UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-Q
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For
the quarterly period ended March 31, 2005
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
_______________
Commission
File Number: 0-29625
_______________
Summus,
Inc.
(Exact
Name of Registrant as Specified in its Charter)
|
Delaware |
7370,
5045 |
65-0185306 |
|
(State
or Other Jurisdiction of |
(Primary
Standard |
(IRS
Employer |
|
Incorporation or Organization) |
Industrial
Classification Codes) |
Identification
No.) |
_______________
434
Fayetteville Street, Suite 600
Raleigh,
North Carolina 27601
(919)
807-5600
(Address,
Including Zip Code, and Telephone Number, Including Area
Code
of
Registrant's Principal Executive Offices)
_______________
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
¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes
¨
No
þ
As of May
12, 2005, the registrant had 13,445,738 shares of its Common Stock, par value
$.001 per share, issued and outstanding.
SUMMUS,
INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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Page
No.
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PART
I
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Item
1. |
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3 |
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4
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5 |
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7
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8
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Item
2. |
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19 |
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Item
3. |
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33 |
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Item
4. |
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33
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PART
II
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Item
4. |
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34
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Item
6. |
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34
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2
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March
31, 2005 |
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December
31, 2004 |
|
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|
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Assets
|
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
3,617,655 |
|
$ |
1,405,788 |
|
|
Accounts receivable |
|
|
1,004,546
|
|
|
801,698
|
|
|
Prepaids and other current assets |
|
|
85,311
|
|
|
101,315
|
|
|
Total
current assets |
|
|
4,707,512
|
|
|
2,308,801
|
|
|
Equipment,
software and furniture, net |
|
|
95,654
|
|
|
97,005
|
|
|
Total
assets |
|
$ |
4,803,166 |
|
$ |
2,405,806 |
|
|
|
|
Liabilities
and stockholders’ equity (deficit)
|
|
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Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,369,867 |
|
$ |
1,167,259 |
|
|
Accrued salaries and related costs |
|
|
181,089
|
|
|
187,029
|
|
|
Accrued interest |
|
|
92,493
|
|
|
96,068
|
|
|
Current portion of notes payable |
|
|
140,338
|
|
|
307,668
|
|
|
Convertible notes payable, net of discount of $743,715
|
|
|
|
|
|
|
|
|
at December 31, 2004 |
|
|
-
|
|
|
681,285
|
|
|
Total
current liabilities |
|
|
1,783,787
|
|
|
2,439,309
|
|
|
Notes
payable, less current portion |
|
|
-
|
|
|
53,693
|
|
|
|
|
|
|
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|
Stockholders’
equity (deficit): |
|
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|
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Series
A convertible preferred stock, $0.001 par value; |
|
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10,000 shares designated, 2,407 shares issued
and |
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outstanding at March 31, 2005 and December 31, |
|
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2004 (liquidation preference of $2,519,327 as
of |
|
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|
March 31, 2005) |
|
|
2,407,295
|
|
|
2,407,295
|
|
|
Common
stock, $0.001 par value, 185,000,000 shares |
|
|
|
|
|
|
|
|
authorized; 13,474,736 and 12,105,257 shares
issued |
|
|
|
|
|
|
|
|
and 13,470,886 and 12,101,407 shares outstanding
at |
|
|
|
|
|
|
|
|
March 31, 2005 and December 31, 2004,
respectively |
|
|
13,471
|
|
|
12,101
|
|
|
Additional
paid-in capital |
|
|
57,159,243
|
|
|
52,485,043
|
|
|
Deferred
compensation |
|
|
(68,551 |
) |
|
(90,363 |
) |
|
Accumulated
deficit |
|
|
(56,264,460 |
) |
|
(54,673,653 |
) |
|
Treasury
stock, at cost (3,850 shares) |
|
|
(227,619 |
) |
|
(227,619 |
) |
|
Total
stockholders’ equity (deficit) |
|
|
3,019,379
|
|
|
(87,196 |
) |
|
Total
liabilities and stockholders’ equity (deficit ) |
|
$ |
4,803,166 |
|
$ |
2,405,806 |
|
The
accompanying notes constitute an integral part of these financial
statements.
3
SUMMUS,
INC.
| |
|
Three-Month
Period Ended |
|
| |
|
|
March
31, 2005 |
|
|
March
31, 2004 |
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Wireless applications and contracts |
|
$ |
1,986,347 |
|
$ |
773,330 |
|
|
Contracts and license fees |
|
|
—
|
|
|
13,889
|
|
|
Wireless license fees |
|
|
3,700
|
|
|
750
|
|
|
Total revenues
|
|
|
1,990,047
|
|
|
787,969
|
|
|
Cost
of revenues: |
|
|
|
|
|
|
|
|
Wireless applications and contracts |
|
|
956,187
|
|
|
396,337
|
|
|
Contracts and license fees |
|
|
—
|
|
|
3,199
|
|
|
Wireless license fees |
|
|
—
|
|
|
—
|
|
|
Total cost of revenues
|
|
|
956,187
|
|
|
399,536
|
|
|
Gross
profit |
|
|
1,033,860
|
|
|
388,433
|
|
|
Operating
expenses: |
|
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General and administrative expenses |
|
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727,103
|
|
|
926,061
|
|
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Research and development |
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644,576
|
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520,222
|
|
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Sales and marketing |
|
|
283,299
|
|
|
108,393
|
|
|
Non-cash compensation |
|
|
11,068 |
|
|
47,036 |
|
|
Non-cash consulting expense |
|
|
5,202
|
|
|
6,344
|
|
|
Non-cash settlements |
|
|
58,750
|
|
|
—
|
|
|
Total operating
expenses |
|
|
1,729,998 |
|
|
1,608,056 |
|
|
Loss from
operations |
|
|
(696,138 |
) |
|
(1,219,623 |
) |
|
Interest
expense |
|
|
(43,337
|
) |
|
(20,848
|
) |
|
Amortization
of discount on debt and beneficial
conversion feature |
|
|
(851,332
|
) |
|
—
|
|
|
Net
loss |
|
$ |
(1,590,807
|
) |
$ |
(1,240,471
|
) |
| |
|
Net
loss applicable to common stockholders: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,
590,807 |
) |
$ |
(1,240,471
|
) |
|
Accretion of beneficial conversion feature on preferred stock
|
|
|
—
|
|
|
(208,522
|
) |
|
Preferred stock dividends |
|
|
(48,140
|
) |
|
(41,565
|
) |
|
Net
loss applicable to common stockholders |
|
$ |
(1,638,947
|
) |
$ |
(1,490,558
|
) |
|
Per
share amounts (basic and diluted) |
|
$ |
(0.13
|
) |
|
|
|
|
Weighted
average shares of common stock outstanding |
|
|
12,751,276
|
|
|
|
|
The
accompanying notes constitute an integral part of these financial
statements.
4
SUMMUS,
INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT) (UNAUDITED)
| |
|
Preferred
Stock |
|
|
|
|
|
Additional |
|
| |
|
Series
A |
|
Common
Stock |
|
Paid-In |
|
| |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
|
|
2,407
|
|
$ |
2,407,295 |
|
|
12,101,407
|
|
$ |
12,101 |
|
$ |
52,485,043
|
|
|
Common
stock warrants
issued
for services |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,202
|
|
|
Warrants
issued with
convertible
debt |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
107,617
|
|
|
Common
stock issued in
settlement
of note payable |
|
|
-
|
|
|
-
|
|
|
47,673
|
|
|
48
|
|
|
243,084
|
|
|
Exercise
of warrants |
|
|
-
|
|
|
-
|
|
|
1,263,246
|
|
|
1,263
|
|
|
4,110,871
|
|
|
Exercise
of options |
|
|
-
|
|
|
-
|
|
|
58,560
|
|
|
59
|
|
|
218,170
|
|
|
Adjustment
of deferred
compensation
related to
issuance
of stock options |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(10,744 |
) |
|
Amortization
of deferred
compensation |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Net
loss for the period |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2005 |
|
|
2,407
|
|
$ |
2,407,295 |
|
|
13,470,886
|
|
$ |
13,471 |
|
$ |
57,159,243
|
|
The
accompanying notes constitute an integral part of these financial
statements.
5
SUMMUS,
INC.
