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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, 2003
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 9, 2003 IS 72,086,186 SHARES, ALL OF ONE CLASS OF $.01
STATED VALUE COMMON STOCK.
1
mPHASE TECHNOLOGIES, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets-June 30, 2003 and
September 30, 2003, (Unaudited) 3
Unaudited Consolidated Statements of Operations-Three months
ended September 30, 2002 and 2003 and from October 2, 1996
(Date of Inception) to September 30, 2003 4
Unaudited Consolidated Statement of Changes in Shareholders'
Deficit Three months ended September 30, 2003 5
Unaudited Consolidated Statements of Cash Flows-Three Months
ended September 30, 2002 and 2003 and from October 2, 1996
(Date of Inception) to June 30, 2003 6
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Condition and Results of Operations 15
ITEM 3 Quantitative and Qualitative Disclosures about market risk 25
ITEM 4 CONTROLS AND PROCEDURES 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits on Reports on Form 8-K 27
Signature Page 28
Certifications 29
2
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
June 30, September 30,
2003 2003
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 396,860 $ 146,538
Accounts receivable, net of bad debt reserve
of $0 for each period 287,135 729,455
Stock subscription receivable 110,000 -
Inventories, net 2,103,328 1,088,875
Prepaid expenses and other current assets 100,329 100,592
------------- -------------
Total Current Assets 2,997,652 2,065,460
------------- -------------
Property and equipment, net 581,890 410,099
Patents and licensing rights, net 184,857 151,606
Other Assets 17,250 17,250
------------- -------------
TOTAL ASSETS $ 3,781,649 $ 2,644,415
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 2,352,961 2,379,566
Accrued expenses 885,735 449,561
Due to related parties 187,372 60,974
Notes payable, current 762,735 872,804
Deferred revenue 214,180 267,180
Notes payable, related parties - 460,000
------------- -------------
TOTAL CURRENT LIABILITIES 4,402,983 4,490,085
------------- -------------
Long-term debt, net of current portion 586,303 474,235
Other Liabilities 1,561,249 1,561,249
Other Liabilities, related parties 460,000 -
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIT
Common stock, stated value $.01, 150,000,000
shares authorized; 71,453,521 and
71,961,525 shares issued and outstanding at
June 30, 2003 and September 30, 2003, respectively 714,535 719,615
Additional paid in capital 104,081,049 104,288,212
Deficit accumulated during development stage (108,016,497) (108,881,008)
Less-Treasury stock, 13,750 shares at cost (7,973) (7,973)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (3,228,886) (3,881,154)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,781,649 $ 2,644,415
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
3
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
October 2, 1996
Three Months Ended (Date of
September 30, Inception) to
September 30,
2002 2003 2003
------------ ----------- -------------
REVENUES $ 210,077 $ 2,489,201 $ 17,456,896
------------ ----------- -------------
COSTS AND EXPENSES
Cost of Sales 197,319 2,098,744 11,943,696
Research and development
including non-cash stock related
charges of $43,750, $0
and $2,045,669, respectively) 803,294 446,981 34,794,060
General and Administrative
(including non-cash stock
related charges of $203,780
$112,245 and $21,078,859
respectively) 870,262 604,892 50,388,293
Depreciation and amortization 130,729 210,543 2,977,572
Non-cash charges for stock based
compensation 22,520 - 25,093,735
------------ ----------- -------------
TOTAL COSTS AND EXPENSES 2,024,124 3,361,160 125,197,356
------------ ----------- -------------
LOSS FROM OPERATIONS (1,814,047) (871,959) (107,740,460)
OTHER INCOME
Gain on extinguishments 40,725 23,087 226,549
Minority interest loss in
consolidated subsidiary - - 20,000
Capital losses - - (11,258)
Loss from unconsolidated
subsidiary - - (1,466,467)
Interest Income (expense), net (18,735) (15,639) 90,628
------------ ----------- -------------
TOTAL OTHER INCOME (EXPENSE) 21,990 7,448 (1,140,548)
------------ ----------- -------------
NET LOSS $ (1,792,057) $ (864,511) $(108,881,008)
============ =========== =============
Unrealized holding loss on securities (9,368) - -
------------ ----------- -------------
Comprehensive Loss $ (1,801,425) $(864,511) $(108,881,088)
============ =========== =============
LOSS PER COMMON SHARE,
basic and diluted $ (.03) $ (.01)
============ ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 60,881,131 71,725,318
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statement of Changes in
Shareholders' Deficit (unaudited)
Total
Additional Shareholders
$.01 Stated Treasury Paid-in Accumulated (Deficit)
Shares Value Stock Capital Deficit Equity
---------------------------------------------------------------------------------------
Balance June 30, 2003 71,453,521 $714,535 $(7,973) $104,081,049 $(108,016,497) $(3,228,886)
---------- -------- ------- ------------ ------------- -----------
