UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





T           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended September 30, 2010





OR





o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the transition period from _____________________ to _______________________





Commission file number:                   000-27582








SPEEDUS CORP.


(Exact name of registrant as specified in its charter)





Delaware

13-3853788(State or other jurisdiction of incorporation or organization)

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





1 Dag Hammarskjold Blvd.Freehold, New Jersey

07728(Address of principal executive offices)

(Zip Code)





888-773-3669


(Registrant's 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 T No  ̈





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


Large accelerated filer o
Accelerated filer  ̈Non-accelerated filer  ̈
Smaller reporting company T(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ̈NoTThe number of shares of Common Stock outstanding as of November15, 2010 was 4,162,326










SPEEDUS CORP.


INDEX TO FORM 10-Q





PART I -- FINANCIAL INFORMATION
PageItem 1.
Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009
3Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009
4Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
5Notes to Unaudited Condensed Consolidated Financial Statements
6-13Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
14-19Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20Item 4.
Controls and Procedures
20PART II -- OTHER INFORMATIONItem 1.
Legal Proceedings
21Item 1A.
Risk Factors
21Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21Item 3.
Defaults Upon Senior Securities
21Item 4.
Submission of Matters to a Vote of Security Holders
21Item 5.
Other Information
21Item 6.
Exhibits
21Signature Page
22





Exhibit 31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002Exhibit 31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002Exhibit 32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002Exhibit 32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002


Index


SPEEDUS CORP.


CONDENSED CONSOLIDATED BALANCE SHEETS





September 30,


December 31,2010


2009(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
106,278


$
150,010United States Treasury bills


-



1,750,000Marketable securities


2,484



4,960Accounts receivable, net of allowances of $107,385as of September 30, 2010 and December 31, 2009


55,032



54,975Inventory


99,515



98,222Other current assets


68,925



8,000Total current assets


332,234



2,066,167Property and equipment, net of accumulated depreciation of $55,962 and $38,414 as of September 30, 2010and December 31, 2009, respectively


31,122



36,795Other assets


22,447



22,447Total assets

$
385,803


$
2,125,409LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)Current liabilities:Accounts payable

$
664,245


$
350,386Accrued liabilities


373,624



226,392Convertible note to noncontrolling interest


573,941



-Current portion of redeemable preferred stock


450,836



-Note to shareholder, net of debt discount of $34,611at September 30, 2010


171,389



-Total current liabilities


2,234,035



576,778Convertible note to noncontrolling interest


-



543,608Redeemable preferred stock ($.001 par value;100,000 shares authorized; 70,940 shares issued and outstanding as of September 30, 2010 and December 31, 2009,respectively), net of current portion


404,700



812,972Total liabilities


2,638,735



1,933,358Commitments and ContingenciesStockholders' equity (deficit):Preferred stock ($.01 par value; 20,000,000 shares authorized):Series A Junior Participating ($.01 par value;4,000 shares authorized; no shares issued)


-



-Common stock ($.01 par value; 50,000,000shares authorized; 5,639,736 and 5,498,006 shares issued as of September 30, 2010 and December 31, 2009, respectively)


56,397



54,980Additional paid-in-capital


93,778,823



92,829,557Treasury stock (at cost; 1,502,410 shares)


(6,136,611
)


(6,136,611
)Accumulated deficit


(89,016,515
)


(85,960,079
)Total Speedus stockholders' equity (deficit)


(1,317,906
)


787,847Noncontrolling deficit


(935,026
)


(595,796
)Total stockholders' equity (deficit)


(2,252,932
)


192,051Total liabilities and stockholders' equity (deficit)

$
385,803


$
2,125,409





The accompanying condensed notes are an integral part of these condensed consolidated financial statements.


3
 Index


SPEEDUS CORP.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(unaudited)





For the three months ended September 30,


For the nine months ended September 30,2010


2009


2010


2009Revenues

$
173,838


$
247,236


$
411,751


$
321,936Expenses:Cost of sales


62,906



140,644



111,370



143,982Selling, general and administrative


673,368



629,874



2,552,956



2,437,103Research and development


280,161



396,920



1,126,505



1,362,289Depreciation


6,151



5,230



17,548



17,879Total operating expenses


1,022,586



1,172,668



3,808,379



3,961,253Operating loss


(848,748
)


(925,432
)


(3,396,628
)


(3,639,317
)Investment income (loss)


(482
)


1,158



37,424



161,299Interest income


6



531



59



10,509Other income


40,500



-



41,500



2,800Interest expense


(29,534
)


(24,410
)


(78,021
)


(72,066
)Net loss including noncontrolling interest


(838,258
)


(948,153
)


(3,395,666
)


(3,536,775
)Less:  Net loss attributed to noncontrolling interest


(92,174
)


(107,370
)


(339,230
)


(439,115
)Net loss attributed to Speedus


(746,084
)


(840,783
)


(3,056,436
)


(3,097,660
)Per share:Loss per share attributed to Speedus common shareholders:Loss per common share - basic and diluted

$
(0.18
)

$
(0.21
)

$
(0.75
)

$
(0.79
)Weighted average common shares outstanding - basic and diluted


4,126,904



3,935,596



4,061,913



3,935,596





The accompanying condensed notes are an integral part of these condensed consolidated financial statements


4
 Index


SPEEDUS CORP.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(unaudited)





For the nine months ended September 30,2010


2009Cash flows from operating activities:Net loss

$
(3,395,666
)

$
(3,536,775
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


17,548



17,879Unrealized investment losses (gains)


