UNITED STATES FORM 10-Q |
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE For the quarterly period ended September 30, 2007 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE For the transition period from _____________________ to _______________________ Commission file number: 000-27582 SPEEDUS CORP. |
Delaware | 13-3853788 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
9 Desbrosses Street, Suite 402 | |
New York, New York | 10013 |
(Address of principal executive offices) | (Zip Code) |
888-773-3669 |
(Registrants telephone number, including area code) Not Applicable |
(Former name, former address and former fiscal year, if changed |
since last report) |
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 þ No o | |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. |
Large accelerated filer o Accelerated filer o Non-accelerated filer þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ | |
The number of outstanding shares of the registrants common stock, par value $.01 per share, as
of November 9, 2007 was 15,967,640. |
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SPEEDUS CORP. INDEX TO FORM 10-Q |
PART I FINANCIAL INFORMATION |
Page |
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Item 1. | Financial Statements | ||
Consolidated Balance Sheets (unaudited) as of September 30, 2007 and December 31, 2006 |
3 | ||
Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2007 and 2006 |
4 | ||
Consolidated Statements of Cash Flows (unaudited) for the Three and Nine Months Ended September 30, 2007 and 2006 |
5 | ||
Condensed Notes to Consolidated Financial Statements (unaudited) | 6-9 | ||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
10-15 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | |
Item 4T. | Controls and Procedures | 15 | |
PART II OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 16 | |
Item 1A. | Risk Factors | 16 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 16 | |
Item 3. | Defaults Upon Senior Securities | 16 | |
Item 4. | Submission of Matters to a Vote of Security Holders | 16 | |
Item 5. | Other Information | 16 | |
Item 6. | Exhibits | 16 | |
Signature Page | 17 | ||
2 |
SPEEDUS CORP. CONSOLIDATED BALANCE SHEETS (unaudited) |
September 30, 2007 |
December 31, 2006 |
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ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 4,851,678 | $ | 10,204,167 | |||
United States Treasury bills | 5,975,190 | 4,990,250 | |||||
Marketable securities | 2,139,548 | 354,011 | |||||
Prepaid expenses and other | 123,211 | 143,654 | |||||
Total current assets | 13,089,627 | 15,692,082 | |||||
Property and equipment, net of accumulated depreciation of $567,289 and $444,972 |
439,190 | 527,828 | |||||
Other intangible assets, net of accumulated amortization of $1,125,928 in 2006 |
| 34,116 | |||||
Other investments | 800,000 | 800,000 | |||||
Other assets | 83,127 | 81,737 | |||||
Total assets | $ | 14,411,944 | $ | 17,135,763 | |||
LIABILITIES AND STOCKHOLDERS EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 61,191 | $ | 62,805 | |||
Accrued liabilities | 1,156,759 | 971,055 | |||||
Total current liabilities | 1,217,950 | 1,033,860 | |||||
Commitments and Contingencies | |||||||
Stockholders equity: | |||||||
Common stock ($.01 par value; 50,000,000 shares authorized; 21,750,174 shares issued) |
217,502 | 217,502 | |||||
Preferred stock ($.01 par value; 20,000,000 shares authorized): |
|||||||
Series A Junior Participating ($.01 par value; 4,000 shares authorized; no shares issued and outstanding) |
| | |||||
Additional paid-in-capital | 91,569,765 | 91,464,119 | |||||
Treasury stock (at cost; 5,782,534 and 5,780,884 shares) | (6,085,078 | ) | (6,083,360 | ) | |||
Accumulated deficit | (72,508,195 | ) | (69,496,358 | ) | |||
Stockholders equity | 13,193,994 | 16,101,903 | |||||
Total liabilities and stockholders equity | $ | 14,411,944 | $ | 17,135,763 | |||
The accompanying notes are an integral part of these consolidated financial statements. |
3 |
SPEEDUS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) |
Three months ended September 30, |
Nine months ended September 30, |
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2007 | 2006 | 2007 | 2006 | ||||||||||
Revenues | $ | 191,473 | $ | 210,179 | $ | 577,928 | $ | 638,318 | |||||
Expenses: | |||||||||||||
Selling, general and administrative | 885,302 | 699,044 | 2,806,000 | 3,161,916 | |||||||||
Research and development | 524,296 | 482,199 | 1,258,557 | 1,384,346 | |||||||||
Depreciation and amortization | 51,340 | 174,272 | 156,433 | 617,665 | |||||||||
Cost of sales | 89,912 | 70,969 | 231,614 | 230,215 | |||||||||
Total operating expenses | 1,550,850 | 1,426,484 | 4,452,604 | 5,394,142 | |||||||||
Operating loss | (1,359,377 | ) | (1,216,305 | ) | (3,874,676 | ) | (4,755,824 | ) | |||||
Investment income | 152,674 | 232,460 | 862,839 | 268,109 | |||||||||
