UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED March 31, 2016
COMMISSION FILE NO. 000-30202
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, 2019 |
mPhase Technologies, Inc.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)
| 22-2287503 | ||
| (State | (I.R.S. Employer Identification No.) | |
| ||
| (Address of principal executive offices) | (Zip Code) |
973-256-3737
ISSUER’S TELEPHONE NUMBERRegistrant’s telephone number, including area code:(301) 329-2700
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, DURING THE PRECEDING 12 MONTHS (OR FOR SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORT), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.Securities registered pursuant to Section 12(b) of the Act: None.
YES ☐ NO ☒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.
[X] Yes [ ] 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 | ||
| 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
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF October 19, 2017 IS 16,497,486,598 SHARES, ALL OF ONE CLASS OF $.001 PAR VALUE COMMON STOCK.
As of November 15, 2019 there were 12,667,367 shares of the issuer’s common stock, $0.01 par value per share, issued and outstanding.
mPHASE TECHNOLOGIES, INC.mPhase Technologies, Inc.
Form 10-Q
INDEXTable of Contents
| PART I | – FINANCIAL INFORMATION | 4 | |
| Item | Condensed Consolidated | ||
| Unaudited | |||
| Item | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
| Item | Quantitative and Qualitative Disclosures | ||
| Item | Controls and Procedures | ||
| PART II | – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | ||
| Item 1A. | Risk Factors | 31 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||
| Item 3. | Defaults Upon Senior Securities | ||
| Item 5. | Other Information | ||
| Item 6. | Exhibits | ||
| SIGNATURES | 32 | ||
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, 2019, filed with the SEC on October 15, 2019 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.
mPHASE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
| 3 |
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED COSOLIDATED UNAUDITED FINANCIAL STATEMENTS
CondensedConsolidated Balance Sheets
| March 31, | June 30, | |||||||
| 2016 | 2015 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 1,002 | $ | 2,868 | ||||
| Accounts receivable, net | 4,116 | 8,502 | ||||||
| Inventory | 67,895 | 218,653 | ||||||
| Prepaid and other current assets | 7,854 | 36,868 | ||||||
| TOTAL CURRENT ASSETS | $ | 80,867 | $ | 266,891 | ||||
| Property and equipment, net | 4,368 | 6,714 | ||||||
| Other Assets | 20,170 | 17,109 | ||||||
| TOTAL ASSETS | $ | 105,405 | $ | 290,714 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | 1,121,112 | $ | 1,023,344 | ||||
| Accrued expenses | 659,561 | 328,276 | ||||||
| Due to related parties | 209,328 | 188,045 | ||||||
| Customer Deposits | - | 26,691 | ||||||
| Notes payable, Officers | 582,185 | 534,151 | ||||||
| Note Payable, Director | 113,775 | 90,000 | ||||||
| Note Payable, Finance Company | 31,851 | - | ||||||
| Current Portion, Long term convertible debentures | 1,612,476 | 355,479 | ||||||
| TOTAL CURRENT LIABILITIES | 4,330,288 | 2,545,986 | ||||||
| OTHER OBLIGATIONS CONVERTIBLE TO EQUITY | ||||||||
| Long term portion of Convertible debentures | - | 1,352,168 | ||||||
| Convertible debt derivative liability | 215,353 | 235,425 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 4) | - | - | ||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Common stock, par value $.001, 18,000,000,000 shares authorized, 16,819,183,048 and 15,941,988,381 shares issued and outstanding at March 31, 2016 & June 30, 2015, respectively | 16,819,183 | 15,941,987 | ||||||
| Additional paid in capital | 190,369,706 | 190,949,919 | ||||||
| Accumulated Deficit | (211,629,125 | ) | (210,734,771 | ) | ||||
| TOTAL STOCKHOLDERS' DEFICIT | ($ | 4,440,236 | ) | ($ | 3,842,865 | ) | ||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 105,405 | $ | 290,714 | ||||
| September 30, 2019 | June 30, 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 132,520 | $ | 33,996 | ||||
| Accounts receivable, net | 7,803,102 | 2,526,155 | ||||||
| Prepaid expenses | 2,209 | 8,820 | ||||||
| Total Current Assets | 7,937,831 | 2,568,971 | ||||||
| Property and equipment, net | 10,811 | 11,048 | ||||||
| Goodwill | 6,020 | 6,020 | ||||||
| Intangible asset - purchased software, net | 2,721,065 | 3,025,801 | ||||||
| Other assets | 6,239 | 3,058 | ||||||
| Total Assets | $ | 10,681,966 | $ | 5,614,898 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 1,839,519 | $ | 366,274 | ||||
| Accrued expenses | 6,743,814 | 3,368,801 | ||||||
| Contract liabilities | 53,783 | - | ||||||
| Due to related parties | 85,012 | 65,459 | ||||||
| Notes payable to officers | 25,628 | 25,251 | ||||||
| Convertible notes payable, net | 36,685 | 2,351 | ||||||
| Liabilities in arrears with convertible features | 109,000 | 109,000 | ||||||
| Liabilities in arrears - judgement settlement agreement (Note 7) | 820,181 | 855,660 | ||||||
| Derivative liability | 495,441 | 133,669 | ||||||
| Liabilities of discontinued operations | 82,795 | 82,795 | ||||||
| Total Current Liabilities | 10,291,858 | 5,009,260 | ||||||
| Commitments and Contingencies (Note 12) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at September 30, 2019 and June 30, 2019 | 10 | 10 | ||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized and 12,363,732 and 11,689,078 shares issued and outstanding at September 30, 2019 and June 30, 2019, respectively | 123,637 | 116,890 | ||||||
| Additional paid-in-capital | 224,139,906 | 214,007,203 | ||||||
| Common stock to be issued | 11,225 | 115,388 | ||||||
| Accumulated other comprehensive income | 54,694 | - | ||||||
| Accumulated deficit | (223,939,364 | ) | (213,633,853 | ) | ||||
| Total Stockholders’ Equity | 390,108 | 605,638 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 10,681,966 | $ | 5,614,898 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
mPHASE TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2016 | 2015 | |||||||
| REVENUES | $ | 96,592 | $ | 174,442 | ||||
| COSTS AND EXPENSES | ||||||||
| Cost of Sales | 61,537 | 115,818 | ||||||
| Selling and Marketing (including non-cash stock related charges of $3,150 and $3,341 for the three months ended March 31, 2016 & 2015). | 32,287 | 55,313 | ||||||
| General and Administrative | 207,488 | 342,785 | ||||||
| Depreciation and Amortization | 804 | 669 | ||||||
| TOTAL COSTS AND EXPENSES | 302,116 | 514,585 | ||||||
| OPERATING LOSS | $ | (205,524 | ) | $ | (340,143 | ) | ||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest (Expense) | (93,904 | ) | (82,372 | ) | ||||
| Other Income (Expense) | 18,378 | (3,629 | ) | |||||
| Change in Fair Value of Derivative Liability | 510,748 | 1,667 | ||||||
| TOTAL OTHER INCOME (EXPENSE) | $ | 435,222 | $ | (84,334 | ) | |||
| Income (Loss) From Operations, before Income Taxes | $ | 229,698 | $ | (424,477 | ) | |||
| Income Taxes | - | - | ||||||
| Net Income (Loss) | $ | 229,698 | $ | (424,477 | ) | |||
| Basic & Diluted Net Income (Loss) per share: | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Weighted Average Number of Shares Outstanding; | ||||||||
| Basic & Diluted | 16,503,289,787 | 15,080,180,968 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
mPHASE TECHNOLOGIES, INC.mPhase Technologies, Inc.
CondensedConsolidated Statements of Operations
(Unaudited)
| For the Nine Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2016 | 2015 | |||||||
| REVENUES | $ | 494,938 | $ | 969,415 | ||||
| COSTS AND EXPENSES | ||||||||
| Cost of Sales | 339,096 | 620,421 | ||||||
| Research and Development | - | 4,694 | ||||||
| Selling and Marketing (including non-cash stock related charges of $7,804 and $17,955 for the nine months ended March 31, 2016 & 2015). | 126,937 | 194,949 | ||||||
| General and Administrative | 693,382 | 1,098,985 | ||||||
| Depreciation and Amortization | 2,346 | 3,341 | ||||||
| TOTAL COSTS AND EXPENSES | 1,161,761 | 1,922,390 | ||||||
| OPERATING LOSS | $ | (666,823 | ) | $ | (952,975 | ) | ||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest (Expense) | (267,142 | ) | (244,214 | ) | ||||
| Other Income (Expense) | 19,539 | (141,048 | ) | |||||
| Change in Fair Value of Derivative Liability | 20,072 | 62,080 | ||||||
| TOTAL OTHER INCOME (EXPENSE) | $ | (227,531 | ) | $ | (323,182 | ) | ||
| Loss From Operations, before Income Taxes | $ | (894,354 | ) | $ | (1,276,157 | ) | ||
| Income Taxes | - | - | ||||||
| Net Loss | $ | (894,354 | ) | $ | (1,276,157 | ) | ||
| Basic & Diluted Net loss per share: | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Weighted Average Number of Shares Outstanding; | ||||||||
| Basic & Diluted | 16,197,503,647 | 14,637,604,866 | ||||||
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Revenue | $ | 7,569,612 | $ | - | ||||
| Cost of revenue | 5,706,514 | - | ||||||
| Gross Profit | 1,863,098 | - | ||||||
| Operating Expenses: | ||||||||
| Software development costs | 1,203,614 | - | ||||||
| General and administrative expenses | 10,742,022 | 63,827 | ||||||
| Total Operating Expenses | 11,945,636 | 63,827 | ||||||
| Operating loss | (10,082,538 | ) | (63,827 | ) | ||||
| Other Income (Expense): | ||||||||
| Interest expense | (38,866 | ) | (122,052 | ) | ||||
| Gain on change in fair value of derivative liability | 65,803 | - | ||||||
| Initial derivative expense | (215,575 | ) | - | |||||
| Amortization of debt discount | (32,663 | ) | - | |||||
| Amortization of deferred financing costs | (1,521 | ) | - | |||||
| Amortization of original issue discount | (151 | ) | - | |||||
| Total Other Income (Expense) | (222,973 | ) | (122,052 | ) | ||||
| Loss from continuing operations before income taxes | (10,305,511 | ) | (185,879 | ) | ||||
| Income taxes | - | - | ||||||
| Loss from continuing operations | (10,305,511 | ) | (185,879 | ) | ||||
| Discontinued operations (Note 13) | ||||||||
| Loss from discontinued operations | - | (11,766 | ) | |||||
| Net loss | $ | (10,305,511 | ) | $ | (197,645 | ) | ||
| Comprehensive loss: | ||||||||
| Unrealized gain on currency translation adjustment | 54,694 | - | ||||||
| Comprehensive loss: | $ | (10,250,817 | ) | $ | (197,645 | ) | ||
| Loss per common share: | ||||||||
| Loss from continuing operations per common share - basic and diluted | $ | (0.85 | ) | $ | (0.05 | ) | ||
| Loss from discontinued operations per common share - basic and diluted | $ | - | $ | (0.00 | ) | |||
| Loss per common share - basic and diluted | $ | (0.85 | ) | $ | (0.05 | ) | ||
| Weighted average shares outstanding – basic and diluted | 12,117,849 | 3,675,939 | ||||||
The accompanying condensed notes are an integral part of these unaudited condensed consolidated financial statements.
mPHASE TECHNOLOGIES, INC.mPhase Technologies, Inc.
CondensedConsolidated Statements of Cash FlowsStockholders’ Equity (Deficit)
For the Three Months Ended September 30, 2019 and 2018
(Unaudited)
| For the Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash Flow From Operating Activities: | ||||||||
| Net Loss | $ | (894,354 | ) | $ | (1,276,157 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 2,346 | 3,843 | ||||||
| Non-cash charges relating to Convertible Debt Settlement | - | 137,419 | ||||||
| Non-cash charges relating to issuance of common stock, common stock options and warrants | 7,804 | 17,955 | ||||||
| Settlement income | (1,538 | ) | - | |||||
| Change in fair value of Derivative Liability and Debt Discount charges (credits) | (20,072 | ) | (62,080 | ) | ||||
| Other non cash charges including amortization of deferred | ||||||||
| compensation and beneficial conversion interest expense | 91,178 | 91,178 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 4,386 | 18,742 | ||||||
| Inventories | 150,758 | 348,829 | ||||||
| Prepaid expenses and Other current assets | 29,014 | (35,111 | ) | |||||
| Other assets | 3,060 | (17,109 | ) | |||||
| Accounts payable & Accrued expenses | 212,544 | 112,760 | ||||||
| Customer deposits | (26,691 | ) | 32,802 | |||||
| Due to/from related parties | ||||||||
| Microphase & Eagle | 4,500 | 20,001 | ||||||
| Officers | 248,444 | - | ||||||
| Net cash used in operating activities | $ | (188,623 | ) | $ | (606,928 | ) | ||
| Cash Flow Used in Investing Activities: | ||||||||
| Purchase of fixed assets | - | (8,838 | ) | |||||
| Net Cash used in investing activities | $ | - | $ | (8,838 | ) | |||
| Cash Flow from Financing Activities: | ||||||||
| Proceeds from issuance of common stock, net of finders fees | 153,000 | 515,500 | ||||||
| Proceeds of demand note | 35,000 | - | ||||||
| Proceeds from Finance Company | 66,029 | |||||||
| Repayment to Finance Company | (34,178 | ) | - | |||||
| Issuance of Convertible Debentures | - | 40,000 | ||||||
| Repayment of Convertible Debentures | (91,262 | ) | (93,232 | ) | ||||
| Proceeds from notes payable related parties | 112,265 | |||||||
| Repayment of notes payable related parties | (54,096 | ) | - | |||||
| Net cash provided by financing activities | $ | 186,758 | $ | 462,268 | ||||
| Net increase (decrease) in cash | (1,866 | ) | (153,498 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of period | 2,868 | 179,257 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 1,002 | $ | 25,759 | ||||
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | $0.01 Par Value | Shares | $0.01 Par Value | AdditionalPaid in Capital | CommonStock to be Issued | AccumulatedComprehensive 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 | |||||||||||||||||||
| Common Stock | ||||||||||||||||||||
| Shares | $0.01 Par Value | Additional Paid in Capital | Accumulated Deficit | Stockholders’ Deficit | ||||||||||||||||
| Balance June 30, 2018 | 3,372,103 | $ | 33,721 | $ | 207,652,502 | $ | (211,678,692 | ) | $ | (3,992,469 | ) | |||||||||
| Issuance of common stock to accredited investors in private placements | 40,000 | 400 | 9,600 | 10,000 | ||||||||||||||||
| Beneficial conversion feature interest expense charged to additional paid in capital | 91,177 | 91,177 | ||||||||||||||||||
| Issuance of common stock for accrued services | 1,150,000 | 11,500 | 563,500 | 575,000 | ||||||||||||||||
| Issuance of common stock for the conversion of related party debts and strategic vendor payables | 3,305,492 | 33,055 | 1,619,691 | 1,652,746 | ||||||||||||||||
| Net loss | (197,645 | ) | (197,645 | ) | ||||||||||||||||
| Balance September 30, 2018 | 7,867,595 | $ | 78,676 | $ | 209,936,470 | $ | (211,876,337 | ) | $ | (1,861,191 | ) | |||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
CondensedConsolidated Statements of Cash Flows
(Unaudited)
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (10,305,511 | ) | $ | (197,645 | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Stock-based compensation | 10,020,178 | - | ||||||
| Depreciation and amortization | 242,139 | - | ||||||
| Initial derivative expense | 215,575 | - | ||||||
| Amortization of debt discount | 32,663 | 3,552 | ||||||
| Amortization of deferred financing costs | 1,521 | - | ||||||
| Amortization of original issue discount | 151 | - | ||||||
| Gain on change in fair value of derivative liability | (65,803 | ) | - | |||||
| Amortization of deferred compensation and beneficial conversion interest expense | - | 91,177 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | (5,276,947 | ) | - | |||||
| Increase in other assets | (3,181 | ) | - | |||||
| Decrease in prepaid expenses | 6,611 | - | ||||||
| Increase in contract liabilities | 53,783 | - | ||||||
| Increase in accounts payable and accrued expenses | 4,887,451 | 226,976 | ||||||
| Net cash (used in) provided by operating activities of continuing operations | (191,370 | ) | 124,060 | |||||
| Net cash used in operating activities of discontinued operations | - | (165,143 | ) | |||||
| Net cash used in operating activities | (191,370 | ) | (41,083 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of convertible notes payable, net | 212,000 | - | ||||||
| Proceeds from issuance of common stock, net of finder’s fees | 64,500 | 10,000 | ||||||
| Proceeds from notes payable to related parties | 10,700 | 43,070 | ||||||
| Repayments under settlement agreement | (45,000 | ) | - | |||||
| Repayments of notes payable to related parties | (7,000 | ) | (588 | ) | ||||
| Net cash provided by financing activities of continuing operations | 235,200 | 52,482 | ||||||
| Net cash provided (used) by financing activities of discontinued operations | - | - | ||||||
| Net cash provided by financing activities | 235,200 | 52,482 | ||||||
| Effect of foreign exchange rate changes on cash | 54,694 | - | ||||||
| Net increase in cash | 98,524 | 11,399 | ||||||
| Cash at beginning of period | 33,996 | 261 | ||||||
| Cash at end of period | $ | 132,520 | $ | 11,660 | ||||
| Supplemental disclosure: | ||||||||
| Cash paid for interest | $ | - | $ | 1,794 | ||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Issuance of Common Stock for accrued services | ||||||||
| Value | $ | - | $ | 1,299,777 | ||||
| Shares | - | 2,599,554 | ||||||
| Issuance of Common Stock for the conversion of Related Party debts and Strategic Vendor payables | ||||||||
| Value | $ | 73,663 | $ | 927,969 | ||||
| Shares | 294,654 | 1,855,939 | ||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 8 |
NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION
NATURE OF OPERATIONSOrganization and Nature of Business
mPhase Technologies, Inc. (the “Company”), including its wholly-owned subsidiaries, are collectively referred to herein as “mPhase,” “XDSL”, “Company,” “us,” or “we.”
The Company was organized on Octoberincorporated 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, 19961997 when the Company changed its name to mPhase Technologies, Inc.
On January 11, 2019, the Company underwent a major change in management and control. The new management of the Company is presently focused on restructuring its debt obligationspositioning the Company to be a technology leader in artificial intelligence and machine learning while enabling a position to capitalize onmore rapid commercial development of its existing intellectual propertypatent portfolio and endeavorother intellectual property. The Company’s goal is to further develop new “smart surface” products through the sciences of microfluidics, microelectromechanical systems (MEMS)generate significant revenue from its artificial intelligence and nanotechnology. The Company plans to restructure its business through some combination of raising additional capital, strategic partnerships and or mergers & acquisitions.