Issuance of common stock with
warrants in private placement 333,337 3,333 -- 96,667 -- 100,000
Issuance of Common stock
for services 174,667 1,747 -- 50,653 -- 52,400
Issuance of warrants
to purchase Common
stock for services -- -- -- 59,843 -- 59,843
Net Loss -- -- -- -- (864,511) (864,511)
---------- -------- ------- ------------ ------------- -----------
Balance, September, 2003 71,961,525 $719,615 $(7,973) $104,288,212 $(108,881,008) $(3,881,154)
========== ======== ======= ============ ============= ===========
5
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
October 2,
1996
Three Months Ended (Date of
September 30, Inception) to
September 30,
2002 2003 2003
----------- ----------- -------------
Cash Flow From Operating Activities:
Net Loss $ (1,792,057) $ (864,511) $(108,881,008)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 380,563 210,543 5,804,683
Book Value of fixed assets disposed -- -- 74,272
Provision for doubtful accounts -- -- 32,124
Gain on debt extinguishments (40,725) (23,087) (226,549)
Loss on unconsolidated subsidiary -- -- 1,466,467
Impairment of note receivable -- -- 232,750
Loss on Security 11,258
Non-cash charges relating to issuance of 270,050 112,245 48,256,342
common stock, common stock options and
Warrants
Changes in assets and liabilities:
Accounts receivable 154,944 (442,320) (761,569)
Inventories 160,690 1,014,452 (878,636)
Prepaid expenses and other current assets 24,662 (263) (596,884)
Other non-current assets 1,623 -- --
Accounts payable 44,567 49,692 4,207,087
Accrued expenses (1,248) (400,014) 1,412,729
Due to/from related parties
Microphase 127,500 (57,778) 2,238,171
Janifast 237,438 21,963 2,301,963
Officers -- (90,583) 468,756
Lintel -- -- 477,000
Others -- -- 211,972
Receivables from Subsidiary -- -- (150,000)
Deferred revenue -- 53,000 267,180
----------- ----------- -----------
Net cash used in operating Activities (431,993) (416,662) (44,031,903)
----------- ----------- -----------
Cash Flow from Investing Activities:
Payments related to patents and licensing rights -- -- (375,720)
Purchase of fixed assets -- (5,500) (2,542,605)
----------- ----------- -----------
Net Cash (used)/provided by investing
activities -- (5,500) (2,918,325)
----------- ----------- -----------
Cash Flow from Financing Activities:
Proceeds from issuance of common stock and
exercises of options and warrants -- 173,840 46,681,758
Payments of notes payable (29,697) (2,000) (204,859)
Advances from related party 418,750 -- 627,840
Repurchase of treasury stock at cost -- -- (7,973)
----------- ----------- -----------
Net cash provided by financing activities 389,053 171,840 47,096,766
----------- ----------- -----------
Net increase (decrease) in cash (42,940) (250,322) 146,538
CASH AND CASH EQUIVALENTS, beginning of period 47,065 396,860 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,125 $ 146,538 $ 146,538
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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"). The primary business
of the company is to design, develop, manufacture and market high
band-width telecommunication products incorporating digital subscriber
line ("DSL") technology. The present activities of the Company are
focused (a) upon cost reduction and enhancement of its proprietary
Traverser(TM) product under an Agreement with Lucent Technologies, Inc.
and (b) deployment of the Traverser(TM) product. The Traverser(TM)
enables telecommunications service providers to simultaneously deliver
MPEG2 digital quality television (utilizing non-internet protocol),
high-speed Internet and voice over copper telephone wire utilizing DSL
technology. Additionally, the Company sells DSL component products
which includes microfilters, splitters, and line extenders.
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, 2003 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, 2003.
Through September 30, 2003, the Company had incurred cumulative (a)
development stage losses totaling approximately $108,881,008 and (b)
negative cash flow from operations equal to $44,031,903. At September
30, 2003, the Company had approximately $146,538 of cash, cash
equivalents and approximately $729,455 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) allow the successful wide scale development, deployment and
marketing of its products.
7
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 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." This statement rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that statement, SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
statement amends SFAS No. 13, "Accounting for Leases," to eliminate
inconsistencies between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Also, this statement
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Provisions of SFAS No. 145 related to the rescission of SFAS No. 4
were effective for the Company on November 1, 2002 and provisions affecting SFAS
No. 13 were effective for transactions occurring after May 15, 2002. The
adoption of SFAS No. 145 did not have a material impact on our financial
statements.
