UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
------------------
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
COMMISSION FILE NO.000-24969
mPhase Technologies, Inc.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2287503
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
587 CONNECTICUT AVE., NORWALK, CT 06854-1711
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, (203) 838-2741
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 SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORT), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK AS OF NOVEMBER 11, 2002 IS 65,880,841 SHARES, ALL OF ONE CLASS OF $.01
STATED VALUE COMMON STOCK.
mPHASE TECHNOLOGIES, INC.
INDEX
PAGE
--------------------------------------------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets-June 30, 2002
and September 30, 2002 (Unaudited).....................................................................1
Unaudited Consolidated Statements of Operations-Three Months ended
September 30, 2001 and 2002 and from October 2, 1996
(Date of Inception) to September 30, 2002 .............................................................2
Unaudited Consolidated Statement of Changes in Shareholders' Equity (Deficit)............................3
Three months ended September 30, 2002
Unaudited Consolidated Statements of Cash Flows-Three Months Ended
September 30, 2001 and 2002 and from October 2, 1996
(Date of Inception) to September 30, 2002 .............................................................4
Notes to Unaudited Consolidated Financial Statements............................................ 5-10
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................11 - 16
ITEM 3 Quantitative and qualitative disclosures about
market risk.......................................................................................16
ITEM 4 CONTROLS AND PROCEDURES ................................................................................16
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................16
Item 2. Changes in Securities...................................................................................17
Item 3. Defaults Upon Senior Securities.........................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.....................................................17
Item 5. Other Information.......................................................................................17
Item 6. Exhibits on Reports on Form 8-K.........................................................................17
Signature Page...................................................................................................18
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
June 30, September 30,
2002 2002
------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 47,065 $ 4,125
Accounts receivable, net of bad debt
reserve of $2,906 in each period 273,780 118,836
Inventories, net 3,342,716 3,182,026
Prepaid expenses and other current assets 830,589 553,279
------------- -------------
Total Current Assets 4,494,150 3,858,266
------------- -------------
Property and equipment, net 1,742,186 1,457,633
Patents and licensing rights, net 685,349 612,048
Other Assets 20,830 19,207
------------- -------------
TOTAL ASSETS 6,942,515 5,947,154
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,819,245 2,691,135
Accrued expenses 673,065 671,818
Due to related parties 35,000 35,000
Notes payable, current 353,339 370,809
Deferred revenue 214,180 214,180
------------- -------------
TOTAL CURRENT LIABILITIES 4,094,829 3,982,942
------------- -------------
Long-term debt, net of current portion 1,014,218 1,001,200
Other Liabilities 1,211,249 1,211,249
Other Liabilities, related parties 665,068 --
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Common stock, stated value $.01, 150,000,000 shares
authorized; 60,807,508 and 65,880,841 shares
issued and outstanding at June 30, 2002 and
September 30, 2002, respectively 608,075 658,808
Additional paid in capital 100,751,284 102,274,068
Deferred compensation (23,923) (1,403)
Deficit accumulated during development stage (101,366,286) (103,158,343)
Unrecognized capital losses (4,026) (13,394)
Less-Treasury stock, 13,750 shares at cost (7,973) (7,973)
------------- -------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (42,849) (248,237)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,942,515 $ 5,947,154
============= =============
The accompanying notes are an integral part of these
consolidated balance sheets.
1
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
For the October 2, 1996
Three Months Ended Date of
September 30, Inception) to
September 30,
2001 2002 2002
------------- ------------- -------------
REVENUES $ 537,008 $ 210,077 $ 13,596,133
------------- ------------- -------------
COSTS AND EXPENSES
Cost of Sales (see note 2--related
party transactions) 456,699 197,319 8,548,877
Research and development 1,111,416 803,294 31,612,068
(including non-cash stock
related charges of $167,770,
$43,750, and $1,703,924,
respectively, see note 2--related
party transactions)
General and Administrative 2,861,588 892,782 73,086,384
(including non-cash stock
related charges of $1,159,855,
$226,300, and $45,537,809,
respectively, see note 2--related
party transactions)
Depreciation and amortization 193,079 130,729 2,382,341
------------- ------------- -------------
TOTAL COSTS AND EXPENSES 4,622,782 2,024,124 115,629,670
------------- ------------- -------------
LOSS FROM OPERATIONS (4,085,774) (1,814,047) (102,033,537)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Gain on extinguishments 32,528 40,725 182,961
Minority interest loss in
consolidated subsidiary -- -- 20,000
Loss from unconsolidated
subsidiary -- -- (1,466,467)
Interest Income (expense), net (10,087) (18,735) 138,700
------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 22,441 21,990 (1,124,806)
------------- ------------- -------------
NET LOSS $ (4,063,333) $ (1,792,057) $(103,158,343)
============= ============= =============
Unrealized holding loss on
securities -- (9,368) (13,394)
------------- ------------- -------------
COMPREHENSIVE LOSS $ (4,063,333) $ (1,801,425) $(103,171,737)
============= ============= =============
LOSS PER COMMON SHARE,
basic and diluted $ (.10) $ (.03)
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and
diluted 42,037,506 60,881,131
============= =============
The accompanying notes are an integral part of these
consolidated balance sheets.
2
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
For the three months ended September 30, 2002 (unaudited)
Common Stock
------------
$.01 Shareholders
Stated Treasury Additional Deferred Accumulated Comprehensive (Deficit)
Shares Value Stock Paid-in Capital Compensation Deficit Loss Equity
------ ----- ----- --------------- ------------ ------- ---- ------
Balance
June 30, 2002 60,807,508 $608,075 $(7,973) $100,751,284 $(23,923) $(101,366,286) $ (4,026) $ (42,849)
Issuance of
Common stock
for services 200,000 2,000 - 46,000 - - - 48,000
Amortization
of deferred
employee
stock option
compensation - - - - 22,520 - - 22,520
Issuance of
common stock
in settlement
of debt 340,000 3,400 - 61,200 - - - 64,600
Issuance of
warrants to
certain Officers
in settlement of
debt - - - 480,917 - - - 480,917
Issuance of
Common stock in
settlement of
debt to related
parties 4,533,333 45,333 - 934,667 - - - 980,000
Net Loss - - - - (1,792,057) - (1,792,057)
Other
Comprehensive
Loss - - - - - - (9,368) (9,368)
---------- -------- -------- ------------ --------- -------------- --------- ----------
Balance,
September 30,2002 65,880,841 $658,808 $(7,973) $102,274,068 $ (1,403) $(103,158,343) $(13,394) $(248,237)
========== ======== ======== ============ ========= ============== ========= ==========
The accompanying notes are an integral part of these
consolidated balance sheets.
3
mPhase TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
For the October 2, 1996
Three Months Ended Date of
September 30, Inception) to
September 30,
2001 2002 2002
------------- ------------- -------------
Cash Flow From Operating Activities:
Net Loss $ (4,063,333) $ (1,792,057) $(103,158,343)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 427,132 380,563 4,548,750
Book Value of fixed assets disposed -- -- 74,272
Provision for doubtful accounts -- -- 32,124
Gain on debt extinguishments (32,528) (40,725) (182,961)
Loss on unconsolidated subsidiary -- -- 1,466,467
Impairment of note receivable -- -- 232,750
Non-cash charges relating to issuance of
common stock, common stock options and
Warrants 1,327,625 270,050 47,279,812
Changes in assets and liabilities:
Accounts receivable (121,778) 154,944 (150,960)
Inventories 68,251 160,690 (3,182,026)
Prepaid expenses and other current assets 133,158 24,662 (542,135)
Other non-current assets 37,500 1,623 (1,957)
Accounts payable 363 44,567 4,027,023
Accrued expenses 554,753 (1,248) 2,014,338
Due to/from related parties (see note 2--related
party transactions) 1,016,280 364,938 4,643,978
Receivables from Subsidiary -- -- (150,000)
Deferred revenue 156,180 -- 214,180
------------- ------------- -------------
Net cash used in operating Activities (496,397) (431,993) (42,834,688)
------------- ------------- -------------
Cash Flow from Investing Activities:
Payments related to patents and licensing rights (840) -- (375,720)
Purchase of fixed assets (27,864) -- (2,463,800)
------------- ------------- -------------
Net Cash used in investing activities (28,704) -- (2,839,520)
------------- ------------- -------------
Cash Flow from Financing Activities:
Proceeds from issuance of common stock and
exercises of options and warrants 525,000 -- 45,417,444
Advances from related parties -- 418,750 418,750
Payments of notes payable -- (29,697) (149,888)
Repurchase of treasury stock at cost -- -- (7,973)
------------- ------------- -------------
Net cash provided by financing activites 525,000 389,053 45,678,333
------------- ------------- -------------
Net increase (decrease) in cash (101) (42,940) 4,125
CASH AND CASH EQUIVALENTS, beginning of period 31,005 47,065 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 30,904 $ 4,125 $ 4,125
============= ============= =============
The accompanying notes are an integral part of these
consolidated balance sheets.
4
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS-mPhase Technologies, Inc. (the "Company") was
organized on October 2, 1996. On February 17, 1997, the Company acquired Tecma
Laboratories, Inc. ("Tecma") in a transaction accounted for as a reverse merger.
On June 25, 1998, the Company acquired Microphase Telecommunications, Inc.
("MicroTel"), through the issuance of 2,500,000 shares of its common stock in
exchange for all the issued and outstanding shares of MicroTel. The assets
acquired in this acquisition were patents related to the mPhase line of DSL
component products (e.g., POTS Splitters) and patent applications utilized in
the Company's proprietary Traverser(TM) Digital Video Data Delivery System
("Traverser(TM)).
The primary business of the Company is to design, develop, manufacture
and market high-bandwidth telecommunication products incorporating digital
subscriber line ("DSL") technology. The present activities of the Company are
focused on the deployment of its proprietary Traverser(TM) System, which
delivers MPEG2, non-Internet Protocal-based television, high-speed Internet and
voice over copper wire. Additionally, the Company sells a line of DSL component
products.
The Company is in the development stage, as defined by Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by
Development Stage Enterprises." and its present activities are focused on the
commercial deployment of its proprietary Traverser(TM) and associated DSL
component products. Since mPhase is in the development stage, the accompanying
consolidated financial statements should not be regarded as typical for normal
operating periods.
BASIS OF PRESENTATION-The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the regulations of
the Securities Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ending
September 30, 2002 are not necessarily indicative of the results that may be
expected for a full fiscal year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002.
Through September 30, 2002, the Company had incurred development stage
losses totaling approximately $103,158,343. At September 30, 2002, the Company
had approximately $4,125 of cash, cash equivalents and approximately $118,836 of
trade receivables to fund short-term working capital requirements. The Company's
ability to continue as a going concern and its future success is dependent upon
its ability to raise capital in the near term to: (1) satisfy its current
obligations, (2) continue its research and development efforts, and (3) the
successful wide scale development, deployment and marketing of its products.
USE OF ESTIMATES-The preparation of 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 date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
5
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECLASSIFICATIONS-Certain reclassifications have been made in the prior
period consolidated financial statements to conform to the current period
presentation.
LOSS PER COMMON SHARE, BASIC AND DILUTED - The Company accounts for net
loss per common share in accordance with the provisions of SFAS No. 128,
"EARNINGS PER SHARE". ("EPS"). SFAS No. 128 requires the disclosure of the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. Common
equivalent shares have been excluded from the computation of diluted EPS for all
periods presented since their affect is antidilutive.
RESEARCH AND DEVELOPMENT-Research and development costs are charged to
operations as incurred.