2,476



(1,533
)Stock based compensation


677,919



216,415Access and exclusivity fee


-



85,265Accrued dividends on preferred stock


42,564



42,564Accrued interest on convertible note


30,333



29,503Changes in operating assets and liabilities,Accounts receivable


(57
)


(152,772
)Inventory


(1,293
)


(73,596
)Other current assets


(60,925
)


(26,116
)Accounts payable


313,859



157,027Accrued liabilities


131,370



(142,256
)Net cash used in operating activities


(2,241,872
)


(3,384,395
)Cash flows from investing activities:Property and equipment additions


(11,875
)


-United States Treasury bills:Purchases


-



(1,749,982
)Maturities


1,750,000



-Net cash provided by (used in) investing activities


1,738,125



(1,749,982
)Cash flows from financing activities:Convertible note financing in subsidiary by minority investor


-



175,000Proceeds from shareholder note


206,000



-Proceeds from the exercise of stock options


254,015



100Net cash provided by financing activities


460,015



175,100Net decrease in cash and cash equivalents


(43,732
)


(4,959,277
)Cash and cash equivalents, beginning of period


150,010



6,007,757Cash and cash equivalents, end of period


106,278



1,048,480





The accompanying condensed notes are an integral part of these condensed consolidated financial statements.


5
 Index


SPEEDUS CORP.





CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





1.
Basis of Presentation





The unaudited condensed consolidated financial statements of Speedus Corp.  (the “Company” or “Speedus”) have been prepared in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. These financial statements do not include all information and notes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the Company's 2009 audited consolidated financial statements and notes thereto on Form 10-K.





Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.





Business Activities





Speedus Corp. operates primarily through its two majority-owned subsidiaries Zargis Medical Corp. (“Zargis”) and Density Dynamics Corp. (“DDC”).





In 2001 we co-invested with Siemens Corporate Research, Inc., a subsidiary of Siemens Corporation, in Zargis 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 DDC, a company breaking new ground in the development of DRAM based, energy efficient, sold-state drives (“SSD”) with I/O acceleration technology. For additional information on each of these business segments and our other assets and operations, see the discussions below and “Condensed Notes to Condensed Consolidated Financial Statements — Note 5, Business Segment Information.”


Zargis





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 CardioscanTM 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 received its most recent clearance in February, 2009.  Cardioscan is fully integrated with the Zargis TeleStethTM portal and is also cleared for marketing in Australia, Canada, India, Singapore, South Africa, Turkey, Malaysia, and 31 European states.





In September of 2009, Zargis also announced FDA clearance to market its Signal X6TM device.  Signal X6 is noninvasive and simultaneously records heart and lung sounds from six adhesive acoustic sensors. The recordings can be evaluated locally or, for locations where a cardiac specialist is not immediately available for consultation, transmitted through the Internet for remote evaluation. The sensors are adhesive, rather than handheld, which may reduce motion noise and increases clarity when compared to handheld stethoscopes.  Zargis initially released Signal X6 in August 2009, when 510(k) clearance for the device was received.





In addition to the development of Cardioscan, Signal X6 and Zargis StethAssistTM, Zargis has been awarded several contracts by the U.S. Army, most recently in August of 2010, 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 of approximately 63%.  At September 30, 2010 and December 31, 2009, as a result of continued investment, our primary equity ownership was approximately 90%.





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 supported 3M in its efforts to develop a next-generation stethoscope that is 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) as an access and exclusivity fee 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.


6
 Index


Density Dynamics


In March 2008, we obtained approximately a 75% equity interest in DDC. DDC was 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.





DDC is continuing development of its line of environmentally friendly DRAM based solid-state storage and I/O acceleration technology. The Jet.io RamFlash and DramJet Solid State Drives are built in a standard 3.5” drive format.  These drives are the core components for DDC high performance storage products. In January 2010, DDC launched its JetX10 acceleration appliance and its JetPod and JetNode expansion chassis which integrate the Jet.io Solid State Drives to deliver the highest performance and greatly reduces complexity, space requirements and power consumption in traditional storage solutions.  All DDC products are designed for enterprise and cloud computing environments which demand the highest performance, durability and lowest power consumption. See note 3 for further discussion.





Other Business Activities





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.” As of September 30, 2010 the Company had not demonstrated to the FCC that it was providing “substantial service”; however, the Company hopes to demonstrate to the FCC that it is providing this “substantial service” by June 1, 2012.





Liquidity





We have recorded operating losses and negative operating cash flows since our inception and have limited revenues. At September 30, 2010, we had an accumulated deficit of approximately $89.0 million. 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 do 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.





These conditions raise 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.


7
 Index


Financial statements and principles of consolidation





The condensed consolidated financial statements include the accounts of Speedus and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.





Noncontrolling interests


Companies in which Speedus directly or indirectly owns more than 50% of the outstanding voting securities or that Speedus has effective control over are accounted for under the consolidation method of accounting. Under this method, those companies’ balance sheets and results of operations, from the date Speedus acquired control, are included in Speedus’ consolidated financial statements. Effective January 1, 2009, the Company adopted certain provisions of Financial Accounting Standards Board (“FASB”) ASC Topic 810, “Consolidation,” which established new standards governing the accounting for and reporting of noncontrolling interests in partially owned consolidated subsidiaries and the loss of control of subsidiaries.  Certain provisions of this standard indicate, among other things, that noncontrolling interests (previously referred to as minority interests) be treated as a separate component of equity and that losses of a partially owned consolidated subsidiary be allocated to the noncontrolling interest even when such allocation might result in a deficit balance.  This standard also required changes to certain presentation and disclosure requirements. The provisions of the standard were applied to all noncontrolling interests prospectively.  The net loss attributed to the noncontrolling interests has been separately designated in the accompanying consolidated statements of operations.  Losses attributable to the noncontrolling interest in a subsidiary may exceed the noncontrolling interests in the subsidiary’s equity.  The noncontrolling interest shall continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance.





Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Significant estimates and assumptions include the adequacy of the calculations related to stock based compensation, allowance for doubtful accounts, and other than temporary impairment of investments and certain accruals.  Actual results could differ from those estimates.





Cash and Cash Equivalents


The Company considers all highly liquid interest earning investments with original maturities of three months or less to be cash equivalents. At September 30, 2010 and December 31, 2009, cash equivalents consisted of money market funds.  At times the Company has cash and cash equivalents balances in excess of the FDIC and SIPC insured limits.





Marketable Securities


All marketable securities are defined as trading securities under the provisions of FASB ASC 320, "Investments in Debt and Equity Securities." At September 30, 2010 and December 31, 2009, marketable securities consisted of publicly traded equity securities which were recorded at the fair market value of approximately $2,000 and $5,000 as of September 30, 2010 and December 31, 2009, respectively.  Pursuant to FASB ASC 820 “Fair Value Measurements”, the fair value of our marketable securities were determined based on “Level 1” inputs, which consist of closing prices quoted from established securities markets. Unrealized gains or losses are included in investment income (loss) in the accompanying consolidated statements of operations.





Fair Value of Financial Instruments


Cash and cash equivalents, U.S. Treasury bills, accounts receivable, inventory, other assets, accounts payable and accrued expenses are reflected in the consolidated balance sheets at their carrying value, which approximates fair value due to the short-term nature of these instruments and the variability of the respective interest rates, where applicable.  Pursuant to FASB ASC 820 “Fair Value Measurements”, the fair value of our U.S. Treasury bills were determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets.





Accounts receivable


Accounts receivable are recorded at the invoice amount and are not interest bearing.  The Company reviews its accounts receivable aging quarterly, on a customer by customer basis, and records an allowance for bad debt at such time that a receivable is deemed to be likely uncollectable.





Inventory


Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out basis.





Property and Equipment


Property and equipment consists of office equipment which is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from three to seven years.  When assets are fully depreciated, it is the Company’s policy to remove the costs and related accumulated depreciation from its books and records.


8
 Index


Accrued liabilities


Accrued liabilities approximately consist of the following:





September 30,


December 31,2010


2009Professional fees

$
85,000


$
80,000Income taxes


103,000



63,000Other accrued expenses


186,000



83,000Total accrued liabilities

$
374,000


$
226,000





Note to Shareholder


In the three months ended September 30, 2010, the Company received $206,000 from a Company shareholder affiliated to the Company’s CEO.  The promissory note dated August 30, 2010 bears interest at a rate of 14% per annum and matures the earlier of June 30, 2011 or the closing of any sale of assets of the Company, or any private placement of additional debt or equity of at least $500,000.  The note includes a warrant for the purchase of common stock up to 25% of the balance of the note.  This liability is reflected net of debt discount of approximately $35,000 on the Condensed Consolidated Balance Sheet as of September 30, 2010.





Revenue Recognition


Zargis recognizes service revenue upon completion of services performed under contracts, in accordance with the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue Recognition". Zargis and DDC recognize product revenue upon the shipment of product and transfer of title to customers.





Income Taxes


As required by FASB ASC 740  “Accounting for Income Taxes,” the Company is required to provide for deferred tax assets or liabilities arising due to temporary differences between the book and tax basis of the Company’s assets and liabilities.





FASB ASC 740 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 September 30, 2010, 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, the Company’s open tax years extend back to 1996. 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.  The Company has no unrecognized tax positions or any interest and penalties as of and for the three and nine months ended September 30, 2010 and 2009.





As of the date of this report, the Company has only filed extensions with estimated taxes and not filed complete income tax returns since 2005.  As of September 30, 2010, the Company estimates that it has a deferred tax asset of approximately $53 million, relating primarily to book operating losses. An offsetting valuation allowance of $53 million has been established as the Company has no ability to carryback its losses and a limited earnings history.





At September 30, 2010, the Company estimates that it has net operating loss carryforwards of approximately $113 million which expire between 2015 and 2030. Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s stock ownership may result in a limitation on the amounts of net operating loss carryforwards which can be utilized in future years.  Furthermore, as the Company has only filed extensions with estimated taxes and not complete income tax returns since 2005, it is possible that adjustments may ultimately be made that could significantly reduce the actual amount of available net operating loss carryforwards.





Loss Per Share


Basic and diluted loss per common share are determined in accordance with FASB ASC 260.  For the three months ended September 30, 2010 and 2009, outstanding stock options and warrants in the weighted average amounts of 582,000 and 683,000, respectively, have been excluded from the diluted loss per share since their effect would be antidilutive as the Company has losses in each of these periods. For the nine months ended September 30, 2010 and 2009, outstanding stock options and warrants in the weighted average amounts of 577,000 and 660,000, respectively have been excluded from the diluted loss per share since their effect would be antidilutive as the Company has losses in each of these periods.





Stock Options


The Company accounts for stock options under FASB ASC 718, “Stock Compensation”.  Under this method, 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 was approximately $36,000 and $131,000 for the three months ended September 30, 2010 and 2009, respectively. Stock based compensation expense was approximately $678,000 and $216,000 for the nine months ended September 30, 2010 and 2009, respectively.


9
 Index


The Company accounts for restricted stock and stock options granted to non-employees on a fair value basis in accordance with FASB ASC 505, “Equity.”  Any restricted stock or stock options issued to non-employees are recorded in the consolidated financial statements using the fair value method and then amortized to expense over the applicable service periods.





