MPHASE TECHNOLOGIES INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED MARCH 31, 2003 COMMISSION FILE NO. 000-24969

mPhase Technologies, Inc.
(Exact name of registrant as specified in its charter)

NEW JERSEY			22-2287503
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)


587 CONNECTICUT AVE., NORWALK, CT			06854-1711
(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 NO

THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT’S CLASSES OF COMMON STOCK AS OF April 23, 2003 IS 68,065,510 SHARES, ALL OF ONE CLASS OF $.01 STATED VALUE COMMON STOCK.

mPHASE TECHNOLOGIES, INC.
INDEX

		PAGE
PART I FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

	Consolidated Balance Sheets-June 30, 2002 and March 31, 2003, (Unaudited)	3

	Unaudited Consolidated Statements of Operations-Three months ended March 31, 2002 and 2003 and from October 2, 1996 (Date of Inception) to March 31, 2003	4

	Unaudited Consolidated Statements of Operations-Nine months ended March 31, 2002 and 2003 and from October 2, 1996 (Date of Inception) to March 31, 2003	5

	Unaudited Consolidated Statement of Changes in Shareholders’ Deficit Nine months ended March 31, 2003	6

	Unaudited Consolidated Statements of Cash Flows-Nine Months Ended March 31, 2002 and 2003 and from October 2, 1996 (Date of Inception) to March 31, 2003	7

	Notes to Unaudited Consolidated Financial Statements	8

ITEM 2 Management’s Discussion and Analysis of Financial Conditions and Results of Operations		14

ITEM 3 Quantitative and Qualitative Disclosures about market risk		25

ITEM 4 CONTROLS AND PROCEDURES		25

PART II OTHER INFORMATION

Item 1. Legal Proceedings		25

Item 2. Changes in Securities		25

Item 3. Defaults Upon Senior Securities		25

Item 4. Submission of Matters to a Vote of Security Holders		25

Item 5. Other Information		25

Item 6. Exhibits on Reports on Form 8-K		26

Signature Page		27

Certifications		28

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mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)

		June 30,		March 31,
		2002		2003

				(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	47,065	$	1,235
Accounts receivable, net of bad debt reserve of $2,906 and $11,217 respectively		273,780		91,270
Stock subscription receivable		—		30,000
Inventories, net		3,342,716		2,592,587
Prepaid expenses and other current assets		830,589		78,663

Total Current Assets		4,494,150		2,793,755

Property and equipment, net		1,742,186		1,008,795
Patents and licensing rights, net		685,349		292,787
Other Assets		20,830		17,250

TOTAL ASSETS	$	6,942,515	$	4,112,587

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable		2,819,245		2,637,032
Accrued expenses		673,065		953,892
Due to related parties		35,000		343,590
Notes payable, current		353,339		887,268
Deferred revenue		214,180		214,180

TOTAL CURRENT LIABILITIES		4,094,829		5,035,962

Long-term debt, net of current portion		1,014,218		594,068
Other Liabilities		1,211,249		1,211,249

Other Liabilities, related parties		665,068		—

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS’ EQUITY

Common stock, stated value $.01, 150,000,000 shares authorized; 60,807,508 and 68,065,510 shares issued and outstanding at June 30, 2002 and March 31, 2003, respectively		608,075			680,655
Additional paid in capital		100,751,284			102,973,121
Deferred compensation		(23,923	)		—
Deficit accumulated during development stage		(101,366,286	)		(106,374,495	)
Unrecognized capital losses		(4,026	)		—
Less-Treasury stock, 13,750 shares at cost		(7,973	)		(7,973	)

TOTAL STOCKHOLDERS’ DEFICIT		(42,849	)		(2,728,692	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,942,515		$	4,112,587

The accompanying notes are an integral part of these consolidated financial statements.

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mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)

		Three Months Ended March 31,						October 2, 1996 (Date of Inception) to March 31,
		2002			2003			2003

REVENUES	$	865,797		$	209,754		$	14,267,647

COSTS AND EXPENSES
Cost of Sales		724,699			205,231			9,300,819
Research and development (including non-cash stock related charges of $17,080, $0 and $1,966,424, respectively)		538,826			905,554			23,270,470
General and Administrative (including non-cash stock related charges of $737,407 $88,282, and $20,795,054 respectively)		1,261,713			543,627			49,272,312
Depreciation and amortization		135,799			128,725			2,639,718
Non-cash charges for stock based compensation		92,976			—			25,089,095

TOTAL COSTS AND EXPENSES		2,754,013			1,783,137			119,572,414
LOSS FROM OPERATIONS		(1,888,216	)		(1,573,383	)		(105,204,767	)
OTHER INCOME (EXPENSE)
Gain on extinguishments		86,009			9,399			192,359
Minority interest loss in consolidated subsidiary		—			—			20,000
Loss on investments		—			(12,251	)		(28,328	)
Loss from unconsolidated subsidiary		—			—			(1,466,467	)
Interest Income (expense), net		(5,340	)		(10,578	)		112,708

TOTAL OTHER INCOME (EXPENSE)		80,669			(13,430	)		(1,169,728	)

NET LOSS	$	(1,807,547	)	$	(1,586,813	)	$	(106,374,495	)

LOSS PER COMMON SHARE, basic and diluted	$	(.03	)	$	(.02	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted		55,606,168			65,956,810

The accompanying notes are an integral part of these consolidated financial statements.

