UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2020

 

Or

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _______________________ to ___________________

 

Commission File Number 000-30202

 

mPHASE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey		22-2287503
(State of incorporation)		(I.R.S. Employer Identification No.)
9841 Washingtonian Blvd #390 Gaithersburg, MD		20878
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (301) 329-2700

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

[  ] Yes [X] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

[X] Yes [  ] No

 

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

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]
Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) [  ] Yes [X] No

 

As of January 18, 2021 there were 75,763,376 shares of the issuer’s common stock, $0.01 par value per share, outstanding.

 

 

 

mPHASE TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

		Page No.
PART I – FINANCIAL INFORMATION
Item 1.	Consolidated Unaudited Financial Statements
	Consolidated Balance Sheets – September 30, 2020 (Unaudited) and June 30, 2020	3
	Consolidated Unaudited Statements of Operations and Other Comprehensive Income (Loss) – Three Months Ended September 30, 2020 and 2019	4
	Consolidated Unaudited Statements of Changes in Stockholders Equity – Three Months Ended September 30, 2020 and 2019	5
	Consolidated Unaudited Statements of Cash Flows – Three Months Ended September 30, 2020 and 2019	6
	Condensed Notes to Consolidated Unaudited Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
SIGNATURES		37

 

 

Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such as “may,” “will,” “might,” “projects,” “expects,” “plans,” “believes,” “anticipates,” “targets,” “intends,” “hopes,” “aims,” “can,” “should,” “could,” “would,” “goal,” “potential,” “approximately,” “estimate,” “pro forma,” “continue” or “pursue” or the negative of these words or other words or expressions of similar meaning may identify forward-looking statements. For example, forward-looking statements include any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing.

 

These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and the other documents referred to and relate to a variety of matters, including, but not limited to, other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of management, are not guarantees of performance and are subject to significant risks and uncertainty. These forward-looking statements should not be relied upon as predictions of future events and mPhase Technologies, Inc. (the “Company”) cannot assure you that the events or circumstances discussed or reflected in these statements will be achieved or will occur. Furthermore, if such forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by the Company or any other person that the Company will achieve its objectives and plans in any specified timeframe, or at all.

 

These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on January 5, 2021 and elsewhere in this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company disclaims any obligation to publicly update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by law.

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

mPhase Technologies, Inc.

Consolidated Balance Sheets

 

		September 30, 2020				June 30, 2020
		(Unaudited)
Assets
Current Assets
Cash		$	46,514			$	142,413
Accounts receivable, net			14,174,294				14,048,095
Prepaid expenses			24,649				4,477
Other assets			35,028				30,879
Total Current Assets			14,280,485				14,225,864
Property and equipment, net			29,407				32,669
Goodwill			3,682				3,636
Intangible asset - purchased software, net			2,687,340				2,835,117
Other assets			11,434				11,670
Total Assets		$	17,012,348			$	17,108,956
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	6,011,034			$	7,897,887
Accrued expenses			1,341,677				1,123,842
Contract liabilities			263,652				219,652
Due to related parties			85,274				84,485
Note payable to officer			27,225				26,818
Convertible notes payable, net			131,103				189,641
Liabilities in arrears with convertible features			109,000				109,000
Liabilities in arrears - judgement settlement agreement (Note 6)			765,247				771,702
Derivative liability			1,009,850				897,631
Liabilities of discontinued operations			82,795				82,795
Total Current Liabilities			9,852,954				11,423,922
Notes payable, net of current portion			163,358				167,459
Total Liabilities			10,016,312				11,591,381
Commitments and Contingencies (Note 11)
Stockholders’ Equity
Preferred stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at September 30, 2020 and June 30, 2020			10				10
Common stock, $0.01 par value; 500,000,000 shares authorized, 73,212,527 shares issued and 73,096,710 shares outstanding at September 30, 2020, and 19,318,679 shares issued and 19,174,492 outstanding at June 30, 2020			730,968				191,745
Additional paid-in-capital			232,324,611				231,984,704
Common stock to be issued			955,466				955,466
Accumulated other comprehensive (loss) income			(8,093	)			113,070
Accumulated deficit			(227,006,926	)			(227,727,420	)
Total Stockholders’ Equity			6,996,036				5,517,575
Total Liabilities and Stockholders’ Equity		$	17,012,348			$	17,108,956

 

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

 

 

mPhase Technologies, Inc.

Consolidated Statements of Operations and Other Comprehensive Income (Loss)

(Unaudited)

 

		For the Three Months Ended
		September 30,
		2020				2019
Revenue		$	7,586,864			$	7,569,612
Cost of revenue			5,625,389				5,706,514
Gross Profit			1,961,475				1,863,098
Operating Expenses:
Software development costs			-				1,203,614
Salaries and benefits			519,773				10,373,281
General and administrative expenses			246,073				368,741
Total Operating Expenses			765,846				11,945,636
Operating Income (Loss)			1,195,629				(10,082,538	)
Other (Expense) Income:
Interest expense			(85,963	)			(38,866	)
Amortization of debt discounts, deferred financings costs, and original issue discounts			(320,462	)			(34,335	)
Initial derivative expense			(366,068	)			(215,575	)
Gain on change in fair value of derivative liability			266,088				65,803
Gain on extinguishment of debt			31,240				-
Total Other (Expense) Income			(475,135	)			(222,973	)
Income (Loss) from continuing operations before income taxes			720,494				(10,305,511	)
Income taxes			-				-
Net income (loss)		$	720,494			$	(10,305,511	)
Comprehensive income (loss):
Unrealized (loss) gain on currency translation adjustment			(121,163	)			54,694
Comprehensive income (loss)		$	599,331			$	(10,250,817	)
Income (Loss) per common share:
Income (loss) per common share – basic		$	0.01			$	(0.85	)
Income (loss) per common share – diluted		$	0.01			$	(0.85	)
Weighted average shares outstanding – basic			63,215,776				12,117,849
Weighted average shares outstanding – diluted			96,159,147				12,117,849

 

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

 

 

mPhase Technologies, Inc.

Consolidated Statements of Stockholders’ Equity

For the Three Months Ended September 30, 2020 and 2019

(Unaudited)

 

		Preferred Stock								Common Stock
		Shares				$0.01 Par Value				Shares				$0.01 Par Value				Additional Paid in Capital				Common Stock to be Issued				Accumulated Comprehensive Income				Accumulated Deficit				Stockholders’ Equity
Balance June 30, 2020			1,000			$	10				19,174,492			$	191,745			$	231,984,704			$	955,466			$	113,070			$	(227,727,420	)		$	5,517,575
Issuance of common stock for conversions of convertible promissory notes											16,331,766				163,318				544,954																708,272
Issuance of common stock for exchange of warrants											37,390,452				373,905				(220,604	)															153,301
Stock-based compensation for restricted shares under employment agreement																			10,737																10,737
Issuance of Common Stock for vendor services											200,000				2,000				4,820																6,820
Other comprehensive income																											(121,163	)							(121,163	)
Net income																															720,494				720,494
Balance September 30, 2020			1,000			$	10				73,096,710			$	730,968			$	232,324,611			$	955,466			$	(8,093	)		$	(227,006,926	)		$	6,996,036

 

		Preferred Stock								Common Stock
		Shares				$0.01 Par Value				Shares				$0.01 Par Value				Additional Paid in Capital				Common Stock to be Issued				Accumulated Comprehensive Income				Accumulated Deficit				Stockholders’ Equity
Balance June 30, 2019			1,000			$	10				11,689,078			$	116,890			$	214,007,203			$	115,388			$	-			$	(213,633,853	)		$	605,638
Issuance of common stock to accredited investors in private placements											380,000				3,800				91,200				(30,500	)											64,500
Issuance of common stock for the conversion of related party debts and strategic vendor payables											294,654				2,947				70,716				(73,663	)											-
Warrants earned under employment contract																			9,970,787																9,970,787
Other comprehensive income																											54,694								54,694
Net loss																															(10,305,511	)			(10,305,511	)
Balance September 30, 2019			1,000			$	10				12,363,732			$	123,637			$	224,139,906			$	11,225			$	54,694			$	(223,939,364	)		$	390,108