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 Speedus, Zargis, and DDC are evaluated and revised, as necessary, to reflect market conditions and experience. Expected volatility is calculated based on the historical volatility of the Company’s stock over the period commensurate with the expected term of the option. The expected term represents the period of time that options granted are expected to be outstanding and is estimated based on historical option exercise experience. The risk-free interest rates are equivalent to the U.S. Treasury yield in effect at the time of grant for the estimated life of the option grant. Estimated forfeiture rates are based on historical experience.  There are no expected dividends.  These assumptions were:





Three months ended September 30,


Nine months ended September 30,2009


2010


2009Risk-free interest rates


2.3% - 3.2
%


2.5% - 3.4
%


2.3% - 3.2
%Expected lives

7 years


5 - 7 years


7 yearsExpected forfeiture rates


0 - 35
%


0 - 35
%


0 - 35
%Expected volatility


124% - 131
%


126% - 137
%


124% - 131
%





On January 27, 2010 the Company engaged Morgan Joseph & Company, Inc., a full service investment bank, to evaluate strategic alternatives available to maximize shareholder value in its Zargis subsidiary.  In connection with this agreement Morgan Joseph & Company was paid an initial retainer of $25,000, which is fully creditable towards any future transaction fees, and was granted a five year warrant to purchase 8,681 shares of the Company common stock with an exercise price of $.01 per share. In connection with the grant of this warrant, stock based compensation of approximately $24,000 was recorded in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2010 and is included in the $678,000 in total stock compensation referenced above.





Recent Accounting Pronouncements


The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.





Reclassifications


Certain reclassifications have been made to the prior periods’ financial statements to conform to the current periods’ presentation.





2.
Stock Option Activity





Aggregate stock option activity and weighted average prices under the Speedus Option Plans for the nine months ended September 30, 2010 is summarized as follows:





Options


Exercise PriceOutstanding at January 1, 2010


544,062


$
5.06Granted


245,500



2.60Exercised


(126,966
)


2.00Expired


(71,250
)


13.21Outstanding at  September 30, 2010


591,346


$
3.71





At September 30, 2010 there were approximately 96,000 options available to be granted and approximately 574,000 options exercisable at a weighted average price of $3.74 under the two Speedus stock options plans. Stock based compensation expense was approximately $23,000 and $94,000 for the three months ended September 30, 2010 and 2009, respectively. Stock based compensation expense was approximately $606,000 and $98,000 for the nine months ended September 30, 2010 and 2009, respectively. Stock Option expense includes the expense of the warrants issued to Morgan Joseph & Company mentioned previously.


10
 Index


The following table aggregates certain information concerning currently outstanding and exercisable stock options under both Plans at September 30, 2010:





Stock options outstanding


Stock options exercisableRange of exercise prices


Options


Weighted average remaining life (years)


Weighted average exercise price


Aggregate intrinsic value


Options


Weighted average exercise price


Aggregate intrinsic value$
0.38 - 1.00



48,250



6.2


$
0.65


$
9,623



48,250


$
0.65


$
9,6231.94 - 4.00



305,746



7.0



3.03



-



287,996



3.04



-4.40 - 5.16



187,050



4.3



4.83



-



187,050



4.83



-6.00 - 9.08



50,300



4.7



6.62



-



50,300



6.62



-591,346



5.9


$
3.74


$
9,623



573,596


$
3.74


$
9,623





There were no options issued by Zargis during the three and nine months ended September 30, 2010.  At September 30, 2010 there were approximately 339,000 options exercisable at a weighted average price of $3.02 and approximately 61,000 options available for grant.  Stock based compensation expense was $0 and approximately $27,000 for the three months ended September 30, 2010 and 2009, respectively. Stock based compensation expense was approximately $38,000 and $80,000 for the nine months ended September 30, 2010 and 2009, respectively.





The following table aggregates certain information concerning currently outstanding and exercisable stock options under the Zargis 2002 Plan at September 30, 2010:





Stock options outstanding


Stock options exercisableRange of exercise prices


Options


Weighted average remaining life (years)


Weighted average exercise price


Aggregate intrinsic value


Options


Weighted average exercise price


Aggregate intrinsic value$
0.50



30,000



2.2


$
0.50


$
90,000



30,000


$
0.50


$
90,0001.75



6,000



2.2



1.75



10,500



6,000



1.75



10,5002.50



59,634



3.6



2.50



59,634



59,634



2.50



59,6343.50



243,024



6.3



3.50



-



243,024



3.50



-338,658



5.4


$
3.03


$
160,134



338,658


$
2.90


$
160,134





During the nine months ended September 30, 2010, 54,000 options were issued by DDC at $2.50 that vest 20% annually over five years.  There were no options granted by DDC during the three months ended September 30, 2010.  At September 30, 2010 there were approximately 135,000 options exercisable at a weighted average price of $1.12 and 94,000 options available for grant.  Stock based compensation expense was approximately $13,000 and $10,000 for the three months ended September 30, 2010 and 2009. Stock based compensation expense was approximately $34,000 and $38,000 for the nine months ended September 30, 2010 and 2009, respectively.





