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MPHASE TECHNOLOGIES INC - 10-Q - MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following is management's discussion and analysis of certain significant
factors which have affected mPhase's financial position and should be read in
conjunction with the accompanying financial statements, financial data, and the
related notes.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:
Some of the statements contained in or incorporated by reference in this Form
10-Q discuss the Company's plans and strategies for its business or state other
forward-looking statements, as this term is defined in the Private Securities
Litigation Reform Act of 1995. The words "anticipate," "believe," "estimate,"
"expect," "plan," "intend," "should," "seek," "will," and similar expressions
are intended to identify these forward-looking statements, but are not the
exclusive means of identifying them. These forward-looking statements include,
among others, statements concerning the Company's expectations regarding its
working capital requirements, gross margin, results of operations, business,
growth prospects, competition and other statements of expectations, beliefs,
future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. Any
forward-looking statements contained in this Quarterly Report on Form 10-Q are
subject to risks and uncertainties that could cause actual results to differ
materially from those results expressed in or implied by the statements
contained herein.
RESULTS OF OPERATIONS OVERVIEW
mPhase, a New Jersey corporation founded in 1996, is a publicly-held company
with over 23,000 shareholders and approximately 4.4 billion shares of common
stock outstanding. The Company's common stock is traded on the Over the Counter
Bulletin Board under the ticker symbol XDSL. We are headquartered in Norwalk,
Connecticut with offices in Little Falls, NJ. mPhase shares common office space
with Microphase Corporation, a privately held company. Microphase is a leader in
the field of radio frequency and filtering technologies within the defense and
telecommunications industry. It has been in operation for over 50 years and
supports mPhase with both engineering and administrative and financial resources
as needed.
mPhase is a development stage company specializing in microfluidics,
microelectromechanical systems (MEMS) and nanotechnology. mPhase is in the
process of commercializing its first nanotechnology-enabled product for military
and commercial applications - The Smart NanoBattery providing Power On Command™.
The new patented and patent pending battery technology, based on the phenomenon
of electrowetting, offers a unique way to store energy and manage power.
Features of the Smart NanoBattery include potentially infinite shelf life,
environmentally friendly design, fast ramp to power, programmable control, and
direct integration with microelectronic devices.
The platform technology behind the Smart NanoBattery is a porous nanostructured
material used to repel and precisely control the flow of liquids. The material
has a Smart Surface that can potentially be designed for other product
applications including medical oxygen generation, hot/cold packs and emergency
lighting.
mPhase has completed a Phase II Small Business Technology Transfer Program
(STTR) grant, part of the Small Business Innovation Research (SBIR) program,
with the U.S. Army for continued development of a reserve Smart NanoBattery for
a critical computer memory application.
Since our inception in 1996, we have been a development-stage company and
operating activities have related primarily to research and development,
establishing third-party manufacturing relationships and developing product
brand recognition, and since July 1, 2007, we have focused primarily upon
development of our smart reserve battery and other battery and illuminator
products.
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Description of Operations Microfluidics, MEMS, and Nanotechnology
In February of 2004, mPhase entered the business of developing new products
based on materials whose properties and behavior are controlled at the
micrometer and nanometer scales. (For reference, a micrometer or micron is equal
one millionth (10 -6) of a meter and a nanometer is one billionth (10 -9) of a
meter - the scale of atoms and molecules. A human hair is approximately 50
microns in diameter, or 50,000 nanometers thick.) The Company has expertise and
capabilities in microfluidics, microelectromechanical systems (MEMS), and
nanotechnology. Microfluidics refers to the behavior, precise control and
manipulation of fluids that are geometrically constrained to a small, typically
micrometer scale. MEMS is the integration of mechanical elements, sensors,
actuators, and electronics on a common silicon substrate through
microfabrication technology. Nanotechnology is the creation of functional
materials, devices and systems through control of matter (atoms and molecules)
on the nanometer length scale (1-100 nanometers), and exploitation of novel
phenomena and properties (physical, chemical, biological, mechanical,
electrical) at that length scale. In its Smart NanoBattery, mPhase exploits the
physical phenomenon of electrowetting by which a voltage is used to change the
wetting properties of a liquid/solid interface at the nanometer scale. Consider
water as the liquid. Through electrowetting, mPhase can change a surface from
what is referred to as a hydrophobic ("water fearing") state to a hydrophilic
("water loving") state. In the hydrophobic state, the water beads up or is
repelled by the surface. In the hydrophilic state, the water spreads out or is
absorbed by the surface. The ability to electronically control the wetting
characteristics of a surface at the nanometer scale forms the basis of mPhase's
nanotechnology operations and intellectual property portfolio.
In the Smart NanoBattery application, mPhase uses electrowetting as a new
technique to activate or literally "turn on" a battery once it is ready to be
used for the first time. At the heart of the Smart NanoBattery is a porous,
nanostructured superhydrophic or superlyophobic membrane designed and fabricated
by mPhase. The so-called superhydrophobic membrane applies to water and the
superlyophobic membrane applies to nonaqueous or organic liquids such as ethanol
or mineral oil. The difference between the two membrane types lies in the
nanoscale architecture at the surface. By virtue of its superhydrophobic or
superlyophobic character, the membrane, although porous, is able to physically
separate the liquid electrolyte from the solid electrodes so that the battery
remains dormant or inactive, thus providing no voltage or current until called
upon. This electrolyte-electrode separation gives the battery the feature of
potentially unlimited shelf life and the benefit of being always ready when
needed, which is not necessarily the case for conventional batteries.