INVENTORY RESERVE AND VALUATION ALLOWANCE-The Company carries its
inventory at the lower of cost, determined on a first-in, first-out basis, or
market. Inventory consists mainly of the Company's POTS Splitter Shelf and
Filters. In determining the lower of cost or market, the Company periodically
reviews and estimates a valuation allowance to reserve for technical
obsolescence and marketability. The allowance represents management's assessment
and reserve for the technical obsolescence based upon the inter-operability of
its component products, primarily filters and splitters, with presently deployed
and next generation DSL infrastructures as well as a reserve for marketability
based upon current prices and the overall demand for the individual inventory
items. Material changes in either the technical standards of future DSL
deployments or further erosion in the demand for deployments of DSL
infrastructures could affect the estimates and assumptions resulting in the
amounts reported. Actual results could differ from these estimates.
REVENUE RECOGNITION-All revenue included in the accompanying
consolidated statements of operations for all periods presented relates to sales
of mPhase's line of POTS Splitter products and other related DSL component
products. As required, the Company adopted the Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on applying
generally accepted accounting principles to revenue recognition based on the
interpretations and practices of the SEC. The Company recognizes revenue for its
line of POTS Splitter products and other DSL component products at the time of
shipment, at which time, no other significant obligations of the Company exist,
other than normal warranty support. In addition, the Company includes costs of
shipping and handling billed to customers in revenue and the related expenses of
shipping and handling costs is included in cost of sales.
RECENT ACCOUNTING PRONOUCEMENTS - In July 2001, the Financial
Accounting Standards Board, ("FASB") issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives (but with no maximum
life). The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company was required to
adopt SFAS No. 142 effective July 1, 2002 and has done so. Effective July 1,
2002, the Company adopted SFAS Nos. 141 and 142. SFAS No.142 eliminates
amortization of goodwill and certain other intangible assets, but requires
annual testing for impairment (comparison of fair market value to carrying
value). Fair value is estimated using the present value of expected future cash
flows and other measures. The adoption of SFAS Nos. 141 and 142 did not have a
material impact on our financial statements.
In August 2001, the FASB issued FASB No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", and provides
guidance on classification and accounting for such assets when held for sale or
abandonment. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001, and as such became applicable to the Company effective July 1, 2002.
The adoption of SFAS No. 144 has not resulted in any adjustments to the carrying
values of the Company's Long-Lived Assets.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," which rescinds SFAS No. 4 and SFAS No. 44 and SFAS No. 64, which
relates to circumstances whereby the Company would determine when settlement of
debt or other liabilities would be considered extraordinary or recurring. The
Company has adopted the relevant provisions of SFAS No. 145 and that adoption of
SFAS No. 145 has not had a material effect on the Company's results of
operations of financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which provides alternative
methods of transition for a voluntary change to fair value based method of
accounting for stock-based employee compensation as prescribed in SFAS No. 123,
"Accounting for Stock-Based Compensation". Additionally, SFAS No. 148 required
more prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The provisions of this Statement are
effective for fiscal years ending after December 15, 2002, with early
application permitted in certain circumstances. Financial Accounting Statement
No. 123, "Accounting for Stock-Based Compensation", encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. The Company has adopted the "disclosure only" alternative described
in SFAS No. 123 and SFAS No. 148, which requires pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been
applied on an annual basis beginning with the current fiscal year which will end
June 30, 2003.
6
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
STATEMENT OF CASH FLOW SUPPLEMENTAL INFORMATION
September 30, September 30,
2001 2002
------------- -------------
Interest paid $10,087 $ 2,803
------- -------
Taxes Paid $ -- $ --
------- -------
2. RELATED PARTY TRANSACTIONS
The Company records material related-party transactions. mPhase's
President, Executive Vice President and Chairman of the Board of the Company are
also executive officers of Microphase. On May 1, 1997, the Company entered into
an agreement with Microphase, whereby it will use office space as well as the
administrative services of Microphase, including the use of accounting
personnel. This agreement was for $5,000 per month and was on a month-to-month
basis. In July 1998, the office space agreement was revised to $10,000, in
January 2000 to $11,050 per month, in July 2001 to $11,340, and in July 2002 to
$12,200 per month. Additionally, in July 1998, mPhase entered into an agreement
with Microphase, whereby mPhase reimburses Microphase $40,000 per month for
technical research and development assistance including engineering design and
production of prototypes. Microphase also charges fees for specific projects on
a project-by-project basis. During the three months ended September 30, 2001 and
2002 and for the period from inception (October 2, 1996) to September 30, 2002,
$258,287, $253,980, and $6,830,404, respectively, have been charged to expense
or inventory under these Agreements and is included in operating expenses in the
accompanying consolidated statements of operations. In addition, Microphase
advanced $418,750 for the three months ended September 30, 2002.
The Company is obligated to pay a 3% royalty to Microphase on revenues
from its proprietary Traverser(TM) Digital Video and Data Delivery System and
DSL component products. The three months ended September 30, 2001 and 2002,
mPhase recorded royalties to Microphase totaling $16,409 and $6,302,
respectively. For the year ended June 30, 2002, in consideration for a direct
investment of $100,000 and pursuant to debt conversion agreements, Microphase
received 2,900,000 shares of mPhase common stock and 2,200,000 warrants to
purchase mPhase common stock. Subsequent to September 30, 2002, the Company
issued 3,033,333 shares of its Common Stock in settlement of all amounts
outstanding and due to Microphase through September 30, 2002. For accounting
purposes these have been reflected as of September 30, 2002.
As a result of the foregoing transactions as of September 30, 2002, the
Company had no amounts payable to Microphase. Additionally, at September 30,
2002, approximately $142,000 of undelivered purchase orders remain outstanding
to Microphase.
7
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company purchases products and incurs certain research and
development expenses with Janifast Ltd., which is owned by U.S. Janifast
Holdings, Ltd. (a company in which Mr. Durando, Mr. Dotoli, and Mr. Ergul are
significant shareholders and Mr. Durando is Chairman of the Board) in connection
with the manufacturing of POTS Splitter shelves and component products including
cards and filters sold by the Company. For the year ended June 30, 2002,
pursuant to debt conversion agreements, Janifast Ltd. received 3,450,000 shares
of mPhase common stock and 1,200,000 warrants to purchase the Company's common
stock. Subsequent to September 30, 2002, the Company issued 1,500,000 shares of
its Common Stock in settlement of all amounts outstanding and due to Janifast
Ltd. through September 30, 2002. For accounting purposes these have been
reflected as of September 30, 2002. During the three months ended September 30,
2001 and 2002 and the period from inception (October 2, 1996 to September 30,
2002) $332,363, $0 and $10,698,480, respectively have been charged to inventory
or expense and is included in operating expenses in the accompanying statements
of operations. Additionally, at September 30, 2002, approximately $1,614,000 of
undelivered purchase orders remain outstanding to Janifast Ltd.