STATEMENT
OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
| |
|
|
|
|
|
|
|
Total |
|
| |
|
Deferred |
|
Accumulated |
|
Treasury |
|
Stockholders’ |
|
| |
|
Compensation |
|
Deficit |
|
Stock |
|
Equity
(Deficit) |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004 |
|
$ |
(90,363 |
) |
$ |
(54,673,653 |
) |
$ |
(227,619 |
) |
$ |
(87,196 |
) |
|
Common
stock warrants
issued
for services |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,202
|
|
|
Warrants
issued with
convertible
debt |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
107,617
|
|
|
Common
stock issued in
settlement
of note payable |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
243,132
|
|
|
Exercise
of warrants |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,112,134
|
|
|
Exercise
of options |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
218,229
|
|
|
Adjustment
of deferred
compensation
related to
issuance
of stock options |
|
|
10,744
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Amortization
of deferred
compensation |
|
|
11,068
|
|
|
-
|
|
|
-
|
|
|
11,068
|
|
|
Net
loss for the period |
|
|
-
|
|
|
(1,590,807 |
) |
|
-
|
|
|
(1,590,807 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2005 |
|
$ |
(68,551 |
) |
$ |
(56,264,460 |
) |
$ |
(227,619 |
) |
$ |
3,019,379 |
|
The
accompanying notes constitute an integral part of these financial
statements.
6
SUMMUS,
INC.
| |
|
Three-Month
Period Ended |
|
|
|
|
|
March
31, 2005 |
|
|
March
31, 2004 |
|
| |
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(1,590,807 |
) |
$ |
(1,240,471
|
) |
|
Adjustments
to reconcile net loss to net cash used in operating |
|
|
|
|
|
|
|
|
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
11,550
|
|
|
43,273
|
|
|
Non-cash compensation |
|
|
11,068
|
|
|
47,036
|
|
|
Common stock options and warrants issued for services
|
|
|
5,202
|
|
|
6,344
|
|
|
Amortization of discount on debt and beneficial conversion
feature |
|
|
851,332
|
|
|
—
|
|
|
Non-cash settlements |
|
|
58,750
|
|
|
—
|
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(202,848
|
) |
|
(149,904
|
) |
|
Prepaid and other assets |
|
|
16,004
|
|
|
(205,849
|
) |
|
Accounts payable and other accrued expenses |
|
|
199,033
|
|
|
(122,278
|
) |
|
Accrued salaries and related costs |
|
|
(5,940 |
) |
|
(209,774
|
) |
|
Deferred revenue |
|
|
—
|
|
|
21,000
|
|
|
Net
cash used in operating activities |
|
|
(646,656 |
) |
|
(1,810,623
|
) |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchases
of equipment, software and furniture |
|
|
(10,199 |
) |
|
(21,417
|
) |
|
Net
cash used in investing activities |
|
|
(10,199 |
) |
|
(21,417
|
) |
| |
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options and warrants |
|
|
4,330,363
|
|
|
—
|
|
|
Proceeds
from issuance of convertible debt |
|
|
215,000 |
|
|
— |
|
|
Payments
of convertible debt |
|
|
(1,640,000 |
) |
|
—
|
|
|
Principal
payments on capital lease obligations |
|
|
—
|
|
|
(10,546
|
) |
|
Principal
payments on notes payable and short-term borrowings |
|
|
(36,641 |
) |
|
(46,012
|
) |
|
Net
cash provided by (used in) financing activities |
|
|
2,868,722
|
|
|
(56,558
|
) |
| |
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash |
|
|
2,211,867
|
|
|
(1,888,598
|
) |
|
Cash
at beginning of period |
|
|
1,405,788
|
|
|
2,188,645
|
|
|
Cash
at end of period |
|
$ |
3,617,655 |
|
$ |
300,047 |
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid for interest |
|
$ |
46,912 |
|
$ |
18,032 |
|
The
accompanying notes constitute an integral part of these financial
statements.
7
Summus,
Inc.
Notes to Financial Statements
1. Business,
Organization and Basis of Presentation
Business
Summus,
Inc. ("Summus” or the "Company") is engaged primarily in the development of
applications that optimize the consumer wireless experience. The core of
the Company's business plan is to focus on the emerging wireless market and
partner with leading content brands to bring branded products to mobile
phones. Our major content brands include Sports Illustrated, America
Online, Fujifilm, Mattel, The Associated Press, The Wall Street Journal, Phil
Hellmuth, Howard Lederer, Golf Digest, Hooters, The Grateful Dead and others.
Summus
has developed software, technology and applications to enable information
processing and resource management to include, but not be limited to, the
creation, transmission, playing and management of content over wireless
networks. We currently offer products in various categories, including
games, personalization, photo messaging, and news/information. The Company's
technology, which provides the foundation for its current products, is designed
to address the usability constraints of the existing wireless network
infrastructure. This technology will enable more efficient use of existing and
future bandwidth allocations, resulting in a perceived bandwidth increase by the
mobile end-user.
Summus
builds end-user applications for most major mobile platforms, including
QUALCOMM’s Binary Runtime Environment for Wireless™ (BREW™), Java™ 2 Platform,
Micro Edition (J2ME™), Symbian™ OS and Wireless Application Protocol
(WAP). We distribute our applications through major wireless carriers who
make our products available to their customers. Summus currently has
relationships with carriers that account for 98% of all U.S. wireless
subscribers. We also have relationships with international carriers covering
Canada, Latin America, Australia, Israel, the U.K., and
China.
We have
completed the development and deployment of at least one or a combination of
twenty-nine (29) wireless applications on a total of forty-one (41) wireless
carriers, sixteen (16) of which are United States carriers and twenty-five (25)
of which are international carriers. Some of our United States based wireless
carriers include Alltel, Cingular, Sprint PCS, T-Mobile, US Cellular and Verizon
Wireless. These applications can be purchased by the end-user as a one-time
purchase, or a monthly subscription, depending on content, product function,
and/or carrier preferences.
The
majority of the applications completed and deployed by the Company, as well as
planned future applications, have been developed by the Company through a
process that involves securing agreements with content providers and carriers,
and developing and launching the applications. The Company outsources the
infrastructure needed to host and deliver the transactions for its application
end-users.
8
1. Business,
Organization and Basis of Presentation (continued)
Future
Operations
As shown
in the financial statements for the three months ended March 31, 2005, the
Company incurred a net loss of $1,590,807 and experienced negative cash flows
from operations. The Company’s operations are dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing, and ultimately to attain profitability. The
Company is actively promoting and expanding its product line. As disclosed in
Note 5, during the three months ended March 31, 2005, the Company raised
additional equity financing from existing stockholders. Management expects
to be able to attract additional capital, if necessary, to expand operations and
also expects that increased revenues will reduce its operating losses in future
periods. However, there can be no assurance that management’s plan will be
executed as anticipated.
Basis
of Presentation
The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, these financial statements do not include all of
the information and notes required by accounting principles generally accepted
in the United States. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
financial condition and results of operations have been included. Operating
results for the three-month period ended March 31, 2005, are not necessarily
indicative of the results that may be attained for the entire year. For further
information, refer to the financial statements and notes thereto included in the
Company’s Form 10-K for the year ended December 31, 2004.
9
2. Summary
of Significant Accounting Policies
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reverse
Stock Split
On March
11, 2005, the Company effected a one-for-ten reverse stock split. Accordingly,
all share and per share amounts have been retroactively adjusted to give effect
to this event.
Reclassifications
Certain
reclassifications have been made to the 2004 financial statements to conform to
classifications used in the current year. These reclassifications had no impact
on net loss or stockholders’ equity (deficit).
Revenue
Recognition and Related Costs
Wireless
applications and contracts
Revenues
earned from wireless applications are recognized upon delivery and acceptance by
the end-user either as a one-time purchase or a monthly subscription. For
content delivery partner arrangements, whereby the Company remits a portion of
the revenues earned through the sale of the Company’s applications, revenue is
recorded on a gross basis in accordance with Emerging
Issues Task Force No. 99-19 “Reporting Revenue Gross as a Principal versus Net
as an Agent”(“EITF 99-19”). The
Company recognizes the cost of payments to the content providers as a cost of
revenues. Wireless applications and contracts cost of revenues include all
third-party hosting, testing and/or carrier distribution fees. These costs are
incurred on a monthly basis and are primarily fixed in nature regardless of the
revenue generated by the related applications.
Periodically,
we enter into non-recurring engineering arrangements with our content partners.
Generally, under the terms of these agreements, we receive funding upfront to
complete projects. The funding we receive upfront is recorded as deferred
revenue and is recognized as revenue under the terms of the individual
arrangements. Deferred revenue represents amounts received for which the Company
has not yet completed its contractual obligations.
