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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended December 31, 2021

 

Or

 

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

 

For the transition period from _______________________ to ___________________

 

Commission File Number 000-30202

 

mPHASE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey   22-2287503

(State of

incorporation)

 

(I.R.S. Employer

Identification No.)

 

9841 Washingtonian Blvd #200

Gaithersburg, MD

  20878
(Address of principal executive offices)   (Zip Code)

 

(301) 329-2700

Registrant’s telephone number, including area code:

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   None   None

 

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 such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes ☒ No

 

As of February 10, 2022, there were 85,042,887 shares of the issuer’s common stock, $0.01 par value per share, outstanding.

 

 

 

 
 

 

mPHASE TECHNOLOGIES, INC.

QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

   

Page

No.

PART I – FINANCIAL INFORMATION  
Item 1. Consolidated Unaudited Financial Statements 2
  Consolidated Balance Sheets – December 31, 2021 (Unaudited) and June 30, 2021 2
  Consolidated Unaudited Statements of Operations and Other Comprehensive Income (Loss) – Three and Six Months Ended December 31, 2021 and 2020 3
  Consolidated Unaudited Statements of Changes in Stockholders Equity – Six Months Ended December 31, 2021 and 2020 4
  Consolidated Unaudited Statements of Cash Flows – Six Months Ended December 31, 2021 and 2020 5
  Condensed Notes to Consolidated Unaudited Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 38
     
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 39
Item 1A. Risk Factors 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 39
Item 4. Mine Safety Disclosures 39
Item 5. Other Information 39
Item 6. Exhibits 40
     
SIGNATURES 41

 

1
 

 

ITEM 1. FINANCIAL STATEMENTS

 

mPhase Technologies, Inc.

Consolidated Balance Sheets

 

   

December 31,

2021

   

June 30,

2021

 
    (Unaudited)        
Assets                
Current Assets                
Cash   $ 545,871     $ 2,473,386  
Accounts receivable, net     19,929,137       15,784,081  
Prepaid expenses     195,354       238,927  
Other assets     479,827       422,254  
Total Current Assets     21,150,189       18,918,648  
Property and equipment, net     9,278       16,518  
Goodwill     3,662       3,669  
Intangible assets - purchased software, net     1,599,933       2,079,047  
Other assets     3,634       3,645  
Total Assets   $ 22,766,696     $ 21,021,527  
                 
Liabilities and Stockholders’ Equity                
Current Liabilities                
Accounts payable   $ 3,497,201     $ 4,158,006  
Accrued expenses     1,205,065       1,368,367  
Contract liabilities     430,027       350,689  
Due to related parties     89,377       87,688  
Notes payable to officer     713,137       691,942  
Notes payable     93,144       323,218  
Convertible notes payable, net     3,527,623       1,991,036  
Liabilities in arrears with convertible features     109,000       109,000  
Liabilities of discontinued operations     82,795       82,795  
Total Current Liabilities     9,747,369       9,162,741  
                 
Notes payable, net of current portion     146,890       146,890  
Total Liabilities     9,894,259       9,309,631  
                 
Commitments and Contingencies (Note 11)     -        -   
                 
Stockholders’ Equity                
Preferred stock, $0.01 par value; 1,000 shares authorized, issued and outstanding at December 31, 2021 and June 30, 2021     10       10  
Common stock, $0.01 par value; 500,000,000 shares authorized, 81,656,033 shares issued and 81,627,663 shares outstanding at December 31, 2021, and 78,612,608 shares issued and 78,584,238 shares outstanding at June 30, 2021     816,278       785,844  
Additional paid-in-capital     237,890,249       236,935,277  
Common stock to be issued     30,000       63,700  
Accumulated other comprehensive income (loss)     3,106       (11,526 )
Accumulated deficit     (225,867,206 )     (226,061,409 )
Total Stockholders’ Equity     12,872,437       11,711,896  
Total Liabilities and Stockholders’ Equity   $ 22,766,696     $ 21,021,527  

 

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

 

2
 

 

mPhase Technologies, Inc.

Consolidated Statements of Operations and Other Comprehensive Income (Loss)

(Unaudited)

 

                                 
    For the Three Months Ended     For the Six Months Ended  
    December 31,     December 31,  
    2021     2020     2021     2020  
Revenue   $ 8,339,877     $ 7,636,436     $ 16,565,587     $ 15,223,300  
Cost of revenue     5,625,000       5,625,010       11,250,033       11,250,399  
Gross Profit     2,714,877       2,011,426       5,315,554       3,972,901  
Operating Expenses:                                
Software development costs     314,664       -       314,664       -  
Salaries and benefits     241,304       268,859       458,891       788,632  
General and administrative expenses     971,290       423,669       1,977,242       669,742  
Total Operating Expenses     1,527,258       692,528       2,750,797       1,458,374  
Operating Income (Loss)     1,187,619       1,318,898       2,564,757       2,514,527  
Other (Expense) Income:                                
Interest expense     (82,027 )     (31,776 )     (178,308 )     (117,739 )
(Loss) gain on change in fair value of derivative liability     -       (108,188 )     -       157,900  
Amortization of debt discounts, deferred financing costs, and original issue discounts     (1,038,525 )     (173,722 )     (2,077,049 )     (494,184 )
Initial derivative liability expense     -       -       -       (366,068 )
(Loss) gain on debt extinguishments and settlements     (166,625 )     -       (115,197 )      31,270  
Total Other (Expense) Income     (1,287,177 )     (313,686 )     (2,370,554 )     (788,821 )
(Loss) income before income taxes     (99,558 )     1,005,212       194,203     1,725,706  
Income taxes     -       -       -       -  
Net (loss) income   $ (99,558 )   $ 1,005,212     $ 194,203   $ 1,725,706  
                                 
Comprehensive income (loss):                                
Unrealized gain (loss) on currency translation adjustment     1,573       (21,932 )     14,632       (143,095 )
Comprehensive income (loss)   $ (97,985 )   $ 983,280     $ 208,835   $ 1,582,611  
                                 
(Loss) Income per common share:                                
(Loss) income per common share – basic   $ -   $ 0.01     $ -   $ 0.03  
                                 
(Loss) income per common share – diluted   $ -   $ 0.01     $ -   $ 0.02  
                                 
Weighted average shares outstanding – basic     80,160,272       73,996,275       79,547,721       68,591,025  
                                 
Weighted average shares outstanding – diluted     80,160,272       105,716,572       118,768,099       100,341,323  

 

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

 

3
 

 

mPhase Technologies, Inc.

Consolidated Statements of Stockholders’ Equity

For the Six Months Ended December 31, 2021 and 2020

(Unaudited)

 

                                                                         
    Preferred Stock     Common Stock                                
    Shares     $0.01 Par Value     Shares     $0.01 Par Value     Additional Paid in
Capital
    Common Stock to
be Issued
    Accumulated Comprehensive
Income (Loss)
    Accumulated
Deficit
    Stockholders’
Equity
 
Balance June 30, 2021     1,000     $ 10       78,584,238     $ 785,844     $ 236,935,277     $ 63,700     $ (11,526 )   $ (226,061,409 )   $ 11,711,896  
                                                                         
Issuance of common stock for vendor services     -                543,425       5,454       142,226       (63,700 )                     83,960  
Stock-based compensation for restricted shares under employment agreement                                     19,466                               19,466  
Relative fair value of warrants issued with convertible promissory notes                                     125,252                               125,252  
Other comprehensive income                                                     13,059               13,059  
Net income                                                             293,761       293,761  
Balance September 30, 2021     1,000     $ 10       79,127,663     $ 791,278     $ 237,222,221     $ -     $ 1,533     $ (225,767,648 )   $ 12,247,394  
                                                                         
Issuance of common stock for conversions of convertible promissory notes     -                2,500,000       25,000       641,625                               666,625  
Stock-based compensation for restricted shares under employment agreements                                     26,403                               26,403  
Issuance of common stock for Board of Directors services                                             30,000                       30,000  
Other comprehensive income                                                     1,573               1,573  
Net loss                                                             (99,558 )     (99,558 )
Balance December 31, 2021     1,000     $ 10       81,627,663     $ 816,278     $ 237,890,249     $ 30,000     $ 3,106     $ (225,867,206 )   $ 12,872,437  

 

    Preferred Stock     Common Stock                                
    Shares     $0.01 Par Value     Shares     $0.01 Par Value     Additional Paid in
Capital
    Common Stock to
be Issued
    Accumulated Comprehensive
Income (Loss)
    Accumulated
Deficit
    Stockholders’
Equity
 
Balance June 30, 2020     1,000     $ 10       19,174,492     $ 191,745     $ 231,984,704     $ 955,466     $ 113,070     $ (227,727,420 )   $ 5,517,575  
                                                                         
Issuance of common stock for conversions of convertible promissory notes             -        16,331,766       163,318       544,954       -                        708,272  
Issuance of common stock for exchange of warrants                     37,390,452       373,905       (220,604 )                             153,301  
Stock-based compensation for restricted shares under employment agreement                                     10,737                               10,737  
Issuance of common stock for vendor services                     200,000       2,000       4,820                               6,820  
Other comprehensive loss                                                     (121,163 )             (121,163 )
Net income                                                             720,494       720,494  
Balance September 30, 2020     1,000     $ 10       73,096,710     $ 730,968     $ 232,324,611     $ 955,466     $ (8,093 )   $ (227,006,926 )   $ 6,996,036  
                                                                         
Issuance of common stock for CloseComms acquisition     -        -        2,666,666       26,667       928,799       (955,466 )                     -  
Stock-based compensation for restricted shares under employment agreement                                     10,737                               10,737  
Other comprehensive loss                                                     (21,932 )             (21,932 )
Net income                                                             1,005,212       1,005,212  
Balance December 31, 2020     1,000     $ 10       75,763,376     $ 757,635     $ 233,264,147     $ -     $ (30,025 )   $ (226,001,714 )   $ 7,990,053  

 

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

 

4
 

 

mPhase Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

                 
    For the Six Months Ended  
    December 31,  
    2021     2020  
Cash flows from operating activities:                
Net income   $ 194,203   $ 1,725,706  
Adjustments to reconcile net income to net cash used in operating activities:                
Amortization of debt discounts, deferred financing costs, and original issue discounts     2,077,049       494,184  
Depreciation and amortization     459,230       461,659  
Stock-based compensation     159,829       206,521  
Loss (gain) on debt extinguishments and settlements     115,197       (31,270 )
Gain on change in fair value of derivative liability     -       (157,900 )
Initial derivative expense     -       366,068  
Changes in operating assets and liabilities:                
Increase in accounts receivable     (11,645,056 )     (15,298,054 )
Decrease (increase) in prepaid expenses     43,573       (7,692 )
Increase in other assets     (57,573 )     (546 )
Increase in contract liabilities     79,338       79,677  
Increase in accounts payable and accrued expenses     6,782,462       11,833,599  
Net cash used in operating activities     (1,791,748 )     (328,048 )
                 
Cash flows from investing activities:                
Capital expenditures     (2,357 )     (1,727 )
Net cash used in investing activities     (2,357 )     (1,727 )
                 
Cash flows from financing activities:                
Proceeds from issuance of convertible notes payable, net     156,248       463,600  
Repayments of notes payable     (304,290 )     -  
Repayments under settlement agreement     -       (15,000 )
Repayments of convertible notes payable     -       (116,000 )
Net cash provided by financing activities     (148,042 )     332,600  
                 
Effect of foreign exchange rates changes on cash     14,632       (143,095 )
Net decrease in cash     (1,927,515 )     (140,270 )
Cash at beginning of period     2,473,386       142,413  
Cash at end of period   $ 545,871     $ 2,143  
                 
Supplemental disclosure:                
Cash paid for interest   $ 32,603     $ 52,681  
Cash paid for taxes   $ -     $ -  

 

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

 

5
 

 

    For the Six Months Ended  
    December 31,  
    2021     2020  
Supplemental disclosure of non-cash operating activities:                
                 
Initial fair value of derivative liability recorded as debt discount   $ -     $ 463,300  
                 
Supplemental disclosure of non-cash investing and financing activities:                
                 
Relative fair value of warrants issued with convertible promissory notes   $ 125,252     $ -  
                 
Issuance of Common Stock for services                
Value   $ 147,660     $ 6,820  
Shares     543,425       200,000  
                 
Issuance of Common Stock for conversions of convertible promissory notes and accrued interest                
Value   $ 666,625     $ 708,272  
Shares     2,500,000       16,331,766  

 

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

 

6
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

Organization and Nature of Business

 

mPhase Technologies, Inc., including its wholly-owned subsidiaries, are collectively referred to herein as “mPhase,” “XDSL”, “Company,” “us,” or “we.”

 

The Company was incorporated in the state of New Jersey in 1979 under the name Tecma Laboratory, Inc. and has subsequently operated under Tecma Laboratories, Inc., and Lightpaths TP Technologies, Inc., until June 2, 1997 when the Company changed its name to mPhase Technologies, Inc.

 

On January 11, 2019, the Company underwent a major change in management and control. New management of the Company is positioning the Company to be a technology leader in artificial intelligence (“AI”) and machine learning while enabling a more rapid commercial development of its patent portfolio and other intellectual property. The Company believes there are significant opportunities to embed artificial intelligence and machine learning into business operations, platform architectures, business services, and customer experiences, whereby its goal is to generate significant revenue from its artificial intelligence and machine learning technologies.

 

On February 15, 2019, the Company acquired Travel Buddhi, a software platform to enhance travel via ultra-customization tools that tailor a planned trip experience in ways not previously available.

 

On June 30, 2019, the Company acquired 99% of the outstanding common shares of Alpha Predictions LLP (“Alpha Predictions”). Alpha Predictions is an India-based technology company that has developed a suite of commercial data analysis products for use across multiple industries. This acquisition has been integrated into the Company’s international operations and as expected, has driven revenue growth and innovation.

 

On May 11, 2020, the Company acquired CloseComms, a patented, software application platform that can be integrated into a retail customer’s existing Wi-Fi infrastructure, giving the retailer important customer data and enabling AI-enhanced, targeted promotions to drive store traffic and sales.

 

During 2021, the Company announced that it would be adding EV+ (electric vehicle) charging network and consumer engagement platform as part of a major strategic initiative to monetize additional points of contact during consumer travel and travel planning. During the course of 2021, the Company actively planned pilot programs in EV+ (electric vehicle) charging network and, as part of a larger strategy to build an AI-driven consumer ecosystem. By late-2021, the Company transitioned into a “green” consumer company, serving as an important bridge between consumers, retailers, and service providers.

 

The Company can best be described as a technology company focused on consumer engagement using data analytics and artificial intelligence to create a monetizable link between consumers and retailers at opportunistic times and places. The Company is currently building a connected ecosystem that includes EV charging and software solutions that optimize consumer engagement within the framework of a SaaS/TaaS model. Branded under the mPower name, this ecosystem will empower the way people shop, dine, fuel and interact with the world to create a richer life experience. The mPower ecosystem is tailored to each individual’s tastes and needs, with particular emphasis on empowering tomorrow’s green consumer. The Company has data driven business units generating recurring revenue outside of its consumer ecosystem, in addition to legacy nanobattery technology and a related patent portfolio that are slated for future development. The Company plans to expand into other markets, both in the United States and globally, where it believes its technology and services will provide a distinct competitive advantage over its competition.

 

7
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 1: NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)

 

Concurrently, the Company continues to pursue strategic alternatives to best monetize its patent portfolio, including partnering to exploit opportunities for its drug delivery system. The Company continues seeking to obtain government funding available under the Departments of Defense and Homeland Security including The Department of Defense Ordnance Technology Consortium (“DOTC”), Small Business Innovative Research (“SBIR”), Cooperative Research and Development Agreements (“CRADA”) and similar programs for targeted applications for its smart nano-battery applications.

 

Basis of Presentation

 

The unaudited consolidated financial information furnished herein reflects all adjustments, consisting only of normal recurring items, which in the opinion of management, are necessary to fairly state the Company’s financial position, results of operations and cash flows for the dates and periods presented and to make such information not misleading. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”); nevertheless, management of the Company believes that the disclosures herein are adequate to make the information presented not misleading.

 

The unaudited consolidated financial statements for the three and six months ended December 31, 2021 and 2020 include the operations of mPhase and its wholly-owned subsidiaries, mPower Technologies, Inc., Medds, Inc., mPhase Technologies India Private Limited effective March 19, 2019, and Alpha Predictions LLP effective June 30, 2019. All significant intercompany accounts and transactions have been eliminated in the consolidation.

 

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 30, 2021, contained in the Company’s Annual Report on Form 10-K filed with the SEC on October 13, 2021. The results of operations for the three and six months ended December 31, 2021, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending June 30, 2022.

 

Impact of COVID-19 Pandemic

 

A novel strain of coronavirus, COVID-19, surfaced during December 2019 and has spread around the world, including to the United States. During March 2020, COVID-19 was declared a pandemic by the World Health Organization. During certain periods of the pandemic thus far, a number of U.S. states and various countries throughout the world had been under governmental orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining. As a result of these governmental orders, the Company temporarily closed its domestic and international offices and required all of its employees to work remotely. As economic activity has begun and continues recovering, the impact of the COVID-19 pandemic on our business has been more reflective of greater economic and marketplace dynamics. Furthermore, in light of variant strains of the virus that have emerged, the COVID-19 pandemic could once again impact our operations and the operations of our customers and vendors as a result of quarantines, illnesses, and travel restrictions.

 

The full impact of the COVID-19 pandemic on the Company’s financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on the Company’s employees, customers, and vendors, in addition to how quickly normal economic conditions and operations resume and whether the pandemic impacts other risks disclosed in Item 1A “Risk Factors” within the Company’s Annual Report on Form 10-K. Even after the pandemic has subsided, the Company may continue to experience adverse impacts to its business as a result of any economic recession or depression that has occurred as a result of the pandemic. Therefore, the Company cannot reasonably estimate the impact at this time. The Company continues to actively monitor the pandemic and may determine to take further actions that alter its business operations as may be required by federal, state, or local authorities or that it determines are in the best interests of its employees, customers, vendors, and shareholders. The Company applied for a loan under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES ACT”). During April 2020, the Company received loan proceeds of $33,333 under the SBA PPP of the CARES Act (see Note 6: Notes Payable).

 

8
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 2: GOING CONCERN

 

The accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

The Company has generated net income of $194,203 and has used cash in operating activities of $1,791,748 for the six months ended December 31, 2021. At December 31, 2021, the Company had a working capital surplus of $11,402,820, and an accumulated deficit of $225,867,206. While these factors alone may raise doubt as to the Company’s ability to continue as a going concern, management believes the Company’s present and expected cash flows will enable it to meet its obligations for a period of twelve months from the date of this filing. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

In the event managements’ plans do not materialize, in order to meet the Company’s working capital needs through the next twelve months and to fund the growth of its nanotechnology, artificial intelligence, and machine learning technologies, as well as our EV charging initiatives, the Company may consider plans to raise additional funds through the issuance of equity or debt. Although the Company intends to obtain additional financing to meet its cash needs, the Company may be unable to secure any additional financing on terms that are favorable or acceptable to it, if at all. The Company’s ability to raise additional capital may also be impacted by the recent COVID-19 pandemic, which such ability is highly uncertain, cannot be predicted, and could have an adverse effect on the Company’s business and financial condition.

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications

 

Certain reclassifications of prior year amounts have been made to enhance comparability with the current year’s unaudited consolidated financial statements, including, but not limited to, presentation of certain items within the unaudited consolidated statements of operations and comprehensive income (loss), unaudited consolidated statements of cash flows, and certain notes to the unaudited consolidated financial statements.

 

Foreign Currency Translation and Transactions

 

The functional currencies of our operations in India and the United Kingdom are the Indian Rupee (“INR”) and the British Pound (“GBP”), respectively. Assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, and income and expense items are translated at the average exchange rates in effect during the applicable period. The aggregate effect of foreign currency translation is recorded in accumulated other comprehensive income (loss) in our consolidated balance sheets. Our net investments in our Indian and United Kingdom operations are recorded at the historical rates and the resulting foreign currency translation adjustments, net of income taxes, are reported as other comprehensive income and accumulated other comprehensive income within stockholders’ equity in accordance with ASC 220 – Comprehensive Income.

 

9
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The exchange rates used to translate amounts in INR and GBP into USD for the purposes of preparing the consolidated financial statements were as follows:

 

Balance sheet:

 

   

December 31,

2021

   

June 30,

2021

 
Period-end INR: USD exchange rate   $ 0.01349     $ 0.01349  
Period-end GBP: USD exchange rate   $ 1.34915     $ 1.38510  

 

Income statement:

 

    For the Three Months Ended     For the Six Months Ended  
    December 31,     December 31,  
    2021     2020     2021     2020  
Average Period INR: USD exchange rate   $ 0.01349     $ 0.01362     $ 0.01349     $ 0.01351  
Average Period GBP: USD exchange rate   $ 1.34876     $ 1.32094     $ 1.36066     $ 1.29006  

 

Translation gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are translated at the rate on the date of the transaction and included in the results of operations as incurred.

 

Use of Estimates

 

The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP 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 unaudited consolidated financial statements and reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. If actual results significantly differ from the Company’s estimates, the Company’s financial condition and results of operations could be materially impacted. Significant estimates include the collectability of accounts receivable, estimated useful lives of finite-lived intangible assets, accrued expenses, valuation of derivative liabilities, stock-based compensation, and the deferred tax asset valuation allowance.

 

Concentrations of Credit Risk

 

Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with four financial institutions. Deposits held with the financial institutions may exceed the amount of insurance provided by the Federal Deposit Insurance Corporation on such deposits, but may be redeemed upon demand. The Company performs periodic evaluations of the relative credit standing of the financial institutions. With respect to accounts receivable, the Company monitors the credit quality of its customers as well as maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.

 

10
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Revenue Risk

 

Agreements which potentially subject the Company to concentrations of revenue risk consist principally of one customer agreement. For the six months ended December 31, 2021 and 2020, this one customer accounted for approximately 100% and 100% of our total revenue, respectively. At December 31, 2021 and June 30, 2021, this one customer accounted for approximately 100% and 100% of our total accounts receivable, respectively. During December 2021, the Company began invoicing its consumer engagement locations. Although immaterial at December 31, 2021, as these locations continue to grow, the aforementioned one customer will become less of the Company’s total revenue and accounts receivable, thus decreasing the Company’s revenue risk concentrations.

 

Supplier Risk

 

Agreements which potentially subject the Company to concentrations of supplier risk consist principally of one supplier agreement. For the six months ended December 31, 2021, this one supplier accounted for approximately 100% of our total cost of revenue and accounted for approximately 80% of our total accounts payable. For the six months ended December 31, 2020, this one supplier accounted for approximately 100% of our total cost of revenue and accounted for approximately 97% of our total accounts payable.

