Summary of SPEEDUS CORP - Yahoo! Finance

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview
Speedus Corp. operates primarily through its two majority-owned subsidiaries Zargis Medical Corp. and Density Dynamics Corporation.

In 2001 we 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. In March of 2008 we acquired a majority interest in Density Dynamics Corporation, a pioneer in environmentally friendly solid-state storage and I/O acceleration technology.

For additional information on each of these business segments and our other assets and operations, see the discussions below and "Notes to Consolidated Financial Statements - Note 10, Business Segment Information."

Zargis Medical Corp.
Zargis is a medical device company focused on improving health outcomes and cost effectiveness through the development of computer-aided medical devices and telemedicine based delivery systems. Zargis was formed in 2001 when we co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation. As part of this transaction, Siemens contributed certain intellectual property including a core technology used in the Zargis Cardioscan™ device (Cardioscan).

Cardioscan is a non-invasive, diagnostic support solution that automatically analyzes acoustical data from a patient to determine whether or not the patient possesses a suspected diastolic or systolic murmur and whether or not they present a Class I indication for echocardiography referral. Heart murmurs can be a sign of serious types of valvular or other heart disease. Zargis' patented technology utilizes advanced signal processing algorithms deployed on a standard pc computer platform. Cardioscan received its initial FDA clearance in May 2004 and additional clearances in September 2005 and March 2006.

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In addition to the development of Cardioscan, Zargis has been awarded several contracts by the U.S. Army, most recently in October of 2008, to develop prototype versions of telemedicine systems for use in cardiology. These systems record, synchronize and analyze heart sounds, lung sounds and ECG signals in pediatric patients who are being cared for by remote military treatment facilities. The systems have been fully integrated with an existing Army telehealth platform.

Demand for medical systems designed to remotely project the expertise of cardiologists and other medical specialists is growing within both military and civilian environments worldwide and it is for this reason that Zargis has identified the field of telemedicine as a key focus area for product commercialization.

In February 2003, we acquired a controlling interest in Zargis Medical of approximately 63%. At December 31, 2008, as a result of continued investment, our primary equity ownership interest was approximately 93%.

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 with 3M, based on the total number of Zargis fully diluted shares as of the agreement date, grants 3M a 5% equity position in Zargis following the first sale of Zargis' software through the 3M distribution channel (which occurred in August of 2009) and an additional 5% equity in Zargis in the event that other conditions are met. The agreement also entitles 3M to a royalty payment based on sales of certain Zargis products and a seat on the Zargis Board of Directors.

Density Dynamics
In March 2008, we obtained approximately a 75% equity interest in Density Dynamics Corporation. Density Dynamics 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.

Density Dynamics is continuing development of its line of environmentally friendly solid-state storage and I/O acceleration technology. The Density Dynamics Jet.io Solid RamFlash Solid State Drive product line provides innovative solutions for high performance storage requirements that greatly reduce the complexity, space requirements, and power requirements compared to traditional storage solutions. The Jet.io products are unique because they provide a scalable industry standard 3.5" drive format and also use patented low power DRAM technology which provides low latency, high IOPS and long durability.

Other Business Activities
F&B Gudtfood
As a result of continued losses at the two F&B restaurant locations we closed one F&B restaurant store in 2007 and in October 2008 transferred the operations and liabilities of the remaining F&B restaurant store in to an unrelated third party for no consideration. We have reflected the accounts of F&B as a discontinued operation in our consolidated financial statements for the period ending December 31, 2008.

Local Multipoint Distribution Service (LMDS) License We have an FCC commercial operating license which covers between 150 - 300 MHz of spectrum in the New York City area. 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."

Internet initiatives
In the fourth quarter of 2008, we ceased allocation of any material resources to our portfolio of Internet initiatives, which included NetfreeUs, Wibiki, Adchooser and iMarklet.

Investments
We have invested a portion of our assets in a portfolio of marketable securities consisting of publicly traded equity securities. We have in the past and may in the future sell publicly traded equity securities we do not own in anticipation of declines in the fair market values of these securities. As of December 31, 2008, we had not sold any securities that we did not own.

