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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NO. 000-24969
------------------------
MPHASE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant'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 the registrant's common stock, stated
value $.01 per share, as of November 2, 2000 is 32,272,790 shares.
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<PAGE>
MPHASE TECHNOLOGIES, INC.
FORM 10-Q REPORT
SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I............... FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets--September 30, 2000 (unaudited)
and June 30, 2000......................................... 3
Unaudited Consolidated Statements of Operations--Three
Months ended September 30, 2000 and 1999 and from October
2, 1996 (Date of Inception) to September 30, 2000......... 4
Unaudited Consolidated Statements of Cash Flows--Three
Months ended September 30, 2000 and 1999 and from October
2, 1996 (Date of Inception) to September 30, 2000......... 5
Notes to Consolidated Financial Statements.................. 6
Item 2 Management's Discussion and Analysis of financial condition
and results of
operations................................................ 10
Item 3 Quantitative and Qualitative Disclosures About Market
Risk...................................................... 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 13
Item 2. Changes in Securities....................................... 13
Item 3. Defaults Upon Senior Securities............................. 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
Item 5. Other Information........................................... 13
Item 6. Exhibits on Reports on Form 8-K............................. 14
Signature Page.............................................. 15
Exhibit 3i. Amendment to the Certificate of Incorporation
Exhibit 27. Financial Data Schedule
</TABLE>
2
<PAGE>
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 6,432,417 $ 3,445,634
Accounts receivable....................................... 151,186 1,562,868
Inventory................................................. -- 512,250
Note receivable........................................... 250,000 250,000
Prepaid expenses and other current assets................. 578,726 806,633
------------ -----------
Total Current Assets.................................... 7,412,329 6,577,385
------------ -----------
Production advances--related parties........................ 1,109,641 1,944,020
Property and equipment, net................................. 1,323,756 1,326,229
Patents and licensing rights, net........................... 1,338,520 1,227,181
------------ -----------
Total Assets............................................ $ 11,184,246 $11,074,815
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............................................ $ 1,520,505 $ 3,134,335
Accrued expenses............................................ 1,837,532 2,063,646
Due to officers and related party........................... 412,400 --
Due to related parties...................................... 85,305 49,801
------------ -----------
Total Current Liabilities............................... 3,855,742 5,247,782
------------ -----------
Stockholders' Equity
Common stock, stated value $.01, 150,000,000 shares
authorized; 31,404,540 and 32,272,790 shares issued and
outstanding at June 30, 2000 and September 30, 2000
(Unaudited), respectively................................. 314,045 322,728
Additional paid-in capital.................................. 74,370,291 78,913,791
Deferred compensation....................................... (1,225,668) (1,528,644)
Deficit accumulated during development stage................ (66,122,191) (71,872,869)
Treasury stock, 13,750 shares at cost....................... (7,973) (7,973)
------------ -----------
Total Stockholders' Equity.................................. 7,328,504 5,827,033
============ ===========
Total Liabilities and Stockholders' Equity.............. $ 11,184,246 $11,074,815
============ ===========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 2,
1996
FOR THE (DATE OF
THREE MONTHS ENDED INCEPTION)
SEPTEMBER 30, TO
------------------------- SEPTEMBER 30,
1999 2000 2000
----------- ----------- --------------
<S> <C> <C> <C>
Total Revenues........................................ $ -- $ 1,865,610 $ 2,145,086
----------- ----------- ------------
Costs and Expenses
Cost of sales......................................... -- 871,852 1,003,608
Research and development.............................. 1,491,034 3,162,361 19,371,982
Selling, general and administrative................... 1,163,766 3,125,162 27,125,008
Licensing fees........................................ -- -- 487,500
Depreciation and amortization......................... 114,140 123,458 1,044,515
Non-cash charges for stock based employee
compensation........................................ 45,833 361,934 23,707,653
----------- ----------- ------------
Total Costs and Expenses............................ 2,814,773 7,644,767 72,740,266
----------- ----------- ------------
Loss From Operations................................ 2,814,773 5,779,157 70,595,180
Other Income (Expense):
Minority Interest Loss in Unconsolidated
Subsidiary........................................ -- -- 20,000
Loss From Unconsolidated Subsidiary................. -- -- (1,466,467)
Interest Income (Expense), net...................... 17,578 28,479 168,778
----------- ----------- ------------
Total Other Income (Expense)........................ 17,578 28,479 (1,277,689)
----------- ----------- ------------
Net Loss.............................................. $(2,797,195) $(5,750,678) $(71,872,869)
=========== =========== ============
Loss Per Common Share; basic and diluted.............. $ (.11) $ (.18)
=========== ===========
Weighted Average Common Shares; Outstanding, basic and
diluted............................................. 24,942,965 31,562,727
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 2,
1996
FOR THE (DATE OF
THREE MONTHS ENDED INCEPTION)
SEPTEMBER 30, TO
------------------------- SEPTEMBER 30,
1999 2000 2000
----------- ----------- -------------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss............................................ $(2,797,195) $(5,750,678) $(71,872,869)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 152,115 239,383 1,519,012
Loss on disposal of fixed asset................... -- 26,477 39,335
Loss on unconsolidated subsidiary................. -- -- 1,466,467
Non-cash charges relating to issuance of common
stock, common stock options and warrants........ 45,833 1,517,086 37,866,944
Changes in assets and liabilities:
Accounts receivable............................... -- (1,411,682) (1,562,868)
Inventory......................................... -- (512,250) (512,250)
Prepaid expenses and other current assets......... (299,948) (227,907) (806,633)
Production advances--related party................ -- (834,379) (1,944,020)
Accounts payable.................................. 624,685 1,613,830 3,134,335
Accrued expenses.................................. (1,689,971) 226,114 1,914,274
Due to affiliate and related parties.............. (26,860) (35,504) (385,874)
Due to officers and related party................. 270,441 (412,400) --
Receivables from subsidiary....................... -- -- (150,000)
Note receivable................................... -- -- (250,000)
----------- ----------- ------------
Net cash used in operating activities........... (3,720,900) (5,561,910) (31,544,147)
----------- ----------- ------------
Cash Flow From Investing Activities:
Investment in unconsolidated subsidiary............. -- -- (300,000)
Proceeds from defaulted license agreement with
unconsolidated subsidiary......................... -- -- 300,000
Payments related to patents and licensing rights.... (9,703) -- (152,944)
Purchases of fixed assets........................... (209,151) (156,993) (1,883,771)
----------- ----------- ------------
Net cash used in investing activities............. (218,854) (156,993) (2,036,715)
----------- ----------- ------------
Cash Flow From Financing Activities:
Net proceeds from issuance of common stock and
exercises of options and warrants................. 2,099,384 2,732,120 37,034,469
Repurchase of treasury stock at cost................ -- -- (7,973)
----------- ----------- ------------
Net cash provided by financing activities......... 2,099,384 2,732,120 37,026,496
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash
equivalents......................................... (1,840,370) (2,986,783) 3,445,634
Cash and Cash equivalents, Beginning of Period........ 7,977,860 6,432,417 --
=========== =========== ============
Cash and Cash equivalents, End of Period.............. $ 6,137,490 $ 3,445,634 $ 3,445,634
=========== =========== ============
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--mPhase Technologies, Inc. (the "Company") was
organized on October 2, 1996. On February 17, 1997, the Company acquired Tecma
Laboratories, Inc., ("Tecma") in a transaction accounted for as a reverse merger
whereby Tecma issued 6,600,000 shares of its common stock for all of the issued
and outstanding shares of the Company, and thereafter Tecma changed its name to
the Company's current name. Tecma was primarily engaged in research and
development of certain patented products in the health care field. On June 25,
1998, the Company acquired Microphase Telecommunications, Inc. ("MicroTel") a
Delaware corporation, through the issuance of 2,500,000 shares of its common
stock in exchange for all the issued and outstanding shares of MicroTel. The
assets acquired in this acquisition were patents and patent applications
utilized in the Company's proprietary Traverser-TM- Digital Video Data Delivery
System ("Traverser"). The primary business of mPhase is to design, develop,
manufacture and market high-bandwidth telecommunications products incorporating
direct subscriber line ("DSL") technology. The present activities of the Company
are focused on the deployment of its proprietary Traverser-TM- utilizing
existing twisted pair copper wire infrastructure in "Plain Old Telephone
Systems" ("POTS"), and the sale of component products. The Company continues to
be a development stage company, as defined by Statement of Financial Accounting
Standards ("SFAS") No. 7, "ACCOUNTING AND REPORTING BY DEVELOPMENT STAGE
ENTERPRISES", as it continues to devote substantially all of its efforts to
establishing its core business, and it has not yet commenced the significant
deployment of its planned principal operations.
BASIS OF PRESENTATION--The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q 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, 2000 are not necessarily indicative of the results
that may be expected for a full fiscal year. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on form 10KSB for the year ended June 30, 2000.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
RECLASSIFICATIONS--Certain reclassifications have been made in the prior
period condensed consolidated financial statements to conform to the current
period presentation.
EARNINGS PER SHARE--The Company computes earnings per share in accordance
with SFAS No. 128, "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 affect is antidilutive.
6
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RESEARCH AND DEVELOPMENT--Research and development costs are charged to
operations as incurred.
REVENUE RECOGNITION--As required, the Company has adopted the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on applying
generally accepted accounting principles to revenue recognition based on the
interpretations and practices of the SEC. The Company recognizes revenue for its
"POTS Splitter Shelf" and "Splitter Card" products in accordance with SAB
No. 101. Revenue is recognized at the time of shipment, at which time, no other
significant obligations of the Company exist, other than normal warranty
support. Sales to one customer represent approximately 77% of revenues for the
three months ended September 30, 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--In June 2000, the FASB issued
SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES, which amends the accounting and reporting standards of SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, for
certain derivative instruments and hedging activities. SFAS No. 133, was
previously amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133,
which deferred the effective date of SFAS No. 133 to fiscal years commending
after June 15, 2000. The Company will adopt SFAS No. 138 concurrently with SFAS
No. 133, however, management does not believe that such adoptions will have a
material impact on the Company's results of operations.
In March 2000, the FASB issued Interpretation (FIN) No. 44, "ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB
OPINION NO. 25" "FIN 44 clarifies the definition of employees, the criteria for
determining whether a plan qualifies as a non-compensatory plan, the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in the Interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company adopted the provisions
of FIN 44 as of July 1, 2000.
2. RELATED PARTY TRANSACTIONS
The management of the Company are also employees of Microphase Corp.
("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
January 2000, the office space agreement was revised to $11,050 per month.
Additionally, in July 1998, the Company entered into an agreement with
Microphase, whereby the Company pays Microphase $40,000 per month for technical
research and development assistance. Microphase also charges fees for specific
projects on a project by project basis. During the three months ended
September 30, 1999 and 2000 and for the period from inception (October 2, 1996)
to September 30, 2000, $203,225, $731,088 and $3,965,935 have been charged to
expense or inventory at September 30, 2000 under these Agreements.
7
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company will be obligated to pay a 3% royalty to Microphase on revenues
from the Company's proprietary Traverser Digital Video Data Delivery System and
related component products. During the three months ended September 30, 2000 the
Company recorded royalties to Microphase totaling $37,312.
During the year ended June 30, 2000 the Company advanced money to Janifast
Limited, which is owned by U.S. Janifast Holdings, Ltd., a related party of
which three directors of mPhase are significant shareholders, in connection with
the manufacturing of POTS Splitter shelves and component products including
cards and filters sold by the Company. As of September 30, 2000 the amount
advanced to Janifast was approximately $1,944,020 which is included in
production advances-related parties in the accompanying balance sheet. During
the period ended September 30, 2000 Janifast charged the Company $1,019,223 for
product costs and research and development expenses which are included in the
statement of operations and inventory at September 30, 2000. Management believes
the amounts charged are comparable to other suppliers and these charges are
subject to review by the conflict of interest committee of the Board of
Directors on a periodic basis.
Due to related parties includes $36,120 due to Nutley Securities, a company
owned by the Company's president and $13,681 due to affiliates of the Company's
joint venture partner, Alpha Star International Inc. both amounts are for
various services performed.
As of September 30, 2000, the Company has no amounts due to Microphase
included in the accompanying consolidated balance sheet.
The Note receivable at September 30, 2000 represents an 6% note due from a
consultant who was previously granted 100,000 shares of the Company's common
stock. The Note is secured by 75,000 of those shares.
3. INCOME TAXES
The Company accounts for income taxes using the asset and liability method
in accordance with SFAS No. 109 "ACCOUNTING FOR INCOME TAXES". Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Because of the
uncertainty as to their future realizability, net deferred tax assets,
consisting primarily of net operating loss carryforwards, have been fully
reserved for. Accordingly, no income tax benefit for the net operating loss has
been recorded in the accompanying consolidated financial statements.
Utilization of net operating losses generated through September 30, 2000 may
be limited due to changes in ownership that have occurred.
8
<PAGE>
MPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. INVESTMENT IN CONSOLIDATED SUBSIDIARY
In March 2000, the Company acquired a 50% interest in mPhase
Television.Net, Inc. (formerly Telco Television Network, Inc.), an incorporated
joint venture, for $20,000. The agreement provided for the grant of warrants to
the joint venture partner in consideration of the execution of the Joint Venture
Agreement, to purchase 200,000 shares of the Company's stock for $4.00 (valued
at $2,633,400) which is included in general and administrative expenses in the
accompanying statement of operations for the period from inception (October 2,
1996) to September 30, 2000. The agreement also stipulates for the Company's
joint venture partner, AlphaStar International, Inc., to provide mPhase
Television right of first transmission for its transmissions including MPEG-2
digital satellite television. In addition, the Company loaned the joint venture
$1,000,000 at 8% interest per annum in March 2000. The loan is repayable to the
Company from equity infusions to the subsidiary, no later than such time that
mPhase Television qualifies for a NASDAQ Small Cap Market Listing. During
April 2000, the Company acquired an additional 6.5% in interest in mPhase
Television for $1,500,000. Through September 30, 2000 100% of the losses
incurred of the subsidiary have been consolidated into the results of operations
of the Company.
5. EQUITY TRANSACTIONS
During the quarter ended September 30, 2000 the Company issued 510,000
shares of its common stock to accredited investors in private placements
generating gross proceeds of $2,550,000 which net of offering costs of $145,380,
generated net proceeds to the Company of $2,404,620. The Company also issued
320,000 shares for the exercise of options and warrants for a total of $327,500.
In connection with the private placement the Company issued 38,250 shares of its
common stock to an investment banking firm. The Company granted 81,000 options
to employees and 344,000 options to consultants for services performed during
the quarter.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into various agreements with Georgia Tech Research
Corporation ("GTRC"), pursuant to which the Company receives technical
assistance in developing the commercialization of its digital video and data
delivery system (DVDDS). The amounts incurred by the Company for GTRC technical
assistance with respect to its research and development activities and included
in the accompanying consolidated statement of operations for the three months
ended September 30, 1999 and 2000 totaled approximately $1,085,000 and
$1,135,000, 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.
From time to time, the Company may be involved in various legal proceedings
and other matters arising in the normal course of business.
9
<PAGE>
ITEM 2. 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 consolidated financial
statements, as well as information relating to the plans of the Company's
current management.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
LITIGATION REFORM ACT OF
1995:
Some of the statements contained in or incorporated by reference on this
Form 10-Q discuss the Company's plans and strategies for its business or state
other forward-looking statements, as this term is defined in the Private
Securities Litigation Reform Act of 1995. The words "anticipate," "believe,"
"estimate," "expect," "plan," "intend," "should," "seek," "will," and similar
expressions are intended to identify these forward-looking statements, but are
not the exclusive means of identifying them. These forward-looking statements
include, among others, statements concerning the Company's expectations
regarding its working capital requirements, gross margin, results of operations,
business, growth prospects, competition and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. Any
forward-looking statements contained in this Quarterly Report on Form 10-Q are
subject to risks and uncertainties that could cause actual results to differ
materially from those results expressed in or implied by the statements
contained herein.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. SEPTEMBER 30, 1999
The Company recorded a net loss of $5,750,678 on total revenues of
$1,865,610 for the three months ended September 30, 2000 as compared to a loss
of $2,797,195 without any total revenue for the comparable period ended
September 30, 1999. This represents a loss per common share of $(.18) for the
period ended September 30, 2000 as compared to a loss per common share of $(.11)
for the period ended September 30, 1999. Cost of sales were $871,852 in 2000 and
are not comparable to the prior period. Research and development expenses were
$3,162,361 in 2000 compared to $1,491,034 in 1999 due to the Company's increased
efforts in its deployment of the Traverser and the implementation of the
Company's initial DSL component products. Selling, general and administrative
expenses rose to $3,125,162 in 2000 from $1,163,766 for the comparable period in
1999. The increase in the administrative costs primarily relate to the hiring of
additional full time employees, an increase in the Company's marketing efforts,
including non-cash charges relating to the issuance of options to employees and
consultants of $1,517,086 for the three months ended September 30, 2000 as
compared to $45,833 during the comparable period in 1999.
PLAN OF OPERATIONS
RESEARCH AND DEVELOPMENT ACTIVITIES
Georgia Tech conducts a significant amount of research and development for
the Company 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 deployment of the Traverser DVDDS version
1.1, the Company expects Georgia Tech to continue research and development of
the Traverser product to enhance features and functionality, as well as to
coordinate the effort to develop the Traverser, version 2.0 and additional
products utilizing Traverser technology.
10
<PAGE>
For the three months ended September 30, 1999, and 2000 and for the period
since inception (October 2, 1996) to September 30, 2000, approximately
$1,085,000, $1,135,000 and $10,295,000 respectively, has been billed to mPhase
for research and development conducted by Georgia Tech, of which approximately
$1,135,000 was included in accounts payable and accrued expenses as of
September 30, 2000.
The Company is the sole, worldwide licensee 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 as defined.
The total amount of research and development costs the Company has expended
from inception (October 2, 1996) through September 30, 2000 was approximately
$19,400,000.
STRATEGIC ALLIANCES IMPLEMENTED
The manufacturer of the Company's TRAVERSER 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 the pilot run for
the Intelligent Network Interface (INI) (a next generation set top box). The
Company delivered its initial prototype to Hart Telephone in May, 2000. The
Company believes that the selection of Flextronics enhances the Company's
ability to implement the delivery system necessary to satisfy what the Company
hopes to be a strong and evolving market demand.
On January 31, 2000 Alcatel Networks Corporation (NYSE: ALA), a leading
provider of networking solutions, agreed to re-sell the Company's filter
products, including the "POTS SPLITTER SHELF " and "SPLITTER CARD." The filter
products the Company provides Alcatel Networks are the Company's first products
sold and utilized. The filter products enable Alcatel Networks customers, which
include 350 of the world's largest telecommunication services providers, to
provide quality, cost efficient voice, video and Internet access applications.
In March of 2000, the Company shipped its initial orders and recorded its
initial operating revenue from these products.
CONTENT SUBSIDIARY
On March 2, 2000 the Company and AlphaStar International, Inc. formed a
joint venture now named mPhase Television.Net, Inc. to broadcast MPEG-2 signals
over satellite to competitive local exchange carriers and/or Telco head-ends,
providing the first TV network to integrate satellite and DSL. Presently the
company owns 56.5% of this consolidated subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had working capital of $1,329,603.
During the three months ended September 30, 2000 the Company raised net
additional capital of approximately $2,735,000 through the issuance of common
stock and the exercise of options held by accredited investors in transactions
exempt from registration pursuant to Rule 506 of Regulation D promulgated by the
Securities and Exchange Commission under the Securities Act of 1933. Included in
the above was approximately $327,500 from the exercise of stock options. In the
fiscal year ending June 30, 2000 the Company raised a total of $17,622,279
through the issuance of 5,748,634 shares to accredited investors in transactions
exempt from registration pursuant to Rule 506 discussed above and the exercise
of options and warrants. Through the three months ended September 30, 2000 the
Company has incurred estimated cash offering costs of approximately $145,380 in
connection with the placement of 510,000 shares of its common stock for total
proceeds of $2,550,000, generating net proceeds to the Company of approximately
$2,404,620. The Company does anticipate that, in connection with the full
commercial production of the Traverser DVDDS product and the anticipated
11
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costs relating to the Company's investment in the mPhase Television.Net, Inc.
joint venture, the Company will raise significant additional funds through a
public or private offering of the Company's common stock or otherwise. On
October, 11, 2000, the Company engaged Corporate Solutions Group, LLC, an
American Express affiliate, to serve as its strategic business advisor to assist
the Company in identifying optimal opportunities in the equity capital markets.