 

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

 

 

mPhase Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Three Months Ended
		September 30,
		2020				2019
Cash flows from operating activities:
Net income (loss)		$	720,494			$	(10,305,511	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Initial derivative expense			366,068				215,575
Amortization of debt discounts, deferred financing costs, and original issue discounts			320,462				34,335
Depreciation and amortization			229,349				242,139
Stock-based compensation			187,852				10,020,178
Gain on extinguishment of debt			(31,270	)			-
Gain on change in fair value of derivative liability			(266,088	)			(65,803	)
Changes in operating assets and liabilities:
Increase in accounts receivable			(7,626,199	)			(5,276,947	)
(Increase) decrease in prepaid expenses			(19,060	)			6,611
Increase in other assets			(4,149	)			(3,181	)
Increase in contract liabilities			44,000				-
Increase in accounts payable and accrued expenses			5,772,173				4,887,451
Net cash used in operating activities			(306,368	)			(191,370	)
Cash flows from investing activities:
Capital expenditures			(968	)			-
Net cash used in investing activities			(968	)			-
Cash flows from financing activities:
Proceeds from issuance of convertible notes payable, net			463,600				212,000
Proceeds from sale of common stock, net of finder’s fees			-				64,500
Proceeds from notes payable to related parties			-				10,700
Repayments of notes payable to related parties			-				(7,000	)
Repayments under settlement agreement			(15,000	)			(45,000	)
Repayments of convertible notes payable			(116,000	)			-
Net cash provided by financing activities			332,600				235,200
Effect of foreign exchange rates changes on cash			(121,163	)			54,694
Net (decrease) increase in cash			(95,899	)			98,524
Cash at beginning of period			142,413				33,996
Cash at end of period		$	46,514			$	132,520
Supplemental disclosure:
Cash paid for interest		$	52,681			$	-
Cash paid for taxes		$	-			$	-

 

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

 

 

		For the Three Months Ended
		September 30,
		2020				2019
Supplemental disclosure of non-cash operating activities:
Initial fair value of derivative liability recorded as debt discount		$	463,600			$	212,000
Supplemental disclosure of non-cash investing and financing activities:
Issuance of Common Stock for services
Value		$	6,820			$	-
Shares			200,000				-
Issuance of Common Stock for the conversion of Related Party debts and Strategic Vendor payables
Value		$	-			$	73,663
Shares			-				294,654
Issuance of Common Stock for conversions of convertible promissory notes and accrued interest
Value		$	708,272			$	-
Shares			16,331,766				-

 

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

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Organization and Nature of Business

 

mPhase Technologies, Inc., including its wholly-owned subsidiaries, are collectively referred to herein as “mPhase,” “XDSL”, “Company,” “us,” or “we.”

 

The Company was incorporated in the state of New Jersey in 1979 under the name Tecma Laboratory, Inc. and has subsequently operated under Tecma Laboratories, Inc., and Lightpaths TP Technologies, Inc., until June 2, 1997 when the Company changed its name to mPhase Technologies, Inc.

 

On January 11, 2019, the Company underwent a major change in management and control. New management of the Company is positioning the Company to be a technology leader in artificial intelligence and machine learning while enabling a more rapid commercial development of its patent portfolio and other intellectual property. The Company believes there are significant opportunities to embed artificial intelligence and machine learning into business operations, platform architectures, business services, and customer experiences, whereby its goal is to generate significant revenue from its artificial intelligence and machine learning technologies.

 

On February 15, 2019, the Company acquired Travel Buddhi, a software platform to enhance travel via ultra-customization tools that tailor a planned trip experience in ways not previously available.

 

On June 30, 2019, the Company acquired 99% of the outstanding common shares of Alpha Predictions LLP (“Alpha Predictions”). Alpha Predictions is an India-based technology company that has developed a suite of commercial data analysis products for use across multiple industries. The Company expects the acquisition to result in synergies with its other operating divisions, which will drive revenue growth and innovation.

 

On May 11, 2020, the Company acquired CloseComms Limited (“CloseComms”), a patented, software application platform that can be integrated into a retail customer’s existing Wi-Fi infrastructure, giving the retailer important customer data and enabling AI-enhanced, targeted promotions to drive store traffic and sales.

 

Basis of Presentation

 

The consolidated unaudited financial information furnished herein reflects all adjustments, consisting only of normal recurring items, which in the opinion of management, are necessary to fairly state the Company’s financial position, results of operations and cash flows for the dates and periods presented and to make such information not misleading. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”); nevertheless, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading.

 

The consolidated unaudited financial statements for the three months ended September 30, 2020 and 2019 include the operations of mPhase and its wholly-owned subsidiaries, mPower Technologies, Inc., Medds, Inc., mPhase Technologies India Private Limited effective March 19, 2019, and Alpha Predictions LLP effective June 30, 2019. All significant intercompany accounts and transactions have been eliminated in the consolidation.

 

These consolidated unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 30, 2020, contained in the Company’s Annual Report on Form 10-K filed with the SEC on January 5, 2021. The results of operations for the three months ended September 30, 2020, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending June 30, 2021.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

Impact of COVID-19 Pandemic

 

A novel strain of coronavirus, COVID-19, surfaced during December 2019 and has spread around the world, including to the United States. During March 2020, COVID-19 was declared a pandemic by the World Health Organization. During certain periods of the pandemic thus far, a number of U.S. states and various countries throughout the world had been under governmental orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining. As a result of these governmental orders, the Company temporarily closed its domestic and international offices and required all of its employees to work remotely. Although these temporary office closures created minor disruption to the Company’s business operations, such disruptions to date have not been significant.

 

The full impact of the COVID-19 pandemic on the Company’s financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on the Company’s employees, customers, and vendors, in addition to how quickly normal economic conditions and operations resume and whether the pandemic impacts other risks disclosed in Item 1A “Risk Factors” within the Company’s Annual Report on Form 10-K. Even after the pandemic has subsided, the Company may continue to experience adverse impacts to its business as a result of any economic recession or depression that has occurred as a result of the pandemic. Therefore, the Company cannot reasonably estimate the impact at this time. The Company continues to actively monitor the pandemic and may determine to take further actions that alter its business operations as may be required by federal, state, or local authorities or that it determines are in the best interests of its employees, customers, vendors, and shareholders.

 

NOTE 2: GOING CONCERN

 

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

The Company has incurred negative cash flows from operations of $306,368 for the three months ended September 30, 2020. At September 30, 2020, the Company had a working capital surplus of $4,427,531, and an accumulated deficit of $227,006,926. It is management’s opinion that these facts raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date of this report, without additional debt or equity financing. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

In order to meet its working capital needs through the next twelve months and to fund the growth of the nanotechnology, artificial intelligence, and machine learning technologies, the Company may consider plans to raise additional funds through the issuance of equity or debt. Although the Company intends to obtain additional financing to meet its cash needs, the Company may be unable to secure any additional financing on terms that are favorable or acceptable to it, if at all. The Company’s ability to raise additional capital will also be impacted by the recent COVID-19 pandemic, which such ability is highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s business and financial condition.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications

 

Certain reclassifications of prior year amounts have been made to enhance comparability with the current year’s unaudited consolidated financial statements, including, but not limited to, presentation of certain items within the unaudited consolidated statements of operations and comprehensive income (loss), unaudited consolidated statements of cash flows, and certain notes to the unaudited consolidated financial statements.

 

Foreign Currency Translation and Transactions

 

The functional currencies of our operations in India and the United Kingdom are the Indian Rupee (“INR”) and the British Pound (“GBP”), respectively. Assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, and income and expense items are translated at the average exchange rates in effect during the applicable period. The aggregate effect of foreign currency translation is recorded in accumulated other comprehensive income (loss) in our consolidated balance sheets. Our net investments in our Indian and United Kingdom operations are recorded at the historical rates and the resulting foreign currency translation adjustments, net of income taxes, are reported as other comprehensive income and accumulated other comprehensive income within stockholders’ equity in accordance with ASC 220 – Comprehensive Income.