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mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)

		Nine Months Ended March 31,						October 2, 1996 (Date of Inception) to March 31,
		2002			2003			2003

REVENUES	$	1,948,351		$	981,591		$	14,367,647

COSTS AND EXPENSES
Cost of Sales		1,711,811			949,261			9,300,819
Research and development (including non-cash stock related charges of $202,175, $306,250 and $1,966,424 respectively)		2,907,256			2,461,696			33,270,470
General and Administrative (including non-cash stock related charges of $2,441,659, $548,717, and $20,795,054 respectively)		5,376,709			2,143,882			49,272,312
Depreciation and amortization		538,255			388,106			2,639,718
Non-cash charges for stock based compensation		480,727			23,923			25,089,095

TOTAL COSTS AND EXPENSES		11,014,758			5,966,868			119,572,414
LOSS FROM OPERATIONS		(9,066,407	)		(4,985,277	)		(105,204,767	)
OTHER INCOME (EXPENSE)
Gain on extinguishments		123,858			50,125			192,359
Minority interest loss in consolidated subsidiary		—			—			20,000
Loss on investments		—			(28,328	)		(28,328	)
Loss from unconsolidated subsidiary		—			—			(1,466,467	)
Interest Income (expense), net		(16,898	)		(44,729	)		112,708

TOTAL OTHER INCOME (EXPENSE)		106,960			(22,932	)		(1,169,728	)

NET LOSS	$	(8,959,447	)		(5,008,209	)	$	(106,374,495	)

LOSS PER COMMON SHARE, basic and diluted	$	(.19	)	$	(.08	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, basic and diluted		47,346,671			64,238,350

The accompanying notes are an integral part of these consolidated financial statements.

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mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statement of Changes in
Shareholders’ Deficit (Unaudited)

	Shares		$.01 Stated Value		Treasury Stock			Additional Paid-in Stock		Deferred Compen-sation			Accumulated Deficit			Compre-hensive Loss			Total Shareholders (Deficit) Equity

Balance June 30, 2002	60,807,508	$	608,075	$	(7,973	)	$	100,751,284	$	(23,923	)	$	(101,366,286	)	$	(4,026	)	$	(42,849	)

Issuance of common stock with warrants in private placement	1,126,669		11,267		—			326,733		—			—			—			338,000
Issuance of common stock for services	258,000		2,580		—			60,595		—			—			—			63,175
Issuance of warrants for services	—		—		—			67,725		—			—			—			67,725
Amortization of deferred employee stock option compensation	—		—		—			—		23,923			—			—			23,923
Issuance of common stock in settlement of debt	340,000		3,400		—			61,200		—			—			—			64,600
Issuance of warrants to certain officers in settlement of debt	—		—		—			480,917		—			—			—			480,917
Issuance of common stock in settlement of debt to related parties	5,533,333		55,333		—			1,224,667		—			—			—			1,280,000
Net loss	—		—		—			—		—			(5,008,209	)		—			(5,008,209	)
Other comprehensive loss	—		—		—			—		—			—			4,026			4,026


Balance, March 31, 2003	68,065,510	$	680,655	$	(7,973	)	$	102,973,121	$	—		$	(106,374,495	)	$	—		$	(2,728,692	)

The accompanying notes are an integral part of these consolidated financial statements.

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mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)

		Nine Months Ended March 31,						October 2, 1996 (Date of Inception) to March 31,
		2002			2003			2003

Cash Flow From Operating Activities:
Net loss	$	(8,959,447	)	$	(5,008,209	)	$	(106,374,495	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,224,362			1,100,974			5,269,162
Realized and unrealized losses		—			16,504			16,504
Book value of fixed assets disposed		—			—			74,272
Provision for doubtful accounts		—			8,311			40,435
Gain on debt extinguishments		(123,858	)		(50,125	)		(192,361	)
Loss on unconsolidated subsidiary		—			—			1,466,467
Impairment of note receivable		—			—			232,750
Non-cash charges relating to issuance of common stock, common stock options and warrants		3,124,561			878,890			47,888,652
Changes in assets and liabilities:
Accounts receivable		(224,550	)		174,199			(131,705	)
Inventories		266,491			750,129			(2,592,587	)
Prepaid expenses and other current assets		(65,276	)		28,960			(537,837	)
Other non-current assets		64,455			3,580			—
Accrued expenses		915,540			280,826			2,296,411
Due to/from related parties		1,677,366			864,438			5,143,478
Due from officer		100,000			—			—
Receivables from subsidiary		—			—			(150,000	)
Deferred revenue		214,180			—			214,180
Accounts payable		(779,341	)		(2,646	)		3,979,810
Other current liabilities		—			130,000			130,000

Net cash used in operating activities		(2,565,517	)		(824,169	)		(43,226,864	)

Cash Flow from Investing Activities: