UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended |
Or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _______________________ to ___________________ |
Commission File Number 000-30202
mPHASE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| New Jersey | 22-2287503 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) | |
9841 Washingtonian Blvd #390 Gaithersburg, MD | 20878 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:(301) 329-2700
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
[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 [X] |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) [ ] Yes [X] No
As of February 18,May 15, 2020 therewere 13,244,22114,127,814 shares of the issuer’s common stock, $0.01 par value per share, issued and outstanding.
mPhase Technologies, Inc.mPHASE TECHNOLOGIES, INC.
Form 10-QQUARTERLY REPORT ON FORM 0-Q
Table of ContentsTABLE OF CONTENTS
| 1 |
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.
| 2 |
mPHASE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTH PERIOD ENDED DECEMBER 31, 2019
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED COSOLIDATED UNAUDITED FINANCIAL STATEMENTS
mPhase Technologies, Inc.
Condensed Consolidated Balance Sheets
| December 31, 2019 | June 30, 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 106,079 | $ | 33,996 | ||||
| Accounts receivable, net | 6,580,980 | 2,526,155 | ||||||
| Prepaid expenses | 2,180 | 8,820 | ||||||
| Total Current Assets | 6,689,239 | 2,568,971 | ||||||
| Property and equipment, net | 10,669 | 11,048 | ||||||
| Goodwill | 6,020 | 6,020 | ||||||
| Intangible asset - purchased software, net | 2,441,549 | 3,025,801 | ||||||
| Other assets | 8,761 | 3,058 | ||||||
| Total Assets | $ | 9,156,238 | $ | 5,614,898 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 1,797,065 | $ | 366,274 | ||||
| Accrued expenses | 4,538,949 | 3,368,801 | ||||||
| Contract liabilities | 115,166 | - | ||||||
| Due to related parties | 88,072 | 65,459 | ||||||
| Notes payable to officers | 26,006 | 25,251 | ||||||
| Convertible notes payable, net | 108,618 | 2,351 | ||||||
| Liabilities in arrears with convertible features | 109,000 | 109,000 | ||||||
| Liabilities in arrears - judgement settlement agreement (Note 7) | 784,313 | 855,660 | ||||||
| Derivative liability | 586,073 | 133,669 | ||||||
| Liabilities of discontinued operations | 82,795 | 82,795 | ||||||
| Total Current Liabilities | 8,236,057 | 5,009,260 | ||||||
| Commitments and Contingencies (Note 12) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at December 31, 2019 and June 30, 2019 | 10 | 10 | ||||||
Common stock, $0.01 par value; 100,000,000 shares authorized, 12,667,367 shares issued and 12,493,641 shares outstanding at December 31, 2019, and 11,689,078 shares issued and outstanding at June 30, 2019 | 124,936 | 116,890 | ||||||
| Additional paid-in-capital | 230,495,006 | 214,007,203 | ||||||
| Common stock to be issued | 141,225 | 115,388 | ||||||
| Accumulated other comprehensive income | 33,132 | - | ||||||
| Accumulated deficit | (229,874,128 | ) | (213,633,853 | ) | ||||
| Total Stockholders’ Equity | 920,181 | 605,638 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 9,156,238 | $ | 5,614,898 | ||||
| March 31, 2020 | June 30, 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 8,054 | $ | 33,996 | ||||
| Accounts receivable, net | 6,409,386 | 2,526,155 | ||||||
| Prepaid expenses | 437 | 8,820 | ||||||
| Other assets | 227,486 | - | ||||||
| Total Current Assets | 6,645,363 | 2,568,971 | ||||||
| Property and equipment, net | 10,678 | 11,048 | ||||||
| Goodwill | 6,020 | 6,020 | ||||||
| Intangible asset - purchased software, net | 2,117,009 | 3,025,801 | ||||||
| Other assets | 12,792 | 3,058 | ||||||
| Total Assets | $ | 8,791,862 | $ | 5,614,898 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | 3,560,910 | $ | 366,274 | ||||
| Accrued expenses | 796,434 | 3,368,801 | ||||||
| Contract liabilities | 170,449 | - | ||||||
| Due to related parties | 88,907 | 65,459 | ||||||
| Notes payable to officers | 26,420 | 25,251 | ||||||
| Convertible notes payable, net | 253,712 | 2,351 | ||||||
| Liabilities in arrears with convertible features | 109,000 | 109,000 | ||||||
| Liabilities in arrears - judgement settlement agreement (Note 7) | 762,921 | 855,660 | ||||||
| Derivative liability | 343,193 | 133,669 | ||||||
| Liabilities of discontinued operations | 82,795 | 82,795 | ||||||
| Total Current Liabilities | 6,194,741 | 5,009,260 | ||||||
| Commitments and Contingencies (Note 12) | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at March 31, 2020 and June 30, 2019 | 10 | 10 | ||||||
| Common stock, $0.01 par value; 100,000,000 shares authorized, 13,486,040 shares issued and 13,312,314 shares outstanding at March 31, 2020, and 11,689,078 shares issued and outstanding at June 30, 2019 | 133,123 | 116,890 | ||||||
| Additional paid-in-capital | 230,811,941 | 214,007,203 | ||||||
| Common stock to be issued | 8,725 | 115,388 | ||||||
| Accumulated other comprehensive income | 125,310 | - | ||||||
| Accumulated deficit | (228,481,988 | ) | (213,633,853 | ) | ||||
| Total Stockholders’ Equity | 2,597,121 | 605,638 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 8,791,862 | $ | 5,614,898 | ||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 3 |
mPhase Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenue | $ | 7,556,507 | $ | - | $ | 22,688,086 | $ | - | ||||||||
| Cost of revenue | 5,624,876 | - | 16,955,320 | - | ||||||||||||
| Gross Profit | 1,931,631 | - | 5,732,766 | - | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Software development costs | 16,905 | - | 2,126,942 | - | ||||||||||||
| General and administrative expenses | 694,554 | 1,422,737 | 18,558,605 | 1,541,960 | ||||||||||||
| Total Operating Expenses | 711,459 | 1,422,737 | 20,685,547 | 1,541,960 | ||||||||||||
| Operating Income (Loss) | 1,220,172 | (1,422,737 | ) | (14,952,781 | ) | (1,541,960 | ) | |||||||||
| Other (Expense) Income: | ||||||||||||||||
| Interest expense | (76,817 | ) | (14,027 | ) | (172,470 | ) | (147,936 | ) | ||||||||
| Gain on change in fair value of derivative liability | 505,649 | - | 976,049 | - | ||||||||||||
| Initial derivative income (expense) | 12,231 | - | (245,572 | ) | - | |||||||||||
| Amortization of debt discount | (248,685 | ) | (1,843 | ) | (421,590 | ) | (7,976 | ) | ||||||||
| Amortization of deferred financing costs | (11,944 | ) | - | (19,473 | ) | - | ||||||||||
| Amortization of original issue discount | (8,466 | ) | - | (12,298 | ) | - | ||||||||||
| Gain on debt extinguishments | - | - | - | 16,279 | ||||||||||||
| Total Other Income (Expense) | 171,968 | (15,870 | ) | 104,646 | (139,633 | ) | ||||||||||
| Income (Loss) from continuing operations before income taxes | 1,392,140 | (1,438,607 | ) | (14,848,135 | ) | (1,681,593 | ) | |||||||||
| Income taxes | - | - | - | - | ||||||||||||
| Income (Loss) from continuing operations | 1,392,140 | (1,438,607 | ) | (14,848,135 | ) | (1,681,593 | ) | |||||||||
| Discontinued operations (Note 13) | ||||||||||||||||
| Loss from discontinued operations | - | (3,805 | ) | - | (14,713 | ) | ||||||||||
| Net income (loss) | $ | 1,392,140 | $ | (1,442,412 | ) | $ | (14,848,135 | ) | $ | (1,696,306 | ) | |||||
| Comprehensive income (loss): | ||||||||||||||||
| Unrealized gain on currency translation adjustment | 92,178 | - | 125,310 | - | ||||||||||||
| Comprehensive income (loss) | $ | 1,484,318 | $ | (1,442,412 | ) | $ | (14,722,825 | ) | $ | (1,696,306 | ) | |||||
| Income (Loss) per common share: | ||||||||||||||||
| Income (loss) from continuing operations per common share – basic | $ | 0.11 | $ | (0.13 | ) | $ | (1.18 | ) | $ | (0.22 | ) | |||||
| Income (loss) from continuing operations per common share – diluted | $ | 0.02 | $ | (0.13 | ) | $ | (1.18 | ) | $ | (0.22 | ) | |||||
| Loss from discontinued operations per common share – basic and diluted | $ | - | $ | (0.00 | ) | $ | - | $ | (0.01 | ) | ||||||
| Income (loss) per common share – basic | $ | 0.11 | $ | (0.13 | ) | $ | (1.18 | ) | $ | (0.23 | ) | |||||
| Income (loss) per common share – diluted | $ | 0.02 | $ | (0.13 | ) | $ | (1.18 | ) | $ | (0.23 | ) | |||||
| Weighted average shares outstanding – basic | 13,107,042 | 10,943,154 | 12,562,668 | 7,496,294 | ||||||||||||
| Weighted average shares outstanding – diluted | 53,270,177 | 10,943,154 | 12,562,668 | 7,496,294 | ||||||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 4 |
mPhase Technologies, Inc.