We have also invested a portion of our assets in equity and debt instruments of non-publicly held companies. The Company monitors 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(s). The Company determined that based on the current general negative economic and liquidity environment affecting the ability of businesses to obtain credit and to raise money in the capital markets, and based on specific unobserved data received from the underlying entities indicating severe operational and liquidity problems, there is significant doubt as to whether these entities will be able to continue to operate as going concerns. Therefore, during the fourth quarter of 2008 the Company made an impairment charge of $800,000 against these assets reducing the fair value of these non-public investments to zero as of December 31, 2008.

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Critical Accounting Policies

General
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 2 to our consolidated financial statements included in this 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 and marketable securities. The carrying value of cash equivalents 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. 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
We account for share-based payments under FASB 123R, "Share-Based Payment." Under this method, 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.

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 years December 31, 2008 and 2007, we do not believe that reasonable changes in the projections would have had a material effect on share-based compensation expense.

Contingencies
We account for contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies". SFAS No. 5 requires that we record an estimated loss when information available prior to issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as environmental, legal and income tax matters requires us to use our judgment. While we believe that our accruals for these matters are adequate, if the actual loss is significantly different than the estimated loss, our results of operations will be affected in the period that the difference is known.

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Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 Revenues increased approximately $145,000 from $11,000 for the year ended December 31, 2007 to approximately $156,000 for the year ended December 31, 2008. Revenues consisted primarily of a service contract completed by Zargis.

Selling, general and administrative expenses increased approximately $2,212,000 from approximately $2,819,000 for the year ended December 31, 2007 to approximately $5,031,000 for the year ended December 31, 2008. This increase is primarily a result of the inclusion of Density Dynamics in the amount of approximately $1,287,000, and an increase of approximately $1,300,000 in withholding tax related expenses (see below) in the corporate segment, and legal expenses in connection with litigating patent infringement claims in the amount of approximately $125,000 in the corporate segment. Density Dynamics is included in the consolidated financial statements of the Company since March 5, 2008, the date of acquisition.

Research and development expenses increased approximately $1,313,000 from approximately $1,613,000 for the year ended December 31, 2007 to approximately $2,926,000 for the year ended December 31, 2008. This increase is primarily a result of an increase in the amount of approximately $941,000 from the inclusion of Density Dynamics, included in the consolidated financial statements of the Company since March 5, 2008, the date of acquisition, and an increase in the amount of approximately $582,000 as a result of continuing development of Zargis' medical device technology. The increase for the year ended December 31, 2008 is net of a decrease in the amount of approximately $210,000 in connection with the Company's Internet initiatives as a result of less development work being done in 2008.

Depreciation and amortization increased approximately $21,000 from approximately $63,000 for the year ended December 31, 2007 to approximately $84,000 for the year ended December 31, 2008. This increase is primarily a result of an increase from Density Dynamics in the amount of approximately $72,000, net of a decrease in the amount of approximately $34,000 as a result of the completion of amortization of Zargis medical technology in 2007 and a decrease in the amount of approximately $17,000 as a result of assets becoming fully depreciated in the corporate segment. Density Dynamics is included in the consolidated financial statements of the Company since March 5, 2008, the date of acquisition.

Investment income decreased approximately $311,000 from a net gain in the amount of approximately $851,000 for the year ended December 31, 2007 to a net gain in the amount of approximately $540,000 for the year ended December 31, 2008. Net interest expense increased approximately $51,000 from $0 for the year ended December 31, 2007 to approximately $51,000 for the year ended December 31, 2008. This net increase in interest expense is due to interest and dividends of approximately $51,000 relating to a convertible note issued to a minority owner in 2008. These investment income 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.