 

The exchange rates used to translate amounts in INR (beginning March 19, 2019) and GBP (beginning May 11, 2020) into USD for the purposes of preparing the consolidated financial statements were as follows:

 

Balance sheet:

 

		September 30, 2020				June 30, 2020
Period-end INR: USD exchange rate		$	0.01357			$	0.01329
Period-end GBP: USD exchange rate		$	1.28593			$	1.23244

 

Income statement:

 

		September 30,
		2020				2019
Average Annual INR: USD exchange rate		$	0.01343			$	0.01437
Average Annual GBP: USD exchange rate		$	1.25861			$	-

 

Use of Estimates

 

The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP 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 unaudited consolidated financial statements and reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. If actual results significantly differ from the Company’s estimates, the Company’s financial condition and results of operations could be materially impacted. Significant estimates include the collectability of accounts receivable, valuation of intangible assets, accrued expenses, valuation of derivative liabilities, stock-based compensation, and the valuation reserve for income taxes.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Concentrations of Credit Risk

 

Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with four financial institutions. Deposits held with the financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits, but may be redeemed upon demand. The Company performs periodic evaluations of the relative credit standing of the financial institutions. With respect to accounts receivable, the Company monitors the credit quality of its customers as well as maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.

 

Revenue Risk

 

Agreements which potentially subject the Company to concentrations of revenue risk consist principally of one customer agreement. For the three months ended September 30, 2020 and 2019, this one customer accounted for 100% and 99% of our total revenue, respectively. At September 30, 2020 and June 30, 2020, this one customer accounted for approximately 100% and 100% of our total accounts receivable, respectively.

 

Supplier Risk

 

Agreements which potentially subject the Company to concentrations of supplier risk consist principally of one supplier agreement. For the three months ended September 30, 2020, this one supplier accounted for approximately 100% of our total cost of revenue and accounted for approximately 94% of our total accounts payable. For the three months ended September 30, 2019, this one supplier accounted for approximately 99% of our total cost of revenue and accounted for approximately 83% of our total accrued expenses.

 

Cash and Cash Equivalents

 

For purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money market funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents. There were no cash equivalents at September 30, 2020 and June 30, 2020. The Company places its cash and cash equivalents with high-quality financial institutions. At times, balances in the Company’s cash accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. At September 30, 2020 and June 30, 2020, the Company’s cash balances did not exceed the FDIC limit.

 

Accounts Receivable

 

The Company regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. The Company maintains reserves for potential credit losses, and such losses traditionally have been within its expectations. Additionally, to date, the Company has entered into three separate tri-party settlement and offset agreements with its largest customer and largest vendor, whereby the Company’s largest customer has agreed to direct funds due the Company for certain outstanding invoices, to the Company’s largest vendor to satisfy payment on behalf of the Company for certain outstanding invoices. To date, the aggregate amount of the three tri-party settlement and offset agreements has totaled $22,500,000. At September 30, 2020 and June 30, 2020, the Company determined there was no requirement for an allowance for doubtful accounts.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Goodwill and Intangible Assets

 

Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company tests goodwill for impairment by first comparing the fair value of the reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss, if any. On June 30, 2021, we will perform our annual evaluation of goodwill impairment to determine if the estimated fair value of the reporting unit exceeds its carrying value.

 

Patents and licenses are capitalized when the Company determines there will be a future benefit derived from such assets and are stated at cost. Amortization is computed using the straight-line method over the estimated useful life of the asset, generally five years. As of September 30, 2020 and June 30, 2020, the book value of patents and licenses of $214,383, has been fully amortized and no amortization expense was recorded for the three months ended September 30, 2020 and 2019.

 

Capitalized Software Development Costs

 

The Company follows the provisions of ASC 350-40, “Internal Use Software.” ASC 350-40 provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improve and support products after they become available are charged to expense as incurred.

 

Capitalized software development costs are amortized on a straight-line basis over the estimated useful lives, currently three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

 

At September 30, 2020, the book value of purchased and developed technology of $3,835,077, included three technology platforms, a machine learning platform and two artificial intelligence platforms. For the three months ended September 30, 2020 and 2019, the Company incurred amortization expense of $223,833 and $242,139, respectively.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Fair Value of Financial Instruments

 

The Company accounts for the fair value of financial instruments in accordance with ASC topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements”. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

ASC 820 also describes three levels of inputs that may be used to measure fair value:

 

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

 

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Financial instruments consist principally of cash, accounts receivable, prepaid expenses, accounts payable, accrued liabilities, due to related parties, and current and long-term debt. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. The fair value of short and long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities. The carrying amounts approximate fair value with the exception of the fair value of due to related parties as the fair value cannot be determined due to a lack off similar instruments available to the Company. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments. At September 30, 2020, the Company had a Level 3 financial instrument related to its derivative liability.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

 

Revenue is derived from the sale of artificial intelligence and machine learning focused technology products and related services. The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. In the event any discounts, sales incentives, or similar arrangements are agreed to with a customer, such amounts are estimated at time of sale and deducted from revenue. Sales taxes and other similar taxes are excluded from revenue (see Note 5).

 

Contract liabilities include amounts billed to customers in excess of revenue recognized and are presented as contract liabilities on the consolidated balance sheets (see Note 5).

 

A contract asset is recognized for incremental costs to obtain a customer contract that are recoverable, otherwise such incremental costs are expensed as incurred.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Share-Based Compensation

 

The Company computes share based payments in accordance with the provisions of ASC Topic 718, Compensation – Stock Compensation and related interpretations. As such, compensation cost is measured on the date of grant at the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the grants. The Company estimates the fair value of stock options and warrants by using the Black-Scholes option pricing model.

 

Derivative Instruments

 

The Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities as well as related interpretations of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.

 

The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes.

 

Convertible Debt Instruments

 

The Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the Financial Accounting Standards Board (“FASB”) ASC. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt using the effective interest method.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Income Taxes

 

The Company accounts for income taxes in accordance with Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes (“ASC 740”). Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities and net operating loss and tax credit carryforwards given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.

 

ASC 740 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company’s tax returns for its June 30, 2020, 2019, 2018, and 2017 tax years may be selected for examination by the taxing authorities as the statute of limitations remains open.

 

The Company recognizes expenses for tax penalties and interest assessed by the Internal Revenue Service and other taxing authorities upon receiving valid notice of assessments. The Company has received no such notices for the years ended June 30, 2020 and 2019.

 

Earnings Per Share

 

In accordance with the provisions of FASB ASC Topic 260, Earnings per Share, basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating EPS on a diluted basis.

 

In computing diluted EPS, only potential common shares that are dilutive, those that reduce EPS or increase loss per share, are included. The effect of contingently issuable shares are not included if the result would be anti-dilutive, such as when a net loss is reported. At September 30, 2020, as we incurred net income for the period, dilutive shares included 32,943,371 shares of the Company’s common stock related to convertible promissory notes, assuming exercise of such warrants and conversion of such convertible promissory notes occurred at July 1, 2020, as the conversion price of the convertible promissory notes were less than the average market price of the Company’s common stock for the three months ended September 30, 2020. Additionally, for dilutive EPS purposes for the three months ended September 30, 2020, the assumed conversion of such convertible promissory notes at July 1, 2020, increased the net income amount used in the dilutive EPS computation by $455,673 as a result of the net impact of interest that would not have been incurred during the period as well as original issue discounts, deferred financing costs, debt discounts, and derivative liability balances that would not have been required at September 30, 2020. At September 30, 2020, there were 2,666,666 shares of the Company’s common stock to be issued in conjunction with the CloseComms acquisition, and 115,817 restricted shares of the Company’s common stock to be issued upon vesting pursuant to the terms of an employment agreement with its Chief Financial Officer, which were not included in computing dilutive EPS. For the three months ended September 30, 2019, basic and diluted EPS are computed using the same number of weighted average shares as we incurred a net loss.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Modification/Extinguishment of Debt

 

In accordance with ASC 470, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as extinguishment of the original instrument along with the recognition of a gain or loss. Additionally, under ASC 470, a substantive modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an extinguishment of the original instrument along with the recognition of a gain or loss.