Condensed Consolidated Statements of OperationsStockholders’ Equity (Deficit)
For the Nine Months Ended March 31, 2020 and 2019
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue | $ | 7,561,967 | $ | - | $ | 15,131,579 | $ | - | ||||||||
| Cost of revenue | 5,623,930 | - | 11,330,444 | - | ||||||||||||
| Gross Profit | 1,938,037 | - | 3,801,135 | - | ||||||||||||
| Operating Expenses: | ||||||||||||||||
| Software development costs | 906,423 | - | 2,110,037 | - | ||||||||||||
| General and administrative expenses | 7,122,030 | 54,754 | 17,864,051 | 119,223 | ||||||||||||
| Total Operating Expenses | 8,028,453 | 54,754 | 19,974,088 | 119,223 | ||||||||||||
| Operating loss | (6,090,416 | ) | (54,754 | ) | (16,172,953 | ) | (119,223 | ) | ||||||||
| Other (Expense) Income: | ||||||||||||||||
| Interest expense | (56,787 | ) | (22,049 | ) | (95,653 | ) | (133,908 | ) | ||||||||
| Gain on change in fair value of derivative liability | 404,597 | - | 470,400 | - | ||||||||||||
| Initial derivative liability expense | (42,227 | ) | - | (257,803 | ) | - | ||||||||||
| Amortization of debt discount | (140,242 | ) | (2,581 | ) | (172,905 | ) | (6,133 | ) | ||||||||
| Amortization of deferred financing costs | (6,008 | ) | - | (7,529 | ) | - | ||||||||||
| Amortization of original issue discount | (3,681 | ) | - | (3,832 | ) | - | ||||||||||
| Gain on debt extinguishments | - | 16,278 | - | 16,278 | ||||||||||||
| Total Other Income (Expense) | 155,652 | (8,397 | ) | (67,322 | ) | (123,763 | ) | |||||||||
| (Loss) income from continuing operations before income taxes | (5,934,764 | ) | (63,151 | ) | (16,240,275 | ) | (242,986 | ) | ||||||||
| Income taxes | - | - | - | - | ||||||||||||
| (Loss) income from continuing operations | (5,934,764 | ) | (63,151 | ) | (16,240,275 | ) | (242,986 | ) | ||||||||
| Discontinued operations (Note 13) | ||||||||||||||||
| Income (loss) from discontinued operations | - | 6,902 | - | (10,908 | ) | |||||||||||
| Net loss | $ | (5,934,764 | ) | $ | (56,249 | ) | $ | (16,240,275 | ) | $ | (253,894 | ) | ||||
| Comprehensive loss: | ||||||||||||||||
| Unrealized (loss) gain on currency translation adjustment | (21,562 | ) | - | 33,132 | - | |||||||||||
| Comprehensive loss | $ | (5,956,326 | ) | $ | (56,249 | ) | $ | (16,207,143 | ) | $ | (253,894 | ) | ||||
| Loss per common share: | ||||||||||||||||
| Loss from continuing operations per common share – basic and diluted | $ | (0.48 | ) | $ | (0.01 | ) | $ | (1.32 | ) | $ | (0.04 | ) | ||||
| (Loss) income from discontinued operations per common share – basic and diluted | $ | - | $ | 0.00 | $ | - | $ | (0.00 | ) | |||||||
| Loss per common share – basic and diluted | $ | (0.48 | ) | $ | (0.01 | ) | $ | (1.32 | ) | $ | (0.04 | ) | ||||
| Weighted average shares outstanding – basic and diluted | 12,473,865 | 7,917,087 | 12,294,895 | 5,809,871 | ||||||||||||
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
| Shares | $0.01 Par Value | Shares | $0.01 Par Value | Additional Capital | Common Stock to be Issued | Accumulated Comprehensive Income | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance June 30, 2019 | 1,000 | $ | 10 | 11,689,078 | $ | 116,890 | $ | 214,007,203 | $ | 115,388 | $ | - | $ | (213,633,853 | ) | $ | 605,638 | |||||||||||||||||||
| Issuance of common stock to accredited investors in private placements | 380,000 | 3,800 | 91,200 | (30,500 | ) | 64,500 | ||||||||||||||||||||||||||||||
| Issuance of common stock for the conversion of related party debts and strategic vendor payables | 294,654 | 2,947 | 70,716 | (73,663 | ) | - | ||||||||||||||||||||||||||||||
| Warrants earned under employment contract | 9,970,787 | 9,970,787 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | 54,694 | 54,694 | ||||||||||||||||||||||||||||||||||
| Net loss | (10,305,511 | ) | (10,305,511 | ) | ||||||||||||||||||||||||||||||||
| Balance September 30, 2019 | 1,000 | $ | 10 | 12,363,732 | $ | 123,637 | $ | 224,139,906 | $ | 11,225 | $ | 54,694 | $ | (223,939,364 | ) | $ | 390,108 | |||||||||||||||||||
| Issuance of common stock to accredited investors in private placements | 10,000 | 100 | 2,400 | 130,000 | 132,500 | |||||||||||||||||||||||||||||||
| Issuance of common stock for accrued services | 62,000 | 620 | 14,880 | 15,500 | ||||||||||||||||||||||||||||||||
| Restricted shares issued under employment contract | 57,909 | 579 | 106,078 | 106,657 | ||||||||||||||||||||||||||||||||
| Warrants earned under employment contract | 6,231,742 | 6,231,742 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (21,562 | ) | (21,562 | ) | ||||||||||||||||||||||||||||||||
| Net loss | (5,934,764 | ) | (5,934,764 | ) | ||||||||||||||||||||||||||||||||
| Balance December 31, 2019 | 1,000 | $ | 10 | 12,493,641 | $ | 124,936 | $ | 230,495,006 | $ | 141,225 | $ | 33,132 | $ | (229,874,128 | ) | $ | 920,181 | |||||||||||||||||||
| Issuance of common stock to accredited investors in private placements | 739,577 | 7,396 | 275,104 | (132,500 | ) | 150,000 | ||||||||||||||||||||||||||||||
| Issuance of common stock for services related to private placements | 11,003 | 110 | (110 | ) | - | |||||||||||||||||||||||||||||||
| Issuance of common stock for conversions of convertible promissory notes | 68,093 | 681 | 18,319 | 19,000 | ||||||||||||||||||||||||||||||||
| Stock-based compensation for restricted shares of common stock under employment contract | 23,622 | 23,622 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | 92,178 | 92,178 | ||||||||||||||||||||||||||||||||||
| Net income | 1,392,140 | 1,392,140 | ||||||||||||||||||||||||||||||||||
| Balance March 31, 2020 | 1,000 | $ | 10 | 13,312,314 | $ | 133,123 | $ | 230,811,941 | $ | 8,725 | $ | 125,310 | $ | (228,481,988 | ) | $ | 2,597,121 | |||||||||||||||||||
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||
| Shares | $0.01 Par Value | Shares | $0.01 Par Value | Additional 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 | ) | ||||||||||||||
| Reversal of accrued fees from private placements to accredited investors | 7,500 | 7,500 | ||||||||||||||||||||||||||
| Issuance of common stock to accredited investors in private placements | 80,000 | 800 | 19,200 | 20,000 | ||||||||||||||||||||||||
| Issuance of common stock for the conversion of related party debts and strategic vendor payables | 593,240 | 5,932 | 142,378 | 148,310 | ||||||||||||||||||||||||
| Net loss | (56,249 | ) | (56,249 | ) | ||||||||||||||||||||||||
| Balance December 31, 2018 | - | $ | - | 8,540,835 | $ | 85,408 | $ | 210,105,548 | $ | (211,932,586 | ) | $ | (1,741,630 | ) | ||||||||||||||
| Issuance of common stock to accredited investors in private placements | 320,000 | 3,200 | 76,800 | 80,000 | ||||||||||||||||||||||||
| Issuance of common stock in connection with employment contract | 2,620,899 | 26,209 | 1284,240 | 1,310,449 | ||||||||||||||||||||||||
| Issuance of preferred stock in connection with employment contract | 1,000 | $ | 1 | (1 | ) | - | ||||||||||||||||||||||
| Net loss | (1,442,412 | ) | (1,442,412 | ) | ||||||||||||||||||||||||
| Balance March 31, 2019 | 1,000 | $ | 1 | 11,481,734 | $ | 114,817 | $ | 211,466,587 | $ | (213,374,998 | ) | $ | (1,793,593 | ) | ||||||||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 5 |
mPhase Technologies, Inc.
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)Cash Flows
For the Six Months Ended December 31, 2019 and 2018
(Unaudited)
| Preferred Stock | Common Stock | Additional | Common | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | $0.01 Par Value | Shares | $0.01 Par Value | Paid in Capital | Stock to be Issued | Comprehensive Income | Accumulated Deficit | Stockholders’ Equity | ||||||||||||||||||||||||||||
| Balance June 30, 2019 | 1,000 | $ | 10 | 11,689,078 | $ | 116,890 | $ | 214,007,203 | $ | 115,388 | $ | - | $ | (213,633,853 | ) | $ | 605,638 | |||||||||||||||||||
| Issuance of common stock to accredited investors in private placements | 380,000 | 3,800 | 91,200 | (30,500 | ) | 64,500 | ||||||||||||||||||||||||||||||
| Issuance of common stock for the conversion of related party debts and strategic vendor payables | 294,654 | 2,947 | 70,716 | (73,663 | ) | - | ||||||||||||||||||||||||||||||
| Warrants earned under employment contract | 9,970,787 | 9,970,787 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | 54,694 | 54,694 | ||||||||||||||||||||||||||||||||||
| Net loss | (10,305,511 | ) | (10,305,511 | ) | ||||||||||||||||||||||||||||||||
| Balance September 30, 2019 | 1,000 | $ | 10 | 12,363,732 | $ | 123,637 | $ | 224,139,906 | $ | 11,225 | $ | 54,694 | $ | (223,939,364 | ) | $ | 390,108 | |||||||||||||||||||
| Issuance of common stock to accredited investors in private placements | 10,000 | 100 | 2,400 | 130,000 | 132,500 | |||||||||||||||||||||||||||||||
| Issuance of common stock for the conversion of related party debts and strategic vendor payables | 62,000 | 620 | 14,880 | 15,500 | ||||||||||||||||||||||||||||||||
| Restricted shares issued under employment contract | 57,909 | 579 | 106,078 | 106,657 | ||||||||||||||||||||||||||||||||
| Warrants earned under employment contract | 6,231,742 | 6,231,742 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (21,562 | ) | (21,562 | ) | ||||||||||||||||||||||||||||||||
| Net loss | (5,934,764 | ) | (5,934,764 | ) | ||||||||||||||||||||||||||||||||
| Balance December 31, 2019 | 1,000 | $ | 10 | 12,493,641 | $ | 124,936 | $ | 230,495,006 | $ | 141,225 | $ | 33,132 | $ | (229,874,128 | ) | $ | 920,181 | |||||||||||||||||||
| For the Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (14,848,135 | ) | $ | (1,696,306 | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Stock-based compensation | 16,316,344 | 1,310,449 | ||||||
| Depreciation and amortization | 700,387 | - | ||||||
| Amortization of debt discount | 421,590 | 7,976 | ||||||
| Initial derivative expense | 245,572 | - | ||||||
| Amortization of deferred financing costs | 19,473 | - | ||||||
| Amortization of original issue discount | 12,298 | - | ||||||
| Gain on change in fair value of derivative liability | (976,049 | ) | - | |||||
| Gain on debt extinguishments | - | (16,279 | ) | |||||
| Amortization of deferred compensation and beneficial conversion interest expense | - | 91,177 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | (3,883,231 | ) | - | |||||
| Increase in other assets | (9,734 | ) | - | |||||
| Decrease (increase) in prepaid expenses | 8,383 | (3,686 | ) | |||||
| Increase in contract liabilities | 170,449 | - | ||||||
| Increase in accounts payable and accrued expenses | 683,154 | 188,354 | ||||||
| Net cash used in operating activities of continuing operations | (1,139,499 | ) | (118,315 | ) | ||||
| Net cash used in operating activities of discontinued operations | - | (31,056 | ) | |||||
| Net cash used in operating activities | (1,139,499 | ) | (149,371 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (553 | ) | - | |||||
| Net cash used in investing activities of continuing operations | (553 | ) | - | |||||
| Net cash used in investing activities of discontinued operations | - | - | ||||||
| Net cash used in investing activities | (553 | ) | - | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of convertible notes payable, net | 940,000 | - | ||||||
| Proceeds from sale of common stock, net of finder’s fees | 347,000 | 110,000 | ||||||
| Proceeds from notes payable to related parties | 37,800 | 93,046 | ||||||
| Repayments of notes payable to related parties | (32,000 | ) | (588 | ) | ||||