Net loss | $ | (1,206,703 | ) | $ | (983,845 | ) | $ | (3,011,837 | ) | $ | (4,487,715 | ) | |
Per share: | |||||||||||||
Loss per common share - basic and diluted | $ | (0.08 | ) | $ | (0.06 | ) | $ | (0.19 | ) | $ | (0.28 | ) | |
Weighted average common shares outstanding - basic and diluted |
15,967,640 | 16,024,108 | 15,968,359 | 16,063,362 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements. |
4 |
SPEEDUS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) |
Nine months ended September 30, |
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2007 | 2006 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (3,011,837 | ) | $ | (4,487,715 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: |
|||||||
Depreciation and amortization | 156,433 | 617,665 | |||||
Unrealized investment (gains)/losses | (347,315 | ) | 470,095 | ||||
Stock based compensation | 105,646 | 552,795 | |||||
Changes in operating assets and liabilities: | |||||||
Marketable securities | (1,438,222 | ) | 462,529 | ||||
Prepaid expenses and other | 20,443 | (1,858 | ) | ||||
Other assets | (1,390 | ) | 622,728 | ||||
Accounts payable | (1,614 | ) | 18,808 | ||||
Accrued liabilities | 185,704 | (221,023 | ) | ||||
Net cash used in operating activities | (4,332,152 | ) | (1,965,976 | ) | |||
Cash flows from investing activities: | |||||||
Property and equipment additions | (33,679 | ) | (381,090 | ) | |||
United States Treasury bills: | |||||||
Purchases | (18,984,940 | ) | (14,989,300 | ) | |||
Maturities | 18,000,000 | 10,000,000 | |||||
Net cash used in investing activities | (1,018,619 | ) | (5,370,390 | ) | |||
Cash flows from financing activities: | |||||||
Repurchase of stock | (1,718 | ) | (131,207 | ) | |||
Net cash used in financing activities | (1,718 | ) | (131,207 | ) | |||
Net decrease in cash and cash equivalents | (5,352,489 | ) | (7,467,573 | ) | |||
Cash and cash equivalents, beginning of period | 10,204,167 | 18,563,088 | |||||
Cash and cash equivalents, end of period | $ | 4,851,678 | $ | 11,095,515 | |||
The accompanying notes are an integral part of these consolidated financial statements. |
5 |
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Other investments consist of: |
September 30, 2007 |
December 31, 2006 |
|||||||
(a) 791,667 shares of preferred stock of a non-publicly held cardiovascular technology company, recorded at cost in the amount of $300,000. In connection with this investment, the Company also received warrants expiring in 2009 to purchase 375,000 shares of common stock at $.40 per share. This investment was acquired in 2004. |
$ | 300,000 | $ | 300,000 | ||||
(b) an investment in an entity specifically formed to invest in convertible preferred stock in a non-publicly held online and directory assistance company, recorded at cost in the amount of $250,000. The preferred stock is convertible into shares of common stock at a conversion price equal to 50% of the price of the common stock in an initial public offering. This investment was acquired in 2005. |
250,000 | 250,000 | ||||||
(c) an investment in an entity specifically formed to invest in a senior third-party note of a non-publicly held online and directory assistance company, recorded at cost in the amount of $250,000. The note is convertible into shares of common stock at a conversion price equal to the price of the common stock in an initial public offering. This investment was acquired in 2005. |
250,000 | 250,000 | ||||||
$ | 800,000 | $ | 800,000 | |||||
Securities Sold But Not Purchased The Company has in the past and may in the future sell publicly traded equity securities it does not own in anticipation of declines in the fair market values of the securities. When the Company effects such transactions, it must borrow the securities it sold in order to deliver them and settle the trades. The amounts shown on the balance sheet as Securities sold and not purchased represent the value of these securities at fair market value. At September 30, 2007 and December 31, 2006, there were no securities sold and not purchased. Concentrations of Credit Risk Financial instruments that potentially could subject the Company to concentrations of credit risk consist largely of cash equivalents and marketable securities. These instruments are potentially subject to concentrations of credit risk but the Company believes that this risk is limited due to diversification and investments being made in investment grade securities. The Company has in the past and may in the future sell publicly traded equity securities that it does not own in anticipation of declines in the fair market values of the securities. When the Company sells securities that it does not own, it must borrow the securities it sold in order to deliver them and settle the trades. Thereafter, the Company must buy the securities and deliver them to the lender of the securities. The Companys potential for loss on these transactions is unlimited since the value of the underlying