<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the Quarter ended September 30, 1999 Commission File No.000-24969
MPHASE TECHNOLOGIES, INC. (FORMERLY TECMA LABORATORIES, INC.)
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2287503
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
587 CONNECTICUT AVE., NORWALK, CT 06854-0566
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, (203) 838 - 2741
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes: X No:
------- -------
Transitional Small Business Disclosure Format:
Yes: X No:
------- -------
The number of shares outstanding of each of the registrant's classes of common
stock as of September 30, 1999 is 25,771,825 shares all of one class of $0
stated value no par common stock.
<PAGE>
MPHASE TECHNOLOGIES, INC.
(FORMERLY TECMA LABORATORIES, INC.)
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION
Consolidated Balance Sheet - September 30, 1999 1
Consolidated Statements of Operations - Three
Months Ended September 30, 1999 and 1998 2
Consolidated Statement of Cash Flows - Three
Months Ended September 30, 1999 and 1998 4
Notes to Financial Statements 4-5
Management's Discussion and Analysis of financial
conditions and results of operations 6-9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of
Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits on Reports on Form 8-K 10
Signature Page 11
</TABLE>
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets
Cash and equivalents $ 6,137,490
Due from affiliate 12,525
Prepaid expenses and other current assets 398,048
------------
TOTAL CURRENT ASSETS 6,548,063
Property and equipment, net of accumulated
depreciation of $119,741 461,679
Patents and licensing rights, net of accumulated
amortization of $555,513 1,642,705
------------
TOTAL ASSETS $ 8,652,447
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,058,453
Accrued expenses 770,004
Deferred revenue 40,000
------------
TOTAL LIABILITIES 1,868,457
------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 50,000,000 shares
authorized; 25,771,825 shares issued and
outstanding shares at September 30, 1999 257,718
Additional paid in capital 37,386,256
Deferred compensation (120,000)
Deficit accumulated during development stage (30,732,011)
Treasury stock, 13,750 shares at cost (7,973)
------------
TOTAL STOCKHOLDERS' EQUITY 6,783,990
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,652,447
============
</TABLE>
See notes to the consolidated financial statements.
1.
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
October 2,
1996
(Date of
For the Inception)
Three Months Ended to
September 30, September 30,
1998 1999 1999
-------- -------- --------
<S> <C> <C> <C>
TOTAL REVENUES $ - $ $ -
---------- ---------- ----------
TOTAL REVENUE - -
---------- ---------- ----------
COSTS AND EXPENSES
Research and development 1,118,930 1,491,034 7,543,719
General and administrative 407,098 1,163,766 7,647,398
Licensing fees - - 487,500
Depreciation and amortization 101,081 114,140 564,096
Stock based compensation - 20,000 13,022,605
---------- ---------- ----------
TOTAL COSTS AND EXPENSES 1,627,109 2,788,940 29,265,318
---------- ---------- -----------
LOSS FROM OPERATIONS 1,627,109 2,788,940 29,265,318
---------- ---------- ----------
OTHER INCOME (EXPENSE):
LOSS FROM UNCONSOLIDATED
SUBSIDIARY - - (1,466,467)
INTEREST INCOME (EXPENSE), NET (6,300) 17,578 (226)
---------- ---------- ----------
NET (LOSS) $(1,633,409) $(2,771,362) $(30,732,011)
========== ========== ==========
LOSS PER COMMON SHARE; basic and diluted $ (.19) $ (.11) $ (2.68)
========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES;
OUTSTANDING, Basic and diluted 8,384,532 24,942,965 11,480,425
========== ========== ===========
</TABLE>
See notes to the consolidated financial statements.
2.
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
(A Development Stage Company)
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
October 2,
1996
(Date of
For the Inception)
Three Months Ended to
September 30, September 30,
1998 1999 1999
-------- -------- --------
<S> <C> <C> <C>
Cash Flow Used In Operating
Activities:
Net (Loss) $(1,633,409) $(2,771,362) $(30,732,011)
Adjustments to reconcile net (loss)
to net cash (used in) operating
activities:
Depreciation and amortization 108,460 152,115 675,689
Loss on disposal of fixed asset - - 7,062
Loss on unconsolidated subsidiary - - 1,466,467
Non-cash common stock - 20,000 15,938,058
Common stock option and warrant expense
Changes in assets and liabilities:
Deposits
Prepaid expenses and other current assets 11,600 (299,948) (398,048)
Accounts payable (139,759) 524,681 1,058,454
Accrued expenses 850,753 (1,419,530) (620,627)
Due to affiliate 358,898 (26,860) (448,195)
Deferred revenue 25,000 - 40,000
cash overdraft (8,432)
Receivables from
unconsolidated subsidiary - (150,000)
Net cash (used in) operating
activities (826,889) (3,720,900) (11,921,897)
Cash Flow Used in Investing Activities:
Investment in unconsolidated subsidiary - - (300,000)
Investment in licensing rights and organizational costs (695) (9,703) (124,375)
Investment in fixed assets (3,282) (209,151) (587,719)
Proceed from default of license agreement with
unconsolidated subsidiary - - (300,000)
Net cash (used in) investing
activities (3,977) (218,854) (712,094)
Cash Flow From Financing Activities:
Proceeds from issuance of common stock 1,050,000 2,099,384 18,779,454
Repurchase of treasury stock at cost - - (7,973)
Net cash provided by financing
activities 1,050,000 2,099,384 18,771,481
Net Increase (Decrease)in Cash 219,134 (1,840,370) 6,137,490
Cash, Beginning of Period - 7,977,860 -
Cash, End of Period $ 219,134 6,137,490 6,137,490
=========== =========== ==========
</TABLE>
See notes to the consolidated financial statements.
3.
<PAGE>
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Unaudited)
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the
year ending June 30, 2000. For the year ending June 30, 1998, and
all periods presented thereafter, the Company adopted FASB 128 to
compute earnings per share. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Common
equivalent shares have been excluded from the computation of diluted
EPS since their effect is antidilutive. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on form 10KSB for the year
ended June 30, 1999.
B. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
4.
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mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Unaudited)
C. RELATED PARTY TRANSACTIONS
The management of the Company are also employee of Microphase, Inc.
("Microphase"). On May 1, 1997, the Company entered into an
agreement with Microphase, whereby the Company will use office space
as well as the administrative services of Microphase including the
use of accounting personnel. This Agreement was for $5,000 per month
and was on a month-to-month basis. In July 1998, the office space
agreement was revised to $10,000 per month. Additionally, in July
1998, the Company entered into an agreement with Microphase, whereby
the Company reimburses Microphase $40,000 per month for technical
research and development assistance. During the period ended
September 30, 1998 and 1999, $150,000 and $203,225, respectively,
have been charged to expense under these Agreements and is included
in operating expenses in the accompanying statements of operations.
As of September 30, 1999, the Company has $12,525 due from
affiliates included in the accompanying consolidated balance sheet.
The Company will be obligated to pay a 3% royalty to Microphase on
revenues from the Company's proprietary Traverser-TM- Digital Video
Data Delivery System. No such royalty payments have been made to
date.
D. COMMITMENTS AND CONTINGENCIES
The Company has entered into various agreements with Georgia Tech
Research Corporation ("GTRC"), pursuant to which the Company
receives technical assistance in developing the commercialization of
its digital video and data system. The dollar amount incurred by the
Company for GTRC technical assistance with respect to its research
and development activities during the three months ended September
30, 1998 and 1999 totaled $958,130 and $1,085,515, respectively. If
and when sales commence utilizing this particular technology, the
Company will be obligated to pay to GTRC a royalty of 3% to 5% of
product sales as defined.
E. INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in results of operations in the period that
includes the enactment date. Because of the uncertainty regarding
the Company's future profitability, the future tax benefits of its
losses have been fully reserved for. Therefore, no benefit for the
net operating loss has been recorded in the accompanying
consolidated financial statements.
5.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
mPHASE TECHNOLOGIES, INC.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed financial
statements, as well as information relating to the plans of the Company's
current management.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 vs. September 30, 1998
The Company recorded a net loss of $2,771,362 for the three months ended
September 30, 1999 as compared to a loss of $1,633,409 for the comparable
period ended September 30, 1998. This represents a loss per common share of
$.11 for the period ended September 30, 1999 as compared to a loss per common
share of $.19 for the period ended September 30, 1998. Research and
development expenses were $1,491,034 in 1999 compared to $1,118,930 in 1998
and general and administrative expenses rose to $1,163,766 in 1999 from
$407,098 for the comparable quarter in 1998. The increase in the
administrative costs primarily relate to the hiring of full time employees,
implementation of management employment agreements, market making expenses
relating to investor relations and an increase in the Company's marketing
efforts as the Company is preparing for the release of its first commercial
product which is expected to be available in the year 2000.
PLAN OF OPERATIONS
Year 2000 Issues
Many computer systems and software programs, including several used by the
Company may require modification and conversion to allow date code fields to
accept dates beginning with the year 2000. Major system failures or erroneous
calculations can result if computer system failures are not year 2000
compliant.
The Company is in the process of evaluating the computer systems they now
have in use and does not anticipate a major undertaking to be compliant. The
Company experienced no difficulty at the turn of the new calendar year.