The following table aggregates certain information concerning currently outstanding and exercisable stock options under the DDC 2008 Plan at September 30, 2010:





Stock options outstanding


Stock options exercisableRange of exercise prices


Options


Weighted average remaining life (years)

Weighted average exercise price

Aggregate intrinsic value


Options

Weighted average exercise price

Aggregate intrinsic value$
1.00



232,900



8.3


$
1.00


$
349,350



110,500


$
1.00


$
165,7502.50



69,000



9.0



2.50



-



23,215



2.50



-301,900



8.4


$
1.34


$
349,350



133,715


$
1.10


$
165,750


11
 Index


3.
Acquisition





On March 5, 2008, the Company acquired a 75% interest in Density Dynamics Corp., 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.  In connection with the acquisition, DDC issued $809,400 of redeemable preferred stock to the noncontrolling interest, $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: $120,000 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 holders of the redeemable preferred stock have not issued a call for redemption and no redeemable preferred stock was redeemed in the three and nine months ended September 30, 2010 and September 30, 2009  or as of the date of this report. On March 25, 2010, the holders of the redeemable preferred shares agreed to defer all obligations of DDC to redeem or make payments to the holders until April 1, 2011 and, to the extent that any redeemable preferred shares remain outstanding, the balance will be redeemable in 2013.  As a result of this agreement all of the redeemable preferred stock has been reflected as a non-current liability on the Company’s December 31, 2009 consolidated balance sheet and is split proportionally between current and noncurrent liability based on the remaining term of the redemption on the Company’s September 30, 2010 consolidated balance sheet.   For the three months  ended September 30, 2010 and 2009, accrued dividends on this redeemable preferred stock of approximately $14,000  has been recorded as interest expense on the Company’s condensed consolidated statements of operations. For the nine months ended September 30, 2010 and 2009, accrued dividends on this redeemable preferred stock of approximately $43,000 has been recorded as interest expense on the Company’s condensed consolidated statements of operations.





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 noncontrolling interest of DDC. The investment by Speedus has been eliminated in consolidation. DDC issued seven year warrants to purchase 56,250 and 18,750 shares of DDC common stock to Speedus and the noncontrolling interest, respectively, with an exercise 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 noncontrolling interest. 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 noncontrolling interest. At December 31, 2008, $75,000 had been advanced by each of the Company and the noncontrolling interest. In 2009, the remaining balance of $175,000 was advanced by each of the Company and the noncontrolling interest. The holders of the notes have not issued a call for repayment of the loans and the loans were not repaid during the three and nine months ended September 30, 2010 or as of the date of this report.  On March 25, 2010, the holders of the notes agreed to defer any and all obligations DDC has under the notes until April 1, 2011. As a result of this agreement the loans have been reflected as a non-current liability on the Company’s December 31, 2009 consolidated balance sheet and as a current liability on the September 30, 2010 condensed consolidated balance sheet.  The loan by the Company has been eliminated in consolidation. For the three months ended September 30, 2010 and 2009, accrued interest on these convertible notes to the noncontrolling interest of approximately $10,000 has been recorded as interest expense on the Company’s condensed consolidated statements of operations. For the nine months ended September 30, 2010 and 2009, accrued interest on these convertible notes to the noncontrolling interest of approximately $30,000 has been recorded as interest expense on the Company’s condensed consolidated statements of operations.





4.
Other investments





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).  In the fourth quarter of 2008 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 was 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 against these assets reducing the fair value of these non-public investments to zero as of December 31, 2008.





In the nine month period ended September 30, 2010 the Company received a distribution from one of these non-public companies that the Company had recorded an impairment charge reducing the fair value of this investment to zero. The distribution consisted of approximately $32,000 in cash, a five year note payable of approximately $41,000, and approximately 21,000 shares in a private company.  The Company recorded the $32,000 cash distribution as investment income, but because of continued general negative economic and liquidity environment and the lack of reliable data on which to ascertain the value of these assets the Company set a 100% allowance against the note payable and shares.  The Company will continue to monitor the data received from these private investments and review the evidence to determine if and when these assets should be realized.


12
 Index


5.
Business Segment Information





The following table sets forth the Company's financial performance by reportable operating segment for the three and nine months ended September 30, 2010 and 2009:





Three months ended September 30, 2010CorporateZargis


DDC


and other


TotalsRevenues from external customers

$
173,838


$
-


$
-


$
173,838Depreciation


1,792



4,359



-



6,151Operating loss


(205,967
)


(262,101
)


(380,680
)


(848,748
)Fixed Assets


13,960



17,162



-



31,122Total assets


197,116



90,739



97,948



385,803





Three months ended September 30, 2009CorporateZargis


DDC


and other


TotalsRevenues from external customers

$
196,311


$
50,925


$
-


$
247,236Depreciation


1,315



3,915



-



5,230Operating loss


(291,006
)


(296,666
)


(337,760
)


(925,432
)Fixed Assets


3,842



25,290



-



29,132Total assets


318,991



126,925



2,718,843



3,164,759





Nine months ended September 30, 2010CorporateZargis


DDC


and other


TotalsRevenues from external customers

$
411,751


$
-


$
-


$
411,751Depreciation


5,359



12,189



-



17,548Operating loss


(745,478
)


(986,434
)


(1,664,716
)


(3,396,628
)Fixed Assets


13,960



17,162



-



31,122Total assets


197,116



90,739



97,948



385,803





Nine months ended September 30, 2009CorporateZargis


DDC


and other


TotalsRevenues from external customers

$
271,011


$
50,925


$
-


$
321,936Depreciation


6,134



11,745



-



17,879Operating loss


(1,035,862
)


(1,360,218
)


(1,243,237
)


(3,639,317
)Fixed Assets


3,842



25,290



-



29,132Total assets


318,991



126,925



2,718,843



3,164,759





TheCompany has limited foreign operations. During the three months ended September 30, 2010 and 2009 the Company had sales to the U.S. Army of approximately 44% and 29% of total Company revenues, respectively.  During the nine months ended September 30, 2010 and 2009 the Company had sales to the U.S. Army of approximately 46% and 45% of total Company revenues, respectively. Accounts receivable from the U.S. Army represented 0% and approximately 68% of total Company accounts receivable as of September 30, 2010 and December 31, 2009, respectively.