security can keep increasing which could have a material adverse effect on the Companys consolidated financial statements. Property and Equipment Office equipment and leasehold improvements are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from three to seven years, but not longer than initial lease terms in the case of leasehold improvements. When assets are fully depreciated, it is the Companys policy to remove the costs and related accumulated depreciation from its books and records. Long-lived Assets The Company periodically evaluates the net realizable value of long-lived assets, including fixed and intangible assets, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, relying on anticipated future cash flows. The Companys evaluation of anticipated future cash flows considers operating results, business plans and economic projections, as well as, non-financial data such as market trends, product and development cycles, and changes in managements market emphasis. An impairment in the carrying value of an asset is recognized when the |
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expected future operating cash flows derived from the asset are less than its carrying value. Revenue Recognition Revenues from F&B Güdtfoods operations are recorded on a cash basis. Earnings Per Share Basic and diluted earnings/(loss) per common share are determined in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For the three and nine months ended September 30, 2007 and 2006, outstanding stock options and warrants in the aggregate weighted average amount of 2,164,000, 2,130,000, 2,174,000 and 1,995,000, respectively, have been excluded from the diluted loss per share since their effect would be antidilutive. Stock Options Effective January 1, 2006, the Company adopted FASB 123R, Share-Based Payment, using the modified prospective application method. Under this method, for all unvested awards as of January 1, 2006, the Company records 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, the Company records 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. Stock based compensation expense recognized during the three and nine months ended September 30, 2007 and 2006 was $50,000, $106,000, $5,000 and $553,000, respectively. The fair value of the awards on the grant date was estimated using a Black-Scholes option pricing model. Assumptions utilized in the model for both Speedus and Zargis are evaluated and revised, as necessary, to reflect market conditions and experience. Recent Accounting Pronouncements There have been no recent accounting pronouncements which upon future adoption would have an effect on the Companys results of operations or financial position, except as disclosed below. In September 2006, the Financial Accounting Standards Board issued FASB 157, Fair Value Measurements. FASB 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not expect adoption of FASB No. 157 to have a material effect on its results of operations or financial position. In February 2007, the Financial Accounting Standards Board issued FASB No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, which permits companies to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). FASB 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the possible impact of adopting FASB No. 159 on our consolidated financial statements. Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of the date of adoption, there were no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months from the date of adoption of FIN 48 or from September 30, 2007. As of September 30, 2007, the only tax jurisdictions to which the Company is subject are the United States and several states where the Company operates. Open tax years relate to years in which unused net operating losses were generated. Thus, upon adoption of FIN 48, the Companys open tax years extend back to 2000. In the event that the Company concludes that it is subject to interest and/or penalties arising from uncertain tax positions, the Company will present interest and penalties as a component of income taxes. No amounts of interest or penalties were recognized in the Companys Consolidated Statements of Operations or Consolidated Balance Sheets upon adoption of FIN 48 or as of and for the three and nine months ended September 30, 2007. |
8 |
2. Business Segment Information The following table sets forth the Companys financial performance by reportable operating segment for the three and nine months ended September 30, 2007 and 2006. |
Three months ended September 30, 2007 |
||||||||||||||||
F&B |
Zargis |
Wibiki |
Corporate and other |
Totals |
||||||||||||
Revenues from external customers | $ | 191,473 | $ | | $ | | $ | | $ | 191,473 | ||||||
Depreciation and amortization | 32,186 | 2,803 | | 16,351 | 51,340 | |||||||||||
Operating loss | (185,099 | ) | (515,117 | ) | (215,601 | ) | (443,560 | ) | (1,359,377 | ) | ||||||