BASIS OF PRESENTATIONmachine 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 accompanying unauditedCompany expects the acquisition to result in synergies with its other operating divisions, which will drive revenue growth and innovation.
Basis of Presentation
The condensed 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 have been prepared in accordance with accounting principles generally accepted accounting principles for interim financial information andin the United States of America (“US GAAP”) have been omitted pursuant to therules and regulations of the Securities and Exchange Commission. Accordingly, they do not include allCommission (the “SEC”); nevertheless, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading.
The condensed consolidated unaudited financial statements for the three months ended September 30, 2019 and footnotes required by generally accepted accounting principles for complete financial statements. In2018 include the opinionoperations of management, all adjustments considered necessary for a fair presentationmPhase 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 included. Operating results foreliminated in the nine months ending March 31, 2016 are not necessarily indicative ofconsolidation.
These condensed consolidated unaudited financial statements should be read in conjunction with the results that may be expected for a full fiscal year. For further information, refer to theCompany’s audited consolidated financial statements and footnotes thereto includedfor the year ended June 30, 2019, contained in the Company’s Annual Report on Form 10-K as amended,filed with the SEC on October 15, 2019. The results of operations for the three months ended September 30, 2019, are not necessarily indicative of results to be expected for any other interim period or the fiscal year endedending June 30, 2015.2020.
mPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 2: GOING CONCERN
The Company’saccompanying unaudited condensed 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.
Through March 31, 2016,The Company has incurred negative cash flows from operations of $191,370 for the three months ended September 30, 2019. At September 30, 2019, the Company had incurred cumulative (a) losses totaling ($211,629,125), (b) stockholders’a working capital deficit of ($4,440,236). At March 31, 2016, the Company had $1,002$2,354,027, and an accumulated deficit of cash and $4,116 of trade receivables to fund short-term working capital requirements. In addition, the Company relies on the continuation of funding through private placements of its common stock. In the Company’s form 10k for the period June 30, 2015, the Company’s Auditor stated that” there$223,939,364. It is management’s opinion that these facts raise substantial doubt about the Company’s ability to continue as a going concern”.
concern for a period of twelve months from the date of this report, without additional debt or equity financing. The Company’s abilityunaudited 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 concernconcern.
In order to meet its working capital needs through the next twelve months from the date of this report and its future success is dependent upon its abilityto fund the growth of our nanotechnology, artificial intelligence, and machine learning technologies, the Company may consider plans to raise capitaladditional 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.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Foreign Currency Translation and Transactions
The functional currency of our operations in India is the Indian Rupee. Foreign currency denominated 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. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive income (loss).” Gains and losses resulting from foreign currency transactions are included in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allowconsolidated statements of comprehensive income (loss), as other comprehensive income (loss). There have been no significant fluctuations in the successful wide scale development, deployment and marketingexchange rate for the conversion of its products. There can be no assuranceIndian Rupee to U.S. dollars after the necessary debt or equity financing will be available, or if so, on terms acceptable to the Company.balance sheet date.
INVENTORY
The Company uses the First In First Out method (FIFO) to account for inventory which is carried at lowerUse of cost and net realizable value. As of June 30, 2015, inventory consisted primarily of its various Jump products including the Jump and the mini Jump, and our remaining flashlight inventory, and was valued at $218,653. As of March 31, 2016, inventory consisted primarily of the Company’s line of Jump products including the new Jump Plus, and our remaining flashlight inventory, and was valued at $67,895. Subsequently, the Company discontinued its entire line of Jump products in the 1st quarter of fiscal year 2017 owing to increased competition and decreasing margins. Appropriate reserves have been taken as of June 30, 2015 and March 31, 2016, to assure that the cost of such inventory does not exceed the expected net realizable value.
USE OF ESTIMATESEstimates
The preparation of condensed consolidated unaudited financial statements in conformity with generally accepted accounting principlesUS 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 the reported amounts of revenues and expenses during the reporting periods. These include net realizable inventories, prepaid expenses, accrued expenses and changes in and the ending fair value of derivative liability.period. Actual results could differ from those estimates.
LOSS PER COMMON SHARE, BASIC AND DILUTED
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net loss adjusted for income or loss that would result If actual results significantly differ from the assumed conversion of potential common shares from contracts that may be settled in stock or cash by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. The Company had no warrants to purchase shares of its common stock and no options to purchase shares of its common stock outstanding at March 31, 2016.
At March 31, 2016 the Company has convertible securities held by third parties that are immediately convertible into 440,555,647 shares of common stock (which amount include one additional assumed monthly conversion by John Fife in April 2016 under the terms of the Forbearance Agreement, as amended). Under the terms of the Forbearance Agreement, as amended, with John Fife (arrangement #4), Fife may acquire a total of 5,044,264,869 shares ofCompany’s estimates, the Company’s common stock based uponfinancial condition and results of operations could be materially impacted. Significant estimates include the conversion terms; if the forbearance agreement discussed in Note 3 is settled entirely in stock. In addition, the Company has convertible notes pluscollectability of accounts receivable, valuation of intangible assets, accrued interest thereon held by officersexpenses, valuation of the Company, subject to availability, convertible into approximately 1,455,462,450, immediately, if available.
The following table illustrates debts convertible into shares of the Company’s Common Stock at March 31, 2016:
| March 31, 2016 | ||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||
| Note Principle | Accrued Interest | Total Convertible Debt | Shares Convertible | |||||||||||||||||
| immediately | over full term/ if available*** | |||||||||||||||||||
| Arrangement #3 - JMJ Financial, Inc | $ | 802,060 | $ | 295,817 | $ | 1,097,877 | 274,469,263 | 274,469,263 | ||||||||||||
| Arrangement #4 - St. George Investments/Fife Forbearance Obligation | 807,083 | - | 807,083 | 125,000,000 | 5,044,264,869 | |||||||||||||||
| Arrangement #5 - MH Investment trust II | 3,333 | 1,454 | 4,787 | 41,086,385 | 41,086,385 | |||||||||||||||
| Total Convertible Notes payable | $ | 1,612,476 | $ | 297,271 | $ | 1,909,747 | 440,555,647 | 5,359,820,516 | ||||||||||||
| Notes Payable- Officers*** | $ | 582,185 | $ | - | $ | 582,185 | - | 1,455,462,450 | ||||||||||||
| Total | $ | 2,194,661 | $ | 297,271 | $ | 2,491,932 | 440,555,647 | 6,815,282,966 | ||||||||||||
*** convertible if shares available
RECLASSIFICATIONS
Certain reclassifications have been made in the prior period consolidated financial statements, primarily selling and marketing expense in the prior period, to conform to the current period presentation. The reclassified financial statement items had no effect on (a) Net Loss for the nine months ended March 31, 2016 and 2015, or (b), total Stockholders’ Deficit or total Assets as of March 31, 2016 or June 30, 2015.
MATERIAL FINANCIAL INSTRUMENTS
The Company has material financial instruments including convertible securities. Such securities have conversion features that are accounted for as derivative liabilities, that are evaluated quarterly for any changes in fair value. (SEE NOTE 3)
DERIVATIVE LIABILITY
The Company has estimatedstock-based compensation, and the value of the derivative liability associated with its convertible debt. Such estimate is based on a Black Scholes calculation at the time the debt was issued. At each reporting period, the value of this liability is marked to market and adjusted accordingly. Such adjustments are included in Other Income (Expense).
| For the Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2016 | 2015 | |||||||
Supplemental Disclosure: Cash Paid During Period For: | ||||||||
| Interest | $ | 76,570 | $ | 43,568 | ||||
| Income Taxes | $ | - | $ | - | ||||
| Non Cash Investing and Financing Activities: | ||||||||
| Conversion of $10,000 of Convertible Debt and Accrued Interest thereon and a $35,000 Demand note into 62,500,000 and 175,000,000 shares respectively, or a total of $45,000 of debt into 237,500,000 shares of the Company’s Common stock. | $ | 45,000 | $ | - | ||||
| Conversion of $18,000 of officer loan in consideration of transfer of vehicle at market value | $ | 18,000 | $ | - | ||||
| Beneficial Conversion of Officers’ Notes | $ | 91,178 | $ | 91,178 | ||||
| Issuances of Common Stock for services | $ | 7,804 | $ | 17,955 | ||||
| Non-cash loan charges relating to initial and second funding under factoring agreement(s), including revision. | $ | 2,295 | $ | - | ||||
| Convertible Note payable of $720,157 and $172,127 of accrued interest thereon merged into forbearance obligation | $ | - | $ | 892,283 | ||||
| Non-cash charges relating to Convertible Debt Settlement including $118,950 increase in loan amount and $18,469 increase in corresponding Derivative Liability | $ | - | $ | 137,419 | ||||
The Company in its annual meeting of shareholders for the fiscal year ended June 30, 2013 held on February 12, 2014 received shareholder approval to increase its authorized shares to 18 billion shares of common stock so that as of March 31, 2016 the Company has said number of authorized shares of stock.deferred tax asset valuation allowance.
Private PlacementsConcentrations of Credit Risk
During the nine months ended March 31, 2016,Credit Risk
Financial instruments which potentially subject the Company issued 616,666,667 sharesto concentrations of its common stock in connectioncredit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with private placements, pursuant to Section 4(a) (2) ofthree financial institutions. Deposits held with the Securities Act of 1933, as amended, raising gross proceeds of $170,000 and incurred finder’s fees infinancial institutions may exceed the amount of $17,000. The proceeds were usedinsurance provided by the Federal Deposit Insurance Corporation on such deposits, but may be redeemed upon demand. The Company as working capital.
Duringperforms periodic evaluations of the nine months ended March 31, 2015,relative credit standing of the financial institutions. With respect to accounts receivable, the Company issued 1.533 million sharesmonitors the credit quality of its common stock in connection with private placements pursuantcustomers as well as maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to Section 4(a) (2) of the Securities Act of 1933, as amended, raising gross proceeds of $550,000 and incurring finder’s fees of 50,000,000 shares of common stock and $34,500. The proceeds were used by the Company as working capital.make required payments.
Stock Based CompensationRevenue Risk
DuringAgreements which potentially subject the nineCompany to concentrations of revenue risk consist principally of one customer agreement. For the three months ended March 31, 2016, the Company issued 23,028,000 sharesSeptember 30, 2019 and 2018, this one customer accounted for 99% and 0% of common stock to employees valued at $7,804, based upon the closing trading priceour total revenue, respectively. At September 30, 2019 and 2018, this one customer accounted for each quarter end earned, the entire amount96% and 0% of which is included in selling and marketing expenses in the Condensed Consolidated Statements of Operations for that period. The Company during such period did not issue any common stock, warrants or options to officers.
During the nine months ended March 31, 2015, the Company issued 33,459,857 shares of common stock compensation to an employee valued at $17,955, based upon the closing trading price for each quarter end earned, the entire amount of which is included in selling and marketing expenses in the Condensed Consolidated Statements of Operations for that period. The Company during such period did not issue any common stock, warrants or options to officers.our total accounts receivable, respectively.
Other Short-Term Notes Cash and Cash Equivalents
Note Payable, Director
A DirectorFor purposes of balance sheet presentation and reporting of cash flows, the Company loaned the Company $90,000 in the fourth quarterconsiders all unrestricted demand deposits, money market funds and highly liquid debt instruments with an original maturity of fiscal year endedless than 90 days to be cash and cash equivalents. There were no cash equivalents at September 30, 2019 and June 30, 2015 and additionally, he advanced the Company $20,000 in the nine months ended March 31, 2016, net of repayments, together with $3,775 of accrued interest totaled $113,775 which was outstanding at March 31, 2016.2019.
MPHASE TECHNOLOGIES, INC.
Other Note payableNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
An unaffiliated shareholder advanced the Company $10,000 in September 2015 and $25,000 in December of 2015, totaling $35,000, which was converted into 175,000,000 shares of the Company’s common stock effective March 31, 2016.
Note Payable Finance Company
The Company Borrowed approximately $66,000 under two advances commencing January 2016, with scheduled repayments of approximately $87,500 originally due through July 2016, incurring $19,527 of finance charges which are included in interest expense during the nine months ended March 31, 2016. At March 31, 2016, $31851 remains outstanding under this note.(UNAUDITED)
Long Term Convertible Debentures / Debt DiscountNOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Receivable
The Company had five separate convertible debt arrangements with independent investors that were in effect at various times duringregularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the fiscal year endedlevel 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. At September 30, 2019 and June 30, 2015, three of which were still active as of March 31, 2016.
2019, the Company determined there was no requirement for an allowance for doubtful accounts.
DuringGoodwill and Intangible Assets
Goodwill is recorded when the nine months ended March 31, 2016,purchase price paid for an acquisition exceeds the Company incurred the conversion of $10,000 of Convertible Debt and Accrued Interest thereon relating to the forbearance agreement and a $35,000 Demand note into 62,500,000 and 175,000,000 shares respectively, or a total of 237,500,000 shares;fair value of the Company’s Common stock.
The following table summarizes notes payable under convertible debtnet identified tangible and debenture agreements as of:
| March 31, | June 30, | |||||||
| 2016 | 2015 | |||||||
| (unaudited) | ||||||||
| Arrangement #3 - JMJ Financial, Inc | $ | 802,060 | $ | 802,060 | ||||
| Arrangement #4 - St. George Investments/Fife Forbearance Obligation | 807,083 | 902,253 | ||||||
| Arrangement #5 - MH Investment trust II | 3,333 | 3,333 | ||||||
| Total Convertible Notes payable | $ | 1,612,476 | $ | 1,707,646 | ||||
| Convertible Notes payable-short term portion | 1,612,476 | 355,479 | ||||||
| Convertible Notes payable-long term portion | $ | - | $ | 1,352,167 | ||||
Included in accrued expenses is $297,271 and $231,944 interest accrued on these notes at March 31, 2016 (unaudited) & June 30, 2015, respectively.
These transactions are intended to provide liquidity and capital to the Company and are summarized below.
Arrangement #1, #2 &, #3 (JMJ Financial, Inc.)
Arrangement #1
intangible assets acquired. The Company entered into a convertible note on November 17, 2009,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 received a total of $186,000 of proceeds in connection with a new financing agreement with JMJ Financial. This transaction consiststests goodwill for impairment by first comparing the fair value of the following: 1)reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a convertible note insecond step is performed to measure the amount of $1,200,000 plusimpairment loss. On June 30, 2020, 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 one-time interest factorfuture benefit derived from such assets and are stated at cost. Amortization is computed using the straight-line method over the estimated useful life of 12% ($144,000) and a maturity datethe asset, generally five years. As of September 23, 201230, 2019, and (2) a secured promissory note in the amount of $1,100,000 plus a one-time interest rate factor of 13.2% ($144,000 each) and a maturity date of September 23, 2012 due from the holder of the convertible note.
At June 30, 2012 this convertible note had $372,060 outstanding which2019, the book value of patents and licenses of $214,383, has been fully amortized and no amortization expense was combined with arrangement #3 JMJ Financial, Inc.recorded for the three months ended September 30, 2019 and 2018.
Arrangement #2
On December 15, 2009 the Company entered into a new financing agreement with JMJ Financial that consists of the following: 1) a convertible note issued by the Company in the amount of $1,500,000 plus a one-time interest factor of 12% ($180,000) and a maturity date of December15, 2012 and (2) a secured promissory note in the amount of $1,400,000 plus a one-time interest rate factor of 13.2% ($180,000) and a maturity date of December 15, 2012 due from the holder of the convertible note. To date the Company has received a total of $300,000 cash under this note and has issued no shares of common stock to the holder upon conversions.
The Company and the holder entered into a Forbearance Agreement amendment, as amended, and funding and conversions have not occurred since April 2011. As of June 30, 2012, this convertible note had $321,000 outstanding which was combined with arrangement #3 JMJ Financial, Inc.
Arrangement #3
On April 5, 2010, the Company entered into a new financing agreement with JMJ Financial that consists of the following: 1) a convertible note issued by the Company in the principal amount of $1,200,000 plus a one-time interest factor of 12% ($144,000) and a maturity date of December 15, 2012, and (2) a secured promissory note from the holder of the convertible note in the amount of $1,100,000 plus a one-time interest rate factor of 13.2% ($144,000 each) and a maturity date of December 15, 2012. To date the Company has received a total of $100,000 cash under this note and has issued no shares of common stock to the holder upon conversions. The remaining $1,144,000 of cash to be received from the holder plus accrued and unpaid interest is convertible into shares of common stock at the option of the holder.
During the year ended June 30, 2012 the Company reduced the debt discount for this note by $91,000 to $9,000, and as a result $109,000 was combined with Arrangements 1&2 for a total of $ 802,060 principle due from the combined notes payable, with a revised interest rate of 9%, to JMJ.
As of June 30, 2015, and as of March 31, 2016, the combined arrangements with JMJ in this note would be convertible into 258,208,588 into 274,469,385 common shares at the conversion floor price of $.004; and would be required to do so if the Company does not make the scheduled payments pursuant to the June 1, 2012 amended agreement.
The Company has not made any payments of the $37,018 installment payments commencing October 1, 2012 and the holder has continued to accrue interest on the outstanding balance. At March 31, 2016 the amount recorded in Current Liabilities for all three convertible notes and accrued interest thereon previously issued to JMJ Financial was $1,097,877.
Arrangement #4 (John Fife dba St. George Investors)/Fife ForbearanceCapitalized Software Development Costs
The Company entered into an amended agreementfollows 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 June 1, 2012, when principleaccounting for the proceeds of $557,500 accrued interest of $66,338computer software originally developed or obtained for internal use and $95,611 of contractual charges for previous notes with John Fife totaled $719,449; whereby, the Company agreed to make payments of principle and interest of $33,238 per month commencing October 1, 2012 through September 1, 2014 at 8% interest and so long as the payments are not in default then no conversions into the Company’s common stock would be availablesubsequently sold to the holder.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.
On November 20, 2012, mPhase Technologies, Inc. (the “Company”) formally receivedCapitalized 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 Event of Defaultannual basis and Redemption Notice dated November 16, 2012 with respect to an 8% Convertible Note dated September 13, 2011 issued by the Company to St. George Investments LLC and assigned to John Fife. The notice included alleged defaults with respect to payments owed by the Company under the Convertible Note and the failure to convert the Note into shares of the Company’s common stock. The alleged amount owed according to the notice is approximately $902,279.