13
 Index


ITEM2. MANAGEMENT'SDISCUSSION 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, 2009.





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 affect 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





Overview


Speedus Corp. (“Speedus” or the “Company”) operates primarily through its two majority-owned subsidiaries Zargis Medical Corp. (“Zargis”) and Density Dynamics Corp. (“DDC”).





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 company breaking new ground in the development of DRAM based, energy efficient, sold-state drives (“SSD”) with I/O acceleration technology.  For additional information on each of these business segments and our other assets and operations, see the discussions below and “Condensed Notes to Condensed Consolidated Financial Statements — Note 5, Business Segment Information.





Zargis


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 CardioscanTM 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 received its most recent clearance in February, 2009.  Cardioscan is fully integrated with the Zargis TeleStethTM portal and is also cleared for marketing in Australia, Canada, India, Singapore, South Africa, Turkey, Malaysia, and 31 European states.





In September of 2009, Zargis also announced FDA clearance to market its Signal X6TM device.  Signal X6 is noninvasive and simultaneously records heart and lung sounds from six adhesive acoustic sensors. The recordings can be evaluated locally or, for locations where a cardiac specialist is not immediately available for consultation, transmitted through the Internet for remote evaluation. The sensors are adhesive, rather than handheld, which may reduce motion noise and increases clarity when compared to handheld stethoscopes.  Zargis initially released Signal X6 in August 2009, when 510(k) clearance for the device was received.





In addition to the development of Cardioscan, Signal X6 and Zargis StethAssistTM, Zargis has been awarded several contracts by the U.S. Army, most recently in August of 2010, 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.


14
 Index


In February 2003, we acquired a controlling interest in Zargis of approximately 63%.  At March 31, 2010 and December 31, 2009, as a result of continued investment, our primary equity ownership interest was approximately 90%.





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 supported 3M in its efforts to develop a next-generation stethoscope that is 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) as an access and exclusivity fee 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 DDC. DDC was 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.





DDC is continuing development of its line of environmentally friendly DRAM based solid-state storage and I/O acceleration technology. The Jet.io RamFlash and DramJet Solid State Drives are built in a standard 3.5” drive format.  These drives are the core components for DDC high performance storage products. In January 2010, DDC launched its JetX10 acceleration appliance and its JetPod and JetNode expansion chassis which integrate the Jet.io Solid State Drives to deliver the highest performance and greatly reduces complexity, space requirements and power consumption in traditional storage solutions.  All DDC products are designed for enterprise and cloud computing environments which demand the highest performance, durability and lowest power consumption.





Other Business Activities





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.”  As of September 30, 2010 the Company had not demonstrated to the FCC that it was providing “substantial service”; however, the Company hopes to demonstrate to the FCC that it is providing this “substantial service” by June 1, 2012.





Other investments


We have in the past 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 September 30, 2010 and December 31, 2009, we had not sold any securities that we did not own.





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 the 2009 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.





Share-Based Payments


The Company accounts for stock options under FASB ASC 718, “Stock Compensation”.  Under this method, 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.





The Company accounts for restricted stock and stock options granted to non-employees on a fair value basis in accordance with FASB ASC 505, “Equity.”  Any restricted stock or stock options issued to non-employees are recorded in the consolidated financial statements using the fair value method and then amortized to expense over the applicable service periods.





The fair value of the awards on the grant date is estimated using a Black-Scholes option pricing model. Assumptions utilized in the model for Speedus, Zargis, and DDC are evaluated and revised, as necessary, to reflect market conditions and experience. Expected volatility has been calculated based on the historical volatility of the Company’s stock over the period commensurate with the expected term of the option. The expected term represents the period of time that options granted are expected to be outstanding and is estimated based on historical option exercise experience. The risk-free interest rates are equivalent to the U.S. Treasury yield in effect at the time of grant for the estimated life of the option grant. Estimated forfeiture rates are based on historical experience.


15
 Index


Contingencies


We account for contingencies in accordance with Statement of FASB ASC 450, “Contingencies”.  This ASC 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. 2010 Compared to Three and Nine Months Ended September 30, 2009.





Revenue decreased approximately $73,000 from approximately $247,000 for the three months ended September 30, 2009 to approximately $174,000 for the three months ended September 30, 2010.  Approximately $51,000 of this decrease in revenue related to the sale of a server in the DDC segment in the three months ended September 30, 2009 that did not occur in the three months ended September 30, 2010.  The remaining decrease in revenue occurred in the Zargis segment, with a decrease in product revenue of approximately $27,000 and an increase in contracted service revenue of approximately $5,000.  Revenue increased approximately $90,000 from approximately $322,000 for the nine months ended September 30, 2009 to approximately $412,000 for the nine months ended September 30, 2010.  Revenue in the Zargis segment increased approximately $141,000 including approximately $98,000 in product revenue and approximately $43,000 in contracted service revenue.  This increase of revenue in the Zargis segment was offset by a decrease of approximately $51,000 relating to the sale of a server in the DDC segment as mentioned above.