The Company has also incurred charges for beta testing and on-site
marketing, including the display of a live working model at Hart Telephone. In
addition, the Company has entered into a supply agreement with Hart Telephone,
which is scheduled to commence upon the commercial production of the
Traverser(TM). A member of mPhase's board of directors is employed by Lintel,
Inc., the parent corporation of Hart Telephone. Lintel Corporation is a
significant shareholder in mPhase.
The Company has incurred costs for obtaining transmission rights. This
enabled the Company to obtain re-transmission accreditation to proprietary
television content that the Company plans to provide with its flagship product,
the Traverser(TM) within its incorporated joint venture mPhase Television.net,
in which the Company owns a 56.5% interest.
As consideration for a letter of settlement with a former consultant of
mPhase, the Company had loaned the former consultant $250,000 in the form of a
Note ("Note"), secured by 75,000 shares of the former consultants common stock
of mPhase. The Note was due April 7, 2001. Accordingly, during the year ended
June 30, 2001 and 2002, the Company charged $212,500 and $20,250, respectively,
to administrative expense as a result of impairment of the Note. At September
30, 2002, the Company has included the residual balance of $17,250, representing
the estimated fair value of the underlying stock, in long-term assets in the
accompanying consolidated balance sheet.
Management believes the amounts charged to the Company by Microphase,
Janifast, mPhase Television.net and Hart Telephone are commensurate to amounts
that would be incurred if outside parties were used. The Company believes
Microphase, Janifast and Hart Telephone have the ability to fulfill their
obligations to the Company without further support from the Company.
Effective March 31, 2002, the Company converted $420,872 of liabilities
due to Piper Rudnick LLP, outside legal counsel to mPhase into a warrant to
purchase up to a total of 1,683,490 shares of the Company's common stock, which
pursuant to EITF 96-18, has an approximate value of $.30 per share; and a
warrant to purchase 550,000 shares of the Company's common stock at an exercise
price of $.30 per share pursuant to the terms of payment agreement. In addition
Piper agreed to accept a Promissory note for $420,872 of current payables at an
interest rate of 8% with payments of $5,000 per month commencing June 1, 2002
and continuing through December 1, 2003, with a final payment of principal plus
accrued interest due at maturity on December 31, 2003.
3. INVENTORIES
Inventory is stated at the lower of cost, determined on a first-in,
first-out basis, or market. Inventory consists mainly of the Company's POTS
Splitter shelves and cards. At September 30, 2002 inventory is comprised of the
following:
Raw materials $ 266,748
Work in progress 1,037,987
Finished goods 3,124,466
------------
Total 4,429,201
Less: Reserve for Obsolescence (1,247,175)
------------
Net Inventory $ 3,182,026
===========
8
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INCOME TAXES
The Company accounts for income taxes using the asset and liability
method in accordance with SFAS No. 109 "ACCOUNTING FOR INCOME TAXES". Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Because of the
uncertainty as to their future realizability, net deferred tax assets,
consisting primarily of net operating loss carryforwards, have been fully
reserved for. Accordingly, no income tax benefit for the net operating loss has
been recorded in the accompanying consolidated financial statements.
Utilization of net operating losses generated through September 30,
2002 may be limited due to changes in ownership that have occurred.
5. ACCRUED EXPENSES
Accrued expenses representing accrued general and administrative
expenditures were $673,065 for June 30, 2002 and $671,818 for September 30,
2002.
6. JOINT VENTURE
In March 2000, mPhase acquired a 50% interest in mPhaseTelevision.Net
pursuant to a Joint Venture Agreement (the "Agreement") for $20,000. The
agreement stipulates for mPhase's joint venture partner, AlphaStar
International, Inc., ("Alphastar"), to provide mPhaseTelevision.Net right of
first transmission for its transmissions including MPEG-2 digital satellite
television. In addition, in March 2000, mPhase loaned the joint venture
$1,000,000 at 8% interest per annum. The loan is repayable to the Company from
equity infusions to the subsidiary, no later than such time that
mPhaseTelevision.Net qualifies for a NASDAQ Small Cap Market Listing. During
April 2000, the Company acquired an additional 6.5% interest in
mPhaseTelevision.Net for $1,500,000.
During the three months ended September 30, 2001 and ended September
30, 2002, mPhaseTelevision.Net, Inc., was charged $35,608 and $0, respectively
for fees and costs by its joint venture partner and its affiliates.
Pursuant to an agreement dated as of June 18, 2002,
mPhaseTelevision.Net has terminated its lease of the earth station and Alphastar
and its affiliated entity have converted certain accounts payable into shares of
the Company's common stock. Additionally, under this Agreement, mPhase is
obligated to pay Alphastar and its affiliates $35,000, which is included in
amounts due to related parties in the accompanying consolidated balance sheet.
7. EQUITY TRANSACTIONS
During the three months ending September 30, 2002, the Company granted
200,000 shares of its common stock to consultants for services performed.
Additionally, effective for the three months ended September 30, 2002, the
Company issued 4,873,333 shares of the Company's Common Stock and 2,491,800
warrants in connection with the extinguishments of debt.
9
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. DEBT EXTINGUISHMENTS
Effective for the three months ending September 30, 2002, pursuant to
debt conversion agreements, the Company converted the $1,566,242 of liabilities
due to certain strategic vendors and related parties into 4,873,333 shares of
the Company's common stock, and 2,491,800 warrants.