8
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement covers
restructuring type activities beginning with plans initiated after December 31,
2002. Activities covered by this standard that are entered into after that date
will be recorded in accordance with the provisions of SFAS No. 146. The adoption
of SFAS No. 146 did not have a significant impact on our consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS 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 123, "Accounting for
Stock-Based Compensation." Additionally, SFAS 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. The Company has adopted the disclosure provisions in our
consolidated financial statements as disclosed above under Stock Based
Compensation.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirements are
effective for the Company during the first quarter ending January 31, 2003. The
adoption of FIN 45 did not have a significant impact on our consolidated
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN
46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The adoption of FIN 46 did not
have a significant impact on our consolidated financial position or results of
operations.
STATEMENT OF CASH FLOW SUPPLEMENTAL INFORMATION
2002 2003
------- ------
Interest Paid $ 2,803 $3,000
======= ======
Taxes Paid $ - $ 250
======= ======
9
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. RELATED PARTY TRANSACTIONS
mPhase's President, Chief Operating Officer and Chairman of the Board
of the Company are also officers of Microphase and mPhase's president and
chairman of the board are shareholders 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 per
month, in July 2002 to $12,200 per month, in January 2003 to $10,000 per month,
and in July 2003 to $18,000 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. In January 2003 the
technical research and development agreement was revised to $20,000 per month,
and in July 2003 it was further revised to $5,000 per month.
Microphase also charges fees for specific projects on a
project-by-project basis. During the three months ended September 30, 2002 and
2003 and from inception (October 2, 1996) to September 30, 2003, $253,980,
$72,948, and $7,297,474, respectively, have been charged to expense or inventory
under these Agreements and is included in operating expenses in the accompanying
consolidated statements of operations.
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. For the three months ended September 30, 2002 and 2003,
mPhase recorded royalties to Microphase totaling $6,302 and $63,507,
respectively. During the fiscal, year ended June 30, 2003 Microphase received
4,033,333 shares of common stock plus 1,000,000 five year warrants to purchase
shares of common stock of mPhase at $.30 per share in exchange for the
cancellation of accounts payable totaling $920,000.
As a result of the foregoing transactions as of September 30, 2003, the
Company had $4,011 payable to Microphase, which is included in amounts due to
related parties in the accompanying consolidated balance sheet. Additionally, at
September 30, 2003, there are no undelivered purchase orders remain outstanding
to Microphase.
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 and one is an officer, in connection with the manufacturing of POTS
Splitter shelves and component products including cards and filters sold by the
Company. During the year ended June 30, 2003 Janifast Ltd. was issued 1,500,000
shares of mPhase common stock in connection with the cancellation of $360,000 of
outstanding liabilities of mPhase, the value of which was based upon the price
of the Company's stock on the effective date of the settlement. No gain or loss
was recognized in connection with conversions by Janifast Ltd. for the fiscal
year ended June 30, 2003.
During the three months ended September 30, 2002 and 2003 and the
period from inception (October 2, 1996) to September 30, 2003, $0, $1,185,995
and $11,877,681, respectively have been charged by Janifast to inventory or
expense and is included in operating expenses in the accompanying statements of
operations.
As a result of the foregoing transactions as of September 30, 2003, the
Company had $21,963 payable to Janifast, which is included in amounts due to
related parties in the accompanying balance sheet. Additionally, at September,
2003, approximately $723,700 of undelivered purchase orders remain outstanding
to Janifast Ltd.
10
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2002 and 2003, the Company charged $20,250 and $0, respectively, to
administrative expense as a result of impairment of the Note. At September,
2003, 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 30, 2002, the Company converted 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; a second
warrant to purchase 550,000 shares of the Company's common stock; and Piper
agreed to accept a Promissory note for $420,872 of their remaining payable at an
interest rate of 8% with scheduled 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. The
Company is currently in arrears with respect to $45,000 of payments due under
the Promissory note.
11
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2003 inventory is comprised of the
following:
Raw materials $ 133,947
Work in progress 738,558
Finished goods 681,728
----------
Total 1,554,237
Less: Reserve for Obsolescence (465,358)
----------
Net Inventory $1,088,875
==========
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 carry-forwards. Because of the
uncertainty as to their future realizability, net deferred tax assets,
consisting primarily of net operating loss carry-forwards, 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,
2003 may be limited due to changes in ownership that have occurred.
5. ACCRUED EXPENSES
Accrued expenses representing accrued general and administrative
expenditures were $449,561 at Setember 30, 2003. At September, 2003 accrued
expenses consisting of administrative expenses were $249,561 and accrued
expenses for research and development expenses incurred with Lucent
Technologies, Inc. were $200,000, totaling $449,561.
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 and presently the Company owns 56.5% of this
venture.