Non Recurring Charges
Withholding Tax Provision

On January 22, 2009, the Internal Revenue Service (the "IRS") issued a "30-day letter" to the Company asserting that withholding income tax was due to the IRS in connection with this payment, plus interest and penalties, which totaled approximately $1.3 million ("Claim"). Thereafter, on February 23, 2009, the IRS issued notice of its intention to levy in respect of these claims. The Company appealed the IRS proposed tax adjustment and while the appeal process is underway, any related IRS levy has been stayed. The Company took the step to set aside sufficient cash to satisfy the Claim and other potential obligations that may arise with respect to this issue. The Company has established a reserve of $1.3 million in accrued expenses and recorded a charge to selling, general and administrative expenses for this claim at December 31, 2008.

Recently, the Company met with officials of the IRS and proposed a settlement that would relieve the Company of responsibility for payment of the Federal income tax withholding with respect to the $2.8 million payment in exchange for the payment by the Company of Social Security and Medicare taxes (including associated interest) on such amount. While the Company reasonably believes that a settlement will be achieved and expects a decision before the end of October of 2009, there can be no assurance that a settlement will be reached or that the ultimate payment will be below the amount levied.

Non-public Company Investment Impairment.

We have invested a portion of our assets in equity and debt instruments of non-publicly held companies. The Company monitors 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(s). The Company determined that based on the current general negative economic and liquidity environment affecting the ability of businesses to obtain credit and to raise money in the capital markets, and based on specific unobserved data received from the underlying entities indicating severe operational and liquidity problems, there is significant doubt as to whether these entities will be able to continue to operate as going concerns. Therefore, during the fourth quarter of 2008 the Company recorded an impairment charge of $800,000 against these assets reducing the fair value of these non-public investments to zero as of December 31, 2008.

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Intellectual Property Impairment.

The Company's acquisition of Density Dynamics included certain intangible assets which had a carrying value of $0.5 million at December 31, 2008, before adjustment. However, during the fourth quarter of 2008, in light of market conditions affecting the ability of this business to obtain credit and to raise money in the capital markets and, our ability to fund this operation and generate sufficient cash to fully realize these assets, the realization of these assets became uncertain. As a result, during the fourth quarter of 2008, we recognized an impairment loss in the amount of approximately $0.5 million.

Liquidity and Capital Resources

We have recorded operating losses and negative operating cash flows since our inception and have limited revenues. At December 31, 2008, we had an accumulated deficit of approximately $83,116,000. We do not expect to have earnings from operations or positive operating cash flow until such time as our strategic investments achieve successful implementation of their business plans and/or form alliances for the use of our capabilities in the future.

We may not have funds sufficient to finance our operations and enable us to meet our financial obligations for the next twelve months. There can be no assurances that we will be able to consummate any capital raising transactions, particularly in view of current economic conditions. The inability to generate future cash flow or raise funds to finance our strategic investments could have a material adverse effect on our ability to achieve our business objectives.

The report of our independent registered public accounting firm for the fiscal year ended December 31, 2008 contains an explanatory paragraph which states that there is substantial doubt about our ability to continue as a going concern.

If we are not able to reduce or defer our expenditures, secure additional sources of revenue or otherwise secure additional funding, we may be unable to continue as a going concern, and we may be forced to restructure or significantly curtail our operations, file for bankruptcy or cease operations. In addition, a bankruptcy filing by one or more of our strategic investments could cause us to lose our investment and/or control and could prevent us from sharing in any future success of those strategic investments. The accompanying financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets or the amount of liabilities that might result should the Company be unable to continue as a going concern. Should we be successful in securing the necessary capital to continue operations, it is likely that such arrangements would result in significant dilution to each shareholder's ownership interest in the Company.

Net cash used in operating activities was approximately $6,070,000 for the year ended December 31, 2008 compared to approximately $3,310,000 for the year ended December 31, 2007. This net increase in cash used in operating activities is primarily the result of an increase in operating expenses.

Net cash provided by investing activities was approximately $2,984,000 for the year ended December 31, 2008 compared to approximately $1,953,000 for the year ended December 31, 2007. This net increase in cash provided by investing activities is primarily the result of an approximately $2,997,000 maturation in 2008 of United States Treasury bills purchased in 2007.