| Repayments under settlement agreement | (120,000 | ) | (28,004 | ) | ||||
| Repayments of convertible notes payable | (184,000 | ) | - | |||||
| Net cash provided by financing activities of continuing operations | 988,800 | 174,454 | ||||||
| Net cash provided by financing activities of discontinued operations | - | - | ||||||
| Net cash provided by financing activities | 988,800 | 174,454 | ||||||
| Effect of foreign exchange rate changes on cash | 125,310 | - | ||||||
| Net (decrease) increase in cash | (25,942 | ) | 25,083 | |||||
| Cash at beginning of period | 33,996 | 261 | ||||||
| Cash at end of period | $ | 8,054 | $ | 25,344 | ||||
| Supplemental disclosure: | ||||||||
| Cash paid for interest | $ | 83,064 | $ | 21,393 | ||||
| Common Stock | Additional | |||||||||||||||||||
| Shares | $0.01 Par Value | 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 | ) | |||||||||
| Reversal of accrued fees from private placements to accredited investors | 7,500 | 7,500 | ||||||||||||||||||
| Issuance of common stock to accredited investors in private placements | 80,000 | 800 | 19,200 | 20,000 | ||||||||||||||||
| Issuance of common stock for the conversion of related party debts and strategic vendor payables | 593,240 | 5,932 | 142,378 | 148,310 | ||||||||||||||||
| Net loss | (56,249 | ) | (56,249 | ) | ||||||||||||||||
| Balance December 31, 2018 | 8,540,835 | $ | 85,408 | $ | 210,105,548 | $ | (211,932,586 | ) | $ | (1,741,630 | ) | |||||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
mPhase Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Six Months Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (16,240,275 | ) | $ | (253,894 | ) | ||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Stock-based compensation | 16,292,722 | - | ||||||
| Depreciation and amortization | 484,278 | - | ||||||
| Initial derivative expense | 257,803 | - | ||||||
| Amortization of debt discount | 172,905 | 6,133 | ||||||
| Amortization of deferred financing costs | 7,529 | - | ||||||
| Amortization of original issue discount | 3,832 | - | ||||||
| Gain on change in fair value of derivative liability | (470,400 | ) | - | |||||
| Gain on debt extinguishments | - | (16,278 | ) | |||||
| Amortization of deferred compensation and beneficial conversion interest expense | - | 91,177 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in accounts receivable | (4,054,825 | ) | - | |||||
| Increase in other assets | (5,703 | ) | - | |||||
| Decrease in prepaid expenses | 6,640 | - | ||||||
| Increase in contract liabilities | 115,166 | - | ||||||
| Increase in accounts payable and accrued expenses | 2,769,479 | 243,912 | ||||||
| Net cash (used in) provided by operating activities of continuing operations | (660,849 | ) | 71,050 | |||||
| Net cash used in operating activities of discontinued operations | - | (175,094 | ) | |||||
| Net cash used in operating activities | (660,849 | ) | (104,044 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of convertible notes payable, net | 665,000 | - | ||||||
| Proceeds from sale of common stock, net of finder’s fees | 197,000 | 30,000 | ||||||
| Proceeds from notes payable to related parties | 37,800 | 82,870 | ||||||
| Repayments under settlement agreement | (90,000 | ) | - | |||||
| Repayments of convertible notes payable | (78,000 | ) | (8,151 | ) | ||||
| Repayments of notes payable to related parties | (32,000 | ) | (588 | ) | ||||
| Net cash provided by financing activities of continuing operations | 699,800 | 104,131 | ||||||
| Net cash provided (used) by financing activities of discontinued operations | - | - | ||||||
| Net cash provided by financing activities | 699,800 | 104,131 | ||||||
| Effect of foreign exchange rate changes on cash | 33,132 | - | ||||||
| Net increase in cash | 72,083 | 87 | ||||||
| Cash at beginning of period | 33,996 | 261 | ||||||
| Cash at end of period | $ | 106,079 | $ | 348 | ||||
| Supplemental disclosure: | ||||||||
| Cash paid for interest | $ | 35,053 | $ | 9,659 | ||||
| For the Nine Months Ended | ||||||||
| March 31, | ||||||||
| 2020 | 2019 | |||||||
| Supplemental disclosure of non-cash operating activities: | ||||||||
| Initial fair value of derivative liability recorded as debt discount | $ | 940,001 | $ | - | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Issuance of Common Stock for accrued services | ||||||||
| Value | $ | 15,500 | $ | 575,000 | ||||
| Shares | 62,000 | 1,150,000 | ||||||
| Issuance of Common Stock for the conversion of Related Party debts and Strategic Vendor payables | ||||||||
| Value | $ | 73,663 | $ | 1,801,056 | ||||
| Shares | 294,654 | 3,898,732 | ||||||
| Issuance of Common Stock for services related to private placements | ||||||||
| Value | $ | 11,250 | $ | - | ||||
| Shares | 11,003 | - | ||||||
| Issuance of Common Stock for conversions of convertible promissory notes | ||||||||
| Value | $ | 19,000 | $ | - | ||||
| Shares | 68,093 | - | ||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
| 7 |
| For the Six Months Ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Supplemental disclosure of non-cash operating activities: | ||||||||
| Initial fair value of derivative liability recorded as debt discount | $ | 665,001 | $ | - | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Issuance of Common Stock for accrued services | ||||||||
| Value | $ | 15,500 | $ | 575,000 | ||||
| Shares | 62,000 | 1,150,000 | ||||||
| Issuance of Common Stock for the conversion of Related Party debts and Strategic Vendor payables | ||||||||
| Value | $ | 73,663 | $ | 1,801,056 | ||||
| Shares | 294,654 | 3,898,732 | ||||||
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION
Organization and Nature of Business
mPhase Technologies, Inc., including its wholly-owned subsidiaries, are collectively referred to herein as “mPhase,” “XDSL”, “Company,” “us,” or “we.”
The Company was incorporated in the state of New Jersey in 1979 under the name Tecma Laboratory, Inc. and has subsequently operated under Tecma Laboratories, Inc., and Lightpaths TP Technologies, Inc., until June 2, 1997 when the Company changed its name to mPhase Technologies, Inc.
On January 11, 2019, the Company underwent a major change in management and control. The new management of the Company is positioning the Company to be a technology leader in artificial intelligence and machine learning while enabling a more rapid commercial development of its patent portfolio and other intellectual property. The Company’s goal is to generate significant revenue from its artificial intelligence and machine learning technologies.
On February 15, 2019, the Company acquired Travel Buddhi, a software platform to enhance travel via ultra-customization tools that tailor a planned trip experience in ways not previously available.
On June 30, 2019, the Company acquired 99% of the outstanding common shares of Alpha Predictions LLP (“Alpha Predictions”). Alpha Predictions is an India-based technology company that has developed a suite of commercial data analysis products for use across multiple industries. The Company expects the acquisition to result in synergies with its other operating divisions, which will drive revenue growth and innovation.
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 prepared in accordance with accounting principles generally accepted in the United States of America (“USU.S. GAAP”) have been omitted pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”); nevertheless, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading.
The condensed consolidated unaudited financial statements for the sixnine months ended DecemberMarch 31, 20192020 and 20182019 include the operations of mPhase and its wholly-owned subsidiaries, mPower Technologies, Inc., Medds, Inc., mPhase Technologies India Private Limited effective March 19, 2019, and Alpha Predictions LLP effective June 30, 2019. All significant intercompany accounts and transactions have been eliminated in the consolidation.
These condensed consolidated unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 30, 2019, contained in the Company’s Annual Report on Form 10-K filed with the SEC on October 15, 2019. The results of operations for the sixnine months ended DecemberMarch 31, 2019,2020, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending June 30, 2020.
Impact of COVID-19 Pandemic
A novel strain of coronavirus, COVID-19, surfaced during December 2019 and has spread around the world, including to the United States. During March 2020, COVID-19 was declared a pandemic by the World Health Organization. The COVID-19 pandemic has resulted in, and is likely to continue to result in, significant economic disruption. Although these disruptions are expected to be temporary, significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. As the Company cannot predict the scope or duration of the COVID-19 pandemic, any anticipated negative financial impact to its results of operations cannot be reasonably estimated but could ultimately be material and last for an extended period of time.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 2: GOING CONCERN
The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred negative cash flows from operations of $660,849$1,139,499 for the sixnine months ended DecemberMarch 31, 2019.2020. At DecemberMarch 31, 2019,2020, the Company had a working capital deficitsurplus of $1,546,818,$450,622, and an accumulated deficit of $229,874,128.$228,481,988. It is management’s opinion that these facts raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date of this report, without additional debt or equity financing. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In order to meet its working capital needs through the next twelve months from the date of this report and to fund the growth of ourthe nanotechnology, artificial intelligence, and machine learning technologies, the Company may consider plans to raise additional funds through the issuance of equity or debt. Although the Company intends to obtain additional financing to meet its cash needs, the Company may be unable to secure any additional financing on terms that are favorable or acceptable to it, if at all.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain reclassifications of prior year amounts have been made to enhance comparability with the current year’s consolidated financial statements, including, but not limited to, presentation of certain items within the consolidated statement of cash flows.
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 consolidated statements of comprehensive income (loss), as other comprehensive income (loss). There have been no significant fluctuations in the exchange rate for the conversion of Indian Rupee to U.S. dollars after the balance sheet date.
Use of Estimates
The preparation of condensed consolidated unaudited financial statements in conformity with USU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and reported amounts of revenues and expenses duringfor the reporting period. Actual results could differ from those estimates. If actual results significantly differ from the Company’s estimates, the Company’s financial condition and results of operations could be materially impacted. Significant estimates include the collectability of accounts receivable, valuation of intangible assets, accrued expenses, valuation of derivative liabilities, stock-based compensation, and the deferred tax asset valuation allowance.reserve for income taxes.