Cost of sales decreased approximately $78,000 from approximately $141,000 for the three months ended September 30, 2009 to approximately $63,000 for the three months ended September 30, 2010.  Approximately $23,000 of this decrease was related to the cost of a server sold in the DDC segment in the three months ended September 30, 2009 that did not happen in the three months ended September 30, 2010.  The remaining decrease in cost of sales occurred in the Zargis segment with a decrease of approximately $92,000 in exclusivity fees and an increase of approximately $14,000 in product royalties, and an increase of approximately $23,000 in product costs.  Cost of sales decreased approximately $33,000 from approximately $144,000 for the nine months ended September 30, 2009 to approximately $111,000 for the nine months ended September 30, 2010. Approximately $23,000 of this decrease was related to the cost of a server sold in the DDC segment in the nine months ended September 30, 2009 that did not happen in the nine months ended September 30, 2010.  The remaining change in cost of sales occurred in the Zargis segment with a decrease of approximately $92,000 in exclusivity fees, an increase of approximately $52,000 in product royalties, and an increase in product costs of approximately $30,000.





Selling, general and administrative expenses increased approximately 7% from approximately $630,000 for the three months ended September 30, 2009 to approximately $673,000 for the three months ended September 30, 2010.  This increase of approximately $43,000 was related to increases of approximately $65,000 in consulting and professional fees, approximately $16,000 in marketing expenses in the DDC segment, approximately $20,000 in rent and repairs in the Zargis segment, approximately a $68,000 adjustment in state and franchise fees in the corporate segment, offset by a decrease in stock compensation expense of approximately $95,000, and approximately $31,000 in insurance and other administrative expenses.  Selling, general and administrative expenses increased approximately 5% from approximately $2,437,000 for the nine months ended September 30, 2009 to approximately $2,553,000 for the nine months ended September 30, 2010. This increase of approximately $116,000 was due to an increase in stock compensation expense of approximately $462,000, an increase in marketing in the DDC segment of approximately $46,000, an increase in state and franchise fees of approximately $39,000, an increase of approximately $14,000 in Board of Director fees, an increase of approximately $41,000 in professional fees, an increase of approximately $20,000 in dues and subscriptions, and an increase of approximately $12,000 in legal and other administrative expenses. These increases were offset by a decrease in payroll and related expenses of approximately $518,000.





Research and development expenses decreased approximately 29% from approximately $397,000 for the three months ended September 30, 2009 to approximately $280,000 for the three months ended September 30, 2010.  This reduction of approximately $117,000 was primarily the result of cost cutting initiatives in staff and related expenses of approximately $14,000 in the corporate segment, approximately $48,000 in the Zargis segment, and approximately $55,000 in the DDC segment.  Research and development expenses decreased approximately 17% from approximately $1,362,000 for the nine months ended September 30, 2009 to approximately $1,127,000 for the nine months ended September 30, 2010. This reduction of approximately $235,000 was primarily the result of cost cutting initiatives in staff and related expenses of approximately $107,000 in the corporate segment, approximately $107,000 in the Zargis segment, and approximately $21,000 in the DDC segment.


16
 Index


Investment income decreased approximately $1,000 from approximately $1,000 during the three months ended September 30, 2009 to approximately $0 during the three months ended September 30, 2010. Investment income decreased approximately $124,000 from approximately $161, 000 during the nine months ended September 30, 2009 to approximately $37,000 during the nine months ended September 30, 2010. These decreases were primarily the result of a significant reduction in trading activity due to a reduction in the amount of capital available for investment purposes.





Interest income decreased from approximately $1,000 in the three months ended September, 2009 to approximately $0 during the three months ended September 30, 2010.  Interest income decreased from approximately $11,000 in the nine months ended September 30, 2009 to approximately $0 during the nine months ended September 30, 2010.  These reductions in interest income were primarily due to a reduction in the amount of capital available for investment purposes.





Other income increased from approximately $0 for the three months ended September 30, 2009 to approximately $41,000 for the three months ended September 30, 2010. This increase of approximately $41,000 was primarily related to the sale of copy written material of approximately $40,000 that occurred in three months ended September 30, 2010 that did not occur in the three months ended September 30, 2009. Other income increase from approximately $3,000 during the nine months ended September 30, 2009 and approximately $42,000 for the nine months ended September 30, 2010.  This decrease of approximately $1,000 was related to a decrease in proceeds from the sale of a domain name during the nine months ended September 30, 2010 compared to the nine months ended June 30, 2009 and the sale of copy written material that occurred in the nine months ended September 30, 2010 that did not happen in the nine months ended September 30, 2009.





Interest expense increased from approximately $24,000 in the three months ended September 30, 2009 to approximately $30,000 during the three months ended September 30, 2010.  Interest expense increased from approximately $72,000 in the nine months ended September 30, 2009 to approximately $78,000 during the nine months ended September 30, 2010.  These increases in interest expense were primarily related to interest and dividends due to a noncontrolling entity and interest due to shareholders.


17
 Index


Liquidity and Capital Resources





We have recorded operating losses and negative operating cash flows since our inception and have limited revenues. At September 30, 2010 we had an accumulated deficit of approximately $89.0 million. We do not expect to have earnings from operations or positive operating cash flow unless or 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 do 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.  Since January of 2010, the Company has been pursuing a transaction involving the businesses of Zargis Medical Corp. that would provide investment capital for it’s Zargis subsidiary and other operations.  There can be no assurance that it will be successful in securing such arrangement.





The report of our registered public accounting firm for the fiscal year ended December 31, 2009 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 for the nine months ended September 30, 2010 and 2009 was approximately $2,242,000 and $3,385,000, respectively.  This reduction in net cash used in operating activities of approximately  $1,143,000 was primarily related to an improvement in net loss of approximately $141,000, an increase in non-cash operating expenses of  approximately $381,000, and an increase in operating assets and liabilities of approximately $621,000.





