Summary of SPEEDUS CORP - Yahoo! Finance

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the corresponding discussion and analysis included in the Company's Report on Form 10-K for the year ended December 31, 2007.

Cautionary Statement Regarding Forward-Looking Information

This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or current expectations of the Company or its officers with respect to, among other things, the ability of the Company to make capital expenditures, the ability to incur additional debt, as necessary, to service and repay such debt, if any, as well as other factors that may effect the Company's financial condition or results of operations. Forward-looking statements may include, but are not limited to, projections of revenues, income or losses, capital expenditures, plans for future operations, financing needs or plans, compliance with covenants in loan agreements, plans for liquidation or sale of assets or businesses, plans relating to products or services of the Company, assessments of materiality, predictions of future events, and the ability to obtain additional financing, including the Company's ability to meet obligations as they become due, and other pending and possible litigation, as well as assumptions relating to the foregoing. All statements in this Form 10-Q regarding industry prospects and the Company's financial position are forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Business Activities

Speedus Corp. is a holding company that owns significant equity interests in diverse businesses. We seek business opportunities across all industries for potential transactions and relationships in which we can apply our current resources and management strengths. The companies that we target, either public or privately held, will be seeking growth or restructuring capital to pursue near term business objectives in demonstrated markets. We will continue to pursue opportunities involving our expertise in the medical device and wireless markets, as well as those areas involving our broadband assets as attractive opportunities present themselves.

We have co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis Medical Corp. to develop advanced diagnostic decision support products and services for primary care physicians, pediatricians, cardiologists and other healthcare professionals. Zargis Acoustic Cardioscan® (Cardioscan®), Zargis' core product, is the first and only FDA-authorized computer-assisted medical device designed to support physicians in analyzing heart sounds for the identification of suspected systolic and diastolic murmurs-which are a potential sign of heart disease. We own a 75% equity interest in Density Dynamics Corporation, a newly formed company that was created to acquire the technology, assets and some of the operations of a developer and marketer of ultra-high speed storage systems for server networks and other applications. We own 90% of F&B Güdtfood Holding Corp., the creator and operator of the original Eurocentric "chic and quick" café, which is operating one store in Manhattan. As a result of continued losses, in October 2008 we transferred the operations and right to use the assets of the remaining F&B Restaurant store to an unrelated third party for no consideration. In 2005, under our Internet initiatives, we conceived Wibiki from which evolved iMarklet which was launched in June 2008 as a social bookmarking site optimized for wireless smartphones. A user opt-in advertising platform called Adchooser is currently the core of a new site for consumers which is in development. We own a portfolio of patents that allow for high-speed wireless communications. We have an FCC license for fixed wireless spectrum in the New York City metropolitan area that we may commercialize in the future to support high-speed, or broadband, Internet access service. For additional information on each of our business segments, see the discussions below and "Notes to Consolidated Financial Statements - Note 4, Business Segment Information."

Zargis Medical Corp. In January 2001, we co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis Medical Corp. to develop non-invasive, diagnostic support solutions that automatically analyze acoustical data from a patient to determine physiologically significant features useful in medical diagnosis. The development of Zargis' patented technology is a pioneering effort in medicine which uses advanced signal processing algorithms deployed on standard computer platforms. The first Zargis device, Cardioscan, received its initial FDA authorization in May 2004 and additional authorizations in September 2005 and March 2006. Cardioscan is currently being tested by a small group of physicians during general medical examinations and physicals to help detect and analyze suspected heart murmurs which could be a sign of valvular and congenital heart disease. Zargis is currently researching, and conducting trials on, additional noninvasive diagnostic support tools that process acoustical data from the body in order to provide an accurate and intelligible assessment of a patient's health. These assessments may be used by physicians and other healthcare providers to assist in the early identification or monitoring of heart, lung, vascular and other conditions and to provide better patient treatment.

Major next steps remaining for Zargis include continuing market trials and clinical trials for new applications of the Zargis technology and the formation of strategic partnerships designed to support product commercialization.

In February 2003, we acquired a controlling interest in Zargis Medical. At September 30, 2008, as a result of continued investment, our ownership interest was approximately 82%.

In October 2007, Zargis and the 3M Company entered into an exclusive multi-year marketing alliance involving Zargis' heart sound analysis software and 3M Littmann's next-generation electronic stethoscope. Under the agreement, Zargis will support 3M in its efforts to develop a next-generation stethoscope that will be compatible with Zargis' heart sound analysis software. In addition, the alliance provides Zargis with a wide-range of marketing and promotional opportunities along with exclusive rights to sell its heart sound analysis software through the global distribution network of the Littmann brand. The agreement grants 3M a 10% minority equity position in Zargis, 5% following the first sale of Zargis' software through the 3M distribution channel and 5% in the event the agreement is renewed after an initial two year term and certain other conditions are met, and a seat on Zargis' board of directors.