12
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three months ended September, 2002 and ended September 30,
2003, mPhaseTelevision.Net, Inc., was charged $0 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 2003, the Company granted
174,667 shares of its common stock and warrants to purchase 249,667 shares of
its common stock to consultants for services performed value at $112,243. In
August of 2003, the Company issued 333,334 shares of its commons stock together
with a like amount of warrants in a private placement generating net proceeds of
$100,000 which was collected during the three month period ended on September
30, 2003.
8. DEBT CONVERSION AND EXTENSION
During the three months ending September 30, 2003, a note payable in
the amount of $360,000 to Microphase Corporation was executed in exchange for
the cancelation of a like amount of accounts payable to Microphase on September
25, 2003 which matures on July 25, 2004. Additionally, a note payable to Martin
Smiley, CFO and General Counsel of mPhase, in the amount of $100,000 was
extended from September 25, 2003 to July 24, 2004. Both liabilities carry an
interest rate of 12% payable quarterly in arrears. Each note is convertible into
Common Stock of mPhase at the rate of $.30 cents per share through Jul 25, 2004.
Upon conversion, each note holder will be granted warrants to purchase an
equivalent amount of mPhase Common stock at $.30 cents per share for a period of
five years from the date of conversion.
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, 2002 and 2003 and for the period from inception through
September 30, 2003 totaled approximately $100,000, $0 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 sales of the
Traverser(TM) DVDDS.
13
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. DEFERRED REVENUE
Deferred revenue as of September 30, 2003 consists of customer's
billings in excess of costs totaling $209,180 on the POTS product line whereby
completion of customer acceptance will be attained when original splitters are
upgraded to the next generation splitters and deposits of $58,000 from Beta
customers on the Traverser(TM) product line orders to be delivered when it
reaches commercial production.
14
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, a New Jersey corporation, founded in 1996 is a publicly-held
company with over 12,000 shareholders and approximately 72 million shares of
common stock outstanding. The Company's common stock is traded on the Over the
Counter Bulletin Board under the ticker symbol XDSL. We are headquartered in
Norwalk, Connecticut with offices in Little Falls, NJ and Atlanta, GA. mPhase
shares common office space with Microphase Corporation, a privately held
company. Microphase is a leader in the field of RF and filtering technologies
within the defense and telecommunications industry. It has been in operation for
almost 50 years and supports mPhase with both engineering, administrative and
financial resources as needed.
mPhase develops, markets and sells a line of innovative DSL ("digital
subscriber line")-based broadband telecommunications equipment. Our flagship
product line includes two systems enabling the delivery of television over DSL
by telephone service providers. Both of these products facilitate telephone
companies becoming full service communications providers by enabling the
simultaneous delivery of digital broadcast television, high speed data and voice
services over the existing telephone line infrastructure. mPhase has developed
its flagship line of products with a specific target in mind-telephone companies
in parts of the world where access to multichannel television is limited. To
that end, mPhase's primary goal is to develop cost-effective TV over DSL
solutions that support proven, revenue-generating services (i.e., broadcast
television) rather than developing robust, feature-intensive and expensive
platforms intended to compete with cable companies such as those that exist in
the US.
mPhase introduced its first TV over DSL product, the Traverser(TM)
Digital Video and Data Delivery System in 1999. The Traverser(TM) DVDDS, is a
patented end-to-end system based upon proprietary technology developed in
conjunction with Georgia Tech Research Corporation. Because it is an end-to-end
video-over-ADSL system, the Traverser(TM) does not interoperate with other
manufacturer's DSL CO equipment or CPE modems. This system is the only
non-Internet Protocol system on the market today. The company continues to
market this product, and believes it to be ideal for customers specifically
interested in supporting television services with a minimal need to support
high-speed data customers.
15
The Traverser(TM) is installed at Hart Telephone Company in Hartwell,
Georgia, where a 100-user system is currently operational. Hart Telephone
competed the construction of its digital head end toward the end of 2001,
marking the Traverser's(TM) transition to commercial deployment. A Traverser(TM)
system is also installed at the BMW manufacturing plant in Spartanburg, South
Carolina for use as a telebroadcast system in a commercial setting.
The mPhase TV+ platform, recently developed in conjunction with the
Bell Labs division of Lucent Technologies, Inc. (Lucent), is a new product also
designed to allow for the simultaneous delivery of voice, high speed data, and
broadcast TV over copper telephone lines between a telephone service provider's
CO and the customer premises. The TV+ formerly named `Simple TV', is a modular
solution for the delivery of several hundred broadcast television channels over
ADSL that utilizes an industry-leading, standards-based Lucent Stinger(TM) DSL
Access Concentrator for transport of digital television plus high speed internet
and voice. The mPhase TV+ platform consists of a cost-reduced Traverser INI(TM)
set top box located in a customer's premises plus the Lucent Stinger located at
the telephone company's CO. A newly developed mPhase Broadcast Television Switch
("BTS") interfaces with the Stinger and a video headend built by a telephone
service provider to downlink broadcast television programming from satellites.
