery without the need to own or operate a facility with traditional broadcast equipment.  


- 12 -



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 local channels.


TPS products include:


TelVue Princeton® Digital Broadcaster B100

TelVue Princeton® Digital Broadcaster B1000

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 Princeton® HyperCaster

TelVue Turbo Workflow Accelerator

CampusOneHD High-Definition Broadcast Platform


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 websites

VideoActives

Real time, dynamic video content for channels

PEG.TV

Internet Streaming and Video-on-Demand Service

TelVue Connect

Cloud video service for content contribution

TelVue CloudCast

Hosting of 24x7 linear and streaming channels


TelVues second and legacy business segment is the marketing and service company, which sells 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. 


NEW PRODUCTS AND SERVICES


In the third quarter of 2011, TelVue introduced TelVue Connect, a cloud video service for multi-user content contribution, transcoding and scheduling.  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 Connect uses the cloud to handle large media file uploads, transcoding, content management, content deliver to destination networks and channel scheduling.  In the TelVue Connect cloud, content is automatically converted to the proper format and delivered to the operators broadcast server.  TelVue Princeton and Hypercaster full integration with TelVue Connect means that the operator can schedule local contributor series into pre-assigned time slots using flexible rules and recurring patterns such as once a week at 8PM.  This allows contributors to self-manage their episodes within a series, effectively distributing the channel scheduling task amongst the contributors.  TelVue Connect enables new revenue streams through the partitioning and assignment of channels for different content formats, such as long-form and advertiser supported local event broadcasts.


TelVue also announced the availability of a new TelVue Hypercaster model, the B1000 Hypercaster that supports up to 20 IP origination broadcast channels in a single unit of rack space.  The B1000 Hypercaster offers improved density and increased storage when compared to the B3000 Hypercaster.  TelVue also released new Hypercaster features including support for variable bit rate content to support a wider range of content and stream formats, IP capture that enables the simultaneous broadcast of live network streams and recording to hard drive for archival and rebroadcast, and enhanced stream processing for digital ad-insertion and interactive TV applications.


- 13 -



In the third quarter of 2011, TelVue rebranded its Hosted Broadcasting service as TelVue CloudCast.  TelVue CloudCast allows broadcasters and media companies to launch professional 24X7 television channels without having to own, operate, or maintain any playback or distribution equipment.  Channels are managed via the Internet using a web browser.  TelVue CloudCast can deliver channels to multiple platforms including traditional cable, Telco and satellite networks via Interconnect, and to mobile devices, PCs, Macs, iPads, and over-the-top set top boxes such as Roku.  


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.


Use of Estimates


TelVue’s discussion and analysis of its financial condition and results of operations are based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an ongoing basis, TelVue evaluates estimates, including those related to impairment of long-lived assets and allowance for doubtful accounts.  TelVue bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions; however, TelVue believes that its estimates, including those for the above described items, are reasonable.

 

Areas that require estimates and assumptions include valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities and sales returns, and valuation allowances on deferred tax assets.


Intangible Assets


Intangible assets are reviewed for impairment annually, or more frequently if impairment indicators arise.  


Revenue Recognition


In accordance with accounting principles generally accepted in the United States, TelVue recognizes revenues related to TelVue Princeton® and other equipment upon shipment of the equipment to its customers.  Revenues related to its WEBUS®, PEG.TV, TelVue Connect and TelVue CloudCast 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.  The revenue related to these plans is recognized on a straight-line basis over the term being covered by the plan. If the Company chose to recognize these revenues when payments were received under these agreements, then the Company would recognize more revenue in earlier periods and would not record any deferred revenues.  TelVue believes that its practice allows the Company to better match revenues with the expenses related to providing these services over the term of the agreements and, accordingly, is a better reflection of generally accepted accounting principles.  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.


- 14 -



The above listing is not intended to be a comprehensive list of all of 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 for the year ended December 31, 2010, 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 reduction in operating losses for the three and nine months ended September 30, 2011, when compared to the same periods of 2010, 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, 2011 to the three and nine months ended September 30, 2010.  TelVue also discusses the changes in TPS revenue and expenses.