All costs associated with year 2000 compliance that have been incurred by the
Company have been expensed and have not been capitalized. The overall cost to
the Company of modifications and conversion for year 2000 compliance with
relation to the financial statements taken as a whole is not material. The
Company is advised by a substantial majority of its vendors of computer
products upgraded to be year 200 compliant, or will not be affected by the
year 2000 problem. The Company's business could be materially adversely
affected if the Company's computer-based systems are not year 2000 compliant
in a timely manner, the company incurs significant additional expenses
pursuing year 2000 compliance, the Company's vendors do not timely provide
year 200 compliant products, or the COmpany is subject to warranty or other
claims by the Company's clients related to product failures caused by the
year 2000 problem.
6.
<PAGE>
Research and Development Activities
Georgia Tech conducts a significant amount of research and development for us
pursuant to a basic ordering agreement comprised of a series of delivery
orders, which outline the timing, necessary actions and form of payment for
specific tasks related to the completion of certain components of the
Traverser product lines. After the development of the Traverser DVDDS version
1.1, we expect Georgia Tech to continue research and development of the
Traverser product to enhance features and functionality, as well as to
coordinate the effect to develop the Traverser, version 2.0 and additional
products utilizing Traverser technology.
For the three months ended September 30,1998, 1999 and for the period since
inception (October 2,1996) to September 30,1999, approximately $960,000,
$1,085,000 and $5,685,000 respectively, has been billed to mPhase for
research and development conducted by Georgia Tech, of which approximately
$362,000 was included in accrued expenses as of September 30,1999.
We are the sole, worldwide license of the technology developed by Georgia Tech
in conjunction with the Traverser product line. Upon completion of the
commercial product, Georgia Tech will receive a royalty of 3% to 5% of product
sales.
The amount of research and development costs we have expended from October
2,1996, our inception date, through September 30,1999 was approximately
$7,544,000. During the three months ended September 30,1999, we incurred
research and development expenses of approximately $1,490,000 as a consequence
of the continued development of our current DSL products.
STRATEGIC ALLIANCE IMPLEMENTATION
The manufacturer of the Company's TRAVERSER(TM) DIGITAL VIDEO and DATA
Delivery System (DVDDS), Flextronics International LTD. (NASDAQ: FLEX),
completed a pilot run of the central office equipment for the (DVDDS) system
and presently conducting the pilot run for the Intelligent Network Interface
(INI), (a next generation set top box).
LIQUIDITY AND CAPITAL RESOURCES
At September 30,1999 the Company had working capital of $4,679,606
As a result of anticipated required research and development, capital
expenditures and operating losses, during the quarter ended September 30,
1999, we raised additional capital of approximately $1,313,000 through the
issuance of common stock from the exercise of warrants held by sophisticated
investors in transactions exempt from registration sold during 1998 in an
offering pursuant to Rule 505 of Regulation D promulgated by the Securities
and Exchange Commission under the Securities Act of 1933. We also received
approximately $275,000 from the exercise of previously outstanding stock
options granted to employees and consultants. As a result of those private
offerings we anticipate having sufficient working capital through the end of
fiscal year ending June 2000. We do anticipate that, in connection with the
full commercial production of our Traverser DVDDS product we will raise
significant additional funds through a public or private offering of our
common stock or otherwise during the current fiscal year which will end on
June 30, 2000.
7.
<PAGE>
RISK FACTORS WHICH MAY AFFECT OUR BUSINESS
OUR OPERATING HISTORY IS LIMITED
We have a limited operating history upon which you can evaluate our
performance. Before investing in our common stock, you should consider the
risks and difficulties we may encounter as development stage company in the
rapidly evolving market for high-speed internet access, traditional telephone
service and digital television over existing copper telephone lines. These
risks include our ability to:
- complete our Flagship proovers;
- anticipate and adapt to rapid changes in our markets;
- attract initial customers and maintain customer satisfaction;
If we do not successfully manage these risks, our business will suffer. We
cannot assure you that we will successfully address these risks or that our
business strategy will be successful.
WE EXPECT TO INCUR SUBSTANTIAL NET LOSSES FOR THE FORSEEABLE FUTURE.
We expect operating losses and negative cash flow for the foreseeable future
as we must invest in marketing and promotional activities, maintenance of the
Company's technology and operating systems. We cannot be certain when and if
we will achieve sufficient revenues in relation to expenses to become
profitable. We believe that increasing our revenues will depend in large part
on our ability to:
- Complete the beta-stage of our initial products;
- increase consumer awareness of our products and develop
effective marketing and other promotional activities to
develop our customer base;
- develop strategic relationships.
Our future profitability depends on generating and sustaining high revenue
growth while maintaining reasonable expense levels. Slower revenue growth
than we anticipate or operating expenses that exceed our expectations would
harm our business. If we achieve profitability, we cannot be certain that we
would be able to sustain or increase profitability in the future.