The BTS formats the video data prior to distribution to a customer by the
Stinger and supports administrative tasks associated with subscriber management.
Using the Lucent Stinger (digital subscriber line access mutiplexer commonly
known as a DSLAM) for transport in the TV+ platform results in a highly scalable
architecture for the delivery of video. This scalability is accomplished by
internally multicasting each television channel for delivery from the CO to a
larger number of end users than would be otherwise possible over ADSL. We
believe that the TV+ platform is the most cost-effective, standards-based
solution for delivery of broadcast television using ADSL. The Stinger is one of
a few DSLAM's currently on the market with robust internal multicasting
capabilities. For mPhase, the alliance with Lucent marks a change in strategy
from selling a complete proprietary platform to providing an industry-standard
modular solution.
Both the TV+ platform and the legacy DVDDS products are aimed for use
in markets primarily outside of the United States that do not have a hybrid
fiber coaxial cable ("HFC") infrastructure necessary for cable TV or fiber to
the curb necessary for very fast DSL (VDSL). We believe there is a significant
cost advantage when our mPhase TV+ solution is compared against other platforms
utilizing existing telephone lines containing the same features. The mPhase TV+
platform does not contain the features such as the delivery of two or more TV
channels to a single set top box over copper telephone lines or video on demand
and interactive TV features. As ADSL technology migrates forward to ADSL2 or
ADSL2+, mPhase will include additional features to its TV+ platform in a modular
scaleable cost-effective manner depending upon actual market demand for such
features in markets that mPhase is targeting.
We believe the legacy DVDDS developed by GTRC, when combined with a
version of the cost-reduced Traverser INI(TM) set top box redesigned by Lucent,
continues to be a cost effective TV platform. The DVDDS can be sold in
international markets where primary demand is for multi-channel digital
broadcast television plus voice only and where there is little demand for high
speed internet. We believe the mPhase TV+ platform is the optimal solution for
both a telecommunications service provider where the ultimate customer requires
all three services, i.e. high-speed internet, voice and digital broadcast
television over ADSL.
For those television markets in the United States that are not served
by HFC, we believe the availability of programming content is essential to
facilitate potential sales of our TV platforms over ADSL. In March of 2000, we
established mPhase Television net., Inc. (mPhase TV), a joint venture between
mPhase and Alphastar International, Inc. mPhase TV can provide contracts,
licensing agreements, marketing and legal support to service providers
interested in deploying television over ADSL for U.S. markets. mPhase TV has
secured licenses to resell programming for approximately 80 channels of U.S.
broadcast television. mPhase TV enables telecommunications service providers in
the U.S. to provide customers a full complement of television programming. This
enables a U.S. telecommunications service provider to avoid the necessity of
securing such contracting rights individually with many different providers of
broadcast television content. It is important to note that the role of mPhase TV
has changed since its inception. Originally, mPhase TV was to utilize a
satellite uplink/downlink facility and serve as an aggregator of television
content. This would eliminate the need for a telecommunications service
provider, purchasing a TV delivery platform from mPhase, from having to build a
full scale television reception facility (head-end) to downlink broadcast
television channels from satellites orbiting the earth. However, recent advances
in technology have significantly reduced the costs for a telephone company to
build a full scale headend. Therefore, the role of mPhaseTV is now limited to
providing the appropriate licenses and relationships as opposed to offering a
content aggregation solution. As part of its cost reduction efforts, mPhase
terminated its lease of Alphastar's earth station satellite uplink and downlink
facility in Oxford, CT. mPhase owns approximately 57% of mPhase TV.
To effectively market this joint solution, mPhase has been established
as a Lucent Business Partner. As a business partner, mPhase is able to sell the
complete SimpleTV platform, including reselling the Lucent Stinger(R). The
agreement enables mPhase to sell the SimpleTV platform anywhere in the world
where the customer is interested in supporting digital video services.
Additionally, mPhase and Lucent are jointly marketing this product solution to
existing Lucent customers, as well as to Lucent's extensive network of business
partners around the world. Together the two companies are in the process of
identifying strong opportunities and target markets. Once identified,
collectively mPhase and Lucent will approach Lucent's established business
partner in that region for further marketing to the appropriate end customer.
This co-marketing relationship adds tremendous value to mPhase. By gaining
access to Lucent's business partners, mPhase will have the opportunity to
significantly increase exposure for its SimpleTV solution without having to
increase the size of its direct sales force.