Related parties and strategic vendors converted debt aggregating
approximately $620,000 and $477,242 respectively into approximately 3,033,333
and 1,840,000 shares of common stock respectively, the value of which was based
upon the price of the Company's common stock on the effective date of settlement
with each party. Additionally, two warrants to purchase 2,491,800 shares of
common stock were issued to the Company's president and vice-president to settle
outstanding indebtedness of approximately $469,000 as of September 30, 2002. The
aggregate value of such warrants was estimated using the Black Scholes options
pricing model, assuming an annual expected return of 0%, annual Beta volatility
of 125.4 and a risk-free interest rate of 2.4% pursuant to EITF 96-18, for the
aggregate conversion of $1,566,242 of such liabilities which resulted in an
aggregate gain on extinguishments of $40,725.
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into various agreements with Georgia Tech
Research Corporation ("GTRC"), pursuant to which the Company receives technical
assistance in developing the commercialization of its Digital Video and Data
Delivery System (DVDDS). The amounts incurred by the Company for GTRC technical
assistance with respect to its research and development activities and included
in the accompanying consolidated statement of operations for the three months
ending September 30, 2001 and 2002 and for the period from inception through
September 30, 2002 totaled approximately $250,000, $100,000 and $13,524,300,
respectively.
If and when sales commence utilizing this particular technology, the
Company will be obligated to pay to GTRC a royalty of up to 5% of product sales,
as defined.
From time to time, the Company may be involved in various legal
proceedings and other matters arising in the normal course of business. The
Company currently has no material outstanding legal proceedings.
10. Subsequent Events
Pursuant to commitments by related parties to concurrently convert
certain liabilities on October 11, 2002, the Company entered into, subject to
the Company's and the counter parties respective board of director's approval,
an agreement in principle with the Company's officers and affiliates, including
Janifast Ltd. and Microphase Corporation, to convert up to an amount equal to
the unpaid compensation and accounts payable through September 30, 2002. The
Company issued warrants to purchase 2,491,800 shares of the Company's common
stock at an exercise price of $.01, valued at $480,917, or $.193 per share
pursuant to ETIF 98-16, for the cancellation of unpaid compensation due to
officer's, with a measurement date of October 14, 2002 pursuant to ETIF 0019,
and 4,533,333 shares of its common stock for the conversion of $980,000 due to
related parties, with respective measurement dates of October 14 and 15, 2002
pursuant to ETIF 0019. The Company's board of director's approved these
transactions on October 30, 2002 and the warrants and shares were issued on
November 11 and 12, 2002. The warrants were calculated using the Black-Schoales
pricing model, assuming an annual expected return of 0%, a Beta volatility of
125.4 and a risk free interest rate of 5.9% pursuant to ETIF 96-18 and were
treated as permanent equity as of September 30, 2002 pursuant to ETIF 00-19. The
shares are reflected outstanding as of September 30, 2002 pursuant to AU 560 and
SFAS 128.
The Company entered into a memorandum of intention with Georgia Tech
Research Corporation, (GTRC), and its affiliate, Georgia Tech Applied Research
Corporation, (GTRAC), on October 14, 2002, which memorandum was revised on
November 12, 2002 and is subject to the approval of the respective board of
directors of the parties thereto and the exchange of mutual releases. The
memorandum provides for the settlement of any and all amounts outstanding to
GTRC and GTRAC through September 30, 2002, in consideration for two term notes
totaling $624,235 with interest at 7% and varied payments through 2007 and the
issuance of an amount of warrants to purchase shares of the Company's common
stock through 2007, at a price and formula yet to be agreed upon. In the
accompanying balance sheet for September 30, 2002 the Company has reclassified
$624,235 and $1,211,249 of accounts payable and accrued expenses due to GTRC and
GTRAC to long term debt and other liabilities for the amounts expected to be
converted to notes payable and equity, respectively.
11. RESTATEMENT
Management has reevaluated the adequacy and completeness of certain
disclosures in the accompanying consolidated financial statements. As a result
of this reevaluation, management has reissued the September 30, 2002
consolidated financial statements in an effort to clarify and more completely
disclose the Company's presentation of the consolidated financial statements
at September 30, 2002.
The aforementioned changes to the consolidated financial statements
have no effect on the financial position and results of operations for the three
months ended September 30, 2002.
10
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
ITEM 2 MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The following is management's discussion and analysis of certain
significant factors, which have affected mPhase's financial position and should
be read in conjunction with the accompanying financial statements, financial
data, and the related notes.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
LITIGATION REFORM ACT OF 1995:
Some of the statements contained in or incorporated by reference in
this Form 10-Q discuss the Company's plans and strategies for its business or
state other forward-looking statements, as this term is defined in the Private
Securities Litigation Reform Act of 1995. The words "anticipate," "believe,"
"estimate," "expect," "plan," "intend," "should," "seek," "will," and similar
expressions are intended to identify these forward-looking statements, but are
not the exclusive means of identifying them. These forward-looking statements
include, among others, statements concerning the Company's expectations
regarding its working capital requirements, gross margin, results of operations,
business, growth prospects, competition and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. Any
forward-looking statements contained in this Quarterly Report on Form 10-Q are
subject to risks and uncertainties that could cause actual results to differ
materially from those results expressed in or implied by the statements
contained herein.
ABOUT THIS AMENDMENT
Management has reevaluated the clarity and completeness of the Form
10Q/A and certain disclosures in the accompanying unaudited consolidated
financial statements. As a result of this reevaluation, management has reissued
the Form 10Q/A and the September 30, 2002 consolidated financial statements.
The amendment includes expanded and clarified disclosure in the
Consolidated Financial Statements, including notes 10, and 11 for the Three
Months Ended September 30, 2001 and 2002 beginning on page 10, and
reclassifications of previously segregated expenses for non-cash stock based
compensation of administrative employees now combined with general and
administrative for both quarterly periods and Cumulative totals through
September 30, 2002. Additionally, the amendment includes technical and clerical
edits, expanded and clarified disclosure in "Management's Disclosure and
Analysis", which begins on page 11, as well as updated certifications by the
certifying officers' of the Company.