Concentrations of Credit Risk
Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with three financial institutions. Deposits held with the financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits, but may be redeemed upon demand. The Company performs periodic evaluations of the relative credit standing of the financial institutions. With respect to accounts receivable, the Company monitors the credit quality of its customers as well as maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.
Revenue Risk
Agreements which potentially subject the Company to concentrations of revenue risk consist principally of one customer agreement. For the sixnine months ended DecemberMarch 31, 20192020 and 2018,2019, this one customer accounted for 99%100% and 0% of our total revenue, respectively. At DecemberMarch 31, 20192020 and June 30, 2019, this one customer accounted for 96%100% and 99% of our total accounts receivable, respectively.
Cash and Cash Equivalents
For purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money market funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents. There were no cash equivalents at DecemberMarch 31, 20192020 and June 30, 2019.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounts Receivable
The Company regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. The Company maintains reserves for potential credit losses and such losses traditionally have been within its expectations. At DecemberMarch 31, 20192020 and June 30, 2019, the Company determined there was no requirement for an allowance for doubtful accounts.
Goodwill and Intangible Assets
Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company tests goodwill for impairment by first comparing the fair value of the reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss. 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 future benefit derived from such assets and are stated at cost. Amortization is computed using the straight-line method over the estimated useful life of the asset, generally five years. As of DecemberMarch 31, 2019,2020 and June 30, 2019, the book value of patents and licenses of $214,383, has been fully amortized and no amortization expense was recorded for the sixnine months ended DecemberMarch 31, 20192020 and 2018.2019.
Capitalized Software Development Costs
The Company follows the provisions of ASC 350-40, “Internal Use Software.” ASC 350-40 provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improve and support products after they become available are charged to expense as incurred.
Capitalized software development costs are amortized on a straight-line basis over the estimated useful lives, currently three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
At DecemberMarch 31, 2019,2020, the book value of purchased and developed technology of $2,925,827,$2,817,396, included two technology platforms, a machine learning platform and an artificial intelligence platform. For the sixnine months ended DecemberMarch 31, 20192020 and 2018,2019, amortization expense which is included in general and administration expenses within the consolidated statements of operations, was $484,278$700,387 and $0, respectively.
Fair Value of Financial Instruments
The Company accounts for the fair value of financial instruments in accordance with ASC topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements”. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 also describes three levels of inputs that may be used to measure fair value:
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Financial instruments consist principally of cash, accounts receivable, prepaid expenses, 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.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(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.718,Compensation – Stock Compensationand related interpretations. As such, compensation cost is measured on the date of grant at the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the grants. The Company estimates the fair value of stock options and warrants by using the Black-Scholes option pricing model.
Derivative Instruments
The Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC topicTopic 815,Accounting for Derivative Instruments and Hedging Activities as well as related interpretations of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes.
Convertible Debt Instruments
The Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the Financial Accounting Standards Board (“FASB”) ASC. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(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 20162017 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 and six months ended DecemberMarch 31, 2019 and 2018,nine months ended March 31, 2020 and 2019, respectively, as we incurred a net loss for those periods. At DecemberMarch 31, 2019, there were outstanding warrants to purchase up to approximately 37,000,0002020, as we incurred net income for the period, dilutive shares included 37,390,452 shares of the Company’s common stock approximately 703,726related to warrants and 2,772,684 shares of the Company’s common stock related to be issued,convertible promissory notes, assuming exercise of such warrants and conversion of such convertible promissory notes payable held by third parties withoccurred at January 1, 2020, as the exercise price of the warrants and conversion price of the convertible features that if converted, would total approximately 1,400,000 sharespromissory notes were less than the average market price of the Company’s common stock which may dilute future EPS. At Decemberfor the three months ended March 31, 2018, there were2020. Additionally, for dilutive EPS purposes for the three months ended March 31, 2020, the assumed conversion of such convertible promissory notes payable heldat January 1, 2020, reduced the net income amount used in the dilutive EPS computation by third parties and officers and directors, with convertible features that if converted, would total approximately 200,000 shares$280,822 as a result of the Company’s common stock, which may dilute future EPS.net impact of interest that would not have been incurred during the period as well as original issue discounts, deferred financing costs, debt discounts, and derivative liability balances that would not have been required at March 31, 2020.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(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), andLeases (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”)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.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 unaudited consolidated financial statements.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(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 summarizes 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.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 5: INTANGIBLE ASSET – PURCHASED SOFTWARE, NET
Intangible asset – Purchased Software, net, is comprised of the following at:
| December 31, | June 30, | March 31, | June 30, | |||||||||||||
| 2019 | 2019 | 2020 | 2019 | |||||||||||||
| Purchased software | $ | 2,925,827 | $ | 3,025,801 | $ | 2,817,396 | $ | 3,025,801 | ||||||||
| Less: accumulated amortization | (484,278 | ) | - | (700,387 | ) | - | ||||||||||
| Purchased software, net | $ | 2,441,549 | $ | 3,025,801 | $ | 2,117,009 | $ | 3,025,801 | ||||||||
Intangible asset – Purchased Software consists of the following two software technologies:
| Alpha Predictions purchased software | $ | 2,805,860 | ||
| Travel Buddhi purchased software | 119,967 | |||
| Total purchased software | $ | 2,925,827 |
| Alpha Predictions purchased software | $ | 2,697,668 | ||
| Travel Buddhi purchased software | 119,728 | |||
| Total purchased software | $ | 2,817,396 |
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 remainedremains outstanding. At DecemberMarch 31, 2019,2020, the Travel Buddhi technology platform has not been placed in service, but is expected to be during the first quarter of fiscal year 2020.2021.
Purchased software costs are amortized on a straight-line basis over three years. Amortization of purchased software costs is included in general and administration expenses within the consolidated statements of operations.
For the three and sixnine months ended DecemberMarch 31, 2019,2020, amortization expense was $242,139$216,109 and $484,278,$700,387, respectively. There was no amortization expense related to purchased software for the three and sixnine months ended DecemberMarch 31, 2018.2019.
Future amortization expense related to the existing net carrying amount of purchased software at DecemberMarch 31, 20192020 is expected to be as follows:
| Remainder of fiscal year 2020 | $ | 484,311 | $ | 221,920 | ||||
| Fiscal year 2021 | 968,622 | 927,590 | ||||||
| Fiscal year 2022 | 968,622 | 927,590 | ||||||
| Fiscal year 2023 | 19,994 | 39,909 | ||||||
| $ | 2,441,549 | $ | 2,117,009 | |||||
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(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 | For the Six Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
| December 31, | December 31, | March 31, | March 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Subscription | $ | 6,180,000 | $ | - | $ | 12,360,000 | $ | - | $ | 6,180,000 | $ | - | $ | 18,540,000 | $ | - | ||||||||||||||||
| Service and support | 874,979 | - | 1,745,068 | - | 881,606 | - | 2,626,674 | - | ||||||||||||||||||||||||
| Application development and implementation | 506,988 | - | 1,026,511 | - | 494,901 | - | 1,521,412 | - | ||||||||||||||||||||||||
| Revenue | $ | 7,561,967 | $ | - | $ | 15,131,579 | $ | - | $ | 7,556,507 | $ | - | $ | 22,688,086 | $ | - | ||||||||||||||||
For the three and sixnine months ended DecemberMarch 31, 2019,2020, the Company was subject to revenue concentration risk as one customer accounted for 99%100% of our total revenue for both periods.
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. At DecemberMarch 31, 20192020 and June 30, 2019 contract liabilities totaled $115,166$170,449 and $0, respectively.
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 PAYABLELIABILITIES IN ARREARS – JUDGEMENT SETTLEMENT AGREEMENT
Short term notes payableLiabilities in arrears – judgement settlement agreement is comprised of the following:
| December 31, | June 30, | March 31, | June 30, | |||||||||||||
| 2019 | 2019 | 2020 | 2019 | |||||||||||||
| Note payable, John Fife (dba St. George Investors) / Fife Forbearance[1] | $ | 784,313 | $ | 855,660 | $ | 762,921 | $ | 855,660 | ||||||||
| Total short-term notes payable | $ | 784,313 | $ | 855,660 | ||||||||||||
| Total liabilities in arrears – judgement settlement agreement | $ | 762,921 | $ | 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 iswas 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 required payments required aswith the exception of the date hereof. Failurefinal payment of $195,000 which was due and payable in March of 2020. The Company and Fife are negotiating a structure whereby the Company will be able to make anythe final payment of $195,000, which may include additional consideration depending on the payments,timing of when the final payment is made. The Company expects to repay Fife the agreed upon balance due will result inas quickly as possible based upon its available capital. The ultimate final payment amount is expected to be less than the remaining liability balance of $559,313 (at December 31, 2019), to be immediately due and payable by$762,921 presented as liabilities in arrears – judgement settlement agreement on the Company.consolidated balance sheets.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 8:Convertible Debt Arrangements
JMJ Financial
At DecemberMarch 31, 20192020 and June 30, 2019, the amount recorded in current liabilities for this one convertible note and accrued interest thereon due to JMJ Financial was $201,148$205,199 and $193,287, respectively. During the sixnine months ended DecemberMarch 31, 20192020 and 20182019 the Company recorded $7,861$11,911 and $7,212,$10,952, respectively of interest for the outstanding convertible note.
As of DecemberMarch 31, 20192020 and June 30, 2019, the aggregate remaining amount of convertible securities held by JMJ could be converted into 10,05710,260 and 9,664 shares, respectively, with a conversion price of $20.
Accredited Investors
On June 19, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with an accredited investor (“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 Agreementsecurities purchase agreement and Convertible Promissory Noteconvertible 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. During December 2019, the Company paid-off the aggregate balance of the convertible promissory note, including accrued interest and prepayment penalty.
On July 30, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Noteconvertible 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 Agreementsecurities purchase agreement and Convertible Promissory Note.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. TheDuring January 2020, the Company paid-off the aggregate balance of the convertible promissory note, andincluding accrued interest was $53,000 and $1,789, respectively, at December 31, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at December 31, 2019 was $22,362.prepayment penalty.
On September 5, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Noteconvertible 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 Agreementsecurities purchase agreement and Convertible Promissory Noteconvertible 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. TheDuring February 2020, the Company paid-off the aggregate balance of the convertible promissory note, andincluding accrued interest was $53,000 and $1,359, respectively, at December 31, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at December 31, 2019 was $16,989.prepayment penalty.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 8:Convertible Debt Arrangements (continued)
On September 24, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with accredited investors (“Lenders”) and issued 8% Convertible Promissory Notesconvertible 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 Agreementsecurities purchase agreement and Convertible Promissory Notes.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$106,200 and $2,668,$5,129, respectively, at DecemberMarch 31, 2019.2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at DecemberMarch 31, 20192020 was $33,347.$46,312.