Detailed financial information for each of the three and nine months ended September 30, 2011 and 2010, is as follows:


 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

$ Change

 

% Change

 

 

 

2011

 

2010

 

 

Fav/(Unfav)

 

Fav/(Unfav)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

$

942,336

 

$

648,387

 

$

293,949

 

45.3

 

ANI services

 

 

168,365

 

 

201,371

 

 

(33,006

)

(16.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenues

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

490,012

 

 

408,133

 

 

(81,879

)

(20.1

)

ANI services

 

 

27,394

 

 

28,273

 

 

879

 

3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

265,706

 

 

293,221

 

 

27,515

 

9.4

 

ANI services

 

 

 

 

 

 

 

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

787,454

 

 

495,024

 

 

(292,430

)

(59.1

)

ANI services

 

 

25,376

 

 

33,532

 

 

8,156

 

24.3

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

61,266

 

 

221,770

 

 

160,504

 

72.4

 

ANI services

 

 

3,866

 

 

29,280

 

 

25,414

 

86.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(550,373

)

 

(659,475

)

 

109,102

 

16.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

(256,637

)

 

(229,420

)

 

(27,217

)

(11.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(807,010

)

$

(888,895

)

$

81,885

 

9.2

 


- 15 -



 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

September 30,

 

 

September 30,

 

 

$ Change

 

% Change

 

 

 

2011

 

2010

 

 

Fav/(Unfav)

 

Fav/(Unfav)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

$

2,877,825

 

$

2,012,981

 

$

864,844

 

43.0

 

ANI services

 

 

522,788

 

 

696,038

 

 

(173,250

)

(25.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Revenues

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

1,630,886

 

 

1,030,832

 

 

(600,054

)

(58.2

)

ANI services

 

 

88,616

 

 

96,904

 

 

8,288

 

8.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

818,119

 

 

948,870

 

 

130,751

 

13.7

 

ANI services

 

 

 

 

 

 

 

 

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

2,257,032

 

 

1,595,994

 

 

(661,038

)

(41.4

)

ANI services

 

 

96,888

 

 

119,696

 

 

22,808

 

19.1

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

TelVue products and services

 

 

190,077

 

 

692,964

 

 

502,887

 

72.6

 

ANI services

 

 

11,149

 

 

98,760

 

 

87,611

 

88.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(1,692,154

)

 

(1,875,001

)

 

182,847

 

9.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

(737,234

)

 

(662,699

)

 

(74,535

)

(11.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$

(2,429,388

)

$

(2,537,700

)

$

108,312

 

4.3

 


Additional financial information by reporting segment for each of the three and nine months ended September 30, 2011 and 2010, is as follows:


 

 

TelVue products and services

 

ANI services

Three months ended September 30,

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income/(loss)

 

 $

(662,102

)

 $

(769,764

 $

111,729

 

 $

110,289

 

Other income/(expense)

 

 $

(222,770

)

 $

(191,176

)

 $

(33,867

)

 $

(38,244

)

Net income/(loss)

 

 $

(884,872

)

 $

(960,940

 $

77,862

 

 $

72,045

 

Capital expenditures

 

 $

24,727

 

 $

17,295

 

 $

 

 $

 


 

 

TelVue products and services

 

ANI services

Nine months ended September 30,

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income/(loss)

 

 $

(2,018,289

)

 $

(2,255,679

 $

326,135

 

 $

380,678

 

Other income/(expense)

 

 $

(639,918

)

 $

(552,227

)

 $

(97,316

)

 $

(110,472

)

Net income/(loss)

 

 $

(2,658,207

)

 $

(2,807,906

 $

228,819

 

 $

270,206

 

Capital expenditures

 

 $

106,697

 

 $

49,103

 

 $

 

 $

 


The TPS segment had operating losses of $662,102 and $2,018,289 for the three and nine months ended September 30, 2011, respectively, compared to operating losses of $769,764 and $2,255,679 for the three and nine months ended September 30, 2010 primarily due to an increase in TPS segment revenue and savings in depreciation and amortization, offset by an increase in cost of sales and general and administrative expenses.  The ANI segment had operating income of $111,729 and $326,135 for the three and nine months ended September 30, 2011, respectively, compared to $110,289 and $380,678 for the three and nine months ended September 30, 2010. 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, 13% of certain expenses were allocated to the ANI segment for the three and nine months ended September 30, 2011, compared to an allocation percentage of 17% for the same periods of 2010.