Electrowetting alters the liquid/membrane interface so that the liquid is now
able to flow over the membrane's surface and rapidly move through the pores
where it is able to contact the solid electrode materials located on the other
side of the membrane.
mPhase uses MEMS to precisely control the machining of silicon-based materials
at the micrometer and nanometer scales. This ability has led to the Company's
proprietary membrane design that controls the wetting and movement of liquids on
a solid surface. mPhase uses microfluidics to control the flow of liquid
electrolyte through the porous membrane and this is also the basis for other
possible applications such as self-cleaning surfaces, filtration and separation
and liquid delivery systems.
History of Nanotechnology Operations Smart NanoBattery
mPhase Technologies along with Bell Labs jointly conducted research from
February 2004 through April of 2007 that demonstrated control and manipulation
of fluids on superhydrophobic and superlyophobic surfaces to create a new type
of battery or energy storage device with power management features obtained by
controlling the wetting behavior of a liquid electrolyte on a solid surface. The
scientific research conducted set the ground work for continued development of
the Smart NanoBattery and formed a path to commercialization of the technology
for a broad range of market opportunities. During 2005 and 2006, the battery
team tested modifications and enhancements to the internal design of the battery
to optimize its power and energy density characteristics, as well as making
engineering improvements that were essential in moving the battery from a
zinc-based chemistry to a commercial lithium-based chemistry that can be
manufactured on a large scale. The Company began its efforts by entering into a
$1.2 million 12 month Development Agreement with the Bell Labs division of
Alcatel/Lucent for exploratory research of control and manipulation of fluids on
superhydrophobic surfaces to create power cells ( batteries) by controlling
wetting behavior of an electrolyte on nanostructured electrode surfaces. The
goal was to develop a major breakthrough in battery technology creating
batteries with longer shelf lives as the result of no direct electrode contact
(meaning no power drain prior to activation). The Company extended its
development effort twice for an additional 2 years ending in March of 2007 and
for two additional periods thereafter through July 31, 2007. During this time,
the technical focus shifted from trying to separate the liquid electrolyte from
nanostructured electrodes to developing a nanostructured membrane that could
physically separate the liquid electrolyte from the solid electrodes.
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mPhase also began working with the Rutgers University Energy Storage Research
Group (ESRG) in July of 2005 to conduct contract research in advanced battery
chemistries involving lithium. This work involved characterizing and testing
materials that could be used in the mPhase battery. In July of 2007, the
relationship shifted to a collaboration focused on developing a memory backup
battery needed by the U.S. Army. The work was funded through a Phase I Small
Business Technology Transfer Program (STTR) grant.
In July of 2007, mPhase formed a new wholly-owned subsidiary, Always Ready,
Inc., to focus on the development of its nanotechnology products. The Company
has used this subsidiary as a division of the Company in order to develop
increasing brand recognition of its battery product. The Company decided in
September of 2007 to transfer its development work out of Bell Labs
(Alcatel/Lucent) in order to broaden its nanotechnology product
commercialization efforts. Prior to such time mPhase was limited to development
using zinc-based batteries since Bell Labs did not have facilities to handle
lithium chemistry. mPhase continued to work with Rutgers ESRG that has
facilities capable of handing lithium battery development and also engaged in
work with other companies to supply essential components, fabricate prototypes,
and plan manufacturing approaches. These companies included a well-respected
silicon foundry and battery manufacturer.
In February of 2008, the Company announced that a prototype of its Smart
NanoBattery was successfully deployed in a gun-fired test at the Aberdeen
Proving Ground at Maryland. The test was conducted by the U.S. Army Armament
Research and Development and Engineering Center (ARDEC) of Picatinny, New
Jersey. The battery not only survived the harsh conditions of deployment at a
gravitational force in excess of 45,000 g, but was also flawlessly activated in
the process.
In March of 2008, mPhase announced that it had been invited to submit a proposal
for a Phase II STTR grant based upon the successful work it had performed on the
Phase I grant to develop a version of the Smart NanoBattey referred to as the
multi-cell, micro-array reserve battery for a critical U.S. Army memory backup
application. The Phase II grant in the gross amount of $750,000 (net $500,000)
was granted to the Company in the middle of September of 2008. In March of 2008,
the Company also announced the successful transfer to a commercial foundry of
certain processes critical to the manufacturing of its Smart NanoBattery. This
enabled fabrication of the porous membranes for the multi-cell, micro-array
reserve battery mentioned above. The Company successfully manufactured
nanostructured membranes at the foundry that are essential to commercial
production of the battery. By achieving a series of delayed activations, the
shelf-life and continuous run-time of such battery is increased to a period of
time in excess of twenty years. In April of 2008, the Company announced that it
had successfully activated its first Smart NanoBattery prototype by
electrowetting using a hard-wired configuration and a remotely-activated device.
Remote activation plays a key role in providing power to wireless sensors
systems and RFID tags.
Also, in April of 2008, the Company announced that it had successfully produced
its first lithium-based reserve battery with a soft or pouch package and
breakable separator (in place of the electrowettable membrane) that relies on
mechanical rather than electrical activation to provide Power On Command™. The
Company believes that it is a significant milestone in moving from a low energy
density zinc-based battery to a higher energy density lithium-based battery
towards proving that the Smart NanoBattery will eventually be economically and
commercially viable.
In fiscal years ended June 30, 2009 and June 30, 2011, the Company focused upon
further development of its Smart Nano Battery under a Phase II STTR grant from
the U.S. Army as a potential reserve battery for a back-up computer memory
application for a weapons system. The Company has recently completed such Phase
II Army grant. On November 12, of 2010, the Company announced that it had
successfully triggered and activated its first functional multi-cell smart nano
battery. Triggering and activation of the cells of the battery were achieved by
using the technique of electrowetting or programmable triggering. Triggering was
accomplished by applying a pulse of electrical energy to a porous, smart surface
membrane located inside each cell in the battery causing the electrolyte to come
in contact with the cell's electrodes, creating the chemical reaction to produce
voltage inside of the multi-cell battery. The multi-cell battery consists of a
matrix of 12 individual cells populated with an electrode stack consisting of
lithium and carbon monofluoride materials with each rated at 3.0 volts. Using a
custom designed circuit board for testing, each of the cells in the battery were
independently triggered and activated without affecting any of the non-activated
cells in the multi-cell configuration. Each cell in the battery has a very long
shelf-life prior to triggering.
On February 9, 2011, the Company announced that it had signed a 3 year
Cooperative Research and Development Agreement (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 in order 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.
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In March of 2012, the Company accepted an invitation to visit a Cluster of
International Technology research and development in Grenoble, France. The
Cluster is made up on multinational companies and sponsored by various agencies
of the French Government to perform advanced technology research is the area of
energy storage devices, micro fluidics and nanotechnology. The Company is
continuing exploratory negotiations with 3 potential strategic partners each of
which is a member of the cluster to "custom tailor" its intellectual property
and component products for use in a commercial end product.
On June 6, 2012, the Company announced that negotiations with two creditors have
led to a standstill agreement and restructuring of approximately $1,500,000 in
floating rate convertible securities into 8% fixed rate debt instruments with
payments commencing on October 1, 2012 at an aggregate amount of approximately
$70,000 per month for two years The beneficial effect of restructuring of the
variable convertibility feature should give the Company the control it needs to
cease the automatic dilution outside of the Company's control of its issued and
outstanding common stock. The debt restructuring should allow the company the
flexibility it needs to obtain other funding.
During fiscal year ended June 30, 2012 the Company announced that it had
successfully completed a prototype of a new automotive and marine product
designed by a premiere European automotive company of luxury cars. A series of
prototypes has resulted in a significant reduction in size and increased
functionality of the product. The Company believes that the small footprint and
distinguished designed may have significant appeal to both original equipment
manufacturers and the automotive and marine aftermarket. The Company, pending
establishment of a complete marketing and distribution network for the product,
has not disclosed the product's identity in order to first establish a "first to
market presence" against potential competitors. The Company has identified and
had discussions with a marketing agency and launch firm for the new product.
On July 17, 2012, the Company announced that it has executed a Memorandum Of
Understanding with Stevens Institute of Technology in Hoboken NJ. The Memorandum
of Understanding establishes a framework formalizing a cooperative collaboration
to jointly pursue business opportunities, research and development ("R&D")
projects, and other appropriate cooperative arrangements between the parties.
The Parties anticipate joint efforts towards achieving mutually beneficial goals
and objectives with the intent of working together collaboratively in the design
and fabrication of an advanced battery technology utilizing intellectual
property and know-how from both parties with the possibility of integrating and
advancing mPhase 's Smart NanoBattery Technology with Stevens graphene based
inkjet printing method for printing electrodes and electronic circuits. The
parties also wish to explore the possibility of funding Stevens research
activities relative to graphene based research projects to advance the inkjet
printing of electronics utilizing advanced materials. Stevens and mPhase also
agreed to pursue joint collaborations with Government Research Agencies and
other Corporations.
On August 7, 2012 the Company announced its intention to explore the possibility
of complementing its Smart NanoBattery with new printing technologies utilizing
graphene and other advanced materials.
On August 16, 2012 the Company announced that it has received a Notice of
Allowance from the U.S. Patent & Trademark Office (USPTO) for a Reserve Battery
System Utility patent.The techniques described in the patent are for creating a
battery system that is easily activated via a low energy mechanical force, thus
allowing the reserve battery to be used in a wide variety of consumer related
and non-consumer related electrical devices. The invention generally relates to
a reserve battery, which includes a battery case having an electrolyte
compartment at a first end and an electrode compartment at a second end, a first
terminal having an external button connected to the case at the first end, and a
second terminal connected to the case at the second end. A movable ampoule is
movably positioned within the electrolyte compartment. A bias member is located
within the case between the external button and the ampoule, and a porous cutter
is positioned within the case between the electrodes and the ampoule and
supported by an inverted U-shaped support structure. When an external force is
applied to the external button, the bias member transfers an internal force to
the ampoule to cause the ampoule to engage the cutter and allow the electrolyte
to release thus activating the battery.