 

Recently Adopted Accounting Standards

 

Effective July 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The standard modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concept Statement, including the consideration of costs and benefits. The Company determined the adoption of ASU 2018-13 did not have a material impact on its consolidated financial statements.

 

Recently Issued Accounting Standards Not Yet Adopted

 

During August 2020, the FASB issued ASU 2020-06, to modify and simplify the application of U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. The standard is effective for the Company as of July 1, 2024, with early adoption permitted. The Company is reviewing the impact of this guidance on its consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying unaudited consolidated financial statements.

 

NOTE 4: INTANGIBLE ASSET – PURCHASED SOFTWARE, NET

 

Intangible asset – Purchased Software, net, is comprised of the following at:

 

		September 30,				June 30,
		2020				2020
Purchased software		$	3,835,077			$	3,759,021
Less: accumulated amortization			(1,147,737	)			(923,904	)
Purchased software, net		$	2,687,340			$	2,835,117

 

Intangible asset – Purchased Software consists of the following three software technologies:

 

Alpha Predictions developed software		$	1,583,222
Travel Buddhi developed software			115,466
CloseComms developed software			988,653
Total developed software		$	2,687,340

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 4: INTANGIBLE ASSET – PURCHASED SOFTWARE, NET (continued)

 

The Alpha Predictions developed software was acquired on June 30, 2019, through the acquisition of 99% of the outstanding common shares of Alpha Predictions LLP, was valued at $2,905,668, and included all rights, software, and code of the technology platform. The Travel Buddhi developed software was acquired on February 15, 2019, for $115,281 and included all rights, software, and code of the technology platform. The CloseComms developed software was acquired on March 11, 2020, valued at $954,918, and included all rights, software, and code of the technology platform. At September 30, 2020, the Travel Buddhi and CloseComms technology platforms have not been placed in service, but are expected to be during fiscal year 2021.

 

Developed software costs are amortized on a straight-line basis over three years. Amortization of developed software costs is included in general and administration expenses within the unaudited consolidated statements of operations.

 

For the three months ended September 30, 2020 and 2019, amortization expense was $223,833 and $242,139, respectively.

 

Future amortization expense related to the existing net carrying amount of developed software at September 30, 2020 is expected to be as follows:

 

Remainder of fiscal year 2021		$	862,543
Fiscal year 2022			1,272,738
Fiscal year 2023			368,040
Fiscal year 2024			184,020
		$	2,687,340

 

NOTE 5: REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The following table presents our revenue disaggregated by category and primary geographic regions within our single reporting segment:

 

		For the Three Months Ended
		September 30,
		2020				2019
Categories:
Subscription		$	6,180,000			$	6,180,000
Service and support			897,264				870,089
Application development and implementation			509,600				519,523
Total revenue		$	7,586,864			$	7,569,612
Primary Geographic Regions:
India			100	%			100	%
			100	%			100	%

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 5: REVENUE FROM CONTRACTS WITH CUSTOMERS (continued)

 

The following table presents our long-lived assets by primary geographic regions within our single reporting segment:

 

		For the Three Months Ended
		September 30,
		2020				2019
India		$	1,714,711			$	2,883,092
United Kingdom			1,017,152				-
Total long-lived assets		$	2,731,863			$	2,883,092

 

For the three months ended September 30, 2020 and 2019, the Company was subject to revenue concentration risk as one customer accounted for approximately 100% and 100% of our total revenue, respectively.

 

Subscription and Application Development and Implementation Revenue

 

The Company recognizes revenue when, or as, it satisfies a performance obligation to a customer. The Company primarily has one performance obligation, which includes the combined promise to develop, implement, and license customized software. Payment terms for the software include one-time application development and implementation fees, which are generally billed on a time-and-materials basis over the development and implementation period, plus fixed license subscription fees, which may either be billed in full upfront or in monthly installments over the license period, which is generally three years. All of these fees are allocated to the single performance obligation of providing software to the customer.

 

The performance obligation is fully satisfied at the point in time when the customer has taken control of the completed software, which is when physical possession of the software has transferred to the customer, the customer is able to use and benefit from the software, and the contractual license period has begun. Since the Company has no further obligation to the customer once control of the software has transferred, the Company recognizes revenue in full for all of the development and implementation fees at that point in time. Subscription fees are also recognized when control of the software has transferred to the customer but only to the extent such fees are contractually guaranteed to the Company. Any future monthly subscription fees that the Company would not have a contractually guaranteed right to collect in the event of early termination of the contract are instead recognized as revenue on a straight-line basis over the license period.

 

Service and Support Revenue

 

Certain contracts also contain a second performance obligation for service and support. This performance obligation includes the promise to provide future updates, upgrades, and enhancements to the software over the license period, if and when they occur. Service and support fees are fixed as a percentage of total contract value and billed in monthly installments over the license period. The Company recognizes service and support fee revenue over time, on a straight-line basis over the license period, as the customer receives such services on a generally uniform basis throughout the license period.

 

Allocation of the Transaction Price

 

Prices allocated to each performance obligation generally correspond with the contractually stated prices, since they equal standalone selling price. In some cases, services may be discounted, which requires the company to allocate the transaction price based on relative standalone selling price. The Company estimates standalone selling price based on comparable industry practices and the costs and margins involved in providing services to its customers.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 5: REVENUE FROM CONTRACTS WITH CUSTOMERS (continued)

 

Contract Liabilities

 

Contract liabilities include amounts billed to the customer in excess of revenue recognized and are presented as contract liabilities on the consolidated balance sheets. At September 30, 2020 and June 30, 2020, contract liabilities totaled $263,652 and $219,652, respectively.

 

The following table presents a reconciliation of the contract liabilities from June 30, 2020 to September 30, 2020:

 

June 30, 2020		$	219,652
Contract liability deferral			71,174
Amortization of contract liability to revenue			(27,174	)
June 30, 2020		$	263,652

 

Practical Expedient

 

The Company has elected a practical expedient to omit certain disclosures about the transaction price allocated to remaining performance obligations for contracts with terms of one year or less.

 

NOTE 6: NOTES PAYABLE

 

Notes payable is comprised of the following:

 

		September 30,				June 30,
		2020				2020
Note payable, SBA – Paycheck Protection Program [1]		$	33,472			$	33,388
Note payable, SBA – Economic Injury Disaster Loan [2]			155,983				154,540
Note payable, John Fife (dba St. George Investors)/Judgment Settlement Agreement [3]			765,247				771,702
Total notes payable		$	954,702			$	956,630
Less: current portion of notes payable			(791,344	)			(792,171	)
Long-term portion of notes payable		$	163,358			$	167,459

 

[1] effective April 28, 2020, the Company entered into a promissory note with an approved lender in the principal amount of $33,333. The note was approved under the provisions of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) and the terms of the Paycheck Protection Program of the U.S. Small Business Administration’s 7(a) Loan Program. The note accrues interest for the first six months following the issuance date at a rate of 1% per annum, (increasing to 6% per annum upon the occurrence of an Event of Default (as defined in the note)), and beginning November 28, 2020, requires 18 monthly payments of $1,876 each, consisting of principal and interest until paid in full on April 28, 2022. The note may be prepaid by the Company at any time prior to the maturity date with no prepayment penalties. Additionally, any portion of the note up to the entire principal and accrued interest balance may be forgiven in the event the Company satisfies certain requirements as determined by the CARES Act. The Company expects to satisfy the requirements for forgiveness of the entire principal and accrued interest balance and will apply for such forgiveness by the deadline. At September 30, 2020, $20,635 was recorded as a current liability within notes payable and $12,837 was recorded as a long-term liability within notes payable, net of current portion with the consolidated balance sheets.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 6: NOTES PAYABLE (continued)

 

[2] effective May 28, 2020, the Company entered into a promissory note and security agreement with the U.S. Small Business Administration (“SBA”) in the principal amount of $150,000. The note was approved under the provisions of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) and the terms of the COVID-19 Economic Injury Disaster Loan (“EIDL”) program of the U.S. Small Business Administration’s EIDL Program. The note accrues interest at a rate of 3.75% per annum, and beginning May 28, 2021, requires monthly payments of $731 each, consisting of principal and interest until paid in full on May 28, 2050. The note may be prepaid by the Company at any time prior to the maturity date with no prepayment penalties. Additionally, this promissory note is collateralized by certain of the Company’s property as specified within the security agreement. Furthermore, on June 4, 2020, the Company received $4,000 from the SBA, which it is currently working to obtain details from the SBA regarding this amount. As such, at September 30, 2020, the Company recorded this amount as a current liability. At September 30, 2020, $5,462 was recorded as a current liability within notes payable and $150,521 was recorded as a long-term liability within notes payable, net of current portion with the consolidated balance sheets.