10
2. Summary
of Significant Accounting Policies (continued)
Wireless
License Fees
We
recognize revenue from licensee fees for wireless software applications in
accordance with the provisions of AICPA Statement of Position 97-2, “Software
Revenue Recognition”, as amended by AICPA Statement of Position 98-9
“Modification of SOP No. 97-2 Software Revenue Recognition with Respect to
Certain Transactions.” Revenue from software license fees is generally
recognized upon delivery provided that a contract has been executed, the vendor
fee is fixed or determinable, no significant vendor obligations or uncertainties
surrounding customer acceptance remain, and collection of the resulting
receivable is deemed probable.
There
were no costs related to the wireless license fee revenue generated during the
three months ended March 31, 2005, as the license fee revenue related to
technology that had been previously developed by the Company, and there were no
costs for installation, delivery or customization, or other related
costs.
Contracts
and license fees
We derive
certain revenues from research and development contracts for governmental
agencies and the commercial licensing of our technology. We recognize revenue on
these contracts at the time services are rendered based upon the terms of
individual contracts. Regarding the commercial licensing of our technology, we
follow the provisions of AICPA Statement of Position 97-2, “Software Revenue
Recognition”, as amended by AICPA Statement of Position 98-9 “Modification of
SOP No. 97-2 Software Revenue Recognition with Respect to Certain Transactions.”
Revenue from software license fees is generally recognized upon delivery
provided that a contract has been executed, the vendor fee is fixed or
determinable, no significant vendor obligations or uncertainties surrounding
customer acceptance remain, and collection of the resulting receivable is deemed
probable.
Segments
Management
has structured the Company's internal organization as one business segment from
which all operating decisions are made and all operating results are
evaluated.
Equipment,
Software and Furniture
Equipment,
software and furniture is stated at cost. Depreciation is computed over the
estimated useful lives of the assets (generally three to seven years) using the
straight-line method. Amortization of capital lease assets is included in
depreciation expense.
Software
Development Costs
Capitalization
of software development costs begins with the establishment of technological
feasibility of new or enhanced software products. Technological feasibility of a
computer software product is established when the Company has completed all
planning, designing, coding and testing that is necessary to establish that the
software product can be produced to meet design specifications including
functions, features and technical performance requirements. All costs incurred
prior to establishing technological feasibility of a software product are
charged to research and development expense as incurred. No capitalized software
development costs were incurred during the three-month periods ended March 31,
2005 and 2004.
11
2. Summary
of Significant Accounting Policies (continued)
Income
Taxes
Income
taxes are accounted for using the liability method in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes." Under
SFAS 109, deferred tax assets or liabilities are computed based upon the
difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability from
period to period. If available evidence suggests that it is more likely than not
that some portion or all of the deferred tax assets will not be realized, a
valuation allowance is required to reduce the deferred tax assets to the amount
that is more likely than not to be realized. Future changes in such valuation
allowance would be included in the provision for deferred income taxes in the
period of change.
Stock-Based
Compensation
The
Company has stock-based compensation plans for employees, consultants and
directors. The Company accounts for those plans under the intrinsic value method
prescribed by APB Opinion No. 25, Accounting
for Stock Issued to Employees (“APB 25”) and
related interpretations. For options granted under those plans with an exercise
price equal to the market value of the stock on the date of grant, no
compensation cost is recognized in net operations as reported in the statement
of operations. Compensation cost is recognized in net earnings/loss for awards
granted under those plans with an exercise price less than the market value of
the underlying common stock on the date of grant. Such costs are recognized
ratably over the vesting period. The Company recorded non-cash compensation
related to the issuance of fully-vested stock options with exercise prices below
the fair market value of the underlying stock plus the amortization of deferred
compensation arising from stock option issuances subject to vesting totaling
$11,068 and $47,036 for the three months ended March 31, 2005 and 2004,
respectively.
12
2. Summary
of Significant Accounting Policies (continued)
The
following table illustrates the effect on net loss and net loss per share if the
Company had applied the fair value recognition provision of Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (“SFAS 123”). In
accordance with SFAS 123, the fair value of each option grant was determined by
using the Black-Scholes option pricing model with the following weighted average
assumptions for the three-month periods ended March 31, 2005 and 2004: dividend
yield of 0%; volatility ranging from 1.218 to 1.789; risk-free interest rate
ranging from 2.75% to 5.00%; and expected option lives of 5 years for employees
and 10 years for Board members.
| |
|
|
Three-Month
Period Ended |
|
| |
|
|
March
31 |
|
| |
|
|
(Unaudited) |
|
| |
|
|
2005 |
|
|
2004 |
|
|
Net
loss applicable to common stockholders |
|
$ |
(1,638,947 |
) |
$ |
(1,490,558 |
) |
|
Non-cash
compensation charges included in net loss applicable
to |
|
|
|
|
|
|
|
|
common
stockholders |
|
|
11,068
|
|
|
47,036
|
|
|
Stock-based
employee compensation cost that would have been |
|
|
|
|
|
|
|
|
included
in net loss applicable to common stockholders under
the |
|
|
|
|
|
|
|
|
fair
value method |
|
|
(126,493
|
) |
|
(361,736
|
) |
|
|
|
Adjusted
net loss applicable to common stockholders |
|
$ |
(1,754,372 |
) |
$ |
(1,805,258 |
) |
|
|
|
Basic
and diluted loss per share: |
|
|
|
|
|
|
|
|
Reported
net loss applicable to common stockholders |
|
|
(0.13
|
) |
|
(0.21
|
) |
|
Non-cash
compensation charges included in net loss applicable to
|
|
|
|
|
|
|
|
|
common
stockholders |
|
|
0.00
|
|
|
0.01
|
|
|
Stock-based
employee compensation cost that would have been |
|
|
|
|
|
|
|
|
included
in net loss applicable to common stockholders under the
|
|
|
|
|
|
|
|
|
fair
value method |
|
|
(0.01
|
) |
|
(0.05
|
) |
|
|
|
Adjusted
net loss applicable to common stockholders |
|
$ |
(0.14 |
) |
$ |
(0.25
|
) |
The
Company accounts for stock-based compensation to non-employees of the Company,
primarily consultants and advisors, at the fair value of the equity instrument
in accordance with the provisions of SFAS No. 123. Non-cash consulting expense
related to such stock based compensation for the three-month period ended March
31, 2005 and 2004 was $5,202 and $6,344, respectively.
13
2. Summary
of Significant Accounting Policies (continued)
Net
Loss Per Share
Loss per
share has been calculated in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings
Per Share." Basic
loss per share was computed by dividing the net loss for each period presented
by the weighted average number of shares of common stock outstanding for such
period, as adjusted for the recapitalization. Although the Company has potential
common stock equivalents related to its outstanding stock options, warrants and
preferred stock, these potential common stock equivalents were not included in
diluted loss per share for each period presented because the effect would have
been antidilutive.
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS
No. 123 (R)”). SFAS No. 123(R), a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation”,
supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees”, and
amends SFAS No. 95, “Statement
of Cash Flows.” SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. SFAS No. 123(R) is effective for the beginning of the first
annual period beginning after June 15, 2005. Therefore the Company plans to
adopt SFAS No. 123(R) on January 1, 2006. The adoption of the SFAS No. 123(R)
fair value method will have a significant impact on the Company’s results of
operations, although it will have no impact on financial position. The impact of
adoption of SFAS No. 123(R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had the
Company adopted SFAS No. 123(R) in prior periods, the impact of the standard
would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net income (loss) and earnings (loss) per share in Note
2 to the Company’s financial statements. The Company is currently evaluating the
two fair value pricing methods permitted by SFAS No. 123(R) and has not selected
a final fair value pricing model.
3. Convertible
Notes Payable
In
December 2004, the Company entered into senior debt agreements with certain
investors for $1,425,000 of financing in the form of notes payable (the "Senior
Notes"). The Senior Notes bore interest at 12% and were to mature on the earlier
of when the Company closed on at least $3,000,000 in financing or May 15, 2005
(“Maturity Date”). The Senior Notes had an optional conversion feature in that
the Senior Notes were convertible into shares of the Company’s common stock at
the option of the holder, in the event the Senior Notes were not repaid prior to
or on the Maturity Date. The conversion price was to be the lower of 90% of the
closing price of the Company’s common stock on the Maturity Date or 90% of the
average closing prices of the Company’s common stock for the five days prior to
optional conversion.