The Company is in the process of raising a minimum of $25,000,000 which it will
use for the controlled introductory roll-out of its Traverser Digital Video and
Delivery System. However, there can be no assurance that the Company's efforts
to produce a commercially viable product will be successful, that the Company
will generate sufficient revenues to provide positive cash flows from operations
or that sufficient capital will be available, when required, to permit the
Company to realize its plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to changes in interest rates as the Company has
no debt arrangements and no investments in certain held-to-maturity securities.
Under our current policies, we do not use interest rate derivative instruments
to manage exposure to interest rate changes. A hypothetical 100 basis point
adverse move in interest rates along the entire interest rate yield curve would
not materially affect the fair value of any financial instruments at
September 30, 2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about September 30, 2000 the Company received notice that on
September 22, 2000, a former mPhase employee commenced a lawsuit in the United
States District Court for the Middle District of Tennessee against the Company,
two of its officers, and one of its outside attorneys. The action alleges that
the Company failed to timely remove restrictions from plaintiff's restricted
stock, and failed to provide plaintiff with an employment contract. Plaintiff
alleges violations of federal securities law, Tennessee securities law, and
common law and seeks damages of $1,679,000 plus punitive damages. The plaintiff
seeks damages of $2,000,000 plus punitive damages for the employment claim.
No responsive pleadings have been filed to date, and none are required until
December 11, 2000. The Company believes it has meritorious defenses to
plaintiff's claims and plans to vigorously defend the action.
From time to time the Company may be involved in various legal proceedings
and other matters arising in the normal course of business.
ITEM 2. CHANGES IN SECURITIES
On May 5, 2000 the shareholders of the Company approved a proposal to amend
the Company's Certificate of Incorporation to increase the number of authorized
shared from 50,000,000 shares to 150,000,000. On September 15, 2000 the Company
filed with the Secretary of State of the State of New Jersey an amendment
effectuating this increase.
During the quarter ended September 30, 2000 the Company issued 510,000
shares of its common stock to accredited investors in private placements
generating gross proceeds of $2,550,000 which net of offering costs of $145,380,
generated net proceeds to the Company of $2,404,620. The Company also issued
320,000 shares for the exercise of options and warrants for a total of $327,500.
In connection with the private placement the Company issued 38,250 shares of its
common stock to an investment banking firm. The Company granted 81,000 options
to employees and 344,000 options to consultants for services performed during
the quarter.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On April 7, 2000, the Company submitted an application to NASDAQ for a
listing on the National Market System. The Company's shares currently trade on
the OTC Bulletin Board under the symbol "XDSL" and under the proposal would
continue trading under that symbol. The Company believes that securing such
listing at this time is appropriate given the current progression from
development stage to operating mode, and it further believes that such listing
may enhance the marketability of its shares, particularly among institutional
investors who are often restricted from owning stock in non-NASDAQ-listed
companies. While the Company believes it met all necessary requirements at the
time of filing, there can be no assurance that such approval will be issued or,
if issued, that it will occur within any specific time frame, or that such
approval, if received, will result in increased marketability. Recent
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volatility in the U.S. equity capital markets have caused a decline in the price
of the Company's stock below $5 a share during a portion of the month of
October 2000 which may affect the Company's eligibility to qualify for the
National Market System.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 3i.--Amendment to the Certificate of Incorporation
Exhibit 27.--Financial Data Schedule
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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.
<TABLE>
<S> <C> <C>
MPHASE TECHNOLOGIES, INC.
Formerly Tecma Laboratories, Inc.
By: /s/ RONALD A. DURANDO
-----------------------------------------
Ronald A. Durando
PRESIDENT, CEO
Dated: November 10, 2000
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ RONALD A. DURANDO
------------------------------------------- President, CEO November 10, 2000
Ronald A. Durando
/s/ GUSTAVE T. DOTOLI
------------------------------------------- Chief Operating Officer November 10, 2000
Gustave T. Dotoli
/s/ MARTIN S. SMILEY Executive Vice President,
------------------------------------------- Chief Financial Officer November 10, 2000
Martin S. Smiley and General Counsel
</TABLE>
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