Net cash provided by investing activities for the nine months ended September 30, 2010 was approximately $1,738,000 and net cash used in investing activities for the nine months ended September 30, 2009 was approximately $1,750,000. This increase in net cash provided by investing activities was primarily due to the maturation of a U.S. Treasury bill of $1,750,000 in the nine months ended September 30, 2010 compared to the purchase of a U.S. Treasury bill of approximately $1,750,000 that occurred during the nine months ended September 30, 2009.  In addition, during the nine months ended September 30, 2010 equipment additions were made of approximately $12,000.





Net cash provided from financing activities for the nine months ended September 30, 2010 and 2009 was approximately $460,000 and $175,000, respectively. This net increase in cash provided by financing activities of approximately $285,000 was a result of approximately $175,000 in proceeds received from convertible note financing by a noncontrolling interest in the nine months ended September 30, 2009 compared to the proceeds from the exercise of stock options of approximately $254,000 and approximately $206,000 in proceeds from shareholder loans that were received in the nine months ended September 30, 2010.





At September 30, 2010, the Company’s future minimum lease payments due under non-cancelable leases aggregated approximately $11,000 and are due during the year ending December 31, 2010.  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 January 27, 2010 the Company engaged Morgan Joseph & Company, Inc., a full service investment bank, to evaluate strategic alternatives available to maximize shareholder value in its Zargis subsidiary.  In connection with this agreement Morgan Joseph & Company was paid an initial retainer of $25,000, which is fully creditable towards any future transaction fees, and was granted a five year warrant to purchase 8,681 shares of the Company common stock with an exercise price of $.01 per share.





In the three months ended September 30, 2010, the Company received $206,000 from a Company shareholder affiliated to the Company’s CEO.  The promissory note dated August 30, 2010 bears interest at a rate of 14% per annum and matures the earlier of June 30, 2011 or the closing of any sale of assets of the Company, or any private placement of additional debt or equity of at least $500,000.  The note includes a warrant for the purchase of common stock up to 25% of the balance of the note.  This liability is reflected net of debt discount of approximately $35,000 on the Condensed Consolidated Balance Sheet as of September 30, 2010.





Off-Balance Sheet Arrangements


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


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Recent Accounting Pronouncements


See Note 1 to the consolidated financial statements for a full description of recent accounting pronouncements including the impact the future adoption would have on the Company’s results of operations or financial position.


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 Index


ITEM3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The Company’s financial instruments at September 30, 2010 consist primarily of cash equivalents which are invested primarily in money market accounts, and marketable securities.





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. These amounts are shown on the balance sheet as ‘Securities sold and not purchased’ and represent the value of these securities at fair market value. The Company’s 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 Company’s condensed consolidated financial statements.  At September 30, 2010 and December 31, 2009 we had not sold any securities that we did not own.





ITEM 4
(“CONTROLS AND PROCEDURES”) of Speedus Corp.’s
 
 Evaluation of Disclosure Controls and Procedures
 
 The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures," as such term is defined in Rules l3a-15e and l5d-I5e promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such Disclosure Controls and Procedures were not effective as of September 30, 2010. This conclusion was reached because of the material weaknesses in internal control over financial reporting previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and the fact that the Company did not have sufficient time or management resources available to adequately test its control procedures. Such controls and procedures are designed to ensure that all material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported as specified in the rules and forms of the SEC.
 
 Changes in Internal Control over Financial Reporting
 
 Management continues to review and evaluate our internal controls procedures and the design of those procedures relating to financial reporting processes in light of the material weaknesses in those areas that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. Although we can make no assurances, we believe that the remediation efforts that are being implemented will improve our internal controls over financial reporting, and our disclosure controls and procedures, and we will continue to work to fully implement these changes through the end of fiscal year 2010. Management will continue to monitor the remediation plan and implementation efforts.
 
 There were no changes to the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II.  OTHER INFORMATION


ITEM1.
LEGAL PROCEEDINGS





None.





ITEM 1A.
RISK FACTORS





No material changes.





ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





None.





ITEM3.
DEFAULTS UPON SENIOR SECURITIES





None.





ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM5.
OTHER INFORMATION





Nasdaq Compliance





The Company received notification on October 14, 2009 that the Nasdaq Capital Market requires that the Company comply with the Nasdaq Listing Rule 5550 which includes requirements that Company have either a minimum $2.5 million in stockholders' equity, a $35 million market capitalization or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. The Company submitted a plan to regain compliance with this rule on October 29, 2009.  On March 11, 2010 a hearing took place at which time the Company presented to the Panel its plan for regaining and sustaining compliance with the Rule.  On April 11, 2010 the Company received notice that the Nasdaq Hearing Panel granted the Company the maximum allowable extension to July 27, 2010 to regain compliance with Listing Rule 5550(b).





On July 27, 2010, the Company received a letter from the Nasdaq Stock Market advising that the Company has not met the deadline for complying with the stockholders’ equity requirement of Nasdaq Listing Rule 5550.  Accordingly, trading of the Company’s common stock on the NASDAQ Stock Market was suspended at the opening of business on July 30, 2010, and on August 2, 2010 the Company’s common stock began to trade on the OTCQBTM Marketplace








ITEM6.
EXHIBITS





Exhibit number 31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.





Exhibit number 31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.





Exhibit number 32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.





Exhibit number 32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.


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SIGNATURES





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: February 14, 2011
By: /s/ Shant S. HovnanianShant S. HovnanianChairman of the Board, President and Chief Executive OfficerDate: February 14, 2011
By: /s/ John A. KallassyJohn A. KallassyTreasurer and Chief Financial and Accounting Officer






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