MPHASE TECHNOLOGIES INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE QUARTER ENDED DECEMBER 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 FEBRUARY 9, 2004 IS 78,271,658 SHARES, ALL OF ONE CLASS OF $.01 STATED VALUE COMMON STOCK.

mPHASE TECHNOLOGIES, INC.
INDEX

		PAGE
PART I	FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

	Unaudited Consolidated Balance Sheets–June 30, 2003 and December 31, 2003	3

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

	Unaudited Consolidated Statements of Operations–Six months ended December 31, 2002 and 2003 and from October 2, 1996 (Date of Inception) to December 31, 2003	5


	Unaudited Consolidated Statements of Changes in Shareholders’ Deficit Six months ended December 31, 2003	6

	Unaudited Consolidated Statement of Cash Flow–Six Months Ended December 31, 2002 and 2003 and from October 2, 1996 (Date of Inception) to December 31, 2003	7

	Notes to Unaudited Consolidated Financial Statements	8

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Condition and Results of Operations	15

ITEM 3	Quantitative and Qualitative Disclosures about market risk	26

ITEM 4	CONTROLS AND PROCEDURES	26

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	27

Item 2.	Changes in Securities	27

Item 3.	Defaults Upon Senior Securities	27

Item 4.	Submission of Matters to a Vote of Security Holders	27

Item 5.	Other Information	27

Item 6.	Exhibits on Reports on Form 8-K	28

Signature Page		29

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

		June 30,			December 31,
		2003			2003


ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	396,860		$	319,923
Accounts receivable, net of bad debt reserve of $0 for each period		287,135			182,136
Stock subscription receivable		110,000			175,000
Inventories, net		2,103,328			1,488,451
Prepaid expenses and other current assets		100,329			69,911

TOTAL CURRENT ASSETS		2,997,652			2,235,421

Property and equipment, net		581,890			240,067
Patents and licensing rights, net		184,857			129,924
Other Assets		17,250			17,250

TOTAL ASSETS		3,781,649			2,622,661

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES
Accounts payable		2,352,961			2,731,266
Accrued expenses		885,735			430,016
Due to related parties		187,372			584,902
Notes payable, current		762,735			822,804
Deferred revenue		214,180			214,180
Notes payable, related parties		—			460,000

TOTAL CURRENT LIABILITIES		4,402,983			5,243,169

Long-term debt, net of current portion		586,303			—
Other Liabilities		1,561,249			2,085,484
Notes payable, related parties		460,000			—

COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ DEFICIT
Common stock, stated value $.01, 150,000,000 shares authorized; 71,453,521 and 74,861,525 shares issued and outstanding at June 30, 2003 and December 31, 2003, respectively		714,535			748,615
Additional paid in capital		104,081,049			105,135,240
Deficit accumulated during development stage		(108,016,497	)		(110,581,874	)
Less-Treasury stock, 13,750 shares at cost		(7,973	)		(7,973	)

TOTAL STOCKHOLDERS’ DEFICIT		(3,228,886	)		(4,705,992	)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	3,781,649		$	2,622,661

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

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

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

REVENUES	$	561,760		$	1,290,935		$	18,747,831

COSTS AND EXPENSES
Cost of Sales		546,711			1,191,193			13,134,889
Research and development
(including non-cash stock related charges of $43,750, $0 and $2,045,669, respectively)		752,848			843,478			35,801,977
General and Administrative
(including non-cash stock related charges of $258,058, $195,000 and $46,172,594 respectively)		731,396			913,519			76,395,547
Depreciation and amortization		128,652			27,978			2,841,111

TOTAL COSTS AND EXPENSES		2,159,607			2,976,168			128,173,524

LOSS FROM OPERATIONS		(1,597,847	)		(1,685,233	)		(109,425,693	)

OTHER INCOME (EXPENSE)
Gain on extinguishments		—			—			226,549
Minority interest loss in consolidated subsidiary		—			—			20,000
Capital losses		(16,077	)		—			(1,466,467	)
Loss from unconsolidated subsidiary		—			—			(11,258	)
Interest Income (expense), net		(15,414	)		(15,633	)		74,995

TOTAL OTHER INCOME (EXPENSE)		(31,491	)		(15,633	)		(1,156,181	)

NET LOSS	$	(1,629,338	)	$	(1,700,866	)	$	(110,581,874	)

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

WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, basic and diluted		65,914,466			72,814,272

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)

		Six Months Ended December 31,						October 2, 1996 (Date of Inception) to December 31,
		2002			2003			2003

REVENUES	$	771,837		$	3,780,137		$	18,747,831

COSTS AND EXPENSES
Cost of Sales		744,030			3,289,937			13,134,889
Research and development
including non-cash stock related charges of $262,500, $0 and $2,045,669, respectively)		1,556,142			1,454,899			35,801,977
General and Administrative
(including non-cash stock related charges of $484,358, $307,245 and $46,172,894, respectively)		1,624,178			1,518,411			76,395,547
Depreciation and amortization		259,381			74,082			2,841,111

TOTAL COSTS AND EXPENSES		4,183,731			6,337,329			128,173,524

LOSS FROM OPERATIONS		(3,411,894	)		(2,557,192	)		(109,425,693	)

OTHER INCOME (EXPENSE)
Gain on extinguishments		40,724			23,087			226,549
Minority interest loss in consolidated subsidiary		—			—			20,000
Capital losses		(16,077	)		—			(1,466,467	)
Loss from unconsolidated subsidiary		—			—			(11,258	)
Interest Income (expense), net		(34,149	)		(31,272	)		74,995

TOTAL OTHER INCOME (EXPENSE)		(9,502	)		(8,185	)		(1,156,181	)

NET LOSS	$	(3,421,396	)	$	(2,565,377	)	$	(110,581,874	)


LOSS PER COMMON SHARE, basic and diluted	$	(.06	)	$	(.04	)

WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING, basic and diluted		63,397,799			72,251,251

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 Capital		Accumulated Deficit			Total Shareholders (Deficit) Equity

Balance June 30, 2003		71,453,521	$	714,535	$	(7,973	)	$	104,081,049	$	(108,016,497	)	$	(3,228,886	)

Issuance of common stock with warrants in private placements		1,983,337		19,834		—			611,194		—			631,028
Issuance of common stock for services		924,667		9,246		—			238,154		—			247,400
Issuance of common stock pursuant to exercise of warrants		500,000		5,000		—			145,000		—			150,000
Issuance of warrants to purchase common stock for services		—		—		—			59,843		—			59,843
Net loss		—		—		—			—		(2,565,377	)		(2,565,377	)

Balance, December 31, 2003		74,861,525	$	748,615	$	(7,973	)	$	105,135,240	$	(110,581,874	)	$	(4,705,992	)

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)

		Six Months Ended December 31,						October 2, 1996 (Date of Inception) to December 31,
		2002			2003			2003

Cash Flow From Operating Activities:
Net Loss	$	(3,421,396	)	$	(2,565,377	)	$	(110,581,874	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		753,433			402,257			5,996,397
Book Value of fixed assets disposed		16,077			—			74,272
Provision for doubtful accounts		—			—			32,124
Gain on debt extinguishments		(40,725	)		(23,087	)		(226,549	)
Loss on unconsolidated subsidiary		—			—			1,466,467
Impairment of note receivable		—			—			232,750
Loss on securities		—			—			11,258
Non-cash charges relating to issuance of common stock, common stock options and Warrants		790,608			307,245			48,451,342
Changes in assets and liabilities:
Accounts receivable		(68,859	)		104,999			(214,260	)
Inventories		630,237			614,876			(1,278,212	)
Prepaid expenses and other current assets		69,324			30,418			(566,203	)
Other non-current assets		2,695			—			—
Accounts payable		—			401,394			4,558,788
Accrued expenses		(15,229	)		(419,559	)		1,393,184
Due to/from related parties
Microphase		495,566			313,226			2,609,175
Janifast		107,204			534,887			2,814,888
Officers		60,048			(450,583	)		108,756
Lintel		—			—			477,000
Others		—			—			211,972
Receivables from Subsidiary		—			—			(150,000	)
Deferred revenue		—			—			214,180

Net cash used in operating activities		(621,017	)		(749,304	)		(44,364,545	)

Cash Flow from Investing Activities:
Payments related to patents and licensing rights		—			—			(375,720	)
Purchase of fixed assets		—			(5,500	)		(2,542,605	)

Net Cash (used)/provided by investing activities		—			(5,500	)		(2,918,325	)

Cash Flow from Financing Activities:
Proceeds from issuance of common stock and exercises of options and warrants		—			679,867			47,187,785
Payments of notes payable		(39,425	)		(2,000	)		(204,859	)
Advances from related party		623,290			—			627,840
Repurchase of treasury stock at cost		—			—			(7,973	)

Net cash provided by financing activities		583,865			677,867			47,602,793

Net increase (decrease) in cash		(37,152	)		(76,937	)		319,923
CASH AND CASH EQUIVALENTS, beginning of period		47,065			396,860			—

CASH AND CASH EQUIVALENTS, end of period	$	9,913		$	319,923		$	319,923

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

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mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

mPhase Technologies, Inc. (the “Company”) was organized on October 2, 1996. On February 17, 1997, the Company acquired Tecma Laboratories, Inc. (“Tecma”) in a transaction accounted for as a reverse merger. On June 25, 1998, the Company acquired Microphase Telecommunications, Inc. (“MicroTel”), 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 related to the mPhase line of DSL component products (e.g., POTS Splitters) and patent applications utilized in the Company’s proprietary Traverser™ Digital Video Data Delivery System (“Traverser”). The primary business of the company is to design, develop, manufacture and market high band-width telecommunication products incorporating digital subscriber line (“DSL”) technology. The present activities of the Company are focused (a) upon cost reduction and enhancement of its proprietary Traverser™ product under an Agreement with Lucent Technologies, Inc. and (b) deployment of the Traverser™ product. The Traverser™ enables telecommunications service providers to simultaneously deliver MPEG2 digital quality television (utilizing non-internet protocol), high-speed Internet and voice over copper telephone wire utilizing DSL technology. Additionally, the Company sells DSL component products which includes microfilters, splitters, and line extenders.

The Company is in the development stage, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises.” and its present activities are focused on the commercial deployment of its proprietary Traverser™ and associated DSL component products. Since mPhase is in the development stage, the accompanying consolidated financial statements should not be regarded as typical for normal operating periods.

BASIS OF PRESENTATION – The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the regulations of the Securities Exchange Commission. 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 six months ending December 31, 2003 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.

Through December 31, 2003, the Company had incurred cumulative (a) development stage losses totaling approximately $110,581,874 and (b) negative cash flow from operations equal to $44,364,545. At December 31, 2003, the Company had approximately $319,923 of cash, cash equivalents and approximately $182,136 of trade receivables to fund short-term working capital requirements. The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) allow the successful wide scale development, deployment and marketing of its products.

USE OF ESTIMATES – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

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mPHASE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

RECLASSIFICATIONS – Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current period presentation.

LOSS PER COMMON SHARE, BASIC AND DILUTED – The Company accounts for net loss per common share in accordance with the provisions of SFAS No. 128, “EARNINGS PER SHARE” (“EPS”). SFAS No. 128 requires the disclosure of 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 for all periods presented since their affect is antidilutive.

RESEARCH AND DEVELOPMENT – Research and development costs are charged to operations as incurred.

REVENUE RECOGNITION – All revenue included in the accompanying consolidated statements of operations for all periods presented relates to sales of mPhase’s line of POTS Splitter products and other related DSL component products. As required, the Company adopted the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, which provides guidance on applying generally accepted accounting principles to revenue recognition based on the interpretations and practices of the SEC. The Company recognizes revenue for its line of POTS Splitter products and other DSL component products at the time of shipment, at which time, no other significant obligations of the Company exist, other than normal warranty support. In addition, the Company includes costs of shipping and handling billed to customers in revenue and the related expenses of shipping and handling costs is included in cost of sales.

STOCK-BASED COMPENSATION – During the second quarter of fiscal 2004, the Company adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, for stock-based employee compensation, effective as of the beginning of the fiscal year. Under the modified prospective method of adoption selected by the Company, stock-based employee compensation cost recognized in 2003 is the same as that which would have been recognized had the fair value recognition provisions of Statement 123 been applied to all awards granted after October 1, 1995. The following table illustrates the effect on net income and earnings per share as if the fair value based method has been applied to all outstanding and unvested awards in each period.


	Three Months Ended December 31,						Six Months Ended December 31,

	2003			2002			2003			2002

Net loss, as reported	$	(1,700,866	)	$	(1,629,338	)	$	(2,565,377	)	$	(3,421,396	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—			1,403			—			23,923
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—			(12,016	)		—			(204,885	)

Pro forma net loss	$	(1,700,866	)	$	(1,639,951	)	$	(2,565,337	)	$	(3,602,358	)

Loss per share:
Basic and diluted—as reported	$	(.02	)	$	(.03	)	$	(.04	)	$	(.06	)
Basic and diluted—pro forma	$	(.02	)	$	(.03	)	$	(.04	)	$	(.06	)