Investment income | 435 | | | 152,239 | 152,674 | |||||||||||
Other intangible assets | | | | | | |||||||||||
Fixed assets | 414,943 | 22,584 | | 1,663 | 439,190 | |||||||||||
Total assets | 597,376 | 62,376 | | 13,752,192 | 14,411,944 |
Three months ended September 30, 2006 |
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F&B |
Zargis |
Wibiki |
Corporate and other |
Totals |
||||||||||||
Revenues from external customers | $ | 210,179 | $ | | $ | | $ | | $ | 210,179 | ||||||
Depreciation and amortization | 35,868 | 3,957 | | 134,447 | 174,272 | |||||||||||
Operating loss | (177,762 | ) | (430,230 | ) | (274,443 | ) | (333,870 | ) | (1,216,305 | ) | ||||||
Investment income | | 4 | | 232,456 | 232,460 | |||||||||||
Other intangible assets | | 45,492 | | 103,192 | 148,684 | |||||||||||
Fixed assets | 617,484 | 24,757 | | 21,612 | 663,853 | |||||||||||
Total assets | 811,403 | 38,560 | | 17,342,172 | 18,192,135 |
Nine months ended September 30, 2007 |
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F&B |
Zargis |
Wibiki |
Corporate and other |
Totals |
||||||||||||
Revenues from external customers | $ | 566,928 | $ | 11,000 | $ | | $ | | $ | 577,928 | ||||||
Depreciation and amortization | 99,026 | 8,329 | | 49,078 | 156,433 | |||||||||||
Operating loss | (583,219 | ) | (1,390,537 | ) | (376,790 | ) | (1,524,130 | ) | (3,874,676 | ) | ||||||
Investment income | 1,330 | | | 861,509 | 862,839 | |||||||||||
Nine months ended September 30, 2006 |
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F&B |
Zargis |
Wibiki |
Corporate and other |
Totals |
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Revenues from external customers | $ | 637,980 | $ | | $ | | $ | 338 | $ | 638,318 | ||||||
Depreciation and amortization | 118,871 | 9,605 | | 489,189 | 617,665 | |||||||||||
Operating loss | (822,444 | ) | (1,259,014 | ) | (645,788 | ) | (2,028,578 | ) | (4,755,824 | ) | ||||||
Investment income | 1,026 | 62 | | 267,021 | 268,109 |
The Company has no foreign operations. During the three and nine months ended September 30, 2007 and 2006, the Company did not have sales to any individual customer greater than 10% of total Company revenues. The Companys accounting policies for segments are the same as those described in Note 1. 3. Subsequent Event In October 2007, Zargis and the 3M Company entered into an exclusive multi-year marketing agreement involving Zargis heart sound analysis software and 3M Littmanns 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 ground-breaking heart sound analysis software through the global distribution network of the Littmann brand. The agreement grants 3M a minority equity position in Zargis, following the first sale of Zargis software through the 3M distribution channel, and a seat on Zargis board of directors. |
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In October 2007, Zargis and the 3M Company entered into an exclusive multi-year marketing agreement involving Zargis heart sound analysis software and 3M Littmanns 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 ground-breaking heart sound analysis software through the global distribution network of the Littmann brand. The agreement grants 3M a minority equity position in Zargis, following the first sale of Zargis software through the 3M distribution channel, and a seat on Zargis board of directors. In February 2003, we acquired a controlling interest in Zargis Medical. At September 30, 2007, as a result of continued investment, our ownership interest was approximately 81%. 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 two stores 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%. We have also entered into a management services contract with F&B Güdtfood that will result in direct revenues to us although these revenues will be eliminated on our consolidated financial statements. 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 with expiration dates ranging from 2007 through 2017, 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 great 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. Wibiki. During 2005, our technology resources and experience in wireless broadband enabled us to conceive a new software-based Wibiki initiative to leverage existing Wi-Fi infrastructures to reduce cost and complexity that is now available at www.gobiki.com. The business premise for Wibiki is an advertising platform we call Adbiki. On September 21, 2007, Wibiki launched a new beta service to transform web ads into a usable space by Wibiki members for sharing web content with their friends. We continue to evolve the Wibiki platform beyond its original wireless focus. Adbiki 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. 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 March 27, 2007 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 Companys FCC license renewal to October 6, 2008. Other. We have invested a portion of our assets in a portfolio of marketable securities consisting of publicly traded equity |