On December 15, 2014, a Memorandum Opinion and Order was issued by the United States District Court Northern District of Illinois Eastern Division granting the motion of John Fife, plaintiff (“Plaintiff”),tests for summary judgment against mPhase Technologies, Inc. (the “Company”) for breach of contract (the “Opinion”). All other claims and counterclaims were dismissed. The Company commenced settlement negotiations with the Plaintiff after we explored options with regard to an appeal and other alternatives, which there is no guarantee of success. As discussed in Note 7, effective February 10, 2015, the Company entered into a Forbearance Agreement with the Holder. The agreement provides that the Holder would forego his right to enforce its remedies pursuant to the judgment, which include demand for immediate payment of approximately $1.6 million, provided the Company satisfy its forbearance obligation of $1,003,943, and after accounting for a payment of $15,000 the Company paid, under the terms of the agreement.
The terms of the agreement, as amended, provide for interest to accrue on the unpaid portion at 9% per annum with monthly payments in cashimpairment whenever events or conversions into common stock of the Company; commencing with an initial $15,000 payment due on February 15, 2015, and thereafter and on or before the 15th day of each month thereafter the Company agrees to pay to Holder the following amounts ; $30,000.00 per month on each of the following dates: March 15, 2015, April 15, 2015, May 15, 2015, June 15, 2015, and July 15, 2015; $15,000.00 per month on each of the following dates: August 15, 2015 and September 15, 2015; $20,000.00 per month on each of the following dates: October 15, 2015, November 15, 2015, and December 15, 2015; $35,000.00 per month on each of the following dates: January 15, 2016 and February 15, 2016 and March 15, 2016; and $50,000.00 per month thereafter until the Forbearance Amount has been paid in full. The Company has been able to meet its monthly payment obligations through November, 2015.
The value of the forbearance debt obligation on June 30, 2015 is $902,253. At June 30, 2015, given the changes in circumstances occur that could impact the Company’s stock price during the 20 day look-back period for June 30, 2015, the estimated derivative liability had decreased to $232,423, a decrease from June 30, 2014recoverability of $548,906 totaling $316,493, which when added to the $18,469 increase at the time the forbearance agreement resulted in a non-cash credit to earnings of $334,962 for the year ended June 30, 2015. The Forbearance agreement requires the Company to place, and the Company has done so, 1,000,000,000 shares in reserve with its transfer agent, to satisfy the conversion provisions for any unpaid monthly cash payments. The original agreement also provided that the Company file a Proxy statement before June 1, 2015 should additional shares be needed for the conversion reserve. The Company has not filed such a proxy statement due to cost prohibitions. The Company had not issued any stock for conversions since entering into the forbearance agreement and during the year ended June 30, 2015 and has made cash payments repaying $69,081 of principle and $41,019 of interest under the agreement. During the nine months ended March 31, 2016 the Company repaid $95,170 of principle and $54,830 of interest under the agreement, which included a non-cash conversion of 62,500,000 shares of the Company’s common stock valued at $10,080 of which $3,907 represented accrued interest and $6,093 represented principle. The value of the forbearance debt obligation on March 31, 2016 is $807,083.
As of August 11, 2015 the Company entered into an Amendment No. 1 with Fife to the Forbearance Agreement rescheduling the monthly payment schedulesthese assets.
At December 31, 2015,September 30, 2019, the derivative liability was estimated to be $716,543,book value of purchased and developed technology of $2,963,204, included two technology platforms, a machine learning platform and an increase of $484,120 from $232,423, the balance as of our last fiscal year end, creating a charge to expense of a like amount during the six months then ended.
As of January 19, 2016 the Company entered into a Second Amendment to the Forbearance Agreement again rescheduling certain of the monthly payments.
As of March 31, 2016 the derivative liability was estimated to be $207,957, a decrease of $508,586 forartificial intelligence platform. For the three months ended March 31, 2016 resulting in a net credit for the three months period of that amountSeptember 30, 2019 and a $24,467 net credit for the nine months ended March 31, 2016.
As of March 31, 2016 this forbearance obligation, as amended, would only be convertible for monthly obligations the Company elects to/or does not pay in cash in part or in full, for: (i) up to281, 250,000 shares, for the satisfaction of the next required monthly payment, (ii) up to 2,824,375,000 shares, for the satisfaction of the next 12 required monthly payments;2018, amortization expense was $242,139 and (iii) up to 5,044,264,869 shares of our common stock should the entire obligation be converted.
On August 18, 2017 the Company entered into a Judgment Settlement Agreement with John Fife with respect to the Judgment in favor of Fife, which reduces the balance under the amended agreement to $360, 000, without conversion rights, in connection with the default by the Company under a Convertible Debenture dated September 13, 2011.$0, respectively.
Arrangement #5 (MH Investment trust II)
On August 26, 2014, the Company issued to the MH Investment Trust. a Convertible Note in a Private Placement pursuant to Section 4(2)Fair Value of the Securities Act of 1933 in which the Company received $40,000 in gross proceeds on September 1, 2014. The instrument is in the principal amount of $40,000 and matures on May 1, 2015. Interest only is payable at the rate of 12% per annum by the Company to the holder until maturity. The instrument is convertible into the Company’s common stock at 60% of the volume weight average price of the stock based upon the average of the three lowest trading days in the 10 day trading period immediately preceding such conversion, or 65 % when the trading price exceeds $.0020 for the five days before such conversion. All proceeds received in connection with the above financing have been used by the Company as working capital.
At the time of the transaction, the estimated derivative liability of this security and the warrant was calculated to be $37,778 and the company recorded a loan discount of the same amount. During the year ended June 30, 2015 the Company amortized $37,778 to loan discount expense and the unamortized loan discount was reduced to $0. As of June 30, 2015, which given the changes in the Company’s stock price during the 10 day look-back period for this date the estimated liability had decreased to $3,002, a decrease for this period of $34,776 and creating a non-cash credit to earnings of that amount. Based upon the price of the Company’s common stock and partial principle payments during the year ended June 30, 2015 of $36,667; on June 30, 2015 this Note is convertible into approximately 25,016,667 shares of common stock. As of March 31, 2016, which given the changes in the Company’s stock price during the 10 day look-back period for this date the estimated liability had increased to $7,396, an increase for this period of $4,394 and creating a non-cash charge to earnings of that amount during the nine months ended March 31, 2016. At March 31, 2026 the note balance was $3,333 and accrued interest of $1,597, at 12%, remained due under this agreement. Based upon the price of the Company’s common stock on March 31, 2016 this Note is convertible into approximately 41,086,385 shares of common stock.
EQUITY LINE OF CREDITFinancial Instruments
The Company entered a $10,000,000 equity line of Credit with Dutchess Opportunity Fund II, LLC in December of 2011. Underaccounts for the equity line, the Company is eligible to “PUT” to the fund, 20,000,000 shares of its common stock during any pricing period. The Company had registered a total of 250,000,000 shares of its common stock on a Form S-1 Registration Statement with the Securities and Exchange Commission that was declared effective on January 17, 2012 relating to the Dutchess Equity Line.
Through June 30, 2014, the Company has received $227,744 of proceeds under the Equity Line relating to the resale of 135,990,000 shares of the Company’s common stock, net of $22,920 transaction fees. No proceeds under this line were received in the year ended June 30, 2015.
As of February 13, 2015, the Equity line of Credit expired, and the Company may no longer draw any funds under such equity line.
RESERVED SHARES
The Forbearance agreement connected with arrangement #4 above requires the Company to place, and the Company has done so, 1,000,000,000 shares in reserve with its transfer agent, to satisfy the conversion provisions for any unpaid monthly cash payments. During the nine months ended March 31, 2016, 62,500,000 shares were issued upon conversion of $10,000 of monthly payments as requested by holder and 937,500,000 shares remained in reserve for conversion under this agreement at March 31, 2016. Through August 31, 2016, the remaining 937,500,000 shares from this reserve have been issued to satisfy the conversion of $150,000 of scheduled payments due under the forbearance agreement through that date.
During the Fiscal Year Ended June 30, 2014 the Company advanced 40,000,000 shares distributable under the Equity Line of Credit discussed above, of which 3,990 shares of the Company’s common stock were resold and 36,010,000 shares were unsold when the agreement expired in February 2015, and remain subject to be returned to the Company’s treasury for cancellation.
COMMITMENTS
Our corporate headquarters had been located in Clifton, New Jersey since August 15, 2014., The Company initially rented the Clifton premise under a one year lease with monthly rent of $4,020, which was renewed with monthly rent of $4,132 per month through July, 2016, when this lease terminated by mutual agreement with landlord. The Company cancelled its security deposit and no amounts remain due under the agreement.
The Company had leased a warehouse and limited office space in Norwalk, Connecticut, commencing in April of 2015 with a monthly rental of $2,200 per month. The Company vacated the Norwalk premise in April 2016 and the Company moved its warehouse contents, primarily inventory and associated shipping materials of its mPower battery products into the Clifton premise. The Company has $22,000 of unpaid rent in accounts payable at March 31, 2016.
Presently the Company has relocated its office, which includes modest office space, limited storage and utilities, to 688 New Dorp Lane, Staten Island, New York, on May 1, 2017, the rental terms included a three-month commitment; renewable 3 months at a time, with monthly rent of $400.
The Company entered into a conditional lease for a production facility located in Passaic, New Jersey, the commencement of which was contingent upon the Company obtaining funding from investors pursuant to an economic development program within governmental guidelines. During the six months ended December 31, 2015 the Company canceled this lease and received the deposit.
CONTINGENCIES
The Company had been in litigation with John Fife with respect to a Convertible Note originally issued on September 13, 2011 in the principal amount of $557,000. Fife sought damages on a Motion for Summary Judgment in the amount in excess of $1,300,000 attorney’s fees. On December 15, 2014 the federal district court in the North East District of Illinois found in favor of Fife on a motion for Summary Judgment. The Company has entered into a Forbearance Agreement with Fife as a result of negotiations to settle such Judgment.
Thefair value of the forbearance obligation on March 31, 2016 is $807,083 (See Note 3). At March 31, 2016, the derivative liability was estimated to be $207,957, and as such a total of $1,015,040 liabilities have been recordedfinancial instruments in the unaudited condensed consolidated financial statements to reflect this obligation, $807,083 which is included in current liabilities and $207,957 non-current. The value of the judgment totaled approximately $1.6 million as of December 31, 2014 and bears a punitive interest rate of 16%, and would become payable in full if the Company defaults under the forbearance obligation reduced by payments under the Forbearance Agreement, which through March 31, 2016 totals $204,150 or approximately, 1.4 million. Through March 31, 2016 the Company has not defaulted under the agreement. The Forbearance agreement requires the Company to place, and the Company has done so, 1,000,000,000 shares in reserveaccordance with its transfer agent, to satisfy the conversion provisions for any unpaid monthly cash payments, which through March 31, 2016, 62,500,000 shares from this reserve have been issued to satisfy the conversion provisions.
As of March 31, 2016, this forbearance obligation would only be convertible for monthly obligations the Company elects to/or does not pay in cash in part or in full, for: (i) up to 281,250,000 shares, for the satisfaction of the next required monthly payment, (ii) up to 2,825,375,000 shares, for the satisfaction of the next 12 required monthly payments; and (iii) up to 5,044,264,869 shares of our common stock should the entire obligation be converted.
Effective July 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820-10-20, FairASC topic 820, “Fair Value Measurements and Disclosures” (ASC 820), which provides a framework for measuring fair value under GAAP.formerly SFAS No. 157 “Fair Value Measurements”. ASC 820-10-20820 defines fair value“fair value” as the exchange 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 820-10-20 requires820 also describes three levels of inputs that valuation techniques maximize the use of observablemay be used to measure fair value:
Level 1: Observable inputs and minimize the use of unobservable inputs. ASC 820-10-20 also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels. Financial assets and liabilities valued using level 1 inputs are based onthat reflect unadjusted quoted market prices within active markets. Financial assets and liabilities valued using level 2 inputs are based primarily on 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, due from affiliates, accounts payable, accrued liabilities, due to related parties, and other current liabilities. 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. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Revenue is derived from the sale of artificial intelligence and machine learning focused technology products. 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 6).
Share-Based Compensation
The Company computes share based payments in accordance with ASC 718-10, Compensation (“ASC 718-10”) and Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment No. 107 (“SAB 107”). The Company has applied the provisions of SAB 107 in its adoption of ASC 718-10. The Company accounts for non-employee share-based awards in accordance with ASC Topic 505-50, Equity Based Payments to Non-Employees. 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 activethe balance sheet and are measured at fair values with gains or inactive markets. For certain long-term debt,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 wasof derivative instruments and hybrid instruments based on present valueavailable 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 using inputs derived principally or corroborated from(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 data. Financial assetsrisks that it embodies and liabilities using level 3 inputs were primarily valued using management’s assumptions about the assumptionsexpected 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 participants would utilizefactors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in pricing the asset or liability. Valuation techniques utilized to determinetrading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair value are consistently applied.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.
mPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(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, 2019, 2018, 2017, and 2016 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 tax years ended June 30, 2019 and 2018.
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. Therefore, basic and diluted EPS are computed using the same number of weighted average shares for the three months ended September 30, 2019 and 2018, as we incurred a net loss for those periods. At September 30, 2019, there were outstanding warrants to purchase up to approximately 25,000,000 shares of the Company’s common stock, approximately 45,000 shares of the Company’s common stock to be issued, and notes payable held by third parties with convertible features that if converted, would total approximately 690,000 shares of the Company’s common stock, which may dilute future EPS. At September 30, 2018, there were notes payable held by third parties and officers and directors, with convertible features that if converted, would total approximately 2,500,000 shares of the Company’s common stock, which may dilute future EPS.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Adopted Accounting Standards
Effective July 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU 2016-02”). The standard amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842, which amends certain aspects of the new lease standard. The Company determined the adoption of ASU 2016-02 did not have a material impact on its consolidated financial statements.
Effective July 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-11, Update to Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU makes limited changes to the guidance on classifying certain financial instruments as either liabilities or equity. The ASU is intended to improve (1) the accounting for instruments with “down-round” provisions and (2) the readability of the guidance in ASC 480 on distinguishing liabilities from equity by replacing the indefinite deferral of certain pending content with scope exceptions. The Company determined the adoption of ASU 2017-11 did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, to modify 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 standard is effective for the Company as of July 1, 2020, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, to modify 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 standard is effective for the Company as of July 1, 2020, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact 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 consolidated financial statements.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 4: BUSINESS ACQUISITION
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.
The goodwill of $6,020 arising from the acquisition consists largely of the synergies expected from combining the operations of the Company and Alpha Predictions.
The following table belowsummarizes the consideration paid for Alpha Predictions and the fair values of the assets acquired and liabilities assumed recognized at the acquisition date.
| Consideration | ||||
| Cash | $ | 1,438 | ||
| Fair value of total consideration transferred | 1,438 | |||
| Recognized amounts of identifiable assets acquired and liabilities assumed | ||||
| Cash | 3,127 | |||
| Accounts receivable | 26,155 | |||
| Prepaid expenses | 7,488 | |||
| Property and equipment | 11,048 | |||
| Intangible asset – purchased software | 2,905,668 | |||
| Accounts payable | (26,067 | ) | ||
| Accrued expenses and other current liabilities | (2,924,288 | ) | ||
| Income tax provision, current | (7,713 | ) | ||
| Total identifiable net assets | (4,582 | ) | ||
| Goodwill | $ | 6,020 |
The Company is currently evaluating the fair values of the assets acquired and liabilities assumed. The preliminary estimates and measurements are, therefore, subject to change during the measurement period. The acquired intangible asset – purchased software was recognized at fair value as of the acquisition date. It is provisionally subject to a useful life of 3 years, pending further evaluation of the underlying software.
The fair value of the one-percent noncontrolling interest in Alpha Predictions was determined to be immaterial, based on extrapolation of the price paid by the Company for its controlling interest and consideration of any potential control premiums.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 5: INTANGIBLE ASSET – PURCHASED SOFTWARE, NET
Intangible asset – Purchased Software, net, is comprised of the following at:
| September 30, | June 30, | |||||||
| 2019 | 2019 | |||||||
| Purchased software | $ | 2,963,204 | $ | 3,025,801 | ||||
| Less: accumulated amortization | (242,139 | ) | - | |||||
| Purchased software, net | $ | 2,721,065 | $ | 3,025,801 | ||||
Intangible asset – Purchased Software consists of the following two software technologies:
| Alpha Predictions purchased software | $ | 2,843,175 | ||
| Travel Buddhi purchased software | 120,029 | |||
| Total purchased software | $ | 2,963,204 |
The Alpha Predictions purchased software was acquired as further described in Note 4. The Travel Buddhi purchased software was acquired on February 15, 2019, for $115,281 and included all rights, software, and code of the technology platform. During the fiscal year ended June 30, 2019, $55,000 of the Travel Buddhi purchase price was paid and $60,281 remained outstanding. At September 30, 2019, the Travel Buddhi technology platform has not been placed in service, but is expected to be during fiscal year 2020.
Purchased software costs are amortized on a straight-line basis over three years. Amortization of purchased software costs are included in depreciation and amortization within the consolidated statements of operations.
For the three months ended September 30, 2019, amortization expense was $242,139. There was no amortization expense related to purchased software for the three months ended September 30, 2018.
Future amortization expense related to the existing net carrying amount of purchased software at September 30, 2019 is expected to be as follows:
| Remainder of fiscal year 2020 | $ | 739,381 | ||
| Fiscal year 2021 | 985,841 | |||
| Fiscal year 2022 | 985,841 | |||
| Fiscal year 2023 | 10,002 | |||
| $ | 2,721,065 |
| 16 |
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 6: REVENUE FROM CONTRACTS WITH CUSTOMERS
The following table presents our revenue disaggregated by category within our single reporting segment:
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2019 | 2018 | |||||||
| Subscription | $ | 6,125,957 | $ | - | ||||
| Service and support | 924,132 | - | ||||||
| Application development and implementation | 519,523 | - | ||||||
| Revenue | $ | 7,569,612 | $ | - | ||||
For the three months ended September 30, 2019, the Company was subject to revenue and accounts receivable concentration risk as one customer accounted for 99% and 96% of revenue and accounts receivable, 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.
Contract Liabilities
Contract liabilities include amounts billed to the customer in excess of revenue recognized and are presented as contract liabilities on the condensed consolidated balance sheets.