At the
closing of the Senior Notes, the investors received warrants to purchase 279,413
shares of the Company’s common stock. The warrants were exercisable upon
issuance, have a term of five years and have an exercise price of $5.60 per
share.
14
3. Convertible
Notes Payable (continued)
In
January 2005, the Company received an additional investment of $215,000 of
Senior Notes, on the same terms as the December 2004 Senior Notes financing. The
holder was granted warrants to purchase a total of 42,157 shares of the
Company’s common stock on the same terms as the warrants issued in the December
2004 Senior Notes Financing.
Due to
the financing received by the Company in February and March 2005 as discussed in
Note 5, the maturity of the 12% Senior Notes accelerated from the original
maturity date of May 15, 2005. The Company repaid the principal balance of
$1,640,000 of the Senior Notes, plus interest at the rate of 12% per annum.
Since the Senior Notes were paid off in accordance with their terms, they will
have no rights of conversion into the Company’s common stock.
The
Company allocated the $1,640,000 of proceeds received in connection with the
financing in December 2004 and January 2005 between the Senior Notes and the
warrants on a relative fair value basis. Accordingly, the Company
allocated $735,319 to the Senior Notes and $904,681 to the warrants
issued. Since the Senior Notes were issued at a discount to the principal
balance, which is the basis for the optional conversion, the effective
conversion price of the Senior Notes was less than the fair value of the
Company's common stock on the date of issuance. In accordance with EITF
98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," a
beneficial conversion feature of $735,319 has been measured at the date of
issuance and would have been recognized and recorded as a discount on debt and a
corresponding credit to additional paid-in capital if the Senior Notes are not
repaid prior to or on the Maturity Date. Due to the fact that the Senior Notes
were repaid prior to the Maturity Date, the beneficial conversion feature will
not be recognized.
The
discount on the debt of $904,681 related to the warrants was being amortized to
interest expense over the term of the Senior Notes beginning on the date of
issuance. The remaining discount on the Senior Notes was fully amortized
in the three months ended March 31, 2005. Amortization of the discount of the
Senior Notes was $851,332 for the three months ended March 31,
2005.
4. Notes
Payable
On
January 31, 2005, the Company entered into a modified settlement agreement with
Holland & Knight LLP (“H&K”). The remaining amount of the recorded
liability due to H&K of $184,382 was satisfied through the issuance to
H&K of 47,673 shares of the Company’s common stock. The fair value of the
47,673 shares of common stock was estimated at $243,132, based on the traded
value of the Company’s common stock on the date of the settlement
agreement. The difference between the estimated fair value of the 47,673
common shares and the recorded value of the liability of $184,382, totaling
$58,750, was recorded as settlement loss. H&K has contractually agreed to
sell no more than 1,800 shares in any one (1) business day.
15
5. Common
Stock and Warrants
Exercise
of Warrants
During
February and March 2005, the Company received $4,112,134 from the exercise of
1,263,246 warrants to purchase shares of the Company’s common stock. These
warrants were originally issued in connection with private placements of the
Company’s preferred stock and common stock. The Company agreed to reprice most
of these warrants, which originally had exercise prices ranging from $3.50 to
$7.50 per share, to exercise prices ranging from $2.50 to $3.50 per share in
consideration for their immediate exercise.
Exercise
of Stock Options
In
January and February 2005, the Company issued 58,560 shares in connection with
the exercise of stock options at their original exercise prices ranging from
$1.60 to $5.10 per share. The total received by the Company from these exercises
was $218,229.
As of
March 31, 2005, the Company had reserved shares of its authorized 185,000,000
shares of common stock for future issuance as follows:
|
|
|
|
|
Series
A convertible preferred stock and related dividends |
|
17,692 |
|
Outstanding
common stock warrants |
|
3,443,890 |
|
Outstanding
stock options |
|
952,028 |
|
Possible
future issuance under stock option plans |
|
385,766 |
|
Total |
|
4,799,376 |
6. Preferred
Stock
Series
A Convertible Preferred Stock
The
Company has 2,407 shares of Series A convertible preferred stock (“Series A
preferred stock”) outstanding as of March 31, 2005. These shares are valued
based upon the liquidation preference (the “Liquidation Preference”) of Series A
preferred stock of $1,000 per share.
The
holders of the Series A preferred stock are entitled to receive cumulative cash
dividends at a rate of 8% per annum of the initial liquidation preference of
$1,000 per share. The Company, at its election, can provide for the payment of
dividends on the Series A preferred stock through the issuance of additional
shares of Series A preferred stock having an aggregate initial liquidation
preference equal to the amount of cash dividends otherwise payable. Dividends
are cumulative from the date of issuance and are payable, when, as and if
declared by the Board of Directors. The Company is restricted from paying
dividends on common stock until dividends are paid on Series A preferred in
full. No dividends have been paid in 2005. Cumulative unpaid dividends at March
31, 2005 were $112,327.
16
6. Preferred
Stock (continued)
The
holders of the outstanding shares of Series A preferred stock are not entitled
to vote on matters submitted to the Company’s stockholders for voting. However,
approval of holders of a majority of the outstanding shares of Series A
preferred stock is required prior to the issuance of a new series of preferred
stock that ranks senior to the Series A preferred stock. Each share of the
Series A preferred stock is convertible at the option of the holder, at any time
after the date of issuance, into shares of common stock equal to the Liquidation
Preference divided by the initial conversion price of $142.40. The conversion
price is subject to adjustment in accordance with the Company’s articles of
incorporation. At the Company’s election, it has the right to redeem any
outstanding shares of the Series A preferred stock at the Liquidation Preference
of $1,000 per share.
7. Commitments
and Contingencies
Dr.
Bjorn Jawerth’s Employment Agreement
In 2001,
the Company entered into a three-year employment agreement with Dr. Bjorn
Jawerth,which expired on February 16, 2004, and was not renewed by the Board of
Directors. His employment agreement provided for an initial base salary of
$350,000, with annual increases of 10%.
The
difference between the increased salary amounts of $385,000 and $423,500,
respectively, in the second and third years of his employment agreement, and his
original base salary of $350,000, was deferred and accrued by the Company, at
Dr. Jawerth’s election, until the Board of Directors and Dr. Jawerth determine
when and how these deferred and accrued amounts may be paid. The 10% annual
increases provided for in Dr. Jawerth’s employment contract have been recorded
as accrued salaries in the Company’s balance sheet as of March 31,
2005.
Cancellation
of warrants
On July
19, 2002, the Company entered into an irrevocable common stock equity line that
was intended to provide funding to the Company in amounts up to $10.0 million.
The Company filed a registration statement on Form S-1 with the Securities and
Exchange Commission (“SEC”) on July 31, 2002 relating to this common stock
equity line agreement. Based on comments received from the Securities and
Exchange Commission and related communications with the SEC, the Company
understood that the terms of the equity line financing arrangement were such
that it would not be able to resolve the staff’s comments in a timely manner and
seek effectiveness of the registration statement in a timely manner. Due to
these developments, the length of time involved in completing the transaction,
and other factors, the Company determined that it was in its best interest to
withdraw the registration statement and not proceed with the equity line.
Accordingly, on September 17, 2002, the Company submitted to the SEC a request
to withdraw the registration statement and cancelled all agreements associated
with the common stock equity line.
17
7. Commitments
and Contingencies (continued)
In
connection with the cancellation of the agreements associated with the common
stock equity line, Talisman, the intended purchaser under the equity line,
indicated to the Company its intention to retain ownership of the warrants to
purchase 50,000 shares of the Company’s unregistered common stock at an exercise
price of $4.70 per share that were issued to Talisman upon the execution of the
equity line agreements. It is management’s position, with the advice of legal
counsel, that the cancellation of these warrants became effective with the
cancellation of the equity line agreements and that no loss contingency exists.
Therefore, the Company has not recorded the issuance of these 50,000 warrants in
its financial statements nor disclosed them as part of outstanding warrants. The
Company has sent correspondence to Talisman stating its position that the
warrants have been cancelled. To date, the Company has not received
correspondence back from Talisman indicating their concurrence.
18
Item
2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Forward-Looking
Statements
This Form 10-Q contains certain forward-looking statements that we believe are
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, which are intended to be covered by the
safe harbors created by such acts. For this purpose, any statements that are not
statements of historical fact may be deemed to be forward-looking statements,
including the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding our strategy, future
operations, future expectations or future estimates, financial position and
objectives of management. Those statements in this Form 10-Q containing the
words "believes," "anticipates," "plans," "expects" and similar expressions
constitute forward-looking statements, although not all forward-looking
statements contain such identifying words. These forward-looking statements are
based on our current expectations and are subject to a number of risks,
uncertainties and assumptions relating to our operations, results of operations,
competitive factors, shifts in market demand and other risks and uncertainties.
The most important factors that could prevent us from achieving our stated goals
include, but are not limited to, the following:
| · |
our
ability to generate sufficient working capital to meet our operating
requirements; |
| · |
our
future expense levels (including cost of revenues, research and
development, sales and marketing, and general and administrative
expenses); |
| · |
our
future revenue opportunities; |
| · |
our
ability to develop and enter into strategic relationships with wireless
service providers, wireless
software developers, semiconductor and device designers, mobile and
wireless device manufacturers and content providers; |
| · |
timely
deployment by wireless service providers, semiconductor and device
designers, and wireless device manufacturers
of our wireless applications in their networks and mobile information
devices; |
| · |
the
continued growth in demand for wireless and mobile
usage; |
| · |
our
new product development and acceleration of commercial deployment of such
products; |
| · |
the
future adoption of our current and future products, services and
technologies; |
| · |
the
future growth of our customer base; |
| · |
technological
competition, which creates the risk of our technology being rendered
obsolete or noncompetitive; |
| · |
the
lack of patent protection with respect to the Company's technology;
|
| · |
potential
infringement of the patent rights of third parties;
and |
| · |
evolving
technology trends. |
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, any of the assumptions could be inaccurate and actual
results may differ from those indicated by the forward-looking statements
included in this Form 10-Q. In light of the significant uncertainties inherent
in the forward-looking statements included in this Form 10-Q, you should not
consider the inclusion of such information as a representation by us or anyone
else that we will achieve such results. Moreover, we assume no obligation to
update these forward-looking statements to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
statements.
19
Overview
Summus’
predecessor company, High Speed Net Solutions, Inc., was founded in 1984.
Summus, Ltd. was merged into High Speed in February 2001. High Speed changed its
name in February 2002 to Summus, Inc. (USA). On March 11, 2005, Summus, Inc.
(USA) was reincorporated into the State of Delaware as Summus, Inc.
Summus is
primarily engaged in the development of mobile media applications that optimize
the consumer wireless experience. The core of our business is to focus on
the emerging wireless market and partner with leading content brands to bring
branded products to mobile phones. Our major content brands include Sports
Illustrated, America Online, Fujifilm, Mattel, The Associated Press, The Wall
Street Journal, Phil Hellmuth, Howard Lederer, Golf Digest, Hooters, The
Grateful Dead and others.
Summus
has developed wireless applications and tools for the creation, transmission,
playing and management of content by consumers over wireless networks. We
currently offer applications in four major business areas:
· Personalization;
· Gaming;
· Photo
messaging; and
· News/Information.
Summus
builds consumer applications for most major mobile platforms, including
QUALCOMM’s Binary Runtime Environment for Wireless™ (BREW™), Java™ 2 Platform,
Micro Edition (J2ME™), Symbian™ OS and Wireless Application Protocol
(WAP). We distribute our applications through major wireless carriers who
make our products available to their customers. Summus currently has
relationships with carriers that account for 98% of all U.S. wireless
subscribers. We also have relationships with international carriers covering
Canada, Latin America, Australia, Israel, the U.K., and
China.
We have
completed the development and deployment of at least one or a combination of
twenty-eight (28) wireless applications on a total of forty-one (41) wireless
carriers, sixteen (16) of which are United States carriers and twenty-five (25)
of which are international carriers. Some of our U.S. based wireless carriers
include, Alltel, Cingular, Sprint PCS, T-Mobile, US Cellular and Verizon
Wireless.
The
majority of the applications developed and deployed by Summus, as well as future
applications, have been developed by us through a process that involves securing
agreements with content providers and carriers, and developing and launching the
applications. We outsource the infrastructure needed to host and deliver the
transactions for our applications.
Our goal
is to be the leading developer of wireless applications and mobile media content
in the four areas listed above for mobile phones, smart phones, personal digital
assistants (PDA’s) and other handheld wireless devices. Our technology
works over existing second generation (2G) wireless networks, as well as 2.5G
and 3G networks, and is not generally limited by the wireless network. Our
wireless applications are designed to take advantage of multimedia enhancements
in the latest generation of mobile phones, including high-resolution color
display camera capabilities, increased processing power and improved audio
capabilities.
20
Our
customers typically purchase and download our applications through a wireless
carrier's branded e-commerce service accessed directly from their mobile phones,
which must be enabled by technologies such as BREW, J2ME, Symbian and WAP. These
wireless carrier services include, among others, Verizon Wireless' Get
It Now,
Sprint’s PCS Vision,
Alltel’s
Axcess and US
Cellular’s Easy
Edge. Our
customers are charged a one-time or monthly subscription fee for the application
which appears on their mobile phone bills. The wireless carriers retain a
percentage of the fee and remit the balance to us. We then pay the entities from
which we license content a part of this amount. The wireless distribution of our
applications eliminates traditional publishing complexities, including physical
production, packaging, shipping, inventory management and return
processing.
To date,
the Company has experienced significant operating losses as we have made
investments in application development. The Company is focused on the
development and delivery of applications and the marketing of those applications
to make substantial progress in revenue generation. We plan to expand our market
presence by partnering with additional wireless carriers as well as increasing
subscriber adoption of our applications. Our ability to generate profits and
positive cash flow from operations will depend primarily on increasing revenues
as well as continuing cost control measures.
Key
Developments in 2005
Development
Agreement with America Online, Inc.
In March
2005, Summus and America Online announced their relationship to develop an
application to bring America Online’s You’ve Got Pictures service to America
Online members on their mobile handheld device. America Online members will be
able to manage online photo albums, save photos as wallpaper, and send pictures
to friends and family members using a mobile email service. The application will
be developed for BREW™, J2ME™ and WAP.
Collaborative
Agreement with Mattel, Inc.
In March
2005, Summus announced a partnering agreement with Mattel, Inc. to develop and
distribute the card game UNO and other classic games including Ker Plunk!®,
Rock' Em Sock 'Em RobotsTM
and Toss
AcrossTMfor the
mobile phone. The applications will launch on BREW™ and J2ME™.
Additional
Senior Notes Financing
In
January 2005, Summus received an additional investment of $215,000 of 12% Senior
Notes, on the same terms as the December 2004 Senior Notes Financing. Summus
originally received $1,425,000 in the initial closing of the Senior Notes in
late December 2004. The holder was also granted warrants to purchase a total of
42,157 shares of Summus’s common stock. The warrants are exercisable upon
issuance, have a term of five years and have an exercise price of $5.60 per
share.
21
Exercise
of Warrants
During
February and March 2005, Summus received $4,112,134 from the exercise of
1,263,246 warrants to purchase shares of Summus’s common stock. These warrants
were originally issued in connection with private placements of Summus’s
preferred stock and common stock. Summus agreed to reprice most of these
warrants, which originally had exercise prices ranging from $3.50 to $7.50 per
share, to exercise prices ranging from $2.50 to $3.50 per share in consideration
for their immediate exercise.
Exercise
of Stock Options
In
January and February 2005, Summus issued 58,560 shares in connection with the
exercise of stock options at their original exercise prices ranging from $1.60
to $5.10 per share. The total received by Summus from these exercises was
$218,229.
Payment
of Senior Notes
Due to
the additional financing received by Summus in February and March 2005 from the
exercise of warrants, the maturity of the 12% Senior Notes were accelerated from
the original maturity date of May 15, 2005. Summus repaid the principal balance
of $1,640,000 of the Senior Notes, plus interest at the rate of 12% per annum.
Since the Senior Notes were paid off in accordance with their terms, they will
have no rights of conversion into Summus’ common stock.
Payment
of H&K Note Payable with stock
On
January 31, 2005, Summus entered into a modified settlement agreement with
Holland & Knight LLP (“H&K”). The remaining amount of the recorded
liability due to H&K of $184,382 was satisfied through the issuance to
H&K of 47,673 shares of Summus’s common stock. The fair value of the 47,673
shares of common stock was estimated at $243,132, based on the traded value of
Summus’s common stock on the date of the settlement agreement. The difference
between the estimated fair value of the 47,673 common shares and the recorded
value of the liability of $184,382, totaling $58,750, was recorded as settlement
loss.
22
Results
of Operations
Three-Month
Period Ended March 31, 2005 Compared to Three-Month Period Ended March 31,
2004
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31 |
|
|
|
|
|
%
of Total |
|
|
|
|
%
of Total |
|
|
|
|
|
|
|
|
|
2005
|
|
Revenues |
|
|
2004
|
|
Revenues |
|
|
$
Change
|
|
%
Change |
|
|
|
|
Revenues
by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
applications and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts |
|
$
1,986,347 |
|
99.8
|
%
|
|
$
773,330 |
|
98.1
|
%
|
|
$
1,213,017 |
|
156.9
|
%
|
|
Contracts
and license fees |
|
-
|
|
-
|
|
|
13,889
|
|
1.8
|
|
|
(13,889)
|
|
(100.0)
|
% |
|
Wireless
license fees |
|
3,700
|
|
0.2
|
|
|
750
|
|
0.1
|
|
|
2,950
|
|
393.3
|
% |
|
Total
revenues |
|
$
1,990,047 |
|
100.0
|
%
|
|
$
787,969 |
|
100.0
|
%
|
|
$
1,202,078 |
|
152.6
|
%
|
Wireless
Applications and Contracts. Revenue
from wireless applications and contracts increased $1,213,017 to $1,986,347 in
the three-month period ended March 31, 2005, up 156.9% from $773,330 in the
three-month period ended March 31, 2004. The increase in revenue from wireless
applications and contracts resulted from the increase in sales of existing
wireless applications and additional wireless applications developed by Summus,
launched by several wireless carriers and purchased by end-users. Summus
launched its Sports Illustrated Swimsuit Collection wallpaper and screen saver
applications in March 2004 and launched its multi-player Texas Hold’em game
application in May 2004. We continue to increase our subscriber base as well as
our expansion to new carriers.
Revenue
earned from wireless applications is recognized upon delivery and acceptance by
the end-user either as a one-time purchase or a monthly
subscription.
Contracts
and License Fees. Revenue
from contracts and license fees was $13,889 in the three-month period ended
March 31, 2004 and was generated from providing governmental contract services.
This government contract commenced in 2003 and was completed in March 2004.
There was no revenue earned from contracts and license fees during the
three-month period ended March 31, 2005.
Wireless
License Fees. Revenue
earned from wireless license fees totaled $3,700 and $750 in the three-month
periods ended March 31, 2005 and 2004, respectively.
23
Costs
of Revenues
|
|
Three
Months Ended March 31 |
|
|
2005 |
|
2004 |
|
$
Change |
|
%
Change |
|
|
Cost
of revenues by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless applications and contracts |
$ |
956,187 |
|
$ |
396,337 |
|
$ |
559,850 |
|
|
141.3
|
% |
|
Contracts and license fees |
|
- |
|
|
3,199 |
|
|
(3,199) |
|
|
(100.0) |
% |
|
Wireless license fees |
|
- |
|
|
- |
|
|
- |
|
|
-
|
% |
|
Total
cost of revenues |
$ |
956,187 |
|
$ |
399,536 |
|
$ |
556,651 |
|
|
139.3
|
% |
Wireless
Applications and Contracts. Costs of
wireless applications and contracts increased $559,850 to $956,187 in the
three-month period ended March 31, 2005, up 141.3% from $396,337 in the
three-month period ended March 31, 2004. The increase in costs of wireless
applications and contracts resulted from the increase in sales of existing
wireless applications and additional wireless applications developed by the
Company, launched by several wireless carriers and purchased by end-users. These
costs are direct costs associated with the sale and delivery of wireless
applications and primarily consist of third-party hosting fees, carrier
distribution and fees associated with content information provided by our
content providers for wireless applications which were deployed during the
three-month period ended March 31, 2005. The costs related to third-party
hosting and carrier distribution are incurred on a monthly basis and are
primarily fixed in nature regardless of the revenue generated by the related
applications.
Contracts
and License Fees. Costs of
contracts and license fees were $3,199 in the three-month period ended March 31,
2004, and were incurred as part of providing services under a government
contract that commenced in 2003 and was completed in March 2004. Costs of
contracts and license fees consisted primarily of salaries and other related
costs of providing governmental contract services. There was no revenue earned
from contracts and license fees during the three-month period ended March 31,
2005, therefore the Company did not record any costs of revenues.
Wireless
License Fees. There
were no costs of revenues regarding wireless license fees during the three-month
periods ended March 31, 2005 and 2004, since the license fee agreements
consummated during this period related to technology that had been previously
developed by the Company.
24
Gross
Profit
|
|
Three
Months Ended March 31 |
|
|
2005 |
|
2004 |
|
$
Change |
|
%
Change |
|
|
Gross
profit by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless applications and contracts |
$ |
1,030,160 |
|
$ |
376,993 |
|
$ |
653,167 |
|
|
173.3
|
% |
|
Contracts and license fees |
|
- |
|
|
10,690 |
|
|
(10,690) |
|
|
(100.0) |
% |
|
Wireless license fees |
|
3,700 |
|
|
750 |
|
|
2,950
|
|
|
393.3
|
% |
|
Total
gross profit |
$ |
1,033,860 |
|
$ |
388,433 |
|
$ |
645,427 |
|
|
166.2
|
% |
Wireless
Applications and Contracts. Gross
profit resulting from the development and deployment of wireless applications
increased $653,167 to $1,030,160 for the three-month period ended March 31,
2005, an increase of 173.3% over the gross profit for the three-month period
ended March 31, 2004 of $376,993. The increase in gross profit resulting from
these activities corresponds with the increase in revenues from wireless
applications and contracts. The costs for these revenues include costs that are
primarily fixed in nature, consisting mostly of third-party hosting fees and
content information provided by certain of our content providers, and costs that
are primarily variable in nature, consisting mostly of third-party content
information.
Contracts
and License Fees. Gross
profit resulting from the government contract services during the three-month
period ended March 31, 2004 totaled $10,690. The gross profit from these
services resulted from deducting primarily salaries and other related costs from
the related earned revenue. During the three-month period ended March, 31, 2005,
the Company did not generate any revenue, costs of revenue or gross profit
related to contracts and license fees.
Wireless
License Fees. Gross
profit resulting from wireless license fees totaled $3,700 and $750 for the
three-month periods ended March 31, 2005 and 2004, respectively. The Company did
not incur any specific direct costs associated with the sale, delivery, or
installation of the software underlying the license agreements consummated
during the period. Additionally, the Company does not expect to incur any future
obligations relating to these license fees.
General
and Administrative Expenses
|
|
|
Three
Months Ended March 31 |
|
|
|
2005
|
|
2004
|
|
$
Change |
|
%
Change |
|
|
|
General
and administrative |
|
$
727,103 |
|
$
926,061 |
|
$(198,958) |
|
(21.5)% |
General
and administrative expenses consist primarily of salaries, consulting fees,
office operations, administrative and general management activities, including
legal, accounting and other professional fees. General and administrative
expenses for the three-month period ended March 31, 2005 were $727,103, compared
to $926,061 for three-month period ended March 31, 2004. The decrease in general
and administrative expenses during the current period as compared to the prior
period reflect a reduction in several expense categories, namely salaries,
third-party consulting fees, travel and general office administration costs. The
reductions in these categories reflect continued cost reduction efforts
implemented by management.
25
Research
and Development Expenses
|
|
|
Three
Months Ended March 31 |
|
|
|
2005
|
|
2004
|
|
$
Change |
|
%
Change |
|
|
|
Research
and development |
|
$644,576 |
|
$520,222 |
|
$
124,354 |
|
23.9% |
Research
and development expenses for the three-month period ended March 31, 2005, were
$644,576 compared to $520,222 for the three-month period ended March 31, 2004.
The increase in research and development expenses is due to the increase in the
number of applications that the Company is developing for future revenue
generation and specific investments in certain technologies in the three-month
period ended March 31, 2004. We are focusing our resources on the development of
new products for rapid deployment.
Sales
and Marketing Expenses
|
|
|
Three
Months Ended March 31 |
|
|
|
2005 |
|
2004 |
|
$
Change |
|
%
Change |
|
|
|
Sales
and marketing |
|
$283,299 |
|
$108,393 |
|
$174,906 |
|
161.4% |
Sales and
marketing expenses consist primarily of salaries, consulting fees, advertising
fees and other professional fees. Sales and marketing expenses for the
three-month period ended March 31, 2005 were $283,299, compared to $108,393 for
the three-month period ended March 31, 2004. The increase in sales and marketing
expenses during the current period as compared to the prior period reflects a
focus to deploy and market new products in order to continue increasing
revenues.