- 16 -



Revenues


TPS revenues increased $293,949 and $864,844 for the three and nine months ended September 30, 2011, respectively, compared to the same periods of 2010. The majority of the revenue increases were attributed to a 59% increase in TelVue Princeton® equipment sales, which grew from $1,184,605 for the nine months ended September 30, 2010 to $1,887,258 for the nine months ended September 30, 2011.  This increase is attributed to expansion of the customer base and additional sales to existing customers.  Prices remain consistent with prior periods and the fluctuation is based on volume only.  Additionally, there were increases in PEG.TV revenue, TelVue Princeton® support revenue and consulting revenue. These increases were offset by declines in sponsorship revenue related to the WEBUS® service, when comparing the three and nine months ended September 30, 2011 to the three and nine months ended September 30, 2010.  


TelVue has been shifting product, sales, and marketing resources to the cable, Telco, and professional broadcast markets that have not been adversely affected by the economic downturn.  This strategy has been effective in counter-balancing the slow-down in the PEG and education markets and has created new opportunities for TelVue.  For the three and nine months ended September 30, 2011, cable, Telco and professional broadcast markets accounted for 38% and 59% of TelVue Princeton® sales, respectively, while PEG and education accounted for 62% and 41% of TelVue Princeton® sales, respectively. While TelVue Princeton® equipment sales increased for the three and nine months ended September 30, 2011, when compared to the same periods of 2010, further growth in sales was slowed by reduced municipal budgets impacting the PEG and K-12 educational market new system sales. The Company expects to see a modest increase in government and K-12 educational sales as new fiscal budgets are approved. During the three months ended September 30, 2011, TelVue saw an increase in PEG orders.  TelVue has been able to partially offset the slower growth in new system sales in the PEG and education markets by focusing sales resources on add-on sales to existing customers including its TelVue Care maintenance and support service. Sales of TelVue Care service increased 34% and 36% for the three and nine months ended September 30, 2011, respectively, when compared to the same periods of 2010.


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 during the remainder of 2011.


ANI revenues decreased $33,006 and $173,250 for the three and nine months ended September 30, 2011, when compared to the same periods of 2010.  While there were $1,437 and $109 increases in pay-per-view revenue for the three and nine months ended September 30, 2011 when compared to the same period of 2010, there was an expected decrease of $5,646 and $21,402 in pay-per-view plus revenue for the three and nine months ended September 30, 2011, when compared to the same period of 2010.  These decreases were mainly due to a reduction in the number of subscribers served during these periods when compared to 2010 (as discussed below). Additionally, there were decreases in feature revenue of $15,261 and $109,221 for the three and nine months ended September 30, 2011, respectively, and decreases in data link revenue of $6,563 and $26,052, respectively, when comparing the three and nine months ended September 30, 2011 to the three and nine months ended September 30, 2010, primarily due to a decline in the number of ANI subscribers (as discussed below).


As of September 30, 2011, the ANI service was serving approximately 1.0 million full-time cable subscribers compared to approximately 1.1 million full-time cable subscribers served as of September 30, 2010.  During the three and nine months ended September 30, 2011, there were 61,104 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.


Cost of Revenues


Cost of revenues for the TPS segment increased $81,879 and $600,054 for the three and nine months ended September 30, 2011, respectively, when compared to the same periods of 2010, primarily as a result of higher cost of sales related to increased TelVue Princeton® sales, higher product discounts, higher consulting expenses and an increase in compensation related to the filling of a position that was open during part of the nine months ended September 30, 2010, but filled for the entire nine months ended September 30, 2011.  Additionally, there was an increase in the purchase of ancillary computer supplies (i.e., cables, connectors, etc.) during the three and nine months ended September 30, 2011, when compared to the same periods of 2010.  These non-inventory items are expensed when purchased.