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 7: SHORT TERM NOTES PAYABLE
Short term notes payable is comprised of the following:
| September 30, | June 30, | |||||||
| 2019 | 2019 | |||||||
| Note payable, John Fife (dba St. George Investors) / Fife Forbearance[1] | $ | 820,181 | $ | 855,660 | ||||
| Total short-term notes payable | $ | 820,181 | $ | 855,660 | ||||
[1]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 is required to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 due and payable in March of 2020. The Company has made all payments required as of the date hereof. Failure to make any of the payments, when due, will result in the remaining liability balance of $550,181 (at September 30, 2019), to be immediately due and payable by the Company.
| 17 |
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 8:Convertible Debt Arrangements
JMJ Financial
At September 30, 2019 and June 30, 2019, the amount recorded in current liabilities for this one convertible note and accrued interest thereon due to JMJ Financial was $197,178 and $193,287, respectively. During the three months ended September 30, 2019 and 2018 the Company recorded $3,892 and $3,571, respectively of interest for the outstanding convertible note.
As of September 30, 2019 and June 30, 2019, the aggregate remaining amount of convertible securities held by JMJ could be converted into 9,859 and 9,664 shares, respectively, with a conversion price of $20.
Power Up Lending
On June 19, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Group (“Lender”) and issued an 8% convertible promissory note in the principal amount of $78,000 to the Lender with a maturity date of June 19, 2020. The Company received net proceeds in the amount of $45,800, with $25,000 refinancing a prior convertible promissory note due to the Lender that had been in default, $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note and $4,200 being paid to the Company’s Transfer Agent to satisfy an outstanding balance. 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 $103,161, deferred financing costs of $3,000 and debt discount of $75,000. 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 $78,000 and $1,761, respectively, at September 30, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30, 2019 was $22,011.
On July 30, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Group (“Lender”), and issued an 8% Convertible Promissory Note in the principal amount of $53,000 to the Lender with a maturity date of July 30, 2020. The Company received net proceeds in the amount of $50,000 as a result of $3,000 being paid to reimburse the Lender 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 $114,380, deferred financing costs of $3,000 and debt discount of $50,000. 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 $53,000 and $720, respectively, at September 30, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30, 2019 was $9,003.
On September 5, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Group (“Lender”), and issued an 8% Convertible Promissory Note in the principal amount of $53,000 to the Lender with a maturity date of September 5, 2020. On September 9, 2019, the Company received net proceeds in the amount of $46,800 as a result of $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note and $3,200 being paid to the Company’s Transfer Agent to satisfy an outstanding balance. 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 $104,860, deferred financing costs of $3,000 and debt discount of $50,000. 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 $53,000 and $290, respectively, at September 30, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30, 2019 was $3,630.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 8:Convertible Debt Arrangements (continued)
Platinum Point Capital and Jefferson Street Capital
On September 24, 2019, the Company entered into a Securities Purchase Agreement with accredited investors (“Lenders”), and issued 8% Convertible Promissory Notes in the principal amount of $124,200 (including an aggregate of $9,200 in original issue discounts) to the Lenders with maturity dates of September 24, 2020. On September 27, 2019, the Company received net proceeds in the amount of $112,000 as a result of $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Notes. 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 $208,335, original issue discount of $9,200, deferred financing costs of $3,000 and debt discount of $112,000. 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 $124,200 and $163, respectively, at September 30, 2019. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at September 30, 2019 was $2,042.
At September 30, 2019 and June 30, 2019, there was $308,200 and $78,000 of convertible notes payable outstanding, net of discounts of $271,515 and $75,649, respectively.
During the three months ended September 30, 2019 and 2018, amortization of original issue discount, deferred financing costs, and debt discount amounted to $34,335 and $0, respectively.
At September 30, 2019, the Company was in compliance with the terms of the Power Up Lending and Platinum Point Capital and Jefferson Street Capital convertible promissory notes.
NOTE 9: 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 for liabilitiesof the derivative liability measured at fair value on a recurring basis at March 31, 2016 and 2015:using significant unobservable inputs (Level 3) from June 30, 2018 to September 30, 2019:
| Fair Value Measurements | ||||||||
| Using Significant | ||||||||
| Unobservable Inputs | ||||||||
| (Level 3) | ||||||||
| Derivative Liability | ||||||||
| March 31, | March 31, | |||||||
| 2016 | 2015 | |||||||
| Balance at July 1, | $ | 235,425 | $ | 637,543 | ||||
| Increase (Decrease) in Derivative and associated liabilities | (20,072 | ) | (102,972 | ) | ||||
| Debt discounts | - | 37,778 | ||||||
| Balance at March 31, | $ | 215,353 | $ | 572,349 | ||||
| Conversion feature derivative liability | ||||
| June 30, 2018 | $ | - | ||
| Initial fair value of derivative liability recorded as debt discount | 75,000 | |||
| Initial fair value of derivative liability recorded as deferred financing costs | 3,000 | |||
| Initial fair value of derivative liability charged to other expense | 25,161 | |||
| Loss on change in fair value included in earnings | 30,508 | |||
| June 30, 2019 | $ | 133,669 | ||
| Initial fair value of derivative liability recorded as debt discount | 212,000 | |||
| Initial fair value of derivative liability charged to other expense | 215,575 | |||
| Gain on change in fair value included in earnings | (65,803 | ) | ||
| September 30, 2019 | $ | 495,441 | ||
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniquesNOTE 9: DERIVATIVE LIABILITY (continued)
Total derivative liability at September 30, 2019 and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination ofJune 30, 2019 amounted to $495,441 and $133,669, respectively. The change in fair value requires significant management judgment or estimation.
Someincluded in earnings of $65,803 is due in part to the quoted market price of the Company’s financial instruments are not measuredcommon stock decreasing from $0.85 at fair value on a recurring basis but are recordedJune 30, 2019 to $0.76 at amounts that approximate fair valueSeptember 30, 2019, coupled with substantially reduced conversion prices due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.the effect of “ratchet” provisions incorporated within the convertible notes payable.
We have determined that it is not practical to estimateThe Company used the fair value of our notes payable because of their unique nature and the costs that would be incurred to obtain an independent valuation. We do not have comparable outstanding debt on which to base an estimated current borrowing rate or other discount ratefollowing assumptions for purposes of estimatingdetermining the fair value of the notes payableconvertible instruments granted under the binomial pricing model with Binomial simulations at September 30, 2019:
| Expected volatility | 557.1% - 1,358.9 | % | ||
| Expected term | 8.62 months - 11.8 months | |||
| Risk-free interest rate | 1.75% - 1.79 | % | ||
| Stock price | $ | 0.76 |
NOTE 10: STOCKHOLDERS’ EQUITY
The total number of shares of all classes of stock that the Company shall have the authority to issue is 100,001,000 shares consisting of 100,000,000 shares of common stock, $0.01 par value per share, of which 12,363,732 are issued and weoutstanding and 44,899 are to be issued at September 30, 2019 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 at September 30, 2019.
Common Stock
Private Placements
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.
During the three months ended September 30, 2018, the Company received $10,000 of net proceeds from the issuance of 40,000 shares of common stock in private placements with accredited investors, incurring no finder’s fees.
Stock Award Payable
During the three months ended September 30, 2019, the Company did not been ableissue any shares of common stock to develop a valuation model that can be applied consistently in a cost efficient manner. These factors all contributeformer officers, outside directors, or strategic consultants.
During the three months ended September 30, 2018, three former officers of the Company, Mr. Biderman as an outside director, and certain strategic consultants, who provided services to the impracticabilityCompany, received a total of estimating1,150,000 shares of common stock, which were valued at $0.50 or $575,000, based on the fair valueclosing price of the notes payable. At March 31, 2016,Company’s common stock on September 24, 2018, and was included in accrued expenses at June 30, 2018.
Stock Based Compensation
During the carrying valuethree months ended September 30, 2019, the Company did not issue any common stock to employees or officers. During the three months ended September 30, 2019, the Company recorded $49,391 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.
During the three months ended September 30, 2018, the Company did not issue any common stock to employees or officers or record any stock-based compensation expense.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 10: STOCKHOLDERS’ EQUITY (continued)
Conversion of Debt Securities
During the three months ended September 30, 2019, there were no shares of common stock issued to related parties or strategic consultants who provided services to the Company.
During the three months ended September 30, 2018, former officers converted $538,777 accrued wages into 1,077,554 shares and $702,105 of notes payable and accrued interest into 1,404,210 shares and a director converted $186,000 of accrued fees into 372,000 shares and $126,364 of a note and accrued interest into 252,728 shares, of the Company’s common stock. Also, on September 24, 2018 accounts payable to strategic vendors totaling $99,500 were converted into 199,000 shares of common stock.
Reserved Shares
The convertible promissory notes entered into with Power Up Lending, Platinum Point Capital and Jefferson Street Capital require the Company to reserve 18,910,751 shares of its Common Stock for convertible agreementspotential future conversions under such instruments.
At September 30, 2019, 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.
Common Stock Warrants
Warrant Agreement – Earned Warrants
Mr. Bhatnagar, the Company’s President and CEO, is 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 is equal to $0.50 per share, and he may not receive Earned Warrants to the extent that the number of Signing Shares and Earned Warrants exceed 80% of the fully diluted common stock of the Company (“Warrant Cap”).
Warrant Agreement – Accelerated Warrants
Mr. Bhatnagar, the Company’s President and CEO, shall immediately receive the remaining amount of warrants necessary to acquire up to 80% of the outstanding fully diluted common stock of the Company (“Accelerated Warrants”) when either of the following occur:
| a) | the Company completes a stock or asset purchase of Scepter Commodities, LLC; or | |
| b) | the Company completes a stock or asset purchase of any other entity, either of which, in the aggregate, together with prior revenue increases achieved by the Company, results in the consolidated revenues of the Company being not less than $15,000,000; or | |
| c) | the Company grows a similar business organically within mPhase to include contracts generating revenues in excess of $15,000,000; or | |
| d) | the Company meets the listing requirements of either the NYSE or NASDAQ |
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 remains approximately 12,500,000 shares of the Company’s common stock that Mr. Bhatnagar can earn.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 10: STOCKHOLDERS’ EQUITY (continued)
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 remains approximately $6,232,000 of stock-based compensation expense that the Company expects to recognize over the next six months.
The Company estimates 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 uses 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 is 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 is 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:
| 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, 2019 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at September 30, 2019 | 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 | |||||||||||||||
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 10: STOCKHOLDERS’ EQUITY (continued)
Settlement and New Funding Share Reserves
The Company agreed to reserve a total of 3,000,000 shares of its common stock of which 532,040 shares of common stock were reserved for and issued concurrently for the conversion of 75% of outstanding accounts payables to officers’ notes was approximately $2.2 millionand a director (discussed below), 1,967,960 shares of common stock were reserved to reduce liabilities outstanding December 31, 2018 (“Settlement Reserve”), and 500,000 shares of common stock were reserved to fund continuing operations (“Funding Reserve”). At September 30, 2019, 1,225,949 shares of common stock remained available from the initial Settlement Reserve to settle prior liabilities and 185,063, shares of common stock remained available from the Funding Reserve to fund continuing operations.
| Settlement Reserve | Funding Reserve | |||||||
| Initial Shares of Common Stock to Establish Reserve | 1,967,960 | 500,000 | ||||||
| Shares issued concurrently to transition agreement for the conversion of 75% strategic vendors, outstanding December 31, 2018 | (61,200 | ) | - | |||||
| Shares available upon execution of the Transition Agreement dated January 11, 2019 | 1,906,760 | 500,000 | ||||||
| Shares issued subsequent to a “Change in Control” to accredited investors in private placements through September 30, 2019 | (680,811 | ) | (314,937 | ) | ||||
| Shares of Common Stock available at September 30, 2019 | 1,225,949 | 185,063 | ||||||
Prior Liabilities – Settlement Reserve
1,967,960 shares of the Company’s common stock have been reserved to settle the debts of the Company that were outstanding at December 31, 2018, in the following priority; the Judgement Settlement Agreement (formerly Fife forbearance Agreement), JMJ Financial, Inc., MH Investment Trust, Power Up Lending Ltd, as well as other liabilities satisfactory to the CEO of the Company and the Company (as per Section 2(a) of the Reserve Agreement concurrent with “Change in Control Agreements”, dated January 11, 2019). At September 30, 2019, 1,225,949 shares of common stock remain available under this reserve category.
Officer’s and Director’s – Conversion Share Reserve
532,040 shares of the Company’s common stock were reserved for the conversion of 75% of payables to officers’ and a director that were outstanding December 31, 2018, (as per Section 2(a) of the Reserve Agreement concurrent with “Change in Control Agreements”, dated January 11, 2019). All these shares were issued effective December 31, 2018 and no shares remain available under this reserve category.
Continuing Operations Share Reserve
500,000 shares of the Company’s common stock were reserved as per Section 2(c) to be sold at a price, not less than $0.25 per share in periodic Private Placements, (as per Section 2(a) of the Reserve Agreement concurrent with “Change in Control Agreements”, dated January 11, 2019). At September 30, 2019, 185,063 shares of common stock remain available under this reserve category.
Final Adjustment for Liabilities Eliminated by Settlement Reserve
On October 9, 2019, the Company and its CEO entered into Amendment No. 1 to the original Reserve Agreement dated January 11, 2019, to extend the date whereby the Company is able to eliminate the above-mentioned liabilities from July 11, 2019 to March 31, 2020. In the event the Company is not able to eliminate the above-mentioned liabilities, or the cost to do so requires more than the funding provided by the Warrant Cap pertaining to Warrants to be issued to Mr. Bhatnagar, the Settlement Reserve shares shall be increased by that number of shares at $0.25, which equals the amount of the remaining liabilities.
Series A Preferred Stock
On January 11, 2019, the Company issued 1,000 shares of Series A Preferred Stock to Mr. Bhatnagar as the Company’s new President and CEO, to effectuate voting control of the Company pursuant to the terms of the Transition Agreement. The JMJ convertible notes, whichSeries A Preferred shares were originally duerecorded at various timespar value, are not tradeable, and have a nominal liquidation value.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 11: RELATED PARTY TRANSACTIONS
Microphase Corporation
At September 30, 2019, 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, 2012, yield an interest rate of 12%, the Fife Forbearance obligation is 9%. Refer to Note 3 of these unaudited condensed consolidated financial statements for more information about the Company’s notes payable as of March 31, 2016. 2015.
MICROPHASE CORPORATIONFormer Director
mPhase’s President was also an officer and shareholderOn September 24, 2018, a former outside director converted $126,364 of Microphase and mPhase’s Chief Operating Officer was also an employeehis note payable into 252,728 shares of Microphase. On May 1, 1997, the Company entered into an agreement with Microphase whereby it would use office space as well as the administrative services of Microphase, including the use of accounting personnel. This agreement was modified during subsequent period based upon Microphase involvement each year. As of July 1, 2011, the fees had been revised to $3,630 per month. In addition, Microphase also charged fees for specific projects on a project-by-project basis, providing the Company with limited services in our most recent fiscal years, primarily warranty repairs on our mPower product line and charges for delivery equipment. On April 15, 2015 the Company moved its Connecticut Office and no longer shares office space with Microphase.common stock.
During the ninethree months ended March 31, 2016September 30, 2019 and 2015,2018, the Company recorded $0 and $29,725 have been charged for rent and $4,500 and $15,327 have been charged for other expenses, respectively, to the Company by Microphase. As a result$1,831 of the foregoing transactions, as of March 31, 2016, the Company owed $32,945 to Microphase.
Mr. Durando was Microphase’s Chief Operating Officer since May 1, 1995 and a Director since March 31, 2010.
Mr. Durando resigned as both an Officer and Director of Microphase Corporation on January 2, 2015. On February 9, 2015 Mr. Durando assigned all his interests in the Capital Stock of Microphase for a period of not less than three years RCKJ Trust as the Grantor. The beneficial owners for economic purposes are Mr. Durando’s children. Mr. Durando was a strategic employee of Microphase Corporation from January 2, 2015 through May 31, of 2017. On June 2, 2017 the RCKJ Trust exchanged all its shares of stock in Microphase in exchange for shares of stock in Digital Power Corporation, a publicly-held company then listed on the New York Stock exchange.accrued interest.
OTHER RELATED PARTIES
A director of the Company, was employed until September 30, 2003 by our former investment-banking firm Lipper & Company. On March 31, 2016, The Director’s affiliated firms of Palladium Capital Advisors and Eagle Strategic Advisers were owed unpaid finders’ fees in the amount of $177,000, which is included in due to related parties. Also The Director loaned the Company $90,000 in the fourth quarter of the fiscal year ended June 30, 2015 and additionally, he advanced the Company $20,000 in the nine months ended March 31, 2016, net of repayments, together with $3,775 accrued interest and $113,775 remains outstanding as of March 31, 2016.
Transactions withTransactions With Officers
At various points during past fiscal years certain officers and former officers of the Messrs. Durando, Dotoli and SmileyCompany 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 demanddemand. During the three months ended September 30, 2019 and summarized in2018, the tables below.officers and former officers advanced $20,952 and $42,531 to provide working capital to the Company and $11,137 and $563 has been charged for interest on loans from officers and former officers.
At September 30, 2019 and June 30, 2019, these outstanding notes including accrued interest totaled $78,095 and $58,165, respectively. At September 30, 2019, these promissory notes are not convertible into shares of the Company’s common stock.
During the ninethree months ended March 31, 2016September 30, 2018, three former officers of the Company, transferredMr. Biderman as a fully-depreciated sales vehicleformer outside director, and certain strategic consultants, who provided services to its Chief Operating Officer, Gus Dotoli,the Company, received a total of 1,150,000 shares of common stock, which were valued at $18,000$0.50 or $575,000, based on the closing price of the Company’s common stock on September 24, 2018, and was included in accrued expenses at June 30, 2018.
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.
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.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 12: COMMITMENTS AND CONTINGENCIES
Commitments
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.
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 10).
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 is required to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 due and payable in March of 2020. The Company has made all payments required as partial repayment of his Officer’s loan. Includedthe date hereof. Failure to make any of the payments, when due, will result in Other Income is $18,000 recordedthe remaining liability balance of $550,181 (at September 30, 2019), to be immediately due and payable by the Company (see Note 7).
Should the Company satisfy the liability as described within the Judgement Settlement Agreement above, the Company would realize a gain on salesuch settlement of approximately $550,000.
Amounts Contingent upon Certain Terms of Change in Control Agreements Effective January 11, 2019
To the extent Company does not eliminate the certain liabilities within six months of the effective date, the Warrant Cap for warrants issued to Mr. Bhatnagar shall increase by such number of shares at a price of $0.25 per share to equal the amount of the remaining liability.
The Change inControl Agreements, effective January 11, 2019, also have certain provisions that may accelerate the warrant “earn out” formula contained in the Transition Agreement.
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 13: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, 2019 and 2018.