On December 2, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Noteconvertible promissory note in the principal amount of $200,000 (including a $7,500 original issue discount) to the Lender with a maturity date of December 2, 2020. On December 2, 2019, the Company received net proceeds in the amount of $182,500 as a result of $10,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreementsecurities purchase agreement and Convertible Promissory Note.convertible promissory note. This convertible debenture converts at the greater of (i) $0.50 per share or (ii) 60% 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 $200,000, original issue discount of $7,500, deferred financing costs of $10,000 and debt discount of $182,500. 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 $200,000 and $1,271,$5,260, respectively, at DecemberMarch 31, 2019.2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at DecemberMarch 31, 20192020 was $15,890.$65,753.
On December 2, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Noteconvertible promissory note in the principal amount of $78,000 to the Lender with a maturity date of December 2, 2020. On December 4, 2019, the Company received net proceeds in the amount of $75,000 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 Agreementsecurities purchase agreement and Convertible Promissory Note.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 $78,629, 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 $496,$2,052, respectively, at DecemberMarch 31, 2019.2020. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at DecemberMarch 31, 20192020 was $6,197.$25,644.
On December 2, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Noteconvertible promissory note in the principal amount of $135,000 (including a $6,750 original issue discount) to the Lender with a maturity date of December 2, 2020. On December 3, 2019, the Company received net proceeds in the amount of $122,000 as a result of $6,250 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreementsecurities purchase agreement and Convertible Promissory Note.convertible promissory note. This convertible debenture converts at the greater of (i) $0.50 per share or (ii) 60% 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 $135,000, original issue discount of $6,750, deferred financing costs of $6,250 and debt discount of $122,000. 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 $135,000 and $858,$3,551, respectively, at DecemberMarch 31, 2019.2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at DecemberMarch 31, 20192020 was $10,726.
$44,384.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 8:Convertible Debt Arrangements (continued)
On December 17, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Noteconvertible promissory note in the principal amount of $81,000 (including a $6,000 original issue discount) to the Lender with a maturity date of December 17, 2020. On December 17, 2019, the Company received net proceeds in the amount of $73,500 as a result of $1,500 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreementsecurities purchase agreement and Convertible Promissory Note.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 $81,599, original issue discount of $6,000, deferred financing costs of $1,500 and debt discount of $73,500. 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 $81,000 and $249,$1,864, respectively, at DecemberMarch 31, 2019.2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at DecemberMarch 31, 20192020 was $3,107.$23,301.
On January 9, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender”) and issued an 8% convertible promissory note in the principal amount of $110,000 (including a $5,000 original issue discount) to the Lender with a maturity date of January 9, 2021. On January 13, 2020, the Company received net proceeds in the amount of $100,000 as a result of $5,000 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 a price of $0.50 per share, however, in the event the closing bid price of the Company’s common stock is less than $0.70 per share on any day while this convertible promissory note is outstanding, this convertible debenture will convert at 60% 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 $107,338, original issue discount of $5,000, deferred financing costs of $5,000 and debt discount of $100,000. 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 $110,000 and $2,194, respectively, at March 31, 2020. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at March 31, 2020 was $24,712.
On January 21, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender”) and issued an 8% convertible promissory note in the principal amount of $68,000 to the Lender with a maturity date of January 21, 2021. On January 23, 2020, the Company received net proceeds in the amount of $65,000 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 $60,735, deferred financing costs of $3,000 and debt discount of $65,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $68,000 and $1,058, respectively, at March 31, 2020. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at March 31, 2020 was $13,227.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 2020 AND 2019
(UNAUDITED)
NOTE 8:Convertible Debt Arrangements (continued)
On February 24, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender”) and issued an 8% convertible promissory note in the principal amount of $53,000 to the Lender with a maturity date of February 24, 2021. On February 26, 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 $43,426, 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 $430, respectively, at March 31, 2020. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at March 31, 2020 was $5,373.
On March 3, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender”) and issued an 8% convertible promissory note in the principal amount of $63,000 to the Lender with a maturity date of March 3, 2021. On March 5, 2020, the Company received net proceeds in the amount of $60,000 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 $51,269, deferred financing costs of $3,000 and debt discount of $60,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $63,000 and $400, respectively, at March 31, 2020. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at March 31, 2020 was $5,005.
At DecemberMarch 31, 20192020 and June 30, 2019, there was $724,200$894,200 and $78,000 of convertible notes payable outstanding, net of discounts of $615,582$640,488 and $75,649, respectively.
During the sixnine months ended DecemberMarch 31, 20192020 and 2018,2019, amortization of original issue discount, deferred financing costs, and debt discount amounted to $184,266$453,361 and $0,$7,976, respectively.
At DecemberDuring the nine months ended March 31, 2020, $19,000 of convertible notes, including fees, were converted into 68,093 shares of the Company’s common stock. During the nine months ended March 31, 2019, there were no conversions of convertible notes into shares of the Company’s common stock.
At March 31, 2020, the Company was in compliance with the terms of the Accredited Investors 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, “DerivativesDerivatives and Hedging.”Hedging. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operation as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from June 30, 2018 to DecemberMarch 31, 2019:2020:
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 | 665,001 | |||
| Initial fair value of derivative liability charged to other expense | 257,803 | |||
| Gain on change in fair value included in earnings | (470,400 | ) | ||
| December 31, 2019 | $ | 586,073 | ||
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 | 940,001 | |||
| Initial fair value of derivative liability charged to other expense | 245,572 | |||
| Gain on change in fair value included in earnings | (976,049 | ) | ||
| March 31, 2020 | $ | 343,193 | ||
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 9: DERIVATIVE LIABILITY (continued)
Total derivative liability at DecemberMarch 31, 20192020 and June 30, 2019 amounted to $586,073$343,193 and $133,669, respectively. The change in fair value included in earnings of $470,400$976,049 is due in part to the quoted market price of the Company’s common stock increasingdecreasing from $0.85 at June 30, 2019 to $0.91$0.55 at DecemberMarch 31, 2019,2020, coupled with slightly increaseddecreased conversion prices due to the effect of “ratchet” provisions incorporated within the convertible notes payable.
The Company used the following assumptions for determining the fair value of the convertible instruments granted under the binomial pricing model with binomial simulations at DecemberMarch 31, 2019:2020:
| Expected volatility | 162.6% - 357.2 | % | ||
| Expected term | 6.9 months - 11.5 months | |||
| Risk-free interest rate | 1.59% - 1.60 | % | ||
| Stock price | $ | 0.91 |
| Expected volatility | 141.9% - 233.2 | % | ||
| Expected term | 5.8 months – 11.1 months | |||
| Risk-free interest rate | 0.15% - 0.17 | % | ||
| Stock price | $0.55 |
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 12,667,36713,486,040 are issued, and13,312,314 are outstanding, and 564,900173,726 are to be issued at DecemberMarch 31, 20192020, 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 DecemberMarch 31, 2019.2020.
Common Stock
Private Placements
During the sixnine months ended DecemberMarch 31, 2019,2020, the Company received $197,000$347,000 of net proceeds from the sale of 788,000997,577 shares of common stock in private placements with accredited investors, incurring no$11,250 in finder’s fees, which were paid by the issuance of which 530,00011,003 shares of common stock. During the nine months ended March 31, 2020, the Company issued 132,000 shares of common stock werewhich was sold in private placements with accredited investors and presented as common stock to be issued subsequent to December 31, 2019.at June 30, 2019 on the consolidated balance sheets.
During the sixnine months ended DecemberMarch 31, 2018,2019, the Company received $30,000$110,000 of net proceeds from the issuance of 120,000440,000 shares of common stock in private placements with accredited investors, incurring no finder’s fees.
Stock Award Payable
During the sixnine months ended DecemberMarch 31, 2019,2020, the Company did not issue any shares of common stock to former officers, outside directors, or strategic consultants.
During the sixnine months ended DecemberMarch 31, 2018,2019, three former officers of the Company, Mr. Biderman as an outside director, and certain strategic consultants, who provided services to the Company, received a total of 1,150,000 shares of common stock, which were valued at $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.
Stock Based Compensation
During the sixnine months ended DecemberMarch 31, 2019,2020, the Company issued 231,635 restricted shares of its common stock to Mr. Cutchens, the Company’s Chief Financial Officer, 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 3 year anniversaries of the Grant Date. During the sixnine months ended DecemberMarch 31, 2019,2020, the Company recorded $90,193$113,815 of stock-based compensation expense related to the vested portion of this award.
During the sixnine months ended DecemberMarch 31, 2018,2019, the Company did not issue anyissued 2,620,899 shares of its common stock to employees or officers or record anyMr. Bhatnagar, the Company’s President and Chief Executive Officer, which were granted on January 11, 2019 (the “Grant Date”), pursuant to the terms of an employment agreement and related transition agreement with the Company. The shares of common stock were immediately vested and the Company recorded $1,310,449 of stock-based compensation expense.
expense during the nine months ended March 31, 2020.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 10: STOCKHOLDERS’ EQUITY (continued)
Conversion of Service Fees
During the sixnine months ended DecemberMarch 31, 2019,2020, the Company issued 62,000 shares of common stock to a former officer who provided services to the Company.
During the sixnine months ended DecemberMarch 31, 2018,2019, former officers converted $671,787 accrued wages into 1,609,594 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, accounts payable to strategic vendors totaling $114,800 were converted into 260,200 shares of common stock.
Reserved Shares
TheAt March 31, 2020, the convertible promissory notes entered into with the accredited investors require the Company to reserve 28,226,60534,209,383 shares of its Common Stockcommon stock for potential future conversions under such instruments.
At DecemberMarch 31, 2019,2020, 7,202 shares of the Company’s Common Stockcommon 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 Stockcommon 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,Chief Executive Officer, 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 (as defined in the Warrant Agreement) 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,Chief Executive Officer, 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 sixnine months ended DecemberMarch 31, 2019,2020, since the Company’s revenue was $15,131,579,$22,688,086, Mr. Bhatnagar earned warrants to acquire 32,405,058 shares of the Company’s common stock under the provisions of the Warrant Agreement. At DecemberMarch 31, 2019,2020, as Mr. Bhatnagar has earned the maximum number of warrants available under the currentprovisions of the Warrant Cap,Agreement to acquire 37,390,452 shares of the Company’s common stock, there remains no additional shares of the Company’s common stock that Mr. Bhatnagar can earn.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 10: STOCKHOLDERS’ EQUITY (continued)
For the sixnine months ended DecemberMarch 31, 2019,2020, the Company recognized $16,202,529 of stock-based compensation expense related to the earned warrants, based upon a value of $0.50 per warrant. At DecemberMarch 31, 2019,2020, there remains no additional stock-based compensation expense related to the Warrant Agreement that the Company expects to recognize over the next sixthree 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 sixnine months ended DecemberMarch 31, 2019:2020:
| 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 DecemberMarch 31, 2019:2020:
| Warrants | Weighted Average Exercise Price | Intrinsic Value | ||||||||||
| Outstanding, June 30, 2019 | 4,985,394 | $ | 0.50 | $ | - | |||||||
| Warrants earned | 32,405,058 | 0.50 | - | |||||||||
| Warrants forfeited | - | - | - | |||||||||
| Outstanding, December 31, 2019 | 37,390,452 | $ | 0.50 | $ | - | |||||||
| Common stock issuable upon exercise of warrants | 37,390,452 | $ | 0.50 | $ | - | |||||||
| Warrants | Weighted Average Exercise Price | Intrinsic Value | ||||||||||
| Outstanding, June 30, 2019 | 4,985,394 | $ | 0.50 | $ | - | |||||||
| Warrants earned | 32,405,058 | 0.50 | - | |||||||||
| Warrants forfeited | - | - | - | |||||||||
| Outstanding, March 31, 2020 | 37,390,452 | $ | 0.50 | $ | - | |||||||
| Common stock issuable upon exercise of warrants | 37,390,452 | $ | 0.50 | $ | - | |||||||
Common Stock Issuable Upon Exercise of Warrants Outstanding | Common Stock Issuable Upon Warrants Exercisable | ||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding at December 31, 2019 | Weighted | Weighted | Number Exercisable at December 31, 2019 | Weighted | ||||||||||||||||
| $ | 0.50 | 37,390,452 | 4.80 | $ | 0.50 | 37,390,452 | $ | 0.50 | |||||||||||||
| 37,390,452 | 4.80 | $ | 0.50 | 37,390,452 | $ | 0.50 | |||||||||||||||
Common Stock Issuable Upon Exercise of Warrants Outstanding | Common Stock Issuable Upon Warrants Exercisable | �� | ||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding at March 31, 2020 | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable at March 31, 2020 | Weighted Average Exercise Price | |||||||||||||||||
| $ | 0.50 | 37,390,452 | 4.55 | $ | 0.50 | 37,390,452 | $ | 0.50 | ||||||||||||||
| 37,390,452 | 4.55 | $ | 0.50 | 37,390,452 | $ | 0.50 | ||||||||||||||||
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(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’ and a director (discussed below), 1,967,960 shares of common stock were reserved to reduce liabilities outstanding at December 31, 2018 (“Settlement Reserve”), and 500,000 shares of common stock were reserved to fund continuing operations (“Funding Reserve”). At DecemberMarch 31, 2019,2020, 315,949 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 | Settlement Reserve | Funding Reserve | |||||||||||||
| Initial Shares of Common Stock to Establish Reserve | 1,967,960 | 500,000 | 1,967,960 | 500,000 | ||||||||||||
| Shares issued concurrently to transition agreement for the conversion of 75% strategic vendors, outstanding December 31, 2018 | (61,200 | ) | - | (61,200 | ) | - | ||||||||||
| Shares available upon execution of the Transition Agreement dated January 11, 2019 | 1,906,760 | 500,000 | 1,906,760 | 500,000 | ||||||||||||
| Shares issued subsequent to a “Change in Control” to accredited investors in private placements through December 31, 2019 | (1,590,811 | ) | (314,937 | ) | ||||||||||||
| Shares of Common Stock available at December 31, 2019 | 315,949 | 185,063 | ||||||||||||||
| Shares issued subsequent to a “Change in Control” to accredited investors in private placements through March 31, 2020 | (1,590,811 | ) | (314,937 | ) | ||||||||||||
| Shares of Common Stock available at March 31, 2020 | 315,949 | 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 CEOChief Executive Officer 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 DecemberMarch 31, 2019,2020, 315,949 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 DecemberMarch 31, 2019,2020, 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 CEOChief Executive Officer 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. Amendment No. 1 to the original Reserve Agreement expired with no further amendment.
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,Chief Executive Officer, to effectuate voting control of the Company pursuant to the terms of the Transition Agreement. The Series A Preferred shares were recorded at par value, are not tradeable, and have a nominal liquidation value.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 11: RELATED PARTY TRANSACTIONS
Microphase Corporation
At DecemberMarch 31, 2019,2020, the Company owed $32,545 to Microphase for previously leased office space at its Norwalk location and for certain research and development services and shared administrative personnel from time to time, all through December 31, 2015.
Former Director
OnDuring September 24, 2018, a former outside director converted $126,364$130,733 of his note payable and accrued interest and $186,000 of accrued fees into 252,728an aggregate of 642,203 shares of common stock.
During the sixnine months ended DecemberMarch 31, 20192020 and 2018,2019, the Company recorded $0 and $1,915$1,931 of accrued interest.
Transactions With Officers
At various points during past fiscal years certain officers and former officers of the Company provided bridge loans to the Company evidenced by individual promissory notes and deferred compensation so as to provide working capital to the Company. All of these notes accrue interest at the rate of 6% per annum, and are payable on demand. During the sixnine months ended DecemberMarch 31, 20192020 and 2018,2019, the officers and former officers advanced $48,052 and $42,880$53,712 to provide working capital to the Company and $1,447$3,625 and $2,294$38,545 has been charged for interest on loans from officers and former officers.
At DecemberMarch 31, 20192020 and June 30, 2019, these outstanding notes including accrued interest totaled $76,419$77,591 and $58,165, respectively. At DecemberMarch 31, 2019,2020, these promissory notes are not convertible into shares of the Company’s common stock.
During the sixnine months ended DecemberMarch 31, 2018,2019, three former officers of the Company, Mr. Biderman as a former outside director, and certain strategic consultants, who provided services to the Company, received a total of 1,150,000 shares of common stock, which were valued at $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 sixnine months ended DecemberMarch 31, 2019,2020, the Company incurred $15,500 of expense related to legal and consulting services provided by Mr. Smiley, the Company’s former CFOChief Financial Officer and legal counsel. During October 2019, the entire balance of $15,500 was converted into 62,000 shares of common stock.
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.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 12: COMMITMENTS AND CONTINGENCIES
Commitments
Office Lease
Effective May 1, 2019, the Company relocated its corporate office to 9841 Washingtonian Blvd., Suite 390, Gaithersburg, MD 20878, and incurs rent expense of $1,350 per month, which is payable to a related party. The lease term with the related party is a month-to-month arrangement.
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 required payments required aswith the exception of the date hereof. Failurefinal payment of $195,000 which was due and payable in March of 2020. The Company and Fife are negotiating a structure whereby the Company will be able to make anythe final payment of $195,000, which may include additional consideration depending upon the payments,timing of when the final payment is made. The Company expects to repay Fife the agreed upon balance due will result inas quickly as possible based upon its available capital. The ultimate final payment amount is expected to be less than the remaining liability balance of $559,313 (at December 31, 2019), to be immediately due and payable by$762,921 presented as liabilities in arrears – judgement settlement agreement on the Companyconsolidated balance sheets (see Note 7).
Should the Company satisfy the liability as described within the Judgement Settlement Agreement above, the Company would realize a gain on such settlement of approximately $560,000.
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,by March 31, 2020, the Warrant Cap for warrantspertaining to Warrants to be issued to Mr. Bhatnagar, the Settlement Reserve shares shall increasebe increased by suchthat number of shares at a price of $0.25, per share to equalwhich equals the amount of the remaining liability.liabilities. Amendment No. 1 to the original Reserve Agreement expired with no further amendment.
The Change in Control Agreements, effective January 11, 2019, also have certain provisions that may accelerate the warrant “earn out” formula contained in the Transition Agreement. As of March 31, 2020, all available warrants to be earned by the Chief Executive Officer have been earned.
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(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 sixnine months ended DecemberMarch 31, 20192020 and 2018.2019.
The assets and liabilities associated with discontinued operations included in our consolidated balance sheets were as follows:
| December 31, 2019 | June 30, 2019 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||
| Cash | $ | - | $ | 106,079 | $ | 106,079 | $ | - | $ | 33,996 | $ | 33,996 | ||||||||||||
| Accounts receivable, net | - | 6,580,980 | 6,580,980 | - | 2,526,155 | 2,526,155 | ||||||||||||||||||
| Prepaid expenses | - | 2,180 | 2,180 | - | 8,820 | 8,820 | ||||||||||||||||||
| Total Current Assets | - | 6,689,239 | 6,689,239 | - | 2,568,971 | 2,568,971 | ||||||||||||||||||
| Property and equipment, net | - | 10,669 | 10,669 | - | 11,048 | 11,048 | ||||||||||||||||||
| Goodwill | - | 6,020 | 6,020 | - | 6,020 | 6,020 | ||||||||||||||||||
| Intangible asset - purchased software, net | - | 2,441,549 | 2,441,549 | - | 3,025,801 | 3,025,801 | ||||||||||||||||||
| Other assets | - | 8,761 | 8,761 | - | 3,058 | 3,058 | ||||||||||||||||||
| Total Assets | $ | - | $ | 9,156,238 | $ | 9,156,238 | $ | - | $ | 5,614,898 | $ | 5,614,898 | ||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||||||
| Accounts payable | $ | 82,795 | $ | 1,797,065 | $ | 1,879,860 | $ | 82,795 | $ | 366,274 | $ | 449,069 | ||||||||||||
| Accrued expenses | - | 4,538,949 | 4,538,949 | - | 3,368,801 | 3,368,801 | ||||||||||||||||||
| Contract liabilities | - | 115,166 | 115,166 | - | - | - | ||||||||||||||||||
| Due to related parties | - | 88,072 | 88,072 | - | 65,459 | 65,459 | ||||||||||||||||||
| Notes payable to officers | - | 26,006 | 26,006 | - | 25,251 | 25,251 | ||||||||||||||||||
| Convertible notes payable, net | - | 108,618 | 108,618 | - | 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) | - | 784,313 | 784,313 | - | 855,660 | 855,660 | ||||||||||||||||||
| Derivative liability | - | 586,073 | 586,073 | - | 133,669 | 133,669 | ||||||||||||||||||
| Total Current Liabilities | $ | 82,795 | $ | 8,153,262 | $ | 8,236,057 | $ | 82,795 | $ | 4,926,465 | $ | 5,009,260 | ||||||||||||
| March 31, 2020 | June 30, 2019 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current Assets | ||||||||||||||||||||||||
| Cash | $ | - | $ | 8,054 | $ | 8,054 | $ | - | $ | 33,996 | $ | 33,996 | ||||||||||||
| Accounts receivable, net | - | 6,409,386 | 6,409,386 | - | 2,526,155 | 2,526,155 | ||||||||||||||||||
| Prepaid expenses | - | 437 | 437 | - | 8,280 | 8,280 | ||||||||||||||||||
| Other assets | - | 227,486 | 227,486 | - | - | - | ||||||||||||||||||
| Total Current Assets | - | 6,645,363 | 6,645,363 | - | 2,568,971 | 2,568,971 | ||||||||||||||||||
| Property and equipment, net | - | 10,678 | 10,678 | - | 11,048 | 11,048 | ||||||||||||||||||
| Goodwill | - | 6,020 | 6,020 | - | 6,020 | 6,020 | ||||||||||||||||||
| Intangible asset - purchased software, net | - | 2,117,009 | 2,117,009 | - | 3,025,801 | 3,025,801 | ||||||||||||||||||
| Other assets | - | 12,792 | 12,792 | - | 3,058 | 3,058 | ||||||||||||||||||
| Total Assets | $ | - | $ | 8,791,862 | $ | 8,791,862 | $ | - | $ | 5,614,898 | $ | 5,614,898 | ||||||||||||
| Liabilities | ||||||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||||||
| Accounts payable | $ | 82,795 | $ | 3,560,910 | $ | 3,643,705 | $ | 82,795 | $ | 366,274 | $ | 449,069 | ||||||||||||
| Accrued expenses | - | 796,434 | 796,434 | - | 3,368,801 | 3,368,801 | ||||||||||||||||||
| Contract liabilities | - | 170,449 | 170,449 | - | - | - | ||||||||||||||||||
| Due to related parties | - | 88,907 | 88,907 | - | 65,459 | 65,459 | ||||||||||||||||||
| Notes payable to officers | - | 26,420 | 26,420 | - | 25,251 | 25,251 | ||||||||||||||||||
| Convertible notes payable, net | - | 253,712 | 253,712 | - | 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) | - | 762,921 | 762,921 | - | 855,660 | 855,660 | ||||||||||||||||||
| Derivative liability | - | 343,193 | 343,193 | - | 133,669 | 133,669 | ||||||||||||||||||
| Total Current Liabilities | $ | 82,795 | $ | 6,111,946 | $ | 6,194,741 | $ | 82,795 | $ | 4,926,465 | $ | 5,009,260 | ||||||||||||
mPHASE TECHNOLOGIES, INC.