On September 13, 2012 the Company announced the receipt of a Notice of Allowance
from the USPTO for a Modular Device patent. The invention generally relates to a
handheld, powered device containing at least one power module having at least
one battery, wherein the power module is removable and separately connects to
each of the load modules. The patent relates to a modular device for providing
multiple modular components that may be interchanged as desired. A system for
providing a modular device for use in emergency or everyday applications and
having a plurality of modular components that are interchangeable with one
another depending on the particular desired use.
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Emergency Flashlight
On December 5, 2008, mPhase Technologies, Inc. signed a contract with Porsche
Design Gesellschaft m.b.H. in Austria ("Porsche Design' Studio"), to design a
premium version of the AlwaysReady Emergency Flashlight. A pilot program that
began in March of 2010 has resulted in the sale of approximately 56 emergency
flashlights. The flashlight sold in the pilot program contained mPhase's
proprietary mechanically-activated lithium reserve battery. The battery contains
a breakable barrier that separates the solid electrodes from the liquid
electrolyte until the battery is manually activated. Unlike traditional
batteries, the mPhase battery remains in an inert state with no leakage or
self-discharge until activation. The mPhase battery is designed to have an
almost infinite shelf life making it ideal for emergency lighting applications.
The premium flashlight will be marketed as an accessory for automobile roadside
emergency kits.
On January 29, 2009, the Company announced that it had contracted with
EaglePicher Technologies to design and manufacture, in small quantities, its
mechanically-activated battery that were used in the pilot program of sales of
the Company's new Emergency Flashlight. EaglePicher was selected for the project
because of their experience in custom and standardized power solutions for the
extreme environments of aerospace and military applications as well as medical
and commercial applications.
The reserve battery is a manually activated lithium cell designed to provide
Power On Command. The battery remains dormant until "turned on" by the user. It
is built to the highest standards with a minimum storage life of 20 years. Once
activated, the reserve battery is expected to deliver the electrical performance
of a standard primary CR123 battery used in many portable electronic
applications today.
EaglePicher Technologies, LLC, along with EaglePicher Company, is a world leader
in custom and standardized power solutions for the extreme environments of
aerospace and military applications as well as medical and commercial
applications. The company specializes in design and manufacture of battery
cells, battery packaging, battery management systems (BMS), analysis,
environmental testing, and energetic devices. Active in battery development and
testing since 1922, EaglePicher Technologies has the most experience and
broadest capability in battery electrochemistry of any battery supplier.
Owing to cost considerations, the Company has decided to utilize a cost reduced
active-reserve battery in its current version of its emergency flashlight
product for potential sales after the pilot program. Such active reserve battery
also has a very long shelf life and enables the Company to significantly reduce
the selling price of the Emergency Flashlight. In March 2011,the Company
received an initial order from Porsche Design Group in Germany for mPhase's
Porsche design branded mPower Emergency illuminators to be sold in Porsche
Design stores in Germany, Great Britain and the United States and it began
shipments of the Emergency Illuminators in April of 2011.
The Company is planning a cost-reduction of its luxury illuminator product in
order to penetrate a higher volume sales channel beyond the higher end market.
Magnetometer
In March of 2005, the Company entered into a second Development Agreement for 12
months at a cost of $1.2 million with the Bell Labs to develop MEMS-based
ultrasensitive magnetic sensor devices, also known as magnetometers, that could
be used in military and commercial electronics ( e.g., cell phones) for
determining location, as well as in portable security and metal detection
applications. The agreement was renewed in April of 2006 for another 12 months.
Although proven to work in the lab, the magnetometer technology could not be
scaled up as quickly and as cost effectively as the Company's nano battery. The
project was suspended in September 2007 so that all technical resources could be
allocated to the nano battery project.
Jump Starter
On October 17, 2011 the Company announced that it has developed a new product
with Porsche Design Studio for the automotive and marine markets. The product is
a rechargeable "jump starter" designed to recharge a dead automotive or similar
battery that is small enough to fit into the glove compartment of a car. The
Company, subject to adequate financing, is examining avenues for the production
and marketing of the product. The Company believes there may be a significant
market for this product since it is quickly rechargeable and is substantially
smaller than other competing products in the market.
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FINANCIAL OVERVIEW
Revenues. Since July 1, 2007, quarterly revenue, if any, has primarily been
attributable to grants from the United States Army and testing arrangements
involving its nanotechnology products. The Company is not currently working on
any research in connection with government grants. The Company plans to apply
for further STTR and SBIR grants with respect to its nanotechnology research and
product development efforts. The Company also derived minor revenues in
connection with sales of its emergency flashlight product under an initial pilot
program that commenced in March of 2010.
Cost of revenues. Cost associated with revenues from Army Grants and fees for
testing our nanotechnology products is currently very low. It is anticipated
that the Company's cost of revenues will increase significantly as the Company
moves forward with the commercialization and distribution of its emergency
flashlight product and other potential products associated with its
mechanically-activated reserve battery.
Research and development. Research and development expenses have consisted
principally of direct labor and payments made to MKE manufacturing (an approved
vendor of Porsche), Porsche Design Studio and Microphase Corporation in
connection with the Company's Emergency Illuminator product and to Silex, a
foundry located in Sweden, as well as other third party vendors involved in the
development of the nanotechnology products. All research and development costs
are expensed as incurred. Such expenses are expected to increase in the next
fiscal year as the Company introduces a second automotive product into the
market and pursues design and development of a cost reduced flashlight product.
General and administrative. General and administrative expenses consist
primarily of salaries and related expenses for personnel engaged in its
nanotechnology product line, legal and accounting personnel. In addition the
Company from time to time will use outside consultants. Certain administrative
activities are outsourced on a monthly fee basis to Microphase Corporation and
mPhase leases its office in Norwalk, Connecticut from Microphase Corporation.
Non-cash compensation charges . The Company makes extensive use of stock, stock
options and warrants as a form of compensation to employees, directors and
outside consultants. We incurred non-cash compensation charges totaling
$19,501,094 from inception (October 2, 1996) through September 30, 2012.
Other Income (Expense). Included in Other Expense are non-recurring items
related to the change in the value of derivative securities and amortization as
related debt discount. Such amounts will fluctuate significantly and should not
be considered as recurring or in any way indicative of operating results. In
addition, it has been the Company's policy to record as an expense the cost of
re-pricing securities (Reparation Cost) to raise capital.
Cumulative losses, net worth and capital needs
The Company has incurred cumulative development stage losses of $203,137,845 and
negative cash flow from operations of $88,823,004 from inception through
September 30, 2012. The auditors' report for the fiscal year ended June 30, 2012
includes the statement that "there is substantial doubt of the Company's ability
to continue as a going concern". As of September 30, 2012, the Company had a
negative net worth of ($4,948,242) compared to a negative net worth of
($5,502,767) as of June 30, 2012 as a result of continuing net losses, reduced
in the current three months primarily by conversions of convertible notes and
accrued interest in excess of the net loss for the current period.
The Company has convertible notes funded under a number of facilities with
Accredited Investors. Draws under this facility for the three months ended
September 30, 2012 amounted to $0 (accounted for as a pay-down of notes
receivable) and also the collection of $0 of accrued interest (included in the
statement of operations). The Company has significant overhang from funded and
unconverted portion of these convertible notes in excess of $1,523,462
convertible into 1,044,666,287 shares of common stock. On June 6, 2012 the
Company announced the restructuring of all of its convertible securities that
were issued to JMJ Financial and John Fife of approximately $1,500,000. The
result of the restructuring is that such debt is now 8% fixed rate debt payable
in equal monthly payments over a two year period of time commencing October of
2012. The monthly payments that must be made by the Company amount to
approximately $70,000 per month. The Company intends to raise funds in the
equity private placement market and though its equity line of credit to meet
this obligation as well as short term operating needs. The Company has not, as
of the date hereof, made any of the monthly payments, in cash and the holders
have continued to accrue interest on the convertible notes.
The Company anticipates it will need to establish new and additional funding
sources for the remaining portion of fiscal year 2013. The Company raised
$215,000 in net proceeds from private placements of 561,250,000 shares of its
common stock during the three months ended September 30, 2012. In addition the
Company has entered into an Equity Line with a fund sponsored by Dutchess
Capital and has registered a total of 250 million shares of common stock on a
Form S-1 Registration Statement that is effecitve. Under the terms of the Equity
Line, the Company is eligible to "PUT" from time to time up to 20 million shares
to the Dutchess fund at a price equal to 94% of the proceeds received from
periodic sales of the common stock in the open market by the Dutchess fund. The
Company has received $4,000 in net proceeds from the exercise of a 7th partial
PUT options during the three months ended September 30, 2012.
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The Company has been unable to fund short term capital needs for the
approximately $70,000 it needs to pay in cash on the convertible notes. The
Company is seeking new sources of short term funding to make such payments. In
the longer term, we estimate that the Company will need to raise approximately
$300,000 and $5,000,000 of additional capital above these funds through June 30,
2013 and June 30, 2014 respectively in order to fund commercialization of its
products.
The Company does not expect to derive any material revenue from its
nanotechnology product development during the current fiscal year. The Company
estimates that material revenues from its SmartNanoBattery could occur in 18
months depending upon the Company's ability to secure federal funding in the
form of SBIR grants and adoption and custom tailoring of such product as a
reserve battery to a computer memory or other function for a specific weapons
system. Additional revenues may be derived as early as the first quarter of
fiscal year 2013 from further sales of the Company's emergency flashlight
product depending upon the establishment of a successful licensing arrangement
with a major high-end product distributor.
THREE MONTHS ENDED SEPTEMBER 30, 2012 VS. SEPTEMBER 30, 2011
REVENUE
Total revenues were $2,154 for the three months ended September 30, 2012
compared to $0 for the three months ended September 30, 2011.The absence in
revenue was the result of completion of the Phase II Army grant by the Company
and the fact that during the quarter the Company did not receive any awards of
new government grants.
RESEARCH AND DEVELOPMENT
Research and development expenses were $993 for the three months ended September
30, 2012 as compared to $41,403 during the comparable period in 2011 or a
decrease of $40,410. This decrease in spending is a result of completion of its
smart nano battery prototype and its emergency flashlight using its
mechanically-activated reserve battery as brought to market in its pilot program
as well as the Company's current austerity program with respect to costs. This
was offset, in part, by development of a second automotive product by the
Company to be introduced in the market, assuming the availability of sufficient
funding, during the fiscal year 2013.
Subject to available funds, the Company expects to increase its research and
development efforts throughout fiscal years 2013 and 2014. Such research is
expected to focus on other applications for "smart surfaces" including the Smart
Nano Battery. The initial applications for the nano power cell technology will
address the need to supply emergency and reserved power to a wide range of
electronic devices for both commercial and defense applications.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative (G&A) expenses were $283,080 for the three months
ending September 30, 2012, down from $6,888,462 or a decrease of $6,605,382 from
the comparable period in 2011. Administrative expenses were held in check as the
Company has made a concentrated effort to freeze or otherwise reduce
administrative costs while it seeks to commercialize its smartnanobattery
product capabilities and secure more substantial research funding for possible
applications of its "smart surfaces" technology.
OTHER (EXPENSE) AND INCOME
Included in this category are non-cash gains and costs associated with
convertible debt that include a non-cash gain for the change in derivative value
of $771,241 offset by amortization of debt discount costs of $92,538 and $17,500
of prepayment fees and charges, resulting in a net credit of $661,203 from
derivative liabilities associated with the Company's convertible debt and is not
indicative of operating results. Additionally, net interest expense of $69,943
brought the total other income (expense) to $591,260 in the current period. For
the same period ended September 30, 2011, net other income (expense) totaled
$754,895, consisting primarily of net credits of $824,454 from derivative
liabilities and other income of $1,131, reduced by interest expense of $70,690.
NET INCOME AND (LOSS)
The Company recorded net income of $293,062 for the three months ended September
30, 2012 as compared to a loss of $6,179,222 for the three months ended
September 30, 2011. This represents a net income per common share of $0.00 and
loss per share of $(0.00) for the three month periods ended September 30, 2012
and 2011 respectively. The net loss recorded in the current period as compared
to the net loss reported for the same period last year is directly attributable
to the magnitude of the net gain from derivative liabilities associated with the
Company's convertible debt recorded for the three months ended September 30,
2012 and is not indicative of operating results.
26--------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
As required, mPhase has adopted ASC 605-10-525 "Revenue Recognition in Financial
Statements", which provides guidelines on applying generally accepted accounting
principles to revenue recognition based upon the interpretations and practices
of the SEC.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred in
accordance with ASC 730 "Research and Development."
MATERIAL EQUITY INSTRUMENTS
The Company has material equity instruments including convertible debentures and
convertible notes that are accounted for as derivative liabilities (SEE BELOW)
and options and warrants that are evaluated quarterly for potential
reclassification as liabilities pursuant to FASB Standards Codification Topic
815 (previously known as EITF 00-19) (SEE ALSO NOTE 3 under the caption "Other
Equity"). The Company utilized a sequencing method prescribed by EITF 00-19,
based upon applying shares available to contracts with the earliest inception
date first. During the fiscal year ended June 30, 2008, the Company reclassified
contracts for warrants to purchase 12,604,168 shares at fixed prices ranging
from $.13 to $.15 per share to liabilities.
The liability was recorded at the fair market value, which estimated value was
based upon the contractual life of the free standing warrants, using the Black
Scholes pricing model, based on the following weighted average assumptions:
annual expected return of 0%, an average life of 5 years, annual volatility of
81% and a risk-free interest rate of 2.25%. At the issuance date of the free
standing warrants, which warrants were issued during the fourth quarter of
fiscal June 30, 2008, the estimated value approximated $1,006,200 and, as
recalculated on the quarterly measurement dates, at June 30, 2008 the estimated
value approximated $433,300. During fiscal year ended 2009, the estimated value
was reduced to zero. The net change in the liability was credited to the change
in derivative value in the Consolidated Statement of Operations for the fiscal
years ended June 30, 2008 and 2009 for $572,900 and $433,300, respectively, for
each of these periods in accordance with FASB Standards Codification Topic 815
(previously known as EITF 00-19). Effective May, 2009, warrants to purchase
11,111,112 shares, and effective September, 2009, warrants to purchase 1,493,056
shares, representing all of the contracts for warrants to purchase 12,604,168
shares that were reclassified to liabilities during the fiscal year ended June
30, 2008, were reclassified to permanent equity.
Subsequent to September 30, 2009, the Company has not entered into, and
presently the Company does not have, any contracts for warrants or other equity
instruments subject to reclassification to liabilities as prescribed by FASB
Standards Codification Topic 815 (previously known as EITF 00-19) until August
10, 2011, when it entered into a Convertible Note for $25,000, which
concurrently provided the note holder a warrant and recorded an additional
derivative liability for the warrant.
DERIVATIVE LIABILITY
The Company has estimated the value of the derivative liability associated with
its convertible debt. Such estimate is based on a Black Scholes calculation and
is initially recorded for each convertible debt agreement at the time the debt
was issued. At each reporting period, the value of this liability is marked to
market and adjusted accordingly. Such adjustments are included in Other Income
(Expense).
STOCK-BASED COMPENSATION
On July 1, 2005, the Company adopted the provisions of ASC 718 "Compensation -
Stock Compensation" which requires companies to measure and recognizes
compensation expense for all employee stock-based payments at fair value over
the service period underlying the arrangement. Therefore, the Company is now
required to record the grant-date fair value of its stock-based payments (i.e.,
stock options and other equity-based compensation) in the statement of
operations. The Company adopted the "modified prospective" method, whereby fair
value of all previously-granted employee stock-based arrangements that remained
unvested at July 1, 2005 and all grants made on or after July 1, 2005 have been
included in the Company's determination of stock-based compensation expense.