The assets and liabilities associated with discontinued operations included in our consolidated balance sheets were as follows:
| September 30, 2019 | June 30, 2019 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||
| Cash | $ | - | $ | 132,520 | $ | 132,520 | $ | - | $ | 33,996 | $ | 33,996 | ||||||||||||
| Accounts receivable, net | - | 7,803,102 | 7,803,102 | - | 2,526,155 | 2,526,155 | ||||||||||||||||||
| Prepaid expenses | - | 2,209 | 2,209 | - | 8,820 | 8,820 | ||||||||||||||||||
| Total Current Assets | - | 7,937,831 | 7,937,831 | - | 2,568,971 | 2,568,971 | ||||||||||||||||||
| Property and equipment, net | - | 10,811 | 10,811 | - | 11,048 | 11,048 | ||||||||||||||||||
| Goodwill | - | 6,020 | 6,020 | - | 6,020 | 6,020 | ||||||||||||||||||
| Intangible asset - purchased software, net | - | 2,721,065 | 2,721,065 | - | 3,025,801 | 3,025,801 | ||||||||||||||||||
| Other assets | - | 6,239 | 6,239 | - | 3,058 | 3,058 | ||||||||||||||||||
| Total Assets | $ | - | $ | 10,681,966 | $ | 10,681,966 | $ | - | $ | 5,614,898 | $ | 5,614,898 | ||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||||||
| Accounts payable | $ | 82,795 | $ | 1,839,519 | $ | 1,922,314 | $ | 82,795 | $ | 366,274 | $ | 449,069 | ||||||||||||
| Accrued expenses | - | 6,743,814 | 6,743,814 | - | 3,368,801 | 3,368,801 | ||||||||||||||||||
| Contract liabilities | - | 53,783 | 53,783 | - | - | - | ||||||||||||||||||
| Due to related parties | - | 85,012 | 85,012 | - | 65,459 | 65,459 | ||||||||||||||||||
| Notes payable to officers | - | 25,628 | 25,628 | - | 25,251 | 25,251 | ||||||||||||||||||
| Convertible notes payable, net | - | 36,685 | 36,685 | - | 2,351 | 2,351 | ||||||||||||||||||
| Liabilities in arrears with convertible features | - | 109,000 | 109,000 | - | 109,000 | 109,000 | ||||||||||||||||||
| Liabilities in arrears - judgement settlement agreement (Note 7) | - | 820,181 | 820,181 | - | 855,660 | 855,660 | ||||||||||||||||||
| Derivative liability | - | 495,441 | 495,441 | - | 133,669 | 133,669 | ||||||||||||||||||
| Total Current Liabilities | $ | 82,795 | $ | 10,209,063 | $ | 10,291,858 | $ | 82,795 | $ | 4,926,465 | $ | 5,009,260 | ||||||||||||
MPHASE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
NOTE 13: DISCONTINUED OPERATIONS (continued)
For the three months ended September 30, 2019, there were no revenue or expenses associated with discontinued operations included in our consolidated statements of operations. For the three months ended September 30, 2018, the revenue and expenses associated with discontinued operations included in our consolidated statements of operations were as follows:
| For The Three Months Ended | ||||||||||||
| September 30, 2018 | ||||||||||||
| Discontinued | Continuing | Total | ||||||||||
| Revenue | $ | - | $ | - | $ | - | ||||||
| Cost of revenue | - | - | - | |||||||||
| Gross Profit | - | - | - | |||||||||
| Operating Expenses: | ||||||||||||
| Software development costs | - | - | - | |||||||||
| General and administrative | - | 63,827 | 63,827 | |||||||||
| Total Operating Expenses | - | 63,827 | 63,827 | |||||||||
| Operating loss | - | (63,827 | ) | (63,827 | ) | |||||||
| Other Income (Expense): | ||||||||||||
| Interest expense | (11,766 | ) | (122,052 | ) | (133,818 | ) | ||||||
| Total Other Income (Expense) | (11,766 | ) | (122,052 | ) | (133,818 | ) | ||||||
| Loss before income taxes | (11,766 | ) | (185,879 | ) | (197,645 | ) | ||||||
| Income taxes | - | - | - | |||||||||
| Net loss | $ | (11,766 | ) | $ | (185,879 | ) | $ | (197,645 | ) | |||
NOTE 14: SUBSEQUENT EVENTS
From October 1, 2019 through November 15, 2019, the Company issued 72,000 shares of its common stock to a number of related parties and strategic consultants in connection with such transfer bythe private placement memorandum and prior services provided to the Company. The shares issued were valued at $18,000.
Total compensationOn October 9, 2019, the Company issued 231,635 restricted shares of its common stock to its CFO which were granted on June 1, 2019 (the “Grant Date”), pursuant to the terms of an employment agreement with the Company. The restricted shares of common stock vest 25% on the six-month, 1 year, 2 year, and payables to related parties and to officers is summarized below:3 year anniversaries of the Grant Date.
Summary of compensationOn October 9, 2019, the Company and its CEO entered into Amendment No. 1 to related parties for the Nine Months Endedoriginal Reserve Agreement dated January 11, 2019, to extend the date whereby the Company is able to eliminate the above-mentioned liabilities from July 11, 2019 to March 31, 2016
| Durando | Dotoli | Smiley | Officers | K. Durando | Director | Microphase | Total | |||||||||||||||||||||||||
| Consulting / Salary | $ | 130,000 | $ | 62,000 | $ | 62,000 | $ | 254,000 | - | - | - | $ | 254,000 | |||||||||||||||||||
| Interest | $ | 15,929 | $ | 6,805 | $ | 5,131 | $ | 27,865 | - | - | - | $ | 27,865 | |||||||||||||||||||
| Rent | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Selling & marketing | - | - | - | - | $ | 50,000 | - | $ | 4,500 | $ | 54,500 | |||||||||||||||||||||
| Finders Fees | - | - | - | - | - | $ | 17,000 | - | $ | 17,000 | ||||||||||||||||||||||
| Total compensation for the Nine Months Ended March 31, 2016 | $ | 145,929 | $ | 68,805 | $ | 67,131 | $ | 281,865 | $ | 50,000 | $ | 17,000 | $ | 4,500 | $ | 353,365 | ||||||||||||||||
Summary of compensation to related parties for2020. To the Nine Months Endedextent the Company does not eliminate certain liabilities as set forth in the Reserve Agreement and the Transition Agreement by March 31, 20152020, the Warrant Cap for warrants issued to Mr. Bhatnagar shall increase by such number of shares (at a price of $0.25 per share) equal to the amount of the remaining liability.
ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Durando | Dotoli | Smiley | Officers | K. Durando | Director | Microphase | Total | |||||||||||||||||||||||||
| Consulting / Salary | $ | 150,000 | $ | 75,000 | $ | 75,000 | $ | 300,000 | $ | 300,000 | ||||||||||||||||||||||
| Interest | $ | 39,703 | $ | 26,609 | $ | 22,573 | $ | 88,885 | $ | 88,885 | ||||||||||||||||||||||
| Rent | - | $ | 29,725 | $ | 29,725 | |||||||||||||||||||||||||||
| Selling & marketing | - | $ | 54,000 | $ | 15,327 | $ | 69,327 | |||||||||||||||||||||||||
| Finders Fees | - | $ | 34,500 | $ | 34,500 | |||||||||||||||||||||||||||
| Total compensation for the Nine Months Ended March 31, 2015 | $ | 189,703 | $ | 101,609 | $ | 97,573 | $ | 388,885 | $ | 54,000 | $ | 34,500 | $ | 45,052 | $ | 522,437 | ||||||||||||||||
Summary of amounts payable to related parties as of March 31, 2016
| Total | ||||||||||||||||||||||||||||||||
| Notes | ||||||||||||||||||||||||||||||||
| Durando | Dotoli | Smiley | Payable-Officers | K. Durando | Director | Microphase | Total | |||||||||||||||||||||||||
| Notes Payable Officers & Director | $ | 306,793 | $ | 109,056 | $ | 8,800 | $ | 424,649 | - | $ | 113,775 | - | $ | 538,425 | ||||||||||||||||||
| Accrued Wages Officers/Accrued Fees | $ | 154,389 | $ | 75,194 | $ | 75,194 | - | $ | 22,000 | (i) | - | - | $ | 326,777 | (i) | |||||||||||||||||
| Due to Affiliates | - | - | - | - | - | $ | 177,000 | $ | 32,545 | $ | 209,545 | |||||||||||||||||||||
| Interest Payable | $ | 41,240 | $ | 17,548 | $ | 98,748 | $ | 157,536 | - | - | - | $ | 157,536 | |||||||||||||||||||
| Total Payable to Officers / Affiliates as of March 31, 2016 | $ | 502,423 | $ | 201,797 | $ | 182,742 | $ | 582,185 | $ | 22,000 | $ | 290,775 | ** | $ | 32,545 | $ | 1,232,282 | |||||||||||||||
Summary of payables to related parties as of June 30, 2015
| Total Notes | ||||||||||||||||||||||||||||
| Durando | Dotoli | Smiley | Payable-Officers | Director | Microphase | Total | ||||||||||||||||||||||
| Notes Payable Officers & Director | $ | 283,565 | $ | 115,915 | $ | 5,000 | $ | 404,480 | $ | 90,000 | - | $ | 494,480 | |||||||||||||||
| Accrued Wages Officers | $ | 29,167 | $ | 14,583 | $ | 14,583 | - | - | $ | 58,333 | (i) | |||||||||||||||||
| Due to Affiliates | - | - | - | - | $ | 160,000 | $ | 28,045 | $ | 188,045 | ||||||||||||||||||
| Interest Payable | $ | 25,311 | $ | 10,743 | $ | 93,617 | $ | 129,671 | - | - | $ | 129,671 | ||||||||||||||||
| Total Payable to Officers / Affiliates as of June 30, 2015 | $ | 338,043 | $ | 141,241 | $ | 113,200 | $ | 534,151 | $ | 250,000 | $ | 28,045 | $ | 870,529 | ||||||||||||||
The following is management’s discussion and analysis of certain significant factors which have affected mPhase’s financial position and should be read in conjunction with the accompanyingattached unaudited consolidated financial statements and notes thereto, and our audited consolidated financial data,statements and related notes for our fiscal year ended June 30, 2019 found in our Annual Report on Form 10-K filed with the related notes.Securities and Exchange Commission (“SEC”) on October 15, 2019.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
Some of the statements contained in or incorporated by reference in this Form 10-Q discuss the Company’s plans and strategies for its business or state other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995. The words "anticipate," "believe," "estimate," "expect," "plan," "intend," "should," "seek," "will," and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements include, among others, statements concerning the Company’s expectations regarding its working capital requirements, gross margin, results of operations, business, growth prospects, competition and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to risks and uncertainties that could cause actual results to differ materially from those results expressed in or implied by the statements contained herein.
RESULTS OF OPERATIONS OVERVIEW
mPhase, a New Jersey corporation founded in 1996, is a publicly-held company with over 23,000 shareholders and approximately 16,819,183,048 shares of common stock outstanding as of March 31, 2016. The Company’s common stock is traded on the Over the Counter Bulletin Board under the ticker symbol XDSL. As of April 15, 2015, we are headquartered in Clifton, New -Jersey. Previously mPhase shared common office space in Norwalk Connecticut with Microphase Corporation, a privately held company. Microphase is a leader in the field of radio frequency and filtering technologies within the defense and telecommunications industry. It has been in operation for over 50 years and supports mPhase with both engineering and administrative and financial resources as needed.
mPhase is a company specializing in microfluidics, microelectromechanical systems (MEMS) and nanotechnology. mPhase is subject to availability of additional financing, seeking commercializing its first nanotechnology-enabled product for military and commercial applications - The Smart NanoBattery providing Power On Command™. The new patented and patent pending battery technology, based on the phenomenon of electrowetting, offers a unique way to store energy and manage power. Features of the Smart NanoBattery include potentially infinite shelf life, environmentally friendly design, fast ramp to power, programmable control, and direct integration with microelectronic devices.
The platform technology behind the Smart NanoBattery is a porous nanostructured material used to repel and precisely control the flow of liquids. The material has a Smart Surface that can potentially be designed for other product applications including medical oxygen generation, hot/cold packs and emergency lighting.
mPhase has completed a Phase II Small Business Technology Transfer Program (STTR) grant, part of the Small Business Innovation Research (SBIR) program, with the U.S. Army for continued development of a reserve Smart NanoBattery for a critical computer memory application.
Since our inception in 1996, operating activities have related primarily to research and development, establishing third-party manufacturing relationships and developing product brand recognition, and since July 1, 2007, we have focused primarily upon development of our smart reserve battery and other battery and illuminator products.
Description of Operations Microfluidics, MEMS, and Nanotechnology
In February of 2004, mPhase entered the business of developing new products based on materials whose properties and behavior are controlled at the micrometer and nanometer scales. (For reference, a micrometer or micron is equal one millionth (10 -6) of a meter and a nanometer is one billionth (10 -9) of a meter – the scale of atoms and molecules. A human hair is approximately 50 microns in diameter, or 50,000 nanometers thick.) The Company has expertise and capabilities in microfluidics, microelectromechanical systems (MEMS), and nanotechnology. Microfluidics refers to the behavior, precise control and manipulation of fluids that are geometrically constrained to a small, typically micrometer scale. MEMS is the integration of mechanical elements, sensors, actuators, and electronics on a common silicon substrate through microfabrication technology. Nanotechnology is the creation of functional materials, devices and systems through control of matter (atoms and molecules) on the nanometer length scale (1-100 nanometers), and exploitation of novel phenomena and properties (physical, chemical, biological, mechanical, electrical) at that length scale. In its Smart NanoBattery, mPhase exploits the physical phenomenon of electrowetting by which a voltage is used to change the wetting properties of a liquid/solid interface at the nanometer scale. Consider water as the liquid. Through electrowetting, mPhase can change a surface from what is referred to as a hydrophobic ("water fearing") state to a hydrophilic ("water loving") state. In the hydrophobic state, the water beads up or is repelled by the surface. In the hydrophilic state, the water spreads out or is absorbed by the surface. The ability to electronically control the wetting characteristics of a surface at the nanometer scale forms the basis of mPhase’s nanotechnology operations and intellectual property portfolio.
In the Smart NanoBattery application, mPhase uses electrowetting as a new technique to activate or literally "turn on" a battery once it is ready to be used for the first time. At the heart of the Smart NanoBattery is a porous, nanostructured superhydrophic or superlyophobic membrane designed and fabricated by mPhase. The so-called superhydrophobic membrane applies to water and the superlyophobic membrane applies to nonaqueous or organic liquids such as ethanol or mineral oil. The difference between the two membrane types lies in the nanoscale architecture at the surface. By virtue of its superhydrophobic or superlyophobic character, the membrane, although porous, is able to physically separate the liquid electrolyte from the solid electrodes so that the battery remains dormant or inactive, thus providing no voltage or current until called upon. This electrolyte-electrode separation gives the battery the feature of potentially unlimited shelf life and the benefit of being always ready when needed, which is not necessarily the case for conventional batteries. Electrowetting alters the liquid/membrane interface so that the liquid is now able to flow over the membrane’s surface and rapidly move through the pores where it is able to contact the solid electrode materials located on the other side of the membrane.
mPhase uses MEMS to precisely control the machining of silicon-based materials at the micrometer and nanometer scales. This ability has led to the Company’s proprietary membrane design that controls the wetting and movement of liquids on a solid surface. mPhase uses micro fluidics to control the flow of liquid electrolyte through the porous membrane and this is also the basis for other possible applications such as self-cleaning surfaces, filtration and separation and liquid delivery systems.
History of Nanotechnology Operations Smart NanoBatteryOverview
mPhase Technologies, along with Bell Labs jointly conducted research from February 2004 through AprilInc., was incorporated in the state of 2007 that demonstrated controlNew Jersey in 1979 under the name Tecma Laboratory, Inc. and manipulation of fluids on superhydrophobichas subsequently operated under Tecma Laboratories, Inc., and superlyophobic surfacesLightpaths TP Technologies, Inc., until June 2, 1997 when the Company changed its name to createmPhase Technologies, Inc.
On January 11, 2019, the Company underwent a major change in management and control. The new type of battery or energy storage device with power management features obtained by controlling the wetting behavior of a liquid electrolyte on a solid surface. The scientific research conducted set the ground work for continued development of the Smart NanoBatteryCompany is positioning the Company to be a technology leader in artificial intelligence and formedmachine learning while enabling a path to commercialization of the technology for a broad range of market opportunities. During 2005 and 2006, the battery team tested modifications and enhancements to the internal design of the battery to optimize its power and energy density characteristics, as well as making engineering improvements that were essential in moving the battery from a zinc-based chemistry to amore rapid commercial lithium-based chemistry that can be manufactured on a large scale. The Company began its efforts by entering into a $1.2 million 12 month Development Agreement with the Bell Labs division of Alcatel/Lucent for exploratory research of control and manipulation of fluids on superhydrophobic surfaces to create power cells ( batteries) by controlling wetting behavior of an electrolyte on nanostructured electrode surfaces. The goal was to develop a major breakthrough in battery technology creating batteries with longer shelf lives as the result of no direct electrode contact (meaning no power drain prior to activation). The Company extended its development effort twice for an additional 2 years ending in March of 2007 and for two additional periods thereafter through July 31, 2007. During this time, the technical focus shifted from trying to separate the liquid electrolyte from nanostructured electrodes to developing a nanostructured membrane that could physically separate the liquid electrolyte from the solid electrodes.
mPhase also began working with the Rutgers University Energy Storage Research Group (ESRG) in July of 2005 to conduct contract research in advanced battery chemistries involving lithium. This work involved characterizing and testing materials that could be used in the mPhase battery. In July of 2007, the relationship shifted to a collaboration focused on developing a memory backup battery needed by the U.S. Army. The work was funded through a Phase I Small Business Technology Transfer Program (STTR) grant.
In July of 2007, mPhase formed a new wholly-owned subsidiary, Always Ready, Inc., to focus on the development of its nanotechnology products.patent portfolio and other intellectual property. The Company has used this subsidiary as a division of the Company in orderCompany’s goal is to develop increasing brand recognition ofgenerate significant revenue from its battery product. The Company decided in September of 2007 to transfer its development work out of Bell Labs (Alcatel/Lucent) in order to broaden its nanotechnology product commercialization efforts. Prior to such time mPhase was limited to development using zinc-based batteries since Bell Labs did not have facilities to handle lithium chemistry. mPhase continued to work with Rutgers ESRG that has facilities capable of handing lithium battery developmentartificial intelligence and also engaged in work with other companies to supply essential components, fabricate prototypes, and plan manufacturing approaches. These companies included a well-respected silicon foundry and battery manufacturer.