The aformentioned changes to the consolidated financial statements have
no effect on the financial position at September 30, 2002, or results of
operations and loss per share for the Three Months Ended September 30, 2001 and
2002.
RESULTS OF OPERATIONS
OVERVIEW
mPhase is a development stage company headquartered in Norwalk,
Connecticut. We develop and sell broadband communications products,
specifically, DSL (Digital Subscriber Line) products, to telecommunication
providers around the world. mPhase's business can be segmented into two areas of
concentration: (1) Its principal product, the Traverser(TM) Digital Video and
Data Delivery System (DVDDS) and (2) its line of DSL component products.
Our principal product, the Traverser(TM) DVDDS enables
telecommunications service providers to simultaneously deliver broadcast digital
television, high-speed Internet access and voice services over the existing
copper telephone wire infrastructure utilizing Asymetric DSL technology.
Communications service providers deploying the Traverser system can provide each
service a la carte or as a bundled package of services. We principally market
the Traverser(TM) system abroad, as well as to independent, domestic telephone
companies operating in rural markets. We believe the Traverser(TM) system offers
the most cost-effective and reliable solution for the delivery of integrated
television, data and voice services.
In addition to the Traverser(TM), mPhase also designs and sells a line
of DSL component products that include microfilters, line extenders and POTS
(plain old telephone service) Splitters that are devices placed in a telephone
company's central office or exchange that enable voice and data to be
transmitted together simultaneously over the same telephone lines. mPhase has
recently developed two new products called the Intelligent POTS Splitter and
Universal Bypass respectively, each of which is designed to enable a telephone
company to trouble-shoot and maintain DSL lines from a telephone company's
central office without the need to deploy personnel on a "truckroll" thereby
saving costs.
mPhase was organized on October 2, 1996. On February 17, 1997, the
Company acquired Tecma Laboratories, Inc., a public corporation in a reverse
merger transaction. This resulted in the Company's stock becoming publicly
traded on the NASDAQ Over-the-Counter Bulletin Board. On June 25, 1998, the
Company acquired Microphase Telecommunications, Inc. in a stock for stock
exchange, whose principal assets included patents and patent applications
utilized in the Company's Traverser(TM) product. On March 2, 2000, mPhase
acquired an interest in mPhaseTelevision.Net, Inc., a joint venture organized to
provide digital television programming content to service providers deploying
television over DSL.
11
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
From mPhase's inception, the operating activities related primarily to
research and development, establishing third-party manufacturing and
distribution relationships and developing product brand recognition among
telecommunications service providers. These activities included establishing
trials and field tests of the Traverser(TM) product with Hart Telephone Company
in Georgia, and establishing a core administrative and sales organization.
Revenues. To date, all material revenues have been generated from sales
of the POTS Splitter Shelves and other DSL component products to a small number
of telecommunications companies. mPhase believes that future revenues are
difficult to predict because of the length and variability of the commercial
roll-out of the Traverser(TM) to various telecommunications service providers.
Since the Company believes that there may be a significant international market
for the Traverser(TM) involving many different countries, with different
regulations, certifications and commercial practices than the United States,
future revenues are highly subject to the changing variables and uncertainties.
Additionally, the recent instability of the telecommunications market evidenced
by reduction in capital spending across the whole telecom sector contributes to
our difficulty in accurately predicting future revenues.
Cost of revenues. The costs necessary to generate revenues from the
sale of POTS Splitter Shelves and other related DSL component products include
direct material, labor and manufacturing. mPhase paid these costs to Janifast
Ltd., which has facilities in the People's Republic of China and is owned by and
managed by certain senior executives of the Company. The cost of revenues also
includes certain royalties paid to Microphase Corporation, a privately held
corporation organized in 1955, which shares certain common management with the
Company. Costs for future production of the Traverser(TM) product will consist
primarily of payments to manufacturers to acquire the necessary components and
assemble the products and future patent royalties payable to Georgia Tech
Research Corporation, ("GTRC").
Research and development. Research and development expenses consist
principally of payments made to GTRC and Microphase Corporation for development
of the Traverser(TM) product. All research and development costs are expensed as
incurred.
General and administrative. Selling, general and administrative
expenses consist primarily of salaries and related expenses for personnel
engaged in direct marketing of the Traverser(TM), the POTS Splitter Shelves and
other DSL component products, as well as support functions including executive,
legal and accounting personnel. Certain administrative activities are outsourced
on a monthly fee basis to Microphase Corporation. Finally, mPhase leases the
principal office from Microphase Corporation.
Non-cash compensation charge. The Company makes extensive use of stock
options and warrants as a form of compensation to employees, directors and
outside consultants.
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. SEPTEMBER 30, 2001
REVENUE
Total revenues were $210,077 for the three months ended September 30,
2002 compared to $537,008 for the three months ended September 30, 2001. The
decrease was primarily attributable to slowing sales of the Company's POTS
Splitter product line, caused by the general downturn in the telecommunications
market, including among customers that order component products from the
Company. The Company continues to believe that its line of POTS Splitter
products is positioned to be competitively priced with high reliability and
connectivity, and as such has the potential to be a significant part of DSL
deployment worldwide. The Company cannot say when the demand for
telecommunication equipment will resume.
12
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
COST OF REVENUES
Cost of sales was $197,319 for the three months ending September 30,
2002 as compared to $456,699 in the prior period, representing 94% and 85%, for
the quarters ended September 30, 2002 and 2001 respectively, of gross revenues.
Cost of sales decreased, primarily as a result of the reduction in sales from
the prior period. The margins have varied dramatically during the past 2 fiscal
years as spending among the telecommunications providers has contracted, coupled
with downward pressures related to the supply and demand of telecommunications
products. Additionally, the Company has offered discounts to certain customers
in the period ended September 30, 2002 causing the margin to decrease.
RESEARCH AND DEVELOPMENT
Research and development expenses were $803,294 for the three months
ending September 30, 2002 as compared to $1,111,416 during the comparable period
in 2001. Such expenditures include $100,000 incurred with GTRC for the three
months ended September 30, 2002 as compared to $250,000 during the comparable
period in 2001. In addition, we incurred $703,294 with Microphase and additional
expenses with other strategic vendors for the three months ending September 30,
2002 as compared to $861,416 during the comparable period in 2001.