16
mPhase DSL Component Products - mPhase also has designed and markets a
line of DSL component products ranging from items such as Plain Old Telephone
Service (POTS) splitters to innovative loop management products. From our
inception in 1996 to date virtually all of mPhase's revenue has been derived
from sales of our component DSL products such as POTS splitters and low pass
filters. Our newest innovation in our suite of DSL component products is our
iPOTS or Intelligent POTS splitter product. This product enables telephone
service providers comprehensive remote and automated test access to all elements
of a DSL network. The iPOTS1, and iPOTS3 allow a telephone service provider to
bypass POTS splitters on a DSL network and avoid having to manually intervene
and disrupt line usage so a test signal can pass through a DSL network. This
product marks an advancement in automating DSL loop management. As DSL
deployments increase, it is becoming more important for telecommunications
service providers to streamline the process for rolling-out and troubleshooting
DSL services. Additionally, as competition for high speed Internet expands, the
market is witnessing a reduction in the price for such service. Therefore, it
has become imperative that telecommunications service providers lower the
operational costs involved with supporting DSL services. Currently our iPOTS1 is
designed for use with the Lucent Stinger, whereas, the iPOTS3 is compatible with
DSLAM's manufactured by other vendors. mPhase currently has a non-exclusive
worldwide distribution agreement with Corning Cable Systems for the sale of the
iPOTS products. Such arrangement potentially expands exposure for this product,
as Corning is one of the largest vendors of central office DSL filtering
equipment. The Company is also aggressively pursuing direct efforts with respect
to sales of the iPOTS product.
mPhase has established a worldwide distribution agreement with Corning
Cable Systems for the sale of this product. Utilizing Corning as a distribution
channel expands exposure for this product, as Corning is one of the largest
vendors of central office DSL filtering equipment.
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.
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. In
addition, we have recently entered an Agreement with Lucent Technologies, Inc.
to cost-reduce and enhance features of mPhase's Digital Set Top Box that is part
of its Traverser(TM) product.
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").
17
Research and development. Research and development expenses consist
principally of payments made to GTRC, Microphase Corporation and Lucent
Technologies, Inc. for development of the Traverser(TM) and the integration
mPhase's Broadcast Television Switch with the Lucent Stinger(R) voice and data
delivery system 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. From inception
(October 2, 1996) through September 30, 2003 the Company has incurred cumulative
(a) development stage losses and has an accumulated deficit of $108,881,008 and
(b) negative cash flow from operations of $44,031,903. The auditors report for
the fiscal year ended June 30, 2003 includes the statement that "there is
substantial doubt of the Company's ability to continue as a going concern".
Management estimates that the Company needs to raise approximately $2,000,000
during the next 12 months to continue its present level of operations. As of
September 30, 2003, the Company had a negative net worth of $3,881,154 up from a
negative net worth of $3,228,886 as a result of continuing net losses incurred
after June 30, 2003.
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
telephone industry. For the first three months of fiscal year 2004, sales of
POTS splitters were $2,489,201 which was greater than the total of sales of POTS
Splitters for the entire fiscal year ending June 30, 2003. The Company believes
its new IPOTS product will capture some of the existing DSL deployments,
providing increases in revenue in the third quarter 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 sustain its development process and ultimately achieve profitability.
The Company believes that significant deployments and resulting revenues from
these deployments of its flagship products, the Traverser(TM) and the TV+
respectively, are not expected until the first half of fiscal year 2004. The
Company further believes that an increase in capital expenditures in the
telecommunications industry will also increase sales and improve the Company's
margins as well as increase the probability that the Company will attain
profitability.
18
THREE MONTHS ENDED SEPTEMBER 30, 2003 VS. SEPTEMBER 30, 2002
REVENUE
Total revenues were $2,489,201 for the three months ended September 30,
2003 compared to $210,077 for the three months ended September 30, 2002. The
increase was primarily attributable to an increased demand of the Company's POTS
Splitter product line. 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 predict say if the upturn in sales of
its POTS Splitter product will continue.
COST OF REVENUES
Cost of sales were $2,098,744 for the three months ended September 30,
2003 as compared to $197,319 in the prior period, representing 84.3% of gross
revenues for the quarter ended September 30, 2003 and 93.9% for the quarter
ended September 30, 2002, respectively. Our margins have contracted dramatically
over the past three years as spending among the telecommunications providers has
contracted, coupled with downward pressures related to the supply and demand of
telecommunications products. Margins for the quarter ended September 30, 2003,
increased by 9.6% over the margins for the same period ended September 30, 2002.
We are unable to determine whether such increase in margins will continue for
the remainder of fiscal year 2004.
