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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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
(Unaudited)
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 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)
General and Administrative 2,644,088 870,262 47,998,692
(including non-cash stock
related charges of $942,355,
$203,780, and $20,450,117,
respectively)
Depreciation and amortization 193,079 130,729 2,382,341
Non-cash charges for stock based
compensation 217,500 22,520 25,087,692
------------- ------------- -------------
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 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.
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 PRONOUNCEMENTS-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. The adoption of SFAS No. 141 has had no effect on
the Company's results of operations or financial position.
6
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2001, the FASB issued SFAS 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. Management does not expect the
implementation of SFAS No. 144 will have a material effect on the Company's
results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145 "Recission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," which rescinds SFAS No. 4 and No. SFAS 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 145 and that adoption of
SFAS No. 145 should not have a material effect on the Company's results of
operations of financial position.
STATEMENT OF CASH FLOW SUPPLEMENTAL INFORMATION
September 30, September 30,
2001 2002
------------- -------------
Interest paid $10,087 $ 2,803
------- -------
Taxes Paid $ -- $ --
------- -------
2. RELATED PARTY TRANSACTIONS
mPhase's President, Executive Vice President and Chairman of the Board
of the Company are also employees 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. 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 three Directors of mPhase are significant
shareholders, 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.
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.
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 which resulted in a gain 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
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, for the
cancellation of unpaid compensation due to officer's, effective October 14,
2002, and 4,533,333 shares of its common stock for the conversion of $980,000
due to related parties, effective October 14 and 15, 2002. 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. For accounting purposes,
these debt conversions were reflected in the balance sheet as of September 30,
2002.
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 the issuance of
warrants to purchase 4,500,000 shares, at an exercise price of $.01 and
2,000,000 shares at an exercise price of $.30 of the Company's common stock
through 2007 and two term notes totaling $624,235 with interest at 7% and varied
payments through 2007. 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.
10
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
RESULTS OF OPERATIONS
OVERVIEW
mPhase is a development-stage company that has designed, patented and
is currently engaged in the commercialization of the Company's primary product,
the Traverser(TM). The Company believes that the Traverser(TM) provides a unique
"turnkey" broadband equipment solution that enables telephone companies to
deliver real-time digital television programming, high-speed Internet and voice
service over existing copper telephone lines. The Company believes that the
Traverser(TM) will, in many instances, provide the most cost effective, reliable
and scaleable solution for many telephone companies to provide a comprehensive
suite of bundled or unbundled services, utilizing Asymmetric Digital Subscriber
Line, or ADSL technology. mPhase also manufactures and sells POTS Splitters
Shelves and other related DSL component products, which are currently being
deployed by telephone companies both in the United States and abroad.
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The margins have varied dramatically 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.
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $870,262 for the
three months ending September 30, 2002 down from $2,644,088 for the comparable
period in 2001. The decrease in the selling, general and administrative costs
included a decrease of non-cash charges relating to the issuance of common stock
and options to consultants, which totaled $203,780 for the three months ended
September 30, 2002 as compared to $942,355 during the comparable period in 2001.
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. 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.
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and the exchange of mutual releases in consideration for two
term Notes totaling $624,235 with varied payments through 2007 and warrants to
purchase shares 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.
As of September 30, 2002, mPhase had no material commitments for
capital expenditures.
LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS
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.
15
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 additional monies 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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
None.
(b) Reports on Form 8-K.
Reported August 14, 2002, Notification of delay in
Shareholders Rights Offering.
17
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 report to
be signed on its behalf by the undersigned, thereunto duly authorized.
mPHASE TECHNOLOGIES, INC.
Dated: November 13, 2002 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.
Necdet F. Ergul Chairman of the Board November 13, 2002
Ronald A. Durando Chief Executive Officer, Director November 13, 2002
Gustave T. Dotoli Chief Operating Officer, Director November 13, 2002
Martin S. Smiley Chief Financial Officer November 13, 2002
Anthony Guerino, Director November 13, 2002
Abraham Biderman, Director November 13, 2002
Michael McInerney, Director November 13, 2002
David Klimek, Director November 13, 2002
18
mPHASE TECHNOLOGIES, INC.
Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
I, Ronald A. Durando, President and Chief Executive Officer (principal
executive officer) of mPhase Technologies, Inc. (the "Registrant"), certify that
to the best of my knowledge, based upon a review of the Quarterly Report on Form
10-Q for the period ended September 30, 2002 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section
13(a)[15(d)] of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ Ronald A. Durando
- -------------------------------------------
Name: Ronald A. Durando
President and Chief Executive Officer
Date: November 13, 2002
19
mPHASE TECHNOLOGIES, INC.