On October 19, 2007, the Company announced that in connection with the settlement and dismissal of a civil law suit originally filed on November 16, 2005 by the Securities and Exchange Commission in the Federal District Court in the District of Connecticut, the SEC issued a Cease and Desist Order and certain remedial sanctions against two officers of mPhase Technologies, Inc. The civil suit was filed against Packetport.com, Inc. a Nevada corporation, Microphase Corporation, a Connecticut corporation that provides administrative services to the Company and shares common management with the Company, and others. The two officers of the Company were Mr. Ronald A. Durando, President and Chief Executive Officer and Mr. Gustave T. Dotoli, the Chief Operating Officer. The civil suit by the SEC named as respondents Mr. Durando, Mr. Dotoli and others in connection with their activities as officers and directors of Packetport.com. The cease and desist order from the SEC found that (1) all parties had violated Section 5 of the Securities Act of 1933, as making unregistered offers or sales of Packetport.com common stock, (2) Mr. Durando and Mr. Dotoli had violated Section 16(a) of the Securities Exchange Act of 1934, as amended, and Rule 16(a) thereunder by failing to timely disclose the acquisition of their holdings on Form 3's, and (3) Mr. Durando had violated Section 13(d) of the Securities Exchange Act of 1934, as amended, for failing to disclose the acquisition of more than five percent of the stock of Packetport.com. Under the order Mr. Durando was required to disgorge $150,000 and Mr. Dotoli was required to disgorge $100,000. The Company was not named as a party to the civil suit. More information regarding the detailed terms of the settlement can be found in SEC release No 8858 dated October 18, 2007 promulgated under the Securities Act of 1933 and SEC Release No. 56672 dated October 18, 2007 promulgated pursuant to the Securities Exchange Act of 1934. Mr. Durando and Mr. Dotoli have continued to serve as officers and directors of the Company. Mr. Durando and Mr. Dotoli together with Microphase corporation and others, without admitting or denying the findings of the SEC, except as to jurisdiction and subject matter, have consented to the entry of the Order Instituting Cease and Desist Proceedings, Making Findings and Imposing a Cease and Desist Order and Remedial Sanctions pursuant to Section 8A of the Securities Exchange Act of 1933 and Section 21C of the Securities Exchange Act of 1934
In February of 2008, the Company announced that a prototype of its Smart NanoBattery was successfully deployed in a gun-fired test at the Aberdeen Proving Ground at Maryland. The test was conducted by the U.S. Army Armament Research and Development and Engineering Center (ARDEC) of Picatinny, New Jersey. The battery not only survived the harsh conditions of deployment at a gravitational force in excess of 45,000 g, but was also flawlessly activated in the process.
In March of 2008, mPhase announced that it had been invited to submit a proposal for a Phase II STTR grant based upon the successful work it had performed on the Phase I grant to develop a version of the Smart NanoBattey referred to as the multi-cell, micro-array reserve battery for a critical U.S. Army memory backup application. The Phase II grant in the gross amount of $750,000 (net $500,000) was granted to the Company in the middle of September of 2008. In March of 2008, the Company also announced the successful transfer to a commercial foundry of certain processes critical to the manufacturing of its Smart NanoBattery. This enabled fabrication of the porous membranes for the multi-cell, micro-array reserve battery mentioned above. The Company successfully manufactured nanostructured membranes at the foundry that are essential to commercial production of the battery. By achieving a series of delayed activations, the shelf-life and continuous run-time of such battery is increased to a period of time in excess of twenty years. In April of 2008, the Company announced that it had successfully activated its first Smart NanoBattery prototype by electrowetting using a hard-wired configuration and a remotely-activated device. Remote activation plays a key role in providing power to wireless sensors systems and RFID tags.
Also, in April of 2008, the Company announced that it had successfully produced its first lithium-based reserve battery with a soft or pouch package and breakable separator (in place of the electrowettable membrane) that relies on mechanical rather than electrical activation to provide Power On Command™. The Company believes that it is a significant milestone in moving from a low energy density zinc-based battery to a higher energy density lithium-based battery towards proving that the Smart NanoBattery will eventually be economically and commercially viable.
In fiscal years ended June 30, 2009 and June 30, 2011, the Company focused upon further development of its Smart Nano Battery under a Phase II STTR grant from the U.S. Army as a potential reserve battery for a back-up computer memory application for a weapons system. The Company has recently completed such Phase II Army grant. On November 12, of 2010, the Company announced that it had successfully triggered and activated its first functional multi-cell smart nano battery. Triggering and activation of the cells of the battery were achieved by using the technique ofelectrowetting or programmable triggering. Triggering was accomplished by applying a pulse of electrical energy to a porous, smart surface membrane located inside each cell in the battery causing the electrolyte to come in contact with the cell’s electrodes, creating the chemical reaction to produce voltage inside of the multi-cell battery. The multi-cell battery consists of a matrix of 12 individual cells populated with an electrode stack consisting of lithium and carbon monofluoride materials with each rated at 3.0 volts. Using a custom designed circuit board for testing, each of the cells in the battery were independently triggered and activated without affecting any of the non-activated cells in the multi-cell configuration. Each cell in the battery has a very long shelf-life prior to triggering.machine learning technologies.
On February 9, 2011,15, 2019, the Company announcedacquired Travel Buddhi, a software platform to enhance travel via ultra-customization tools that it had signedtailor a 3 year Cooperative Research and Development Agreement (CRADA) with the U.S. Army Armament Research, Development, and Engineering Center (ARDEC) at Picatinny, New Jersey, to continue to cooperatively test and evaluate the mPhase Smart NanoBattery, including new design features functionally appropriate for DoD based systems requiring portable power sources. The army researchers are evaluating the prototypes using the Army’s testing facilities at Picatinny Arsenalplanned trip experience in New Jersey in order to determine applicability of the technology to gun fired munitions and potentially to incorporate the technologies into research and development and other programs sponsored by Picatinny. The Research Agreement is supported by the Fuse & Precision Armaments Technology Directorate.
During fiscal year ended June 30, 2011, the Company completed work on its Phase II STTR grant for the U.S. army for a nano-reserve battery for a back-up computer memory application. In addition the Company engaged First Principals, Inc to perform an evaluation or each of its patents in order to identify a strategic partner whose products line will need the Company’s SmartNanoBattery as a compelling solution.
On March 6, 2012, the Company announced that it is exploring the printing of its Smart NanoBattery on grapheme and other new advanced materials. Graphene is a very strong material that has been described as the most conductive material known, making it a vast improvement over silicon. Graphene has the potential to lead to faster, cheaper and more flexible devices including power sources
On August 16, 2012, the Company announced that it had received a notice of allowance for a patent from the U.S. patent office for a reserve battery utility patent. The techniques described in the patent are for creating a battery system that is easily activated via a low energy mechanical force, thus allowing the reserve battery to be used in a wide variety of consumer related and non-consumer related electrical devices. The invention generally relates to a reserve battery, which includes a battery case having an electrolyte compartment at a first end and an electrode compartment at a second end, a first terminal having an external button connected to the case at the first end, and a second terminal connected to the case at the second end. A movable ampoule is movably positioned within the electrolyte compartment. A bias member is located within the case between the external button and the ampoule, and a porous cutter is positioned within the case between the electrodes and the ampoule and supported by an inverted U-shaped support structure. When an external force is applied to the external button, the bias member transfers an internal force to the ampoule to cause the ampoule to engage the cutter and allow the electrolyte to release thus activating the battery.
On August 23, 2012, the Company announced that, subject to the availability of sufficient funding, it will engage in further development of its SmartNanoBattery to make it rechargeable.
On September 13, 2012, the Company announced that it had received a notice of allowance of a new patent from the U.S. patent office for a modular device. The invention generally relates to a handheld, powered device containing at least one power module having at least one battery, wherein the power module is removable and separately connects to each of the load modules. The patent covers a modular device for providing multiple modular components that may be interchanged as desired. A system for providing a modular device for use in emergency or everyday applications and having a plurality of modular components that are interchangeable with one another depending on the particular desired use.
On October 26, 2012, the Company announced the development of a prototype of a new product “the mPower Jump” designed by Porsche Design Studio and Porsche Engineering as an automatic jump starter for a dead car battery. The device is portable, light in weight and small in size designed to fit in the glove compartment of most cars.
On January 24, 2013, the Company announced that it had received a notice of allowance from the U.S. patent office of a patent covering a device for fluid spreading and transport. The invention relates to a single porous substrate formed from a network of filaments wherein the network of filaments is comprised of a first plurality of filaments and a second plurality of filaments is exposed to a surface modification treatment and the second plurality of filaments is covered with a conformal coating. A wetting region comprised of the first plurality of filaments extends through a first portion of the porous substrate and is permeable to fluid transport and a non-wetting region comprised of the second plurality of filaments which is operable to switch between a wetting and non-wetting state by an electrical source coupled to the second plurality of filaments. The invention protects a porous substrate with integrated wetting and non-wetting regions and is a key patent win for the Company relative to the protection of its intellectual property in the area of micro fluid dynamics.
On January 30, 2013, the Company announced that it had received a patent from the U.S. patent office for a reserve battery system. The invention patented generally relates to a battery system that is easily activated via low mechanical force thus allowing a reserve battery to be used in a wide variety of consumer related and non-consumer related electrical devices.
On February 12, 2013, the Company announced that it has filed a United States Letter Patent application for a novel drug delivery system based on its Smart Surface technology. The drug delivery patent is based on mPhase's Smart Surface technology electronically or manually enabling the precise control of a fluid on a nano-structured surface. The drug delivery system generally relates to a drug delivery system for automatically dispensing a pre set dosage of a drug agent or medication.ways not previously available.
On June 18, 2013,30, 2019, the Company announcedacquired 99% of the outstanding common shares of Alpha Predictions LLP (“Alpha Predictions”). Alpha Predictions is an India-based technology company that it had receivedhas developed a suite of commercial data analysis products for use across multiple industries. The Company expects the Frost & Sullivan award foracquisition to result in synergies with its Innovative nano battery technology. Frost & Sullivan noted that the smart nanobattery is sustainable, cost-effective, easy to handle,other operating divisions, which will drive revenue growth and possesses a long shelf life, all of which clearly differentiate it from competing battery technologies. Frost & Sullivan further noted that this positions the technology to enhance the effectiveness of conventional batteries and encourage widespread use of reserve batteries.innovation.
On October 31, 2013, the Company announced that it had developed a cost–reduced version of its automotive battery jump starter product designed to appeal to the mass market. Critical Accounting Policies and Estimates
During the remainder of fiscal year ended June 30, 2014 the Company began to receive its first revenues from salesThe discussion and analysis of the JumpCompany’s financial condition and mini Jump automotive battery jump starter from the commercial wholesale and retail marketsresults 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.States of America (“US 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 October 15, 2019 are those that depend most heavily on these judgments and estimates. As of September 30, 2019, there had been no material changes to any of the critical accounting policies contained therein.
Emergency FlashlightResults of Operations
On December 5, 2008, mPhase Technologies, Inc. signed a contract with Porsche Design Gesellschaft m.b.H. in Austria (“Porsche Design’ Studio”),Three months ended September 30, 2019 compared to design a premium version of the AlwaysReady Emergency Flashlight. A pilot program that began in March of 2010 has resulted in the sale of approximately 84 emergency flashlights. The flashlight sold in the pilot program contained mPhase’s proprietary mechanically-activated lithium reserve battery. The battery contains a breakable barrier that separates the solid electrodes from the liquid electrolyte until the battery is manually activated. Unlike traditional batteries, the mPhase battery remains in an inert state with no leakage or self-discharge until activation. The mPhase battery is designed to have an almost infinite shelf life making it ideal for emergency lighting applications. The premium flashlight will be marketed as an accessory for automobile roadside emergency kits. The Company maintains a small inventory of this product, which it continues to sell but does not, at this time, consider it a core product.three months ended September 30, 2018
mPower Jump, mPower Mini Jump and mPower Jump Plus Products
During fiscal year ended June 30, 2014, the Company announced that it had commenced sales through its wholly-owned subsidiary mPower Technologies, Inc. of the mPower Jump, mPower Mini Jump and mPower Jump Plus products. Each product is a rechargeable, compact device designed to jump start a dead battery in an automobile. Each product is rechargeable in a significantly shorter period of time than other jump starters and has a much smaller footprint enabling them to fit in the glove compartment in most cars. The Company views these three products as core strategic products.
The mPower Jump starts all 12V cars including 8 cylinder engines. Its peak current is 600 Amps and weighs 1.5 pounds. It has an operating temperature range of -4 degrees Fahrenheit to 140 degrees Fahrenheit. The mPower Mini Jump starts all 12 V vehicles and can charges smartphones, tablets and cameras and has three charging modes. It has the same temperature operating range as the mPower Jump. The mPower Jump Plus starts up to 40 vehicles on a single charge and recharges in approximately 8 hours. It has the same operating temperature range as the mPower Jump and also will fit into the glove compartment of most cars.
In July of 2016 the Company sold its major patent related our Jump Products leading the Company to discontinue its line of Jump Starter products marketed by mPower Technologies, Inc. (see note 7 - Subsequent Events). (SEE ALSO_MANAGEMENT’S PLANS AND CURRENT STATUS).
FINANCIAL OVERVIEWContinuing Operations
RevenuesRevenue. Since October 1, 2013, quarterly revenue, if any, has primarily been attributable to sales of its Jump and Mini Jump Products. Owing to increased competition, contracting margins and the inability to fund volume purchases of inventory at favorable prices, the Company decided to discontinue its line of Jump Starter products.
Cost of revenues. Cost associated with revenues are comprised primarily of the costOur revenue increased to purchase out-sourced developed and manufactured products internationally and having them private labeled under the mPower brand name. These costs may be reduced assuming the Company moves forward with the commercialization and distribution of its automotive battery jump starter product and other potential products associated with its mechanically-activated reserve battery in large volumes.
Research and development. Research and development expenses have consisted principally of direct labor and payments made to various outside vendors including Porsche Design Studio and cost reduction vendors of the Porsche Designed products outside of the United States in connection with the Company’s Automotive Battery Jump Starter products. The Company is continuing to seek SBIR grants and take advantage of other U.S. government financial programs to fund continued research and development of its Smart Nano Battery.
General and administrative. General and administrative expenses consist primarily of salaries and related expenses for personnel engaged in sales of its automotive jump starter product line and legal and accounting personnel. In addition the Company from time to time will use outside consultants. Certain administrative activities are outsourced.
Non-cash compensation charges. The Company makes extensive use of stock, stock options and warrants as a form of compensation to employees, directors and outside consultants.
Other Income (Expense). Included in Other Expense are non-recurring items related to the change in the value of derivative securities and amortization as related debt discount. Such amounts will fluctuate significantly and should not be considered as recurring or in any way indicative of operating results. In addition, it has been the Company’s policy to record as an expense the cost of re-pricing securities (Reparation Cost) to raise capital.
Cumulative losses, net worth and capital needs
The Company has incurred cumulative losses of ($211,629,125) and has a stockholders’ deficit of ($4,440,236) through March 31, 2016. The auditors’ report for the fiscal year ended June 30, 2015 includes the statement that "there is substantial doubt of the Company’s ability to continue as a going concern". As of March 31, 2016, the Company had a negative net worth of ($4,440,236) compared to a negative net worth of ($3,842,865) as of June 30, 2015 as a result of continuing net losses.
The Company raised $153,000 in net proceeds from private placements of 616,666,667 shares of common stock during the nine months ended March 31, 2016. The Company raised $515,500 in net proceeds from private placements of 1,533,333,333 shares of its common stock during the nine months ended March 31,2015.
While the Company believes it will be able to fund short term capital needs, it will from time to time need to supplement such funding. In the longer term, we estimate that the Company will need to raise approximately $2,000,000 to $4,000,000 of additional funds through June 30, 2018 in order to fund the repayment of convertible debt and continue commercialization of its products, the range affected by the how many products the Company rolls out.
The Company does not expect to derive any material revenue from its nanotechnology product development during the current fiscal year. The Company estimates that material revenues from its SmartNanoBattery could occur in 18 months depending upon the Company’s ability to secure federal funding in the form of SBIR grants and adoption and custom tailoring of such product as a reserve battery to a computer memory or other function for a specific weapons system. Revenues were derived in fiscal year 2016 from sales of the Company’s jump starter products; however, the commoditization of such products puts future revenues in doubt as the Company begins to wind down sales of such products seeking to capitalize on more lucrative opportunities.
THREE MONTHS ENDED MARCH 31, 2016 VS. MARCH 31, 2015
REVENUE
Total revenues were $96,542$7,569,612 for the three months ended March 31, 2016,September 30, 2019, compared to $174,442 for the three months ended March 31, 2015. The decrease in revenue was the result of a reduction in sales by the Company Jump Starter products.
RESEARCH AND DEVELOPMENT
Research and development expenses were $0 for the three months ended March 31, 2016 as compared to $0_ during the comparable period in 2015.September 30, 2018. The Company has curtailed its program in research and development in order to conserve funds during the period.
Subject to available funds, the Company intends to increase research and development efforts throughout fiscal 2017 and 2018. Such research is expected to focus on other applications for “smart surfaces” including the Smart Nano Battery. The initial applications for the nano power cell technology will address the need to supply emergency and reserved power to a wide range of electronic devices for both commercial and defense applications.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $32,288 for the three months ended March 31, 2016 as compared to $55,513 for the comparable period in 2015.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses were $207,487 for the three months ending March 31, 2016, down from $342,785 or a decrease of $135,298 from the comparable period in 2015. Administrative expenses were held in check as the Company has made a concentrated effort to freeze or otherwise reduce administrative costs while it seeks to commercialize its smart nanobattery product capabilities and secure more substantial research funding for possible applications of its “smart surfaces” technology.
OTHER (EXPENSE) AND INCOME
Included in this category for the three month period ended March 31, 2015 are non-cash charges and costs or credits associated with convertible debt derivative liabilities. Such costs and credits include a non-cash credit for the change in derivative value of $510,748, resulting in a net gain of income from derivative liabilities associated with the Company’s convertible debt and is not indicative of operating results. Additionally, net interest expense of $93,904 and settlement income of $84,334 brought total other income to $435,222 in the current period. For the same period ended March 31, 2015,these include a non-cash gain for the change in derivative value of $19,457, plus amortization of debt discount costs of $11,123 and prepayment fees of $6,667, resulting in a net gain of $1,667 from derivative liabilities associated with the Company’s convertible debt and is not indicative of operating results. Additionally, net interest expense of $82,372 and settlement expense of $3,629, brought total other expense to $84,334 .NET INCOME AND (LOSS)
The Company recorded net gain of $229,698 for the three months ended March 31, 2016 as compared to net loss of $424,477 for the three months ended March 31, 2015. This represents a net income per common share of ($0) and loss per share of ($0) for the three month periods ended March 31, 2016 and 2015 respectively. The net loss recorded in the current period as compared to the net loss reported for the same period last year is directly attributable to the magnitude of the net gain from derivative liabilities associated with the Company’s convertible debt recorded for the three months ended March 31, 2016 and is not indicative of operating results.