WE EXPECT TO USE 3RD PARTY MANUFACTURERS.
Even though we have secured a third party to manufacture our products, the
potential for dependence on a third party manufacturer is inherently risky. If
there is a disruption in supply from Flextronics or another vendor that supplies
the Company with products and or components, we may be unable to complete the
products we desire to sell. Our sales would suffer as a result of a disruption
in the operations of any of our manufacturers.
WE HAVE COMMON MANAGEMENT
Necdet F. Ergul, our Chairman of the Board, Ronald A. Durando, our President and
Chief Executive Officer, and Gustave T. Dotoli, our Chief Operating Officer and
Vice President, respectively, and officers and Necdet F. Ergul and Ronald
Durando are shareholders as well of Microphase Corporation. We currently
purchase from Microphase passive components for the Traverser. Microphase also
provides resources and technology related to the development of Traverser.
Microphase may not be the most economical provider of these components and
resources. In addition, we will pay to Microphase, going forward, a royalty
comprised of a percentage of the commercial product sales of DSL-related
technologies.
8.
<PAGE>
OUR SUCCESS DEPENDS ON INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our intellectual property.
To protect our proprietary rights, we have filed provisional patents and
copyright applications relating to some of our proposed products and technology.
Georgia Tech has filed an application for U.S. Patent for Georgia Tech's Digital
Video and Data System. Although we believe that certain of our technology is
patentable, the patents my not be obtained. Even if the patents are obtained,
they may not afford us sufficient protection for our technologies from third
party infringement. We may elect to seek foreign patent protection, but foreign
patent protection may not be granted. Our failure to protect our intellectual
property could materially adversely affect us.
FORWARD LOOKING AND OTHER STATEMENTS
Forward looking statements above and elsewhere in this report that suggest the
Company will increase revenues or become profitable are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations and cash flows. These
statements are identified by words such as "believes," "expects," "anticipates"
or similar expressions. Such forward looking statements are based on the beliefs
of mPHASE Technologies Inc."mPHASE" or "The Company" and its Board of Directors
in which they attempt to analyze the Company's competitive position in its
industry and the factors affecting its business, including management's
evaluation of its sales potential. Stockholders of the Company should
understand that each of the foregoing risk factors, in addition to those
discussed elsewhere in this quarterly report and in the documents which are
incorporated by reference herein, could affect the future results of mPHASE, and
could cause those results to differ materially from those expressed in the
forward-looking statements contained or incorporated by reference herein. In
addition there can be no assurance that the Company and its Board have correctly
identified and assessed all of the factors affecting the Company's business.
9.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 1999, we had settled a litigation with
Global Music and Media Inc. which had asserted it had the
exclusive right to market our technology. This litigation
was resolved in August 1999 in a settlement agreement
wherein Global Music surrendered its claim to the Company's
technology in exchange for the Company to settle claims of
Hal Willis against Global for a cash payment of $100,000,
the issuance of 75,000 shares of the Company's common stock
and option to purchase another 75,000 shares at $5.6275 per
share and the payment of $90,000 to Global to settle
employee claims, the cost of which has been recorded in the
financial statements as of June 30, 1999. The agreement
also called for the repurchase of 75,000 shares of the
Company's common stock from the owners of Global by the
Company or its co-defendant, Microphase Corporation.
Microphase Corporation repurchased these shares in August,
1999.
Other then the Global Musci litigation, we were and are not
a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
During the quarter ended September 30, 1999, 1,751,845
warrants to purchase the Company shares at $.75 were
exercised generating gross proceeds to the Company of
$1,313,884. Pursuant to an option granted July 15, 1998,
352,259 shares were issued to an investment banking firm.
75,000 shares were issued in connection with the settlement
discussed in item one above. 225,000 shares were issued
upon the exercise of options generating net proceeds to the
Company of $275,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
10.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant, caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
mPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
Dated: January 31, 2000 By: /s/ Ronald A. Durando
-------------------------------------
Ronald A. Durando, President, CEO
11.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 6,137,490
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,548,063
<PP&E> 581,420
<DEPRECIATION> (119,741)
<TOTAL-ASSETS> 8,652,447
<CURRENT-LIABILITIES> 1,868,457
<BONDS> 0
0
0
<COMMON> 258,718
<OTHER-SE> 37,258,283
<TOTAL-LIABILITY-AND-EQUITY> 8,652,447
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,788,940
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (17,578)
<INCOME-PRETAX> (2,771,362)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,771,362)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,771,362)
<EPS-BASIC> (.11)
<EPS-DILUTED> 0
</TABLE>