RESEARCH AND DEVELOPMENT
Research and development expenses were $446,981 for the three months
ended September 30, 2003 as compared to $803,294 during the comparable period in
2002 or a decrease of $356,313. This decrease is comprised primarily of a
reduction in expenses to GTRC of $100,000 as compared to the quarter ended
September 30, 2002, a decrease in expenses to Microphase in the amount of
$119,000 as compared to the quarter ended September 30, 2002, a decrease of
$43,750 in non cash option expenses as compared to the quarter ended September
30, 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.
19
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $604,892 for the
three months ending September 30, 2003 down from $870,262 or a decrease of
$265,370 from the comparable period in 2002. The decrease in the selling,
general and administrative costs is comprised primarily of a reduction in
expenses of non-cash charges relating to the issuance of common stock and
options to consultants, which totaled $112,245 for the three months ended
September 30, 2003 as compared to $203,780 for the comparable period ended
September 30, 2002 resulting in a savings of $91,535. The remaining decrease of
$173,835 in selling, general and administrative costs were the aggregate of
various administrative expenses, which the company has made a concerted effort
to contain.
NET LOSS
The Company recorded a net loss of $861,511 for the three months ended
September 30, 2003 as compared to a loss of $1,792,057 for the three months
ended September 30, 2002. This represents a loss per common share of $.01 for
the three month period ended September 30, 2003 as compared to a loss per common
share of $.03 for the three months ending September 30, 2002; based upon
weighted average common shares outstanding of 55,606,168 and 71,725,318 during
the periods ending September 30, 2003 and 2002, respectively.
The Company believes the initial major deployments and the resultant
revenues of its Flagship products, the Traverser(TM) and the TV+ respectively,
are not expected until the third quarter of fiscal year 2004, which along with
any upturn of spending in the telephone industry will also increase sales and
improve the Company's margins and provide the Company with the opportunities to
attain profitability.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
All revenue included in the accompanying consolidated statements of
operations for all periods presented relates to sales of mPhase's POTS Splitter
Shelves and DSL component products.
As required, mPhase has adopted the Securities and Exchange Commission
("SEC")Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", which provides guidelines on applying generally accepted
accounting principals to revenue recognition based upon the interpretations and
practices of the SEC. The Company recognizes revenue for its POTS Splitter Shelf
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.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred in
accordance with Statement of Financial Accounting Standards ("SFAS"), No.2,
"Accounting for Research and Development Cost."
INCOME TAXES
mPhase 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 measured using currently enacted tax
rates. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in results of operations in the period that includes the
enactment date. 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 financial statements.
20
Utilization of net operating losses generated through June 30, 2002 may
be limited due to "changes in control" of our common stock that occurred.
STOCK-BASED COMPENSATION
The Company follows the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-based Compensation". SFAS No 123 encourages, but does not
require companies to record compensation expense for stock-based employee
compensation at fair value. As permitted, the Company has elected to continue to
account for stock-based compensation to employees using the intrinsic value
method presented in Accounting Principles Board ("APB") Opinion No.25
"Accounting for Stock Issued to Employees" and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants as if
the fair valued-based method, as defined, had been applied. Compensation expense
is generally measured on the date of grant only if the current market price of
the underlying stock exceeded the exercise price.
The Company accounts for non-employee stock based awards in which goods
or services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more readily determinable.
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.
MATERIAL RELATED PARTY TRANSACTIONS
The Company records material related party transactions. The Company
incurs costs for engineering, design and production of prototypes and certain
administrative functions from Microphase Corporation and the purchase of
finished goods, primarily consisting of DSL splitter shelves and filters, from
Janifast Limited. 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.
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.
21
Mr. Durando, the President and CEO of mPhase, owns a controlling
interest and is a director of Janifast Limited. Mr. Durando and Mr. Dotoli are
officers of Microphase Corporation. Mr. Ergul, the chairman of the board of
mPhase, owns a controlling interest and is a director of Microphase Corporation.
Microphase, Janifast, Hart Telephone and Lintel Corporation are significant
shareholders of mPhase. Microphase, Janifast and Hart Telephone have converted
significant liabilities to equity in fiscal years June 30, 2001, 2002 and 2003.
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.
22
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 mPhase had working capital deficit of $2,424,625
as compared to working capital deficit of $1,405,331 at June 30, 2003. Through
September 30, 2003, the Company had incurred development stage losses totaling
approximately $108,881,008. At September 30, 2003, the Company had approximately
$146,538 of cash, cash equivalents and approximately $729,455 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, 2003, the Company had cash and cash equivalents of
$146,538 compared to $396,860 at June 30, 2003, accounts receivable of $729,455
and inventory of $1,088,875. This compared to $287,135 of accounts receivable
and $2,103,328 of inventory at June 30, 2003.
Cash used in operating activities was $416,662 during the three months
ending June 30, 2003. 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.