NINE MONTHS ENDED MARCH 31, 2016 VS. MARCH 31,, 2016
REVENUE
Total revenues were $494,978 for the nine months ended March 31, 2016 compared to $969,415 for the Nine months ended March 31, 2015. The decrease in revenue was the result of the decline in working capital that caused the Company to carryexpanding upon a smaller inventory and a Black Friday sale from a majornew customer in the previous year that was absent in the current nine month period.
RESEARCH AND DEVELOPMENT
Research and development expenses were $0 for the nine months ended March 31, 2016 as compared to $4,694 during the comparable period in 2015. The Company has curtailed its program in research and development in order to converse funds during the period.
Subject to available funds, the Company desires to increase its research and development efforts throughout fiscal 2017 and 2018. Such research is expected to focus on other applications for “smart surfaces” including the Smart Nano Battery. The initial applications for the nano power cell technology will address the need to supply emergency and reserved power to a wide range of electronic devices for both commercial and defense applications.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $126,937 for the nine months ended March 31, 2016 as compared to $194,949 for the comparable period in 2015.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses were $693,382 for the nine months ending March 31, 2016, down from $1,098,985 or a decrease of 405,603 from the comparable period in 2015. Administrative expenses were held in check as the Company has made a concentrated effort to freeze or otherwise reduce administrative costs while it seeks to commercialize its smart nanobattery product capabilities and secure more substantial research funding for possible applications of its “smart surfaces” technology.
OTHER (EXPENSE) AND INCOME
Included in this category for the nine months ended March 31, 2016 are non-cash charges and costs or credits associated with convertible debt. This includes a non-cash credit for the change in derivative value of $20,072, net gain of the same amount from derivative liabilities associated with the Company’s convertible debt and is not indicative of operating results. Additionally, net interest expense of $267,142 and settlement income of $19,538 brought total other expense to $227,531 in the period. For the same period ended March 31, 2015, includes a non-cash gain for the change in derivative value of $121,441, prepayment fees of $21,583 and debt discount amortization of $37,778, resulting in a net gain of $62,080 from derivative liabilities associated with the Company’s convertible debt and is not indicative of operating results. Additionally, net interest expense of $244,214 and settlement expense of $141,048 brought total other expense to $323,182 in the period.
NET INCOME AND (LOSS)
The Company recorded a net loss of $894,354 for the nine months ended March 31, 2016 as compared to net loss of $1,276,157 for the nine months ended March 31, 2015. This represents a net loss per common share of ($0) and loss per share of ($0) for the nine month periods ended March 31, 2016 and March 31, 2015, respectively. The net loss recorded in the current period as compared to the net loss reported for the same period last year is directly attributable to the magnitude of the net gain from derivative liabilities associated with the Company’s convertible debt recorded for the nine months ended March 31, 2016 and is not indicative of operating results.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
As required, mPhase has adopted ASC 605-10-525 "Revenue Recognition in Financial Statements", which provides guidelines on applying generally accepted accounting principles to revenue recognition based upon the interpretations and practices of the SEC.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred in accordance with ASC 730 "Research and Development."
MATERIAL EQUITY INSTRUMENTS
The Company has material equity instruments including convertible debentures and convertible notes that are accounted for as derivative liabilities (SEE BELOW).
DERIVATIVE LIABILITY
The Company has estimated the value of the derivative liability associated with its convertible debt. Such estimate is based on a Black Scholes calculation and is initially recorded for each convertible debt agreement at the time the debt was issued. At each reporting period, the value of this liability is marked to market and adjusted accordingly. Such adjustments are included in Other Income (Expense).
STOCK-BASED COMPENSATION
On July 1, 2005, the Company adopted the provisions of ASC 718 "Compensation - Stock Compensation" which requires companies to measure and recognizes compensation expense for all employee stock-based payments at fair value over the service period underlying the arrangement. Therefore, the Company is now required to record the grant-date fair value of its stock-based payments (i.e., stock options and other equity-based compensation) in the statement of operations. The Company adopted the "modified prospective" method, whereby fair value of all previously-granted employee stock-based arrangements that remained unvested at July 1, 2005 and all grants made on or after July 1, 2005 have been included in the Company’s determination of stock-based compensation expense.
MATERIAL RELATED PARTY TRANSACTIONS
MICROPHASE CORPORATION
mPhase’s President was also an officer and shareholder of Microphase. Mr. Durando was Microphase’s chief operating officer since May 1, 1995 and a director since March 31, 2010 until his resignation from both positions on January 22, 2015. On February 9, 2015 Mr. Durando assigned all his interests in the Capital Stock of Microphase, for a period of not less than three years, to the RCKJ Trust as the Grantor. The beneficial owners for economic purposes are Mr. Durando’s children. Mr. Durando is presently strategic employee of Microphase. On May 1, 1997, the Company entered into an agreement with Microphase whereby it would use office space as well as the administrative services of Microphase, including the use of accounting personnel. This agreement was for $5,000 per month and was on a month-to-month basis. In July 1998, the office space agreement was revised to $10,000, in January 2000 to $11,050 per month, in July 2001 to $11,340 per month, in July 2002 to $12,200 per month, in January 2003 to $10,000 per month, and in July 2003 to $18,000 per month. Additionally, in July 1998, mPhase entered into an agreement with Microphase whereby mPhase would reimburse Microphase $40,000 per month for technical research and development. In January 2003 the technical research and development agreement was revised to $20,000 per month, and in July 2003 it was further revised to $5,000 per month for technical and research development, $5,000 per month for administrative services and $5,000 per month under the office space agreement. Beginning July 1, 2006, billings for all of the above services have been $5,000 per month and in July 2008; such fees were reduced to $3,000 per month. As of July 1, 2011, the fees have increased to $3,630 per month. In addition, Microphase also charges fees for specific projects on a project-by-project basis. In April 2015 the Company moved its Connecticut office to a new location and no longer shares its office with Microphase.
mPhase’s President was also an officer, director and shareholder of Microphase Corporation. Mr. Durando was Microphase’s Chief Operating Officer since May 1, 1995 and a Director since March 31, 2010.
Mr. Durando resigned as both an Officer and Director of Microphase Corporation on January 2, 2015. On February 9, 2015 Mr. Durando assigned all his interests in the Capital Stock of Microphase for a period of not less than three years RCK Trust as the Grantor. The beneficial owners for economic purposes are Mr. Durando’s children. Mr. Durando was a strategic employee of Microphase Corporation from January 2, 2015 through May 31, of 2017. On June 2, 2017 the RCK Trust exchanged all its shares of stock in Microphase in exchange for shares of stock in Digital Power Corporation, a publicly-held company then listed on the New York Stock exchange.
During the nine months ended March 31, 2016 and 2015, $0 and $29,725 have been charged for rent and $4,500 and $15,327 have been charged for other expenses, respectively, to the Company by Microphase. As a result of the foregoing transactions, as of March 31, 2016, the Company had a $ 32,945 payable to Microphase.
OTHER RELATED PARTIES
A director of the Company, was employed until September 30, 2003 by our former investment-banking firm Lipper & Company. OnMarch 31, 20165, The director’saffiliated firms of Palladium Capital Advisors and Eagle Strategic Advisers were owed unpaid finders’ fees in the amount of $177,000, which is included in due to affiliates. Also, Mr. Biderman loaned the Company $90,000 induring the fourth quarter of fiscal year ended June 30, 2015 and advanced an additional $20,000 during the nine months ended March 31, 2016 and together with $3,775 accrued interest, $113,775 remains outstanding at March 31, 2016.2019.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
TransactionsCost of Revenue
Cost of revenue totaled $5,706,514 for the three months ended September 30, 2019, compared to $0 for the three months ended September 30, 2018. The increase is the result of generating the increased revenue.
Operating Expenses
Our operating expenses, which include software development costs, salaries and benefits, stock-based compensation, legal and professional fees, and general and administrative expenses increased to $11,945,636 for the three months ended September 30, 2019, compared to $63,827 for the three months ended September 30, 2018, an increase of $11,881,809. The increase is primarily due to stock-based compensation expense related to the Company’s Chief Executive Officer and Chief Financial Officer, an increase in general and administrative expenses related to salaries of the new Chief Executive Officer and Chief Financial Officer, coupled with Officersincreased operating expenses to support the increased operations of the business, partially offset by lower expenses from prior officers for services rendered.
Other (Expense) Income
Our other expense increased by $100,921, or 82%, for the three months ended September 30, 2019. The increase is primarily the result of expenses and amortization related to the convertible promissory notes, partially offset by a decrease in interest expense and a gain on the change in fair value of the derivative liability related to the convertible promissory notes.
Net Loss from Continuing Operations
We had a net loss from continuing operations of $10,305,511 for the three months ended September 30, 2019, compared to a net loss of $185,879 for the three months ended September 30, 2018, an increase of $10,119,632. The increase in net loss is primarily driven by the increase in operating expenses and other expense, partially offset by the increase in gross profit, as disclosed above.
Discontinued Operations
For the three months ended September 30, 2019 and 2018, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations comparatives.
Liquidity and Capital Resources
At various points during past fiscal years Messrs, Durando, Dotoli and Smiley provided bridge loans to the Company evidenced by individual promissory notes and deferred compensation so as to provide working capital to the Company. AllSeptember 30, 2019, we had $132,520 of the notes are payable on demand.
During the nine months ended March 31, 2006 the Company transferred a fully-depreciated sales vehicle to its Chief Operating Officer, Gus Dotoli, valued at $18,000 as partial repayment of his Officer’s loan. Included in Other Income is $18,000 recorded as a gain on sale in connection with such transfer by the Company.
Total compensation and payables to related parties and to officers is summarized below:
Summary of compensation to related parties for the Nine Months Ended March 31, 2016
| Durando | Dotoli | Smiley | Officers | K. Durando | Director | Microphase | Total | |||||||||||||||||||||||||
| Consulting / Salary | $ | 130,000 | $ | 62,000 | $ | 62,000 | $ | 254,000 | - | - | - | $ | 254,000 | |||||||||||||||||||
| Interest | $ | 15,929 | $ | 6,805 | $ | 5,131 | $ | 27,865 | - | - | - | $ | 27,865 | |||||||||||||||||||
| Rent | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Selling & marketing | - | - | - | - | $ | 50,000 | - $ | 4,500 | $ | 54,500 | ||||||||||||||||||||||
| Finders Fees | - | - | - | - | - | $ | 17,000 | - | $ | 17,000 | ||||||||||||||||||||||
| Total compensation for the Nine Months Ended March 31, 2016 | $ | 145,929 | $ | 68,805 | $ | 67,131 | $ | 281,865 | $ | 50,000 | $ | 17,000 | $ | 4,500 | $ | 353,365 | ||||||||||||||||
Summary of compensation to related parties for the Nine Months Ended March 31, 2015
| Durando | Dotoli | Smiley | Officers | K. Durando | Director | Microphase | Total | |||||||||||||||||||||||||
| Consulting / Salary | $ | 150,000 | $ | 75,000 | $ | 75,000 | $ | 300,000 | - | - | - | $ | 300,000 | |||||||||||||||||||
| Interest | $ | 39,703 | $ | 26,609 | $ | 22,573 | $ | 88,885 | - | - | - | $ | 88,885 | |||||||||||||||||||
| Rent | - | - | - | - | - | - | $ | 29,725 | $ | 29,725 | ||||||||||||||||||||||
| Selling & marketing | - | - | - | - | $ | 54,000 | - | $ | 15,327 | $ | 69,327 | |||||||||||||||||||||
| Finders Fees | - | - | - | - | - | $ | 34,500 | - | $ | 34,500 | ||||||||||||||||||||||
| Total compensation for the Nine Months Ended March 31, 2015 | $ | 189,703 | $ | 101,609 | $ | 97,573 | $ | 388,885 | $ | 54,000 | $ | 34,500 | $ | 45,052 | $ | 522,437 | ||||||||||||||||
Summary of amounts payable to related parties as of March 31, 2016
| Total | ||||||||||||||||||||||||||||||||
| Notes | ||||||||||||||||||||||||||||||||
| Durando | Dotoli | Smiley | Payable-Officers | K. Durando | Director | Microphase | Total | |||||||||||||||||||||||||
| Notes Payable Officers & Director | $ | 306,793 | $ | 109,056 | $ | 8,800 | $ | 424,649 | - | $ | 113,775 | - | $ | 538,425 | ||||||||||||||||||
| Accrued Wages Officers/Accrued Fees | $ | 154,389 | $ | 75,194 | $ | 75,194 | - | $ | 22,000 | (i) | - | - | $ | 326,777 | (i) | |||||||||||||||||
| Due to Affiliates | - | - | - | - | - | $ | 177,000 | $ | 32,545 | $ | 209,545 | |||||||||||||||||||||
| Interest Payable | $ | 41,240 | $ | 17,548 | $ | 98,748 | $ | 157,536 | - | - | - | $ | 157,536 | |||||||||||||||||||
| Total Payable to Officers / Affiliates as of March 31, 2016 | $ | 502,423 | $ | 201,797 | $ | 182,742 | $ | 582,185 | $ | 22,000 | $ | 290,775 | ** | $ | 32,545 | $ | 1,232,282 | |||||||||||||||
Summary of payables to related parties as of June 30, 2015
| Total Notes | ||||||||||||||||||||||||||||
| Durando | Dotoli | Smiley | Payable-Officers | Director | Microphase | Total | ||||||||||||||||||||||
| Notes Payable Officers & Director | $ | 283,565 | $ | 115,915 | $ | 5,000 | $ | 404,480 | $ | 90,000 | - | $ | 494,480 | |||||||||||||||
| Accrued Wages Officers | $ | 29,167 | $ | 14,583 | $ | 14,583 | - | - | $ | 58,333 | (i) | |||||||||||||||||
| Due to Affiliates | - | - | - | - | $ | 160,000 | $ | 28,045 | $ | 188,045 | ||||||||||||||||||
| Interest Payable | $ | 25,311 | $ | 10,743 | $ | 93,617 | $ | 129,671 | - | - | $ | 129,671 | ||||||||||||||||
| Total Payable to Officers / Affiliates as of June 30, 2015 | $ | 338,043 | $ | 141,241 | $ | 113,200 | $ | 534,151 | $ | 250,000 | $ | 28,045 | $ | 870,529 | ||||||||||||||
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred cumulative losses of ($211,629,125)cash and a working capital deficit of ($4,249,421)$2,354,027 as compared to cash of March 31, 2016. The auditors’ report$33,996 and a working capital deficit of $2,440,289 at June 30, 2019.
Net cash used in operating activities of continuing operations was $191,370 for the fiscal yearthree months ended JuneSeptember 30, 2015 includes2019 as compared to net cash provided by operating activities of continuing operations of $124,060 for the statement that "there is substantial doubtthree months ended September 30, 2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
We have financed our operations since inception primarily through proceeds from equity and debt financings. During the three months ended September 30, 2019, net cash provided by financing activities of continuing operations was $235,200, as compared to $52,482 during the Company’sthree months ended September 30, 2018. Our continued operations primarily depend upon our ability to continueraise additional capital from various sources including equity and debt financings, as a going concern". As of March 31, 2016,well as our revenue derived from operations. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs or will be on favorable terms. Based on our current plans, we believe that our cash provided from the Company had a negative net worth of ($4,440,206) comparedabove sources may not be sufficient to a negative net worth of ($3,842,865) as of June 30, 2015 as a result of continuing net losses.enable us to meet our planned operating needs for the next twelve months.
During the nine months ended March 31, 2016, the Company issued 616,666,667 shares of its common stock in connection with private placements, pursuant to Rule 506 of Regulation D and Section 4(a)(2) of the Securities Act of 1933, as amended, raising gross proceeds of $170,000 and incurred finder’s fees in the amount of $17,000. The proceeds were used by the Company as working capital.
During the nine months ended March 31, 2015, the Company issued 1.533 million shares of its common stock in connection with private placements pursuant to Rule 506 of Regulation D and Section 4(a)(2) of the Securities Act of 1933, as amended, raising gross proceeds of $550,000 and incurring finder’s fees of 50,000,000 shares of common stock and $34,500. The proceeds were used by the Company as working capital.
Also during the nine months ended March 31, 2016, an unaffiliated shareholder advanced the Company $35,000, which was converted into 175,000.000 shares of the Company’s common stock effective March 31, 2016.
Additionally, the Director who had loaned the Company $90,000 in the fourth quarter of the fiscal year ended June 30, 2015 advanced the Company $20,000 in the nine months ended March 31, 2016, net of repayments, together with $3,775 accrued interest and as a result $113,775 remains outstanding as of March 31, 2016.
While the Company believesWe believe that private placements of itsour common stock and convertible debt to be issued from time to time will fund our short term capital needs it will soon need to seek shareholder approval to increase itsneeds. At September 30, 2019, we had 100,000,000 authorized shares of common stock.stock of which 12,363,732 shares were outstanding and 44,899 shares were to be issued.
The Company expects to continue generating revenues during the fiscal year beginning July 1, 2019 from its artificial intelligence and machine learning software platforms. The Company does not expect to derive any material revenue from its nanotechnology product development until after a deployment and custom tailoring of its Smart Nanobattery in the foreseeable future owing to its current financial condition which does not allow further work to complete the product.Nanobattery.
MANAGEMENT’S PLANS AND CURRENT STATUS
The Company is curtailing its efforts with respectWe have based our estimate on assumptions that may prove to selling its linebe wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of automotive jump starter products owing to increased competition resulting in poor margins as a resultfinancing include strategic relationships, public or private sales of commodity pricing of such products. The Company is seeking alternative products for development but does not foresee a definitive path to revenues to replace the winding down of its line of automotive jump products. The Company has faced significant challenges in funding sufficient inventory of such products to compete successfully with larger competitors selling such product.
The Company is considering strategic alternatives to best monetize its remaining patent portfolio restructuring and revising its debt obligations and Capital structure. The Company and the note holders for arrangements 1 through 3, JMJ Financial, had been renegotiating the settlement of these agreements; In April of 2017, the Company received a judgment from the Federal District Court of Northern Illinois Eastern Division in its favor with prejudice dismissing a claim by River North Equity covering Convertible Securities of the Company which effectively negated the two notes River North Equity obtained from JMJ Financial. At March 31, 2016 the amount recorded in Current Liabilities for all three convertible notes and accrued interest thereon previously issued to JMJ Financial was $1,097,877. At March 31, 2016 the amount recorded in Current Liabilities for the two notes and accrued interest thereon subject to the River North Equity claim was $689,822.