 

[3] effective December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company was required to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 which was due and payable in March of 2020. The Company made all required payments with the exception of the final payment of $195,000 which was due and payable in March of 2020. On August 17, 2020, the Company entered into a second amendment (the “Second Amendment”) to the Judgement Settlement Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the “Note”) to repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on August 17, 2021, bears interest at a rate of 10% per annum, requires certain monthly minimum cash payments as specified in the Note, and is convertible into shares of the Company’s common stock, par value $0.01 per share, at a conversion price as specified in the Note. The Note may be prepaid by the Company at any time prior to maturity without penalty. Failure to make any of the payments, when due, will result in an additional debt obligation, inclusive of principal and interest at the date of default to be immediately due and payable by the Company. The ultimate final payment amount is expected to be less than the liability balance of $765,247 presented as liabilities in arrears – judgement settlement agreement on the consolidated balance sheets.

 

NOTE 7: Convertible Debt Arrangements

 

JMJ Financial

 

At September 30, 2020 and June 30, 2020, the amount recorded in current liabilities for this one convertible note and accrued interest thereon due to JMJ Financial was $213,545 and $209,330, respectively. During the three months ended September 30, 2020 and 2019 the Company recorded $4,215 and $3,892, respectively of interest for the outstanding convertible note.

 

As of September 30, 2020 and June 30, 2020, the aggregate remaining amount of convertible securities held by JMJ could be converted into 10,677 and 10,466 shares, respectively, with a conversion price of $20.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 7: Convertible Debt Arrangements (continued)

 

Accredited Investors

 

On July 24, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 1”) and issued an 8% convertible promissory note in the principal amount of $105,000 (including a $5,000 original issue discount) to the Lender 1 with a maturity date of July 24, 2021. On July 27, 2020, the Company received net proceeds in the amount of $95,000 as a result of $5,000 being paid to reimburse the Lender 1 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible debenture converts at 60% of the lowest closing price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $175,000, original issue discount of $5,000, deferred financing costs of $5,000 and debt discount of $95,000. The original issue discount, deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $105,000 and $1,588, respectively, at September 30, 2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at September 30, 2020 was $19,849.

 

On July 31, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 2”) and issued an 8% convertible promissory note in the principal amount of $68,000 to the Lender 2 with a maturity date of July 31, 2021. On August 6, 2020, the Company received net proceeds in the amount of $65,000 as a result of $3,000 being paid to reimburse the Lender 2 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $102,228, deferred financing costs of $3,000 and debt discount of $65,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $68,000 and $924, respectively, at September 30, 2020. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30, 2020 was $11,551.

 

On August 19, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 3”) and issued an 8% convertible promissory note in the principal amount of $99,225 (including a $4,725 original issue discount) to the Lender 3 with a maturity date of August 19, 2021. On August 20, 2020, the Company received net proceeds in the amount of $90,000 as a result of $4,500 being paid to reimburse the Lender 3 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible debenture converts at 60% of the lowest closing price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $161,856, original issue discount of $4,725, deferred financing costs of $4,500 and debt discount of $86,400. The original issue discount, deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $99,225 and $935, respectively, at September 30, 2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at September 30, 2020 was $11,690.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 7: Convertible Debt Arrangements (continued)

 

On August 20, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 4”) and issued an 8% convertible promissory note in the principal amount of $63,000 to the Lender 4 with a maturity date of August 20, 2021. On August 21, 2020, the Company received net proceeds in the amount of $60,000 as a result of $3,000 being paid to reimburse the Lender 4 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $101,996, deferred financing costs of $3,000 and debt discount of $60,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $63,000 and $580, respectively, at September 30, 2020. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30, 2020 was $7,249.

 

On August 27, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 5”) and issued an 8% convertible promissory note in the principal amount of $105,000 (including a $5,000 original issue discount) to the Lender 5 with a maturity date of August 27, 2021. On August 28, 2020, the Company received net proceeds in the amount of $96,000 as a result of $4,000 being paid to reimburse the Lender 5 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible debenture converts at the lower of i) $0.03 per share or ii) 62% of the lowest closing price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $176,129, original issue discount of $5,000, deferred financing costs of $4,000 and debt discount of $92,200. The original issue discount, deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $105,000 and $805, respectively, at September 30, 2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at September 30, 2020 was $10,068.

 

On August 31, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 6”) and issued an 8% convertible promissory note in the principal amount of $68,000 to the Lender 6 with a maturity date of August 31, 2021. On September 1, 2020, the Company received net proceeds in the amount of $65,000 as a result of $3,000 being paid to reimburse the Lender 6 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $112,459, deferred financing costs of $3,000 and debt discount of $65,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $68,000 and $462, respectively, at September 30, 2020. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30, 2020 was $5,775.

 

During the three months ended September 30, 2020, the Company paid-off two outstanding convertible promissory notes with an aggregate balance, including accrued interest and prepayment amount of $168,691.

 

At September 30, 2020 and June 30, 2020, there was $694,225 and $565,000 of convertible notes payable outstanding, net of discounts of $563,122 and $375,359, respectively.

 

During the three months September 30, 2020 and 2019, amortization of original issue discount, deferred financing costs, and debt discounts amounted to $320,462 and $34,335, respectively.

 

During the three months ended September 30, 2020, $288,182 of convertible notes, including fees and interest, were converted into 16,331,766 shares of the Company’s common stock. During the three months ended September 30, 2019, there were no conversions of convertible notes into shares of the Company’s common stock.

 

  

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 7: Convertible Debt Arrangements (continued)

 

At September 30, 2020, the Company was not in compliance with the terms of the Accredited Investors convertible promissory notes due to the Company being late in filing its Form 10-K for the year ended June 30, 2020.

 

Notes payable under convertible debt and debenture agreements, net is comprised of the following:

 

		September 30,				June 30,
		2020				2020
JMJ Financial		$	109,000			$	109,000
Accredited Investors			694,225				565,000
Unamortized OID, deferred financings costs, and debt discounts			(563,122	)			(375,359	)
Total convertible debt arrangements, net		$	240,103			$	298,641

 

At September 30, 2020 and June 30, 2020, the outstanding balances are reflected as current liabilities within our consolidated balance sheets. At September 30, 2020 and June 30, 2020, accrued interest on these convertible notes of $114,762 and $116,619, respectively, is included within accrued expenses of the consolidated balance sheets.

 

NOTE 8: DERIVATIVE LIABILITY

 

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, Derivatives and Hedging. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operation as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.

 

The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from June 30, 2019 to September 30, 2020:

 

		Conversion feature derivative liability
June 30, 2019		$	133,669
Initial fair value of derivative liability recorded as debt discount			1,115,000
Initial fair value of derivative liability charged to other expense			1,610,913
Gain on change in fair value included in earnings			(1,961,951	)
June 30, 2020		$	897,631
Initial fair value of derivative liability recorded as debt discount			463,600
Initial fair value of derivative liability charged to other expense			366,068
Gain on change in fair value included in earnings			(266,088	)
Derivative liability relieved by conversions of convertible promissory notes			(451,361	)
September 30, 2020		$	1,009,850

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 8: DERIVATIVE LIABILITY (continued)

 

Total derivative liability at September 30, 2020 and June 30, 2020 amounted to $1,009,850 and $897,631, respectively. The change in fair value included in earnings of $266,088 is due in part to the quoted market price of the Company’s common stock decreasing from $0.08 at June 30, 2020 to $0.04 at September 30, 2020, coupled with decreased conversion prices due to the effect of “ratchet” provisions incorporated within the convertible notes payable.

