PART
I
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
All statements other than statements of historical fact could be deemed forward-looking statements. Statements that include words such
as “may,” “will,” “might,” “projects,” “expects,” “plans,” “believes,”
“anticipates,” “targets,” “intends,” “hopes,” “aims,” “can,”
“should,” “could,” “would,” “goal,” “potential,” “approximately,”
“estimate,” “pro forma,” “continue” or “pursue” or the negative of these words or other
words or expressions of similar meaning may identify forward-looking statements. For example, forward-looking statements include any
statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products,
services or developments; any statements regarding future economic conditions or performance; statements of belief and any statement
of assumptions underlying any of the foregoing.
These
forward-looking statements are found at various places throughout this Annual Report on Form 10-K and the other documents referred to
and relate to a variety of matters, including, but not limited to, other statements that are not purely statements of historical fact.
These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of management, are not guarantees
of performance and are subject to significant risks and uncertainty. These forward-looking statements should not be relied upon as predictions
of future events and mPhase Technologies, Inc. (the “Company”) cannot assure you that the events or circumstances discussed
or reflected in these statements will be achieved or will occur. Furthermore, if such forward-looking statements prove to be inaccurate,
the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard
these statements as a representation or warranty by the Company or any other person that the Company will achieve its objectives and
plans in any specified timeframe, or at all.
These
forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in “Item
1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K. You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual Report on Form 10-K. The Company disclaims any obligation to publicly update
or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after
the date of this Annual Report on Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.
PART
I
Throughout
this Annual Report on Form 10-K, the “Company,” “mPhase,” “we,” “us,” and “our”
refers to mPhase Technologies, Inc. and its subsidiaries.
ITEM
1. BUSINESS
General
Description of the Business
mPhase
Technologies, Inc. (“mPhase” or the “Company”) is a publicly-held New Jersey corporation which was organized
on October 2, 1996. The Company has over 11,000 shareholders and 79,190,821 shares of common stock outstanding at October 11,
2021. The Company’s common stock is traded on the OTCQB under the ticker symbol XDSL. The Company is headquartered in Gaithersburg,
Maryland. As of October 1, 2021, the Company employs 20 full-time employees, two of whom are officers
of the Company and 13 consultants, seven of which provide technology platform development services, four that provide sales and marketing
services, one that provides HR services, and one that provides accounting services. The Company’s subsidiary in India employs a
total of 16 software engineers and data analysis experts.
As
of January 11, 2019, the Company underwent a major change in management and control. The Company entered into an Employment Agreement
with Mr. Anshu Bhatnagar to become the new President and Chief Executive Officer and a Director of the Company. Mr. Bhatnagar was also
the President and CEO of Verus International, Inc. (ticker symbol “VRUS”) a publicly-held company. Mr. Bhatnagar replaced
Mr. Ronald Durando who resigned as CEO. Mr. Durando remained a Director of the Company until his resignation from such position effective
March 20, 2019. Effective January 11, 2019 all of the other prior Officers and Directors of the Company resigned their respective positions.
On January 28, 2019, Mr. Smiley, the former CFO of the Company, was reappointed as interim CFO and on June 6, 2019, Mr. Smiley resigned
as CFO of the Company and was replaced by Christopher Cutchens. Under the terms of Mr. Bhatnagar’s Employment Agreement, he will
receive a base salary of $275,000 per annum and was granted 2,620,899 shares of Common Stock, representing 20% of the Company’s
Common Stock then outstanding at January 11, 2019. In addition, Mr. Bhatnagar, pursuant to the terms of a Transition Agreement shall
earn the right to be issued 4% of additional shares of the Company’s Common Stock for each $1 million of gross revenue generated
by the Company. Once the Company has achieved gross revenue of not less than $15,000,000 or is up-listed to a National Securities Exchange,
Mr. Bhatnagar will have earned the remaining amount of the Company’s Common Stock not to exceed 80% of the shares outstanding at
January 11, 2019 as adjusted for the Reverse Split of the Company’s Common Stock as described below. As of December 31, 2020, the
Company achieved gross revenue in excess of $15,000,000 and Mr. Bhatnagar earned the remaining maximum amount of the Company’s
Common Stock in accordance with the terms of the Transition Agreement.
The
new management of the Company is positioning the Company to become a leader in software relating to artificial intelligence and machine
learning while pursuing a more rapid commercial development of its patent portfolio and other intellectual property. Artificial Intelligence
is just simple math executed on an enormous scale. The more calculations a system can process, the more possible it is for that system
to emulate human-like cognitive abilities. With the advent of cloud infrastructure, GPU-accelerated processing and deep learning architectures,
it is now commercially viable to perform this math at such speeds and efficiency that Artificial Intelligence (human-like cognitive abilities)
can be embedded directly into business operations, platform architectures, business services and customer experiences. The goal is to
generate a faster growth of revenues for the Company.
On
February 4, 2019, the Company announced the formation of mPhase Technologies India, Pvt, Ltd to focus on software and technology development
for new and existing projects. On February 6, 2019, the Company announced that it has commenced discussions with a global pharmaceutical
company to explore the use of mPhase’s “Smart Surface” technology for transdermal drug delivery. mPhase’s current
technology uses electronic or other external stimulus to dispense an unattended, predetermined quantity of drug or medical agent through
a smart surface membrane. On February 19, 2019, the Company announced and began assembling a team in India of highly qualified software
and technology experts in the fields of artificial intelligence and machine learning to work as part of its newly formed “Center
of Excellence” India division.
On
March 7, 2019, the Company announced the acquisition of Travel Buddhi, a software platform to enhance travel via ultra-customization
tools that tailor a planned trip experience in ways not previously available. The Company is moving in a new strategic direction of modification
and modernization of its existing technology to make it “smart” and “connected” as part of the internet of things.
Effective
May 22, 2019 the Company completed a 5,000/1 reverse split of its Common stock reducing its authorized shares to 25 million shares of
Common Stock.
On
June 30, 2019, the Company entered into a Share Purchase Agreement (“SPA”) to acquire a controlling interest in Alpha Predictions,
LLP, (“Alpha Predictions”) an India-based technology company. Alpha Predictions had 15 professionals comprised of a team
of data specialists who developed a suite of commercial data analysis products for use across multiple industries. The product offering
included software covering eight categories: inventory, stock management, marketing optimization, sentiment analysis, customer segmentation
and behavior, agro-tech image detection, electrocardiogram automation, and a recommendation engine with multiple uses.
On
August 27, 2019, 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 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 entered into an Asset Purchase Agreement to acquire all assets owned, used or held in connection with the business,
other than excluded assets and assumed certain liabilities of CloseComms Limited (“CloseComms”). The most substantial acquired
asset was 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. Other acquired
assets included cash and computer and office equipment, while assumed liabilities included certain compensation related liabilities attributed
to engaging the operational team on a consulting basis for a minimum of one (1) year.
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.
During
2021, the Company announced that it would be adding 5G and 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. As of July 2021, mPhase was actively
planning pilot programs in 5G and EV charging, as part of a larger strategy to build an AI-driven consumer ecosystem. By late-2021, the
Company plans to transition 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 of EV charging, 5G internet
connectivity 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 also 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.
Description
of Operations
Platform
Technology
mPower EV/5G Consumer
Engagement Platform
The Company is building
an AI-driven, global consumer engagement platform that incorporates both patented in-house and third-party technologies to support adoption
and use. To create this ecosystem, the Company is utilizing the technology and teams from its CloseComms consumer engagement group and
its Travel Buddhi trip planning experts and other engineering teams. The Company recently onboarded experts in EV charging and 5G communication
to create new points of contact for this emerging platform. The completed platform will be designed to learn individual consumer preferences
to match retail and other promotional activities to consumer behavior during travel. The platform will enable travelers to customize
their experience, including tailoring to create a new set of tools for the “green” consumer.
The consumer engagement
portion of the platform has already been successfully tested at major quick service restaurant chains, including Subway, while the technology
segments in 5G and EV charging are in the pilot planning phase. The goal is to have a full ecosystem in pilot mode by the end of 2021.
The platform will the first of its kind, creating multiple monetizable points of contact under a hybrid SaaS/TaaS model.
The 5G portion of the
platform is also being developed to target municipal and other government entities seeking to develop networks for education and other
public services.
Artificial
Intelligence and Machine Learning
The
Company has a team of 15 software engineers and data analysis experts capable of enabling the Company to provide products in the
artificial intelligence and machine learning areas. Additionally, through its recent transaction with CloseComms, the Company has contracted
with 11 software engineer consultants enabling the Company to provide retail customers important customer data while enabling AI-enhanced,
targeted promotions to drive store traffic and sales. The Company has in place and is developing proprietary software to enable customers
to enhance their business capabilities by providing sophisticated digital analysis of large volumes of data to provide sophisticated
solutions to complex problems.
Smart
Surfaces
The
surface is an important part of virtually every physical object and often plays an overriding role in many processes, beyond mere connectivity
and structural support, but more deeply into areas involving chemical and biological interactions. In some instances, the surface provides
an easy entry into the chemical or biological systems; in others it protects the internal elements of the object, surrounded by the surfaces.
The
Company’s current technology platform is the Smart Surface. By being able to control the surface properties of materials down to
the nanometer scale, new and improved devices can be designed and built that may lead to compelling business opportunities. One type
of smart surface of particular interest allows properties to be changed in response to an external stimulus.
Initially,
the Company’s development focused on Micro Electronic Mechanic Systems (MEMS) devices by manipulating the surface of silicon materials
– the same material used to make microelectronic materials and devices. Using physical and chemical processes, the surface of the
silicon is modified to make solid porous structures known as membranes. This is where microfluidics comes into play. These membranes
can be used to selectively control the flow of liquids through the pores or openings at the micrometer length scale.
Surfaces
may be characterized as hydrophilic or hydrophobic depending on whether or not they attract or repel water (or other liquids). A hydrophilic
surface can be wet and adsorbs water. A hydrophobic surface, on the other hand, cannot be wet. Hydrophilic and hydrophobic surfaces are
abundant in nature and in synthetic materials, both organic and inorganic in chemical composition. A familiar example of a hydrophilic
surface is a sponge that readily soaks up water. By contrast, many plant leaves and flower petals are hydrophobic, as are insect parts
and bird feathers. Synthetic hydrophobic surfaces include Scotchgard™ treated fabric, Teflon® coated metal, or Rain-X®
coated glass. On a hydrophobic surface, water beads up and can move around without being absorbed by the solid material that it is resting
on.
So-called
superhydrophobic surfaces are also found in nature and can now be replicated in the lab. The lotus leaf and rose petal, for example,
exhibit super-hydrophobicity. Here water droplets form almost perfect spheres with hardly any contact with the underlying solid surface.
This makes the liquid even easier to move and manipulate. The synthesis of superhydrophobic surfaces has recently been made possible
by advances in nanotechnology and the Company is leading the way to better understand and create materials and devices incorporating
these unique surface properties.
As
the Company’s research and development efforts evolve, in addition to silicon materials, the ability to control the surface properties
of materials can be extended to other substances such as polymers, ceramics, metals, and fibers providing opportunities for our platform
technology to be used in a range of potential applications such as energy storage and power management for portable electronics and microelectronics,
self-cleaning surfaces, filters for water purification or desalination systems, materials for environmental remediation that separate
liquids or solvents, and other situations where the control of the interaction of a solid surface exposed to a liquid is vitally important.
Smart
NanoBattery
Battery
technology has changed little in its fundamentals over the past 150 years. As a result, ordinary batteries begin dissipating energy as
soon as they are assembled and therefore have limited shelf life. Chemistries are fixed inside the package so the user cannot interact
with the contents to program functionality. The size and form of batteries have not kept pace with the miniaturization of electrical
components, microprocessors and integrated circuits. As a result, the optimal implementation of an electronic device is not always achieved.
Some batteries contain chemicals that are not considered safe or environmentally friendly (“green”). This makes disposal
a potential issue.
The
Company is challenging this convention by using their proprietary superhydrophobic porous silicon membrane technology as the basis to
build the Smart NanoBattery, a reserve battery providing Power On Command™ prior to initial activation.
Super-hydrophobicity
initially keeps the liquid electrolyte physically separated from the solid electrodes of the battery, thus preventing the chemical reactions
from occurring that cause the battery to provide power. This gives the Smart NanoBattery the benefit of potentially infinite shelf life.
A
conventional battery loses some capacity while sitting on the shelf in its package or stored in an electronic or electrical device, even
before being used for the first time. On the other hand, the Smart NanoBattery is built so that it is inactive and remains that way indefinitely
until it is turned on. No power is lost to self-discharge or leakage current prior to activation. When needed, the Smart NanoBattery
can be activated on command via the phenomenon of electrowetting. The surface properties of the porous silicon membrane are selectively
controlled to shift instantly from a superhydrophobic to hydrophilic state. In other words, electrowetting acts as the triggering mechanism.
The
Company has successfully fabricated and demonstrated its first 3-volt lithium-based Smart NanoBattery, based on a design allowing either
manual or remote activation by the user, the feature known as Power on Command™.
By
incorporating the phenomenon of electrowetting on nanostructured surfaces into a revolutionary way of storing energy, the Smart NanoBattery
provides power to portable electronic and microelectronic devices exactly when and where it is needed. As a reserve battery it is an
augmentation to conventional primary batteries. The nanobattery converts stored chemical energy into usable electrical energy, but in
a way that is potentially more reliable, more versatile, more environmentally friendly, and less expensive than conventional primary
batteries.
Applications
Artificial
Intelligence and Machine Learning
The
Company has recently acquired technologies focused on artificial intelligence and machine learning. The related proprietary software
enable customers to enhance their business capabilities by providing sophisticated digital analysis of large volumes of data to provide
sophisticated solutions to complex problems. The current product offering includes a Learning Management System (“LMS”) platform
that allows customers to customize their training and become embedded on the platform and 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
Smart
Surfaces and NanoBattery
The
Company is exploring military and commercial applications of smart surfaces in which the properties can be accurately and precisely controlled
down to the nanometer scale. Electrowetting allows the switching from a hydrophobic to hydrophilic state as a result of an electronic
stimulus.
The
Smart NanoBattery, the Company’s first smart surface product, has a unique architecture that enables a shelf life of decades, remote
activation, programmable control, scalable manufacturing, and adaptability to multiple configurations. The value proposition to the end
user is to have a source of energy or power that is literally always ready – reliable, convenient, low cost – a battery guaranteed
to work at full capacity when and where you need it.
The
Smart NanoBattery can conceivably supply power “on command” to a wide variety of portable electronic and microelectronic
devices used in military, medical, industrial, and consumer applications.
The
Company has demonstrated that the battery works in lab tests as well as in a significant field test conducted for the U.S. Army as part
of a guided munitions project. The relationship with the Army also included an $850,000 funded project to develop a battery for a mission
critical computer memory backup application. The target was a small footprint, 3-volt lithium battery with a minimum shelf life of 20
years and uninterruptible power output during this time period. To the best of the Company’s knowledge, no other battery technology
available today can deliver the long-term performance requirements specified by the U.S. Army for this application.
The
Smart NanoBattery can potentially be designed to accommodate a variety of sophisticated portable electronic and microelectronic devices
including next-generation cell phones, handheld gaming devices, wireless sensor systems, radio frequency identification tags, high-tech
flashlights and beacons, health alert alarms, and non-implantable and implantable medical devices such as pacemakers.
Initial
applications will address the need to supply emergency and backup power to a range of products for defense and security, with future
applications in the commercial and consumer arenas.
Strategic
Alliances
Artificial
Intelligence and Machine Learning
The
Company has contracts with three separate customers to provide, including but not limited to, software, training, and support services
as required. The contracts provide for initial revenue streams as well as subsequent revenue for training, support, updates and maintenance
services as provided.
Smart
NanoBattery
The
Company continued during 2020, together with Picatinny Arsenal, to jointly seek federal funding under SBIR grants to develop additional
new products for military small munitions applications. The Company has a strong historic cooperative relationship for product development
and testing with Picatinny Arsenal having entered into 3 CRADA’s (Cooperative Research Agreements) with this small munitions testing
facility of the U.S. Army The Company seek opportunities with various potential academic partners to obtain further STTR grants for new
product research and development.
In
2007, the Company entered into a Cooperative Research and Development Agreement (“CRADA”) with Picatinny Arsenal to test
the single cell version of the Smart NanoBattery suitable for future research and development programs for projectile launched munitions.
From 2007 through the first quarter of calendar year 2010, numerous internal laboratory air gun simulation tests were performed, including
a live-air gun and live gun fired test at the United States Army’s facility at Aberdeen Proving Grounds, Aberdeen, Maryland. A
prototype of the Smart NanoBattery was the subject of a live fire test as part of a projectile fired out of an Abrams Tank. The results
of the test indicated that the battery was activated by 10,000 G forces indicating that it could supply energy necessary to operate a
guidance system for small munitions. In addition, the Smart NanoBattery demonstrated extreme resiliency to shock and acceleration since,
it survived tests that subjected it to high acceleration of over 30,000 G forces.
On
February 9, 2011, the Company announced that it had signed a 3-year CRADA with the U.S. Army Armament Research, Development, and Engineering
Center (ARDEC) at Picatinny, New Jersey, to continue to cooperatively test and evaluate the mPhase Smart NanoBattery, including new design
features functionally appropriate for DoD based systems requiring portable power sources. The army researchers are evaluating the prototypes
using the Army’s testing facilities at Picatinny Arsenal in New Jersey to determine applicability of the technology to gun fired
munitions and potentially to incorporate the technologies into research and development and other programs sponsored by Picatinny. The
Research Agreement is supported by the Fuze & Precision Armaments Technology Directorate. In order for significant further research
and development to be performed with respect to the Smart Nano Battery the Company will have to be successful in obtaining additional
congressional funding specifically designated for this type of battery. This CRADA was renewed on March 27, 2014 for an additional three-year
period by the Army. The Company is currently seeking to enter a new CRADA with the U.S. Army, subject to availability of funding.
Products
and Services
Since
its inception in 1996, the Company has been focused on the development of intellectual property involving high technology innovative
solutions and products with high-growth potential. The Company has previously served as an incubator for exploratory research and initial
development for products that are best characterized as having a high risk/high reward profile since they involve exploratory research
to achieve significant scientific breakthroughs from existing products that can have a substantial economic impact and benefit upon successful
commercialization. Since January 11, 20192020, the new management of the Company has shifted the focus to the rapid expansion of profit
centers centered around the rapid creation, either by acquisition or fast development of software platforms that will enable the Company
to generate revenue from artificial intelligence and machine learning technologies.
Competitive
Business Conditions
The
industry of artificial intelligence and machine learning software is highly competitive. Well capitalized companies such as Amazon, Google,
IBM and Microsoft are devoting significant resources and capital in developing customer products and solutions using this technology.
Such companies have far greater resources than the Company. The Company believes, however, that it has assembled a group in India of
highly qualified software and technology experts on a very cost-effective basis. The Company is also acquiring entities that have already
established customer relationships, revenues and market niches that will enable the Company to leverage off such capabilities, and where
appropriate, enhance its existing technology in the area of “Smart Surfaces” described below.
Artificial
Intelligence and Machine Learning Segment
Artificial
intelligence is the use of machines to do cognitive work such as problem solving, pattern matching and creating new patterns. Machine
learning is a subset of artificial intelligence which refers to training a machine as opposed to simply programming it. Artificial intelligence
has the potential to revolutionize nearly all aspects of business across sections and functions. Currently only a small percentage of
organizations have deployed artificial intelligence but this is changing quickly. There is a high correlation between organizations that
are far along in digitizing their information and those that are ready for products and solutions provided by artificial intelligence
and machine learning providers. The Company has acquired and is developing significant product capabilities in this area.
Battery
Segment
The
Company believes that the design and functionality of its lithium Smart NanoBattery make it unique to the portable electronics battery
market segment. To the best of our knowledge, there is no existing product that directly competes with the Smart NanoBattery in terms
of its combination of small size and reserve design. As a reserve battery, the Smart NanoBattery remains dormant until it is activated
on command. It does not self-discharge or die prior to its first activation, thereby offering extremely long shelf life prior to use
as either a primary or backup battery in a device. Shelf life is projected to be in excess of twenty years.
There
are numerous thin film batteries based on lithium metal, lithium ion and lithium polymer, as well as other chemistries, used in military
devices, portable electronics, RFID tags and wireless sensor networks, that are similar in size to the Smart NanoBattery, often referred
to as microbatteries. None of these designs is based on reserve battery architectures. Thin film batteries are manufactured by companies
including Cymbet Corporation, Front Edge Technology, Infinite Power Solutions, ITN Energy Systems, Johnson Research and Development Company,
KSW Microtec, Lithium Technology Corporation, MPower Solutions, Oak Ridge Micro-Energy, Power Paper, Solicore, VoltaFlex Corporation.
Large companies such as Energizer, Ultralife, Varta and Proctor & Gamble are also involved with developing thin film batteries. Thin
film battery markets are anticipated to grow substantially as the result of a wide expansion of portable devices in that time frame.
With 3.5 billion cell phone users and 67 billion RFID tags per year, it is expected that there will be substantial commercial demand
for thin film batteries.
Traditional
reserve batteries are distinct from the mPhase Smart NanoBattery in terms of size and activation mechanism. The market for reserve batteries
has largely been limited to the military for supplying power to munitions and other mission-critical electronic devices. The traditional
reserve battery tends to be larger and certain types are built by hand and contain mechanical parts to activate the battery. The Smart
NanoBattery relies on the phenomenon of electrowetting to initiate activation or a mechanical barrier that can be broken, in the case
of the breakable barrier design. Traditional reserve batteries for military applications have been supplied by companies such as EaglePicher,
Yardney and Storage Battery Systems, Inc. The Company believes that it may be able to significantly reduce the cost of its Smart Nanobattery
with the recent discovery of the potential of “printing” the battery on a form of graphite rather than traditional silicon
surface. The Company, through its working relationship with Stevens Institute, began in fiscal year 2012 to investigate the feasibility
of the use of graphite which is much stronger, flexible and inexpensive than traditional silicon.
Outsourcing
Research
and Development
The
Company has historically practiced an outsourcing model whereby it contracts with third party vendors to perform research and development
rather than performing the bulk of these functions internally. From February of 2004 through March of 2007, the Company engaged Lucent/Bell
Labs (now Nokia) to develop, using the science of nanotechnology, micro power cell arrays creating a structure for zinc batteries that
separated the chemicals or electrolytes prior to initial activation. This was done by suspending on nano grass or small spoke-like pieces
of silicon a liquid electrolyte taking advantage of a superhydrophobic effect that occurs as a result of the ability to manipulate materials
of a very small size or less than 1/50,000 the size of a human hair. The Company has, as a result of outsourcing, been able to have access
to facilities, equipment and research capabilities that the Company would not be able to develop on its own given the financial resources
and time that would be required to build or acquire such research capabilities. The Company has also been able to achieve key strategic
alliances with the U.S. Army to successfully test, under military combat conditions, its SmartBattery design, leading to further validation
of its path to product development under a Cooperative Research and Development Agreement (CRADA). In addition, the Company has formed
a relationship with Energy Storage Research Group, a center of excellence at Rutgers University, in New Jersey, that has enabled the
Company to expand its battery development from a zinc to a lithium battery capable of delivering significantly more power. During fiscal
years 2009 and 2010, the Company outsourced considerable foundry work for final development of the Smart NanoBattery to Silex, a Swedish
company.
During
the period from March of 2005 to April of 2007, the Company engaged the Bell Labs division of Lucent Technologies, Inc. to develop a
magnetometer or electronic sensor also using the science of nanotechnology. Although the Company has, in order to conserve financial
resources, currently suspended further development of its magnetometer product line, we believe that the intellectual property developed
from the research to date could be resumed to develop viable military and industrial products depending upon future financial resources
of the Company and future competitive market conditions.
Commencing
in fiscal year ended June 30, 2013, the Company has limited product development of its Smart NanoBattery in order to conserve resources.
The Company continues through the fiscal year ended June 30, 2021, to protect its intellectual property with respect to the Smart NanoBattery
through active management of its patent portfolio.
Patents
and Licenses
The
Company has filed and intends to file United States patents and/or copyright applications relating to some of our proposed products and
technologies, either with our collaborators, strategic partners or on our own. There can be no assurance however, that any of the patents
obtained will be adequate to protect our technologies or that we will have sufficient resources to enforce our patents.
Because
we may license our technology and products in foreign markets, we may also seek foreign patent protection for some specific patents.
With respect to foreign patents, the patent laws of other countries may differ significantly from those of the United States as to the
patentability of our products or technology. In addition, it is possible that competitors in both the United States and foreign countries,
many of which have substantially greater resources and have made substantial investments in competing technologies, may have applied
for, or may in the future apply for and obtain, patents, which will have an adverse impact on our ability to make and sell our products.
There can also be no assurance that competitors will not infringe on our patents or will not claim that we are infringing on their patents.
Defense and prosecution of patent suits, even if successful, are both costly and time consuming. An adverse outcome in the defense of
a patent suit could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties
or require us to cease our operations.
The
Company has intellectual property as follows:
Artificial
Intelligence and Machine Learning:
The
Company is evaluating various aspects of its artificial intelligence and machine learning technologies and will file for protective patents
and maintain existing patents as determined appropriate.
Nano
Technology, Micro Electrical Mechanical Systems (MEMS) and Battery Portfolio:
Various
aspects of the Company’s technology are protected by patents either owned directly by the Company or with respect to which the
Company has sub-licensing rights. The Company’s current battery related patent portfolio consists of ten issued or licensed patents,
of which one is jointly owned with Nokia Corporation (formerly Alcatel Lucent Technologies), and five are licensed from Nokia Corporation.
These cover such aspects of the technology as the ability to use electrowetting to create a moveable liquid lens, methodology and apparatus
for reducing friction between a fluid and a body, methodology for etching planar silicon substrates to develop a reserve battery device,
methodology and apparatus for controlling the flow resistance of a fluid on nanostructured or microstructured surfaces, methodology for
creating a structured membrane with controllable permeability, methodology for a nanostructured battery with end of life cells, and methodology
for making a multi-cell battery system with multiple chemistries in each individual cell of the battery pack. Some of these patents are
specific to the development of a battery device while others are more generalized. The Company has four patent applications that are
subject to reinstatement, of which three, the Company intends to submit for reinstatement.
Other
Patents
The
Company has obtained trademark protection for its mPower Emergency IlluminatorTM and mPower on CommandTM.
In
July of 2009, the Company filed for 3 new patents covering the unique design features of its manually-activated lithium reserve battery
and emergency flashlight products.
On
May 20, 2011, the Company announced that it had been granted a U.S. patent for multi-chemistry battery architecture.
On
February 10, 2012 the Company filed a U.S. provisional patent with the USPTO for a Non-Pump Enabled Drug Delivery System.
On
February 11, 2013 the provisional patent application was converted to a patent application entitled Drug Delivery System.
In
order to conserve financial resources, the Company did not file for patent protection on any additional technology or products during
the fiscal year ended June 30, 2021. As of the date hereof, the Company has rights under the following patents:
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Bypass
for telephone system splitter, Filed 3/18/2003 in United States, Patent Number 6,535,581
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Signal
splitter with test relays on auxiliary circuit board and system using same, filed 7/12/2005, Patent Number 6,917,683
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ALWA-001
Battery System, Filed 3/20/2008 in United States, Patent Number 8,021,773
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ALWA-004
Tunable Liquid Microlens with Lubrication Assisted Electrowetting, Filed 9/13/2001in United States, Patent Number 6,545,815
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ALWA-005
Method and Apparatus for Controlling Friction Between a Fluid and a Body, Filed 8/27/2003 in United States, Patent Number 7,156,032
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ALWA-006
Electrowetting Battery Having a Nanostructured Electrode Surface, Filed 11/18/2003 in United States, Patent Number 7,227,235
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ALWA-007
Method And Apparatus For Controlling The Flow Resistance Of A Fluid On Nanostructured Or Microstructured Surfaces, Filed 9/30/2003
in United States, Patent Number 8,124,423
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ALWA-009
Method And Apparatus For Controlling The Flow Resistance Of A Fluid On Nanostructured Or Structured Membrane with Controllable Permeability,
Filed 7/28/2006 in United States, Patent Number 7,695,550
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ALWA-010
End of Life Cycle, Nanostructured Battery, Filed 3/18/2004 in United States, Patent Number 7,618,746
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ALWA-014
Device for Fluid Spreading and Transport, Filed 1/25/2008 in United States, Patent Number 8,435,397
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ALWA-019
Modular Device, Filed 9/2/2009 in United States, Patent Number 8,344,543
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ALWA-034
Reserve Battery System, Filed 3/2/2010 in United States, Patent Number 8,372,531
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Controlling
access and accessing a traffic network in high density environment, Filed 12/7/2017,Patent Number GB2559469
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We
also rely on unpatented proprietary technology, and we can make no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to our unpatented technology.
Research
and Development
Artificial
Intelligence and Machine Learning
With
the acquisition of Alpha Predictions and expansion of its development team located in India, the Company is able to offer a multitude
of services through the use of data analysis. Our team uses its corporate and business level consulting expertise to support and enhance
the growth of promising enterprises. Our research team uses the holistic approach that encompasses multiple facets of a business and
has developed a unique approach to problem solving that is time tested. As consulting is multidisciplinary, our team is comprised not
only of data analysts but also financial analysts and domain experts allowing us to provide a highly sophisticated digital analysis capability
to our business clients. The Company is able to leverage its personnel and their expertise to develop new proprietary software platforms
for data analysis derived from its present experience and expertise gained in servicing its present customer base.
Smart
Surfaces
Our
Smart NanoBattery and power cell technology research and development was performed by the Bell Labs division of Alcatel/Lucent from February
of 2004 through March of 2007 at an aggregate cost of $3.8 million. The Company paid Bell Labs $300,000 covering the period from April
27, 2007 through July 30, 2007, at which time it determined that, in order to develop a lithium battery for higher density energy than
zinc, it required facilities capable of handling lithium battery research that Bell Labs does not have. The Company engaged a number
of small foundries during fiscal year ended June 30, 2008 for commercialization of its Smart NanoBattery at a cost of approximately $150,000.
In fiscal year ended June 30, 2009, the Company engaged Eagle Picher at a cost of $75,000 to design and engineer a prototype of its manually-activated
lithium reserve battery and Porsche Design studio at a cost of $79,123 for design of its emergency flashlight product. In addition, the
Company secured a Co-Branding Agreement with Porsche Design Studio for its emergency flashlight product. In fiscal year ended June 30,
2010, the Company paid $950,018 in connection with producing and bringing this product to market, and in fiscal year ended June 30, 2011,
the Company incurred $33,254 of expenses in connection with this product. During the fiscal year ended June 30, 2009, the Company engaged
Silex, a silicon foundry in Sweden, at a cost of $21,200 for further development of its Smart NanoBattery; payments to Silex for fiscal
year ended June 30, 2010 in connection with the Smart NanoBattery amounted to $396,780, and for fiscal year ended June 30, 2011 they
were $40,800.
During
fiscal years ended June 30, 2008, June 30, 2009, and June 30, 2010, the Company engaged in joint research with Rutgers University in
connection with a $750,000 STTR Grant from the United States Army for purposes of developing an emergency reserve battery to back-up
a computer memory application.
Employees
As
of October 1, 2021, the Company employs 20 full-time employees, two of whom are officers of the
Company and 13 consultants, seven of which provide technology platform development services, four that provide sales and marketing services,
one that provides HR services, and one that provides accounting services. The Company’s subsidiary in India employs a total of
16 software engineers and data analysis experts.
ITEM
1A. RISK FACTORS
An
investment in our securities involves significant risks. Before deciding to invest in our securities, you should carefully consider each
of the following risk factors and all of the other information set forth in this Annual Report on Form 10-K. Our business and results
of operations could be seriously harmed by any of the following risks. The risks set out below are not the only risks we face. Additional
risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results. If any of the following events occur, our business, financial condition and results
of operations could be materially adversely affected. In such case, the value and trading price of our common stock could decline, and
you may lose all or part of your investment.
Risks
Relating to Our Business
Global
or regional health pandemics or epidemics, including COVID-19, could negatively impact our business operations, financial performance
and results of operations.
Our
business and financial results could be negatively impacted by the recent outbreak of COVID-19 or other pandemics or epidemics. The severity,
magnitude and duration of the current COVID-19 pandemic is uncertain, rapidly changing and hard to predict. During 2020, COVID-19 has
significantly impacted economic activity and markets around the world, and it could negatively impact our business in numerous ways,
including but not limited to those outlined below:
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Purchasing
power of consumers may be reduced thereby affecting demand for our products and services;
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Decreased
demand for our products and services due to significant capital constraints as a result of COVID-19 and the macro-economic environment;
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Disruptions
or uncertainties related to the COVID-19 outbreak for a sustained period of time could result in delays or modifications to our strategic
plans and initiatives and hinder our ability to achieve our business objectives;
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Illness,
travel restrictions or workforce disruptions could negatively affect our business processes;
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Government
or regulatory responses to pandemics could negatively impact our business. Mandatory lockdowns or other restrictions could materially
adversely impact our operations and results; and
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The
COVID-19 outbreak has increased volatility and pricing in the capital markets and volatility is likely to continue which could have
a material adverse effect on our ability to obtain debt or equity financing to fund operations.
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These
and other impacts of the COVID-19 or other global or regional health pandemics or epidemics could have the effect of heightening many
of the other risks described in this “Risk Factors” section. We might not be able to predict or respond to all impacts on
a timely basis to prevent near- or long-term adverse impacts to our results. The ultimate impact of these disruptions also depends on
events beyond our knowledge or control, including the duration and severity of any outbreak and actions taken by parties other than us
to respond to them. Any of these disruptions could have a negative impact on our business operations, financial performance and results
of operations, which impact could be material.
We
have reported net operating losses for each of our fiscal years from our inception in 1996 through the present and may not be able to
operate profitability in the future.
We
have had net losses of approximately $226,000,000 since our inception in 1996 and cannot be certain when or if we will ever be profitable.
If we continue to incur losses as we have in the past, investors may not receive any return on their investment and may lose their entire
investment. Our prospects must be considered speculative in light of the risks, expenses and difficulties frequently encountered by companies
with new products in their early stages of development, particularly in light of the uncertainties relating to the new, competitive and
rapidly evolving markets in which we operate. To attempt to address these risks, we must, among other things, further develop our technologies,
products and services, successfully implement our research, development, marketing and commercialization strategies, respond to competitive
developments and attract, retain and motivate qualified personnel. A substantial risk is involved in investing in us because, as a company
we have fewer resources than an established company, and we may be more vulnerable operationally and financially to external factors
beyond our control.
We
generated net income of $1,666,011 and incurred a net loss of $14,093,567 for the years ended June 30, 2021 and 2020, respectively. If
we are unable to achieve profitability, we may be unable to continue our operations.
We
will require additional financing in the future to fund our operations which may cause dilution to our existing stockholders or restrict
our operations.
We
will need additional capital in the future to continue to execute our business plan. Therefore, we will be dependent upon additional
capital in the form of either debt or equity to continue our operations. At the present time, we do not have arrangements to raise all
of the needed additional capital, and we will need to identify potential investors and negotiate appropriate arrangements with them.
Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance
and investor sentiment. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the
ownership interests of our stockholders will be diluted, and the terms of such financings may include liquidation or other preferences,
anti-dilution rights, and other provisions that may adversely affect the rights of our stockholders, including rights, preferences and
privileges that are senior to those of our holders of common stock in the event of a liquidation. In addition, debt financing, if available,
could include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital
expenditures, or declaring dividends and may require us to grant security interests in our assets. If we are unable to raise additional
capital when required or on acceptable terms we may need to curtail or cease our operations.
Our
indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions.
Our
existing indebtedness may adversely affect our operations and limit our growth, and we may have difficulty repaying our debt when due.
If market or other economic conditions deteriorate, our ability to comply with covenants contained in our debt instruments may be impaired.
If we violate any of the restrictions or covenants set forth in our debt instruments, all or a significant portion of our indebtedness
may become immediately due and payable. Our inability to make payments on our indebtedness when due may have a material adverse effect
on our operations and financial condition.
We
may not be able to raise the required capital to conduct our operations and develop and commercialize our products.
We
require substantial additional capital resources in order to conduct our operations and develop and commercialize our products and run
our facilities. We will need significant additional funds or collaborative partners, or both, to finance the research and development
activities of our potential products. Accordingly, we are continuing to pursue additional sources of financing. Our future capital requirements
will depend upon many factors, including:
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The
continued progress and cost of our research and development programs,
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The
costs in preparing, filing, prosecuting, maintaining and enforcing patent claims,
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The
costs of developing sales, marketing and distribution channels and our ability to sell the products if developed,
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The
costs involved in establishing manufacturing capabilities for commercial quantities of our proposed products,
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Competing
technological and market developments,
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Market
acceptance of our proposed products, and
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The
costs for recruiting and retaining employees and consultants.
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Additional
financing through strategic collaborations, public or private equity financings or other financing sources may not be available on acceptable
terms, or at all. Our prior failure to be timely in our required periodic filings of quarterly and annual financial reports with the
SEC may significantly limit our ability to raise additional capital. Additional equity financing could result in significant dilution
to our shareholders. Further, if additional funds are obtained through arrangements with collaborative partners, these arrangements may
require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop and
commercialize on our own. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or
more of our programs or potential products, any of which could have a material adverse effect on our financial condition or business
prospects.
We
depend on one customer and the loss of this customer would have a material adverse effect on our business, financial condition and results
of operations.
At
June 30, 2021 and 2020, approximately 100% and 100%, respectively, of accounts receivable were concentrated with one customer located
outside the United States. For the years ended June 30, 2021 and 2020, approximately 100% and 100%, respectively, of revenue were concentrated
with the same customer. The loss of this customer, or a substantial decrease in demand by this customer for our products, would have
a material adverse effect on our business, results of operations and financial condition.
We
depend on one primary vendor and the loss of this vendor would have a material adverse effect on our business, financial condition and
results of operations.
At
June 30, 2021 and 2020, approximately 90% and 95%, respectively, of accounts payable were concentrated with one vendor located outside
the United States. For the years ended June 30, 2021 and 2020, approximately 100% and 100%, respectively, of cost of revenue were concentrated
with the same vendor. The loss of this vendor would have a material adverse effect on our business, results of operations and financial
condition.
We
operate in a highly competitive industry.
The
artificial intelligence and machine learning industry is intensely competitive and consolidation in this industry continues. We face
competition in the areas of brand recognition, price, convenience and service. A number of our competitors are larger than us and have
substantial financial, marketing and other resources as well as substantial operations. In addition, reduced barriers to entry are creating
new competition. Furthermore, in order to protect our existing market share or capture increased market share in this highly competitive
environment, we may be required to increase expenditures for advertising and continue to introduce and establish new products. Due to
inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about consumer acceptance,
increased expenditures may not prove successful in maintaining or enhancing our market share and could impact our operating results.
In addition, we may incur increased credit and other business risks because we operate in a highly competitive environment.
Our
nanotechnology competition includes both public and private organizations and collaborations among academic institutions and large companies,
most of which have significantly greater experience and financial resources than we do.
Private
and public academic and research institutions also compete with us in the research and development of nanotechnology products based on
micro-fluid dynamics. In the past several years, the nanotechnology industry has selectively entered into collaborations with both public
and private organizations to explore the development of new products evolving out of research in micro-fluid dynamics.
We
depend on certain third parties to assist us in the development of new products, and any failure of those parties to fulfill their obligations
could result in costs and delays and prevent us from successfully commercializing our products on a timely basis, if at all.
We
engage consultants and contract research organizations to help design, develop and manufacture our products. The consultants and contract
research organizations we engage provide us critical skills, resources and finished products for sale that we do not have within our
own company. As a result, we depend on these consultants and contract research and product supply organizations to deliver our existing
automotive products and to perform the necessary research and development to create new products. We may face delays in developing and
bringing new products to market if these parties do not perform their obligations in a timely or competent fashion or if we are forced
to change service providers.
We
depend on our collaborators to help us develop and test our proposed products, and our ability to develop and commercialize products
may be impaired or delayed if collaborations are unsuccessful.
Our
strategy for the development, testing and commercialization of certain of our proposed products requires that we enter into collaborations
with corporate partners, licensors, licensees and others. Some of these collaborators will be located in India and other countries outside
of the United States which pose additional legal and economic risks. We are dependent upon the subsequent success of these other parties
in performing their respective responsibilities and the continued cooperation of our partners. Under agreements with collaborators, we
may rely significantly on such collaborators to, among other things:
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Fund
research and development activities with us;
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Pay
us fees upon the achievement of milestones under STIR and SBIR programs; and
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Market
with us any commercial products that result from our collaborations.
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Our
collaborators may not cooperate with us or perform their obligations under our agreements with them. We cannot control the amount and
timing of our collaborators’ resources that will be devoted to our research and development activities related to our collaborative
agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to those being developed
in collaboration with us.
The
development and commercialization of potential products will be delayed if collaborators fail to conduct these activities in a timely
manner, or at all.
If
various outside vendors and collaborators do not achieve milestones set forth in our agreements, or if our collaborators breach or terminate
their collaborative agreements with us, our business may be materially harmed.
Our
reliance on the activities of our non-employee consultants, research institutions, and scientific contractors, whose activities are not
wholly within our control, may lead to delays in development of our proposed products.
We
rely extensively upon and have relationships with outside consultants and companies having specialized skills to conduct research. These
consultants are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit
their availability to us. We have limited control over the activities of these consultants and, except as otherwise required by our collaboration
and consulting agreements to the extent they exist, can expect only limited amounts of their time to be dedicated to our activities.
These research facilities may have commitments to other commercial and non-commercial entities. We have limited control over the operations
of these collaborators and can expect only limited amounts of time to be dedicated to our research and product development goals.
We
are dependent upon key personnel whose loss may adversely impact our business.
Due
to the specialized nature of our business, we are highly dependent on our ability to identify, hire, train and retain highly qualified
scientific and technical personnel for the research and development activities we conduct or sponsor. The loss of one or more certain
key executive officers, or scientists, would be significantly detrimental to us. In addition, recruiting and retaining qualified scientific
personnel to perform research and development work is critical to our success. Our anticipated growth and expansion into areas and activities
requiring additional expertise, such as new applications for “smart surfaces”, manufacturing and marketing, will require
the addition of new management personnel and the development of additional expertise by existing management personnel. Despite the current
economic conditions and job market there is significant competition for qualified personnel in the areas of our present and planned activities,
and there can be no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the development
of our business. Any difficulties in obtaining and retaining qualified personnel could have a material adverse effect on our results
of operation or financial condition.
We
may fail to realize all of the anticipated benefits of any entities which we acquire, such benefits may take longer to realize than expected
or we may encounter significant difficulties integrating acquired businesses into our operations. If our acquisitions do not achieve
their intended benefits, our business, financial condition, and results of operations could be materially and adversely affected.
We
believe that businesses we acquire will result in certain benefits, including certain cost synergies and operational efficiencies; however,
to realize these anticipated benefits, the businesses we acquire must be successfully combined with our business. The combination of
independent businesses is a complex, costly, and time-consuming process that will require significant management attention and resources.
The integration process may disrupt the businesses and, if implemented ineffectively, would limit the expected benefits of these acquisitions
to us. The failure to meet the challenges involved in integrating acquired businesses and realizing anticipated benefits could cause
an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.
The
overall integration of acquired businesses may result in material unanticipated problems, expenses, liabilities, competitive responses,
loss of customer and other business relationships, and diversion of management’s attention. The difficulties of combining the operations
of companies include, among others:
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the
diversion of management’s attention to integration matters;
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difficulties
in achieving anticipated cost savings, synergies, business opportunities, and growth prospects from the combinations;
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difficulties
in the integration of operations and systems; and
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conforming
standards, controls, procedures, accounting and other policies, business cultures, and compensation
structures between the two companies.
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Many
of these factors are outside of our control and any one of these factors could result in, among other things, increased costs and decreases
in the amount of expected revenues, which could materially adversely impact our business, financial condition, and results of operations.
In addition, even if we are able to successfully integrate acquired businesses, the full benefits, including the synergies, cost savings,
revenue growth, or other benefits that are expected, may not be achieved within the anticipated time frame, or at all. All of these factors
could decrease or delay the expected accretive effect of the acquisitions, and negatively impact our business, operating results, and
financial condition.
Our
insurance policies are limited in scope and coverage and may potentially expose us to unrecoverable risks.
We
do not carry director and officer insurance and have limited commercial insurance policies. Any significant insurance claims would have
a material adverse effect on our business, financial condition and results of operations. Insurance availability, coverage terms and
pricing continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage for insurable risks that we identify,
however, we may, due to limited financial resources, be unable to correctly cover those risks that we can anticipate or quantify as insurable
risks. We may not be able to obtain appropriate insurance coverage, and insurers may not respond as we intend to cover insurable events
that may occur. We have observed rapidly changing conditions in the insurance markets relating to nearly all areas of traditional corporate
insurance. Such conditions have resulted in higher premium costs, higher policy deductibles, and lower coverage limits. For some risks,
we may not have or maintain insurance coverage because of cost or availability.
We
have no product liability insurance, which may leave us vulnerable to future claims we will be unable to satisfy.
The
testing, manufacturing, marketing and sale of consumer products entail an inherent risk of product liability claims, and we cannot assure
you that substantial product liability claims will not be asserted against us. We have no product liability insurance. In the event we
are forced to expend significant funds on defending product liability actions, and in the event those funds come from operating capital,
we will be required to reduce our business activities, which could lead to significant losses.
We
cannot assure you that adequate insurance coverage will be available in the future on acceptable terms, if at all, or that, if available,
we will be able to maintain any such insurance at sufficient levels of coverage or that any such insurance will provide adequate protection
against potential liabilities. Whether or not a product liability insurance policy is obtained or maintained in the future, any product
liability claim could harm our business or financial condition.
Certain
aspects of our technology are not protectable by patent or copyright.
Certain
parts of our know-how and technology are not patentable. To protect our proprietary position in such know-how and technology, we require
all employees, consultants, advisors and collaborators with access to our technology to enter into confidentiality and invention ownership
agreements with us. We cannot ensure that these agreements will provide meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, competitors
who independently develop substantially equivalent technology may harm our business.
We
may not be able to adequately defend against piracy of intellectual property in foreign jurisdictions.
Considerable
research in the areas of micro fluid dynamics is being performed in countries outside of the United States, and a number of potential
competitors are located in these countries. The laws protecting intellectual property in some of those countries may not provide adequate
protection to prevent our competitors from misappropriating our intellectual property. Several of these potential competitors may be
further along in the process of product development and also operate large, company-funded research and development programs. As a result,
our competitors may develop more competitive or affordable products, or achieve earlier patent protection or product commercialization
than we are able to achieve. Competitive products may render any products or product candidates that we develop obsolete.
We
may not be able to protect our proprietary technology, which could harm our ability to operate profitably.
Patent
and trade secret protection is critical for the new technologies we utilize, artificial intelligence, machine learning and nanotechnology
and microfluidics, as well as the products and processes derived through them. Our success will depend, to a substantial degree, on our
ability to obtain and enforce patent protection for our products, preserve any trade secrets and operate without infringing the proprietary
rights of others. We cannot assure you that:
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we
will succeed in obtaining any patents in a timely manner or at all, or that the breadth or degree of protection of any such patents
will protect our interests;
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the
use of our technology will not infringe on the proprietary rights of others;
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patent
applications relating to our potential products or technologies will result in the issuance of any patents or that, if issued, such
patents will afford adequate protection to us or not be challenged, invalidated or infringed;
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patents
will not issue to other parties, which may be infringed by our potential products or technologies; and
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we
will continue to have the financial resources necessary to prosecute our existing patent applications, pay maintenance fees on patents
and patent applications, or file patent applications on new inventions.
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The
fields in which we operate have been characterized by significant efforts by competitors to establish dominant or blocking patent rights
to gain a competitive advantage, and by considerable differences of opinion as to the value and legal legitimacy of competitors’
purported patent rights and the technologies they actually utilize in their businesses.
We
may incur substantial expenditures in the future in order to protect our intellectual property.
We
believe that our intellectual property with respect to our Smart NanoBattery, our proprietary rights with respect to the Company’s
permeable membrane design consisting of both micro and nano scale silicon features that are coated with a monolayer chemistry used to
repel liquids, and our recent entry into the area of artificial intelligence and machine learning are critical to our future success.
The Company’s current battery related patent portfolio consists of Smart Surfaces technologies. Our pending patent applications
may never be granted for various reasons, including the existence of conflicting patents or defects in our applications. Even if additional
U.S. patents are ultimately granted, there are significant risks regarding enforcement of patents in international markets. There are
many patents being filed as the science of nanotechnology develops and the Company has limited financial resources compared to large,
well established companies to bring patent litigation based upon claims of patent infringement.
In
the event litigation over patent matters with one or more of our competitors arise, we could incur substantial litigation or interference
costs in defending ourselves against suits brought against us or in suits in which we may assert our patents against others. If the outcome
of any such litigation is unfavorable, our business could be materially adversely affected. To determine the priority of inventions,
we may also have to participate in interference proceedings declared by the United States Patent and Trademark Office, which could result
in substantial cost to us. Without additional capital, we may not have the resources to adequately defend or pursue this litigation.
Patents
obtained by other persons may result in infringement claims against us that are costly to defend and which may limit our ability to use
the disputed technologies and prevent us from pursuing research and development or commercialization of potential products.
If
third party patents or patent applications contain claims infringed by either our technology or other technology required to make and
use our potential products and such claims are ultimately determined to be valid, there can be no assurance that we would be able to
obtain licenses to these patents at a reasonable cost, if at all, or be able to develop or obtain alternative technology. If we are unable
to obtain such licenses at a reasonable cost, we may not be able to develop some products commercially. We may be required to defend
ourselves in court against allegations of infringement of third-party patents. Patent litigation is very expensive and could consume
substantial resources and create significant uncertainties. Any adverse outcome in such a suit could subject us to significant liabilities
to third parties, require disputed rights to be licensed from third parties, or require us to cease using such technology.
Our
current “smart surface technology” is at an early stage of development and we may not develop products that can be commercialized.
Our
smart surface technology has derived very limited revenue from a Phase I Army Grant of approximately $100,000 and a Phase II Army Grant
of approximately $750,000 with respect to our Smart NanoBattery product from inception of development in February 2004 through the date
hereof. Other material revenue was derived from our series of battery “Jump Starters” in the fiscal years ended 2014 and
2015; products that the Company discontinued beginning in April 2016 owing to contracting margins and increased competition.
Because
of the numerous risks and uncertainties associated with our product development and commercialization efforts, we are unable to predict
the extent of our future losses or when or if we will become profitable, which, in turn, would result in a loss of investment.
Our
failure to continue successful commercialization of our new products in the fields of machine learning and artificial intelligence or
successfully commercialize our Smart Nano Battery or to become and remain profitable could depress the market price of our Common Stock
and impair our ability to raise capital, expand our business, diversify our product offerings and continue our operations.
Forces
outside our control which cannot be predicted, including, but not limited to, general economic conditions and other such forces which
include the success of our research and field testing, the availability of collaborative partners to finance our work in pursuing applications
of artificial intelligence, machine learning and “smart surfaces” or other developments in the field which, due to efficiencies
or technological breakthroughs may render one or more areas of commercialization more attractive, obsolete or competitively unattractive.
It is possible that one or more areas of commercialization will not be pursued at all if a collaborative partner or entity willing to
fund research and development cannot be located. Our decisions regarding the ultimate products and/or services we pursue could have a
significant adverse effect on our ability to earn revenue if we misinterpret trends, underestimate development costs and/or pursue wrong
products or services. Any of these factors either alone or in concert could materially harm our ability to earn revenues or could result
in a loss of any investment in us.
Our
products may not be accepted in the marketplace.
The
degree of market acceptance of our products will depend on many factors, including:
|
|
●
|
Our
ability to manufacture or obtain from third party manufacturers sufficient quantities of our product candidates with acceptable quality
and at an acceptable cost to meet demand; and
|
|
|
●
|
Marketing
and distribution support for our products.
|
We
cannot predict or guarantee that either commercial or military entities, in general, will accept or utilize any of our product candidates.
Failure to achieve market acceptance would limit our ability to generate revenue and would have a material adverse effect on our business.
In addition, if any of our product candidates achieve market acceptance, we may not be able to maintain that market acceptance over time
if competing products or technologies are introduced that are received more favorably or are more cost-effective.
If
we are unable to keep up with rapid technological changes in our field or compete effectively, we will be unable to operate profitably.
We
are engaged in activities in the artificial intelligence, machine learning, nanotechnology and microfluidics field, which is characterized
by extensive research efforts and rapid technological progress. If we fail to anticipate or respond adequately to technological developments,
our ability to operate profitably could suffer. We cannot assure you that research and discoveries by other companies will not render
our technologies or potential products or services uneconomical or result in products superior to those we develop or that any technologies,
products or services we develop will be preferred to any existing or newly-developed technologies, products or services.
Risks
Relating to Our Securities
If
we fail to comply with the rules under the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”) related to internal
controls and procedures in the future, or, if we discover material weaknesses and other deficiencies in our internal controls over financial
reporting, our stock price could decline significantly and raising capital could be more difficult.
Section
404 of Sarbanes-Oxley requires annual management assessments of the effectiveness of our internal controls over financial reporting.
If we fail to comply with the rules under Sarbanes-Oxley related to disclosure controls and procedures in the future, or, if we discover
material weaknesses and other deficiencies in our internal controls over financial reporting, our stock price could decline significantly
and raising capital could be more difficult. If material weaknesses or significant deficiencies are discovered or if we otherwise fail
to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis
that we have effective internal controls over financial reporting in accordance with Section 404 of Sarbanes-Oxley. Moreover, effective
internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If
we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and the trading price of our common stock could drop significantly.
Our
common stock is subject to the “penny stock” rules of the SEC and the trading market in the securities is limited, which
makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.
Rule
15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s
account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction,
setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to
the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination;
and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more
difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions
payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies
available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the limited market in penny stocks.
We
have never paid cash dividends and have no plans to pay cash dividends in the future.
Holders
of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid
no cash dividends on our capital stock and we do not expect to pay cash dividends in the foreseeable future. We intend to retain future
earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our capital stock may have will
be in the form of appreciation, if any, in the market value of their shares of common stock.
If
we fail to remain current in our reporting requirements, we could be removed from the OTCQB which would limit the ability of broker-dealers
to sell our securities and the ability of stockholders to sell their securities in the secondary market.
As
a company listed on the OTCQB and subject to the reporting requirements of the Exchange Act, we must be current with our filings pursuant
to Section 13 or 15(d) of the Exchange Act in order to maintain price quotation privileges on the OTCQB. If we fail to remain current
in our reporting requirements, we could be removed from the OTCQB. As a result, the market liquidity of our securities could be severely
adversely affected by limiting the ability of broker-dealers to trade our securities and the ability of stockholders to sell their securities
in the secondary market.
Our
common stock could be subject to extreme volatility.
The
trading price of our common stock may be affected by a number of factors, including events described in the risk factors set forth in
this Annual Report and in our other reports filed with the SEC from time to time, as well as our operating results, financial condition
and other events or factors. In addition to the uncertainties relating to future operating performance and the profitability of operations,
factors such as variations in interim financial results or various, and unpredictable, factors, many of which are beyond our control,
may have a negative effect on the market price of our common stock. In recent years, broad stock market indices, in general, and smaller
capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide
fluctuations in the market price of our common stock. In addition, securities markets have, from time to time, experienced significant
price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may
have a material adverse effect the market price of our common stock.