CONDENSED NOTES TO CONDENSEDTHE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIXNINE MONTHS ENDED DECEMBERMARCH 31, 20192020 AND 20182019
(UNAUDITED)
NOTE 13: DISCONTINUED OPERATIONS (continued)
For the three and sixnine months ended DecemberMarch 31, 2019,2020, there were no revenue or expenses associated with discontinued operations included in our consolidated statements of operations. For the three and sixnine months ended DecemberMarch 31, 2018,2019, the revenue and expenses associated with discontinued operations included in our consolidated statements of operations were as follows:
| For The Three Months Ended | For The Three Months Ended | |||||||||||||||||||||||
| December 31, 2018 | March 31, 2019 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Cost of revenue | - | - | - | - | - | - | ||||||||||||||||||
| Gross Profit | - | - | - | - | - | - | ||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Software development costs | - | - | - | - | - | - | ||||||||||||||||||
| General and administrative | - | 54,754 | 54,754 | - | 1,422,737 | 1,442,737 | ||||||||||||||||||
| Total Operating Expenses | - | 54,754 | 54,754 | - | 1,422,737 | 1,442,737 | ||||||||||||||||||
| Operating loss | - | (54,754 | ) | (54,754 | ) | - | (1,422,737 | ) | (1,422,737 | ) | ||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||
| Interest expense | (5,631 | ) | (24,675 | ) | (30,306 | ) | (3,805 | ) | (14,027 | ) | (17,832 | ) | ||||||||||||
| Gain on extinguishment of debts | 12,533 | 16,278 | 28,811 | |||||||||||||||||||||
| Amortization of debt discount | - | (1,843 | ) | (1,843 | ) | |||||||||||||||||||
| Total Other Income (Expense) | 6,902 | (8,397 | ) | (1,495 | ) | (3,805 | ) | (15,870 | ) | (19,675 | ) | |||||||||||||
| Income (loss) before income taxes | 6,902 | (63,151 | ) | (56,249 | ) | (3,805 | ) | (1,438,607 | ) | (1,442,412 | ) | |||||||||||||
| Income taxes | - | - | - | - | - | - | ||||||||||||||||||
| Net income (loss) | $ | 6,902 | $ | (63,151 | ) | $ | (56,249 | ) | ||||||||||||||||
| Net loss | $ | (3,805 | ) | $ | (1,438,607 | ) | $ | (1,442,412 | ) | |||||||||||||||
| For The Six Months Ended | For The Nine Months Ended | |||||||||||||||||||||||
| December 31, 2018 | March 31, 2019 | |||||||||||||||||||||||
| Discontinued | Continuing | Total | Discontinued | Continuing | Total | |||||||||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
| Cost of revenue | - | - | - | - | - | - | ||||||||||||||||||
| Gross Profit | - | - | - | - | - | - | ||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||
| Software development costs | - | - | - | - | - | - | ||||||||||||||||||
| General and administrative | - | 119,223 | 119,223 | - | 1,541,960 | 1,541,960 | ||||||||||||||||||
| Total Operating Expenses | - | 119,223 | 119,223 | - | 1,541,960 | 1,541,960 | ||||||||||||||||||
| Operating loss | - | (119,223 | ) | (119,223 | ) | - | (1,541,960 | ) | (1,541,960 | ) | ||||||||||||||
| Other Income (Expense): | ||||||||||||||||||||||||
| Interest expense | (23,441 | ) | (140,041 | ) | (163,482 | ) | (27,245 | ) | (147,936 | ) | (175,181 | ) | ||||||||||||
| Amortization of debt discount | - | (7,976 | ) | (7,976 | ) | |||||||||||||||||||
| Gain on extinguishment of debts | 12,533 | 16,278 | 28,811 | 12,532 | 16,279 | 28,811 | ||||||||||||||||||
| Total Other Income (Expense) | (10,908 | ) | (123,763 | ) | (134,671 | ) | (14,713 | ) | (139,633 | ) | (154,346 | ) | ||||||||||||
| Loss before income taxes | (10,908 | ) | (242,986 | ) | (253,894 | ) | (14,713 | ) | (1,681,593 | ) | (1,696,306 | ) | ||||||||||||
| Income taxes | - | - | - | - | - | - | ||||||||||||||||||
| Net loss | $ | (10,908 | ) | $ | (242,986 | ) | $ | (253,894 | ) | $ | (14,713 | ) | $ | (1,681,593 | ) | $ | (1,696,306 | ) | ||||||
NOTE 14: SUBSEQUENT EVENTS
Subsequent to DecemberMarch 31, 2019, the Company issued 530,000 shares of common stock to accredited investors who invested2020, an aggregate of $132,500 through private placements during December 2019.$114,428 of principal, accrued interest, and fees have been converted into 815,500 shares of the Company’s common stock.
From January 1, 2020 through February 18, 2020, the Company received $150,000 of net proceeds from the issuance of 220,580 shares of common stockSubsequent to accredited investors.
On January 9,March 31, 2020, the Company entered into a Securitiesan Asset Purchase Agreement (“APA”) to acquire CloseComms Limited (“CloseComms”), a United Kingdom based company with an accredited investor (“Lender”offices in Wales (U.K.) and issued an 8% Convertible Promissory Note inCalifornia (U.S.), that has developed a patented, software application platform that can be integrated into a retail customer’s existing Wi-Fi infrastructure, giving the principal amount of $110,000 (including a $5,000 original issue discount)retailer important customer data and enabling AI-enhanced, targeted promotions to drive store traffic and sales. Pursuant to the Lender with a maturity dateterms of January 9, 2021. On January 13, 2020,the APA, the Company received net proceeds in the amount of $100,000 as a result of $5,000 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 a fixed price of $0.50 per share, subject to adjustment.
On January 21, 2020, the Company entered into a Securities Purchase Agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Note in the principal amount of $68,000 to the Lender with a maturity date of January 21, 2021. On January 23, 2020, the Company received net proceeds in the amount of $65,000 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%acquired all of the lowest trading price duringassets owned, used, or held by CloseComms in connection with the 20 days prior to conversion.Business (as defined within the APA), other than Excluded Assets (as defined within the APA), and assuming certain specified liabilities of the Business, in exchange for 2,666,666 restricted shares of the Company’s common stock.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto, and our audited consolidated financial statements and related notes for our fiscal year ended June 30, 2019 found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on October 15, 2019.
Overview
mPhase Technologies, Inc., was incorporated in the state of New Jersey in 1979 under the name Tecma Laboratory, Inc. and has subsequently operated under Tecma Laboratories, Inc., and Lightpaths TP Technologies, Inc., until June 2, 1997 when the Company changed its name to mPhase Technologies, Inc.
On January 11, 2019, the Company underwent a major change in management and control. The new management of the Company is positioning the Company to be a technology leader in artificial intelligence and machine learning while enabling a more rapid commercial development of its patent portfolio and other intellectual property. The Company’s goal is to generate significant revenue from its artificial intelligence and machine learning technologies.
On February 15, 2019, the Company acquired Travel Buddhi, a software platform to enhance travel via ultra-customization tools that tailor a planned trip experience in ways not previously available.
On June 30, 2019, the Company acquired 99% of the outstanding common shares of Alpha Predictions LLP (“Alpha Predictions”). Alpha Predictions is an India-based technology company that has developed a suite of commercial data analysis products for use across multiple industries. The Company expects the acquisition to result in synergies with its other operating divisions, which will drive revenue growth and innovation.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“USU.S. GAAP”). The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, potential impairment of intangible assets, accrued liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in Note 3 above and the Company’s Annual Report on Form 10-K as filed with the SEC on October 15, 2019 are those that depend most heavily on these judgments and estimates. As of DecemberMarch 31, 2019,2020, there had been no material changes to any of the critical accounting policies contained therein.
Results of Operations
Three months ended DecemberMarch 31, 20192020 compared to three months ended DecemberMarch 31, 20182019
Continuing Operations
Revenue
Our revenue increased to $7,561,967$7,556,507 for the three months ended DecemberMarch 31, 2019,2020, compared to $0 for the three months ended DecemberMarch 31, 2018.2019. The increase is the result of expanding upon a new customer agreement entered into during the fourth quarter of fiscal year 2019. Such new customer agreement accounted for 99%100% of our total revenue during the three months ended DecemberMarch 31, 2019,2020, resulting in a significant risk of customer concentration.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Cost of Revenue
Cost of revenue totaled $5,623,930$5,624,876 for the three months ended DecemberMarch 31, 2019,2020, compared to $0 for the three months ended DecemberMarch 31, 2018.2019. 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 decreased to $711,459 for the three months ended March 31, 2020, compared to $1,422,737 for the three months ended March 31, 2019, a decrease of $711,278 or 50%. The decrease is primarily due to stock-based compensation expense related to the Company’s Chief Executive Officer, partially offset by an increase in general and administrative expenses related to the salary of the new Chief Financial Officer, coupled with increased operating expenses to support the increased operations of the business.
Other (Expense) Income
Our other income increased by $187,838 for the three months ended March 31, 2020. The increase is primarily the result of a gain on the change in fair value of derivative liability associated with the convertible promissory notes, partially offset by increases in amortization related to the convertible promissory notes and interest expense.
Net Income from Continuing Operations
We had net income from continuing operations of $1,392,140 for the three months ended March 31, 2020, compared to a net loss of $1,438,607 for the three months ended March 31, 2019, an increase of $2,830,747. The increase in net income is primarily driven by the increases in gross profit and other income, coupled with the decrease in operating expenses, as disclosed above.
Discontinued Operations
For the three months ended March 31, 2020, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations. For the three months ended March 31, 2019, loss from discontinued operations was $3,805.
Nine months ended March 31, 2020 compared to nine months ended March 31, 2019
Continuing Operations
Revenue
Our revenue increased to $22,688,086 for the nine months ended March 31, 2020, compared to $0 for the nine months ended March 31, 2019. The increase is the result of expanding upon a new customer agreement entered into during the fourth quarter of fiscal year 2019. Such new customer agreement accounted for 100% of our total revenue during the nine months ended March 31, 2020, resulting in a significant risk of customer concentration.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Cost of Revenue
Cost of revenue totaled $16,955,320 for the nine months ended March 31, 2020, compared to $0 for the nine months ended March 31, 2019. 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 $8,028,452$20,685,547 for the threenine months ended DecemberMarch 31, 2019,2020, compared to $54,754$1,541,960 for the threenine months ended DecemberMarch 31, 2018,2019, an increase of $7,973,698.$19,143,587. 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 increased operating expenses to support the increased operations of the business, partially offset by lower expenses from prior officers for services rendered.
On a comparative, proforma basis, excluding non-cash stock-based compensation expense related to the Company’s Chief Executive Officer and Chief Financial Officer, our operating expenses increased to $1,665,549$4,369,203 for the threenine months ended DecemberMarch 31, 2019,2020, compared to $54,754$231,511 for the threenine months ended DecemberMarch 31, 2018,2019, an increase of $1,610,795.$4,137,692. The increase is primarily due to increased 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 decreasedincome increased by $164,049,$244,279, or 133%175%, for the threenine months ended DecemberMarch 31, 2019.2020. The decreaseincrease is primarily the result of a gain on the change in fair value of derivative liability associated with the convertible promissory notes, partially offset by increases in expenses and amortization related to the convertible promissory notes and interest expense.
Net Loss from Continuing Operations
We had a net loss from continuing operations of $5,934,763$14,848,135 for the threenine months ended DecemberMarch 31, 2019,2020, compared to a net loss of $63,151$1,681,593 for the threenine months ended December 31, 2018, an increase of $5,871,612. The increase in net loss is primarily driven by the increase in operating expenses, partially offset by the increase in gross profit and decrease in other expense, as disclosed above.
On a comparative, proforma basis, excluding non-cash stock-based compensation expense related to the Company’s Chief Executive Officer and Chief Financial Officer, we generated net income from continuing operations of $428,140 for the three months ended DecemberMarch 31, 2019, an increase of $491,291. The increase in proforma net income is primarily driven by the increase in gross profit and decrease in other expense, partially offset by the increase in operating expenses.
Discontinued Operations
For the three months ended December 31, 2019 and 2018, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations comparatives. For the three months ended December 31, 2018, income from discontinued operations was $6,902.
Six months ended December 31, 2019 compared to six months ended December 31, 2018
Continuing Operations
Revenue
Our revenue increased to $15,131,579 for the six months ended December 31, 2019, compared to $0 for the six months ended December 31, 2018. The increase is the result of expanding upon a new customer agreement entered into during the fourth quarter of fiscal year 2019. Such new customer agreement accounted for 99% of our total revenue during the six months ended December 31, 2019, resulting in a significant risk of customer concentration.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Cost of Revenue
Cost of revenue totaled $11,330,444 for the six months ended December 31, 2019, compared to $0 for the six months ended December 31, 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 $19,974,088 for the six months ended December 31, 2019, compared to $119,223 for the six months ended December 31, 2018, an increase of $19,854,865. 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 increased operating expenses to support the increased operations of the business, partially offset by lower expenses from prior officers for services rendered.
On a comparative, proforma basis, excluding non-cash stock-based compensation expense related to the Company’s Chief Executive Officer and Chief Financial Officer, our operating expenses increased to $3,446,430 for the six months ended December 31, 2019, compared to $119,223 for the six months ended December 31, 2018, an increase of $3,327,207. The increase is primarily due to increased 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 decreased by $56,441, or 46%, for the six months ended December 31, 2019. The decrease is primarily the result of increases in expenses and amortization related to the convertible promissory notes and interest expense, partially offset by a gain on the change in fair value of derivative liability associated with the convertible promissory notes.
Net Loss from Continuing Operations
We had a net loss from continuing operations of $16,240,275 for the six months ended December 31, 2019, compared to a net loss of $242,986 for the six months ended December 31, 2018, an increase of $15,997,289.$13,166,542. 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.
On a comparative, proforma basis, excluding non-cash stock-based compensation expense related to the Company’s Chief Executive Officer and Chief Financial Officer, we generated net income from continuing operations of $287,383$1,468,209 for the sixnine months ended DecemberMarch 31, 2019,2020, an increase of $530,369.$1,839,353. The increase in proforma net income is primarily driven by the increase in gross profit, partially offset by increases in operating expenses and other expense.
Discontinued Operations
For the sixnine months ended DecemberMarch 31, 2019 and 2018,2020, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations comparatives.continuing operations. For the sixnine months ended DecemberMarch 31, 2018,2019, loss from discontinued operations was $10,908.$14,713.
Liquidity and Capital Resources
At DecemberMarch 31, 2019,2020, we had $106,079$8,054 of cash and a working capital deficitsurplus of $1,546,818$450,622 as compared to cash of $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 $660,849$1,139,499 for the sixnine months ended DecemberMarch 31, 20192020 as compared to net cash provided by operating activities of continuing operations of $71,050$118,315 for the sixnine months ended DecemberMarch 31, 2018.2019.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Net cash used in investing activities of continuing operations was $553 for the nine months ended March 31, 2020 as compared to no net cash used in or provided by investing activities of continuing operations for the nine months ended March 31, 2019.
We have financed our operations since inception primarily through proceeds from equity and debt financings. During the sixnine months ended DecemberMarch 31, 2019,2020, net cash provided by financing activities of continuing operations was $699,800,$988,800, as compared to $104,131$174,454 during the sixnine months ended DecemberMarch 31, 2018.2019. Our continued operations primarily depend upon our ability to raise additional capital from various sources including equity and debt financings, as 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 above sources may not be sufficient to enable us to meet our planned operating needs for the next twelve months.
We believe that private placements of our common stock and convertible debt to be issued from time to time will fund our short-term capital needs. At DecemberMarch 31, 2019,2020, we had 100,000,000 authorized shares of common stock of which 12,667,36713,486,040 shares were issued, 13,312,314 shares were outstanding, and 564,900173,726 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.
We have based our estimate on assumptions that may prove to be wrong. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our 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 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company we are not required to provide information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of DecemberMarch 31, 20192020 to determine whether the Company’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in our reports under the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of DecemberMarch 31, 2019.2020.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
As
The disclosure below expands a smaller reporting company we arenumber of the risk factors set forth in “Item 1.A Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 to disclose the potential effects of the Coronavirus pandemic on the Company’s business. These risks and uncertainties, along with those previously disclosed in the Annual Report, could materially adversely affect our business or financial results.
General Risks Relating to our Business
Global or regional health pandemics or epidemics, including COVID-19, could negatively impact our business operations, financial performance and results of operations.
Our business and financial results could be negatively impacted by the recent outbreak of COVID-19 or other pandemics or epidemics. The severity, magnitude and duration of the current COVID-19 pandemic is uncertain, rapidly changing and hard to predict. During 2020, COVID-19 has significantly impacted economic activity and markets around the world, and it could negatively impact our business in numerous ways, including but not requiredlimited to provide information requiredthose outlined below:
| ● | Purchasing power of consumers may be reduced thereby affecting demand for our products and services. | |
| ● | Decreased demand for our products and services due to significant capital constraints as a result of COVID-19 and the macro-economic environment. | |
| ● | Disruptions or uncertainties related to the COVID-19 outbreak for a sustained period of time could result in delays or modifications to our strategic plans and initiatives and hinder our ability to achieve our business objectives. | |
| ● | Illness, travel restrictions or workforce disruptions could negatively affect our business processes. | |
| ● | Government or regulatory responses to pandemics could negatively impact our business. Mandatory lockdowns or other restrictions could materially adversely impact our operations and results. | |
| ● | The COVID-19 outbreak has increased volatility and pricing in the capital markets and volatility is likely to continue which could have a material adverse effect on our ability to obtain debt or equity financing to fund operations. |
These and other impacts of the COVID-19 or other global or regional health pandemics or epidemics could have the effect of heightening many of the other risks described in this “Risk Factors” section. We might not be able to predict or respond to all impacts on a timely basis to prevent near- or long-term adverse impacts to our results. The ultimate impact of these disruptions also depends on events beyond our knowledge or control, including the duration and severity of any outbreak and actions taken by this item.parties other than us to respond to them. Any of these disruptions could have a negative impact on our business operations, financial performance and results of operations, which impact could be material.
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.
During the sixnine months ended DecemberMarch 31, 2019,2020, the Company issued 798,000997,577 shares of its common stock in connection with private placements pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, raising gross proceeds of $199,500.$347,000.
Item 3. Defaults Upon Senior Securities
None.
None.
*Filed herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| mPhase Technologies, Inc. | |
| /s/ Anshu Bhatnagar | |
| Anshu Bhatnagar | |
| Chief Executive Officer (Principal Executive Officer) | |
| /s/ Christopher Cutchens | |
| Christopher Cutchens | |
Chief Financial Officer (Principal Financial and Accounting Officer) | |
| 34 |