 

The Company used the following assumptions for determining the fair value of the convertible instruments granted under the binomial pricing model with binomial simulations at September 30, 2020:

 

Expected volatility		239.7% - 296.5	%
Expected term		8.0 months – 11.0 months
Risk-free interest rate		0.12	%
Stock price		$0.04

 

The Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.

 

At September 30, 2020, the Company did not have any derivative instruments that were designated as hedges.

 

Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of September 30, 2020 and June 30, 2020:

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative liability, September 30, 2020		$	-		$	-		$	1,009.850

 

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Derivative liability, June 30, 2020		$	-		$	-		$	897,631

 

NOTE 9: STOCKHOLDERS’ EQUITY

 

At September 30, 2020, the total number of shares of all classes of stock that the Company shall have the authority to issue is 500,001,000 shares consisting of 500,000,000 shares of common stock, $0.01 par value per share, of which 73,212,527 are issued, 73,096,710 are outstanding, and 2,666,666 are to be issued, and 1,000 shares of preferred stock, par value $0.01 per share of which 1,000 shares have been designated as Series A Super Voting Preferred of which 1,000 are issued and outstanding.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY (continued)

 

On August 27, 2019, the Company’s Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the number of authorized shares of common stock of the Company to 100,000,000 shares from 25,000,000 shares. On September 4, 2019, the Company filed a Certificate of Amendment to its Certificate of Incorporation to increase its authorized common stock from 25,000,000 shares to 100,000,000 shares.

 

On June 10, 2020, the Company’s Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the number of authorized shares of common stock of the Company to 250,000,000 shares from 100,000,000 shares. On July 14, 2020, the Company filed a Certificate of Amendment to its Certificate of Incorporation to increase its authorized common stock from 100,000,000 shares to 250,000,000 shares.

 

On August 3, 2020, the Company’s Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the number of authorized shares of common stock of the Company to 500,000,000 shares from 250,000,000 shares. On August 4, 2020, the Company filed a Certificate of Amendment to its Certificate of Incorporation to increase its authorized common stock from 250,000,000 shares to 500,000,000 shares.

 

Common Stock

 

Private Placements

 

During the three months ended September 30, 2020, the Company did not issue any shares of common stock under any private placements with accredited investors. During the three months ended September 30, 2019, the Company received $64,500 of net proceeds from the issuance of 258,000 shares of common stock and 10,000 shares of common stock to be issued in private placements with accredited investors, incurring no finder’s fees.

 

Stock Award Payable

 

During the three months ended September 30, 2020 and 2019, the Company did not issue any shares of common stock to former officers, outside directors, or strategic consultants.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY (continued)

 

Stock Based Compensation

 

During the three months ended September 30, 2020, the Company entered into an exchange agreement (the “Exchange Agreement”) with its Chief Executive Officer, Anshu Bhatnagar (“Holder”), whereby earned and issued warrants to purchase 37,390,452 shares of the Company’s Common Stock (the “Cancelled Warrants”) pursuant to the terms of that certain Transition Agreement (the “Transition Agreement”) and Warrant Agreement (the “Warrant Agreement”) each between the Company and Holder and dated as of January 11, 2019 were forfeited and exchanged for (i) 37,390,452 shares of the Company’s Common Stock (the “Shares”) and (ii) the cancellation and termination of the Transition Agreement and Warrant Agreement. The Cancelled Warrants had an exercise price of $0.50 per share and were not subject to expiration. Such Exchange Agreement is intended to make the Company’s capitalization more attractive to potential investors and to remove the uncertainty associated with any future grants of warrants under the Transition Agreement and Warrant Agreement, although there can be no assurance of any future investments on terms that are attractive to the Company, or at all. Immediately prior to the Company’s entry into the Exchange Agreement, it was determined that 5,650,708 additional warrants (the “Additional Warrants”) to purchase the Company’s Common Stock were due to and issued to the Holder in accordance with the terms and conditions of the Transition Agreement as the Transition Agreement required certain liabilities to be eliminated by the prior management team within six months of the Transition Agreement’s effective date of January 11, 2019. However, the Additional Warrants were immediately cancelled and terminated with the intention of mitigating potential liabilities arising from certain issuances of the Company’s Common Stock below the minimum price of $0.50 per share as stated within the Transition Agreement. The Shares to be issued and sold to the Holder pursuant to the Exchange Agreement were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. For the three months ended September 30, 2020, the Company recorded $153,301 of stock-based compensation expense related to the Exchange Agreement. See Common Stock Warrants section below for further details of the warrants.

 

Furthermore, during the three months ended September 30, 2020 and 2019, the Company recorded $10,737 and $49,391, respectively, of stock-based compensation expense related to a June 1, 2019 grant of 231,635 shares of common stock to Mr. Cutchens, the Company’s Chief Financial Officer, which vests 25% on the six month, 1 year, 2 year, and 3 year anniversaries of the grant date.

 

Vendor Services

 

During the three months ended September 30, 2020, the Company entered into a consulting, public relations, and marketing agreement whereby the Company issued 200,000 restricted shares of its common stock for services to be performed during the agreement period of July 15, 2020 through October 15, 2020. During the three months ended September 30, 2020 and 2019, the Company recorded $5,708 and $0, respectively, of expense.

 

Conversion of Debt Securities

 

During the three months ended September 30, 2020, $288,182 of convertible notes, including fees and interest, were converted into 16,331,766 shares of the Company’s common stock by accredited investors, valued at $708,272. During the three months ended September 30, 2019, there were no conversions of convertible notes into shares of the Company’s common stock.

 

Reserved Shares

 

At September 30, 2020, the convertible promissory notes entered into with the accredited investors require the Company to reserve approximately 297,000,000 shares of its common stock for potential future conversions under such instruments.

 

At September 30, 2020, 7,202 shares of the Company’s common stock remain subject to be returned to the Company’s treasury for cancellation. Such shares were not sold as part of 8,000 shares of the Company’s common stock that was advanced during fiscal year 2014 under an Equity Line of Credit.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY (continued)

 

Common Stock Warrants

 

Exchange Agreement – Warrants Exchanged for Common Stock

 

During the three months ended September 30, 2020, the Company entered into an Exchange Agreement with its Chief Executive Officer, Anshu Bhatnagar (“Holder”), whereby earned and issued warrants to purchase 37,390,452 shares of the Company’s Common Stock (the “Cancelled Warrants”) pursuant to the terms of that certain Transition Agreement (the “Transition Agreement”) and Warrant Agreement (the “Warrant Agreement”) each between the Company and Holder and dated as of January 11, 2019 were forfeited and exchanged for (i) 37,390,452 shares of the Company’s Common Stock (the “Shares”) and (ii) the cancellation and termination of the Transition Agreement and Warrant Agreement. The Cancelled Warrants had an exercise price of $0.50 per share and were not subject to expiration. Such Exchange Agreement is intended to make the Company’s capitalization more attractive to potential investors and to remove the uncertainty associated with any future grants of warrants under the Transition Agreement and Warrant Agreement, although there can be no assurance of any future investments on terms that are attractive to the Company, or at all. Immediately prior to the Company’s entry into the Exchange Agreement, it was determined that 5,650,708 additional warrants (the “Additional Warrants”) to purchase the Company’s Common Stock were due to and issued to the Holder in accordance with the terms and conditions of the Transition Agreement as the Transition Agreement required certain liabilities to be eliminated by the prior management team within six months of the Transition Agreement’s effective date of January 11, 2019. However, the Additional Warrants were immediately cancelled and terminated with the intention of mitigating potential liabilities arising from certain issuances of the Company’s Common Stock below the minimum price of $0.50 per share as stated within the Transition Agreement. The Shares to be issued and sold to the Holder pursuant to the Exchange Agreement were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. For the three months ended September 30, 2020, the Company recorded $153,301 of stock-based compensation expense related to the Exchange Agreement.