The decrease in research expenditures incurred with GTRC is due to the
Company's nearing completion of the design and manufacture of prototypes of the
set top box and the central office equipment associated with its Traverser(TM)
product in 2002. The Company anticipates that upon completion of the
Traverser(TM) set top box and central office equipment, overall research and
development expenses will generally decline subject to periodic variations for
product cost reduction and feature enhancement. The Company anticipates the
completion of its flagship product line and a leveling off of research and
development costs to reduce the demands on working capital and in turn, this
will have a positive effect on the Company's financial position going forward.
Research expenditures incurred with Microphase were related to the
continuing development of the Company's DSL component products, including the
Company's line of POTS Splitters and Microfilters and the Company's newest
products, the iPOTS(TM) and the mPhase Stretch. We believe the mPhase iPOTS(TM)
offers a much needed solution for the DSL industry; the iPOTS(TM) enables telcos
to remotely and cost-effectively perform loop management and maintenance
including line testing, qualification and troubleshooting. Prior to the
introduction of the iPOTS(TM), loop management could not be remotely performed
through a conventional POTS Splitter without the use of expensive cross connects
or relay banks because of the mandatory DC blocking capacitors in traditional
POTS splitters, as required by the ITU, ANSI and ETSI. The unique (patent
pending) iPOTS(TM) circuit allows most test heads to perform both narrow and
wideband testing of the local loop through the central office POTS Splitter
without having to physically disconnect the POTS Splitter, thereby eliminating
the need to dispatch personnel and a truckroll. The Company anticipates future
demand for this product, as it significantly reduces the cost of deploying and
maintaining DSL services. Also recently developed is the DSL loop extender
product called mPhaseStretch. This product extends the service distance for the
mPhase Traverser(TM) and can be used in conjunction with other DSL services. The
Company anticipates future demand for the Stretch loop extender product as it
addresses a primary issue in DSL services.
13
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $870,000 for the
three month period ended September 30, 2002, a decrease of $1,773,826 from
$2,644,088 for the comparable period in 2001. The decrease in selling, general
and administrative costs included a decrease of (a) non-cash charges relating to
the issuance of common stock and options to consultants by $738,575, (b) payroll
by $125,000, (c) legal expenses by $130,000, (d) marketing expenses relating to
trade shows by $110,000, (e) investment consulting expenses by $317,000 and (f)
various other administrative expenses that aggregate $353,251.
NET LOSS
The Company recorded a net loss of $1,792,057 for the three months
ended September 30, 2002 as compared to a loss of $4,063,333 for the three
months ended September 30, 2001. This represents a loss per common share of $.03
for the three month period ended September 30, 2002 as compared to a loss per
common share of $.10 for the three months ending September 30, 2001 based upon
weighted average common shares outstanding of 60,881,131 and 42,037,506 during
the periods ending September 30, 2002 and September 30, 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002 mPhase had working capital deficit of $124,676 as
compared to working capital of $399,321 at June 30, 2002. From its inception on
October 2, 1996 through September 30, 2002, the Company has incurred development
stage losses totaling approximately $103,158,343 and a stockholders' deficit of
$248,237. Cumulatively, through September 30, 2002, the Company had negative
cash flow from operations of approximately $42.4 million. At September 30, 2002,
the Company had approximately $4,125 of cash, cash equivalents and approximately
$118,836 of trade receivables to fund short-term working capital requirements.
As of June 30, 2002, the Company's outside auditor's stated that there was
"substantial doubt" regarding the Company's ability to continue as a "going
concern". The Company's ability to continue as a going concern and its future
success is dependent upon its ability to raise capital in the near term to: (1)
satisfy its current obligations, (2) continue its research and development
efforts, and (3) the successful wide scale development, deployment and marketing
of its products.
Historically, mPhase has funded its operations and capital expenditures
primarily through private placements of common stock. Management expects that
its ongoing financial needs will be provided by financing activities and
believes that the sales of its line of POTS Splitter products and other related
DSL component products will provide some offset to cashflow used in operations,
although there can be no assurance as to the level and growth rate of such sales
in future periods as seen with quarter to quarter fluctuations in component
sales. At September 30, 2002, the Company had cash and cash equivalents of
$4,125 compared to $47,065 at June 30, 2002, accounts receivable of $118,836 and
inventory of $3,182,026. This compared to $273,780 of accounts receivable and
$3,342,716 of inventory at June 30, 2002.
Cash used in operating activities was $431,993 during the three months
ending September 30, 2002. The cash used by operating activities principally
consists of the net loss, the net decrease in inventory, the net decrease in
accounts receivable offset by the increase in depreciation and amortization, and
by non-cash charges for common stock options and warrants issued for services
and increased accrued expenses.
14
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
The Company has entered into various agreements with GTARC, pursuant to
which the Company receives technical assistance in developing the Digital Video
and Data Delivery System. The Company has incurred expenses in connection with
technical assistance from GTARC totaling approximately $250,000, $100,000, for
the three month period ending September 30, 2001 and 2002, respectively, and
$13,524,300 from the period from inception through September 30, 2002. The
Company and GTRC entered into a Memorandum of Intent, on October 14, 2002 and
revised on November 12, 2002, which would result in the settlement of all
amounts outstanding equal to approximately $1,774,234.56 and the exchange of
mutual releases in consideration for two term Notes totaling $624,235 with
varied payments through 2007 and cancellation of approximately $1,050,000 of the
amounts outstanding in exchange for warrants to purchase 4,569,252 at 1 cent per
share plus a warrant to purchase another 2,000,000 shares of the Company's
common stock at $.30 per share of the Company's common stock through
2007. mPhase is the sole, worldwide licensee of the technology developed by
GTARC in conjunction with the Traverser(TM) product line. Upon completion of the
commercial product, GTRC may receive a royalty of up to 5% of product sales.