Net cash provided from financing activities was approximately $248,000 for the year ended December 31, 2008 compared to net cash used in financing activities of approximately $1,700 for the year ended December 31, 2007. This net increase in cash provided by financing activities is a result of proceeds received from note financing by a minority investor.

At December 31, 2008, the Company's future minimum lease payments due under non-cancelable leases aggregated approximately $146,000. Minimum lease payments of approximately $131,000 and approximately $15,000 are 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 $200,000 if the license agreement is terminated by the Company before September 1, 2011.

On March 5, 2008, the Company acquired a 75% interest in Density Dynamics Corporation ("DDC"), 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. The acquisition price was $1,000,000. In exchange, the Company received $1,000,000 of redeemable preferred stock from DDC, which has been eliminated in consolidation.

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This acquisition was accounted for using the purchase method of accounting. The results of operations of DDC have been included in the consolidated statements of operations from the date of acquisition. The fair value of the net assets acquired as of the acquisition date has been allocated: $195,000 to current assets, $34,000 to non current assets, $580,000 to other intangible assets and $(809,000) to liabilities. The $580,000 allocated as an intangible asset (reflecting intellectual property assets of DDC) was being amortized over a period of seven years until written off in the fourth quarter of 2008.

In connection with the acquisition, DDC issued $809,400 of redeemable preferred stock to the 25% owner, $100,000 of which was redeemed at the time of closing. The redeemable preferred stock accrues dividends equal to 8% of the original purchase price of $10 per share (the "Original Purchase Price"). The redeemable preferred stock will be redeemed for the Original Purchase Price plus accrued and unpaid dividends as follows: $70,000 during the year ended December 31, 2009, $50,000 out of a future financing by the Company, 50% out of the cash flow of DDC as defined, and to the extent that any redeemable preferred shares remain outstanding, the balance will be redeemed in 2013. The Company has reflected this redeemable preferred stock as a liability on its December 31, 2008 consolidated balance sheet. For the year ended December 31, 2008, the Company has recorded accrued dividends on this redeemable preferred stock in the amount of $47,000 and has included it as a liability on its December 31, 2008 consolidated balance sheet.

In July 2008, DDC sold 300,000 shares of its common stock for a price of $1 per share. 225,000 shares were sold to Speedus and 75,000 shares were sold to the minority owner of DDC. The investment by Speedus has been eliminated in consolidation. The investment by the minority owner has been reflected in additional paid-in-capital during the year ended December 31, 2008. In connection with this sale of stock, DDC issued seven year warrants to purchase 56,250 and 18,750 shares of DDC common stock to Speedus and the minority owner, respectively, for a purchase price of $1 per share.

In October 2008, DDC sold $500,000 in 8% convertible notes, in the amounts of $250,000 to each of the Company and the minority owner. In December 2008, DDC agreed to sell an additional $500,000 in 8% convertible notes, in the amounts of $250,000 to each of the Company and the minority owner. At December 31, 2008, $75,000 had been advanced by each of the Company and the minority owner. In 2009, the remaining balance of $175,000 was advanced by each of the Company and the minority owner. The aggregate amount under the notes is due December 31, 2009 unless otherwise converted in connection with any financings completed by
DDC. The loan by the Company has been eliminated in consolidation. For the year ended December 31, 2008, accrued interest on the convertible note to the minority owner in the amount of $4,000 has been recorded as interest expense and accrued interest on the convertible note to the Company in the amount of $4,000 has been eliminated in consolidation.

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 in the past and may in the future sell publicly traded equity securities we do not own in anticipation of declines in the fair market values of these securities. When we sell securities that we do not own, we must borrow the securities we sold in order to deliver them and settle the trades. Thereafter, we must buy the securities and deliver them to the lender of the securities. Our potential for loss on these transactions is unlimited since the value of the underlying security can keep increasing. At December 31, 2008 and 2007, we had not sold any securities that we did not own.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board issued FASB No. 141R, "Business Combinations". FASB 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial . . .