UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE YEAR ENDED JUNE 30, 2003
COMMISSION FILE NO. 000-24969
mPHASE
TECHNOLOGIES, INC.
(Name of issuer in its charter)
NEW JERSEY
(State or other jurisdiction of incorporation or organization) |
22-2287503
(I.R.S. Employer Identification Number) |
587 CONNECTICUT
AVE., NORWALK,
(Address of principal executive offices) |
CT 06854-1711
(Zip Code) |
Registrant’s telephone number, including area code: (203) 838-2741
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to the Form 10-K.
As of August 11, 2003, there were 71,628,182 shares of common stock, no par value, stated value $.01, outstanding and the aggregate market price of shares held by non-affiliates was approximately $14,800,000 (Based upon a closing common stock price of $.30 on August 11, 2003) (solely for the purpose of calculating the preceding amount, all directors and officers of the registrant are deemed to be affiliates.)
mPHASE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I
FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements”. In some cases, you can identify forward-looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” or the negative of these terms and similar expressions intended to identify forward-looking statements. These statements reflect the Company’s current views with respect to future events and are based on assumptions and subject to risks and uncertainties. The Company discusses many of these risks and uncertainties in greater detail in Part I, Item 1 of this 10-K under the heading “Risk Factors.” These risks and uncertainties may cause the Company’s actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Y ou should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent the Company’s estimates and assumptions as of the date of this report. The Company is under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.
The following discussion should be read in conjunction with mPhase Technologies’ financial statements and related notes included elsewhere in this report.
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF THE BUSINESS
mPhase Technologies, Inc. (“mPhase” or the “Company”) is a development stage technology company headquartered in Norwalk, Connecticut with offices in Little Falls, New Jersey and Atlanta, Georgia. The Company is a developer of broadband communications products, specifically, digital subscriber line (“DSL”) products for telecommunications service providers around the world. mPhase shares common office space and common management with Microphase Corporation, a privately-held company. Microphase is a seller of radio frequency and filtering technologies to the defense and telecommunication industries. Microphase has been in operation for almost 50 years and supports mPhase with engineering, administrative and financial resources, as needed.
Since our inception in 1996, mPhase has been a development-stage company. Our primary activities have consisted of designing, manufacturing and testing our flagship products designed to deliver digital broadcast television over DSL. We have not, as yet, derived any significant revenue from such products.
mPhase introduced its first TV over DSL platform, the Traverser™ Digital Video and Data Delivery System (“DVDDS”), in 1998. The DVDDS is a patented end to end system that enables a telecommunications service provider to deliver up to several hundred channels of motion picture experts group two (“MPEG-2”) standard broadcast digital television, high speed internet and voice over copper telephone lines between a central office facility of the provider and a customer’s premise. mPhase has not, as yet, derived any material revenues from sales of the DVDDS. The DVDDS is a proprietary technology developed in conjunction with Georgia Tech Research Corporation which allows for the delivery of any channel to all users at any given time without any dilution in quality. The DVDDS consists of an Access Shelf located at a telephone service provider’s central office (CO) and an Intelligent Network Interface (INI)™ set top box located in a customer’s home. Because it is a propriatary end to end system, the DVDDS does not interoperate with other manufacturer’s DSL central office (CO) equipment or customer premises equipment. The DVDDS utilizes Asymmetric DSL (“ADSL”) that allows for significantly more downstream than upstream bandwidth for transmission that is well suited for delivery of broadcast television. The system is the only system on the market that utilizes non- Internet Protocol (“IP”) transmission over ADSL. The DVDDS is installed at Hart Telephone Company in Hartwell, Georgia, where a limited user system is currently operational. A DVDDS™ system is also installed at the BMW manufacturing plant in Spartanburg, South Carolina for use as a television broadcast system in a commercial setting.
The mPhase TV+ platform, a new product recently developed in conjunction with Bell Laboratories, like the legacy DVDDS platform, is designed to allow for the simultaneous delivery of voice, high speed data, and broadcast TV over copper telephone lines between a telephone service provider’s CO and the customer premises. The mPhaseTV+ platform formerly named ‘Simple TV’ is a modular solution for delivery of several hundred broadcast television channels over ADSL that utilizes an industry-leading, standards-based Lucent Technologies, Inc.’s (Lucent) Stinger™ DSL Access Concentrator for transport of digital television plus high speed internet and voice. The mPhase TV+ platform consists of a cost reduced Traverser INI™ set top box located in a telephone customer’s premises plus the Lucent Stinger located at the CO. A newly developed mPhase Broadcast Television Switch (“BTS”) interfaces with the Stinger and a video headend built by a telephone service provider to downlink broadcast television programming from satellites. The BTS formats the video data prior to the distribution to a customer by the Stinger and supports administrative tasks associated with subscriber management. The use of the Lucent Stinger (digital subscriber line access mutiplexer commonly known as a DSLAM) for transport in the TV+ platform results in a highly scalable architecture for the delivery of video. This is accomplished by internally multicasting each television channel for delivery from the CO to a larger number of end users. We believe that the TV+ platform is the most cost-effective standards-based solution for delivery of broadcast television using ADSL. For mPhase the alliance with Lucent marks a change in strategy from selling a complete proprietary platform to providing an industry-standard modular solution.
Both the TV+ platform and the legacy DVDDS products are aimed for use in markets primarily outside of the United States that do not have a hybrid fiber coaxial cable (“HFC”) infrastructure necessary for cable TV or fiber to the curb necessary for very fast DSL (VDSL). We believe there is a significant cost advantage when our mPhase TV+ solution is compared against other platforms utilizing existing telephone lines containing the same features. The mPhase TV+ platform does not contain the features such as the delivery of two or more TV channels to a single set top box over copper telephone lines or video on demand and interactive TV features. As ADSL technology migrates forward to ADSL2 or ADSL2+, mPhase will include additional features to its TV+ platform in a modular scalable cost effective manner depending upon actual market demand for such features in markets that mPhase is targeting.
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We believe the legacy DVDDS developed by GTRC, when combined with a version of the cost-reduced Traverser INI™ set top box redesigned by Lucent, continues to be a cost effective TV platform. The DVDDS can be sold in international markets where primary demand is for multi-channel digital broadcast television plus voice only and there is little demand for high speed internet. We believe the mPhase TV+ platform is the optimal solution for both a telecommunications service provider and the ultimate customer who requires high-speed internet, voice and digital quality broadcast television over ADSL.
For those television markets in the United States that are not served by HFC, we believe that the availability of programming content is essential to facilitate potential sales of our TV platforms over ADSL. In March of 2000, we established mPhase Television net., Inc. (mPhase TV), a joint venture between mPhase and Alphastar International, Inc. mPhase TV is capable of contracts, licensing agreements, marketing and legal support to service providers interested in deploying television over ADSL for U.S. markets. mPhase TV has secured licenses to resell programming for approximately 80 channels of U.S. broadcast television. mPhase TV enables telecommunications service providers in the U.S. to provide customers a full complement of television programming. This enables a U.S. telecommunications service provider to avoid the necessity of securing such contracting rights individually with many different providers of broadcast television content. It is important to note that the role of mPhase TV has changed since its inception. Originally, mPhase TV was to utilize a satellite uplink/downlink facility and serve as an aggregator of television content. This would eliminate the need for a telecommunications service provider, purchasing a TV delivery platform from mPhase, from having to build a full scale television reception facility (head-end) to downlink broadcast television channels from satellites orbiting the earth. However, recent advances in technology have significantly reduced the costs for a telephone company to build a full scale headend. The role of mPhaseTV is now limited to providing the appropriate licenses and relationships as opposed to offering a content aggregation solution. As part of its cost reduction efforts mPhase terminated its lease of Alphastar’s earth station satellite uplink and downlink facility in Oxford, CT to aggregate broadcast television content. mPhase owns approximately 57% of mPhase TV.
mPhase also has designed and markets a line of DSL component products ranging from items such as Plain Old Telephone Service (POTS) splitters to innovative loop management products. From our inception in 1996 to date virtually all of mPhase’s revenue has been derived from sales of our DSL products such as POTS splitters and low pass filters. Our newest innovation in our suite of DSL component products is our iPOTS or Intelligent POTS splitter product. This product enables telephone service providers comprehensive remote and automated test access to all elements of a DSL network. The iPOTS, and iPOTS3 allow a telephone service provider to bypass POTS splitters on a DSL network and avoid having to manually intervene and disrupt line usage so a test signal can pass through a DSL network. This product marks an advancement in automating DSL loop management. As DSL deployments increase, it is becoming more important for telecommunications service providers to streamline the process for rolling-out and troubleshooting DSL services. Additionally, as competition for high speed Internet expands, the market is witnessing a reduction in the price for such service. Therefore, it has become imperative that telecommunications service providers lower the operational costs involved with supporting DSL services. Currently our iPOTS1 is designed for use with the Lucent Stinger, whereas, the iPOTS3 is compatible with DSLAM’s manufactured by other vendors. mPhase currently has a non-exclusive worldwide distribution agreement with Corning Cable Systems for the sale of the iPOTS products. Such arrangement potentially expands exposure for this product, as Corning is one of the largest vendors of central office DSL filtering equipment. The Company is also aggressively pursuing direct efforts with respect to sales of the iPOTS product.
Business Development, Organization, and Acquisition Activities
mPhase was incorporated in New Jersey in 1979 under the name Tecma Laboratory, Inc. In 1987, the Company changed its name to Tecma Laboratories, Inc. As Tecma Laboratories, Inc., the Company was primarily engaged in the research, development and exploitation of products in the skin care field. On February 17, 1997, the Company acquired Lightpaths, Inc., a Delaware corporation, which was engaged in the development of telecommunications products incorporating DSL technology, and the Company changed its name to Lightpaths TP Technologies, Inc.
On January 29, 1997, the Company formed another wholly-owned subsidiary called TLI Industries, Inc. The shares of TLI were spun off to its stockholders on March 31,1997 after the Company transferred the assets and liabilities, including primarily fixed assets, patents and shareholder loans related to the prior business of Tecma Laboratories. As a consequence of these transactions, the Company became the holding company of its wholly-owned subsidiary, Lightpaths, Inc. on February 17, 1997.
On May 5, 1997, the Company completed a reverse merger with Lightpaths TP Technologies, Inc. and thereafter changed its name to mPhase Technologies, Inc. on June 2, 1997.
On March 26, 1998 the Company entered into a Licensing Agreement with Georgia Tech Research Corporation (“GTRC”) in which mPhase became the exclusive licensee of all patents received by GTRC in connection with development of the Traverser™, GTRC receives a royalty equal to 5% of gross sales of the Traverser ™ and 30% of any “lump sum payments” under the terms of its license, as amended.
On June 25, 1998, mPhase acquired Microphase Telecommunications, Inc., a Delaware corporation, from Microphase Corporation by issuing 2,500,000 shares of its common stock. Microphase Telecommunications’ principal assets were patents and patent applications utilized in the development of its proprietary Traverser™ technology.
In March, 2000, mPhase entered into a joint venture with AlphaStar International, Inc. to form an entity called mPhaseTelevision.Net, Inc. in which the Company held a 50% interest. On May 1, 2000, the Company acquired an additional 6.5% interest in mPhaseTelevision.Net, Inc. and made it one of its consolidated subsidiaries.
On March 14, 2000, mPhase entered into an agreement with BMW Manufacturing Corp., located in South Carolina. Under the agreement, the Company installed version 1.0 of the Traverser ™ for BMW’s telephone transmission network. BMW has agreed that, upon its notice and consent, mPhase will be able to demonstrate to potential customers the functioning system at BMW’s facilities. BMW has made two (2) subsequent purchases increasing the size of the deployment to 48 unique units.
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Our flagship installation, Hart Telephone, has completed the building and development of its digital headend during the fourth quarter of 2001. Hart currently has approximately 70 customers receiving about 80 channels of television services utilizing such platform.
In May of 2002 mPhase initiated discussion for development of a cost-reduced set top box (INI) with the Bell Laboratories division of Lucent Technologies, Inc.
Effective December 1, 2002, mPhase entered into a Development Agreement with the Bell Laboratories division of Lucent Technologies, Inc. for the development of mPhase’s broadcast television switch as an integrated platform with the Lucent Stinger ™ DSL Access Concentrator.
On December 9, 2002, pursuant to a Statement of Work, Lucent commenced development of the BTS for mPhase.
On December 15, 2002, mPhase engaged Lucent for the cost reduction of its Traverser INI set top box.
On January 21, 2003 mPhase entered into a Co-Branding Agreement with Lucent Technologies under which mPhase’s INI set top box would be co-branded with the Lucent Technologies name and logo.
On April 4, 2003, mPhase entered into a Systems Integration Agreement with Lucent Technologies. Under the terms of such an agreement mPhase has been given the exclusive rights to sell worldwide as a ‘bundled’ solution the Stinger in connection with mPhases’ BTS.
Our revenue, historically, has been derived exclusively from sales of DSL component telephone equipment parts, the majority of which has come from our sales of POTS Splitter Shelves. We have derived no material revenue to date with respect to our broadcast television over DSL platforms. In our fiscal years ended June 30, 2003 and June 30, 2002 we generated approximately $1.6 million and $2.6 million in revenue, respectively, from the commercial sale of our component products and overall losses for such years of $6,650,211 and $11,245,361, respectively. These component products, including filters and Central Office POTS Splitter Shelves, are marketed to other DSL equipment vendors. We do not believe that either our legacy DVDDS platform developed by GTRC or our new TV+ platform developed by Lucent will be materially impaired by the sale of these component products to these potential competitors.
Products & Services
Our primary business is to develop and market our platforms that are capable of delivering broadcast television by domestic and international telephone companies and other communications service providers over twisted pair copper telephone lines. We believe our flagship products are the most cost-effective, reliable, scaleable and easiest to operate platforms for delivery of broadcast television, data and voice over ADSL on the market. mPhase primarily is targeting its marketing of its television delivery systems to international telephone companies. Telephone companies around the world are experiencing negative pressures on their wireline calling revenues and need to increase their per subscriber revenue and margins. Outside of the United States, service providers are particularly reliant on their copper infrastructure, as few countries have upgraded their infrastructure to optics. Beyond that, the options for pay-tv services outside the U.S. are, for the most part, limited. Consumers living abroad have less access to digital television, leaving international telecommunication companies well-positioned to capture a large percentage of the market. Hence, we believe the market conditions that exist abroad are stronger for our products than those that exist domestically. mPhase intends to utilize its own sales force, in addition to strategic partners to distribute its products worldwide.
Television over DSL Platforms
mPhase’s first TV platform, the Traverser Digital Video and Data Delivery System (“DVDDS”) introduced in 1998, is a patented end-to-end system enabling the delivery of digital broadcast television, analog voice service and high-speed data, as well as other ancillary services, over a single copper telephone wire using ADSL. Telephone service providers using the mPhase legacy DVDDS need to build a digital video headend or programming and control center (“PCC”) to downlink broadcast television programming content from satellites. This includes installing a satellite receiving dish, off-the-shelf video equipment and mPhase’s software to manage the video content at the PCC. Local off-air channels are received, digitized and combined with the signals received via satellite at the PCC. The PCC can be co-located with a single central office or remotely located and connected to each Central Office (“CO”) via fiber. The DVDDS CO equipment, known as the mPhase Universal Access Shelf, integrates video signals from the PCC with Internet and voice signals. The output of the Universal Access Shelf consists of DSL “lines" capable of carrying a single digital broadcast television channel, high-speed data and POTS (“Plain Old Telephone Service”) to subscribers over existing telephone lines. Upon reaching the home or business, the DSL line is fed into the mPhase intelligent network interface INI , or digital set top box. The INI separates the three signals and routes them to the television, PC and telephone.
The Company believes that the DVDDS is best suited for markets outside of the United States that do not have a fiber-optic infrastructure and where there is a demand for voice and multi-channel digital broadcast TV over DSL. The patented bus architecture utilized by the DVDDS platform allows a plurality of channels to be delivered to a plurality of users all of the time ensuring unequivocal system reliability. The Company believes it to be a very effective method to deliver realtime broadcast television over copper phone wires. Additionally, the DVDDS does not require an upgrade of the existing infrastructure thereby avoiding the capital expense required to support certain competing video over DSL platforms.
The DVDDS utilizes technology that mPhase licenses exclusively from Georgia Tech Research Corporation (“GTRC”) and DSL semiconductor chip technology purchased from GlobeSpan Semiconductor, Inc. Georgia Tech Applied Research Corporation (“GTARC”) provided a significant portion of the engineering research and design to develop the DVDDS. The DVDDS also utilizes component technology developed by Microphase Corporation.
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The DVDDS is currently deployed with two customers, BMW Manufacturing in Spartanburg, South Carolina and Hart Telephone in Hartwell Georgia and has not, as yet, generated material revenues.
mPhase has recently introduced its second television platform that utilizes the industry-leading, standards-based Lucent Technologies, Inc.’s (Lucent) Stinger DSL Access Concentrator for transport of digital television plus high speed-internet from a telephone service provider’s CO to a customer’s premises. The TV+ platform consist of a cost reduced INI set top box located in a telephone customer’s premises and central office equipment consisting of the Lucent Stinger DSL equipment plus a new mPhase Broadcast TV Switch (“BTS”).
The mPhase TV+ platform, like the DVDDS, is designed to allow for the simultaneous delivery of analog voice plus digital high speed data, and broadcast TV over copper telephone lines between a telephone service provider’s CO and the Customer Premises. As noted above, the TV+ platform is aimed for use in markets primarily outside of the United States that do not have a fiber optic infrastructure necessary for cable TV or fiber to the curb necessary for very fast DSL (VDSL). Our solution is more cost effective for both a telecommunications service provider and the end user in such areas since it delivers any given broadcast television the channels to the largest number of users. We believe the mPhase TV+ solution provides the lowest capital cost for telephone service providers to enter the market for broadcast television.
The mPhase TV+ platform does not contain features that currently would require significant and expensive upgrades to its telephone service provider’s current infrastructure. Our goal is to achieve wide acceptance of our television platforms in developing markets outside of the United States for multi-channel digital broadcast television at significant gross margins by creating an extremely cost-effective product. We believe such markets do not demand, or can afford, feature-rich and expensive solutions available with alternative technologies such as cable, VDSL and much more expensive platforms for ADSL. As ADSL technology migrates forward to ADSL2 or ADSL2+, mPhase will include some or all of these features in its TV+ platform in a modular scalable cost effective manner depending upon actual market demand for such features in markets that mPhase is targeting.
For mPhase, the alliance with Lucent marks a change in strategy from selling a complete proprietary platform to providing an industry-standard, modular solution. Under our Co-Branding Agreement with Lucent, mPhases’s Traverser™ INI set top box is co-branded with Lucent and results in greater product recognition. Under our Systems Integration Agreement with Lucent, mPhase has the exclusive worldwide right to resell the Lucent Stinger as part of the bundled “value added” TV+ platform. By utilizing the Lucent Stinger for transport together with the mPhase TV+ platform, service providers can capitalize upon the proven and extremely robust and cost effective method of supporting and delivering data combined with the mPhase BTS supporting delivery of broadcast TV. In addition, the TV+ platform is compatible with DSLAM’s manufactured by other vendors.
Since the mPhaseTV+ platform solution is modular, telephone companies that already have deployed the Stinger can quickly and easily upgrade to support broadcast television in addition to data and voice services. There are over 4 million Stinger DSL ports currently deployed in 20 countries around the globe. As noted above, the hybrid solution is based upon industry-standard transport technology as opposed to the proprietary transport utilized in the Traverser™. Finally, by utilizing the Lucent Stinger for transport, mPhase is able to capitalize upon future engineering and design efficiencies of the Stinger. The mPhaseTV+ platform is ideally suited for large-scale deployments in parts of the world where there either is currently or will likely be demand to support data AND television services simultaneously.
mPhase’s original set top box designed by GTRC to be used as the CPE portion of the Traverser™ has recently been reduced in size and costs by Lucent. This product called the Traverser INI™ is a low-cost set-top box developed specifically for delivering (MPEG2) standard video bitstreams over DSL links. mPhase’s new version of its set top box utilizes standard ADSL transport. Such set top box can be sold as a stand-alone product that supports the Lucent Stinger DSLAM’s designed by Lucent as well as other manufacturers based upon an open form of standards-based technology.
To date, Next Level Communications appears to have the lead among our competitors in terms of the number of deployments of broadcast television over DSL. However, the majority of such deployments utilize very fast DSL (“VDSL”) as opposed to our Asynametric DSL (“ADSL”) solution that has a much shorter reach from its source and requires a fiber to the neighborhood infrastructure. We believe the cost of such solution is prohibitive to many telecommunications service providers in the developing international markets where such an upgrade to such infrastructure is not economic nor feasible.
Other Products
POTS Splitter Shelves
A Plain Old Telephone Service (“POTS”) Splitter Shelf is a low pass/high pass filter that separates voice and data transmissions. POTS Splitter Shelves are necessary to permit simultaneous voice and data transmissions over the same twisted copper wire pair. POTS splitter shelves and the individual cards that populate the shelf, separate and combine traffic traveling along each twisted pair of wires into the analog voice portion of a transmission and the digital data portion, so that each signal can travel independent of the other. This product allows for increased clarity of both voice and data information and decreased crosstalk or interference.
Our POTS Splitter products are available in a domestic and European version.
Intelligent POTS Splitter (iPOTS )™, iPOTS3 and Universal Bypass
The mPhase iPOTS and the recently introduced iPOTS3 are innovative products for the DSL industry that enables remote and cost-effective loop management and maintenance including line testing, qualification and troubleshooting from a telecommunication service provider from a CO. Prior to the introduction of the iPOTS and iPOTS3 products, loop management could not be remotely performed through a conventional POTS Splitter without the use of expensive cross connects or relay banks because of the mandatory direct current blocking capacitors in traditional POTS splitters, as required by regulatory standards. The (patent pending) iPOTS and new iPOTS3 products allow both narrow and wideband testing of a telephone loop for DSL data capabilities necessary to deploy DSL. Using the iPOTS products testing is performed through the central office POTS Splitter without having to manually intervene, thereby eliminating the need to dispatch personnel from the telephone company to the field thus reducing the cost of deploying DSL. Currently the iPOTS1 product is designed for use with the Lucent Stinger, whereas, the iPOTS3 product is compatible with any vendors DSLAM. mPhases’s Universal Bypass product is a module containing the intelligent functionality which can be used with any vendor’s POTS Splitter.
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mPhase is party to a non-exclusive distribution agreement with Corning Cable Systems for its line of intelligent products. This agreement increases the potential exposure of this product line, as Corning has a global sales force and established relationships with the largest telephone companies in the world.
mPhaseStretch
mPhase has recently developed a new product known as the mPhaseStretch targeted for emerging markets outside of the U.S. This product is a digital loop extender that enhances the performance of the legacy DVDDS platform by extending the transmission distance for the delivery of voice, video and data up to 30,000 feet. The mPhaseStretch is a powered device that is placed on the line at approximately 9,000 feet intervals or before the signal begins to degrade. We believe, the addition of the Stretch could give mPhase the greatest serviceable distance radius for the delivery of converged services over copper telephone wires. The current mPhaseStretch is compatible only with the legacy Traverser DVDDS television platform.
Microfilters
We have developed a complete line of microfilters, including a 2 and 4 pole filter for use in single and multi-phone households, as well as a Network Interface Device Splitter. These products, similar to POTS splitters, ensure clear and reliable service of voice, high-speed data, and television when these two services are transported over the same line.
Target Market
mPhase’s primary target market for the DVDDS and TV+ digital broadcast television delivery platforms over ADSL includes international and rural domestic telephone companies. Specifically, we believe our TV over DSL platform products are the most competitive in markets that currently have limited access to multi-channel television services such as many parts of Eastern Europe, Africa, Latin America, Asia and the Middle East, as well as parts of the rural United States.
Competitive Business Conditions
The telecommunications sector continues to experience significant weakness in capital spending by service providers globally. The downturn in spending has continued for the last two fiscal years of mPhase ending June 30, 2003 and June 30, 2002 respectively. The dramatic pull back in equipment purchased by service providers, has significantly reduced earnings and resulted in dramatically reduced stock prices of telecommunications equipment vendors. This, together with the tremendous correction of stock prices in general during the past three years, has halted the growth of the sector. The Company remains optimistic about the future of DSL and the potential of its broadcast television platforms and the market for its component DSL products as the rollout of DSL continues globally. We anticipate some upturn in capital spending during fiscal year 2004, however, service providers still face significant challenges of overcapacity and declining margins for traditional services globally.
In addition to the overall economic climate, the telecommunications equipment market is also characterized by swift technological change. Currently, communications service providers have the option to offer several broadband solutions in the last mile, including the existing ISDN or T-1 technologies, fiber optics or hybrid coaxial cable and wireless and satellite delivery methods. Communications service providers may use these other technologies instead of DSL to offer their subscribers broadband access. Based upon current telecommunications industry standards and deployment methodologies, mPhase believes that DSL can compete favorably with these other technologies, especially outside of the United States. In particular, telephone companies and other copper-wire based service providers, that are interested in maximizing revenues associated with the installed copper wire infrastructure, will favor DSL or other copper-based broadband technologies.
Alcatel is the leading supplier of DSLAMS (digital subscriber line access multiplexers) around the globe having deployed several video over DSL installations with telephone service providers. Historically, Alcatel has worked with multiple equipment vendors to create a complete, end-to-end video solution, including middleware (i.e., software) providers iMagicTV and set top box provider, Pace. Recently, however, Alcatel acquired iMagicTV, bringing at least some of the third party required equipment, in-house. Alcatel has announced upgrades to its ASAM 7301 specifically to better support the delivery of converged voice, video and data.
There are a number of telecommunications equipment providers competing in the television over DSL market. For instance, Next Level Communications (NLC), which has recently become a division of Motorola, has secured over 100 customers predominantly in the United States. The majority of their deployments utilize a specific form of DSL known as VDSL (very fast digital subscriber line). VDSL requires that telecommunications service providers install fiber optics into the neighborhood, or close to the customer premises because signals can only travel up to 5,000 feet over copper telephone wires. As a result, relative to the mPhase solutions, the NLC platform is more capital intensive due to the cost of the infrastructure upgrade (i.e., installing fiber optics closer to the customer premises). NLC has also introduced an ADSL version of its equipment, which enables greater serviceable distance radius of approximately 8,000 feet. This newer product could compete more directly with both of mPhase’s TV platforms over ADSL solutions. In general, NLC’s products tend to more feature rich and therefore more costly. NLC concentrates the majority of its sales efforts within the US market where consumers demand a robust viewing experience due to the plethora of alternatives for television services.
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Lucent also offers another video over DSL solution currently deployed at SasTel in Saskatchewan Canada. This solution, similar to NLC’s products, offers greater functionality and features, however is more costly in terms of per port equipment cost than the mPhaseTV+ platform. Finally, other smaller vendors are emerging, partnering with other equipment vendors to create a video over DSL platform. Equipment providers such as Net to Net and Paradyne are modifying their data platforms to support the delivery of television services. However, mPhase believes it has certain cost of equipment advantages over other vendors making its system more economically viable for potential customers. The Company believes that the strength of the video-centric BTS coupled with the strength of the data-centric Lucent Stinger make its solution extremely competitive in its target markets.
Other vendors that offer complete platforms for delivery of TV over DSL or hardware or software portions of such platforms that incorporate broadband solutions over copper wire include: ADC, Advanced Fiber Communications, Innovia, NEC, Motorola, Huawei Technologies Corporation Limited, Paradyne Networks, Samsung, 2Wire, Siemens, TUT Systems, Motorola, UTSTARCOM and Westell. In addition, we also compete with Minerva and Myrio Corporation, which provide infrastructure software products to deliver multi-channel digital television over telephone networks by using Internet Protocol.
Cable television providers are also competing in the space for converged services using analog and digital cable connections that have been upgraded for digital two-way services. In the United States, the majority of cable connections have already been upgraded and can support the delivery of television and high-speed Internet, and in many cases, cable telephony. In fact, the imposing threat that cable companies present has created a catalyst among telephone companies to expand their service offering to include advanced services such as digital television.
While satellite delivered television services in the U.S. have experienced significant growth over the past several years, the ability for satellite providers to offer reliable, consistent and cost- effective high speed data is still in its infancy and too expensive to commercially deploy. Furthermore, satellite providers are not typically equipped to offer telephony services, unless they were to partner with a telephony provider. Beyond that, particularly outside of the U.S., the direct-to-home satellite options are limited due to either low channel counts or unreliable quality. Satellite signals are often affected by weather events such as severe snow or rain, unlike DSL-delivered services which remain unaffected by weather patterns.
Manufacturing
mPhase subcontracts all of the manufacturing of its products to outside sources including related parties such as Janifast Ltd. and Microphase Corporation.
Outsourcing
The Company practices an outsourcing model whereby it contracts with third party vendors to perform certain functions rather than performing those functions internally. For instance, mPhase out sources digital engineering development for the Traverser™ System to GTARC. It also out sources analog engineering development and certain administrative functions to Microphase Corporation. mPhase has outsourced to Lucent Technologies, Inc. cost reduction of its Traverser INI set top box and development of its new mPhaseTV+ platform. With respect to manufacturing of its TV+-Platform, mPhase is targeting leading contract manufacturing companies with strategically located facilities globally with which it can establish long-term relationships. By using contract manufacturers, mPhase will attempt to avoid the substantial capital investments required for internal production.
As described in detail on page 5, the Company has entered into a number of significant agreements with Lucent Technologies, Inc which include a Co-Branding Agreement, dated as of January 21, 2003, allowing the Company to add the Lucent name and Logo to its cost-reduced Traverser INI set top box. Such agreement is for an initial period of one year and is subject to renewal on an annual basis by mutual consent. In addition, the Company has entered into a Systems Integrator Agreement, dated as of April 4, 2003 designating the Company as a reseller of the Lucent Stinger DSL transport product when bundled as part of the mPhase TV+ platform globally. Such agreement gives mPhase the exclusive right to sell the TV+ product worldwide containing the Lucent Stinger as the DSL transport mechanism for delivering broadcast television, high speed data and voice over copper telephone wires. In order to qualify for such status, as an accredited reseller, Lucent Technologies, Inc. determined that the Company’s TV+ platform added significant software and hardware value to the Stinger DSL product by enabling such product to deliver broadcast television over ADSL in addition to the Stinger’s well known existing world –class capabilities for the delivery of voice and high-speed data over copper telephone lines. Such agreement is for an initial two year term provided that either party may cancel such agreement with 60 days notice to the other party.
Patents and Licenses
We have filed and intend to file United States patent and/or copyright applications relating to some of our proposed products and technologies, either with our collaborators, strategic partners or on our own. There can be no assurance, however, that any of the patents obtained will be adequate to protect our technologies or that we will have sufficient resources to enforce our patents.
Because we may license our technology and products in foreign markets, we may also seek foreign patent protection. With respect to foreign patents, the patent laws of other countries may differ significantly from those of the United States as to the patentability of our products or technology. In addition, it is possible that competitors in both the United States and foreign countries, many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied for, or may in the future apply for and obtain, patents which will have an adverse impact on our ability to make and sell our products. There can also be no assurance that competitors will not infringe on our patents or will not claim that we are infringing on their patents. Defense and prosecution of patent suits, even if successful, are both costly and time consuming. An adverse outcome in the defense of a patent suit could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease our operations.
8
The intellectual property owned and licensed by the Company falls into two general categories, analog and digital intellectual property.
mPhase owns the analog intellectual property which can be characterized as filter technology. This intellectual property includes:
| o | Low pass filter shelves and POTS Splitters, which separate and combine the DSL spectrum from the traditional voice service; | |
| o | ADSL filters, which are filters that conform to the worldwide DSL standard and are utilized in the transmission of data and voice service; and | |
| o | Bypass for telephone Splitter System, which enables an automated and remote bypass of the POTS Splitter so full metallic testing can be performed. |
We have a pending patent application which was filed in June 1999 claiming priority to three provisional patent applications for the analog portion of our technology.
mPhase exclusively licenses our digital intellectual property from GTRC. We also have an exclusive, worldwide license to manufacture and market products using the technology developed by GTARC under our contract with them. The exclusive license with GTRC is applicable for the duration of their patent protecting the system design and other technology related to the Traverser™. The digital intellectual property that we license provides several unique aspects of the Traverser™. Among them is the backplane design, which provides every subscriber the ability to view any channel available. All subscribers in a given system could be watching the same channel at the same time. The intellectual property licensed exclusively to mPhase by GTRC includes the below mentioned patents. A patent for the System and Method for the Delivery of Digital Video and Data over a Communications Channel was issued on November 28, 2000 to the Georgia Tech Research Corporation.
A patent was issued on March 27, 2001 to the Georgia Tech Research Corporation for the System and Method for Maintaining Timing Synchronization in a Digital Video Network. This patent covers the development of the Framer and the Framer chip. The Framer is an Integrated Circuit which gives the Traverser™ the capability of allocating both the downstream and upstream bandwidth into virtually any application required. This feature allows the Traverser™ to deliver both MPEG-2 digital video and Internet data simultaneously and also allows for future applications of the Traverser™.
A patent was issued on November 27, 2001 to the Georgia Tech Research Corporation for the Method and Apparatus for Combining a Plurality of 8B/10B Encoded Data Streams addresses video data transport between digital headends and the access network serving subscribers. A further patent is pending covering other methods of video program transport.
Another patent was issued on August 13, 2002 covering what mPhase calls the System Management Workstation (SMW). Specifically, this patent entitled, “Computer System and Method for Providing Digital Video and Data Over a Communication Channel” addresses the means by which the computer system and method manages the already patented bus or broadcast backplane, for the delivery of converged voice, video and data. The management system covered by this patent performs functions such as monitoring the health of the Traverser™ system, managing a database of user information, as well as linking multiple central offices to a master system control station.
Georgia Tech also has patents pending that protect:
o apparatus and methods of remote control of the Intelligent Network Interface™; and,
o systems and methods to provide subscribers means to playback previously recorded video content.
We also rely on unpatented proprietary technology, and we can make no assurance that others may not independently develop the same or similar technology to ours or otherwise obtain access to our unpatented technology. If we are unable to maintain the proprietary nature of the Traverser™ technology, our future operations would likely be adversely affected.
Government Regulation
The Federal Communication Commission, or FCC, and various state public utility and service commissions, regulate most of mPhase’s potential domestic customers. Changes to FCC regulatory policies may affect the accessibility of communications services, and otherwise affect how telecommunications providers conduct their business. These regulations may adversely affect the Company’s potential penetration into certain markets. In addition, its business and results of operations may also be adversely affected by the imposition of certain tariffs, duties and other import restrictions on components, which mPhase obtains from non-domestic component suppliers. Changes in current or future laws or regulations, in the U.S. or elsewhere, could materially adversely affect the Company’s business.
To the best of our knowledge, there are no state or local laws to which we are subject that are relevant to our system from a regulation and certification standpoint. At the Federal level, we are subject to Federal Communications Commission (FCC) Regulations Under the Code of Federal Regulations, Title 47, Chapter 1, Part 15-RADIO FREQUENCY DEVICES, and Part 68-CONNECTION OF TERMINAL EQUIPMENT TO THE TELEPHONE NETWORK. Part 15 sets out the requirements to obtain a license for operating a radiator of electromagnetic energy, and the technical and administrative specifications relating to the marketing of such radiators. Part 68 sets out the rules and regulations to provide for uniform standards for the protection of the telephone network from harms caused by the connection of terminal equipment and associated wiring thereto, and for the compatibility of hearing aids and telephones so as to ensure that persons with hearing aids have reasonable access to the telephone network.
9
Our products and equipment were designed to comply with the aforementioned rules and regulations. The POTS splitter and filter products were already certified with FCC Part 68. The Traverser™ is still undergoing FCC Part 15 certification process.
Compliance with FCC rules and regulations allows our equipment to be marketed and sold in the United States. While the certification process and costs associated have no material effect on mPhase’s financial condition, failure to comply with FCC rules and regulations would result in loss of revenue and additional costs on product revision and/or redesign.
Research and Development
mPhase has designed the legacy Traverser™ DVDDS and its ancillary component parts in conjunction with multiple research and development partners. On March 26, 1998, we entered into a license agreement with GTRC which has the patent on the Digital Video and Data Delivery System technology. GTRC has granted us the exclusive license to use and re-sell this technology in the legacy Traverser™ DVDDS TV platform. We are required to pay GTRC royalties of 5% on the sales of the legacy Traverser™ DVDDS platform. The agreement expires automatically when the patents covering the invention expire. GTARC conducts the majority of our digital research and development for the Traverser™. Microphase Corporation contributed the analog technology incorporated in the design of the Traverser™, as well as providing ongoing development of analog DSL components. As of June 30, 2003, we had been billed a cumulative total of approximately $13,524,300 for research and development conducted by GTARC.
Our new cost-reduced feature enhanced Traverser™ INI set top box together with our TV+ platform is being developed by Lucent Technologies, Inc. for a cost of approximately $1.6 million and we have engaged and expect to continue to engage Lucent for assistance with our development of other product refinements and enhancements on a project by project basis. As of June 30, 2003 we have been billed a cumulative total of approximately $1,268,750 for research and development conducted by Lucent, of which we have paid approximately $898,000.
Employees
mPhase presently has approximately 13 full-time employees, two of whom are also employed by Microphase Corporation. See the description in the section entitled “Certain Relationships and Related Transactions.”
10
RISK FACTORS
RISKS RELATED TO FINANCIAL ASPECTS OF OUR BUSINESS
We have had substantial losses from operations since our inception in 1996 (including $6,650,211 and $11,245,361 for the fiscal years ended June 30, 2003 and 2002, respectively) and cannot be certain when and if we will ever be profitable.
We will continue to incur losses from operations and negative cash flow for the foreseeable future and will need to depend on external funding which may not be available in the capital markets.
We have never been profitable from our inception in October, 1996 through June 30, 2003 and we have incurred (a) accumulated net losses of $108,016,497 million and a stockholders’ deficit of $3,781,649 respectively and (b) cumulative negative cash flow of approximately $43,515,413.
The report of the Company’s outside auditors’ Rosenberg Rich Baker Berman & Company with respect for the fiscal year ended June 30, 2003 stated that there is substantial doubt of the Company’s ability to continue as a going concern.
We may be forced to raise additional cash for operations by selling additional shares of our common stock at depressed prices causing dilution to our shareholders.
Management estimates that the Company will need additional capital of $2 million between now and June 30, 2004 to continue operations through (a) further reduction of our cash expenditures, (b) sales, (c) external funding or by (d) a combination of the foregoing.
We may be unsuccessful in raising additional needed capital in the current capital markets because of the depressed price of our stock as a telecommunications equipment provider.
As of June 30, 2003, we have warrants and options outstanding convertible into approximately 31,777,735 shares and 17, 167,000 shares of mPhase common stock of which, upon conversion may adversely affect the future price of our common stock.
As of June 30, 2003, a portion of our warrants and options outstanding are convertible into approximately 22,826,010 and 2, 435,000 respectively of our common stock at $.30 per share or less that, upon exercise, will result in significant dilution to many of our current shareholders and may adversely affect the future price of our common stock.
As of June 30, 2003, the Company has approximately 3,130,000 shares of common stock reserved for issuance upon the conversion of convertible notes to related parties at $.30 per share.
Our common stock is a highly speculative investment and is suitable only for such investors with financial resources that enable them to sustain the loss of their entire investment in such stock.
Because the price of our common stock is less than $5.00 per share and is not traded on either the NASDAQ National or NASDAQ Small Cap exchanges it is considered to be a “penny stock” limiting the type of customers that broker- dealers can sell to which is limited to established customers and Accredited Investors (within the meaning of Rule 501 of Regulation D of the Securities Act of 1933, as amended) thereby limiting its liquidity.
RISK FACTORS RELATED TO OUR OPERATIONS
We have had to date no material revenues derived from sales of our legacy Traverser™ DVDDS platform or our new TV+ platform or new line of Intelligent POTS Splitters.
Sales from our POTS Splitter and other DSL products have experienced a significant decline as a result of the significant downturn in capital spending by telecommunications service providers during the past two years.
We depend upon GTRC for continued technical assistance in connection with deployment of our legacy Traverser™ DVDDS television platform and our business would be materially adversely affected if GTRC were to terminate our relationship.
We owe GTRC approximately $1.8 million and are attempting to finalize an agreement in principle to convert a portion of such payables into common stock on terms to be agreed upon, however, no assurances can be given that such an agreement will be reached.
We depend upon Lucent Technologies, Inc. for continued technical assistance in connection with deployment of our TV+ platform and new Traverser™ INI set top box as well as our current ability to resell the Lucent Stinger on a bundled basis with such TV+ platform and our business would be materially adversely affected if Lucent were to terminate our relationship.
Management contracts with all of our senior officers have expired and are currently being renegotiated and no assurances can be given that the Company will reach a new agreement with such key individuals.
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RISK FACTORS RELATED TO OUR TARGETED MARKETS
Our sales cycle for our legacy Traverser™ DVDDS and TV+ platforms as well as our new Traverser™ INI set top box are lengthy (since it involves a major strategic decision by a telecommunications service provider or equipment vendor) and we may incur significant marketing expenses with no guarantee of future sales.
A significant market for our legacy Traverser™ and TV+ platform may never develop if telephone service providers fail to successfully deploy broadband services including high speed data and television.
Telephone service providers worldwide have significantly decreased capital expenditures for broadband as a result of the current economic downturn in the industry.
Certain telephone companies (especially in developing international economies) may have copper wire infrastructure that is not of sufficient quality to accommodate the Traverser™.
We expect the majority of our future revenues to be derived from international emerging markets and our success depends upon our ability to sell our flagship television delivery platforms outside of the United States where political, currency and regulatory risks are significantly greater.
Our television delivery platforms over ADSL may fail to meet foreign regulatory standards.
Our customers may need to build a digital head-end to download television programming signals from satellites involving a significant additional capital expenditure to utilize the digital Television capabilities of either of our legacy Traverser™ DVDDS or TV+ platform.
The telecommunications equipment industry is subject to swift and continuing technological changes that could render our products obsolete
Intense competition in the telecommunications equipment market could limit or prevent our profitability.
Our competitors that sell DSL systems that compete with our products include much larger and better known and capitalized companies with significantly greater selling and marketing experience and financial resources such as ADC, Alcatel S.A., Calix Catena Networks, Copper Mountain, Advanced Fiber Communications, ECT Telecommunications, Ericsson, Fujistsu, Marconi, Motorola, NEC, Nortel, Huawei Technologies, Net to Net Technology, Nokia, UTS Starcom, DVTEL, Inc., Turnstone, Paradyne Networks, Samsung, 2 Wire, Siemens, TuT Systems, and Optibase Wesell.
We also face competition from companies that provide infrastructure software products to deliver multi-channel digital television over telephone such as Imagic TV, Minerva and Myrio Corporation.
Our telephone service provider customers face competition from cable-based technologies, fixed wireless technologies and satellite technologies which may cause them not to deploy our Traverser™ product.
Although the Traverser™ product is patent-protected and neither it nor our TV+ product are the subject of any infringement allegations, the telecommunications industry, in general, is characterized by a large number of patents and frequent patent litigation based upon claims of patent infringement when compared to other industries.
mPhase’s products are subject to various regulations and certifications in different countries and no assumptions can be made that such products will achieve such certifications or satisfy regulatory compliance standards.
Future market demand for telephone service companies to continue an aggressive roll-out of DSL, in general, and ADSL and ADSL2+ in particular, is highly unpredictable especially in developing markets outside of the United States.
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ITEM 2. PROPERTIES
Our corporate headquarters is located at 587 Connecticut Avenue, Norwalk, CT 06854-1711. The Company leases this office space from Microphase Corporation under a facilities agreement with Microphase that provides that mPhase lease office space, lab facilities and administrative staff on a month-to-month basis for $11,340/month. The Company also maintains an office in Little Falls, New Jersey and at the Georgia Advanced Telecommunications Research Technology Center in Atlanta, Georgia.
ITEM 3. LEGAL PROCEEDINGS
The Company has recently been advised that, following an investigation by the staff of the Securities and Exchange Commission, the staff intends to recommend that the Commission file a civil injunctive action against Packetport.com, Inc. (hereinafter “Packetport”) and its Officers and Directors. Such recommendation relates to alleged civil violations by Packetport and such Officers and Directors of various sections of the Federal Securities Laws. The staff has alleged civil violations of Sections 5 and 17(a) of the Securities Act of 1933 and Sections 10(b)and 13(d)of the Securities Exchanges Act of 1934. As noted in other public filings of mPhase, the CEO and COO of mPhase also serve as Directors and Officers of Packetport. Such persons have advised mPhase that they deny any violation of law on their part and intend to vigorously contest such recommendation.
From time to time we may be involved in various legal proceedings and other matters arising in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET PRICES OF COMMON STOCK
The primary market for mPhase’s common stock is the NASDAQ OTC Bulletin Board, where it trades under the symbol “XDSL.” The Company became publicly traded through a merger with Lightpaths TP Technologies, formerly known as Tecma Laboratories, Inc. pursuant to an agreement dated February 17, 1997. The following table sets forth the high and low closing prices for the shares for the periods indicated as provided by the NASDAQ’s OTCBB System. The quotations shown reflect inter-dealer prices, without retail mark-up, markdown, or commission and may not represent actual transactions. These figures have been adjusted to reflect a 1 for 10 reverse stock split on March 1, 1997.
| YEAR/QUARTER | HIGH |
LOW |
||||
| Fiscal year ended June 30, 2000 | ||||||
| First Quarter | $ | 9.25 | $ | 2.97 | ||
| Second Quarter | 6.19 | 2.50 | ||||
| Third Quarter | 19.13 | 6.50 | ||||
| Fourth Quarter | 14.13 | 6.00 | ||||
| Fiscal year ended June 30, 2001 | ||||||
| First Quarter | $ | 9.25 | $ | 3.00 | ||
| Second Quarter | 5.94 | 1.47 | ||||
| Third Quarter | 3.38 | 1.22 | ||||
| Fourth Quarter | 2.61 | 1.03 | ||||
| Fiscal year ended June 30, 2002 | ||||||
| First Quarter | $ | 1.67 | $ | .31 | ||
| Second Quarter | .86 | .31 | ||||
| Third Quarter | .62 | .27 | ||||
| Fourth Quarter | .50 | .23 | ||||
| Fiscal Year ended June 30, 2003 | ||||||
| First Quarter | $ | .32 | .15 | |||
| Second Quarter | .31 | .15 | ||||
| Third Quarter | .36 | .19 | ||||
| Fourth Quarter | .42 | .28 |
(B) HOLDERS
As of June 30, 2003, mPhase had 71,453,521 shares of common stock outstanding and approximately 11,200 stockholders of record. As of June 30, 2003 we have approximately 31,777,735 shares and 17,167,000 shares of stock reserved for issuance upon the conversion of warrants and options respectively.
(C) DIVIDENDS
mPhase has never declared or paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to finance operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be based upon mPhase’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed by any financing arrangements and any other factors that the Board of Directors deems relevant.
Issuance of Unregistered Securities
The information required by this item is set forth in Note 10 on F-19 attached hereto and in 10-Q’s dated September 30, 2002, December 31, 2002, and March 31, 2003.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and notes included in this annual report. The statement of operations data from October 2, 1996 (date of inception) to June 30, 1997 and for the year ended June 30, 1998, and the balance sheet data as of June 30, 1997 and 1998, are derived from financial statements that have been audited by Schuhalter, Coughlin & Suozzo, LLC, independent auditors, and are included in this document. The statement of operations data for the years ended June 30, 1999, 2000, and 2001 and the balance sheet data as of June 30, 1999, 2000, and 2001 are derived from financial statements that have been audited by Arthur Andersen LLP., independent auditors. The statement of operations data for the years ended June 30, 2002, and June 30, 2003 and the balance sheet data as of June 30, 2002 and June 30, 2003 have been audited by Rosenberg Rich Baker Berman & Company, independent auditors, and are included in this document.
Year
Ended June 30,
|
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1999 |
2000 |
2001 |
2002 |
2003 |
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(in
thousands, except share data)
|
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| STATEMENT OF OPERATIONS DATA: | |||||||||||||||
| Total revenues | $ | — | $ | 279 | $ | 10,524 | $ | 2,582 | $ | 1,582 | |||||
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| Costs and Expenses: | |||||||||||||||
| Cost of sales | — | 132 | 5,805 | 2,415 | 1,493 | ||||||||||
| Research and | |||||||||||||||
| development | 3,563 | 10,157 | 10,780 | 3,820 | 3,541 | ||||||||||
| Licensing Fees | — | — | — | — | — | ||||||||||
| General and | |||||||||||||||
| administrative | 4,683 | 17,516 | 16,151 | 6,490 | 2,654 | ||||||||||
| Depreciation and | |||||||||||||||
| amortization | 410 | 471 | 660 | 670 | 515 | ||||||||||
| Non-cash compensation | |||||||||||||||
| charge | 13,003 | 10,343 | 1,171 | 548 | 28 | ||||||||||
| Operating loss | (21,659 | ) | (38,340 | ) | (24,043 | ) | (11,361 | ) | (6,649 | ) | |||||
| Other income (expense), net | (1,162 | ) | 20 | — | 142 | 50 | |||||||||
| Interest income (expense) | (18 | ) | 158 | 43 | (26 | ) | (51 | ) | |||||||
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|
|
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| Net loss | $ | (22,839 | ) | $ | (38,162 | ) | $ | (24,000 | ) | $ | (11,245 | ) | $ | (6,650 | ) |