During the three months ending September 30, 2002, certain strategic
vendors and related parties converted approximately $1,566,000 of accounts
payable and accrued expenses into 4,813,333 shares of the Company's common stock
and 2,491,800 warrants. Fair value of the Common Stock and Warrants issued was
called upon the fair market value of the Common Stock on September 30, 2002 of
$.15 per share.
As of September 30, 2002, mPhase had no material commitments for
capital expenditures.
LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS
The Company has incurred net losses totaling approximately $103 million
during the development of its flagship product. In fiscal 2001, the Company had
anticipated that the sales of its component products would be able to supplement
the underwriting of the completion of our flagship product, the Traverser(TM).
In fiscal 2002 these sales declined with the overall decline of DSL deployments
and spending in the telephonic industry. The Company believes its new iPOTS
product has the potential to capture some of the DSL market for new deployments,
providing increases in revenue in the fourth quarter of fiscal 2003 and the
first half of fiscal 2004. Until such time such revenues are realized, the
Company intends on maintaining its reduced cost structure to minimize its
losses, which management believes will permit the Company to ultimately achieve
profitability.
The Company believes that it will be able to complete the necessary steps
in order to meet its cash flow requirements throughout fiscal 2003 and continue
its development and commercialization efforts. Management's plans in this regard
include, but are not limited to the following:
1) We intend to continue to invest in technology and telecommunications
hardware and software in connection with the full commercial production
of the cost-reduced version of the Traverser(TM). Since we have
strategically determined that the cost to a prospective telco to build
a master head end is substantially reduced owing to new developments in
technology, we have decided that mPhaseTV no longer requires access to
a satellite uplink facility. Thus the amount of capital necessary to
fund mPhaseTV and mPhase has been substantially reduced.
2) We continue our efforts to raise additional funds through private
placements of our common stock and strategic alliances, the proceeds of
which are required to fund continuing expenditures and the controlled
development stage rollout of our Traverser(TM) Digital Video and Data
Delivery System. However, there can be no assurance that mPhase will
generate sufficient revenues to provide positive cash flows from
operations or that sufficient capital will be available, when needed or
at terms that we deem to be reasonable.
3) The Company believes the initial major deployments and resultant
revenues of its Flagship product, the Traverser(TM), are expected in
the first half of fiscal 2004, which along with any upturn of capital
spending in the telephone industry will increase sales and improve the
Company's margins and provide the Company the opportunity to attain
profitability.
15
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
We have evaluated our cash requirements for fiscal year 2003 based upon
certain assumptions, including our ability to raise additional financing and
increased sales of our POTS splitter. The Company anticipates that it will need
to raise not less than $1.5 million primarily in private placements of its
common stock with accredited investors, and/or a Rights Offering to all of the
Company's current shareholders during the fiscal year which will end June 30,
2003, or alternatively we will need to curtail certain expenses as incurred at
the present levels including marketing and research and development expenses.
Additional investment in technology design to reduce the cost of the
Traverser(TM) will be necessary over the next 12 months. In the long-term, the
Company may invest additional funds annually on research and development of the
Traverser(TM) product line based upon sales levels, changes to technology and
the overall success of the Company attaining sufficient financing until such
time as it achieves profitable operations.
Should these cash flows not be available to us, we believe we would
have the ability to revise our operating plan and make certain further
reductions in expenses, so that our resources available at June 30, 2002, plus
financing to be secured during fiscal year 2003, and expected POTS splitter
revenues, will be sufficient to meet our obligations until the end of fiscal
year 2003. We have continued to experience operating losses and negative cash
flows. To date, we have funded our operations with a combination of component
sales debt conversions with related parties and strategic vendors, and private
equity offerings. Management believes that we will be able to secure the
necessary financing in the short-term to fund our operations into our next
fiscal year. However, failure to raise additional funds, or generate significant
cash flows through revenues, could have a material adverse effect on our ability
to achieve our intended business objectives.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to changes in interest rates as the Company
has no debt arrangements and no investments in certain held-to-maturity
securities. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. A hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield
curve would not materially affect the fair value of any financial instruments at
September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have
evaluated the controls and procedures within 90 days of the filing date of this
quarterly report and concluded that the Company's disclosure controls and
procedures were effective. There were no significant changes in the Company's
internal controls subsequent to the date of the evaluation by such officers.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
mPhase was advised in April 2002 that following an investigation by the
staff of the Securities and Exchange Commission, the staff intended to recommend
that the Commission file a civil injunctive action against Packetport.com, Inc.
("Packetport") and its Officer's and Directors. Such recommendation related to
alleged civil violations by Packetport and such Officers and Directors of
various sections of the Federal Securities Laws. The staff has alleged civil
violations of Sections 5 and 17(a) of the Securities Act of 1933 and Sections
10(b) and 13(d) of the Securities Exchanges Act of 1034. As noted in other
public filings of mPhase, the CEO and COO of mPhase also serve as Directors and
Officers of Packetport. At that time these persons advised mPhase that they deny
any violation of law on their part and intend to vigorously contest such
recommendation or action, if any. To date no action has been filed against
Packetport, its Officers or Directors. mPhase is not named as a party in
connection with this matter.
16
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
From time to time mPhase may be involved in various legal proceedings
and other matters arising in the normal course of business.
ITEM 2. CHANGES IN SECURITIES
Effective for the three month period ended September 30, 2002
the Company issued the following unregistered securities:
During the three months ending September 30, 2002, the Company
granted 200,000 shares of its common stock to consultants for services
performed. Additionally, effective for the three months ended September 30,
2002, the Company issued 4,873,333 shares of the Company's Common Stock and
2,491,800 warrants in connection with the extinguishments of debt.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
Reported August 14, 2002, Notification of delay in
Shareholders Rights Offering.
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant, has duly caused this amended
report to be signed on its behalf by the undersigned, thereunto duly authorized.
mPHASE TECHNOLOGIES, INC.
Dated: January 26, 2004 By: /s/ RONALD A. DURANDO
--------------- --------------------------
Ronald A. Durando
President, CEO
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
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