Non-Cash
Compensation Expenses
|
|
|
Three
Months Ended March 31 |
|
|
|
2005
|
|
2004
|
|
$
Change |
|
%
Change |
|
|
|
Non-cash
compensation |
|
$11,068
|
|
$47,036 |
|
$(35,968) |
|
(76.5)% |
Non-cash
compensation for the three-month period ended March 31, 2005 was $11,068
compared to $47,036 for the three-month period ended March 31, 2004. Non-cash
compensation for each of the three-month periods reflects the amortization for
three months of deferred compensation resulting from stock options granted in
prior years, at prices below the fair value of the underlying common stock.
26
Non-Cash
Consulting Expenses
|
|
|
Three
Months Ended March 31 |
|
|
|
2005
|
|
2004
|
|
$
Change |
|
%
Change |
|
|
|
Non-cash
consulting expense |
|
$5,202 |
|
$6,344 |
|
$(1,142) |
|
(18.0)% |
Non-cash
consulting expense for the three-month period ended March 31, 2005, in the
amount of $5,202 is attributable to 1,118 stock warrants granted to consultants
for services, valued using the Black-Scholes option-pricing model.
Non-cash
consulting expense for the three-month period ended March 31, 2004, in the
amount of $6,344 is attributable to 1,042 stock options and 4,402 stock warrants
granted to consultants for services, valued using the Black-Scholes
option-pricing model.
Non-cash
Settlements
|
|
|
Three
Months Ended March 31 |
|
|
|
2005 |
|
2004 |
|
$
Change |
|
%
Change |
|
|
|
Non-cash
settlements |
|
$58,750 |
|
$
- |
|
$58,750 |
|
100.0%% |
Non-cash
settlements totaling $58,750 resulted from the settlement of the remaining
amount of a note payable with Holland & Knight LLP (“H&K”) of $184,382
with the issuance to H&K of 47,673 shares of Summus’s common stock. The fair
value of the 47,673 shares of common stock was estimated at $243,132, based on
the traded value of Summus’s common stock on the date of the settlement
agreement. The difference between the estimated fair value of the 47,673 common
shares and the recorded value of the liability of $184,382, totaling $58,750,
was recorded as settlement loss.
The
Company did not enter into any legal settlements during the three-month period
ended March 31, 2004.
Interest
Expense
|
|
|
Three
Months Ended March 31 |
|
|
|
2005
|
|
2004
|
|
$
Change |
|
%
Change |
|
|
|
Interest |
|
$43,337 |
|
$20,848 |
|
$22,489 |
|
107.9% |
Interest
expense for the three-month period ended March 31 2005, was $43,337 compared to
interest expense of $20,848 for three-month period ended March 31, 2004.
Interest expense for each of the three-month periods related to interest costs
associated with capital lease obligations and note payable agreements. The
increase in interest expense is due primarily to interest incurred on principal
on Senior Notes. These Senior Notes were repaid in March 2005.
27
Amortization
of discount on debt and beneficial conversion feature
|
|
|
Three
Months Ended March 31 |
|
|
|
2005
|
|
2004
|
|
$
Change |
|
%
Change |
|
|
|
Amortization
of discount on debt and
beneficial
conversion feature |
|
$851,332 |
|
$
-
|
|
$851,332 |
|
100.0% |
Amortization
of discount on debt and beneficial conversion feature for the three-month period
ended March 31, 2005 was $851,332. This related to amortization of the discounts
on the convertible notes payable entered into in December 2004. These notes were
repaid in March 2005 and the discount was fully amortized as interest expense in
the three-month period ended March 31, 2005. There was no amortization of
discount on debt and beneficial conversion feature for the three-month period
ended March 31, 2004.
Net
Loss
|
|
|
Three
Months Ended March 31 |
|
|
|
2005
|
|
2004
|
|
$
Change |
|
%
Change |
|
|
|
Net
loss |
|
$1,590,807 |
|
$1,240,471 |
|
$350,336 |
|
28.2% |
As a
result of the factors discussed above, the net losses for the three-month period
ended March 31, 2005 and 2004 were $1,590,807 and $1,240,471, respectively.
Liquidity
and Capital Resources
As of
March 31, 2005 we had $3,617,655 of cash on hand, working capital of $2,923,725,
and approximately $1.78 million in current liabilities.
Funding
Events
In
January 2005, Summus received an additional investment of $215,000 of 12% Senior
Notes, on the same terms as the December 2004 Senior Notes financing. Summus
originally received $1,425,000 in the initial closing of the Senior Notes in
late December 2004. The holder was also granted warrants to purchase a total of
42,157 shares of Summus’s common stock. The warrants are exercisable upon
issuance, have a term of five years and have an exercise price of $5.60 per
share.
During
February and March 2005, Summus received $4,112,134 from the exercise of
1,263,246 warrants to purchase shares of Summus’s common stock. These warrants
were originally issued in connection with private placements of Summus’s
preferred stock and common stock. Summus agreed to reprice most of these
warrants, which originally had exercise prices ranging from $3.50 to $7.50 per
share, to exercise prices ranging from $2.50 to $3.50 per share in consideration
for their immediate exercise.
28
In
January and February 2005, Summus issued 58,560 shares in connection with the
exercise of stock options at their original exercise prices ranging from $1.60
to $5.10 per share. The total received by Summus from these exercises was
$218,229.
Due to
the additional financing received by Summus in February and March 2005, the
maturity of the 12% Senior Notes accelerated from the original maturity date of
May 15, 2005. Summus repaid the principal balance of $1,640,000 of the Senior
Notes, plus interest at the rate of 12% per annum. Since the Senior Notes were
paid off in accordance with their terms, they will have no rights of conversion
into Summus’s common stock.
Other
Matters
From
inception through our 2004 fiscal year, our primary source of funding for our
operations came from the issuance of shares of our common and preferred stock in
private placements to investors. We believe that we have enough working capital
to fund and sustain our business operations through the 2005 fiscal year and
beyond. However, business opportunities, such as product or geographic
expansion, or the acquisition of product lines or companies may present
themselves. If we were to pursue these opportunities, they may require that we
raise additional capital through the issuance of our equity securities or that
we issue shares of our common stock or other equity securities in connection
with acquisitions. If we have to raise additional funding, we cannot guarantee
that we will be able to raise the necessary capital or that, if we do so, it
will be on favorable terms. We may have to sell equity at below market rates,
and any future sales of our capital stock to finance our business plan will
dilute our existing stockholders' ownership.
Summus is
actively promoting and expanding its product line and pursuing additional
financing for capital to expand its operations.
Subject
to our liquidity constraints (including our need to dedicate cash flow to meet
our obligations on a timely basis), we intend to invest a larger portion of our
working capital on:
| · |
increasing
subscriber adoption of our applications through marketing and
promotions; |
| · |
securing
top-tier brands; |
| · |
the
development and delivery of new wireless applications;
and |
| · |
the
marketing of those applications to lay the foundation of future
substantial revenue generation. |
29
Cash
Flow Information
| |
|
|
Three
Months Ended March 31 |
|
| |
|
|
2005 |
|
|
2004 |
|
Cash
used in operating activities |
|
$ |
(646,656 |
) |
$ |
(1,810,623
|
) |
Cash
used in investing activities |
|
$ |
(10,199 |
) |
$ |
(21,417
|
) |
Cash
provided by (used in) financing activities |
|
$ |
2,868,722 |
|
$ |
(56,558
|
) |
Cash
Flow used in Operating Activities. Net cash
used in operating activities was $646,656 in the three-month period ended March
31, 2005, compared to $1,810,623 in the corresponding period of the prior year.
The decrease in net cash used in operating activities was primarily due to
increases in cash collections from customers consistent with the increase in
wireless application revenues, and to cost reductions in several expense
categories, primarily salaries, third-party consulting fees, travel, and general
office administration costs in the three-month period ended March 31, 2005.
Summus restructured its organization in February 2004 as part of its focus to
reduce future operating expenses and focus on revenue generation.
Cash
Flow used in Investing Activities. Net cash
used in investing activities was $10,199 and $21,417 in the three-month periods
ended March 31, 2005 and 2004, respectively, representing computer equipment
purchases.