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securities. We have also invested a portion of our assets in equity and debt instruments of non-publicly held companies. 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. 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 2006 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, United States treasury bills and marketable securities and may include securities sold and not purchased. 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. 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. Prior to January 1, 2006, we accounted for our employee stock options in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended, which defines a fair value method of measuring and accounting for compensation expense from employee stock options. FASB 123 also allowed accounting for such options under the intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees. We elected to use the intrinsic value method and adopted the disclosure only provisions of FASB 123. Generally, no compensation cost was recognized since stock options were issued with exercise prices equal to the market value of the underlying shares on the grant date. 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 nine months ended September 30, 2007, we do not believe that reasonable changes in the projections |
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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. Three and Nine Months Ended September 30, 2007 Compared to Three and Nine Months Ended September 30, 2006 Revenues decreased $60,000 from $638,000 for the nine months ended September 30, 2006 to $578,000 for the nine months ended September 30, 2007 and decreased $19,000 from $210,000 for the three months ended September 30, 2006 to $191,000 for the three months ended September 30, 2007. These decreases are primarily the result of a reduction in menu prices at the Companys first store and a lack of customer acceptance of the F&B format at the second store. We are testing new menu concepts as a solution to customer acceptance. Selling, general and administrative expenses decreased $356,000 from $3,162,000 for the nine months ended September 30, 2006 to $2,806,000 for the nine months ended September 30, 2007 and increased $186,000 from $699,000 for the three months ended September 30, 2006 to $885,000 for the three months ended September 30, 2007. The decrease for the nine month periods is primarily a result of decreases in stock based compensation. The increase for the three month periods is primarily a result of the receipt of a withholding tax refund in the 2006 period. Research and development expenses decreased $125,000 from $1,384,000 for the nine months ended September 30, 2006 to $1,259,000 for the nine months ended September 30, 2007 and increased $42,000 from $482,000 for the three months ended September 30, 2006 to $524,000 for the three months ended September 30, 2007. The decrease for the nine month periods are primarily a result of a lower level of expenses incurred during the first half of 2007 in connection with new wireless initiatives by the Company with an increase in this activity during the three month periods. Depreciation and amortization decreased $462,000 from $618,000 for the nine months ended September 30, 2006 to $156,000 for the nine months ended September 30, 2007 and decreased $123,000 from $174,000 for the three months ended September 30, 2006 to $51,000 for the three months ended September 30, 2007. These decreases are primarily a result of a decrease in amortization of medical technology from the completion of amortization of early tranches of medical technology resulting from the Zargis acquisition, net of an increase as a result of renovation to one of the F&B Restaurant stores. Investment income increased $595,000 from a net gain of $268,000 for the nine months ended September 30, 2006 to a net gain of $863,000 for the nine months ended September 30, 2007 and decreased $79,000 from a net gain of $232,000 for the three months ended September 30, 2006 to a net gain of $153,000 for the three months ended September 30, 2007. Realized gains decreased $71,000 from net gains of $139,000 for the nine months ended September 30, 2006 to net gains of $68,000 for the nine months ended September 30, 2007 and increased $14,000 from net gains of $39,000 for the three months ended September 30, 2006 to net gains of $53,000 for the three months ended September 30, 2007. Unrealized gains increased $758,000 from net losses of $470,000 for the nine months ended September 30, 2006 to net gains of $288,000 for the nine months ended September 30, 2007 and decreased $21,000 from net losses of $37,000 for the three months ended September 30, 2006 to net losses of $58,000 for the three months ended September 30, 2007. Interest income decreased $93,000 from $599,000 for the nine months ended September 30, 2006 to $506,000 for the nine months ended September 30, 2007 and decreased $73,000 from $231,000 for the three months ended September 30, 2006 to $158,000 for the three months ended September 30, 2007. 