DDC. In March 2008, we invested $1,000,000 and obtained a 75% equity interest in Density Dynamics Corporation. DDC is a newly formed company that was created to acquire the technology, assets and some of the operations of a developer and marketer of ultra-high speed storage systems for server networks and other applications.

F&B Güdtfood. We own 90% of F&B Güdtfood, the creator and operator of the original Eurocentric "chic and quick" café, which is operating one store in Manhattan. The acquisition price was $3,500,000 in May 2002. In February 2003, we reduced our cash investment in F&B Güdtfood and received $1,775,000 while maintaining our original 51% interest. In December 2003, as a result of renegotiation, our interest increased to 80% without an additional investment. As a result of certain milestones not having been met, in 2005 our interest increased to 90%. As a result of continued losses, in October 2008 we transferred the operations and right to use the assets of the remaining F&B Restaurant store to an unrelated third party for no consideration.

Broadband Patents. We have accumulated a portfolio of patents that teach and cover the improvement of high-speed wireless communication systems to allow greater information content, reliability, clarity, more efficient use of licensed spectrum as compared to prior systems and other advances. We have 6 domestic patents, 5 of which have expiration dates ranging through 2017 and 1 of which has expired, with approximately 46 international counterparts in 28 countries. We also have 4 domestic patents pending and 14 patents pending in an additional 3 countries. Certain wireless communications systems may employ a number of different combinations of our patented technology to maximize operational and spectrum efficiency. While we believe that there is value in our patented technologies, it is a lengthy and expensive process to investigate and pursue licensing/patent infringement cases. We are evaluating a strategy for the utilization of these patents in the future, which may include pursuit of licensing or development of other strategic opportunities with users of the underlying technology. We have licensed technology in the past, both domestically and internationally, but are not currently receiving any license fees.

On June 2, 2006, we filed two separate complaints against Alltel Corporation in United States District Court in the Southern District of Florida, in which we assert that Alltel is infringing two patents. In an amended complaint, we asserted claims for infringement against Alltel Communications, Inc. and Alltel Wireless Holdings, Inc., in addition to Alltel Corporation. In April 2007, the case was transferred to United States District Court for the Eastern District of Arkansas. In November 2007, one of the complaints was dismissed with prejudice. A separate lawsuit was commenced in October 2006 against All Wireless, LLC, a Florida company, in United States District Court in the Middle District of Florida, alleging infringement. In August 2008, we reached a mutual agreement with all parties leading to the dismissal of all complaints in these matters. No financial consideration was paid or received by any of the parties.

Internet initiatives. During 2005, our Internet technology initiative, Wibiki, was conceived to leverage existing Wi-Fi infrastructures to reduce cost and complexity. It resulted in our development of an opt-in advertising platform we call Adchooser. Wibiki's foundation also allowed us to develop iMarklet which was launched in June 2008 as a social bookmarking site enabling members, including iPhone and iTouch users, to share web content with their friends. We continue to evolve the Adchooser platform beyond its original wireless focus and are working to launch a consumer site and service for members to make better use of their adspace and to share content with their fellow members. Adchooser is versatile, can scale to a large user base and is the underpinning for the NetfreeUS proposed service described below.

NetfreeUs. In March 2007, NetfreeUs, a new wholly-owned subsidiary, asked the FCC for authority to manage a new nationwide Wireless Public Broadband (WPB) network in the 2155-2175 MHz frequency band. NetfreeUS' Wireless Public Broadband ("WPB") service will never charge monthly fees. NetfreeUS will coordinate third-party lessees who would own and operate wireless access points ("WAPs") with no lessee authorized to operate more than 50 WAPs. WPB will promote localism and the provision of advertising and public service messages targeted to local interests and communities, as well as local business and economic development, through ubiquitous coverage provided by small-footprint networks. On August 31, 2007, the FCC issued an Order that dismissed without prejudice the application filed by NetfreeUS and other applicants to provide wireless service. NetfreeUS has filed a Petition for Partial Reconsideration with the FCC requesting a grant of its application and petition for forbearance and has also filed a Notice to Intervene in an action filed by another applicant in the United States Court of Appeals for the District of Columbia. The latter filing was granted and we are now a party to this proceeding.

Local Multipoint Distribution Service (LMDS) license. We have an FCC commercial operating license, awarded to us in recognition of our efforts in developing and deploying LMDS technology and for spearheading its regulatory approval at the FCC,

which covers 150 MHz of spectrum in the New York City area. Under FCC authorization, the license includes an additional 150 MHz of spectrum until the first Ka band satellite is launched, an event which is not currently determinable. The license provides that the spectrum may be used for a wide variety of fixed wireless purposes, including wireless local loop telephony, high-speed Internet access and two-way teleconferencing.

The license has been renewed through February 1, 2016 conditioned upon demonstrating to the FCC by June 1, 2012 that we are providing "substantial service." On March 7, 2007, we filed a notification that we are providing "substantial service" in accordance with FCC standards. On March 27, 2007, out of an abundance of caution, we requested a contingent waiver and an extension of time until March 27, 2010 to demonstrate "substantial service," to the extent our earlier demonstration is not deemed compliant with FCC standards. On July 31, 2007, we were informed by the FCC that we had not demonstrated that we were providing "substantial service" on the required date and were granted a waiver to extend the construction and substantial service deadline under the Company's FCC license renewal to October 6, 2008. In January 2008, we filed a waiver request with the FCC for a limited extension of the deadline for "substantial service" consistent with that filed by the LMDS Coalition, a consortium of license holders and equipment vendors. In April 2008, we were granted a waiver to extend the construction and substantial service deadline under the Company's FCC license renewal to June 1, 2012.

We will not commence a full marketing effort using our LMDS technology until new LMDS equipment becomes commercially available with cost and performance that allow implementation of an economically viable business model. We cannot determine when this will occur and this equipment may never be available to us on this basis.

Other. We have invested a portion of our assets in a portfolio of marketable securities consisting of publicly traded equity securities. We have also invested a portion of our assets in equity and debt instruments of non-publicly held companies. We have also sold publicly traded equity securities we do not own in anticipation of declines in the fair market values of these securities.

We have generated operating losses and negative operating cash flows since our inception and expect to continue to do so in the near future.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of those financial statements in conformity with generally accepted accounting principles 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 dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Actual results could differ from those estimates. For a description of all of our accounting policies, see Note 1 to our consolidated financial statements included in this Form 10-Q and Note 2 to our consolidated financial statements included in our 2007 Form 10-K. However, we believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Financial instruments. Our financial instruments consist primarily of cash equivalents, due from broker, marketable securities and securities sold and not purchased. The carrying value of cash equivalents and due from broker approximates market value since these highly liquid, interest earning investments are invested in money market funds. Marketable securities consist of publicly traded equity securities classified as trading securities and are recorded at fair market value, i.e., closing prices quoted on established securities markets. Securities sold and not repurchased are also carried at the fair market value of the securities. Significant changes in the market value of securities that we invest in could have a material impact on our financial position and results of operations.

We have also invested in equity and debt instruments of non-publicly held companies and account for them under the cost method since we do not have the ability to exercise significant influence over operations. We monitor these investments for other than temporary impairment by considering current factors including economic environment, market conditions, operational performance and other specific factors relating to the business underlying the investment, and record reductions in carrying values when necessary.

Long-lived assets. Long-lived assets, including fixed assets and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable through estimated future cash flows from that asset. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance.

Share-Based Payments. Effective January 1, 2006, we adopted FASB 123R, "Share-Based Payment", using the modified prospective application method. Under this method, for all unvested awards as of January 1, 2006, we record compensation cost based upon the fair value of those awards on the grant date over the remaining service period of each award on a straight line basis. For awards granted after January 1, 2006, we record compensation cost based upon the fair value of those awards on the grant date over the service period of each award on a straight line basis.

We estimate the value of these awards on the date of grant using a Black-Scholes option pricing model. The determination of the fair value of these awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates.

If factors change and we employ different assumptions in the application of FASB 123R in future periods, the compensation expense that we record under FASB 123R may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation under FASB 123R. Consequently, there is a risk that our estimates of the fair values of these awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Employee stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our consolidated financial statements. During the three and nine months ended September 30, 2008, we do not believe that reasonable changes in the projections would have had a material effect on share-based compensation expense.

Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended September 30, 2007

Revenues decreased $82,000 from $578,000 for the nine months ended September 30, 2007 to $496,000 for the nine months ended September 30, 2008 and decreased $73,000 from $191,000 for the three months ended September 30, 2007 to $118,000 for the three months ended September 30, 2008. One F&B store, with revenues of $349,000 and $115,000 for the nine and three months ended September 30, 2007, respectively, was closed in December 2007. During the nine months ended September 30, 2008, Zargis recognized $129,000 in revenues, including $124,000 from the completion of a contract which revenues had previously been deferred.

Selling, general and administrative expenses increased $1,080,000 from $2,806,000 for the nine months ended September 30, 2007 to $3,886,000 for the nine months ended September 30, 2008 and increased $707,000 from $885,000 for the three months ended September 30, 2007 to $1,592,000 for the three months ended September 30, 2008. These increases are primarily a result of increases from DDC in the amounts of $1,356,000 and $811,000 and legal expenses in connection with litigating patent infringement claims in the amounts of $272,000 and $123,000 in the corporate segment for the nine and three months ended September 30, 2008, respectively, net of decreases in the amounts of $304,000 and $119,000, respectively, from the closing of one F&B store in December 2007. DDC is included in the consolidated financial statements of the Company since March 5, 2008, the date of acquisition.

Research and development expenses increased $385,000 from $1,259,000 for the nine months ended September 30, 2007 to $1,644,000 for the nine months ended September 30, 2008 and increased $20,000 from $524,000 for the three months ended September 30, 2007 to $544,000 for the three months ended September 30, 2008. These increases are primarily a result of increases in connection with continuing development of Zargis' medical device technology in the amounts of $503,000 and $186,000 for the nine and three months ended September 30, 2008, respectively, net of decreases in the amounts of $118,000 and $166,000 for the nine and three months ended September 30, 2008, respectively, in connection with the Company's Internet initiatives as a result of less development work being done in the 2008 periods.

Depreciation and amortization increased $198,000 from $156,000 for the nine months ended September 30, 2007 to $354,000 for the nine months ended September 30, 2008. This increase, net of decreases as a result of assets having become fully depreciated, is primarily a result of a $286,000 loss on the fixed asset component of F&B assets held for sale during the 2008 period.

Investment income decreased $862,000 from a net gain of $863,000 for the nine months ended September 30, 2007 to a net gain of $1,000 for the nine months ended September 30, 2008 and decreased $303,000 from a net gain of $153,000 for the three months ended September 30, 2007 to a net loss of $150,000 for the three months ended September 30, 2008. Realized gains increased $86,000 from net gains of $68,000 for the nine months ended September 30, 2007 to net gains of $154,000 for the nine months ended September 30, 2008 and decreased $3,000 from net gains of $53,000 for the three months ended September 30, 2007 to net gains of $50,000 for the three months ended September 30, 2008. Unrealized gains decreased $608,000 from net gains of $288,000 for the nine months ended September 30, 2007 to net losses of $320,000 for the nine months ended September 30, 2008 and decreased $175,000 from net losses of $58,000 for the three months ended September 30, 2007 to net losses of $233,000 for the three months ended September 30, 2008. Interest income decreased $340,000 from $507,000 for the nine months ended September 30, 2007 to $167,000 for the nine months ended September 30, 2008 and decreased $125,000 from $158,000 for the three months ended September 30, 2007 to $33,000 for the three months ended September 30, 2008. These amounts will fluctuate based upon changes in the market value of the underlying investments, overall market conditions and the amount of funds available for short-term investment and are not necessarily indicative of the results that may be expected for any future periods.

Liquidity and Capital Resources

The Company has recorded operating losses and negative operating cash flows in each year of its operations since inception.

Net cash used in operating activities was $4,647,000 for the nine months ended September 30, 2008 compared to net cash used in operating activities of $4,332,000 for the nine months ended September 30, 2007. This net increase in cash used in operating activities was primarily the result of the increase in net loss after adjustment for non-cash charges, substantially offset by a reduced level of purchases of marketable securities.

Net cash provided by investing activities was $2,986,000 for the nine months ended September 30, 2008 compared to net cash used in investing activities of $1,019,000 for the nine months ended September 30, 2007. This net increase in cash provided by

investing activities was primarily the result of an approximate $15,000,000 decrease in maturities and an approximate $19,000,000 decrease in purchases of United States Treasury bills during the nine months ended September 30, 2008.

Net cash used in financing activities was $42,000 for the nine months ended September 30, 2008 primarily as a result of a $100,000 redemption of preferred stock, net of a $75,000 capital contribution in DDC by the minority investor.

At September 30, 2008, the Company's future minimum lease payments due under non-cancelable leases aggregated $238,000. $51,000 of this amount is due during the remainder of 2008 and $155,000 and $32,000 is due during the years ending December 31, 2009 and 2010, respectively. In addition, in connection with a license agreement to which the Company is a party, a termination payment will be payable by the Company in the amount of $300,000 or $200,000 if the license agreement is terminated by the Company before September 2009 or September 2011, respectively.

The Company believes that it has sufficient liquidity to finance its current level of operations and expected capital requirements through the next twelve months. However, the Company does not expect to have earnings from operations until such time as it substantially increases its customer base and/or forms a strategic alliance for use of its capabilities in the future. We cannot predict when this will occur. We have no material non-cancelable commitments and the amount of future capital funding requirements will depend on a number of factors that we cannot quantify, including the success of our business and the types of services we offer, as well as other factors that are not within our control, including competitive conditions, government regulatory developments and capital costs. The lack of additional capital in the future could have a material adverse effect on the Company's financial condition, operating results and prospects for growth.

We have invested a portion of our assets in a portfolio of marketable securities consisting of publicly traded equity securities. We purchase these securities in anticipation of increases in the fair market values of the securities. We have also sold publicly traded equity securities we do not own in anticipation of . . .