Cash
Flow provided by (used in) Financing Activities. Net cash
provided by financing activities was $2,868,722 in the three-month period ended
March 31, 2005 and consisted of the following:
| · |
proceeds
from issuance of Senior Notes of $215,000. |
| · |
proceeds
from the exercise of 1,263,246 stock warrants and 58,560 stock options of
$4,330,363. |
| · |
principal
payments on Senior Notes of ($1,640,000). |
| · |
principal
payments on note payable obligations of
($36,641). |
Net cash
used in financing activities was $56,558 in the three-month period ended March
31, 2004, representing payments on capital lease and note payable
obligations.
Contractual
Obligations
At March
31, 2005, we did not have any material commitments for capital expenses. Our
principal commitments consisted of obligations under capital and operating
leases and notes payable.
The
following table summarizes our contractual obligations at March 31, 2005 and the
effect these obligations are expected to have on our liquidity and cash flows in
future periods.
|
|
|
|
Operating
|
|
Notes
|
|
|
|
|
Total
|
|
Leases
|
|
Payable
|
|
Nine
months ended December 31, 2005 |
|
$ |
345,553 |
|
$ |
189,037 |
|
$ |
156,516 |
|
Year
ending December 31, 2006 |
|
$ |
282,211 |
|
$ |
200,682 |
|
$ |
81,529 |
|
30
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS
No. 123 (R)”). SFAS No. 123(R), a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation”,
supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees”, and
amends SFAS No. 95, “Statement
of Cash Flows.” SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. SFAS No. 123(R) is effective for the beginning of the first
annual period beginning after June 15, 2005. Therefore, the Company plans to
adopt SFAS No. 123(R) on January 1, 2006. The adoption of the SFAS No. 123(R)
fair value method will have a significant impact on the Company’s results of
operations, although it will have no impact on financial position. The impact of
adoption of SFAS No. 123(R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had the
Company adopted SFAS No. 123(R) in prior periods, the impact of the standard
would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net income (loss) and earnings (loss) per share in Note
2 to the Company’s financial statements. The Company is currently evaluating the
two fair value pricing methods permitted by SFAS No. 123(R) and has not selected
a final fair value pricing model.
Description
of Critical Accounting Policies
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect our reported amounts of assets and liabilities, revenues
and expenses. We have identified the following critical accounting policies that
affect the more significant estimates and judgments used in the preparation of
our financial statements. On an ongoing basis, we evaluate our estimates,
including those related to the matters described below. These estimates are
based on the information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary from those estimates under different assumptions or
conditions.
Revenue
Recognition and Related Costs
Wireless
applications and contracts
Revenues
earned from wireless applications are recognized upon delivery and acceptance by
the end-user either as a one-time purchase or a monthly subscription. For
content delivery partner arrangements, whereby the Company remits a portion of
the revenues earned through the sale of the Company’s applications, revenue is
recorded on a gross basis in accordance with EITF 99-19. The Company recognizes
the cost of revenue share payments to the content providers as a cost of
revenues. Wireless applications and contracts cost of revenues includes all
third-party hosting, testing and/or carrier distribution fees. These costs are
incurred on a monthly basis and are primarily fixed in nature regardless of the
revenue generated by the related applications.
Periodically,
we enter into non-recurring engineering arrangements with our content partners.
Generally, under the terms of these agreements, we receive funding upfront to
complete projects. The funding we receive upfront is recorded as deferred
revenue and is recognized as revenue under the terms of the individual
arrangements. Deferred revenue represents amounts received for which the Company
has not yet completed its contractual obligations.
31
Wireless
License Fees
We
recognize revenue from licensee fees for wireless software applications in
accordance with the provisions of AICPA Statement of Position 97-2, “Software
Revenue Recognition”, as amended by AICPA Statement of Position 98-9
“Modification of SOP No. 97-2 Software Revenue Recognition with Respect to
Certain Transactions.” Revenue from software license fees is generally
recognized upon delivery provided that a contract has been executed, the vendor
fee is fixed or determinable, no significant vendor obligations or uncertainties
surrounding customer acceptance remain, and collection of the resulting
receivable is deemed probable.
There
were no costs related to the wireless license fee revenue generated during the
three months ended March 31, 2005 and 2004 as the license fee revenue related to
technology that had been previously developed by the Company, and there were no
costs for installation, delivery or customization, or other related
costs.
Contracts
and license fees
We derive
certain revenues primarily from research and development contracts for
governmental agencies and the commercial licensing of our technology. We
recognize revenue on these contracts at the time services are rendered based
upon the terms of individual contracts. Regarding the commercial licensing of
our technology, we follow the provisions of AICPA Statement of Position 97-2,
“Software Revenue Recognition”, as amended by AICPA Statement of Position 98-9
“Modification of SOP No. 97-2 Software Revenue Recognition with Respect to
Certain Transactions.” Revenue from software license fees is generally
recognized upon delivery provided that a contract has been executed, the vendor
fee is fixed or determinable, no significant vendor obligations or uncertainties
surrounding customer acceptance remain, and collection of the resulting
receivable is deemed probable.
Valuation
of Equity Instruments
We have
utilized our equity securities, including unregistered common stock and
options/warrants to purchase unregistered common stock, to pay for services and
to settle obligations owed to or claimed by creditors. The issuance of equity
instruments as payment for services rendered to Summus results in the recording
of non-cash compensation or consulting expense as the services are performed. We
utilize the Black-Scholes option-pricing model to determine the value of options
or warrants issued as payment for services. Underlying the Black-Scholes
option-pricing model are several assumptions that are evaluated by management
and include: (1) a dividend yield; (2) a common stock volatility factor; (3) the
risk-free interest rate; and (4) the expected life of the option or warrant.
Management evaluates each of these assumptions on a periodic basis in order to
determine the value of the equity instruments used as payment for services as
well as to record the associated expense. As conditions change, our evaluation
of the assumptions underlying the Black-Scholes option-pricing model may change
resulting in differing values of equity instruments issued for services between
reporting periods.
32
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We do not
use any derivative financial instruments for hedging, speculative or trading
purposes. Our exposure to market risk is currently immaterial.
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of our disclosure controls and procedures.
Based on that evaluation, the CEO and CFO have concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the disclosure controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
In addition, there were no significant changes in our internal controls over
financial reporting or in other factors that could significantly affect these
controls subsequent to the Evaluation Date. We have not identified any material
weaknesses in our internal controls, and therefore, no corrective were actions
taken.
33
OTHER
INFORMATION
Item
4. Submissions of Matters to a Vote of Securities
Holders.
On
February 18, 2005, Summus mailed an Information Statement to its security
holders. The matters upon which action was being taken in accordance with the
Information Statement were: (1) the approval of a reverse stock split in an
amount which the Board of Directors deemed appropriate, in its sole discretion,
in the range of 1-for-5 to 1-for-15; and (2) the approval of the reincorporation
of Summus, Inc. (USA), a Florida corporation, as a Delaware corporation by
merging it into Summus, Inc., a Delaware corporation.
Summus’
board of directors unanimously approved, and shareholders holding 61,015,550
shares of our common stock (representing approximately 50.7% of our outstanding
common stock) as of February 15, 2005, consented in writing to, the matters
addressed in the Information Statement. This approval and consent were
sufficient under the Florida Business Corporation Act, our bylaws and our
articles of incorporation to approve such matters.
Under the
rules of the Securities and Exchange Commission, the written consents of our
shareholders as to the matters described in the Information Statement could not
take effect until 20 days after the mailing of this information statement had
elapsed. On March 11, 2005, Summus made filings with the Secretary of State of
the State of Florida and the Secretary of State of the State of Delaware
effecting (1) a 1-for 10 reverse stock, as determined by our Board of Directors,
and (2) the reincorporation of Summus as a Delaware corporation under the name
of Summus, Inc.
(a)
Exhibits:
|
Exhibit
31.1 |
|
Rule
13a-14(a)/15a-14(a) Certification of Gary E. Ban, Chief Executive
Officer |
|
Exhibit
31.2 |
|
Rule
13a-14(a)/15a-14(a) Certification of Donald T. Locke, Chief Financial
Officer |
|
Exhibit
32.1 |
|
Section
1350 Certification of Gary E. Ban, Chief Executive
Officer |
|
Exhibit
32.2 |
|
Section
1350 Certification of Donald T. Locke, Chief Financial
Officer |
34
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date:
May 13, 2005 |
SUMMUS,
INC.
By:
/s/
GARY E.
BAN
Gary
E. Ban
Chief
Executive Officer |
|
|
|
Date:
May 13, 2005 |
By:
/s/
DONALD T.
LOCKE
Donald
T. Locke
Chief
Financial Officer |
35