Financial
reporting obligations of being a public company in the United States are expensive and time-consuming, and our management will be required
to devote substantial time to compliance matters.
As
a publicly traded company we incur significant legal, accounting and other expenses. The obligations of being a public company in the
United States require significant expenditures and places significant demands on our management and other personnel, including costs
resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance
practices, including those under the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules
require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial
reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement, monitor
and maintain compliance with. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply
with all of these requirements and to keep pace with new regulations, otherwise we may fall out of compliance and risk becoming subject
to litigation or being delisted from the OTCQB, among other potential problems.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES
Our
headquarters are located at 9841 Washingtonian Boulevard, Suite 200, Gaithersburg, MD 20878. The lease for this office, which presently
is month to month, is charged at a monthly cost of $1,600 ($19,200 annually).
ITEM
3. LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. Litigation
is subject to inherent uncertainties, and an adverse result in matters may arise from time to time that may harm our business. As of
the date of this Annual Report on Form 10-K, except as set forth herein, management believes that there are no claims against us, which
it believes will result in a material adverse effect on our business or financial condition.
Effective
December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement
with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common
stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company was required to
pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 which was due and
payable in March of 2020. The Company made all required payments with the exception of the final payment of $195,000 which was due and
payable in March of 2020. On August 17, 2020, the Company entered into a second amendment (the “Second Amendment”) to the
Judgement Settlement Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the “Note”)
to repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on August 17, 2021, bears interest at
a rate of 10% per annum, requires certain monthly minimum cash payments as specified in the Note, and is convertible into shares of the
Company’s common stock, par value $0.01 per share, at a conversion price as specified in the Note. The Note may be prepaid by the
Company at any time prior to maturity without penalty. The Company satisfied the initial cash payment as specified in the Note. On April
13, 2021, the Company entered into a third amendment (the “Third Amendment”) to the Judgement Settlement Agreement, whereby
the Company issued a convertible promissory note in the principal amount of $300,000 (the “New Note”) to replace the Note
and repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on April 13, 2022, bears interest at
a rate of 10% per annum, requires certain monthly minimum payments in cash or the Company’s common stock as specified in the New
Note, and is convertible into shares of the Company’s common stock, par value $0.01 per share, at a conversion price as specified
in the New Note. The New Note may be prepaid by the Company at any time prior to maturity without penalty. On April 16, 2021, the Company
paid $235,000 to satisfy, pay in full, and extinguish the New Note and the Judgement Settlement Agreement, which resulted in a gain on
debt settlement of $549,026 during the year ended June 30, 2021.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
1: ORGANIZATION AND NATURE OF BUSINESS
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.”
We
were incorporated in the state of New Jersey during 1979 under the name Tecma Laboratory, Inc. During 1987, we changed our name to Tecma
Laboratories, Inc. As Tecma Laboratories, Inc., we were primarily engaged in the research, development and exploration of products in
the skin care field. On February 17, 1997, we acquired Lightpaths, Inc., a Delaware corporation, which was engaged in the development
of telecommunications products incorporating DSL technology, and we changed our name to Lightpaths TP Technologies, Inc.
On
May 5, 1997, we completed a reverse merger with Lightpaths TP Technologies, Inc. and thereafter changed our name to mPhase Technologies,
Inc. on June 2, 1997.
From
inception through June 30, 2010, we focused much of our efforts in the commercial deployment of our TV+ products for delivery of broadcast
IPTV, and DSL component products which include POTS splitters. Beginning in 2004, we added a new line of power cell batteries and electronic
sensors (magnetometers) being developed through the use of nano-technology. As of June 30, 2010, we discontinued our TV+ line of products
as well as our electronic sensor products.
Beginning
June 30, 2010, we shifted our primary business focus to the development of innovative power cells and related products through the science
of microfluidics, microelectromechanical systems (MEMS) and nano-technology. Using these disciplines, we developed a battery that has
a significantly longer shelf life prior to activation than conventional batteries. In addition, such battery product, unlike conventional
batteries, is capable of disposal after use without harm to the environment.
On
January 11, 2019, we underwent a major change in management and control. New management is positioning us to be a technology leader in
artificial intelligence and machine learning while enabling a more rapid commercial development of our patent portfolio and other intellectual
property. We believe there are significant opportunities to embed artificial intelligence and machine learning into business operations,
platform architectures, business services, and customer experiences, whereby our goal is to generate significant revenue from our artificial
intelligence and machine learning technologies.
On
February 15, 2019, we 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, we 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 our international operations and as expected, has driven revenue growth and innovation.
On
May 11, 2020, we 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
1: ORGANIZATION AND NATURE OF BUSINESS (continued)
During 2021, we announced that we would be adding
5G and EV charging to our consumer engagement platform as part of a major strategic initiative to monetize additional points of contact
during consumer travel and travel planning. As of July 2021, we were actively planning pilot programs in 5G and EV charging, as part
of a larger strategy to build an AI-driven consumer ecosystem. By late-2021, we plan to transition into a “green” consumer
company, serving as an important bridge between consumers, retailers, and service providers.
We 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. We are currently building a connected ecosystem of EV charging, 5G internet connectivity 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. We also
have data driven business units generating recurring revenue outside of our consumer ecosystem, in addition to legacy nanobattery technology
and a related patent portfolio that are slated for future development. We plan to expand into other markets, both in the United States
and globally, where we believe our technology and services will provide a distinct competitive advantage over our competition.
Concurrently,
we continue to pursue strategic alternatives to best monetize our patent portfolio, including partnering to exploit opportunities for
our drug delivery system. We are 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 our smart nano-battery
applications.
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 this 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.
NOTE
2: GOING CONCERN
The
accompanying 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 $1,666,011
and incurred a net loss of $14,093,567 and has used cash in operating activities of $1,520,703 and $1,344,033 for the years ended
June 30, 2021 and 2020, respectively. At June 30, 2021, the Company had a working capital surplus of $9,755,907, and an accumulated deficit
of $226,061,409. 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 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 5G and 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Consolidation and Presentation
The
consolidated financial statements for the years ended June 30, 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.
mPower
Technologies, Inc. is a New Jersey corporation and a wholly-owned consumer products subsidiary of mPhase Technologies, Inc. As this subsidiary
had its last significant sale of Jump products during the first quarter of fiscal 2017, this product line is reflected as discontinued
operations within these consolidated financial statements.
Reclassifications
Certain
reclassifications of prior year amounts have been made to enhance comparability with the current year’s consolidated financial
statements, including, but not limited to, presentation of certain items within the consolidated statements of operations and comprehensive
loss, consolidated statements of cash flows, and certain notes to the 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.
The
exchange rates used to translate amounts in INR (beginning March 19, 2019) and GBP (beginning May 11, 2020) into USD for the purposes
of preparing the consolidated financial statements were as follows:
Balance
sheet:
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
Period-end
INR: USD exchange rate
|
|
$
|
0.01349
|
|
|
$
|
0.01329
|
|
|
Period-end
GBP: USD exchange rate
|
|
$
|
1.38510
|
|
|
$
|
1.23244
|
|
Income
statement:
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
Average
Annual INR: USD exchange rate
|
|
$
|
0.01353
|
|
|
$
|
0.01386
|
|
|
Average
Annual GBP: USD exchange rate
|
|
$
|
1.32459
|
|
|
$
|
1.23680
|
|
Translation
gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency
are translated, as the case may be, at the rate on the date of the transaction and included in the results of operations as incurred.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“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 consolidated financial statements and reported amounts of revenues
and expenses during 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.
Segment
Reporting
Although
the Company has a number of operating divisions, separate segment data has not been presented, as they meet the criteria for aggregation
as permitted by ASC Topic 280, Segment Reporting.
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 maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of customers to make required payments.
Revenue
Risk
Agreements
which potentially subject the Company to concentrations of revenue risk consist principally of one customer agreement. For the years
ended June 30, 2021 and 2020, this one customer accounted for approximately 100% and 100% of our total revenue, respectively. At June
30, 2021 and 2020, this one customer accounted for approximately 100% and 100% of our total accounts receivable, respectively.
Supplier
Risk
Agreements
which potentially subject the Company to concentrations of supplier risk consist principally of one supplier agreement. For the years
ended June 30, 2021 and 2020, this one supplier accounted for approximately 100% and 100% of our total cost of revenue, respectively.
At June 30, 2021 and 2020, this one supplier accounted for approximately 90% and 95% of our total accounts payable, respectively.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 June 30, 2021 or 2020. 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 June 30, 2021, the Company’s cash balance at one financial institution exceeded the FDIC limit. At June 30, 2020, the Company’s
cash balances did not exceed 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 five 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 five tri-party settlement and offset
agreements has totaled $41,250,000. At June 30, 2021 and 2020, the Company determined there was no requirement for an allowance for doubtful
accounts.
Property
and Equipment
All
expenditures on the acquisition for property and equipment are recorded at cost and capitalized as incurred, provided the asset benefits
the Company for a period of more than one year. Expenditures on routine repairs and maintenance of property and equipment are charged
directly to operating expense. The property and equipment is depreciated based upon its estimated useful life after being placed in service.
The estimated useful lives range from 3 to 7 years based upon asset class. When an asset is retired, sold or impaired, the resulting
gain or loss is reflected in earnings. The Company incurred depreciation expense of $22,760 and $6,020 for the year ended June 30, 2021
and 2020, respectively.
Impairment
of Long-Lived Assets
In
accordance with Accounting Standards Codification (“ASC”) 360-10, “Property, Plant, and Equipment”, the Company
periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash
flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. For the years ended June 30, 2021 and 2020, the Company did not impair any long-lived assets.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2021, we performed our annual evaluation of goodwill impairment and determined
that the estimated fair value of our reporting unit exceeded its carrying value.
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 June
30, 2021, and 2020, the book value of patents and licenses of $214,383, has been fully amortized and no amortization expense was recorded
for the years ended June 30, 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
June 30, 2021, the book value of purchased and developed technology software of $3,759,021, included three technology platforms, a machine
learning platform and two artificial intelligence platforms. For the years ended June 30, 2021 and 2020, the Company incurred amortization
expense of $902,277 and $923,904, 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
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. At June 30, 2020, the Company had a Level 3 financial instrument related to its derivative liability. At
June 30, 2021, the Company did not have a derivative liability.
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 7).
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 7).
A
contract asset is recognized for incremental costs to obtain a customer contract that are recoverable, otherwise such incremental costs
are expensed as incurred.
Cost
of Revenue
Cost
of revenue represents the cost of the artificial intelligence and machine learning focused technology products and related services sold
during the periods presented.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
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.
Restricted
stock awards are granted at the discretion of the compensation committee of the board of directors of the Company (the “Board of
Directors”). These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods
(vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of the Company’s
common stock on the grant date.
The
Company estimates the fair value of stock options and warrants by using the Black-Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock
volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected
forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s common stock over the expected
term of the option. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate
term.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective
assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s
best estimates, which involve inherent uncertainties and the application of management’s judgment. The Company is required to estimate
the expected forfeiture rate and recognize expense only for those shares expected to vest.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505–50, “Equity Based
Payments to Non–Employees.” The Company determines the fair value of the stock–based payment as either the fair value
of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable. If the fair
value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier
of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the
date at which the counterparty’s performance is complete.
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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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”). 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. At June 30, 2021 and 2020, the Company had a full valuation allowance against its deferred tax assets.
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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 are not included if the result would be anti-dilutive, such as when a net loss is reported.
For the year ended June 30, 2021, as we incurred net income for the period, no dilutive shares related to the assumed conversion of the
Company’s convertible promissory notes or assumed exercise of the Company’s outstanding warrants were included in the diluted
EPS calculation, as the conversion prices of the convertible promissory notes and the exercise prices of the outstanding warrants were
less than the average market price of the Company’s common stock for the year ended June 30, 2021. At June 30, 2021, there were
outstanding warrants to purchase up to 25,718,971 shares of the Company’s common stock, notes payable with convertible features
that if converted, would total 25,972,553 shares of the Company’s common stock, and 281,734 shares of the Company’s common
stock to be issued pursuant to vendor services provided to the Company. At June 30, 2020, there were outstanding warrants to purchase
up to 37,390,452 shares of the Company’s common stock, notes payable with convertible features that if converted, would total 2,529,007
shares of the Company’s common stock, 2,666,666 shares of the Company’s common stock to be issued in conjunction with the
CloseComms acquisition, and 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 Chief Financial Officer.
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.
Recently
Adopted Accounting Standards
Effective
July 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The standard modifies the disclosure
requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concept Statement, including
the consideration of costs and benefits. The Company determined the adoption of ASU 2018-13 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.
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 consolidated financial statements.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
4: PROPERTY AND EQUIPMENT
At
June 30, 2021 and 2020, the Company’s property and equipment consist of the following:
|
|
|
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Computer
equipment
|
|
$
|
142,343
|
|
|
$
|
135,360
|
|
|
Research
and development equipment
|
|
|
48,383
|
|
|
|
48,383
|
|
|
Furniture
and fixtures
|
|
|
52,743
|
|
|
|
52,025
|
|
|
Property
and equipment, at cost
|
|
|
243,469
|
|
|
|
235,768
|
|
|
Less:
accumulated depreciation
|
|
|
(226,951
|
)
|
|
|
(203,099
|
)
|
|
Property
and equipment, net
|
|
$
|
16,518
|
|
|
$
|
32,669
|
|
The
Company recorded $23,852 and $6,020 of depreciation expense for the years ended June 30, 2021 and 2020, respectively. There was no property
and equipment impairments recorded for the years ended June 30, 2021 and 2020.
NOTE
5: OTHER ACQUISITIONS
On
May 11, 2020, the Company entered into an Asset Purchase Agreement to acquire all assets owned, used or held in connection with the business,
other than excluded assets and assumed certain liabilities of CloseComms Limited (“CloseComms”), in exchange for 2,666,666
shares of the Company’s restricted common stock valued at $955,466. The most substantial acquired asset was 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. Other acquired assets included cash and
computer and office equipment, while assumed liabilities included certain compensation related liabilities attributed to engaging the
operational team on a consulting basis for a minimum of one (1) year. At June 30, 2021, the CloseComms technology platform has not been
placed in service, but is expected to be during fiscal year 2022.
Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the operations of CloseComms and the related agreements to determine if the Company
acquired a business or acquired assets. The gross assets include the intellectual property (the patented, software application platform
- determined to be a single intangible asset), cash, and computer and office equipment. The Company concluded that substantially all
of the fair values of the gross assets acquired is not concentrated in a single identifiable asset or group of similar identifiable assets.
The
Company considered the criteria in 805-10-55 to determine whether the set includes both inputs and a substantive process that together
significantly contribute to the ability to create outputs. The Company determined the assets acquired and liabilities assumed is not
a business because: 1) the Company did not acquire a workforce that is critical to generating outputs as the CloseComms workforce was
not acquired, and 2) there were no acquired critical processes, including any critical processes to generate revenue. Accordingly, the
transaction was not considered a business.
The
relative fair value of the assets acquired and liabilities assumed, were based on management’s estimates of the fair values on
May 11, 2020. The following table summarizes the consideration paid and based upon the purchase price allocation, the estimated relative
fair value of the assets acquired and liabilities assumed at the acquisition date:
|
Consideration
|
|
|
|
|
2,666,666
shares of mPhase Technologies, Inc. common stock to be issued valued at $0.3583 per share
|
|
$
|
955,466
|
|
|
Fair
value of total consideration transferred
|
|
|
955,466
|
|
|
|
|
|
|
|
|
Recognized
amounts of identifiable assets acquired and liabilities assumed
|
|
|
|
|
|
Cash
|
|
|
70,000
|
|
|
Property
and equipment
|
|
|
35,956
|
|
|
Intangible
asset – purchased software
|
|
|
954,918
|
|
|
Accounts
payable
|
|
|
(2,667
|
)
|
|
Other
current liabilities
|
|
|
(102,741
|
)
|
|
Total
acquired net assets
|
|
$
|
955,466
|
|
All
assets have been recorded at fair value for both book and tax purposes, and therefore no deferred taxes have been recorded.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
6: INTANGIBLE ASSET – PURCHASED SOFTWARE, NET
Intangible
asset – Purchased Software, net, is comprised of the following at:
|
|
|
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Purchased
software
|
|
$
|
3,905,228
|
|
|
$
|
3,759,021
|
|
|
Less:
accumulated amortization
|
|
|
(1,826,181
|
)
|
|
|
(923,904
|
)
|
|
Purchased
software, net
|
|
$
|
2,079,047
|
|
|
$
|
2,835,117
|
|
Intangible
asset – Purchased Software consists of the following three developed software technologies:
|
Alpha
Predictions purchased software
|
|
$
|
899,362
|
|
|
Travel
Buddhi purchased software
|
|
|
114,785
|
|
|
CloseComms
purchased software
|
|
|
1,064,900
|
|
|
Total
purchased software
|
|
$
|
2,079,047
|
|
The
Alpha Predictions and Travel Buddhi developed software were acquired during the fiscal year ended June 30, 2019. The CloseComms developed
software was acquired as further described in Note 5. At June 30, 2021, the Travel Buddhi and CloseComms technology platforms have not
been placed in service, but are expected to be during fiscal year 2022.
Developed
software costs are amortized on a straight-line basis over three years. Amortization of developed software costs is included in depreciation
and amortization within the consolidated statements of operations.
The
Company recorded $902,277 and $923,904 of amortization expense for the years ended June 30, 2021 and 2020, respectively.
Future
amortization expense related to the existing net carrying amount of developed software at June 30, 2021 is expected to be as follows:
|
Fiscal
year 2022
|
|
$
|
932,239
|
|
|
Fiscal
year 2023
|
|
|
605,370
|
|
|
Fiscal
year 2024
|
|
|
425,498
|
|
|
Fiscal
year 2025
|
|
|
115,490
|
|
|
|
|
$
|
2,079,047
|
|
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
7: 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 Year Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Categories:
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
24,720,000
|
|
|
$
|
24,720,000
|
|
|
Service and support
|
|
|
3,656,274
|
|
|
|
3,515,438
|
|
|
Application development and implementation
|
|
|
2,296,040
|
|
|
|
2,040,984
|
|
|
Total revenue
|
|
$
|
30,672,314
|
|
|
$
|
30,276,422
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Geographic Regions:
|
|
|
|
|
|
|
|
|
|
India
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
The
following table presents our long-lived assets by primary geographic regions within our single reporting segment:
|
|
|
For
the Year Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
India
|
|
$
|
1,022,030
|
|
|
$
|
1,901,040
|
|
|
United
Kingdom
|
|
|
1,080,849
|
|
|
|
982,052
|
|
|
Total
long-lived assets
|
|
$
|
2,102,879
|
|
|
$
|
2,883,092
|
|
For
the years ended June 30, 2021 and 2020, the Company was subject to revenue concentration risk as one customer accounted for approximately
100% and 100% of its total revenue, respectively.
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 years. All of these fees are allocated to the single performance obligation of providing
software to the customer.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
7: 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 June 30, 2021 and 2020 contract liabilities totaled $350,689 and $219,652, respectively.
The
following table presents a reconciliation of the contract liabilities from June 30, 2020 to June 30, 2021:
|
June
30, 2020
|
|
$
|
219,652
|
|
|
Contract
liability deferral
|
|
|
306,955
|
|
|
Amortization
of contract liability to revenue
|
|
|
(175,918
|
)
|
|
June
30, 2021
|
|
$
|
350,689
|
|
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.
NOTE
8: ACCRUED EXPENSES
Accrued
expenses is comprised of the following at:
|
|
|
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Accrued
interest
|
|
$
|
205,741
|
|
|
$
|
118,161
|
|
|
Accrued
wages
|
|
|
214,683
|
|
|
|
485,647
|
|
|
Other
expenses
|
|
|
947,943
|
|
|
|
520,034
|
|
|
Total
accrued expenses
|
|
$
|
1,368,367
|
|
|
$
|
1,123,842
|
|
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
9: NOTES PAYABLE
Notes
payable is comprised of the following:
|
|
|
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Note
payable, SBA – Paycheck Protection Program [1]
|
|
$
|
33,680
|
|
|
$
|
33,388
|
|
|
Note
payable, SBA – Economic Injury Disaster Loan [2]
|
|
|
160,393
|
|
|
|
154,540
|
|
|
Note
payable, Accredited Investor [3]
|
|
|
276,035
|
|
|
|
-
|
|
|
Note
payable, John Fife (dba St. George Investors)/Judgment Settlement Agreement [4]
|
|
|
-
|
|
|
|
771,702
|
|
|
Total
notes payable
|
|
$
|
470,108
|
|
|
$
|
959,630
|
|
|
Less:
current portion of notes payable
|
|
|
(146,890
|
)
|
|
|
(792,171
|
)
|
|
Long-term
portion of notes payable
|
|
$
|
323,218
|
|
|
$
|
167,459
|
|
[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 June 30, 2021, $33,680 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 Coronavirus, Aid, Relief and
Economic Security Act (the “CARES Act”) and the terms of the COVID-19 Economic Injury Disaster Loan (“EIDL”)
program of the U.S. Small Business Administration’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 June 30, 2020, the Company
recorded this amount as a current liability. At June 30, 2021, $13,503 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
9: 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. The aggregate
balance of the promissory note and accrued interest was $362,250 and $43,470, respectively, at June 30, 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 at
June 30, 2021 was $276,035.
[4]
effective December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance
Agreement with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s
common stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company was required
to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 which was due
and payable in March of 2020. The Company made all required payments with the exception of the final payment of $195,000 which was due
and payable in March of 2020. On August 17, 2020, the Company entered into a second amendment (the “Second Amendment”) to
the Judgement Settlement Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the
“Note”) to repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on August 17, 2021,
bears interest at a rate of 10% per annum, requires certain monthly minimum cash payments as specified in the Note, and is convertible
into shares of the Company’s common stock, par value $0.01 per share, at a conversion price as specified in the Note. The Note
may be prepaid by the Company at any time prior to maturity without penalty. The Company satisfied the initial cash payment as specified
in the Note. On April 13, 2021, the Company entered into a third amendment (the “Third Amendment”) to the Judgement Settlement
Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the “New Note”)
to replace the Note and repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on April 13, 2022,
bears interest at a rate of 10% per annum, requires certain monthly minimum payments in cash or the Company’s common stock as specified
in the New Note, and is convertible into shares of the Company’s common stock, par value $0.01 per share, at a conversion price
as specified in the New Note. The New Note may be prepaid by the Company at any time prior to maturity without penalty. On April 16,
2021, the Company paid $235,000 to satisfy, pay in full, and extinguish the New Note and the Judgement Settlement Agreement, which resulted
in a gain on debt settlement of $549,026 during the year ended June 30, 2021.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
10: Convertible Debt Arrangements
JMJ
Financial
At
June 30, 2021 and 2020, the amount recorded in current liabilities for the one convertible note and accrued interest thereon due to JMJ
Financial was $226,704 and $209,330, respectively. During the fiscal years ended June 30, 2021 and 2020 the Company recorded $17,374
and $16,043, respectively of interest for the outstanding convertible note.
At
June 30, 2021 and 2020, the aggregate remaining amount of convertible securities held by JMJ could be converted into 11,335 and 10,466
shares, respectively, with a conversion price of $20.
Accredited
Investors
On
July 24, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 1”) and issued
an 8% convertible promissory note in the principal amount of $105,000 (including a $5,000 original issue discount) to the Lender 1 with
a maturity date of July 24, 2021. On July 27, 2020, the Company received net proceeds in the amount of $95,000 as a result of $5,000
being paid to reimburse the Lender 1 for legal and due diligence fees incurred with respect to this securities purchase agreement and
convertible promissory note. This convertible debenture converts at 60% of the lowest closing price during the 20 days prior to conversion.
Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $175,000, original issue discount of
$5,000, deferred financing costs of $5,000 and debt discount of $95,000. The original issue discount, deferred financing costs and debt
discount were being amortized over the term of the note. During January 2021, the Company paid-off the aggregate balance of the convertible
promissory note, including accrued interest and prepayment amount.
On
July 31, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 2”) and issued
an 8% convertible promissory note in the principal amount of $68,000 to the Lender 2 with a maturity date of July 31, 2021. On August
6, 2020, the Company received net proceeds in the amount of $65,000 as a result of $3,000 being paid to reimburse the Lender 2 for legal
and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible
debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions
contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $102,228, deferred financing costs of $3,000 and debt discount of $65,000. The
deferred financing costs and debt discount were being amortized over the term of the note. During January 2021, the Company paid-off
the aggregate balance of the convertible promissory note, including accrued interest and prepayment amount.
On
August 19, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 3”) and issued
an 8% convertible promissory note in the principal amount of $99,225 (including a $4,725 original issue discount) to the Lender 3 with
a maturity date of August 19, 2021. On August 20, 2020, the Company received net proceeds in the amount of $90,000 as a result of $4,500
being paid to reimburse the Lender 3 for legal and due diligence fees incurred with respect to this securities purchase agreement and
convertible promissory note. This convertible debenture converts at 60% of the lowest closing price during the 20 days prior to conversion.
Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $161,856, original issue discount of
$4,725, deferred financing costs of $4,500 and debt discount of $86,400. The original issue discount, deferred financing costs and debt
discount were being amortized over the term of the note. On February 17, 2021, the Company entered into a settlement agreement (the “Settlement
Agreement”) with Lender 3 whereby the variable conversion provision within the convertible promissory note was amended and replaced
with a fixed conversion price of $0.10 per share. On February 19, 2021, the aggregate outstanding principal and accrued interest of $103,292
was converted into an aggregate of 1,032,918 shares of the Company’s common stock, fully satisfying this obligation. The Company
recorded an aggregate loss on extinguishment of debt of $121,659 as a result of the Company issuing shares of its common stock to satisfy
this obligation.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
10: Convertible Debt Arrangements (continued)
On
August 20, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 4”) and issued
an 8% convertible promissory note in the principal amount of $63,000 to the Lender 4 with a maturity date of August 20, 2021. On August
21, 2020, the Company received net proceeds in the amount of $60,000 as a result of $3,000 being paid to reimburse the Lender 4 for legal
and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible
debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions
contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $101,996, deferred financing costs of $3,000 and debt discount of $60,000. The
deferred financing costs and debt discount were being amortized over the term of the note. During February 2021, the Company paid-off
the aggregate balance of the convertible promissory note, including accrued interest and prepayment amount.
On
August 27, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 5”) and issued
an 8% convertible promissory note in the principal amount of $105,000 (including a $5,000 original issue discount) to the Lender 5 with
a maturity date of August 27, 2021. On August 28, 2020, the Company received net proceeds in the amount of $96,000 as a result of $4,000
being paid to reimburse the Lender 5 for legal and due diligence fees incurred with respect to this securities purchase agreement and
convertible promissory note. This convertible debenture converts at the lower of i) $0.03 per share or ii) 62% of the lowest closing
price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note,
the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative
liability of $176,129, original issue discount of $5,000, deferred financing costs of $4,000 and debt discount of $92,200. The original
issue discount, deferred financing costs and debt discount were being amortized over the term of the note. During February 2021, the
Company paid-off the aggregate balance of the convertible promissory note, including accrued interest and prepayment amount.
On
August 31, 2020, the Company entered into a securities purchase agreement with an accredited investor (“Lender 6”) and issued
an 8% convertible promissory note in the principal amount of $68,000 to the Lender 6 with a maturity date of August 31, 2021. On September
1, 2020, the Company received net proceeds in the amount of $65,000 as a result of $3,000 being paid to reimburse the Lender 6 for legal
and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible
debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions
contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $112,459, deferred financing costs of $3,000 and debt discount of $65,000. The
deferred financing costs and debt discount were being amortized over the term of the note. During February 2021, the Company paid-off
the aggregate balance of the convertible promissory note, including accrued interest and prepayment amount.
On
January 25, 2021, the Company entered into a securities purchase agreement with an accredited investor (“Lender 7”) and issued
an 8% convertible promissory note in the principal amount of $140,000 (including a $14,000 original issue discount) to the Lender 7 with
a maturity date of January 25, 2022. On January 26, 2021, the Company received net proceeds in the amount of $120,000 as a result of
$6,000 being paid to reimburse the Lender 7 for legal and due diligence fees incurred with respect to this securities purchase agreement
and convertible promissory note. This convertible debenture converts at 60% of the lowest closing price during the 15 days prior to conversion.
Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $656,325, original issue discount of
$14,000, deferred financing costs of $10,800 and debt discount of $115,200. The original issue discount, deferred financing costs and
debt discount were being amortized over the term of the note. During May 2021, the Company paid-off the aggregate balance of the convertible
promissory note, including accrued interest and prepayment amount.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
10: Convertible Debt Arrangements (continued)
On
January 26, 2021, the Company entered into a securities purchase agreement with an accredited investor (“Lender 8”) and issued
an 8% convertible promissory note in the principal amount of $118,500 to the Lender 8 with a maturity date of January 26, 2022. On January
27, 2021, the Company received net proceeds in the amount of $115,000 as a result of $3,500 being paid to reimburse the Lender 8 for
legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This convertible
debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions
contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $568,609, deferred financing costs of $3,500 and debt discount of $115,000.
The deferred financing costs and debt discount were being amortized over the term of the note. During April 2021, the Company paid-off
the aggregate balance of the convertible promissory note, including accrued interest and prepayment amount.
On
February 10, 2021, the Company entered into a securities purchase agreement with an accredited investor (“Lender 9”) and
issued an 8% convertible promissory note in the principal amount of $88,500 to the Lender 9 with a maturity date of February 10, 2022.
On February 11, 2021, the Company received net proceeds in the amount of $85,000 as a result of $3,500 being paid to reimburse the Lender
9 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This
convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion
provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability.
In connection herewith, the Company recorded a derivative liability of $573,537, deferred financing costs of $3,500 and debt discount
of $85,000. The deferred financing costs and debt discount were being amortized over the term of the note. During April 2021, the Company
paid-off the aggregate balance of the convertible promissory note, including accrued interest and prepayment amount.
On
February 18, 2021, the Company entered into a securities purchase agreement with an accredited investor (“Lender 10”) and
issued an 8% convertible promissory note in the principal amount of $78,500 to the Lender 10 with a maturity date of February 18, 2022.
On February 22, 2021, the Company received net proceeds in the amount of $75,000 as a result of $3,500 being paid to reimburse the Lender
10 for legal and due diligence fees incurred with respect to this securities purchase agreement and convertible promissory note. This
convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion
provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability.
In connection herewith, the Company recorded a derivative liability of $466,569, deferred financing costs of $3,500 and debt discount
of $75,000. The deferred financing costs and debt discount were being amortized over the term of the note. During April 2021, the Company
paid-off the aggregate balance of the convertible promissory note, including accrued interest and prepayment amount.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
10: Convertible Debt Arrangements (continued)
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.
The
Notes mature on April 6, 2022 and May 3, 2022, bears interest at the rate of 5% per annum and is 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 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 November 5, 2021 or after November 5, 2021, respectively, 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”). 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
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 June 30, 2021, the aggregate balance of
the convertible promissory note and accrued interest was $2,346,000 and $25,596, respectively. At June 30, 2021, the aggregate balance
of the convertible promissory note, net of original issue discount and deferred financing costs was $2,073,992.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
10: Convertible Debt Arrangements (continued)
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
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 of 1933, as amended (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 $419,664 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 June 30, 2021, the aggregate balance of
the convertible promissory note and accrued interest was $2,797,795 and $18,377, respectively. At June 30, 2021, the aggregate balance
of the convertible promissory note, net of original issue discount and deferred financing costs was $2,424,877.
During
the year ended June 30, 2021, the Company paid-off a total of 12 outstanding convertible promissory notes with an aggregate balance,
including accrued interest and prepayment amount of $1,542,270.
At
June 30, 2021 and June 30, 2020, there was $5,143,795 and $565,000 of convertible notes payable outstanding, net of discounts of $3,157,759
and $375,359, respectively.
During
the year ended June 30, 2021 and 2020, amortization of original issue discount, deferred financing costs, and debt discounts amounted
to $2,032,516 and $899,491, respectively.
During
the years ended June 30, 2021 and 2020, $1,596,888 and $477,763, respectively, of convertible notes, including fees and interest, were
converted into 20,716,750 and 5,872,362, respectively, shares of the Company’s common stock.
At
June 30, 2021, the Company was in compliance with the terms of the Accredited Investors convertible promissory notes.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
10: Convertible Debt Arrangements (continued)
Notes
payable under convertible debt and debenture agreements, net is comprised of the following:
|
|
|
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
JMJ
Financial
|
|
$
|
109,000
|
|
|
$
|
109,000
|
|
|
Accredited
Investors
|
|
|
5,148,795
|
|
|
|
565,000
|
|
|
Unamortized
OID, deferred financings costs, and debt discounts
|
|
|
(3,157,759
|
)
|
|
|
(375,359
|
)
|
|
Total
convertible debt arrangements, net
|
|
$
|
2,100,036
|
|
|
$
|
298,641
|
|
At
June 30, 2021 and 2020, the outstanding balances are reflected as current liabilities within our consolidated balance sheets. At June
30, 2021 and 2020, accrued interest on these convertible notes of $162,271 and $116,619, respectively, is included within accrued expenses
of the consolidated balance sheets.
NOTE
11: DERIVATIVE LIABILITY
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 to be separately accounted for under ASC Topic 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 that fair value is 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, 2019 to June 30, 2021:
|
|
|
Conversion
feature derivative
liability
|
|
|
June
30, 2019
|
|
$
|
133,669
|
|
|
Initial
fair value of derivative liability recorded as debt discount
|
|
|
1,115,000
|
|
|
Initial
fair value of derivative liability charged to other expense
|
|
|
1,610,913
|
|
|
Gain
on change in fair value included in earnings
|
|
|
(1,961,951
|
)
|
|
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 June 30, 2021 and 2020 amounted to $0 and $897,631, respectively. The change in fair value included in earnings
of $3,267,323 is due in part to the quoted market price of the Company’s common stock increasing from $0.08 at June 30, 2020 to
$0.43 at June 30, 2021, coupled with substantially reduced conversion prices due to the effect of “ratchet” provisions incorporated
within the convertible notes payable.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
11: DERIVATIVE LIABILITY (continued)
At
June 30, 2021, there were no outstanding convertible notes payable with conversion prices inclusive of “ratchet” provisions
requiring the use of a binomial pricing model with binomial simulations.
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
June 30, 2021, the Company did not have any derivative instruments that were designated as hedges.
Items
recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following
items as of June 30, 2021 and 2020:
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Derivative
liability, June 30, 2021
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Derivative
liability, June 30, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
897,631
|
|
NOTE
12: STOCKHOLDERS’ EQUITY
At
June 30, 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 78,612,608 shares are issued, 78,584,238 shares
are outstanding and 281,734 shares are to be issued, 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
12: STOCKHOLDERS’ EQUITY (continued)
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
Private
Placements
During
the year ended June 30, 2021, the Company did not issue any shares of common stock under any private
placements with accredited investors.
During
the year ended June 30, 2020, the Company received $347,000 of net proceeds from the issuance of 1,129,577 shares of common stock in
private placements with accredited investors. During the year ended June 30, 2020, the Company issued 11,003 shares of common stock valued
at $11,250 for finder’s services related to certain of these private placements.
Stock Based Compensation – Common Stock
Grants
During the year ended June 30, 2021, 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
12: STOCKHOLDERS’ EQUITY (continued)
Additionally,
during the year ended June 30, 2021, 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 and 1 year
anniversaries of the grant date. Upon Mr. Cutchens’ employment ceasing during January 2021, 115,818 unvested shares of common stock
were forfeited resulting in the reversal of $68,003 of previously recognized stock-based compensation expense.
Furthermore,
during the year ended June 30, 2021, the Company granted 500,000 restricted shares of common stock to its Chief Operating Officer. The
restricted shares of common stock vest 25% on the 1 year, 2 year, 3 year, and 4 year anniversaries of the grant date. At June 30, 2021,
no shares of common stock have vested and 500,000 shares remain unvested. During the year ended June 30, 2021, the Company recorded $9,733
of stock-based compensation expense.
During
the year ended June 30, 2020, the Company issued 231,635 restricted shares of its common stock to the Company’s Chief Financial
Officer, which were granted on June 1, 2019 (the “Grant Date”), pursuant to the terms of an employment agreement with the
Company. The restricted shares of common stock vest 25% on the six-month, 1 year, 2 year, and 3 year anniversaries of the Grant Date.
At June 30, 2020, 115,818 shares of common stock vested and 115,817 shares remain unvested. During the years ended June 30, 2020 and
2019, the Company recorded $133,142 and $16,464, respectively, of stock-based compensation expense related to the vested portion of this
award.
Vendor
Services
During
the year ended June 30, 2021, the Company entered into various consulting, public relations, and marketing agreements whereby the Company
issued an aggregate of 1,422,127 restricted shares of its common stock and has an aggregate of 281,734 restricted shares of common stock
to be issued, for services to be performed during specified periods of time. During the year ended June 30, 2021, the Company recorded
$261,067 of expense.
During
the year ended June 30, 2020, there were no shares of common stock issued to any vendors for consulting, public relations, or marketing
services.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
12: STOCKHOLDERS’ EQUITY (continued)
Conversion
of Service Fees
During
the year ended June 30, 2020, the Company issued 62,000 shares of common stock, valued at $46,500, to a former officer who provided services
to the Company. During the year ended June 30, 2021, there were no shares of common stock issued to any former officer for services provided
to the Company.
During
the year ended June 30, 2020, the Company issued 294,654 shares of common stock to a number of related parties and strategic consultants
in connection with prior services provided to the Company. The shares issued were valued at $219,517. During the year ended June 30,
2021, there were no share of common stock issued to any related parties and strategic consultants for prior services provided to the
Company.
Conversion
of Debt Securities
During
the year ended June 30, 2021, $472,593 of convertible notes, including fees and interest, were converted into 20,716,750 shares of the
Company’s common stock by accredited investors, valued at $1,596,888. During the year ended June 30, 2020, $477,763 of convertible
notes, including fees and interest, were converted into 5,872,362 shares of the Company’s common stock by accredited investors,
valued at $1,054,204.
Cancellation
of Common Stock
During
the year ended June 30, 2021, the Company’s Chief Executive Officer cancelled 3,352,066 of his shares of the Company’s common
stock to partially offset the number of shares of the Company’s common stock issued by the conversion of $472,593 of convertible
notes, including fees and interest, into 20,716,750 shares of the Company’s common stock by accredited investors. The fair value
of the cancelled shares of common stock was $496,106.
Reserved
Shares – Common Stock
At
June 30, 2021, the convertible promissory notes entered into with accredited investors require the Company to reserve approximately 85,000,000
shares of its Common Stock for potential future conversions under such instruments.
At
June 30, 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
During
the year ended June 30, 2021, the Company entered into an 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
12: STOCKHOLDERS’ EQUITY (continued)
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 13,988,971 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. For the year ended June 30, 2021, the Company attributed
an aggregate fair value of $1,753,953 to the warrants, based upon an average value of $0.37 per warrant.
Pursuant
to a Securities Purchase Agreement between the Company and Evergreen Capital Management, LLC (“Investor”), dated as of April
5, 2021, 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. For the year ended June 30, 2021,
the Company attributed an aggregate fair value of $1,293,541 to the warrants, based upon an average value of $0.27 per warrant.
Warrant
Agreement – Earned Warrants
Mr.
Bhatnagar, the Company’s President and CEO, is entitled to receive warrants to acquire 4% of the outstanding fully diluted common
stock of the Company (the “Earned Warrants”) each time the Company’s revenue increases by $1,000,000. The exercise
price of the Earned Warrants is equal to $0.50 per share and he may not receive shares whereby Signing Shares and Earned Warrants exceed
80% of the fully diluted common stock of the Company (“Warrant Cap”).
Warrant
Agreement – Accelerated Warrants
Mr.
Bhatnagar, the Company’s President and Chief Executive Officer, was entitled to receive warrants to acquire 4% of the outstanding
fully diluted common stock of the Company (“Earned Warrants”) each time the Company’s revenue increased by $1,000,000.
The exercise price of the Earned Warrants was equal to $0.50 per share, and he may not receive the Earned Warrants to the extent that
the number of Singing Shares (as defined in the Warrant Agreement) and Earned Warrants exceed 80% of the fully diluted common stock of
the Company (“Warrant Cap”).
For
the year ended June 30, 2020, since the Company’s revenue exceeded $30,000,000, Mr. Bhatnagar earned warrants to acquire 32,405,058
shares of the Company’s common stock under the provisions of the Warrant Agreement. At June 30, 2020, as Mr. Bhatnagar has earned
the maximum number of warrants available under the provisions of the Warrant Agreement to acquire 37,390,452 shares of the Company’s
common stock, there remains no additional shares of the Company’s common stock that Mr. Bhatnagar can earn.
For
the year ended June 30, 2020, the Company recognized $16,202,529 of stock-based compensation expense related to the earned warrants,
based upon a value of $0.50 per warrant. At June 30, 2020, there remains no additional stock-based compensation expense related to the
Warrant Agreement that the Company expects to recognize.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
12: 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 when 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 years ended June 30, 2021 and 2020:
|
Expected
volatility
|
|
|
618.01%
- 21,779.77
|
%
|
|
Weighted-average
volatility
|
|
|
618.01%
- 21,779.77
|
%
|
|
Expected
dividends
|
|
|
0
|
%
|
|
Expected
term (in years)
|
|
|
4.0
- 5.0
|
|
|
Risk-free
rate
|
|
|
0.56%
- 2.52
|
%
|
The
following table sets forth common stock purchase warrants outstanding at June 30, 2021:
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Intrinsic
Value
|
|
|
Outstanding,
June 30, 2020
|
|
|
37,390,452
|
|
|
$
|
0.50
|
|
|
$
|
-
|
|
|
Warrants
issued
|
|
|
25,718,971
|
|
|
|
0.20
|
|
|
|
-
|
|
|
Warrants
exchanged
|
|
|
(37,390,452
|
)
|
|
|
(0.50
|
)
|
|
|
-
|
|
|
Outstanding,
June 30, 2021
|
|
|
25,718,971
|
|
|
$
|
0.20
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuable upon exercise of warrants
|
|
|
25,718,971
|
|
|
$
|
0.20
|
|
|
$
|
-
|
|
|
|
|
|
Common
Stock Issuable Upon Exercise of
Warrants Outstanding
|
|
|
Common
Stock Issuable Upon
Warrants Exercisable
|
|
|
Range
of
Exercise
Prices
|
|
|
Number
Outstanding at
June 30, 2021
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable at
June 30, 2021
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$
|
0.20
|
|
|
|
25,718,971
|
|
|
|
3.83
|
|
|
$
|
0.20
|
|
|
|
25,718,971
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
25,718,971
|
|
|
|
3.83
|
|
|
$
|
0.20
|
|
|
|
25,718,971
|
|
|
$
|
0.20
|
|
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
12: STOCKHOLDERS’ EQUITY (continued)
The
following table sets forth common stock purchase warrants outstanding at June 30, 2020:
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Intrinsic
Value
|
|
|
Outstanding,
June 30, 2019
|
|
|
4,985,394
|
|
|
$
|
0.50
|
|
|
$
|
-
|
|
|
Warrants
earned
|
|
|
32,405,058
|
|
|
|
0.50
|
|
|
|
-
|
|
|
Warrants
forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding,
June 30, 2020
|
|
|
37,390,452
|
|
|
$
|
0.50
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuable upon exercise of warrants
|
|
|
37,390,452
|
|
|
$
|
0.50
|
|
|
$
|
-
|
|
|
|
|
|
Common
Stock Issuable Upon Exercise of
Warrants Outstanding
|
|
|
Common
Stock Issuable Upon
Warrants Exercisable
|
|
|
Range
of
Exercise
Prices
|
|
|
Number
Outstanding at
June 30, 2020
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable at
June 30, 2020
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$
|
0.50
|
|
|
|
37,390,452
|
|
|
|
4.30
|
|
|
$
|
0.50
|
|
|
|
37,390,452
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
37,390,452
|
|
|
|
4.30
|
|
|
$
|
0.50
|
|
|
|
37,390,452
|
|
|
$
|
0.50
|
|
NOTE
13: RELATED PARTY TRANSACTIONS
Microphase
Corporation
At
June 30, 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 so as to provide working capital to the Company. During the year ended June
30, 2021, the Company’s Chief Executive Officer converted his deferred compensation from fiscal years 2019 and 2020, totaling $381,566,
and the fair value of his cancelled shares of the Company’s common stock of $496,106, into separate promissory notes. All of these
notes accrue interest at the rate of 6% per annum, and are payable on demand. During the years ended June 30, 2021 and 2020, the officers
and former officers advanced $0 and $48,052 to provide working capital to the Company and $40,656 and $4,792 has been charged for interest
on loans from officers and former officers.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
13: RELATED PARTY TRANSACTIONS (continued)
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
June 30, 2021 and 2020, these outstanding notes including accrued interest totaled $747,086 and $78,758, respectively. At June 30, 2021,
these promissory notes are not convertible into shares of the Company common stock.
Common
Stock Issuances
During
the year ended June 30, 2021, 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 and 1 year anniversaries
of the grant date. Upon Mr. Cutchens’ employment ceasing during January 2021, 115,818 unvested shares of common stock were forfeited
resulting in the reversal of $68,003 of previously recognized stock-based compensation expense.
Additionally,
during the year ended June 30, 2021, the Company granted 500,000 restricted shares of common stock to its Chief Operating Officer. The
restricted shares of common stock vest 25% on the 1 year, 2 year, 3 year, and 4 year anniversaries of the grant date. At June 30, 2021,
no shares of common stock have vested and 500,000 shares remain unvested. During the year ended June 30, 2021, the Company recorded $9,733
of stock-based compensation expense.
During
the year ended June 30, 2020, the Company issued 231,635 restricted shares of its common stock to Mr. Cutchens, the Company’s Chief
Financial Officer, which were granted on June 1, 2019 (the “Grant Date”), pursuant to the terms of an employment agreement
with the Company. The restricted shares of common stock vest 25% on the six-month, 1 year, 2 year, and 3 year anniversaries of the Grant
Date. At June 30, 2020, 115,818 shares of common stock have vested and 115,817 shares remain unvested. During the years ended June 30,
2020 and 2019, the Company recorded $133,142 and $16,464, respectively, of stock-based compensation expense related to the vested portion
of this award.
During
the year ended June 30, 2020, the Company incurred $15,500 of expense related to legal and consulting services provided by Mr. Smiley,
the Company’s former Chief Financial Officer and legal counsel. During October 2019, the entire balance of $15,500 was converted
into 62,000 shares of common stock. During the year ended June 30, 2021, the Company did not incur any expense or utilize any services
by Mr. Smiley, the Company’s former CFO and legal counsel.
Office
Lease
Effective
February 8, 2021, the Company relocated its corporate office to 9841 Washingtonian Blvd., Suite 200, Gaithersburg, MD 20878, 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 year ended June 30, 2021 and 2020, $12,150 and $7,621, respectively,
was recognized as rent expense. At June 30, 2021 and 2020, $35,971 and $23,821, respectively, was accrued as payable to the related party.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
14: INCOME TAXES
The
Company accounts for income taxes taking into account deferred tax assets and liabilities which represent the future tax consequences
of the differences between financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities.
Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards.
Deferred liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
impact of tax rate changes on deferred tax assets and liabilities is recognized in the year the change is enacted. Due to recurring losses,
the Company’s tax provision for the years ended June 30, 2021 and 2020 was $0.
At
June 30, 2021 and 2020, the difference between the effective income tax rate and the applicable statutory federal income tax rate is
summarized as follows:
|
|
|
June
30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Statutory
federal rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State
income tax rate, net of federal benefit
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
|
Permanent
differences, including stock based compensation and beneficial conversion interest expense
|
|
|
-
|
%
|
|
|
(0.1
|
)%
|
|
Change
in valuation allowance
|
|
|
(27.5
|
)%
|
|
|
(27.4
|
)%
|
|
Effective
tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
At
June 30, 2021 and 2020, the Company’s deferred tax assets were as follows:
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carry forward
|
|
$
|
24,126,409
|
|
|
$
|
23,838,735
|
|
|
Deferred stock warrants
|
|
|
22,184
|
|
|
|
5,157,262
|
|
|
Other temporary differences
|
|
|
241,610
|
|
|
|
509,789
|
|
|
Total deferred tax asset
|
|
|
24,390,203
|
|
|
|
29,505,786
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Other temporary differences
|
|
|
(4,389
|
)
|
|
|
-
|
|
|
Total deferred tax liabilities
|
|
|
(4,389
|
)
|
|
|
-
|
|
|
Net deferred tax asset
|
|
|
24,385,814
|
|
|
|
29,505,786
|
|
|
Less: valuation allowance
|
|
|
(24,385,814
|
)
|
|
|
(29,505,786
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Valuation
Allowance
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary
differences will become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. The Company has recorded a full valuation allowance against its net deferred
tax assets because it is not currently able to conclude that it is more likely than not that these assets will be realized. The amount
of deferred tax assets considered to be realizable could be increased in the near term if estimates of future taxable income during the
carryforward period are increased. The valuation allowance decreased by $5,119,972 during the fiscal year ended June 30,
2021, of which $1,496,544 of the decrease relates to the calculation of the current fiscal year tax provision and
$3,623.428 of the decrease is a result of prior year adjustments and net operating loss expirations. The valuation allowance increased
by $3,349,031 during the fiscal year ended June 30, 2020, as a result of the fiscal year tax provision calculation
and other adjustments.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
14: INCOME TAXES (continued)
Other
Income Tax Related Items
At
June 30, 2021 and 2020, the Company has federal net operating loss carryforwards of approximately $87,000,000 and $87,000,000, respectively,
due to the generation of current fiscal year net operating loss carryforward of approximately $14,000,000 and the expiration of the fiscal
year June 30, 2001 net operating loss carryforward of approximately $13,000,000. Net operating loss carryforwards generated before
January 1, 2018 will expire through 2037. Under the Internal Revenue Code Section 382, certain stock transactions which significantly
change ownership, including the sale of stock to new investors, the exercise of options to purchase stock, or other transactions between
shareholders could limit the amount of net operating loss carryforwards that may be utilized on an annual basis to offset taxable income
in future periods.
At
June 30, 2021 and 2020, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.
The Company does not expect that its unrecognized tax benefits will materially increase within the next twelve months. The Company did
not recognize any interest or penalties related to uncertain tax positions at June 30, 2021 and 2020.
Enacted
in late 2017, the Tax Cut and Jobs Act (“TCJA”) imposed a one-time tax on earnings held outside the United States (“U.S.”).
The Company did not have any earnings subject to this tax. Beginning in 2018, earnings generated outside the U.S. are not subject to
U.S. tax when repatriated. If the Company engages in certain business activities, non-U.S. earnings may be required to be include in
the income of the U.S. parent company. The TCJA added rules that require the U.S. parent company to include in income certain low taxed
income. These so called Global Intangible Low-Taxed Income (“GILTI”) rules are not applicable to the Company.
During
May 2020, the Company received $33,332 under the Small Business Administration’s Paycheck Protection Program (“PPP Loan”)
created as part of the recently enacted CARES Act administered by the Small Business Administration (“SBA”). Certain amounts
of the loan may be forgiven if they are used towards qualifying expenses as described in the CARES Act. In the event that forgiveness
is applied for and received, the loan will not be considered cancellation of debt income and will be considered tax exempt for income
tax purposes.
NOTE
15: COMMITMENTS AND CONTINGENCIES
Commitments
Effective
February 8, 2021, the Company relocated its corporate office to 9841 Washingtonian Blvd., Suite 200, Gaithersburg, MD 20878, 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.
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
15: COMMITMENTS AND CONTINGENCIES (continued)
Judgement
Settlement Agreement
Effective
December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement
with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common
stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company was required to
pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 which was due and
payable in March of 2020. The Company made all required payments with the exception of the final payment of $195,000 which was due and
payable in March of 2020. On August 17, 2020, the Company entered into a second amendment (the “Second Amendment”) to the
Judgement Settlement Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the “Note”)
to repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on August 17, 2021, bears interest at
a rate of 10% per annum, requires certain monthly minimum cash payments as specified in the Note, and is convertible into shares of the
Company’s common stock, par value $0.01 per share, at a conversion price as specified in the Note. The Note may be prepaid by the
Company at any time prior to maturity without penalty. The Company satisfied the initial cash payment as specified in the Note. On April
13, 2021, the Company entered into a third amendment (the “Third Amendment”) to the Judgement Settlement Agreement, whereby
the Company issued a convertible promissory note in the principal amount of $300,000 (the “New Note”) to replace the Note
and repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on April 13, 2022, bears interest at
a rate of 10% per annum, requires certain monthly minimum payments in cash or the Company’s common stock as specified in the New
Note, and is convertible into shares of the Company’s common stock, par value $0.01 per share, at a conversion price as specified
in the New Note. The New Note may be prepaid by the Company at any time prior to maturity without penalty. On April 16, 2021, the Company
paid $235,000 to satisfy, pay in full, and extinguish the New Note and the Judgement Settlement Agreement, which resulted in a gain on
debt settlement of $549,026 during the year ended June 30, 2021 (see Note 9).
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 12).
Contingencies
Judgment
Settlement Agreement
Effective
December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement
with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common
stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company was required to
pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 which was due and
payable in March of 2020. The Company made all required payments with the exception of the final payment of $195,000 which was due and
payable in March of 2020. On August 17, 2020, the Company entered into a second amendment (the “Second Amendment”) to the
Judgement Settlement Agreement, whereby the Company issued a convertible promissory note in the principal amount of $300,000 (the “Note”)
to repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on August 17, 2021, bears interest at
a rate of 10% per annum, requires certain monthly minimum cash payments as specified in the Note, and is convertible into shares of the
Company’s common stock, par value $0.01 per share, at a conversion price as specified in the Note. The Note may be prepaid by the
Company at any time prior to maturity without penalty. The Company satisfied the initial cash payment as specified in the Note. On April
13, 2021, the Company entered into a third amendment (the “Third Amendment”) to the Judgement Settlement Agreement, whereby
the Company issued a convertible promissory note in the principal amount of $300,000 (the “New Note”) to replace the Note
and repay the amounts still outstanding under the Judgment Settlement Agreement. The Note matures on April 13, 2022, bears interest at
a rate of 10% per annum, requires certain monthly minimum payments in cash or the Company’s common stock as specified in the New
Note, and is convertible into shares of the Company’s common stock, par value $0.01 per share, at a conversion price as specified
in the New Note. The New Note may be prepaid by the Company at any time prior to maturity without penalty. On April 16, 2021, the Company
paid $235,000 to satisfy, pay in full, and extinguish the New Note and the Judgement Settlement Agreement, which resulted in a gain on
debt settlement of $549,026 during the year ended June 30, 2021 (see Note 9).
mPHASE
TECHNOLOGIES, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended June 30, 2021 and 2020
NOTE
16: 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 consolidated financial statements for
the fiscal years ended June 30, 2021 and 2020.
The
assets and liabilities associated with discontinued operations included in our consolidated balance sheets at June 30, 2021 and 2020
were only accounts payable with a balance of $82,795 and $82,795, respectively.
For
the years ended June 30, 2021 and 2020, there were no revenue or expenses associated with discontinued operations included in our consolidated
statements of operations.
NOTE
17: SUBSEQUENT EVENTS
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.