 

Warrant Agreement – Earned Warrants

 

Mr. Bhatnagar, the Company’s President and Chief Executive Officer, was entitled to receive warrants to acquire 4% of the outstanding fully diluted common stock of the Company (the “Earned Warrants”) each time the Company’s revenue increases by $1,000,000. The exercise price of the Earned Warrants was equal to $0.50 per share, and he may not receive Earned Warrants to the extent that the number of Signing Shares (as defined in the Warrant Agreement) and Earned Warrants exceed 80% of the fully diluted common stock of the Company (“Warrant Cap”).

 

For the three months ended September 30, 2019, since the Company’s revenue was $7,569,612, Mr. Bhatnagar earned warrants to acquire 19,941,573 shares of the Company’s common stock under the provisions of the Warrant Agreement. At September 30, 2019, under the current Warrant Cap, there remained approximately 12,500,000 shares of the Company’s common stock that Mr. Bhatnagar can earn.

 

For the three months ended September 30, 2019, the Company recognized $9,970,787 of stock-based compensation expense related to the earned warrants. At September 30, 2019, there remained approximately $6,232,000 of stock-based compensation expense that the Company expects to recognize over the next six months.

 

The Company estimated the fair value of each option award on the date of grant using a black-scholes option valuation model that uses the assumptions noted in the table below. Because black-scholes option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on the historical volatility of the Company’s stock. The Company used historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted was derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were utilized during the three months ended September 30, 2019:

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY (continued)

 

Expected volatility			21,779.77	%
Weighted-average volatility			21,779.77	%
Expected dividends			0	%
Expected term (in years)			5.0
Risk-free rate			2.52	%

 

The following table sets forth common stock purchase warrants outstanding at September 30, 2019:

 

		Warrants				Weighted Average Exercise Price				Intrinsic Value
Outstanding, June 30, 2019			4,985,394			$	0.50			$	-
Warrants earned			19,941,574				0.50				-
Warrants forfeited			-				-				-
Outstanding, September 30, 2019			24,926,968			$	0.50			$	-
Common stock issuable upon exercise of warrants			24,926,968			$	0.50			$	-

 

			Common Stock Issuable Upon Exercise of Warrants Outstanding									Common Stock Issuable Upon Warrants Exercisable
Range of Exercise Prices			Number Outstanding at September 30, 2020			Weighted Average Remaining Contractual Life (Years)			Weighted Average Exercise Price			Number Exercisable at September 30, 2020			Weighted Average Exercise Price
$	0.50			24,926,968			4.96		$	0.50			24,926,968		$	0.50
				24,926,968			4.96		$	0.50			24,926,968		$	0.50

 

NOTE 10: RELATED PARTY TRANSACTIONS

 

Microphase Corporation

 

At September 30, 2020, the Company owed $32,545 to Microphase for previously leased office space at its Norwalk location and for certain research and development services and shared administrative personnel from time to time, all through December 31, 2015.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 10: RELATED PARTY TRANSACTIONS (continued)

 

Transactions With Officers

 

Note Payable Issuances

 

At various points during past fiscal years certain officers and former officers of the Company provided bridge loans to the Company evidenced by individual promissory notes and deferred compensation so as to provide working capital to the Company. All of these notes accrue interest at the rate of 6% per annum, and are payable on demand. During the three months ended September 30, 2020 and 2019, the officers and former officers advanced $0 and $20,952, respectively, to provide working capital to the Company and $1,197 and $11,137 has been charged for interest on loans from officers and former officers.

 

At September 30, 2020 and June 30, 2020, these outstanding notes including accrued interest totaled $79,955 and $78,758, respectively. At September 30, 2020, these promissory notes are not convertible into shares of the Company common stock.

 

During the three months ended September 30, 2019, the Company incurred $10,500 of expense related to legal and consulting services provided by Mr. Smiley, the Company’s former CFO and legal counsel. During the three months ended September 30, 2020, the Company did not incur any expense or utilize any services by Mr. Smiley, the Company’s former CFO and legal counsel.

 

Office Lease

 

Effective May 1, 2019, the Company relocated its corporate office to 9841 Washingtonian Blvd., Suite 390, Gaithersburg, MD 20878, and incurs rent expense of $1,350 per month, which is payable to a related party. The lease term with the related party is a month-to-month arrangement. For the three months ended September 30, 2020 and 2019, $4,050 and $4,050, respectively, was recognized as rent expense under the terms of this month-to-month arrangement. At September 30, 2020 and June 30, 2020, $27,871 and $23,821, respectively, was accrued as payable to the related party.

 

NOTE 11: COMMITMENTS AND CONTINGENCIES

 

Commitments

 

Office Lease

 

Effective May 1, 2019, the Company relocated its corporate office to 9841 Washingtonian Blvd., Suite 390, Gaithersburg, MD 20878, and incurs rent expense of $1,350 per month, which is payable to a related party. The lease term with the related party is a month-to-month arrangement.

 

Judgement Settlement Agreement

 

Effective December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company was required to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 which was due and payable in March of 2020. The Company made all required payments with the exception of the final payment of $195,000 which was due and payable in March of 2020. On August 17, 2020, the Company entered into a second amendment (the “Second Amendment”) to the Judgement Settlement Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the “Note”) to repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on August 17, 2021, bears interest at a rate of 10% per annum, requires certain monthly minimum cash payments as specified in the Note, and is convertible into shares of the Company’s common stock, par value $0.01 per share, at a conversion price as specified in the Note. The Note may be prepaid by the Company at any time prior to maturity without penalty. Failure to make any of the payments, when due, will result in an additional debt obligation, inclusive of principal and interest at the date of default to be immediately due and payable by the Company. The ultimate final payment amount is expected to be less than the liability balance of $765,247 presented as liabilities in arrears – judgement settlement agreement on the consolidated balance sheets (see Note 6).

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 11: COMMITMENTS AND CONTINGENCIES (continued)

 

Contracts and Commitments Executed Pursuant to the Transition Agreement

 

In the transaction whereby, Mr. Bhatnagar acquired control of the Company on January 11, 2019, the Company entered into material commitments including an employment agreement and a warrant agreement (see Note 9).

 

Contingencies

 

Judgment Settlement Agreement

 

Effective December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company was required to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 which was due and payable in March of 2020. The Company made all required payments with the exception of the final payment of $195,000 which was due and payable in March of 2020. On August 17, 2020, the Company entered into a second amendment (the “Second Amendment”) to the Judgement Settlement Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the “Note”) to repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on August 17, 2021, bears interest at a rate of 10% per annum, requires certain monthly minimum cash payments as specified in the Note, and is convertible into shares of the Company’s common stock, par value $0.01 per share, at a conversion price as specified in the Note. The Note may be prepaid by the Company at any time prior to maturity without penalty. Failure to make any of the payments, when due, will result in an additional debt obligation, inclusive of principal and interest at the date of default to be immediately due and payable by the Company. The ultimate final payment amount is expected to be less than the liability balance of $765,247 presented as liabilities in arrears – judgement settlement agreement on the consolidated balance sheets (see Note 6).

 

Should the Company satisfy the liability as described within the Judgement Settlement Agreement above, the Company would realize a gain on such settlement of approximately $435,000.

 

NOTE 12: DISCONTINUED OPERATIONS

 

The Company has classified the operating results and associated assets and liabilities from its Jump line of products, which ceased generating material revenue during the first quarter of fiscal year 2017, as discontinued operations in the consolidated financial statements for the three months ended September 30, 2020 and 2019.

 

The assets and liabilities associated with discontinued operations included in our consolidated balance sheets at September 30, 2020 and June 30, 2020 were only accounts payable with a balance of $82,795 and $82,795, respectively.

 

For the three months ended September 30, 2020 and 2019, there were no revenue or expenses associated with discontinued operations included in our consolidated statements of operations.