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 $0, $100,000, for the
three month periods ended September 30, 2003 and 2002, respectively, and
$13,524,300 from the period from inception through September 30, 2003. The
Company and GTRC entered into a Memorandum of Intent, on October 14, 2002 and
revised on November 12, 2002, as revised in October of 2003 which would result
in the settlement of all amounts outstanding and the exchange of mutual releases
in consideration for one term Note totaling approximately $674,000 with varied
payments through 2008 and warrants to purchase 5,069,000 shares of the Company's
common stock through 2008.The Company and GTARC are continuing negotiation of
final documentation based upon such Memorandum of Intent. 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 twelve months ending June 30, 2003, certain strategic
vendors and related parties converted approximately $1.9 million of accounts
payable and accrued expenses into 5,923,333 shares of the Company's common stock
and 2,491,800 warrants to purchase additional shares of common stock of the
Company.
As of September 30,2003, mPhase is obligated to pay Lucent
Technologies, Inc., the sum of $100,000 per month through November of 2003 for
development of mPhase's new Broadcast Television Switch that will enable the
Lucent Stinger(R) Digitial Subscriber Line Technology to deliver television as
well as data and voice over copper telephone lines. In addition, mPhase has
entered into a new Development Agreement with Lucent for further development of
the TV+ product which will require a one time payment of $70,000 in October 2003
plus additional payments of $140,000 per month commencing on October, 2003
through May,2004 for a total sum of $1,190,000.
23
LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT'S PLANS
From inception (October 2, 1996) through September 30, 2003 the Company
had incurred development stage losses and has an accumulated deficit of
approximately $108,881,008 million and a stockholder's deficit of $3,881,154.
For the three months ended September 30, 2003, and from inception through
September 30, 2003 respectively, the Company had negative cash flow from
operations of $416,662 thousand and $44,031,903, respectively. The report of the
Company's outside auditor's, Rosenberg, Rich, Baker, Berman and Company with
respect to its latest audited 10k for the fiscal year ended June 30,2003 stated
that "there is substantial doubt of the Company's ability to continue as a going
concern". Management estimates that the Company will need to raise approximately
$2,000,000 during the next 12 months to continue its present level of
operations.
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.
We have evaluated our cash requirements for fiscal year 2004 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 approximately $2,000,000 primarily in private placements of its common
stock with accredited investors, during the next 12 months, 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 further enhance the capabilities of the TV+ productwill
be necessary over the next 12 months. In the long-term, the Company may also
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 which were available at June 30,
2003, plus financing to be secured during fiscal year 2004, and expected POTS
splitter revenues, will be sufficient to meet our obligations until the end of
fiscal year 2004. 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.
24
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, 2003.
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.
25
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.
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, 2003 the
Company issued the following unregistered securities:
During the three months ending September 2003, the Company granted
174,667 shares of its common stock and warrants to purchase 249,667 shares of
common stock to consultants for services performed valued at $249,667. In August
of 2003, the Company issued 333,334 shares of its commons stock together with a
like amount of warrants in a private placement generating net proceeds of
$100,000 which was collected during the three month period ended on September
30, 2003. Additionally, during the three months ended September 30, 2003, the
Company reserved for issuance 3,066,666 shares of its common stock for up to
1,533,333 shares and five year warrants, with an excercise price of $.30 per
share, for up to 1,533,333 shares in connection with the conversion rights of
certain notes to equity upon debt maturity on notes totaling $460,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
None.
(b) Reports on Form 8-K.
On July 2, 2003-mPhase reported in a press release that it had
received its largest single purchase order ever for its POTS
Splitter product from Covad Communications Group, Inc.
On July 24, 2003 mPhase announced it had received another
significant purchase order from A major customer for its POTS
Splitter product bringing its total backlog to $2.8 million.
27
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 10, 2003 By: /s/ Martin S. Smiley
------------------------
Martin S. Smiley
Executive Vice President
Chief Financial Officer and
General Counsel
28
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, 2003 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 10, 2003
29
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, Martin S. Smiley, Executive Vice President, Chief Financial Officer and
General Counsel ("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,
2003 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/ Martin S. Smiley
----------------
Name: Martin S. Smiley
Executive Vice President
Chief Financial Officer and
General Counsel
Date: September 30, 2003
30
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, 2003 (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;
31
(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 10th day of November 2003.
/s/ Ronald A. Durando
-------------------
Name: Ronald A. Durando
Chief Executive Officer
32
mPhase Technologies Inc.
Certification of Procedures Followed in Connection
with Sarbanes-Oxley Act Certification
The undersigned, Executive Vice President, Chief Financial Officer and
General Counsel 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, 2003, (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) 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;
(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 10th day of November 2003.
/s/ Martin S. Smiley
-----------------------
Name: Martin S. Smiley
Executive Vice President
Chief Financial Officer and
General Counsel
33