 

Cash and Cash Equivalents

 

For purposes of balance sheet presentation and reporting of cash flows, the Company considers all unrestricted demand deposits, money market funds and highly liquid debt instruments with an original maturity of less than 90 days to be cash and cash equivalents. There were no cash equivalents at December 31, 2021 and June 30, 2021. The Company places its cash and cash equivalents with high-quality financial institutions. At times, balances in the Company’s cash accounts may exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. At December 31, 2021 and June 30, 2021, the Company’s cash balance at one financial institution exceeded the FDIC limit.

 

Accounts Receivable

 

The Company regularly reviews outstanding receivables and provides for estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, the Company makes judgments regarding its customers’ ability to make required payments, economic events and other factors. As the financial condition of these parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. The Company maintains reserves for potential credit losses, and such losses traditionally have been within its expectations. Additionally, to date, the Company has entered into six separate tri-party settlement and offset agreements with its largest customer and largest vendor, whereby the Company’s largest customer has agreed to direct funds due the Company for certain outstanding invoices, to the Company’s largest vendor to satisfy payment on behalf of the Company for certain outstanding invoices. To date, the aggregate amount of the six tri-party settlement and offset agreements has totaled $48,750,000. At December 31, 2021 and June 30, 2021, the Company determined there was no requirement for an allowance for doubtful accounts.

 

Goodwill and Intangible Assets

 

Goodwill is recorded when the purchase price paid for an acquisition exceeds the fair value of the net identified tangible and intangible assets acquired. The Company evaluates goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company tests goodwill for impairment by first comparing the fair value of the reporting unit to its carrying value. If the fair value is determined to be less than the carrying value, a second step is performed to measure the amount of impairment loss, if any. On June 30, 2022, the Company will perform its annual evaluation of goodwill impairment to determine if the estimated fair value of the reporting unit exceeds its carrying value.

 

11
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Patents and licenses are capitalized when the Company determines there will be a future benefit derived from such assets and are stated at cost. Amortization is computed using the straight-line method over the estimated useful life of the asset, generally five years. As of December 31, 2021 and June 30, 2021, the book value of patents and licenses of $214,383, has been fully amortized and no amortization expense was recorded for the six months ended December 31, 2021 and 2020.

 

Capitalized Software Development Costs

 

The Company follows the provisions of ASC 350-40, “Internal Use Software.” ASC 350-40 provides guidance for determining whether computer software is internal-use software, and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company expenses all costs incurred during the preliminary project stage of its development, and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improve and support products after they become available are charged to expense as incurred.

 

Capitalized software development costs are amortized on a straight-line basis over the estimated useful lives, currently three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

 

At December 31, 2021, the book value of purchased and developed technology of $3,875,256, included three technology platforms, a machine learning platform and two artificial intelligence platforms. For the six months ended December 31, 2021 and 2020, the Company incurred amortization expense of $449,142 and $450,302, respectively.

 

Fair Value of Financial Instruments

 

The Company accounts for the fair value of financial instruments in accordance with ASC topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements”. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

 

12
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

ASC 820 also describes three levels of inputs that may be used to measure fair value:

 

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

 

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Financial instruments consist principally of cash, accounts receivable, prepaid expenses, accounts payable, accrued liabilities, due to related parties, and current and long-term debt. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. The fair value of short and long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities. The carrying amounts approximate fair value with the exception of the fair value of due to related parties as the fair value cannot be determined due to a lack of similar instruments available to the Company. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with the Financial Accounting Standards Board’s (“FASB”), Accounting Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control is transferred to customers in amounts that reflect the consideration the Company expects to be entitled to receive in exchange for those goods. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

 

Revenue is derived from the sale of artificial intelligence and machine learning focused technology products and related services. The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. In the event any discounts, sales incentives, or similar arrangements are agreed to with a customer, such amounts are estimated at time of sale and deducted from revenue. Sales taxes and other similar taxes are excluded from revenue (see Note 5).

 

Contract liabilities include amounts billed to customers in excess of revenue recognized and are presented as contract liabilities on the consolidated balance sheets (see Note 5).

 

A contract asset is recognized for incremental costs to obtain a customer contract that are recoverable, otherwise such incremental costs are expensed as incurred.

 

13
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Share-Based Compensation

 

The Company computes share based payments in accordance with the provisions of ASC Topic 718, Compensation – Stock Compensation and related interpretations. As such, compensation cost is measured on the date of grant at the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the grants. The Company estimates the fair value of stock options and warrants by using the Black-Scholes option pricing model.

 

Derivative Instruments

 

The Company enters into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. The Company accounts for these arrangements in accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities as well as related interpretations of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company determines the fair value of derivative instruments and hybrid instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.

 

The Company estimates fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes.

 

Convertible Debt Instruments

 

The Company records debt net of debt discount for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant to the Beneficial Conversion and Debt Topics of the Financial Accounting Standards Board (“FASB”) ASC. The amounts allocated to warrants and beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest expense over the life of the debt using the effective interest method.

 

Income Taxes

 

The Company accounts for income taxes in accordance with Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes (“ASC 740”) issued in December 2019. Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities and net operating loss and tax credit carryforwards given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.

 

14
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

ASC 740 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company’s tax returns for its June 30, 2021, 2020, 2019, and 2018 tax years may be selected for examination by the taxing authorities as the statute of limitations remains open.

 

The Company recognizes expenses for tax penalties and interest assessed by the Internal Revenue Service and other taxing authorities upon receiving valid notice of assessments. The Company has received no such notices for the years ended June 30, 2021 and 2020.

 

Earnings Per Share

 

In accordance with the provisions of FASB ASC Topic 260, Earnings per Share, basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating EPS on a diluted basis.

 

In computing diluted EPS, only potential common shares that are dilutive, those that reduce EPS or increase loss per share, are included. The effect of contingently issuable shares is not included if the result would be anti-dilutive, such as when a net loss is reported. For the three months ended December 31, 2021, basic and diluted EPS are computed using the same number of weighted average shares as we incurred a net loss for those periods. For the six months ended December 31, 2021, as we incurred net income for the period, dilutive shares included approximately 25,000,000 shares of the Company’s common stock related to convertible promissory notes and outstanding warrants to purchase up to approximately 14,000,000 shares of the Company’s common stock, assuming conversion of such convertible promissory notes and exercise of such warrants occurred at July 1, 2021, as the conversion price of the convertible promissory notes and warrants were less than the average market price of the Company’s common stock for the six months ended December 31, 2021. At December 31, 2021, there were approximately 134,316 shares of the Company’s common stock to be issued and 1,000,000 restricted shares of the Company’s common stock to be issued upon vesting pursuant to the terms of employment agreements with the Company’s Chief Operating Officer and Chief Financial Officer, which were not included in computing dilutive EPS.For the three and six months ended December 31, 2020, as we incurred net income for those periods, dilutive shares included 31,750,297 shares of the Company’s common stock related to convertible promissory notes, assuming conversion of such convertible promissory notes occurred at October 1, 2020 and July 1, 2020, respectively, as the conversion price of the convertible promissory notes were less than the average market price of the Company’s common stock for the three and six months ended December 31, 2020. Additionally, for dilutive EPS purposes for the three and six months ended December 31, 2020, the assumed conversion of such convertible promissory notes at October 1, 2020 and July 1, 2020, increased the net income amount used in the dilutive EPS computation by $742,537 and $751,482, respectively, as a result of the net impact of interest that would not have been incurred during the period as well as original issue discounts, deferred financing costs, debt discounts, and derivative liability balances that would not have been required at December 31, 2020. At December 31, 2020, there were 115,817 restricted shares of the Company’s common stock to be issued upon vesting pursuant to the terms of an employment agreement with its former Chief Financial Officer, which were not included in computing dilutive EPS.

 

Modification/Extinguishment of Debt

 

In accordance with ASC 470, a modification or an exchange of debt instruments that adds or eliminates a conversion option that was substantive at the date of the modification or exchange is considered a substantive change and is measured and accounted for as extinguishment of the original instrument along with the recognition of a gain or loss. Additionally, under ASC 470, a substantive modification of a debt instrument is deemed to have been accomplished with debt instruments that are substantially different if the present value of the cash flows under the terms of the new debt instrument is at least 10 percent different from the present value of the remaining cash flows under the terms of the original instrument. A substantive modification is accounted for as an extinguishment of the original instrument along with the recognition of a gain or loss.

 

15
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Recently Adopted Accounting Standards

 

Effective July 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740). The standard amends and simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, and also improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company determined the adoption of ASU 2019-12 did not have a material impact on its consolidated financial statements.

 

Recently Issued Accounting Standards Not Yet Adopted

 

During August 2020, the FASB issued ASU 2020-06, to modify and simplify the application of U.S. GAAP for certain financial instruments with characteristics of liabilities and equity. The standard is effective for the Company as of July 1, 2024, with early adoption permitted. The Company is reviewing the impact of this guidance on its consolidated financial statements.

 

During May 2021, the FASB issued ASU 2021-04, to clarify and reduce diversity in accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The standard is effective for the Company as of July 1, 2022, with early adoption permitted. The Company is reviewing the impact of this guidance on its consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying unaudited consolidated financial statements.

 

NOTE 4: INTANGIBLE ASSET – PURCHASED SOFTWARE, NET

 

Intangible asset – Purchased Software, net, is comprised of the following at:

 

    December 31,     June 30,  
    2021     2021  
Purchased software   $ 3,875,256     $ 3,905,228  
Less: accumulated amortization     (2,275,323 )     (1,826,181 )
Purchased software, net   $ 1,599,933     $ 2,079,047  

 

Intangible asset – Purchased Software consists of the following three software technologies:

 

Alpha Predictions developed software   $ 448,255  
Travel Buddhi developed software     114,420  
CloseComms developed software     1,037,258  
Total developed software   $ 1,599,933  

 

The Alpha Predictions and Travel Buddhi developed software were acquired during the fiscal year ended June 30, 2019. The CloseComms developed software was acquired during the fiscal year ended June 30, 2020. At December 31, 2021, the Travel Buddhi and CloseComms technology platforms have been placed in service.

 

Developed software costs are amortized on a straight-line basis over three years. Amortization of developed software costs is included in general and administration expenses within the unaudited consolidated statements of operations.

 

For the three and six months ended December 31, 2021, amortization expense was $224,348 and $449,142, respectively. For the three and six months ended December 31, 2020, amortization expense was $226,469 and $450,302, respectively.

 

Future amortization expense related to the existing net carrying amount of developed software at December 31, 2021 is expected to be as follows:

         
Remainder of fiscal year 2022   $ 402,668  
Fiscal year 2023     564,743  
Fiscal year 2024     415,325  
Fiscal year 2025     217,197  
Purchased software, net   $ 1,599,933  

 

16
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 5: REVENUE FROM CONTRACTS WITH CUSTOMERS

 

The following table presents our revenue disaggregated by category and primary geographic regions within our single reporting segment:

 

    For the Three Months Ended     For the Six Months Ended  
    December 31,     December 31,  
    2021     2020     2021     2020  
Categories:                        
Subscription   $ 6,434,050     $ 6,180,000     $ 12,839,050     $ 12,360,000  
Service and support     1,005,157       906,756       1,961,087       1,804,020  
Application development and implementation     900,670       549,680       1,765,450       1,059,280  
Total Revenue   $ 8,339,877     $ 7,636,436     $ 16,565,587     $ 15,223,300  
                                 
Primary Geographic Regions:                                
United States     100 %     - %     100 %     - %
India     - %     100 %     - %     100 %
      100 %     100 %     100 %     100 %

 

Effective July 1, 2021, the Company moved the invoicing office of its largest customer to its customer’s United States based office. This change was to align the invoicing by the Company to the customer’s location managing the services provided under the customer agreement.

 

The following table presents our long-lived assets by primary geographic regions within our single reporting segment:

 

    December 31,  
    2021     2020  
United States   $ 1,438     $ 1,438  
India     568,973       1,490,952  
United Kingdom     1,046,096       1,068,556  
Total long-lived assets   $ 1,616,507     $ 2,560,946  

 

For the six months ended December 31, 2021 and 2020, the Company was subject to revenue concentration risk as one customer accounted for approximately 100% of our total revenue for both periods.

 

Subscription and Application Development and Implementation Revenue

 

The Company recognizes revenue when, or as, it satisfies a performance obligation to a customer. The Company primarily has one performance obligation, which includes the combined promise to develop, implement, and license customized software. Payment terms for the software include one-time application development and implementation fees, which are generally billed on a time-and-materials basis over the development and implementation period, plus fixed license subscription fees, which may either be billed in full upfront or in monthly installments over the license period, which is generally three to ten years. All of these fees are allocated to the single performance obligation of providing software to the customer.

 

17
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 5: REVENUE FROM CONTRACTS WITH CUSTOMERS (continued)

 

The performance obligation is fully satisfied at the point in time when the customer has taken control of the completed software, which is when physical possession of the software has transferred to the customer, the customer is able to use and benefit from the software, and the contractual license period has begun. Since the Company has no further obligation to the customer once control of the software has transferred, the Company recognizes revenue in full for all of the development and implementation fees at that point in time. Subscription fees are also recognized when control of the software has transferred to the customer but only to the extent such fees are contractually guaranteed to the Company. Any future monthly subscription fees that the Company would not have a contractually guaranteed right to collect in the event of early termination of the contract are instead recognized as revenue on a straight-line basis over the license period.

 

Service and Support Revenue

 

Certain contracts also contain a second performance obligation for service and support. This performance obligation includes the promise to provide future updates, upgrades, and enhancements to the software over the license period, if and when they occur. Service and support fees are fixed as a percentage of total contract value and billed in monthly installments over the license period. The Company recognizes service and support fee revenue over time, on a straight-line basis over the license period, as the customer receives such services on a generally uniform basis throughout the license period.

 

Allocation of the Transaction Price

 

Prices allocated to each performance obligation generally correspond with the contractually stated prices, since they equal standalone selling price. In some cases, services may be discounted, which requires the company to allocate the transaction price based on relative standalone selling price. The Company estimates standalone selling price based on comparable industry practices and the costs and margins involved in providing services to its customers.

 

Contract Liabilities

 

Contract liabilities include amounts billed to the customer in excess of revenue recognized and are presented as contract liabilities on the consolidated balance sheets. At December 31, 2021 and June 30, 2021, contract liabilities totaled $430,027 and $350,689, respectively.

 

The following table presents a reconciliation of the contract liabilities from June 30, 2021 to December 31, 2021:

 

June 30, 2021   $ 350,689  
Contract liability deferral     300,247  
Amortization of contract liability to revenue     (220,909 )
December 31, 2021   $ 430,027  

 

Practical Expedient

 

The Company has elected a practical expedient to omit certain disclosures about the transaction price allocated to remaining performance obligations for contracts with terms of one year or less.

 

18
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 6: NOTES PAYABLE

 

Notes payable is comprised of the following:

 

    December 31,     June 30,  
    2021     2021  
Note payable, SBA – Paycheck Protection Program [1]   $ 33,751     $ 33,680  
Note payable, SBA – Economic Injury Disaster Loan [2]     163,081       160,393  
Note payable, Accredited Investor [3]     43,202       276,035  
Total notes payable   $ 240,034     $ 470,108  
Less: current portion of notes payable     (93,144 )     (323,218 )
Long-term portion of notes payable   $ 146,890     $ 146,890  

 

[1]   effective April 28, 2020, the Company entered into a promissory note with an approved lender in the principal amount of $33,333. The note was approved under the provisions of the Coronavirus, Aid, Relief and Economic Security Act (the “CARES Act”) and the terms of the Paycheck Protection Program of the U.S. Small Business Administration’s 7(a) Loan Program. The note accrues interest for the first six months following the issuance date at a rate of 1% per annum, (increasing to 6% per annum upon the occurrence of an Event of Default (as defined in the note)), and beginning November 28, 2020, requires 18 monthly payments of $1,876 each, consisting of principal and interest until paid in full on April 28, 2022. Subsequent to issuance, the first payment due date was extended. The note may be prepaid by the Company at any time prior to the maturity date with no prepayment penalties. Additionally, any portion of the note up to the entire principal and accrued interest balance may be forgiven in the event the Company satisfies certain requirements as determined by the CARES Act. The Company has applied for forgiveness and expects to satisfy the requirements for forgiveness of the entire principal and accrued interest balance. The Company is awaiting receipt of approval of its requested forgiveness from the SBA through its treasury partner. At December 31, 2021, $33,751 was recorded as a current liability within notes payable with the consolidated balance sheets.

 

[2]   effective May 28, 2020, the Company entered into a promissory note and security agreement with the U.S. Small Business Administration (“SBA”) in the principal amount of $150,000. The note was approved under the provisions of the CARES Act and the terms of the COVID-19 Economic Injury Disaster Loan (“EIDL”) program of the SBA’s EIDL Program. The note accrues interest at a rate of 3.75% per annum, and beginning May 28, 2021, requires monthly payments of $731 each, consisting of principal and interest until paid in full on May 28, 2050. Subsequent to issuance, the SBA extended the first payment due date to 24 months from the date of the note. The note may be prepaid by the Company at any time prior to the maturity date with no prepayment penalties. Additionally, this promissory note is collateralized by certain of the Company’s property as specified within the security agreement. Furthermore, on June 4, 2020, the Company received $4,000 from the SBA, which it is currently working to obtain details from the SBA regarding this amount. As such, at December 31, 2021, the Company recorded this amount as a current liability. At December 31, 2021, $16,191 was recorded as a current liability within notes payable and $146,890 was recorded as a long-term liability within notes payable, net of current portion with the consolidated balance sheets.

 

19
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 6: NOTES PAYABLE (continued)

 

[3]   effective February 8, 2021, the Company entered into a securities purchase agreement with an accredited investor and issued an 12% promissory note in the principal amount of $362,250 (including a $47,250 original issue discount) to the accredited investor with a maturity date of February 8, 2022. Twelve months of interest is immediately earned by the accredited investor upon the Company receiving proceeds and is included in the required monthly repayments. On February 10, 2021, the Company received net proceeds in the amount of $288,000 as a result of $27,000 being paid for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. In accordance with the securities purchase agreement, the Company issued 1) 250,000 restricted shares of its common stock (“Commitment Shares”) to the accredited investor as additional consideration for the purchase of the promissory note and 2) 200,000 restricted shares of its common stock (“Returnable Shares”) to the accredited investor which will be returned to the Company upon timely completion of the required repayment schedule. Repayments of the promissory note shall be made in eight (8) installments each in the amount of $50,715, which commenced July 8, 2021 and continues thereafter each thirty (30) days until February 8, 2022. This promissory note is only convertible upon an event of default as defined in the promissory note. The original issue discount, deferred financing costs and issuance date fair value of the Commitment Shares are being amortized over the term of the note. At December 31, 2021, the aggregate outstanding balance of the promissory note and accrued interest was $101,430. At December 31, 2021, the aggregate balance of the promissory note, net of original issue discount, deferred financing costs and issuance date fair value of the Commitment Shares was $43,202.

 

NOTE 7: CONVERTIBLE DEBT ARRANGEMENTS

 

JMJ Financial

 

At December 31, 2021 and June 30, 2021, the amount recorded in current liabilities for this one convertible note and accrued interest thereon due to JMJ Financial was $235,925 and $213,545, respectively. During the six months ended December 31, 2021 and 2020 the Company recorded $9,221 and $8,514, respectively, of interest for the outstanding convertible note.

 

At December 31, 2021 and June 30, 2021, the aggregate remaining amount of convertible securities held by JMJ could be converted into 11,796 and 10,677 shares, respectively, with a conversion price of $20.

 

Accredited Investors

 

Evergreen Agreement

 

On April 6, 2021, the Company entered into a Securities Purchase Agreement (“Agreement”) with Evergreen Capital Management LLC (the “Investor”), pursuant to which the Company sold to the Investor an aggregate of up to $2,040,000 in aggregate subscription amount of notes and warrants to purchase an aggregate of 11,730,000 shares of common stock in two (2) tranches (each a “Tranche”), with the first Tranche of $1,540,000 in subscription amount of notes (to purchase an aggregate of $1,771,000 in principal amount of notes) and warrants to purchase an aggregate of 8,855,000 shares of Common Stock being closed on upon execution of this Agreement. The closing for the second Tranche of $500,000 in subscription amount of notes (to purchase an aggregate of $575,000 in principal amount of notes) and warrants to purchase an aggregate of 2,875,000 shares of common stock will occur within three (3) business days after the later of (i) the filing by the Company of a Registration Statement on Form S-1 for the sale of common stock that will be listed on a national securities exchange, or (ii) the thirtieth (30th) day following the closing of the first Tranche. The first and second Tranches closed and funded on April 6, 2021 and May 3, 2021, respectively.

 

20
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 7: Convertible Debt Arrangements (continued)

 

The Notes mature on April 6, 2022 and May 3, 2022, bears interest at the rate of 5% per annum and are convertible at any time upon the option of the Investor into shares of Common Stock at a conversion price equal to $0.20 per share or, upon the occurrence and during the continuance of an Event of Default (as defined in the Note), if lower, at a conversion price equal to 75% of the lowest daily volume-weighted average price (“VWAP”) of the Common Stock during the 20 consecutive trading days immediately preceding the applicable conversion date. The Company has the right to prepay all or any portion of the outstanding balance of the Note in an amount equal to 115% or 120%, depending on whether such repayment is made before or after November 5, 2021, multiplied by the portion of the outstanding balance to be prepaid. The Company is required to prepay all or any portion of the outstanding balance of the Note upon the occurrence of a Qualified Financing (as defined in the Note). If at any time while the Note is outstanding, the Company completes any single Future Transaction (as defined in the Note), the Investor may, in its sole discretion, elect to apply all, or any portion, of the then outstanding principal amount of this Note and any accrued but unpaid interest, as purchase consideration for such Future Transaction.

 

The Warrants are exercisable at a purchase price of $0.20 per share at any time on or prior to April 6, 2025 and May 3, 2025, and may be exercised on a cashless basis, beginning on the six-month anniversary of the Effective Date, if the shares of Common Stock underlying the Warrants are not then registered under the Securities Act of 1933, as amended (the “Securities Act”). On January 31, 2022, the Investor agreed to not convert, tender for conversion or otherwise take steps toward the conversion of either of the Notes to Common Stock until the earlier of (a) May 1, 2022 or (b) the date on which the Common Stock commences trading on the Nasdaq Stock Market or another national stock exchange. The Investor will not have the right to exercise the Warrants if the Investor, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to its conversion and under no circumstances may exercise the Warrants if the Investor, together with its affiliates, would beneficially own in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to its exercise.

 

The Securities Purchase Agreement (the “SPA”) contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company, other obligations of the parties thereto, and termination provisions.

 

In connection herewith, the Company recorded an original issue discount of $306,000 and deferred financing costs of $42,500. The original issue discount and deferred financing costs are being amortized over the term of the note. At December 31, 2021, the aggregate balance of the convertible promissory note and accrued interest was $1,927,988. At December 31, 2021, the aggregate balance of the convertible promissory note, net of original issue discount and deferred financing costs was $1,387,297. During October 2021 and December 2021, an aggregate of $500,000 of outstanding principal was converted into an aggregate of 2,500,000 shares of the Company’s common stock. The company recorded an aggregate loss on extinguishment of debt of $166,625 as a result of the Company issuing shares of it common stock to satisfy the outstanding principal conversions.

 

Investors’ Agreement

 

On May 4, 2021, the Company entered into a Securities Purchase Agreement (the “SPA”) with two accredited investors (the “Investors”), pursuant to which the Company sold to the Investors an aggregate of up to $2,550,000 in Aggregate Subscription Amount of Notes and Warrants to acquire an aggregate of 15,000,000 shares of common stock in two tranches (each a “Tranche”), with the first Tranche of $1,924,999 in subscription Amount of Notes (to sell an aggregate of $2,264,706 in principal amount of Notes) and Warrants to acquire an aggregate of 11,323,529, shares of common stock being closed on upon execution of the SPA. The closing for the second tranche for $625,001 in Subscription Amount Notes (to sell an aggregate of $735,294 in principal amount of Notes) and Warrants to acquire an aggregate of 3,676,471 shares of common stock will occur within three (3) business days after the later of (i) the filing of a Registration Statement on Form S-1 for the sale of common stock that will be listed on a national securities exchange or (ii) the thirtieth (30th) day following the closing of the first Tranche. The first and second Tranches closed and funded on May 3, 2021 and June 30, 2021, respectively. The Company received a portion of the proceeds related to the second Tranche on July 1, 2021.

 

21
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 7: Convertible Debt Arrangements (continued)

 

The Notes mature on May 4, 2022 and June 30, 2022, bear interest at the rate of 5% per annum and are convertible at any time upon the option of the Investors into shares of Common Stock at a conversion price equal to $0.20 per share. The Company has the right to prepay all or any portion of the outstanding balance of the Notes in an amount equal to 115% or 120%, depending on whether such repayment is made before November 5, 2021 or after November 5, 2021, respectively, multiplied by the portion of the outstanding balance to be prepaid.

 

The Warrants are exercisable at a purchase price of $0.20 per share at any time on or prior to May 4, 2025 and June 30, 2025, and may be exercised on a cashless basis, beginning on the six-month anniversary of the Effective Date, if the shares of Common Stock underlying the Warrants are not then registered under the Securities Act.

 

The SPA contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company, other obligations of the parties thereto, and termination provisions.

 

In connection herewith, the Company recorded an original issue discount of $447,237 and deferred financing costs of $10,000. The original issue discount and deferred financing costs are being amortized over the term of the note. At December 31, 2021, the aggregate balance of the convertible promissory note and accrued interest was $3,075,146. At December 31, 2021, the aggregate balance of the convertible promissory note, net of original issue discount and deferred financing costs was $2,135,337.

 

At December 31, 2021 and June 30, 2021, there was $4,832,616 and $5,143,795 of convertible notes payable outstanding, net of discounts of $1,304,993 and $3,157,759, respectively.

 

During the six months ended December 31, 2021 and 2020, amortization of original issue discount, deferred financing costs, and debt discounts amounted to $2,077,049 and $494,184, respectively.

 

During the six months ended December 31, 2021, $500,000 of convertible notes were converted into 2,500,000 shares of the Company’s common stock. During the six months ended December 31, 2020, $288,182 of convertible notes, including fees and interest, were converted into 16,331,766 shares of the Company’s common stock.

 

At December 31, 2021, the Company was in compliance with the terms of the Accredited Investors convertible promissory notes.

22
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 7: Convertible Debt Arrangements (continued)

 

Notes payable under convertible debt and debenture agreements, net is comprised of the following:

 

    December 31,     June 30,  
    2021     2021  
JMJ Financial   $ 109,000     $ 109,000  
Accredited Investors     4,832,616       5,148,795  
Unamortized OID, deferred financings costs, and debt discounts     (1,304,993 )     (3,157,759 )
Total convertible debt arrangements, net   $ 3,636,623     $ 2,100,036  

 

At December 31, 2021 and June 30, 2021, the outstanding balances are reflected as current liabilities within our consolidated balance sheets. At December 31, 2021 and June 30, 2021, accrued interest on these convertible notes of $303,207 and $162,271, respectively, is included within accrued expenses of the consolidated balance sheets.

 

NOTE 8: DERIVATIVE LIABILITY

 

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815, Derivatives and Hedging. The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operation as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date then reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.

 

The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from June 30, 2020 to June 30, 2021, as there was no derivative liability transactions during the three months ended December 31, 2021:

 

   

Conversion

feature derivative liability

 
June 30, 2020   $ 897,631  
Initial fair value of derivative liability recorded as debt discount     853,800  
Initial fair value of derivative liability charged to other expense     2,240,908  
Gain on change in fair value included in earnings     (3,267,323 )
Derivative liability relieved by conversions of convertible promissory notes     (725,016 )
June 30, 2021   $ -  

 

Total derivative liability at December 31, 2021 and June 30, 2021 amounted to $0 for both periods.

 

The Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.

 

At December 31, 2021, the Company did not have any derivative instruments that were designated as hedges.

 

23
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY

 

At December 31, 2021, the total number of shares of all classes of stock that the Company shall have the authority to issue is 500,001,000 shares consisting of 500,000,000 shares of common stock, $0.01 par value per share, of which 81,656,033 are issued and 81,627,663 are outstanding, and 1,000 shares of preferred stock, par value $0.01 per share of which 1,000 shares have been designated as Series A Super Voting Preferred of which 1,000 are issued and outstanding.

 

On August 27, 2019, the Company’s Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the number of authorized shares of common stock of the Company to 100,000,000 shares from 25,000,000 shares. On September 4, 2019, the Company filed a Certificate of Amendment to its Certificate of Incorporation to increase its authorized common stock from 25,000,000 shares to 100,000,000 shares.

 

On June 10, 2020, the Company’s Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the number of authorized shares of common stock of the Company to 250,000,000 shares from 100,000,000 shares. On July 14, 2020, the Company filed a Certificate of Amendment to its Certificate of Incorporation to increase its authorized common stock from 100,000,000 shares to 250,000,000 shares.

 

On August 3, 2020, the Company’s Board of Directors approved an amendment to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the number of authorized shares of common stock of the Company to 500,000,000 shares from 250,000,000 shares. On August 4, 2020, the Company filed a Certificate of Amendment to its Certificate of Incorporation to increase its authorized common stock from 250,000,000 shares to 500,000,000 shares.

 

Common Stock

 

Stock Based Compensation – Common Stock Grants

 

During the six months ended December 31, 2021, the Company recorded $45,869 of stock-based compensation expense related to a November 22, 2021 grant of 500,000 restricted shares of common stock to the Company’s Chief Financial Officer and a May 17, 2021 grant of 500,000 restricted shares of common stock to the Company’s Chief Operating Officer, both of which vests 25% on the 1 year, 2 year, 3 year, and 4 year anniversaries of the grant dates.

 

During the six months ended December 31, 2020, the Company entered into an exchange agreement (the “Exchange Agreement”) with its Chief Executive Officer, Anshu Bhatnagar (“Holder”), whereby earned and issued warrants to purchase 37,390,452 shares of the Company’s Common Stock (the “Cancelled Warrants”) pursuant to the terms of that certain Transition Agreement (the “Transition Agreement”) and Warrant Agreement (the “Warrant Agreement”) each between the Company and Holder and dated as of January 11, 2019 were forfeited and exchanged for (i) 37,390,452 shares of the Company’s Common Stock (the “Shares”) and (ii) the cancellation and termination of the Transition Agreement and Warrant Agreement. The Cancelled Warrants had an exercise price of $0.50 per share and were not subject to expiration. Such Exchange Agreement is intended to make the Company’s capitalization more attractive to potential investors and to remove the uncertainty associated with any future grants of warrants under the Transition Agreement and Warrant Agreement, although there can be no assurance of any future investments on terms that are attractive to the Company, or at all. Immediately prior to the Company’s entry into the Exchange Agreement, it was determined that 5,650,708 additional warrants (the “Additional Warrants”) to purchase the Company’s Common Stock were due to and issued to the Holder in accordance with the terms and conditions of the Transition Agreement as the Transition Agreement required certain liabilities to be eliminated by the prior management team within six months of the Transition Agreement’s effective date of January 11, 2019. However, the Additional Warrants were immediately cancelled and terminated with the intention of mitigating potential liabilities arising from certain issuances of the Company’s Common Stock below the minimum price of $0.50 per share as stated within the Transition Agreement. The Shares to be issued and sold to the Holder pursuant to the Exchange Agreement were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. For the year ended June 30, 2021, the Company recorded $153,301 of stock-based compensation expense related to the Exchange Agreement. See Common Stock Warrants section below for further details of the warrants.

 

24
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY (continued)

 

Furthermore, during the six months ended December 31, 2020, the Company recorded $21,474 of stock-based compensation expense related to a June 1, 2019 grant of 231,635 shares of common stock to the Company’s former Chief Financial Officer, which vested 25% on the six month, 1 year, 2 year, and 3 year anniversaries of the grant date.

 

Vendor Services

 

During the six months ended December 31, 2021, the Company entered into various consulting, public relations, and marketing agreements whereby the Company issued an aggregate of 543,425 restricted shares of its common stock for services to be performed during specified periods of time. During the six months ended December 31, 2021, the Company recorded $83,960 of expense.

 

During the six months ended December 31, 2020, the Company entered into a consulting, public relations, and marketing agreement whereby the Company issued 200,000 restricted shares of its common stock for services to be performed during the agreement period of July 15, 2020 through October 15, 2020. During the six months ended December 31, 2020, the Company recorded $6,820 of expense.

 

Board of Director Services

 

During the six months ended December 31, 2021, the Company granted an aggregate of 134,316 restricted shares of its common stock in accordance with the Board of Directors agreements in place during this period. During the six months ended December 31, 2021, the Company recorded $30,000 of expense. At December 31, 2021, the grant date fair value of the 134,316 granted restricted shares of $30,000 is classified as common stock to be issued within the consolidated balance sheets.

 

During the six months ended December 31, 2020, there were no restricted shares of the Company’s common stock granted in accordance with any Board of Directors agreements.

 

Conversion of Debt Securities

 

During the six months ended December 31, 2021, $500,000 of convertible notes were converted into 2,500,000 shares of the Company’s common stock by an accredited investor, valued at $666,625. During the six months ended December 31, 2020, $288,182 of convertible notes, including fees and interest, were converted into 16,331,766 shares of the Company’s common stock by accredited investors, valued at $708,272.

 

25
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY (continued)

 

Reserved Shares

 

At December 31, 2021, the convertible promissory notes entered into with the accredited investors require the Company to reserve approximately 82,000,000 shares of its common stock for potential future conversions under such instruments.

 

At December 31, 2021, 7,202 shares of the Company’s common stock remain subject to be returned to the Company’s treasury for cancellation. Such shares were not sold as part of 8,000 shares of the Company’s common stock that was advanced during fiscal year 2014 under an Equity Line of Credit.

 

Common Stock Warrants

 

Exchange Agreement – Warrants Exchanged for Common Stock

 

Refer to the Exchange Agreement, Cancelled Warrants, Transition Agreement and Warrant Agreement discussed in the aforementioned Stock Based Compensation – Common Stock Grants section of Note 9.

 

Warrant Agreements – Convertible Promissory Note Warrants

 

Pursuant to a Securities Purchase Agreement between the Company and two accredited investors dated as of April 30, 2021, the Company sold to the Investors and the Investors acquired an aggregate of 14,908,077 warrants to acquire shares of the Company’s common stock. The warrants expire four years after issuance and have an exercise price of $0.20 per share, subject to adjustment hereunder. The warrants can also be exercised under a cashless basis as outlined within the Warrant Agreement. The Company attributed an aggregate fair value of $1,879,204 to the warrants, based upon an average value of $0.35 per warrant.

 

As discussed in Note 7, the Evergreen Agreement, the Company sold to the Investor and the Investor acquired an aggregate of 11,730,000 warrants to acquire shares of the Company’s common stock. The warrants expire four years after issuance and have an exercise price of $0.20 per share, subject to adjustment hereunder. The warrants can also be exercised under a cashless basis as outlined within the Warrant Agreement. The Company attributed an aggregate fair value of $1,293,541 to the warrants, based upon an average value of $0.27 per warrant.

 

26
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 9: STOCKHOLDERS’ EQUITY (continued)

 

Fair Value of Warrants

 

The Company estimates the fair value of each option award on the date of grant using a black-scholes option valuation model that uses the assumptions noted in the table below. Because black-scholes option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and applicable employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following range of assumptions were utilized during the six months ended December 31, 2021:

Expected volatility     618.01 %
Weighted-average volatility     618.01 %
Expected dividends     0 %
Expected term (in years)     4.0  
Risk-free rate     0.68 %

 

The following table sets forth common stock purchase warrants outstanding at December 31, 2021:

 

    Warrants     Weighted
Average
Exercise Price
    Intrinsic Value  
Outstanding, June 30, 2021     25,718,971     $ 0.20     $          -  
Warrants issued     919,106       0.20       -  
Warrants forfeited     -       -       -  
Outstanding, December 31, 2021     26,638,077     $ 0.20     $ -  
                         
Common stock issuable upon exercise of warrants     26,638,077     $ 0.20     $ -  

 

      Common Stock Issuable Upon Exercise of Warrants Outstanding     Common Stock Issuable Upon Warrants Exercisable  
Range of Exercise Prices     Number Outstanding at December 31, 2021     Weighted Average Remaining Contractual Life (Years)     Weighted Average Exercise Price     Number Exercisable at December 31, 2021     Weighted Average Exercise Price  
$ 0.20       26,638,077       3.34     $ 0.20       26,638,077     $ 0.20  
          26,638,077       3.34     $ 0.20       26,638,077     $ 0.20  

 

27
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 10: RELATED PARTY TRANSACTIONS

 

Microphase Corporation

 

At December 31, 2021, the Company owed $32,545 to Microphase for previously leased office space at its Norwalk location and for certain research and development services and shared administrative personnel from time to time, all through December 31, 2015.

 

Transactions With Officers

 

Note Payable Issuances

 

At various points during past fiscal years certain officers and former officers of the Company provided bridge loans to the Company evidenced by individual promissory notes and deferred compensation to provide working capital to the Company. During the six months ended December 31, 2021 and 2020, there were no advances from any officers or former officers of the Company. During the six months ended December 31, 2021 and 2020, $22,883 and $2,412 has been charged for interest on loans from officers and former officers.

 

On October 22, 2020, the Company received a notice of event of default and demand letter (“Demand Letter”) from a former officer and promissory note holder (the “Note Holder”). The promissory note was issued on November 1, 2019, in the original principal amount of $40,739, accrued interest at a rate of 6% per annum, and matured on April 18, 2020. The Demand Letter stated an aggregate of $51,940 of principal and interest was immediately due. The promissory note does not have a convertible feature and is not convertible into shares of the Company’s common stock. Additionally, the promissory note does not contain any cross-default provisions with any other promissory notes issued by the Company. The Company expects to work with the Note Holder to negotiate a repayment structure whereby the Company can repay the Note Holder the balance due as quickly as possible based upon its available capital.

 

At December 31, 2021 and June 30, 2021, these outstanding notes including accrued interest totaled $769,970 and $747,086, respectively. At December 31, 2021, these promissory notes are not convertible into shares of the Company’s common stock.

 

Common Stock Issuances

 

During the six months ended December 31, 2021, the Company recorded $45,869 of stock-based compensation expense related to a November 22, 2021 grant of 500,000 restricted shares of common stock to the Company’s Chief Financial Officer and a May 17, 2021 grant of 500,000 restricted shares of common stock to the Company’s Chief Operating Officer, both of which vests 25% on the 1 year, 2 year, 3 year, and 4 year anniversaries of the grant dates.

 

Office Lease

 

Effective February 8, 2021, the Company relocated its corporate office to Gaithersburg, MD, and incurred rent expense of $1,350 per month through March 31, 2021, which was payable to a related party. The current lease payment is $1,600 per month and the lease term is a month-to-month arrangement. For the six months ended December 31, 2021 and 2020, $24,389 and $8,100, respectively, was recognized as rent expense. At December 31, 2021 and June 30, 2021, $35,971 was accrued as payable to the related party.

 

28
 

 

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2021 AND 2020

(UNAUDITED)

 

NOTE 11: COMMITMENTS AND CONTINGENCIES

 

Commitments

 

Office Lease

 

Refer to Note 10: Related Party Transactions, Office Lease.

 

Contracts and Commitments Executed Pursuant to the Transition Agreement

 

In the transaction whereby, Mr. Bhatnagar acquired control of the Company on January 11, 2019, the Company entered into material commitments including an employment agreement and a warrant agreement (see Note 9).

 

NOTE 12: DISCONTINUED OPERATIONS

 

The Company has classified the operating results and associated assets and liabilities from its Jump line of products, which ceased generating material revenue during the first quarter of fiscal year 2017, as discontinued operations in the unaudited consolidated financial statements for the three and six months ended December 31, 2021 and 2020.

 

The assets and liabilities associated with discontinued operations included in our consolidated balance sheets at December 31, 2021 and June 30, 2021 were only accounts payable with a balance of $82,795 for both periods.

 

For the three and six months ended December 31, 2021 and 2020, there were no revenue or expenses associated with discontinued operations included in our unaudited consolidated statements of operations.

 

NOTE 13: SUBSEQUENT EVENTS

 

Subsequent to December 31, 2021, the Company, pursuant to the approval of its Board of Directors (the “Board”), entered into an amended and restated employment agreement with Anshu Bhatnagar, Chief Executive Officer of the Company, modifying the terms of the Employment Agreement entered into between the Company and Mr. Bhatnagar dated January 11, 2019 (collectively, the “Bhatnagar Amended Employment Agreement”). The Bhatnagar Amended Employment Agreement became effective retroactively as of January 1, 2022 and shall expire on December 31, 2032.

 

Subsequent to December 31, 2021, the Company, pursuant to the approval of the Board, entered into an amended and restated employment agreement with Angelia Lansinger Hrytsyshyn, Chief Financial Officer of the Company, modifying the terms of the Employment Agreement entered into between the Company and Ms. Hrytsyshyn dated November 16, 2021 (collectively, the “Hrytsyshyn Amended Employment Agreement”). The Hrytsyshyn Amended Employment Agreement became effective January 21, 2022.

 

Subsequent to December 31, 2021, the Company’s Board appointed James F. Engler, Jr. as a member of the Board to serve as a non-executive director of the Company.

 

Subsequent to December 31, 2021, the Company’s Board ratified and approved the establishment of the Audit Committee, Compensation Committee, and Nominating and Governance Committee as committees of the Board, the adoption of the charters for such committees and the appointment of the Company’s directors to such committees.

 

Subsequent to December 31, 2021, the Company entered into a non-recourse Future Receivables Agreement (“Agreement”) with an accredited investor (the “Investor”), pursuant to which the Company sold, assigned, and transferred to Investor all of the Company’s future accounts, contract rights, and other entitlements arising from or relating to the payment of monies from the Company’s customers’ including all payments made in the ordinary course of business, for the payments due to the Company as a result of the Company’s sale of goods or services. The Agreement provides for the purchase of $4,050,000 of purchased receipts by the Investor with net proceeds of $2,910,000 to the Company. The weekly repayment term began during January 2022 and concludes during July 2022, at which time the Agreement will be fully satisfied.

 

Subsequent to December 31, 2021, the Company’s Board approved the issuance of 3,352,066 shares of the Company’s common stock to Anshu Bhatnagar, Chief Executive Officer of the Company, to satisfy a note payable due to Mr. Bhatnagar in the aggregate amount of $528,607.

 

Subsequent to December 31, 2021, Evergreen agreed to not convert shares for a period of time. Refer to Note 7 for details.

 

Subsequent to December 31, 2021, the Company filed for a name change with the Financial Industry Regulatory Authority (“FINRA”) to mPower Technologies, Inc.

 

29
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Note Regarding Forward-Looking Statements

 

This quarterly report on Form 10-Q and other reports filed by mPhase Technologies, Inc. (“we,” “us,” “our,” or the “Company”) from time to time with the U.S. Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements (collectively the “Filings”) and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

 

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

 

The following discussion should be read in conjunction with the attached unaudited consolidated financial statements and notes thereto, and our audited consolidated financial statements and related notes for our fiscal year ended June 30, 2021 found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on October 13, 2021.

 

30
 

 

Overview

 

mPhase Technologies, Inc., was incorporated in the state of New Jersey in 1979 under the name Tecma Laboratory, Inc. and has subsequently operated under Tecma Laboratories, Inc., and Lightpaths TP Technologies, Inc., until June 2, 1997 when the Company changed its name to mPhase Technologies, Inc.

 

Since January 11, 2019, when the Company underwent a complete change in management and control, the new management has continued to broaden the Company’s product mix to include artificial intelligence and machine learning products.

 

On February 15, 2019, the Company acquired Travel Buddhi, a software platform to enhance travel via ultra-customization tools that tailor a planned trip experience in ways not previously available.

 

On June 30, 2019, the Company acquired 99% of the outstanding common shares of Alpha Predictions LLP (“Alpha Predictions”). Alpha Predictions is an India-based technology company that has developed a suite of commercial data analysis products for use across multiple industries. This acquisition has been integrated into the Company’s international operations and as expected, has driven revenue growth and innovation.

 

On August 27, 2019, the Company’s Board of Directors approved the filing of an amendment (the “Amendment”) to the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) to increase the authorized shares of common stock from 25 million shares to 100 million shares pursuant to Section 14A:7-2(4) of the Business Corporation Law of the State of New Jersey. The Amendment was filed with the State of New Jersey on September 4, 2019.

 

On May 11, 2020, the Company acquired CloseComms, a patented, software application platform that can be integrated into a retail customer’s existing Wi-Fi infrastructure, giving the retailer important customer data and enabling AI-enhanced, targeted promotions to drive store traffic and sales.

 

On June 10, 2020, the Company’s Board of Directors approved the filing of an amendment (the “Amendment”) to the Company’s Certificate of Incorporation to increase the authorized shares of common stock from 100 million shares to 250 million shares pursuant to Section 14A:7-2(4) of the Business Corporation Law of the State of New Jersey. The Amendment was filed with the State of New Jersey on July 14, 2020.

 

On July 15, 2020, the Company entered into an exchange agreement (the “Exchange Agreement”) with its Chief Executive Officer (“Holder”), whereby earned and issued warrants to purchase 37,390,452 shares of the Company’s Common Stock (the “Cancelled Warrants”) pursuant to the terms of that certain Transition Agreement (the “Transition Agreement”) and Warrant Agreement (the “Warrant Agreement”) each between the Company and Holder and dated as of January 11, 2019 were forfeited and exchanged for (i) 37,390,452 shares of the Company’s Common Stock (the “Shares”) and (ii) the cancellation and termination of the Transition Agreement and Warrant Agreement. The Cancelled Warrants had an exercise price of $0.50 per share and were not subject to expiration. Such Exchange Agreement is intended to make the Company’s capitalization more attractive to potential investors and to remove the uncertainty associated with any future grants of warrants under the Transition Agreement and Warrant Agreement, although there can be no assurance of any future investments on terms that are attractive to the Company, or at all. Immediately prior to the Company’s entry into the Exchange Agreement, it was determined that 5,650,708 additional warrants (the “Additional Warrants”) to purchase the Company’s Common Stock were due to and issued to the Holder in accordance with the terms and conditions of the Transition Agreement as the Transition Agreement required certain liabilities to be eliminated by the prior management team within six months of the Transition Agreement’s effective date of January 11, 2019. However, the Additional Warrants were immediately cancelled and terminated with the intention of mitigating potential liabilities arising from certain issuances of the Company’s Common Stock below the minimum price of $0.50 per share as stated within the Transition Agreement.

 

On August 3, 2020, the Company’s Board of Directors approved the filing of an amendment (the “Amendment”) to the Company’s Certificate of Incorporation to increase the authorized shares of common stock from 250 million shares to 500 million shares pursuant to Section 14A:7-2(4) of the Business Corporation Law of the State of New Jersey. The Amendment was filed with the State of New Jersey on August 4, 2020.

 

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During 2021, the Company announced that it would be adding EV charging to its consumer engagement platform as part of a major strategic initiative to monetize additional points of contact during consumer travel and travel planning. During the course of 2021, the Company actively planning pilot programs in EV charging, as part of a larger strategy to build an AI-driven consumer ecosystem. By late-2021, the Company transitioned into a “green” consumer company, serving as an important bridge between consumers, retailers, and service providers.

 

On May 17, 2021, the Company’s Board of Directors appointed Venkat Kodumudi as the Company’s Chief Operating Officer (the “Appointment”). In connection with the Appointment, Mr. Kodumudi entered into an Employment Agreement (the “Employment Agreement”) with the Company. The Employment Agreement is for an indefinite term and may be terminated with or without cause. Mr. Kodumudi will receive an annual base salary of $200,000 (the “Base Salary”) and shall be eligible to earn a performance bonus in the target amount of up to 50% of the Base Salary, if any, upon the attainment of performance goals established by the Chief Executive Officer of the Company. The Base Salary shall increase to $225,000, the first payroll subsequent to the Company completing an uplist to a listed exchange. In connection with his Appointment, Mr. Kodumudi was granted 500,000 restricted stock units of the Company’s common stock (the “RSUs”). The RSUs shall vest in accordance with the following: (i) 125,000 of the RSUs shall vest on the one year anniversary of the Effective Date; (ii) 125,000 RSUs shall vest on the second year anniversary of the Effective Date; (iii) 125,000 RSUs shall vest on the third year anniversary of the Effective Date; and (iv) 125,000 RSUs shall vest on the fourth year anniversary of the Effective Date. As a full-time employee of the Company, Mr. Kodumudi will be eligible to participate in all of the Company’s benefit programs. Upon termination of Mr. Kodumudi without cause and provided that Mr. Kodumudi has been employed by the Company for a minimum of twelve (12) months but less than twenty-four (24) months, the Company shall pay or provide to Mr. Kodumudi severance pay equal to his then current monthly base salary for six months from the date of termination, during which time Mr. Kodumudi shall continue to receive all employee benefits and employee benefit plans as described in the Employment Agreement. Upon termination of Mr. Kodumudi without cause and provided that Mr. Kodumudi has been employed by the Company for a minimum of twenty-four (24) months, the Company shall pay or provide to Mr. Kodumudi severance pay equal to his then current monthly base salary for twelve months from the date of termination.

 

On August 27, 2021, the Board of Directors (the “Board”) of the Company appointed Suhas Subramanyam, Chester White, and Thomas Fore as members of the Board (such appointments, collectively, the “Appointments”). The terms of the Appointments commenced on August 27, 2021 and are in effect for a period of approximately one year, until the time of the Company’s next Annual Meeting of Stockholders. In connection with the Appointments, on August 27, 2021, the Company entered into director agreements with Mr. Subramanyam, Mr. White and Mr. Fore (such director agreements, collectively, the “Director Agreements”). Pursuant to the Director Agreements, the Company will compensate each such director a fee of $20,000 annually, which is to be paid in quarterly installments of $5,000. Such quarterly fee will be increased by $1,250 for each such director who serves as a member of either the Audit, Compensation, or Nominating Committee. In lieu of cash consideration, the annual fee will be paid by issuance of the number of restricted shares of the Company’s common stock equivalent to the applicable cash amount due as determined based upon the closing price on the last trading day of such quarter. This paragraph contains only a brief description of the material terms of and does not purport to be a complete description of the rights and obligations of the parties to the Director Agreements, and such descriptions is qualified in its entirety by reference to the full text of the Director Agreements, a copy of which is incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed with the SEC on September 2, 2021.

 

On November 18, 2021, the Board appointed Angelia Lansinger Hrytsyshyn as Chief Financial Officer, with such appointment to be effective on November 22, 2021, and approved an employment agreement with Ms. Hrytsyshyn (the “Employment Agreement”). Pursuant to the Employment Agreement, the Company will compensate Ms. Hrytsyshyn in the amount of $225,000 annually. Ms. Hrytsyshyn will be eligible for an annual performance-based cash bonus. Ms. Hrytsyshyn shall also receive a restricted stock award of 500,000 shares of the Company’s common stock which will vest on each of the first, second, third and fourth anniversaries of the Employment Agreement, so long as Ms. Hrytsyshyn remains employed by the Company. This paragraph contains only a brief description of the material terms of and does not purport to be a complete description of the rights and obligations of the parties to the Employment Agreement, and such description is qualified in its entirety by reference to the full text of the Employment Agreement, a copy of which is incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q filed with the SEC on November 22, 2021.

 

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On January 5, 2022, the Company filed for a name change with the Financial Industry Regulatory Authority (“FINRA”) to mPower Technologies, Inc.

 

On January 19, 2022, the Company, pursuant to the approval of the Board, entered into an amended and restated employment agreement with Anshu Bhatnagar, Chief Executive Officer of the Company, modifying the terms of the Employment Agreement entered into between the Company and Mr. Bhatnagar dated January 11, 2019 (collectively, the “Bhatnagar Amended Employment Agreement”). The Bhatnagar Amended Employment Agreement, which becomes effective retroactively as of January 1, 2022 (the “Effective Date”) provides for an increase to Mr. Bhatnagar’s annual cash base salary to $600,000. Further, Mr. Bhatnagar is eligible to receive additional increases to base salary, to be determined in the sole discretion of the Company’s Board, which allow for an increase in base salary as follows: base salary shall increase to $700,000 on the first anniversary of the effective date of the Amended Employment Agreement; and base salary shall increase to $800,000 on the second anniversary of the effective date of the Amended Employment Agreement. Additionally, the Amended Employment Agreement provides that Mr. Bhatnagar shall also be entitled to receive stock-based compensation in the form of shares of common stock of the Company, and an annual cash bonus of up to 100% of base salary, which shall be determined by the Board. The Term of the Bhatnagar Amended Employment Agreement shall expire on December 31, 2032. This paragraph contains only a brief description of the material terms of and does not purport to be a complete description of the rights and obligations of the parties to the Bhatnagar Amended Employment Agreement, and such description is qualified in its entirety by reference to the full text of the Bhatnagar Amended Employment Agreement, a copy of which is incorporated by reference to Exhibit 10.3 of the Company’s Form 8-K filed with the SEC on January 25, 2022.

 

On January 19, 2022, the Company, pursuant to the approval of the Board, entered into an amended and restated employment agreement with Angelia Lansinger Hrytsyshyn, Chief Financial Officer of the Company, modifying the terms of the Employment Agreement entered into between the Company and Ms. Hrytsyshyn dated November 16, 2021 (collectively, the “Hrytsyshyn Amended Employment Agreement”). The Hrytsyshyn Amended Employment Agreement, which becomes effective January 21, 2022, provides for an increase to Ms. Hrytsyshyn’s annual cash base salary to $250,000. Further, Ms. Hrytsyshyn is eligible to receive an annual performance-based cash bonus equal to 50% of base salary. The Term of the Hrytsyshyn Amended Employment Agreement shall be “at will” and can be terminated by the Company or Ms. Hrytsyshyn at any time for any reason provided that Ms. Hrytsyshyn may not voluntarily terminate the agreement without thirty (30) days prior written notice delivered to the Company. This paragraph contains only a brief description of the material terms of and does not purport to be a complete description of the rights and obligations of the parties to the Hrytsyshyn Amended Employment Agreement, and such description is qualified in its entirety by reference to the full text of the Hrytsyshyn Amended Employment Agreement, a copy of which is incorporated by reference to Exhibit 10.4 of the Company’s Form 8-K filed with the SEC on January 25, 2022.

 

On January 19, 2022, the Board appointed James F. Engler, Jr. as a member of the Board (the “Appointment”). Mr. Engler will serve as a non-executive director of the Company. In connection with the Appointment, the Company and Mr. Engler entered into a director agreement (the “Director Agreement”) whereby, as compensation for his services as a member of the Board, Mr. Engler shall receive 200,000 shares of the Company’s common stock options, par value $0.01 per share (the “Director Options”) and will vest monthly over three years that Mr. Engler serves as Director. Additionally, Mr. Engler shall be paid an annual fee of $50,000, to be paid $12,500 per quarter, as compensation for his services as a Director of the Company. It was further agreed that until the Company has raised $10 million, or within the first six months, whichever comes first, the Company will pay the annual compensation through the issuance of restricted shares of Company’s common stock in lieu of cash consideration. So long as Mr. Engler serves as a member of any committee of the Board, the amount of quarterly fee shall be increased by $1,250. Additionally, pursuant to the approval of the Board, each independent director’s existing director agreement will be amended such that each independent director will receive compensation on the same terms as set forth in the Director Agreement.

 

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On January 20, 2022, the Company’s Board ratified and approved the establishment of the Audit Committee, Compensation Committee, and Nominating and Governance Committee as committees of the Board, the adoption of the charters for such committees and the appointment of the Company’s directors to such committees. The Board appointed Chester White, Thomas Fore, and James Engler to serve on the Audit Committee of the Board of Directors of the Company, with Mr. Engler serving as the Chair of the Audit Committee. The Board appointed Mr. Fore, Mr. Engler and Mr. Subramanyam to serve on the Compensation Committee of the Board of Directors of the Company, with Mr. Fore serving as the Chair of the Compensation Committee. The Board appointed Mr. Subramanyam, Mr. Engler and Mr. Fore to serve on the Nominating and Corporate Governance Committee of the Board of Directors of the Company, with Mr. Subramanyam serving as the Chair of the Nominating and Corporate Governance Committee.

 

The Company can best be described as a technology company focused on consumer engagement using data analytics and artificial intelligence to create a monetizable link between consumers and retailers at opportunistic times and places. The Company is currently building a connected ecosystem of EV charging and software solutions that optimize consumer engagement within the framework of a SaaS/TaaS model. Branded under the mPower name, this ecosystem will empower the way people shop, dine, fuel and interact with the world to create a richer life experience. The mPower ecosystem is tailored to each individual’s tastes and needs, with particular emphasis on empowering tomorrow’s green consumer. The Company has data driven business units generating recurring revenue outside of its consumer ecosystem, in addition to legacy nanobattery technology and a related patent portfolio that are slated for future development. The Company plans to expand into other markets, both in the United States and globally, where it believes its technology and services will provide a distinct competitive advantage over its competition.