 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(UNAUDITED)

 

NOTE 13: SUBSEQUENT EVENTS

 

On October 13, 2020, the Company withdrew its previously filed preliminary registration statement in accordance with the registration rights agreement entered into with White Lion Capital, LLC on July 13, 2020.

 

On October 22, 2020, the Company received a notice of event of default and demand letter (“Demand Letter”) from a promissory note holder ( the “Note Holder”). The promissory note was issued on November 1, 2019, in the original principal amount of $40,739.31, accrued interest at a rate of 6% per annum, and matured on April 18, 2020. The Demand Letter stated an aggregate of $51,940.09 of principal and interest was immediately due. The promissory note does not have a convertible feature and is not convertible into shares of the Company’s common stock. Additionally, the promissory note does not contain any cross-default provisions with any other promissory notes issued by the Company. The Company expects to work with the Note Holder to negotiate a repayment structure whereby the Company can repay the Note Holder the balance due as quickly as possible based upon its available capital.

 

On December 2, 2020, the Company issued 2,666,666 shares of its common stock in accordance with the Asset Purchase Agreement (“APA”) of its CloseComms acquisition.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto, and our audited consolidated financial statements and related notes for our fiscal year ended June 30, 2020 found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on January 5, 2021.

 

Overview

 

mPhase Technologies, Inc., was incorporated in the state of New Jersey in 1979 under the name Tecma Laboratory, Inc. and has subsequently operated under Tecma Laboratories, Inc., and Lightpaths TP Technologies, Inc., until June 2, 1997 when the Company changed its name to mPhase Technologies, Inc.

 

Since January 11, 2019, when the Company underwent a complete change in management and control, the new management has continued to broaden the Company’s product mix to include artificial intelligence and machine learning products.

 

Since announcing the formation of mPhase Technologies India, Pvt, Ltd during February 2019, the Company has expanded its focus on software and technology development for new and existing projects through the creation and expansion of its “Center of Excellence” India division. This “Center of Excellence” consists of a team in India of highly qualified software and technology experts in the fields of artificial intelligence and machine learning.

 

In addition to the foregoing, since our acquisition of Travel Buddhi during February 2019, we have continued developing the software platform which enhances travel via ultra-customization tools that tailor a planned trip experience in ways not previously available by making it “smart” and “connected” as part of the internet of things.

 

Furthermore, since our acquisition of CloseComms during May 2020, pursuant to which we acquired certain assets and assumed certain liabilities, we have continued advancing our patented, software application platform that can be integrated into a retail customer’s existing Wi-Fi infrastructure, giving the retailer important customer data and enabling AI-enhanced, targeted promotions to drive store traffic and sales.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, potential impairment of intangible assets, accrued liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in Note 3 above and the Company’s Annual Report on Form 10-K as filed with the SEC on January 5, 2021, are those that depend most heavily on these judgments and estimates. As of September 30, 2020, there had been no material changes to any of the critical accounting policies contained therein.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Results of Operations

 

Three months ended September 30, 2020 compared to three months ended September 30, 2019

 

Continuing Operations

 

Revenue

 

Our revenue increased to $7,586,864 for the three months ended September 30, 2020, compared to $7,569,612 for the three months ended September 30, 2019, an increase of $17,252. The consistent revenue is the result of continued deployment of our learning track technology platform and services which generated $6,180,000 of subscription revenue, $897,264 of service and support revenue and $509,600 of application development and implementation revenue.

 

Cost of Revenue

 

Cost of revenue totaled $5,625,389 for the three months ended September 30, 2020, compared to $5,706,514 for the three months ended September 30, 2019.

 

Operating Expenses

 

Our operating expenses decreased to $765,846 for the three months ended September 30, 2020, compared to $11,945,636 for the three months ended September 30, 2019, a decrease of $11,197,790, or 94%. The decrease is primarily due to $9,832,326 of stock-based compensation expense recognized during 2019 related to the Company’s Chief Executive Officer and Chief Financial Officer, and lower operating expenses of $1,326,282.

 

Other (Expense) Income

 

Our other expense, net, increased by $252,162, or 113%, for the three months ended September 30, 2020. The increase is primarily the result of increases in initial derivative expense, amortization of debt discount, and interest expense, partially offset by the gain on the change in fair value of derivative liability associated with the convertible promissory notes and gain on extinguishment of debt.

 

Net Income from Continuing Operations

 

We had net income from continuing operations of $720,494 for the three months ended September 30, 2020, compared to a net loss of $10,305,511 for the three months ended September 30, 2019, an increase of $11,026,005, or 107%. The increase in net income is primarily driven by the increase in gross profit, coupled with the decrease in operating expenses, and partially offset by the increase in other expense, net, as disclosed above.

 

Discontinued Operations

 

For the three months ended September 30, 2020 and 2019, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations comparatives.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Liquidity and Capital Resources

 

At September 30, 2020, we had $46,514 of cash on-hand, a decrease of $95,899 from $142,413 at June 30, 2020.

 

Net cash used in operating activities of continuing operations was $306,368 for the three months ended September 30, 2020, an increase of $114,998 from $191,370 used during the three months ended September 30, 2019. This increase was primarily due to increases in accounts receivable, partially offset by a net increase in non-cash charges and an increase in accounts payable and accrued expenses.

 

Net cash used in investing activities of continuing operations was $968 for the three months ended September 30, 2020 as compared to no net cash used in or provided by investing activities of continuing operations for the three months ended September 30, 2019.

 

Financing activities of continuing operations increased by $97,400 to $332,600 for the three months ended September 30, 2020, compared to $235,200 for the three months ended September 30, 2019. This increase was primarily due to increased proceeds from issuances of convertible promissory notes, coupled with decreased repayments under settlement agreement and notes payable to related parties, partially offset by no proceeds from the sale of common stock or notes payable to related parties, and repayments of convertible promissory notes.

 

Going Concern

 

We have incurred net income of $720,494 and a net loss of $10,305,511, and have used cash in operating activities of $306,368 and $191,370 for the three months ended September 30, 2020 and 2019, respectively. At September 30, 2020, we had a working capital surplus of $4,427,531, and an accumulated deficit of $227,006,926. It is management’s opinion that these facts raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the date of this filing, without additional debt or equity financing. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

 

In order to meet our working capital needs through the next twelve months and to fund the growth of our nanotechnology, artificial intelligence, and machine learning technologies, we may consider plans to raise additional funds through the issuance of equity or debt. Although we intend to obtain additional financing to meet our cash needs, we may be unable to secure any additional financing on terms that are favorable or acceptable to us, if at all. Our ability to raise additional capital will also be impacted by the recent COVID-19 pandemic, which such ability is highly uncertain, cannot be predicted, and could have an adverse effect on our business and financial condition.

 

Impact of COVID-19 Pandemic

 

A novel strain of coronavirus, COVID-19, surfaced during December 2019 and has spread around the world, including to the United States. During March 2020, COVID-19 was declared a pandemic by the World Health Organization. During certain periods of the pandemic thus far, a number of U.S. states and various countries throughout the world had been under governmental orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining. As a result of these governmental orders, we temporarily closed our domestic and international offices and required all of our employees to work remotely. Although these temporary office closures created minor disruption to our business operations, such disruptions to date have not been significant.

 

The full impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our employees, customers, and vendors, in addition to how quickly normal economic conditions and operations resume and whether the pandemic impacts other risks disclosed in Item 1A “Risk Factors” within our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on January 5, 2021. Even after the pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred as a result of the pandemic. Therefore, we cannot reasonably estimate the impact at this time. We continue to actively monitor the pandemic and may determine to take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, vendors, and shareholders.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide information required by this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2020 to determine whether the Company’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in our reports under the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2020.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors.

 

None.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits.

 

Exhibit Number		Description
31.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance Document
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document
101.SCH*		XBRL Taxonomy Extension Schema Document

 

*Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of 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.
	/s/ Anshu Bhatnagar
	Anshu Bhatnagar
	Chief Executive Officer (Principal Executive, Financial and Accounting Officer)
	January 19, 2021