27--------------------------------------------------------------------------------
MATERIAL RELATED PARTY TRANSACTIONS
MICROPHASE CORPORATION
mPhase's President is also an officer and shareholder of Microphase and mPhase's
Chief Operating Officer is also an employee of Microphase. On May 1, 1997, the
Company entered into an agreement with Microphase whereby it would use office
space as well as the administrative services of Microphase, including the use of
accounting personnel. This agreement was for $5,000 per month and was on a
month-to-month basis. In July 1998, the office space agreement was revised to
$10,000, in January 2000 to $11,050 per month, in July 2001 to $11,340 per
month, in July 2002 to $12,200 per month, in January 2003 to $10,000 per month,
and in July 2003 to $18,000 per month. Additionally, in July 1998, mPhase
entered into an agreement with Microphase, whereby mPhase would reimburse
Microphase $40,000 per month for technical research and development. In January
2003 the technical research and development agreement was revised to $20,000 per
month, and in July 2003 it was further revised to $5,000 per month for technical
and research development, $5,000 per month for administrative services and
$5,000 per month under the office space agreement. Beginning July 1, 2006,
billings for all of the above services has been $5,000 per month and in July,
2008, such fees were reduced to $3,000 per month. As of July 1, 2011, the fees
have increased to $3,630 per month. In addition, Microphase also charges fees
for specific projects on a project-by-project basis.
During the three months ended September 30, 2011 and September 30, 2012 and from
inception (October 2, 1996), $13,191, $5,399 and $9,488,788 respectively, have
been charged to expense. As a result of the foregoing transactions as of
September 30, 2012, the Company had a $58,526 payable to Microphase.
JANIFAST LTD.
The Company historically has purchased products and incurred certain research
and development expenses with Janifast Ltd that had offices in Hong Kong and a
manufacturing operation in the Peoples Republic of China in connection with
products associated with its former telecommunications business that was
recently discontinued as a business. Janifast Ltd was owned by a company in
which two directors and one former director of mPhase were significant
shareholders. In March of 2009 Janifast Ltd ceased operations owing to financial
distress and adverse global financial and credit conditions.
Janifast Limited had been a significant shareholder of the Company until
September 19, 2009, when it transferred to Mr. Durando 11,735,584 shares,
representing all the shares of the Company held by Janifast, in consideration of
the cancellation of loan obligations of $181,901 to Mr. Durando in connection
with the plan of its liquidation.
During the three months ended September 30, 2011 and 2012 and the period from
inception (October 2, 1996), $0, $0 and $16,031,811 respectively, have been
charged by Janifast to inventory or is included in operating expenses in the
accompanying statements of operations.
OTHER RELATED PARTIES
Mr. Abraham Biderman was employed until September 30, 2003 by our former
investment-banking firm Lipper & Company. On December 31, 2011, Mr. Biderman's
affiliated firms of Palladium Capital Advisors and Eagle Strategic Advisers were
owed unpaid finders' fees in the amount of $152,000, which is included in due to
related parties.
During the three months ended September 30, 2012, the Company issued no shares
to consultants who are not considered related parties.
Transactions with Officers
At various points during past fiscal years Messrs, Durando, Dotoli and Smiley
provided bridge loans to the Company evidenced by individual promissory notes
and deferred compensation so as to provide working capital to the Company. All
of the notes are payable on demand. During the fourth quarter of the fiscal year
ended June 30, 2009, the Board of Directors authorized a conversion feature on
these notes into shares of commons stock at the discretion of the holder
provided such shares are authorized and available at a conversion price of
$.0075 per share, and subsequently reduced such price to $.0040 per share which
was comparable to private placements done during that quarter.
28--------------------------------------------------------------------------------
Total compensation and payables to related parties and to officers is summarized
below:
Summary of compensation to related parties for the Three Months Ended September
20, 2012
Durando Dotoli Smiley Biderman Microphase Total
Consulting /
Salary $ 21,691 $ 21,691 $ 21,691 $ 65,072
Interest $ 15,857 $ 11,026 $ 9,086 $ 35,969
Rent $ 3,353 $ 3,353
G&A $ 2,046 $ 2,046
Finders Fees $ 9,500 $ 9,500
Total compensation
for the Three
Months Ended
September 30, 201 $ 37,548 $ 32,716 $ 30,777 $ 9,500 $ 5,399 $ 115,940
Summary of compensation to related parties for the Three Months Ended September
30, 2011
Durando Dotoli Smiley Biderman Lawrence Microphase Total
Consulting /
Salary $ 37,500 $ 34,167 $ 33,333 $ 105,000
Interest $ 13,116 $ 8,679 $ 6,337 $ 28,132
Rent $ 10,890 $ 10,890
G&A $ 2,301 $ 2,301Finders Fees $ 8,000 $ 8,000
Stock based
compensation
(shares
issued)* $ 2,488,500 $ 1,858,500 $ 1,858,500 $ 252,000 $ 63,000 $ 6,520,500
Stock based
compensation
(options
previously
issued & $ 173,316 $ 103,990 $ 62,394 $ 339,700
repriced)**
Totalcompensation $ 2,712,432 $ 2,005,336 $ 1,960,564 $ 260,000 $ 63,000 $ 13,191 $ 7,014,523
Commonstockissued*
Optionsissued(5years@5cents)**
Summary of Durando Dotoli Smiley Payable Biderman Microphase Total
payables
to related
parties as
of
September
30, 2012
Notes
payable $ 464,723 $ 321,813 $ 271,327 $ 1,057,863 $ 1,057,863
Accrued
Wages
Officers $ 39,167 $ 39,167 $ 20,416 $ 98,750 $ 98,750
Due to
Officers /
Affiliates $ 152,000 $ 58,526 $ 210,526
Interest
Payable $ 74,628 $ 49,770 $ 37,709 $ 162,108 $ 162,108
Total
Payable to
Officers /
Affiliates
as of
September
30, 2012 $ 578,519 $ 410,750 $ 329,452 $ 1,318,720 $ 152,000 $ 58,526 $ 1,529,246
Summary of Durando Dotoli Smiley Payable Biderman Microphase Total
payables
to related
parties as
of June
30, 2012
Notes
payable $ 456,573 $ 333,663 $ 273,177 $ 1,063,413 $ 1,063,413
Accrued
Wages
Officers $ 29,167 $ 29,167 $ 10,417 $ 68,751 $ 68,751
Due to
Officers /
Affiliates $ 150,000 $ 53,128 $ 203,128
Interest
Payable $ 58,771 $ 38,745 $ 28,623 $ 126,139 $ 126,139
Total
Payable to
Officers /
Affiliates
as of June
30, 2012 $ 544,511 $ 401,575 $ 312,217 $ 1,258,303 $ 150,000 $ 53,128 $ 1,461,431
29
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred cumulative development stage losses of $203,137,845,
and negative cash flow from operations of $88,823,004 as of September 30, 2012.
The auditors' report for the fiscal year ended June 30, 2012 includes the
statement that "there is substantial doubt of the Company's ability to continue
as a going concern". As of September 30, 2012, the Company had a negative net
worth of ($4,948,242) compared to a negative net worth of ($5,502,767) as of
June 30, 2012 as a result of continuing net losses, reduced in the current three
months primarily by conversions of convertible notes and accrued interest in
excess of the net loss for the current period.
The Company raised $215,000 in net proceeds from private placements of
561,250,000 shares of its common stock during the three months ended September
30, 2012. The Company entered into a $10,000,000 equity line of Credit with
Dutchess Opportunity Fund II, LLC in December of 2011. Under the equity line,
the Company is eligible to "PUT" to the fund, 20,000,000 shares of its common
stock during any pricing period. The Company has registered a total of
$250,000,000 shares of its common stock on a Form S-1 Registration Statement
with the Securities and Exchange Commission that was declared effective on
January 17, 2012 in connection with the Dutchess Equity Line. As August 27,
2012, the most recent funding under this agreement, the Company has received
$149,428 of net proceeds under the Equity Line. The amount of proceeds to be
received under the Equity Line will depend upon the stock price of the Company
at the various points in time it exercises the Put Option.
The Company anticipates accessing the Equity Line in combination with private
placements of its common stock to be issued from time to time will fund short
term capital needs. As a result of the restructuring the Convertible Notes with
JMJ Financial and John Fife, the Company is obligated to make monthly payments,
in cash of approximately $70,000 commencing October 1, 2012 over a period of two
years. The Company has not been able to raise sufficient funds to make the first
payment due on October 1, 2012 and the holders of the Convertible Notes have
continued to accrue interest on the outstanding balance. The Company is
continuing its discussions with the two major holders of the Company's
Convertible Notes in order to meet its obligations.. We estimate that the
Company will need to raise approximately $200,000 of cash per month through
private placements of its common stock with Accredited Investors as well as
accessing, from time to time, the Equity Line. The Company is currently in
discussions with a major French multinational company to custom tailor its Smart
NanoBattery through further research and development and have such multinational
company provide funding for such effort. The Company does not expect to derive
any material revenue from its nanotechnology product development until after a
deployment and custom tailoring of its Smart Nanobattery takes place for such
French multinational corporation.
In addition the Company has established a relationship with Stevens Institute
and together with its work with Picatinny Arsenal plans to seek additional
funding, on a combined basis from the United States Army for custom tailoring
its SmartNanoBattery as a reserve battery for either a source of energy for
critical mission guidance systems for small scale smart munitions as well as
energy source for critical mission computer devices used in weapons systems..
MANAGEMENT'S PLANS
The Company has shifted its focus to the development of its "smart surfaces"
using the science of nanotechnology. The Company does not expect to derive any
material revenue from its nanotechnology product development during the next 18
months. In addition, the Company relies on the continuation of funding under the
Equity Line of Credit (See Note 4). This will depend upon the trading volume and
liquidity to the Company's common stock as well as its price. The Company's
ability to continue as a going concern and its future success is dependent upon
its ability to raise capital in the near term to: (1) satisfy its current
obligations including, but not limited to its obligations to pay approximately
$70,000, (2) continue its research and development efforts, and (3) allow the
successful wide scale development, deployment and marketing of its products.
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