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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NO.000-24969
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mPhase Technologies, 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
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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 / / NO /X/
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON
STOCK AS OF MARCH 31, 2000 IS 29,062,200 SHARES ALL OF ONE CLASS OF $.01 STATED
VALUE COMMON STOCK.
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MPHASE TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
Consolidated Balance Sheet-March 31, 2000...................................... 1
Consolidated Statements of Operations-Three Months 2
ended March 31, 2000 and 1999..................................................
Consolidated Statements of Operations-Nine Months 3
Ended March 31, 2000 and 1999..................................................
Consolidated Statements of Cash Flows-Nine Months 4
Ended March 31, 2000 and 1999..................................................
Notes to Consolidated Financial Statements..................................... 5-7
Management's Discussion and Analysis of financial condition 8-13
and results of operations......................................................
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 14
Item 2. Changes in Securities............................................. 14
Item 3. Defaults Upon Senior Securities................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 5. Other Information................................................. 15
Item 6. Exhibits on Reports on Form 8-K................................... 15
Signature Page................................................................. 16
</TABLE>
<PAGE>
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheet
March 31, 2000
(Unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents...................................................................... $ 9,932,855
Stock subscription receivable.................................................................. 1,000,000
Accounts receivable............................................................................ 52,265
Prepaid expenses and other current assets...................................................... 593,024
Total Current Assets....................................................................... 11,578,144
Note receivable................................................................................... 250,000
Property and equipment, net of accumulated depreciation of $264,569............................... 947,430
Patents and licensing rights, net of accumulated amortization of $776,928......................... 1,449,859
Investment in joint venture....................................................................... 1,020,000
TOTAL ASSETS............................................................................... 15,245,433
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................................................. 1,213,243
Accrued expenses.................................................................................. 896,191
Due to affiliate.................................................................................. 531,367
Deferred revenue.................................................................................. 52,680
TOTAL CURRENT LIABILITIES.................................................................. 2,693,481
STOCKHOLDERS' EQUITY
Common stock, stated value $.01, 50,000,000 shares authorized; 29,062,200 shares issued and
outstanding shares at March 31, 2000........................................................... 290,622
Additional paid in capital........................................................................ 62,892,077
Deferred compensation............................................................................. (986,417)
Deficit accumulated during development stage...................................................... (49,636,357)
Treasury stock, 13,750 shares at cost............................................................. (7,973)
TOTAL STOCKHOLDERS' EQUITY........................................................................ 12,551,952
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $15,245,433
</TABLE>
See notes to the consolidated financial statements.
1.
<PAGE>
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
October 2,
1996
(Date of
For the Inception
Three Months Ended to
March 31, March 31,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
Revenues ....................................................... $ -- $ 39,585 $ 39,585
TOTAL REVENUE ............................................... -- 39,585 39,585
COSTS AND EXPENSES
Research and development ....................................... 475,888 2,876,419 12,323,959
Selling, general and administrative ............................ 557,790 7,542,575 16,861,469
Depreciation and amortization .................................. 101,360 117,833 798,344
Non-cash charges for stock based compensation .................. 2,588,125 5,233,500 18,324,188
TOTAL COSTS AND EXPENSES ................................. 3,723,163 15,770,327 48,307,960
LOSS FROM OPERATIONS ..................................... (3,723,163) (15,730,742) (48,268,375)
OTHER INCOME (EXPENSE):
LOSS FROM UNCONSOLIDATED SUBSIDIARY .................... -- -- (1,466,467)
INTEREST INCOME (EXPENSE), NET ........................... (6,300) 57,181 98,485
TOTAL OTHER INCOME (EXPENSE) ............................. (6,300) 57,181 (1,367,982)
NET LOSS ....................................................... $ (3,729,463) $(15,673,561) $(49,636,357)
LOSS PER COMMON SHARE; basic and diluted ....................... $ (.22) $ (.56)
WEIGHTED AVERAGE COMMON SHARES; OUTSTANDING, basic and
diluted ..................................................... 17,159,876 27,743,996
</TABLE>
See notes to the consolidated financial statements.
2.
<PAGE>
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
October 2,
1996
(Date of
For the Inception)
Nine Months Ended to
March 31, March 31,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
Revenues .............................................. $ -- $ 39,585 $ 39,585
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TOTAL REVENUE ...................................... -- 39,585 39,585
------------ ------------ ------------
COSTS AND EXPENSES
Research and development .............................. 2,363,098 6,271,274 12,323,959
Selling, general and administrative ................... 2,033,317 9,890,337 16,861,469
Depreciation and amortization ......................... 303,801 348,388 798,344
Non-cash charges for stock based compensation ......... 2,588,125 5,321,583 18,324,188
TOTAL COSTS AND EXPENSES ........................... 7,288,341 21,831,582 48,307,960
LOSS FROM OPERATIONS ............................... (7,288,341) (21,791,997) (48,268,375)
OTHER INCOME (EXPENSE):
LOSS FROM UNCONSOLIDATED SUBSIDIARY ............... -- -- (1,466,467)
INTEREST INCOME (EXPENSE), NET ..................... (20,900) 116,289 98,485
TOTAL OTHER INCOME (EXPENSE) ....................... (20,900) 116,289 (1,367,982)
NET LOSS ........................................... $ (7,309,241) $(21,675,708) $(49,636,357)
LOSS PER COMMON SHARE; basic and diluted .............. $ (.49) $ (.83)
WEIGHTED AVERAGE COMMON SHARES; OUTSTANDING,
basic and diluted ..................................... 14,960,531 26,032,295
</TABLE>
See notes to the consolidated financial statements.
3.
<PAGE>
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 2,
1996
FOR THE (DATE OF
NINE MONTHS ENDED INCEPTION)
MARCH 31, TO
----------- MARCH 31,
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Loss............................................................... $(7,309,531) $(21,675,708) $(49,636,357)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 332,890 518,356 1,041,930
Loss on disposal of fixed asset..................................... - - 7,062
Loss on unconsolidated subsidiary................................... - - 1,466,467
Non-cash charges relating to issuance of common stock,
common stock options and warrants................................. 3,677,594 11,157,788 27,075,846
Changes in assets and liabilities:
Accounts receivable (52,265) (52,265)
Prepaid expenses and other current assets........................... (10,815) (494,924) (593,024)
Accounts payable.................................................... (564,950) 779,474 1,213,243
Accrued expenses.................................................... 13,529 (1,293,343) 746,814
Due to affiliate.................................................... 679,725 517,032 95,697
Other Assets........................................................ - (250,000) (400,000)
Deferred revenue.................................................... 40,000 12,680 52,680
Net cash used in operating activities............................. (3,141,558) (10,780,910) (18,981,907)
Cash Flow From Investing Activities:
Investment in joint venture............................................ - (1,020,000) (1,020,000)
Payments related to patents and licensing rights ...................... (63,545) (5,069) (119,741)
Purchases of fixed assets.............................................. - (839,730) (1,218,298)
Net cash used in investing activities............................. (63,545) (1,864,799) (2,358,039)
Cash Flow From Financing Activities:
Proceeds from issuance of common stock and exercises of
options and warrants................................................ 3,327,582 14,600,704 31,280,774
Repurchase of treasury stock at cost................................... - - (7,973)
Net cash provided by financing activities......................... 3,327,582 14,600,704 31,272,801
Net Increase in Cash and Cash equivalents................................. 122,479 1,954,995 9,932,855
Cash and Cash equivalents, Beginning of Period............................ - 7,977,860 -
Cash and Cash equivalents, End of Period.................................. $ 122,479 $ 9,932,855 $ 9,932,855
</TABLE>
See notes to the consolidated financial statements.
4.
<PAGE>
mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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. 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-TM-"). The primary business of mPhase is to design, develop,
manufacture and market high-bandwidth telecommunications product incorporating
direct subscriber line ("DSL") technology. The present activities of the Company
are focused on the completion of its proprietary Traverser-TM- utilizing
existing twisted pair copper wire infrastructure in "Plain Old Telephone
Systems" ("POTS"). 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 a new business, and it
has not yet commenced its planned principal operations.
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-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 nine month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2000. 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.
2. EARNINGS PER SHARE
The Company computes earnings per share in accordance with Statements
of Financial Accounting Standards ("SFAS") No. 128. 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.
3. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
4. REVENUE RECOGNITION
During the quarter ended March 31, 2000, the Company commenced
shipments of its "POTS Splitter Shelf" and "Splitter Card" products. Revenue is
recognized in accordance with staff accounting bulletin No. 101, "Revenue
Recognition".
5.
<PAGE>
5. 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
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 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 nine months ended March 31,
1999 and 2000 and for the period from inception (October 2, 1996) to March 31,
2000, $450,000, $1,346,846 and $2,006,846 have been charged to expense under
these Agreements and is included in operating expenses in the accompanying
consolidated statements of operations. As of March 31, 2000, the Company has
$531,367 due to Microphase included in the accompanying consolidated balance
sheet.
During the quarter ended March 31, 2000 the Company received $39,000 of
interest income paid by Microphase in connection with a $2.6 million loan made
to Microphase by the company during the quarter, which was repaid along with
interest thereon, in the same quarter.
The Note receivable at March 31, 2000 represents a note due from a
consultant who was granted 100,000 shares during this quarter with interest at
8% per annum and secured by 75,000 of those shares.
Interest expense for the nine months ended March 31, 1999 represents
$2,000 paid to the Company's vice president and $18,900 payable to the Company's
president.
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.
6. INCOME TAXES
The Company accounts for income taxes using the asset and liability
method in accordance with "SFAS" NO. 109. 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.
7. INVESTMENT IN JOINT VENTURE
In March 2000 the Company acquired a 50% interest in Telco Television
Network, Inc. an incorporated joint venture, for a cash investment of $20,000.
Additionally the agreement provided for the grant of options to the joint
venture partner, to purchase 200,000 shares of the Company's stock for $4.00
(valued at $2,633,400 using the Black Scholes Pricing Model) which was included
in selling, general and administrative expenses as of March 31, 2000. The
agreement also stipulates for our joint venture partner, AlphaStar
International, Inc., to provide the Joint Venture right of first transmission
for it's transmissions including MPEG-2 digital satellite television.
Additionally, 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
at such time that the joint venture qualifies for a NASDQ Small Cap Market
Listing. The Company's investment is accounted for under the equity method as of
March 31, 2000. Subsequent to March 2000 the Company acquired an additional 7%
interest for an additional $1,500,000 investment; as such the joint venture will
become a consolidated subsidiary.
6.
<PAGE>
8. EQUITY TRANSACTIONS
During the quarter ended March 31, 2000 the company issued 1,722,500
shares of its common stock to accredited investors in private placements
generating gross proceeds of $11,885,000 which net of offering costs of
$568,680, generated net proceeds to the company of $11,316,320. The Company also
issued 408,000 shares for the excercise of options and warrants for a total of
$1,370,000. In connection with the private placements the company issued 124,875
shares and an option to purchase 200,000 shares at $4.00, which was exercised
during the quarter, to investment banking firms. Also during the quarter, the
company granted 410,000 shares to employees and 115,000 shares to consultants.
9. 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 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 nine months ended
March 31, 1999 and 2000 totaled $1,800,042 and $3,422,132, 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
proceeding s and other matters arising in the normal course of business. The
Company currently has no material outstanding legal proceedings.
7.
<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 consolidated
financial statements, as well as information relating to the plans of the
Company's current management.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2000 VS. MARCH 31, 1999
The Company recorded a net loss of $21,675,708 for the nine months
ended March 31, 2000 as compared to a loss of $7,309,241 for the comparable
period ended March 31, 1999. This represents a loss per common share of $(.83)
for the period ended March 31, 2000 as compared to a loss per common share of
$(.49) for the period ended March 31, 1999. Research and development expenses
were $6,271,274 in 2000 compared to $2,363,098 in 1999 due to the Company's
increased efforts in its Traverser and POTS products. Selling, general and
administrative expenses rose to $9,890,337 in 2000 from $2,033,317 for the
comparable period in 1999. The increase in the administrative costs primarily
relate to thehiring of additional full time employees, market making expenses
relating to investor relations and an increase in the Company's marketing
efforts, including non-cash charges relating to the issuance of common stock,
options and warrants to consultants of $5,836,205 in 2000 as compared to
$1,089,469 during the comparable period in 1999. Also, through March 2000 the
nine month expenses for stock based compensation to employees of the company
were $5,321,583 as compared to $2,588,125 in 1999.
THREE MONTHS ENDED MARCH 31, 2000 VS. MARCH 31, 1999
The Company recorded a net loss of $15,673,561 for the three months
ended March 31, 2000 as compared to a net loss of $3,729,463 for the comparable
period ended March 31, 1999. This represents a loss per common share of $(.56)
for the period ended March 31, 2000 as compared to a loss per common share of
$(.22) for the three month period ended March 31, 1999. Research and development
expenses were $2,876,419 in 2000 compared to $475,888 in 1999 and selling,
general and administrative expenses rose to $7,542,575 from $557,790 for the
comparable quarter in 1999. The increase in the administrative costs primarily
relate to the hiring of full time employees, market making expenses relating to
investor relations and a significant increase in the Company's marketing and
strategic alliance efforts. In addition, all of the $5,836,205 of the year to
date non-cash expense for stock, options and warrants granted to consultants was
incurred in the quarter ended March 31, 2000, including approximately $800,000
of options granted to a consultant in connection with an agreement with BMW and
$2,633,400 in connection with the Company's joint venture with AlphaStar.
PLAN OF OPERATIONS
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
effort to develop the Traverser, version 2.0 and additional products utilizing
Traverser technology.
For the nine months ended March 31, 1999, and 2000 and for the period
since inception (October 2, 1996) to March 31, 2000, approximately $1,800,042,
$3,422,132 and $8,022,100 respectively, has been billed to mPhase for research
and development conducted by Georgia Tech, of which approximately $740,809 was
included in accounts payable and accrued expenses as of March 31, 2000.
8.
<PAGE>
We are 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 we have expended
from inception (October 2, 1996) through March 31, 2000 was approximately
$12,323,959.
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 has evaluated the computer systems they now have in use.
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 2000 compliant, or will not be affected by the year 2000
problem. The Company's business could be materially adversely affected if the
Company 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 2000 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.
STRATEGIC ALLIANCES IMPLEMENTED
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
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 we
hope to be a strong and evolving market demand.
On January 31, 2000 Newbridge Networks Corporation (NYSE: NN), 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 Newbridge Networks are the Company's first
products sold and utilized. The filter products enable Newbridge 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.
On March 2, 2000 the Company and AlphaStar International, Inc. formed a
joint venture named Telco Television Network, 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.
9.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000 the Company had working capital of $8,884,663.
During the nine months ended March 31, 2000 we raised additional
capital of approximately $14,600,700 through the issuance of common stock and
the exercise of options and warrants held by sophisticated 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 14,600,700 was $510,500 from stock subscriptions
receivable and approximately $2,045,000 from the exercise of stock options and
$1,313,884 from the exercise of warrants. In December 1999 and January 2000 we
raised a total of $4,000,000 through the issuance of 1,000,000 shares to
sophisticated investors in transactions exempt from registration pursuant to
Rule 506 discussed above. In March the Company raised $8,325,000 through the
issuance of 832,500 shares of common stock; again pursuant to Rule 506, of which
$1,000,000 was received in April. Through the nine months ended March 31, 2000
the company has incurred estimated cash offering costs of approximately
$593,680. As a result of these private offerings, we anticipate having
sufficient working capital through the end of the development stage for our
Traverser DVDDS product. We do anticipate that, in connection with the full
commercial production of our Traverser DVDDS product and the anticipated costs
relating to our investment in Telco Television Network, Inc., we will raise
significant additional funds through a public or private offering of our common
stock or otherwise. 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.
10.
<PAGE>
RISK FACTORS WHICH MAY AFFECT OUR BUSINESS
WE EXPECT TO INCUR SUBSTANTIAL NET LOSSES FOR THE FORESEEABLE FUTURE AND WE
EXPECT TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL.
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, in addition to the continued
commitment we must maintain for research and development. As such, we anticipate
additional public or private offerings of our common stock. 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:
- Raise additional capital;
- Complete the Beta-stage of our initial products;
- Gain market acceptance and market share which will be
dependent upon the timing, strength and success of our
strategic alliances;
- increase consumer awareness of our products and develop
effective marketing and other promotional activities to
develop our initial customer base;
- develop strategic relationships that balance the Company's
current and long-term ability to capitalize on its technology.
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.
OUR OPERATING HISTORY IS VERY LIMITED.
We have limited operating history upon which you can evaluate our
performance. As an interested party or investor in our common stock, you should
consider the risks and difficulties we may encounter as in the rapidly evolving
market for high speed Internet access, additional telephone service and digital
television over existing copper telephone lines. These risks include our ability
to:
- complete our flagship products;
- implement our current strategy and obtain market penetration
when our products become available;
- 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 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.
11.
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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, are 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, and
other DSL products, including the "POTS Splitter Shelf" and "Splitter Card".
Microphase also provides resources and technology related to the development of
the Traverser, and other DSL products. 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. Ronald A. Durando and Gustave T.
Dotoli are president and vice-president of PacketPort.com.
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 may 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.
COMPETITION
The telecommunications equipment market is characterized by swift
technological change. Several solutions such as fiber optic, cable, wireless and
satellite technologies compete with DSL for market share. Service providers may
use other technologies such as fiber optic cable, hybrid coaxial cable, ISDN to
deploy high-speed transmissions. Based on current industry standards, we believe
that XDSL can compete, particularly with respect to telephone companies and
other copper wire based service providers, from the standpoint of cost
effectiveness, superior technology and ease of development.
Among equipment companies that supply DSL Technology, our competitors
include ADTRAN, Alacatel S.A., Aware, Inc., Pliant Technologies, CISCO Systems,
Inc., ECI Telecom Ltd., Lucent Technologies, Next Level Communications, Inc.,
Orckit Communications, PairGain Technologies, TUT Systems, Westell Technologies,
AG Communications Systems, Copper Mountain, Nokia, Interspeed and Paradyne
Networks, Inc.
INTEGRATED SERVICES DIGITAL NETWORK. Emerging technologies for high speed data
transmission over copper lines include Integrated Services Digital Network, or
ISDN. ISDN currently delivers 128 Kbps computer networking connections, which
are two times faster than those available with the fastest analog modems.
While ISDN does provide faster access than analog modems, it is
expensive, difficult to install, and not as fast as competing high speed
technologies. Moreover, it does not allow for simultaneous data transmission and
normal telephone service on the same line and it is not capable of delivering
digital television.
FIBER OPTIC CABLE. Fiber optic cable is another alternative that allows high
bandwidth transmission. However, it is expensive to install.
COAXIAL. Cable companies have begun offering high speed Internet access through
cable modems. These modems provide the potential of wider bandwidth (up to 10
Mbps as compared to 56 Kbps analog modems). But coaxial cable is relatively
expensive and has the drawbacks associated with a shared bandwidth medium.
12.
<PAGE>
REGULATION
The Federal Communication Commission, or FCC, and various state public
utility and service commissions, regulate most of our potential domestic
customers. Changes to FCC regulatory policies may affect the accessibility of
services, and otherwise affect how telecommunications providers conduct their
business. These regulations may adversely affect our potential penetration into
certain markets. In addition, our business and results of operations may also be
adversely affected by the Imposition of certain tariffs, duties and other import
restrictions on components which we obtain from non-domestic suppliers. Changes
in current or future laws or regulations, in the U.S. or elsewhere, could
materially adversely affect our business.
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.
13.
<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 repurchased these shares in August, 1999.
Other than the Global Music litigation, we were and are not a party to
any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES
During the nine months ended March 31, 2000, 1,751,845 warrants to
purchase the Company shares for $.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, and 225,000 shares
were issued pursuant to the exercise of options generating net proceeds to the
Company of $275,000 through September. Additionally 400,000 shares were issued
to an investment banking firm pursuant to an option, in October 1999. In
December, 1999 110,000 shares and in January 2000, 890,000 shares respectively,
were issued to investors for $4.00 a share, and in March, 2000 832,500 shares
were issued to investors for $10.00, which subscribed to offerings intended to
be exempt from registration pursuant to Rule 506 of the U.S. Securities and
Exchange Commission. During the quarter ended March 31, 2000 250,000 shares were
issued to an investment banking firm pursuant to options and 124,875 were
granted another investment banking firm. On January 26, 2000, the Board of
Directors authorized the stated value to $.01 per share for its common stock.
On April 7, 2000 ,the Company submitted an application to NASDAQ for
a listing on the National Market System. Our shares currently trade on the OTC
Bulleting 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
14.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As described in the Company's Definitive Proxy Statement (DEF-14A),
filed on April 27, 2000, the following proposals have been submitted to
shareholders for their approval: (1) a proposal to elect eight (8) Directors to
hold office until the next Annual Meeting; (2) a proposal to increase the
authorized capitalization of the Company from 50,000,000 to 150,000,000 shares;
(3) a proposal to adopt the Long-Term Stock Incentive Plan and the increase the
authorized shares available for issuance; and (4) a proposal to ratify the
appointment of Arthur Andersen LLP as the independent accountants for the
Company's fiscal 2000 year. The aforementioned proposals are explained in
greater detail in the Proxy Document; shareholders of record as of April 6, 2000
are entitled to vote before the deadline of May 22, 2000.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
15.
<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: May 15, 2000 By:
Ronald A. Durando
PRESIDENT, CEO
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.
Ronald A. Durando President, CEO May 15, 2000
Gustave T. Dotoli Vice President, COO May 15, 2000
John Randazzo Accounting and Finance May 15, 2000
16.
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