Certification of Procedures Followed in Connection
with Sarbanes-Oxley Act Certification
The undersigned, the Chief Executive Officer of mPhase Technologies
Inc., a New Jersey Corporation (the "Company") hereby certifies, for purposes of
documenting the steps followed by the officer in connection with the execution
and delivery to the Securities and Exchange Commission of the attached
certification, as follows:
(1) I reviewed in detail the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002(the "Report") shortly before the certification
was provided.
(2) I discussed the substance of the Report with each of the Company's
outside auditors and the Chief Financial Officer. These discussions took place
at various times and covered principally the financial statement portions of the
reports (including the notes which are an integral part of the financial
statements) and related financial disclosures. These discussions included my
verifying that the financial statements included in the report are accurate and
complete, and are properly prepared and consolidated. I confirmed that each of
the outside auditors and Chief Financial Officer were satisfied that the notes
to the financial statements read clearly and that the notes fairly explain the
company's significant accounting principles and significant estimates, as well
as disclose all material contingencies and "off balance sheet" transactions and
commitments known to them. In addition, my discussions with outside auditors
included a discussion of any material issues that came up in their review of the
financial statements and the resolution of those issues. I also verified with
the outside auditors and Chief Financial Officer that internal controls are in
place and operating to warrant reliance upon the financial and business
information provided to me by management.
(3) I confirmed that the consolidated financial statements included in
the Report are accurate and complete in all material respects, reflect all
transactions of the Company during and for the statement period following
accounting principles consistent with those applied in prior periods, and that
all period end adjustments have been made in a manner consistent with the
accounting principles in prior periods (other than usual and customary year end
adjustments in the case of interim statements).
(4) I informed the heads of the Company's primary business units and
divisions, as well as any officers of those business units or divisions who have
the primary financial reporting responsibility that I would be providing a
certification regarding the accuracy of the Report and confirmed orally and in
writing with each such head and financial officer that insofar as they knew, the
Report did not include any untrue statement of a material fact or omit to state
a material fact.
(5) The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
20
(6) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
(7) The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any correction
actions with regard to significant deficiencies and material weaknesses.
(8) As a result of the foregoing procedures, I concluded that, to the
best of my knowledge, I was able to provide the certification without exception.
I have executed this certification as of the 11th day of November 2002.
/s/ Ronald A. Durando
- --------------------------------
Name: Ronald A. Durando
Chief Executive Officer
21
mPhase Technologies Inc.
Certification of Procedures Followed in Connection
with Sarbanes-Oxley Act Certification
The undersigned, Chief Financial Officer of mPhase Technologies Inc., a
New Jersey Corporation (the "Company") hereby certifies, for purposes of
documenting the steps followed by the officer in connection with the execution
and delivery to the Securities and Exchange Commission of the attached
certification, as follows:
(1) I reviewed in detail the Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, (the "Report") shortly before the
certification was provided.
(2) I discussed the substance of the Report with each of the Company's
outside auditors and assistant controller. These discussions took place at
various times and covered principally the financial statement portions of the
reports (including the notes which are an integral part of the financial
statements) and related financial disclosures. These discussions included my
verifying that the financial statements included in the report are accurate and
complete, and are properly prepared and consolidated. I confirmed that each of
the outside auditors and acting controller were satisfied that the notes to the
financial statements read clearly and that the notes fairly explain the
Company's significant accounting principles and significant estimates, as well
as disclose all material contingencies and "off balance sheet" transactions and
commitments known to them. In addition, my discussions with outside auditors
included a discussion of any material issues that came up in their review of the
financial statements and the resolution of those issues. I also verified with
the outside auditors and assistant controller that internal controls are in
place and operating to warrant reliance upon the financial and business
information provided to me by management.
(3) I confirmed that the consolidated financial statements included in
the Report are accurate and complete in all material respects, reflect all
transactions of the Company during and for the statement period following
accounting principles consistent with those applied in prior periods, and that
all period end adjustments have been made in a manner consistent with the
accounting principles in prior periods (other than usual and customary year end
adjustments in the case of interim statements).
(4) I informed the heads of the Company's primary business units and
divisions, as well as any officers of those business units or divisions who have
the primary financial reporting responsibility, that I would be providing a
certification regarding the accuracy of the Report and confirmed orally and in
writing with each such head and financial officer that insofar as they knew, the
Report did not include any untrue statement of a material fact or omit to state
a material fact.
(5) As a result of the foregoing procedures, I concluded that, to the
best of my knowledge, I was able to provide the certification without exception.
I have executed this certification as of the 11th day of November 2002.
/s/ Martin S. Smiley
- ----------------------------
Name: Martin S. Smiley
Chief Financial Officer
22