On August 18, 2017 the Company entered into a Judgment Settlement Agreement with John Fife with respect to the Judgment in favor of Fife, which reduces the balance under the amended agreement to $360,000, without conversion rights, in connection with the default by the Company under a Convertible Debenture dated September 13, 2011. At March 31, 2016 we had recorded $1,015,040 of liabilities, including $807,082 for the forbearance agreement and $207,957 for the derivative liability associated with the Conversion feature with respect to this arrangement, as amended.
The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allow the successful wide scale development, deployment and marketing of its products. There can be no assurance the necessaryour securities, debt or other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available or if so,when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the Company.ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.
The Company is not exposed to changes in interest rates as the Company has no debt arrangements and no investments in certain held-to-maturity securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of any financial instruments at March 31, 2016.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 the Chief Executive Officerour principal executive officer and Chief Financial Officer,principal financial officer, we have evaluated the effectivenessconducted an evaluation of our disclosure controls and procedures as required by(as defined in Exchange Act Rule 13a-15(b)Rules 13a-15(e) and 15d-15(e)) as of September 30, 2019 to determine whether the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that theseCompany’s disclosure controls and procedures are effective.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.
The Company did identify control deficiencies regarding its present accounting structure:Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30, 2019.
Lack of segregation of duties and control procedures that would include multiple levels of supervision and review have both been limited due to the reduced level of accounting staff and the Company’s lack of funding.
The Company remediated these deficiencies by increasing the role of an external contract controller.Changes in Internal Control Over Financial Reporting
There was a change in our internal control over financial reporting during the quarter ended March 31, 2016, which included the laying off the Company’s accounting manager, which the Company remediated by the increased involvement of an external contract controller. The result of the changes in our internal control over financial reporting and the Company’s remediation steps to address the change, the Company believes it has made the necessary adjustments so that there were no changes in our internal control over financial reporting that occurred during theour most recently completed fiscal quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.II – OTHER INFORMATION
On February 2, 2015 the Securities and Exchange Commission upheld the denial of a corporate action by the Financial Industry Regulatory Authority (FINRA) in connection with the Company’s seeking to reverse split its common stock pursuant to FINRA Rule 6490 (see SEC Release No 7418 of February 2, 2015). The action was found as deficient by FINRA on the basis that two corporate officers and directors of the Company had previously entered into a Consent Decree with the SEC in October of 2007 by them when they were previously officers of another company named Packetport.com. The Company is considering various options in connection with this matter including its right to appeal this decision to the Federal Circuit Court of the D.C. Circuit. Item 1. Legal Proceedings
On November 20, 2012, mPhase Technologies, Inc. (the “Company”) formally received an Event of DefaultFrom time to time, we may become involved in various lawsuits and Redemption Notice dated November 16, 2012 with respect to an 8% Convertible Note dated September 13, 2011 issued by the Company to St. George Investments LLC and assigned to John Fife. The Triggering Events include alleged defaults with respect to payments owed by the Company under the Convertible Note and the failure to convert the Note into shares of the Company’s common stock. The alleged amount owed according to the notice is approximately $902,279. A lawsuit was commenced in late Novemberlegal proceedings that arise in the Federal District Court, Northern Districtordinary course of Illinois Eastern Division by Fife against the Company alleging breach of contractbusiness. Litigation is subject to inherent uncertainties, and other actionsan adverse result in connection with the 8% Convertible Note.
On December 15, 2014, a Memorandum Opinion and Order was issued by the United States District Court Northern District of Illinois Eastern Division granting the motion of John Fife, plaintiff (“Plaintiff”), for summary judgment against mPhase Technologies, Inc. (the “Company”) for breach of contract (the “Opinion”). All other claims and counterclaims were dismissed.
Effective February 10, 2015, the Company entered into a Forbearance Agreement with the Holder. The agreement providesmatters may arise from time to time that the Holder would forego his right to enforce its remedies pursuant to the judgment, which include demand for immediate payment of approximately $1.6 million, provided the Company satisfy its forbearance obligation of $1,003,943, and after accounting for a payment of $15,000 the Company paid, under the terms of the agreement.may harm our business.
The terms of the agreement, as amended, provide for interest to accrue on the unpaid portion at 9% per annum with monthly payments in cash or conversions into common stock of the Company; commencing with an initial $15,000 payment due on February 15, 2015, and thereafter and on or before the 15th day of each month thereafter the Company agrees to pay to Holder the following amounts ; $30,000.00 per month on each of the following dates: March 15, 2015, April 15, 2015, May 15, 2015, June 15, 2015, and July 15, 2015; $15,000.00 per month on each of the following dates: August 15, 2015 and September 15, 2015; $20,000.00 per month on each of the following dates: October 15, 2015, November 15, 2015, and December 15, 2015; $35,000.00 per month on each of the following dates: January 15, 2016 and February 15, 2016 and March 15, 2016; and $50,000.00 per month thereafter until the Forbearance Amount has been paid in full. The Company has been able to meet its monthly payment obligations through September, 2015.Item 1A. Risk Factors.
As of August 11, 2015 the Company entered into an Amendment No. 1 with Fifea smaller reporting company we are not required to the Forbearance Agreement rescheduling the monthly payment schedules (see Form 8K filed with the SEC on August 2, 2015)
As of January 19, 2016 the Company entered into a Second Amendment to the Forbearance Agreement again rescheduling certain of the monthly payments. The Amendment was filed with the SEC on Form 8k on January 22, 2016.
As of May 12, 2016 the Company entered into a Third Amendment to the Forbearance Agreement again rescheduling certain of the monthly payments. The Amendment was filed with the SEC on Form 8k on May 23, 2016.
On August 18, 2017 the Company entered into a Judgment Settlement Agreement with John Fife with respect to the Judgment in favor of Fife, which reduces the balance under the amended agreement to $360, 000, without conversion rights, in connection with the defaultprovide information required by the Company under a Convertible Debenture dated September 13, 2011.this item.
In April of 2017, the Company received a judgment from the Federal District Court of Northern Illinois Eastern Division in its favor with prejudice dismissing a claim by River North Equity covering Convertible Securities of the Company which effectively negated the two notes River North Equity obtained from JMJ Financial... At March 31, 2016 the amount recorded in Current Liabilities for all three convertible notes and accrued interest thereon previously issued to JMJ Financial was $1,097,877. At March 31, 2016 the amount recorded in Current Liabilities for the two notes and accrued interest thereon subject to the River North Equity claim was $689,822.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
All proceeds received from the following financings were used by the Company for working capital needs.
Private Placements
During the ninethree months ended March 31, 2016,September 30, 2019, the Company issued 616,666,667258,000 shares of its common stock in connection with private placements pursuant to Rule 506 of Regulation D and Section 4(a)(2) of the Securities Act of 1933, as amended, raising gross proceeds of $170,000 and incurred finder’s fees in the amount of $17,000 The proceeds were used by the Company as working capital.$64,500.
Stock Based Compensation
During the nine months ended March 31, 2016, the Company issued 23,028,000 shares of common stock to an employee valued at $7,804, based upon the closing trading price for each quarter end earned. The Company during such period did not issue any common stock, warrants or options to officers.
Conversion of Debt Securities
During the nine months ended March 31, 2016, the Company authorized the conversion of $10,000 of Convertible Debt and Accrued Interest thereon relating to the forbearance agreement and a $35,000 Demand note into 62,500,000 and 175,000,000 shares respectively, or a total of $45,000 of debt into 237,500,000 shares; of the Company's Common stock.
Long Term Convertible Debentures / Debt Discount
The Company had nine (9) separate convertible debt arrangements with independent investors that were in effect at various times during the two fiscal years ended June 30, 2015, three (3) of which were still active as of March 31, 2016.
These transactions are intended to provide liquidity and capital to the Company and are summarized below.
Arrangement #1, #2, &, #3 (JMJ Financial, Inc.)
Arrangement #1
The Company entered into a convertible note on November 17, 2009, the Company received a total of $186,000 of proceeds in connection with a new financing agreement with JMJ Financial. This transaction consists of the following: 1) a convertible note in the amount of $1,200,000 plus a one-time interest factor of 12% ($144,000) and a maturity date of September 23, 2012 and (2) a secured promissory note in the amount of $1,100,000 plus a one-time interest rate factor of 13.2% ($144,000 each) and a maturity date of September 23, 2012 due from the holder of the convertible note.
At June 30, 2012 this convertible note had $372,060 outstanding which was combined with arrangement #3 JMJ Financial, Inc.
Arrangement #2
On December 15, 2009 the Company entered into a new financing agreement with JMJ Financial that consists of the following: 1) a convertible note issued by the Company in the amount of $1,500,000 plus a one-time interest factor of 12% ($180,000) and a maturity date of December 15, 2012 and (2) a secured promissory note in the amount of $1,400,000 plus a one-time interest rate factor of 13.2% ($180,000 ) and a maturity date of December 15, 2012 due from the holder of the convertible note. To date the Company has received a total of $300,000 cash under this note and has issued no shares of common stock to the holder upon conversions.
The Company and the holder are continuing to negotiate potential amendments to this agreement, and funding and conversions have not occurred since April, 2011. During the year ended June 30, 2011, amortization of debt discount amounted to $418,552, reducing the balance to $100,000.
As of June 30, 2012, this convertible note has $321,000 outstanding which was combined with arrangement #3 JMJ Financial, Inc.
Arrangement #3
On April 5, 2010, the Company entered into a new financing agreement with JMJ Financial that consists of the following: 1) a convertible note issued by the Company in the principal amount of $1,200,000 plus a one-time interest factor of 12% ($144,000) and a maturity date of December 15, 2012, and (2) a secured promissory note from the holder of the convertible note in the amount of $1,100,000 plus a one-time interest rate factor of 13.2% ($144,000 each) and a maturity date of December 15, 2012. To date the Company has received a total of $100,000 cash and has issued no shares of common stock to the holder upon conversions. The remaining $1,144,000 of cash to be received from the holder plus accrued and unpaid interest is convertible into shares of common stock at the option of the holder.
During the year ended June 30, 2012 the Company reduced the debt discount for this note by $91,000 to $9,000, and as a result $109,000 was combined with Arrangements 1&2 for a total of $ 802,060 principle due from the combined notes payable, with a revised interest rate of 9%, to JMJ.
As of June 30, 2015, and March 31, 2016, the combined arrangements with JMJ in this note would be convertible into 258,208,588 and 274,469,385 common shares at the conversion floor price of $.004; and would be required to do so if the Company does not make the scheduled payments pursuant to the June 1, 2012 amended agreement.
The Company has not made any payments of the $37,018 installment payments commencing October 1, and the holder has continued to accrue interest on the outstanding balance. At March 31, 2016 the amount recorded in Current Liabilities for all three convertible notes and accrued interest thereon previously issued to JMJ Financial was $1,097,877
Arrangement #4 (John Fife dba St. George Investors)/Fife Forbearance
The company entered into an amended agreement on June 1, 2012, when principle of $557,500 accrued interest of $66,338 and $95,611 of contractual charges for previous notes with John Fife totaled $719,449; whereby, the Company agreed to make payments of principle and interest of $33,238 per month commencing October 1, 2012 through September 1, 2014 at 8% interest and so long as the payments are not in default then no conversions into the Company’s common stock would be available to the holder.
On November 20, 2012, mPhase Technologies, Inc. (the “Company”) formally received an Event of Default and Redemption Notice dated November 16, 2012 with respect to an 8% Convertible Note dated September 13, 2011 issued by the Company to St. George Investments LLC and assigned to John Fife. The notice included alleged defaults with respect to payments owed by the Company under the Convertible Note and the failure to convert the Note into shares of the Company’s common stock. The alleged amount owed according to the notice is approximately $902,279.
On December 15, 2014, a Memorandum Opinion and Order was issued by the United States District Court Northern District of Illinois Eastern Division granting the motion of John Fife, plaintiff (“Plaintiff”), for summary judgment against mPhase Technologies, Inc. (the “Company”) for breach of contract (the “Opinion”). All other claims and counterclaims were dismissed. The Company commenced settlement negotiations with the Plaintiff after we explored options with regard to an appeal and other alternatives, which there is no guarantee of success. As discussed in Note 7, effective February 10, 2015, the Company entered into a Forbearance Agreement with the Holder. The agreement provides that the Holder would forego his right to enforce its remedies pursuant to the judgment, which include demand for immediate payment of approximately $1.6 million, provided the Company satisfy its forbearance obligation of $1,003,943, and after accounting for a payment of $15,000 the Company paid, under the terms of the agreement.
The terms of the agreement, as amended, provide for interest to accrue on the unpaid portion at 9% per annum with monthly payments in cash or conversions into common stock of the Company; commencing with an initial $15,000 payment due on February 15, 2015, and thereafter and on or before the 15th day of each month thereafter the Company agrees to pay to Holder the following amounts ; $30,000.00 per month on each of the following dates: March 15, 2015, April 15, 2015, May 15, 2015, June 15, 2015, and July 15, 2015; $15,000.00 per month on each of the following dates: August 15, 2015 and September 15, 2015; $20,000.00 per month on each of the following dates: October 15, 2015, November 15, 2015, and December 15, 2015; $35,000.00 per month on each of the following dates: January 15, 2016 and February 15, 2016 and March 15, 2016; and $50,000.00 per month thereafter until the Forbearance Amount has been paid in full. The Company has been able to meet its monthly payment obligations through November 2015.
The value of the forbearance debt obligation on June 30, 2015 is $902,253. At June 30, 2015, given the changes in the Company’s stock price during the 20 day look-back period for June 30, 2015, the estimated derivative liability had decreased to $232,423, a decrease from June 30, 2014 of $548,906 totaling $316,493, which when added to the $18,469 increase at the time the forbearance agreement resulted in a non-cash credit to earnings of $334,962 for the year ended June 30, 2015. The Forbearance agreement requires the Company to place, and the Company has done so, 1,000,000,000 shares in reserve with its transfer agent, to satisfy the conversion provisions for any unpaid monthly cash payments. The agreement original agreement also provided that the Company file a Proxy statement before June 1, 2015 should additional shares be needed for the conversion reserve. The Company has not filed such a proxy statement due to cost prohibitions. The Company had not issued any stock for conversions since entering into the forbearance agreement and during the year ended June 30, 2015 the Company repaid $69,081 of principle and $41,019 of interest under the agreement.
As of August 11, 2015, the Company entered into an Amendment No. 1 with Fife to the Forbearance Agreement rescheduling the monthly payment schedules.
At December 31, 2015, the derivative liability was estimated to be $716,543, an increase of $484,120 from $232,423, the balance as of our last fiscal year end, creating a charge to expense of a like amount during the six months then ended.
As of January 19, 2016, the Company entered into a Second Amendment to the Forbearance Agreement again rescheduling certain of the monthly payments.
As of March 31, 2016, the derivative liability was estimated to be $207,957, a decrease of $508,586 for the three months ended March 31, 2016 resulting in a net credit for the three months period of that amount and a $24,467 net credit for the nine months ended March 31, 2016.
During the nine months ended March 31, 2016 the Company repaid $95,170 of principle and $54,830 of interest under the agreement which is included as a non-cash conversion of 62,500,000 shares of the Company’s common stock valued at $10,000 of which $3,907 represented accrued interest and $6,093 represented principle. The value of the forbearance debt obligation on March 31, 2016 is $807,083.
As of March 31, 2016 this forbearance obligation, as amended, would only be convertible for monthly obligations the Company elects to/or does not pay in cash in part or in full, for: (i) up to 281, 250,000 shares, for the satisfaction of the next required monthly payment, (ii) up to 2,824,375,000 shares, for the satisfaction of the next 12 required monthly payments; and (iii) up to 5,044,264,869 shares of our common stock should the entire obligation be converted.
On August 18, 2017 the Company entered into a Judgment Settlement Agreement with John Fife with respect to the Judgment in favor of Fife, which reduces the balance under the amended agreement to $360, 000, without conversion rights, in connection with the default by the Company under a Convertible Debenture dated September 13, 2011.
Arrangement #5 (MH Investment trust II)
On August 26, 2014, the Company issued to the MH Investment Trust. a Convertible Note in a Private Placement pursuant to Section 4(2) of the Securities Act of 1933 which was executed funded with $40,000 in gross proceeds on September 1, 2014. The instrument is in the principal amount of $40,000 and matures on May 1, 2015. Interest only is payable at the rate of 12% per annum by the Company to the holder until maturity. The instrument is convertible into the Company’s common stock at 60% of the volume weight average price of the stock based upon the average of the three lowest trading days in the 10 day trading period immediately preceding such conversion, or 65 % when the trading price exceeds $.0020 for the five days before such conversion. All proceeds received in connection with the above financing have been used by the Company as working capital.
At the time of the transaction, the estimated derivative value of this security and the warrant was calculated to be $37,778 and the company recorded a loan discount of the same amount. During the year ended June 30, 2015 the Company amortized $37,778 to loan discount expense and the unamortized loan discount was reduced to $0. As of June 30, 2015, which given the changes in the Company’s stock price during the 10 day look-back period for this date the estimated liability had decreased to $3,002, a decrease for this period of $34,776 and creating a non-cash credit to earnings of that amount. Based upon the price of the Company’s common stock and and a partial principle payments during the year ended June 30, 2015 of $36,667; on June 30, 2015 this Note is convertible into approximately 25,016,667 shares of common stock. As of March 31, 2016, which given the changes in the Company’s stock price during the 10 day look-back period for this date the estimated liability had increased to $7,396, an increase for this period of $4,394 and creating a non-cash charge to earnings of that amount during the nine months ended March 31, 2016. At March 31, 2016 the note balance was $3,333 and accrued interest of $1,597, at 12%, remained due under this agreement. Based upon the price of the Company’s common stock on March 31, 2016 this Note is convertible into approximately 41, 086,385 shares of common stock.
Item 3. Defaults Upon Senior Securities
None.
None.
Form 8K dated January 28, 2016 announcing second amendment to Fife Forbearance Agreement.Item 6. Exhibits.
Form 8K dated February 22, 2016 announcing change in name of auditing firm
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*Filed herewith.
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| /s/ Anshu Bhatnagar | |||
| Anshu Bhatnagar | |||
| Chief Executive Officer (Principal Executive Officer) | |||
| November | |||
| /s/ Christopher Cutchens | ||
| Christopher Cutchens | |||
| Chief Financial Officer (Principal Financial and | |||
| November 19, 2019 |
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