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 approximately $4,300,000 for the nine months ended September 30, 2007 compared to net cash used in operating activities of approximately $2,000,000 for the nine months ended September 30, 2007 and 2006. This increase is primarily a result of a $300,000 increase in net loss after adjustment for non-cash items and a $1,700,000 increase in marketable securities. Net cash used in investing activities was approximately $1,000,000 for the nine months ended September 30, 2007 compared to net cash used in investing activities of approximately $5,400,000 for the nine months ended September 30, 2006. This net decrease in cash used in investing activities was primarily the result of a $8,000,000 increase in maturities and a $4,000,000 increase in purchases of United States Treasury bills and a $300,000 decrease in property and equipment additions during the nine months ended September 30, 2007. |
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Net cash used in financing activities was $2,000 for the nine months ended September 30, 2007 compared to net cash used in financing activities of $131,000 for the nine months ended September 30, 2006. This decrease was a result of decreases in repurchases of treasury stock. At September 30, 2007, the Companys future minimum lease payments due under non-cancelable leases aggregated $1,177,000. $111,000 of this amount is due during the remainder of 2007. $382,000, $233,000, $138,000 and $109,000 of this amount is due during the years ending December 31, 2008, 2009, 2010 and 2011, respectively, and $315,000 is payable thereafter. 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, the extent to which we expand our high-speed Internet service if suitable equipment becomes available 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 Companys 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 in the past and may in the future also 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. On June 19, 2007, the Company received a letter from the Nasdaq Stock Market informing the Company that it will have 180 days, or until December 17, 2007, to regain compliance with Marketplace Rule 4310(c)(4), which requires the Company to maintain a minimum closing bid price of $1.00 per share. For the 30 consecutive business days prior to June 19, 2007, the bid price of the Companys common stock closed below $1.00 per share. This letter has no effect on the listing of the Companys common stock at this time. If at any time before December 17, 2007 the closing bid price of the Companys common stock is $1.00 or more per share for a minimum of 10 consecutive business days, the Company will have complied with the minimum bid requirement. If the Company is unable to demonstrate compliance with the minimum bid price requirement by December 17, 2007, Nasdaq will notify the Company that its common stock will be delisted from the Nasdaq Stock Market. At that time, the Company may appeal the decision to a Nasdaq Listing Qualifications Panel. The Company is considering all available options in order to maintain its listing on Nasdaq, including seeking shareholder approval for a reverse stock split. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements. Recent Accounting Pronouncements There have been no recent accounting pronouncements which upon future adoption would have an effect on the Companys results of operations or financial position, except as disclosed below. In September 2006, the Financial Accounting Standards Board issued FASB 157, Fair Value Measurements. FASB 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not expect adoption of FASB No. 157 to have a material effect on its results of operations or financial position. In February 2007, the Financial Accounting Standards Board issued FASB No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, which permits companies to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). FASB 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the possible impact of adopting FASB No. 159 on our consolidated financial statements. Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement 109. FIN 48 prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of the date of adoption, there were no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve |
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
SPEEDUS CORP. | ||
Date: November 14, 2007 | By: | /s/ Shant S. Hovnanian |
Shant S. Hovnanian | ||
Chairman of the Board, President and Chief Executive Officer | ||
Date: November 14, 2007 | By: | /s/ Thomas M. Finn |
Thomas M. Finn | ||
Treasurer and Chief Financial and Accounting Officer |
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