ANI cost of revenues decreased $879 and $8,288 for the three and nine months ended September 30, 2011, when compared to the same periods of 2010, primarily due to savings in speech recording expense related to this segment, in addition to lower compensation expenses when comparing these periods.


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Selling and Marketing Expenses


Selling expenses related to the TPS segment decreased $27,515 and $130,751 for the three and nine months ended September 30, 2011, respectively, when compared to the same periods of 2010.  This decrease was primarily the result of the elimination of consulting expenses. During the three and nine months ended September 30, 2010, TelVue contracted outside sales representatives and an outside marketing consultant. There were no consultants providing sales related services during the three and nine months ended September 30, 2011.


There were no selling expenses related to the ANI segment for the three and nine months ended September 30, 2011 or the three and nine months ended September 30, 2010.


General and Administrative Expenses


TPS general and administrative expenses increased $292,430 and $661,038 for the three and nine months ended September 30, 2011, respectively, when compared to the same periods of 2010.  This increase was related to additional spending on research and development activities.  During the three and nine months ended September 30, 2011, TelVue contracted the services of additional development consultants to assist in current product enhancements and new product development.  Additionally, there were executive search fees paid related to the hiring of two new development employees in 2011.  There was also an increase in accounting fees during the three and nine months ended September 30, 2011, related to the new XBRL financial reporting requirement.


ANI general and administrative expenses decreased $8,156 and $22,808 for the three and nine months ended September 30, 2011, respectively, when compared to the same periods of 2010, primarily as a result of a change in allocation percentages, where a lower percentage of expenses are being allocated to the ANI segment.


Depreciation and Amortization


Depreciation expense decreased $40,598 and $152,606 for the three and nine months ended September 30, 2011 when compared to the three and nine months ended September 30, 2010, as a result of prior capital purchases reaching the end of their depreciable lives. Depreciation accounted for 6% of total operating expenses for the three and nine months ended September 30, 2011.  TelVue purchased $106,697 of equipment during the nine months ended September 30, 2011 compared to $49,103 purchased during the nine months ended September 30, 2010. All of the equipment purchased during the nine months ended September 30, 2011 and 2010 was for equipment related to the TPS segment. Amortization expense decreased $145,320 and $437,892 for the three and nine months ended September 30, 2011 when compared to the three and nine months ended September 30, 2010, as a result of the December 31, 2010 intangible asset impairment determination and corresponding write-off.  


Income Taxes


No provision for federal and state income taxes was required for the three and nine months ended September 30, 2011 and 2010 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 $15,700,000 on a tax-reporting basis as of September 30, 2011 (see Note 4 of TelVue's accompanying condensed financial statements).


Net Loss


TelVue had net losses of $807,010 and $2,429,388 for the three and nine months ended September 30, 2011 respectively, compared to net losses of $888,895 and $2,537,700 for the three and nine months ended September 30, 2010. These decreases in net losses were primarily due to revenue increases outweighing higher development expenses during the three and nine months ended September 30, 2011, when compared to the same period in 2010.  


Accounts Receivable-Trade and Allowance for Doubtful Accounts


As of September 30, 2011, TelVue had a net accounts receivable-trade balance of $829,650, compared to $567,763 as of December 31, 2010. This increase was primarily due to increased TPS segment sales for the nine months ended September 30, 2011, offset by cash collections during this period.  Management reviews and assesses the status of customer accounts on a regular basis and had established a bad debt reserve in the amount of $16,932 and $11,587 as of September 30, 2011 and December 31, 2010, respectively.


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TelVue's days of sales in average accounts receivable was 65 days at September 30, 2011, compared to 52 days at December 31, 2010.  This increase was partially attributed to slower customer payments than in prior periods as a result of current economic conditions.  TelVue will from time to time offer sales incentives and/or discounts to its TelVue Princeton® customers.  The Company has not changed its credit terms with its customers for its WEBUS® or ANI services.  A 2% cash, 1% net 15 days discount is offered for payments related to TelVue Princeton® equipment purchases.


Receivable-Other


On September 28, 2011, TelVue's office location at 16000 Horizon Way in Mt. Laurel, NJ suffered a loss due to a burst water pipe in the ceiling of this location. While this event did not disrupt business operations, there were losses of office equipment in addition to TPS product inventory. All of the equipment lost had a net book value of zero. The inventory loss was valued at approximately $36,000 and is covered by insurance. A claim has been filed with TelVue's insurance carrier and the expected proceeds have been recorded as a receivable.


Prepaid Expenses


As of September 30, 2011, TelVue had a prepaid expense balance of $24,045, compared to a balance of $16,298 as of December 31, 2010. This increase was primarily the result of paying in-full for the Company’s business insurance policies during the nine months ended September 30, 2011.  The expense related to these policies is spread out evenly over the policy period.


Accounts Payable-Trade


As of September 30, 2011, TelVue had a net accounts payable-trade balance of $412,149, compared to a balance of $309,056 as of December 31, 2010.   This increase was primarily a result of payments due to development consultants contracted during the nine months ended September 30, 2011, while there were none as of December 31, 2010, as well as increased inventory purchases required to fulfill sales orders.


Accrued Expenses


As of September 30, 2011, TelVue had an accrued expense balance of $150,759, compared to a balance of $107,786 as of December 31, 2010.  This increase was primarily due to a higher general expenses accrual than at December 31, 2010, in addition to 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, 2011, TelVue had a deferred service revenue balance of $639,790, compared to a balance of $534,707 as of December 31, 2010.  This increase was primarily due to increased sales of TelVue Princeton® support and other services, for which the revenue is deferred and spread out over the contract period.


LIQUIDITY AND CAPITAL RESOURCES:


Going Concern and Management’s Plan


The accompanying financial statements of TelVue have been prepared on the basis of generally accepted accounting principles applicable to a “going concern,” 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 $2,429,388 during the nine months ended September 30, 2011, and as of that date, the Company's total liabilities exceeded its total assets by $24,526,955. Those factors, as well as the Company's reliance on financing from its majority stockholder (as discussed in Note 5), raise substantial doubt about the Company's ability to continue as a going concern. Management of the Company secured an additional line of credit of $1,500,000 on December 13, 2010, of which $400,000 remains available at September 30, 2011, and has modified its business plan to focus on equipment sales to the cable, Telco and professional broadcast markets. Funding TelVue's future operating and capital requirements will depend on numerous factors including, but not limited to, the success of the modified business plan and TelVue receiving continued financial support from Mr. Lenfest, which he has not committed to provide at this time, or seeking other alternatives. While management is working toward mitigating the adverse conditions and events which raise doubt about the validity of the going concern assumption used in preparing the accompanying financial statements, there can be no assurance that management will be successful. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.


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Funding of Operations


Since 1989, TelVue has funded its expansion and operating deficit from the proceeds of the sale of shares of TelVue's common stock and Class A Redeemable Convertible Preferred Stock to Mr. Lenfest, TelVue's majority stockholder, and from loans from Mr. Lenfest.


As of September 30, 2011, TelVue had entered into eight Line of Credit Notes (the “Notes”) with Mr. Lenfest.  The purpose of these Notes is to fund expansion and operating deficits.  Under the terms of these Notes, TelVue may borrow, from time to time, up to the maximum principal amount of the Notes. The minimum advance under these Notes is $100,000 and the interest rate on the Notes is equal to the prime rate plus one percent (1%). As of September 30, 2011 and December 31, 2010, the effective interest rate was 4.25%. These Notes contain customary events of default, including, among others, non-payment of principal and interest, dissolution or liquidation, and if TelVue is involved in certain insolvency proceedings. In the event of a default, all of the obligations of TelVue under the Notes may be declared immediately due and payable. These Notes are unsecured and expire six years from the date of the first advance, unless extended or renewed.


The following table summarizes the activity related to the outstanding Notes as of September 30, 2011 and December 31, 2010:


As of September 30, 2011

 

 

 

 

 

 

 

 

 

Maximum

 

 

Amount

Accrued

Note

 

Principal

Maturity

 

Borrowed @

Interest @

Description

Date

Amount

Date

 

9/30/2011

9/30/2011

 

 

 

 

 

 

 

2005 Note

4/27/2005

$  3,800,000

1/1/2016

*

$  3,800,000

$1,275,109

2006 Note

11/3/2006

10,000,000

12/26/2012

 

10,000,000

2,585,386

2007 Note

12/21/2007

2,300,000

5/5/2014

 

2,300,000

332,812

2009 Q1 Note

3/2/2009

400,000

3/3/2015

 

400,000

45,669

2009 Q2 Note

6/8/2009

500,000

6/9/2015

 

500,000

49,522

2009 Q3 Note

10/5/2009

400,000

10/14/2015

 

400,000

33,353

2010 Note

12/8/2009

1,500,000

3/16/2016

 

1,500,000

72,055

2011 Note

12/13/2010

1,500,000

5/2/2017

 

1,100,000

11,290

 

 

 

 

 

 

 

 

 

$20,400,000

 

 

$20,000,000

$4,405,196


* On March 23, 2011, the Company and Mr. Lenfest agreed to extend the maturity date of the 2005 Note to January 1, 2016.  No other terms of the 2005 Note were amended.


As of December 31, 2010

 

 

 

 

 

 

 

 

 

Maximum

 

 

Amount

Accrued

Note

 

Principal

Maturity

 

Borrowed @

Interest @

Description

Date

Amount

Date

 

12/31/2010

12/31/2010

 

 

 

 

 

 

 

2005 Note

4/27/2005

$  3,800,000

11/23/2011

*

$  3,800,000

$1,116,596

2006 Note

11/3/2006

10,000,000

12/26/2012

 

10,000,000

2,192,301

2007 Note

12/21/2007

2,300,000

5/5/2014

 

2,300,000

250,580

2009 Q1 Note

3/2/2009

400,000

3/3/2015

 

400,000

31,750

2009 Q2 Note

6/8/2009

500,000

6/9/2015

 

500,000

32,357

2009 Q3 Note

10/5/2009

400,000

10/14/2015

 

400,000

19,818

2010 Note

12/8/2009

1,500,000

3/16/2016

 

1,100,000

24,391

2011 Note

12/13/2010

1,500,000

 

 

 

 

 

 

 

 

 

 

$20,400,000

 

 

$18,500,000

$3,667,793


* On March 23, 2011, the Company and Mr. Lenfest agreed to extend the maturity date of the 2005 Note to January 1, 2016.  No other terms of the 2005 Note were amended.


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In addition to the borrowings noted above, in January 1995, Mr. Lenfest purchased from Science Dynamics Corporation, TelVue's unsecured non-interest bearing note in the amount of $541,000 (the “Science Note”). The Science Note was originally issued by TelVue to Science and was payable December 31, 1996.  The maturity date of the Science Note had been extended by TelVue and Mr. Lenfest on a yearly basis.  On June 16, 2005, the members of the Board of Directors of TelVue and Mr. Lenfest extended the maturity date of the Science Note to January 1, 2011.  On March 23, 2011, the members of the Board of Directors of TelVue and Mr. Lenfest further extended the maturity date of the Science Note to January 1, 2016.


TelVue's ability to fully fund its operating expenses has suffered due to the loss of a large number of its subscriber base for the ANI service.  As discussed above, TelVue anticipates a continued decrease in revenue and a decrease in net income for the ANI service.  In order to continue to fund a majority of its ANI operating expenses, TelVue needs to retain its current subscriber base level. During the three and nine months ended September 30, 2011, there were 61,104 ANI subscriber cancellations and no new additions.  Management believes that over time, continued erosion will occur in the subscriber base as the cable operators continue to move their subscribers onto two-way digital service.  


TelVue has been, and continues to be, dependent upon Mr. Lenfest for funds to pay the majority of operating and capital expenditures. As discussed above, the financings from Mr. Lenfest under the 2005 Note, 2006 Note, 2007 Note, 2009 Q1 Note, 2009 Q2 Note, 2009 Q3 Note and 2010 Note have been exhausted.  As a result of this, TelVue secured the 2011 Note from Mr. Lenfest to help TelVue grow to a profitable level.  The 2005 Note, 2006 Note, 2007 Note, 2009 Q1 Note, 2009 Q2 Note, 2009 Q3 Note, 2010 Note and 2011 Note have helped to fund the growth of TelVue Products and Services. On May 2, 2011, June 24, 2011 and September 1, 2011, the Company borrowed $300,000, $400,000 and $400,000 on the 2011 Note, respectively. While maintaining the ANI pay-per-view ordering business, TelVue intends to continue to aggressively market and sell its TPS business. However, there can be no assurance that its marketing efforts will be successful.  


While the Company has seen growth in TPS equipment sales, TelVue expects to see some continued adverse effects on TPS system sales in 2011 due to the current economic conditions, primarily in the PEG and educational markets.  The Company anticipates some of this being offset by add-on sales to existing customers as well as its continued expansion into the cable, Telco, and professional broadcast markets.  


Cash and Cash Flows


TelVue had negative cash flow from operating activities of $1,497,660 for the nine months ended September 30, 2011, compared to $999,912 for the nine months ended September 30, 2010.  The decrease in cash flow compared to 2010 was primarily due to less cash collections during the nine months ended September 30, 2011 when compared to the nine months ended September 30, 2010.  Higher cash collections during the nine months ended September 30, 2010 were primarily the result of cash receipts related to an accounts receivable balance of $954,013 as of December 31, 2009, as opposed to a balance of $579,350 as of December 31, 2010. Additionally, there were higher expenses paid related to increased development activities and increased inventory purchases during the nine months ended September 30, 2011, when compared to the same period of 2010.  


TelVue had a cash balance of $86,097 as of September 30, 2011, compared to a balance of $164,197 as of September 30, 2010, primarily due to the factors listed above.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.


TelVue, a smaller reporting company, as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and in Item 10(f)(1) of Regulation S-K, is not required to provide information required by this Item.


Item 4.  Controls and Procedures.


(a) Evaluation of Disclosure Controls and Procedures.  TelVue's Chief Executive Officer and its Treasurer (Controller), have evaluated the effectiveness of TelVue's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, TelVue's Chief Executive Officer and its Treasurer (Controller) have concluded that TelVue's disclosure controls and procedures were adequate and effective to ensure that information regarding the Company is made known to its management, including its Chief Executive Officer and Treasurer (Controller), as appropriate to allow timely decisions regarding required disclosure and were effective in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms, particularly during the period in which this quarterly report on Form 10-Q was being prepared.


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(b) Changes in Internal Controls. During the quarterly period covered by this report, there were no changes in TelVue's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect TelVue's internal control over financial reporting.


PART II — OTHER INFORMATION


Item 6.  Exhibits.


31.1

Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

31.2

Certification of Treasurer-Controller pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

32.1

Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

32.2

Certification of Treasurer-Controller pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

101.INS

XBRL Instance Document.

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.



SIGNATURES


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



 

TELVUE CORPORATION

 

 

 

 

 

 

DATED:  November 14, 2011

By:

/s/ Jesse Lerman

 

 

Jesse Lerman

 

 

President and Chief Executive Officer

 

 

 

 

 

 

DATED:  November 14, 2011

By:

/s/ John Fell

 

 

John Fell

 

 

Treasurer-Controller


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EXHIBIT INDEX


31.1

Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

31.2

Certification of Treasurer-Controller pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

32.1

Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

32.2

Certification of Treasurer-Controller pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (included herein).

 

 

101.INS

XBRL Instance Document.

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.


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