 

Concurrently, the Company continues to pursue strategic alternatives to best monetize its patent portfolio, including partnering to exploit opportunities for its drug delivery system. The Company continues seeking to obtain government funding available under the Departments of Defense and Homeland Security including The Department of Defense Ordnance Technology Consortium (“DOTC”), Small Business Innovative Research (“SBIR”), Cooperative Research and Development Agreements (“CRADA”) and similar programs for targeted applications for its smart nano-battery applications.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of the Company’s financial condition and results of operations are based upon its unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these unaudited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, management evaluates past judgments and estimates, including those related to bad debts, potential impairment of intangible assets, accrued liabilities and contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in Note 3 above and the Company’s Annual Report on Form 10-K as filed with the SEC on October 13, 2021, are those that depend most heavily on these judgments and estimates. As of December 31, 2021, there had been no material changes to any of the critical accounting policies contained therein.

 

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Results of Operations

 

Three months ended December 31, 2021 compared to three months ended December 31, 2020

 

Continuing Operations

 

Revenue

 

Our revenue increased to $8,339,877 for the three months ended December 31, 2021, compared to $7,636,436 for the three months ended December 31, 2020, an increase of $703,441, or 9.2%. The increase is the result of continued deployment and growth of our SaaS technology platforms and services through our channel partner, which generated $6,405,000 of subscription revenue, $1,005,157 of service and support revenue and $900,670 of application development and implementation revenue. The increase was also driven by the launch of our consumer engagement services which generated $29,050 of subscription revenue.

 

Cost of Revenue

 

Cost of revenue remained unchanged at $5,625,000 for the three months ended December 31, 2021, compared to the three months ended December 31, 2020.

 

Operating Expenses

 

Our operating expenses increased to $1,527,258 for the three months ended December 31, 2021, compared to $692,528 for the three months ended December 31, 2020, an increase of $834,730, or 121%. The increase is primarily due to $547,621 of operating expenses related to supporting the addition of EV charging to the Company’s consumer engagement platform as part of a major strategic initiative to monetize additional points of contact during consumer travel and travel planning, coupled with $314,664 of software development costs. The increase was partially offset by a reduction of $27,555 of salaries and benefits expenses related to the reduction of non-U.S. based team members, partially offset by an increase of U.S. based team members.

 

Other (Expense) Income

 

Our other expense, net, increased by $973,491, or 310%, for the three months ended December 31, 2021. The increase is primarily the result of increases in amortization of debt discounts, deferred financings costs, and original issue discounts of $864,803, loss on debt extinguishments and settlements of $166,625, and interest expense of $50,251, partially offset by prior year loss on change in fair value of derivative liability of $108,188.

 

Net (Loss) Income from Continuing Operations

 

We incurred a net loss of $99,558 for the three months ended December 31, 2021, compared to net income of $1,005,212 for the three months ended December 31, 2020, a decrease of $1,104,770, or 110%. The net loss is primarily driven by the increases in operating expenses and other expense, net, partially offset by the increase in gross profit, as disclosed above.

 

Discontinued Operations

 

For the three months ended December 31, 2021 and 2020, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations.

 

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Results of Operations

 

Six months ended December 31, 2021 compared to six months ended December 31, 2020

 

Continuing Operations

 

Revenue

 

Our revenue increased to $16,565,587 for the six months ended December 31, 2021, compared to $15,223,300 for the six months ended December 31, 2020, an increase of $1,342,287, or 8.8%. The increase is the result of continued deployment and growth of our SaaS technology platforms and services through our channel partner, which generated $12,810,000 of subscription revenue, $1,961,087 of service and support revenue and $1,765,450 of application development and implementation revenue. The increase was also driven by the launch of our consumer engagement services which generated $29,050 of subscription revenue.

 

Cost of Revenue

 

Cost of revenue totaled $11,250,033 for the six months ended December 31, 2021, compared to $11,250,399 for the six months ended December 31, 2020.

 

Operating Expenses

 

Our operating expenses increased to $2,750,797 for the six months ended December 31, 2021, compared to $1,458,374 for the six months ended December 31, 2020, an increase of $1,292,423, or 89%. The increase is primarily due to $1,307,500 of operating expenses related to supporting the addition of EV charging to the Company’s consumer engagement platform as part of a major strategic initiative to monetize additional points of contact during consumer travel and travel planning, coupled with $314,664 of software development costs. The increase was partially offset by a reduction of $329,741 of salaries and benefits expenses related to the reduction of non-U.S. based team members and a reduction of employee stock-based compensation expense, partially offset by an increase of U.S. based team members.

 

Other (Expense) Income

 

Our other expense, net, increased by $1,581,733, or 200%, for the six months ended December 31, 2021. The increase is primarily the result of increases in amortization of debt discounts, deferred financings costs, and original issue discounts of $1,582,865, loss on debt extinguishments and settlements of $146,467, and interest expense of $60,569, coupled with prior year gain on change in fair value of derivative liability of $157,900, and partially offset by prior year loss on initial derivative liability expense of $366,068.

 

Net Income from Continuing Operations

 

We generated net income of $194,203 for the six months ended December 31, 2021, compared to net income of $1,725,706 for the six months ended December 31, 2020, a decrease of $1,531,503, or 89%. The net loss is primarily driven by the increases operating expenses and other expense, net, partially offset by the increase in gross profit, as disclosed above.

 

Discontinued Operations

 

For the six months ended December 31, 2021 and 2020, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations.

 

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Liquidity and Capital Resources

 

At December 31, 2021, we had $545,871 of cash on-hand, a decrease of $1,927,515 from $2,473,386 at June 30, 2021.

 

Net cash used in operating activities was $1,791,748 for the six months ended December 31, 2021, an increase of $1,463,700 from $328,048 used during the six months ended December 31, 2020. This increase was primarily due to a decline in net income during the current period as compared to the comparable prior year period, coupled with a decrease in accounts payable and accrued expenses due to increased cash payments in the current year as compared to higher non-cash tri-party offset agreements in the prior year with our largest vendor and customer, and an increase in other assets due to foreign local taxes, partially offset by a net increase in non-cash charges and decreases in accounts receivable due to increased cash receipts in the current year as compared to higher non-cash tri-party offset agreements in the prior year with our largest vendor and customer and prepaid expenses due to net utilization.

 

Net cash used in investing activities was $2,357 for the six months ended December 31, 2021 as compared to $1,727 used in investing activities for the six months ended December 31, 2020. The increase was due to an increase in capital expenditures.

 

Net cash used in financing activities decreased by $480,642 to $148,042 for the six months ended December 31, 2021, compared to net cash provided by financing activities of $332,600 for the six months ended December 31, 2020. This decrease was primarily due to decreased proceeds from issuances of convertible promissory notes, coupled with increased repayments of debt.

 

Going Concern

 

We generated net income of $194,203 and $1,725,706 for the six months ended December 31, 2021 and 2020, respectively. We used cash in operating activities of $1,791,748 and $328,048 for the six months ended December 31, 2021 and 2020, respectively. At December 31, 2021, we had a working capital surplus of $11,402,820, and an accumulated deficit of $225,867,206. While these factors alone may raise doubt as to the Company’s ability to continue as a going concern, management believes the Company’s present and expected cash flows will enable it to meet its obligations for a period of twelve months from the date of this filing. The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

In the event managements’ plans do not materialize, in order to meet the Company’s working capital needs through the next twelve months and to fund the growth of its nanotechnology, artificial intelligence, and machine learning technologies, as well as our EV charging initiatives, we may consider plans to raise additional funds through the issuance of equity or debt. Although we intend to obtain additional financing to meet our cash needs, we may be unable to secure any additional financing on terms that are favorable or acceptable to us, if at all. Our ability to raise additional capital may also be impacted by the recent COVID-19 pandemic, which such ability is highly uncertain, cannot be predicted, and could have an adverse effect on our business and financial condition.

 

Impact of COVID-19 Pandemic

 

A novel strain of coronavirus, COVID-19, surfaced during December 2019 and has spread around the world, including to the United States. During March 2020, COVID-19 was declared a pandemic by the World Health Organization. During certain periods of the pandemic thus far, a number of U.S. states and various countries throughout the world had been under governmental orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining. As a result of these governmental orders, we temporarily closed our domestic and international offices and required all of our employees to work remotely. As economic activity has begun and continues recovering, the impact of the COVID-19 pandemic on our business has been more reflective of greater economic and marketplace dynamics. Furthermore, in light of variant strains of the virus that have emerged, the COVID-19 pandemic could once again impact our operations and the operations of our customers and vendors as a result of quarantines, illnesses, and travel restrictions.

 

The full impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the pandemic, its impact on our employees, customers, and vendors, in addition to how quickly normal economic conditions and operations resume and whether the pandemic impacts other risks disclosed in Item 1A “Risk Factors” within our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC on October 13, 2021. Even after the pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred as a result of the pandemic. Therefore, we cannot reasonably estimate the impact at this time. We continue to actively monitor the pandemic and may determine to take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, vendors, and shareholders.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this Item. We do not hold any derivative instruments and do not engage in any hedging activities.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2021 to determine whether the Company’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed in our reports under the Exchange Act, and the rules and regulations thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of December 31, 2021.

 

(b) Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no other actions, suits, proceedings, inquiries or investigations before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2021, filed with the SEC on October 13, 2021.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of equity securities that were not otherwise disclosed in a current report on Form 8-K, except as set forth below:

 

1,250,000 shares of the Company’s common stock were issued on October 18, 2021 to an accredited investor for the partial conversion of a promissory note; and

 

1,250,000 shares of the Company’s common stock were issued on December 31, 2021 to an accredited investor for the partial conversion of a promissory note.

 

Item 3. Defaults Upon Senior Securities

 

There were no defaults upon senior securities during the quarter ended December 31, 2021.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits.

 

Exhibit Number   Description
     
3.01   Form of Audit Committee Charter (Incorporated by reference to Form 8-K, Exhibit 3.01, filed January 25, 2022)
3.02   Form of Compensation Committee Charter (Incorporated by reference to Form 8-K, Exhibit 3.02, filed January 25, 2022)
3.03   Form of Nominating and Corporation Governance Committee Charter (Incorporated by reference to Form 8-K, Exhibit 3.03, filed January 25, 2022)
10.1   Form of Director Agreements (Incorporated by reference to Form 8-K, Exhibit 10.1, filed September 2, 2021)
10.2   Form of Employment Agreement between Company and Angelia Hrytsyshyn (Incorporated by reference to Form 10-Q, Exhibit 10.2, filed November 22, 2021)
10.3   Form of Amended and Restated Employment Agreement between Company and Anshu Bhatnagar (Incorporated by reference to Form 8-K, Exhibit 10.3, filed January 25, 2022)
10.4   Form of Amended and Restated Employment Agreement between Company and Angelia Hrytsyshyn (Incorporated by reference to Form 8-K, Exhibit 10.4, filed January 25, 2022)
10.5   Form of Director Agreement (Incorporated by reference to Form 8-K, Exhibit 10.5, filed January 25, 2022)
31.1*   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS*   XBRL Instance Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
101.SCH*   XBRL Taxonomy Extension Schema Document
104   Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

*Filed herewith.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  mPhase Technologies, Inc.
   
  /s/ Anshu Bhatnagar
  Anshu Bhatnagar
  Chief Executive Officer (Principal Executive Officer)
  February 10, 2022
   
  /s/ Angelia Lansinger Hrytsyshyn
  Angelia Lansinger Hrytsyshyn
  Chief Financial Officer (Principal Financial and Accounting Officer)
  February 10, 2022

 

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MPhase Technologies (PK) (USOTC:XDSL)
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From Jul 2022 to Aug 2022 Click Here for more MPhase Technologies (PK) Charts.
MPhase Technologies (PK) (USOTC:XDSL)
Historical Stock Chart
From Aug 2021 to Aug 2022 Click Here for more MPhase Technologies (PK) Charts.