-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IXzgfi6qhuZh8C7U+WJZHaeFDx3nOPoQN4wF6gGzRASXDVNEhc/xmA8YPU6030hP aFsiye6fEHHr9nfe48891w== 0000950130-02-003625.txt : 20020515 0000950130-02-003625.hdr.sgml : 20020515 ACCESSION NUMBER: 0000950130-02-003625 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MPHASE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000825322 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 222287503 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30202 FILM NUMBER: 02648518 BUSINESS ADDRESS: STREET 1: 587 CONNECTICUT AVE STREET 2: PO BOX 566 CITY: NORWALK STATE: CT ZIP: 06854 BUSINESS PHONE: 2038312212 MAIL ADDRESS: STREET 1: 587 CONNECTICUT AVE STREET 2: PO BOX 566 CITY: NORWALK STATE: CT ZIP: 06854 FORMER COMPANY: FORMER CONFORMED NAME: TECMA LABORATORIES INC DATE OF NAME CHANGE: 19980915 10-Q 1 d10q.htm FORM 10-Q Prepared by R.R. Donnelley Financial -- FORM 10-Q
Table of Contents
 
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
 
For The Quarter Ended March 31, 2002
 
Commission File No. 000-24969
 
 
mPhase Technologies, Inc.
(Exact name of registrant as specified in its charter)
 
New Jersey
   
22-2287503
(State or other jurisdiction
of incorporation or organization)
   
(I.R.S. Employer
Identification Number)
      
587 Connecticut Ave., Norwalk, Ct
(Address of principal executive offices)
   
06854-1711
(Zip Code)
 
Issuer’s Telephone Number, (203) 838–2741
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act Of 1934, during the preceding 12 months (or for shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 
The number of shares outstanding of each of the registrant’s classes of common stock as of March 31, 2002 is 55,844,508 shares, all of one class of $.01 stated value common stock.
 

Table of Contents
 
mPHASE TECHNOLOGIES, INC.
 
 
        
Page
PART I.    FINANCIAL INFORMATION
     
Item 1.
  
Financial Statements
     
      
1
      
2
      
3
      
4
      
5
      
6-11
Item 2.
     
12-18
Item 3.
     
18
PART II.    OTHER INFORMATION
     
Item 1.
     
18
Item 2.
     
18
Item 3.
     
18
Item 4.
     
18
Item 5.
     
18
Item 6.
     
18
  
19

Table of Contents
 
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
 
    
June 30, 2001
     
March 31, 2002
  
           
(Unaudited)
  
ASSETS
                  
CURRENT ASSETS
                  
Cash and cash equivalents
   
$
31,005
 
   
$
310,643
 
Accounts receivable, net
   
 
292,434
 
   
 
516,984
 
Inventory, net
   
 
4,303,895
 
   
 
4,037,404
 
Due from officer
   
 
100,000
 
   
 
—  
 
Prepaid expenses and other current assets
   
 
856,979
 
   
 
293,220
 
    
  
Total Current Assets
   
 
5,584,313
 
   
 
5,158,251
 
    
  
Property and equipment, net
   
 
2,198,845
 
   
 
2,034,266
 
Patents and licensing rights, net
   
 
1,026,524
 
   
 
746,768
 
Other Assets
   
 
187,500
 
   
 
123,045
 
    
  
TOTAL ASSETS
   
 
8,997,182
 
   
 
8,062,330
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
CURRENT LIABILITIES
                  
Accounts payable
   
 
5,116,029
 
   
 
3,970,984
 
Accrued expenses
   
 
1,742,138
 
   
 
1,445,390
 
Due to officers
   
 
—  
 
   
 
156,252
 
Due to related parties
   
 
184,373
 
   
 
550,879
 
Notes payable, current
   
 
—  
 
   
 
398,116
 
Deferred revenue
   
 
—  
 
   
 
214,180
 
    
  
TOTAL CURRENT LIABILITIES
   
 
7,042,540
 
   
 
6,735,801
 
    
  
Other Liabilities, net of current portion
   
 
90,000
 
   
 
460,396
 
    
  
STOCKHOLDERS’ EQUITY
                  
Common stock, stated value $.01, 150,000,000 shares authorized; 41,344,467 and 55,844,508 shares issued and outstanding at June 30, 2001 and March 31, 2002, respectively
   
 
413,445
 
   
 
558,444
 
Additional paid in capital
   
 
92,293,370
 
   
 
99,487,780
 
Deferred compensation
   
 
(713,275
)
   
 
(91,746
)
Deficit accumulated during development stage
   
 
(90,120,925
)
   
 
(99,080,372
)
Treasury stock, 13,750 shares at cost
   
 
(7,973
)
   
 
(7,973
)
    
  
TOTAL STOCKHOLDERS’ EQUITY
   
 
1,864,642
 
   
 
866,133
 
    
  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   
$
8,997,182
 
   
$
8,062,330
 
    
  
 
The accompanying notes are an integral part of these consolidated balance sheets.

1

Table of Contents
 
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
(unaudited)
 
    
For the Three Months Ended to March 31,
     
October 2, 1996 (Date of Inception) March 31,
  
    
2001
     
2002
     
2002
  
REVENUES
   
$
2,958,635
 
   
$
865,797
 
   
$
12,751,961
 
    
  
  
COSTS AND EXPENSES
                           
Cost of Sales
   
 
1,688,753
 
   
 
724,699
 
   
 
7,648,240
 
Research and development (including non-cash stock related charges of $0, $17,080, and $1,780,106, respectively)
   
 
2,219,933
 
   
 
538,826
 
   
 
29,896,447
 
General and Administrative (including non-cash stock related charges of $615,786, $737,407, and $20,277,625, respectively)
   
 
2,873,437
 
   
 
1,261,713
 
   
 
46,014,766
 
Depreciation and amortization
   
 
200,039
 
   
 
135,799
 
   
 
2,119,684
 
Non-cash charges for stock based compensation
   
 
232,083
 
   
 
92,976
 
   
 
24,997,349
 
    
  
  
TOTAL COSTS AND EXPENSES
   
 
7,214,245
 
   
 
2,754,013
 
   
 
110,676,486
 
    
  
  
LOSS FROM OPERATIONS
   
 
(4,255,610
)
   
 
(1,888,216
)
   
 
(97,924,525
)
    
  
  
OTHER INCOME (EXPENSE):
                           
MINORITY INTEREST LOSS IN CONSOLIDATED SUBSIDIARY
   
 
—  
 
   
 
—  
 
   
 
20,000
 
LOSS FROM UNCONSOLIDATED SUBSIDIARY
   
 
—  
 
   
 
—  
 
   
 
(1,466,467
)
INTEREST INCOME (EXPENSE), NET
   
 
4,137
 
   
 
(5,340
)
   
 
166,762
 
    
  
  
TOTAL OTHER INCOME (EXPENSE)
   
 
4,137
 
   
 
(5,340
)
   
 
(1,279,705
)
    
  
  
LOSS BEFORE EXTRAORDINARY ITEM
   
 
(4,251,473
)
   
 
(1,893,556
)
   
 
(99,204,230
)
GAIN ON EXTINGUISHMENTS
   
 
—  
 
   
 
86,009
 
   
 
123,858
 
    
  
  
NET LOSS
   
$
(4,251,473
)
   
$
(1,807,547
)
   
$
(99,080,372
)
    
  
  
LOSS PER COMMON SHARE
                           
basic and diluted;
                           
Loss from continuing operations before extraordinary gains
   
$
(.12
)
   
$
(.03
)
         
    
  
        
Extraordinary gains on debt Extinguishments
   
$
—  
 
   
$
—  
 
         
    
  
        
Net loss per common share
   
$
(.12
)
   
$
(.03
)
         
    
  
        
WEIGHTED AVERAGE COMMON SHARES; OUTSTANDING, basic and diluted
   
 
34,205,000
 
   
 
55,606,168
 
         
    
  
        
 
The accompanying notes are an integral part of these consolidated financial statements.

2

Table of Contents
 
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
(Unaudited)
 
    
For the Nine Months Ended March 31,
     
October 2,
1996 (Date of Inception to March 31,
  
    
2001
     
2002
     
2002
  
REVENUES
   
$
10,055,006
 
   
$
1,948,351
 
   
$
12,751,961
 
    
  
  
COSTS AND EXPENSES
                           
Cost of Sales
   
 
5,339,634
 
   
 
1,711,811
 
   
 
7,648,240
 
Research and development (including non-cash stock related charges of $0, $202,175, and $1,780,106, respectively)
   
 
8,699,948
 
   
 
2,907,256
 
   
 
29,896,447
 
General and Administrative (including non-cash stock related charges of $2,319,638, $2,441,659, and $20,277,625, respectively)
   
 
8,966,355
 
   
 
5,376,709
 
   
 
46,014,766
 
Depreciation and amortization
   
 
459,464
 
   
 
538,255
 
   
 
2,119,684
 
Non-cash charges for stock based compensation
   
 
950,070
 
   
 
480,727
 
   
 
24,997,349
 
    
  
  
TOTAL COSTS AND EXPENSES
   
$
24,415,471
 
   
 
11,014,758
 
   
 
110,676,486
 
    
  
  
LOSS FROM OPERATIONS
   
 
(14,360,465
)
   
 
(9,066,407
)
   
 
(97,924,525
)
    
  
  
OTHER INCOME (EXPENSE):
                           
MINORITY INTEREST LOSS IN CONSOLIDATED SUBSIDIARY
   
 
—  
 
   
 
—  
 
   
 
20,000
 
LOSS FROM UNCONSOLIDATED SUBSIDIARY
   
 
—  
 
   
 
—  
 
   
 
(1,466,467
)
INTEREST INCOME (EXPENSE), NET
   
 
40,812
 
   
 
(16,898
)
   
 
166,762
 
    
  
  
TOTAL OTHER INCOME (EXPENSE)
   
 
40,812
 
   
 
(16,898
)
   
 
(1,279,705
)
    
  
  
LOSS BEFORE EXTRAORDINARY ITEM
   
 
14,319,653
 
   
 
(9,083,305
)
   
 
(99,204,230
)
GAIN ON EXTINGUISHMENTS
   
 
—  
 
   
 
123,858
 
   
 
123,858
 
    
  
  
NET LOSS
   
$
(14,319,653
)
   
$
(8,959,447
)
   
$
(99,080,372
)
    
  
  
LOSS PER COMMON SHARE
basic and diluted;
                           
Loss from continuing operations before extraordinary gains
   
$
(.44
)
   
$
(.19
)
         
Extraordinary gains on debt Extinguishments
   
$
—  
 
   
$
—  
 
         
    
  
        
Net loss per common share
   
$
(.44
)
   
$
(.19
)
         
    
  
        
WEIGHTED AVERAGE COMMON SHARES; OUTSTANDING, basic and diluted
   
 
32,684,012
 
   
 
47,346,671
 
         
    
  
        
 
 
The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents
 
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
SHAREHOLDERS’ EQUITY
For the nine months ended March 31, 2002 (unaudited)
 
   
Shares
  
$.01 Stated Value
  
Treasury Stock
  
Additional Paid-in Stock
    
Deferred Compensation
  
Accumulated Deficit
       
TOTAL STOCKHOLDERS EQUITY
  
Balance June 30, 2001
  
41,344,467
  
$413,445
  
$(7,973)
  
$92,293,370
 
  
$(713,275)
  
$(90,120,925)
 
     
$1,864,642
 
Sale of Common
stock with warrants
in private placement
  
6,872,643
  
68,727
  
—  
  
1,875,027
 
  
—  
  
—  
 
     
1,943,754
 
Issuance of Common stock for services
  
871,068
  
8,710
  
—  
  
448,537
 
  
—  
  
—  
 
     
457,247
 
Issuance of options and warrants for services
  
—  
  
—  
  
—  
  
1,776,552
 
  
—  
  
—  
 
     
1,776,552
 
Cancellation of unearned options to former employees
  
—  
  
—  
  
—  
  
(140,802
)
  
140,802
  
—  
 
     
—  
 
Amortization of deferred employee stock option compensation
  
—  
  
—  
  
—  
  
—  
 
  
480,727
  
—  
 
     
480,727
 
Issuance of common stock and warrants in settlement of debt
  
1,342,996
  
13,429
  
—  
  
1,265,229
 
  
—  
  
—  
 
     
1,278,658
 
Sale of Common stock to certain Officers and Directors in private placement
  
2,000,000
  
20,000
  
—  
  
980,000
 
  
—  
  
—  
 
     
1,000,000
 
Issuance of Common stock with warrants in settlement of debt to related parties
  
3,400,000
  
34,000
  
—  
  
986,000
 
  
—  
  
—  
 
     
1,020,000
 
Issuance of Common stock upon exercise of options
  
13,334
  
133
  
—  
  
3,867
 
  
—  
  
—  
 
     
4,000
 
Net Loss
  
—  
  
—  
  
—  
  
—  
 
      
(8,959,447
)
     
(8,959,447
)
   
 
 
 
 
 
    
Balance, March 31,2002
  
55,844,508
  
$558,444
  
$(7,973)
  
$99,487,780
 
  
$  (91,746)
  
$(99,080,372)
 
     
$    866,133
 
   
 
 
 
 
 
    
 
 
The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents
 
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
 
    
For the
Nine Months Ended
March 31,
     
October 2, 1996 (Date of Inception)
to March 31,
  
    
2001
     
2002
     
2002
  
Cash Flow From Operating Activities:
                           
Net Loss
   
 
$(14,319,653)
 
   
 
$(8,959,447)
 
   
 
$(99,080,372)
 
Adjustments to reconcile net loss to net cash used in operating activities:
                           
Depreciation and amortization
   
 
866,076
 
   
 
1,224,362
 
   
 
3,759,204
 
Book Value of fixed assets disposed
   
 
31,147
 
            
 
74,272
 
Provision for doubtful accounts
   
 
—  
 
            
 
29,218
 
Extraordinary gain on debt extinguishment
   
 
—  
 
   
 
(123,858
)
   
 
(123,858
)
Loss on unconsolidated subsidiary
   
 
—  
 
            
 
1,466,467
 
Impairment of note receivable
   
 
—  
 
            
 
212,500
 
Non-cash charges relating to issuance of common stock, common stock options and warrants
   
 
3,269,708
 
   
 
3,124,561
 
   
 
46,872,874
 
Changes in assets and liabilities:
                           
Accounts receivable
   
 
(1,423,931
)
   
 
(224,550
)
   
 
(546,202
)
Inventory
   
 
(2,984,124
)
   
 
266,491
 
   
 
(4,037,404
)
Prepaid expenses and other
                           
Other current assets
   
 
(517,528
)
   
 
(65,276
)
   
 
(805,722
)
Other Non-current assets
   
 
—  
 
   
 
64,455
 
   
 
(85,545
)
Accounts payable
   
 
1,621,704
 
   
 
(799,341
)
   
 
3,523,172
 
Accrued expenses
   
 
(484,074
)
   
 
915,540
 
   
 
2,598,306
 
Due to/from related parties
   
 
1,792,646
 
   
 
1,677,366
 
   
 
3,846,103
 
Receivables from Subsidiary
   
 
—  
 
            
 
(150,000
)
Due from officer
   
 
—  
 
   
 
100,000
 
   
 
(0
)
Deferred revenue
   
 
—  
 
   
 
214,180
 
   
 
214,180
 
    
  
  
Net cash used in operating Activities
   
 
(12,148,029
)
   
 
(2,565,517
)
   
 
(42,232,807
)
    
  
  
Cash Flow From Investing Activities:
                           
Payments related to patents and licensing rights
   
 
(120,275
)
   
 
(71,150
)
   
 
(372,221
)
Purchases of fixed assets
   
 
(1,028,218
)
   
 
(31,445
)
   
 
(2,463,800
)
    
  
  
Net cash used in investing activities
   
 
(1,148,493
)
   
 
(102,595
)
   
 
(2,836,021
)
    
  
  
Cash Flow From Financing Activities:
                           
Proceeds from issuance of common stock and exercises of options and warrants
   
 
7,119,345
 
   
 
2,947,750
 
   
 
45,387,444
 
Repurchase of treasury stock at cost
   
 
—  
 
   
 
—  
 
   
 
(7,973
)
    
  
  
Net cash provided by financing activities
   
 
7,119,345
 
   
 
2,947,750
 
   
 
45,379,471
 
    
  
  
Net increase(decrease) in cash
   
 
(6,177,177
)
   
 
279,638
 
   
 
310,643
 
Cash and cash equivalents, beginning of period
   
 
6,432,417
 
   
 
31,005
 
   
 
0
 
    
  
  
Cash and Cash equivalents, end of period
   
$
255,240
 
   
$
310,643
 
   
 $
310,643
 
    
  
  
 
The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents
 
mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
(Unaudited)
 
1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations—mPhase Technologies, Inc. (the “Company”) was organized on October 2, 1996. On February 17, 1997, the Company acquired Tecma Laboratories, Inc. (“Tecma”) in a transaction accounted for as a reverse merger whereby Tecma issued 6,600,000 shares of its common stock in exchange for all of the issued and outstanding shares of the Company, and thereafter Tecma changed its name to the Company’s current name. On June 25, 1998, the Company acquired Microphase Telecommunications, Inc. (“MicroTel”), through the issuance of 2,500,000 shares of its common stock in exchange for all the issued and outstanding shares of MicroTel. The assets acquired in this acquisition were patents related to the mPhase line of DSL component products (e.g., POTS Splitters) and patent applications utilized in the Company’s proprietary Traverser™ Digital Video Data Delivery System (“Traverser™”).
 
The primary business of the Company is to design, develop, manufacture and market its flagship product, the Traverser™ System. The Traverser™ System enables the simultaneous delivery of digital television, high-speed Internet and traditional voice services over telephone wires. This technology allows telephone companies to offer its customers a complete suite of communication services, thereby increasing per subscriber revenue, and increasing the competitiveness of such telcos with respect to other service providers, such as cable companies. Currently, the Company is focused on the early market entry of the Traverser™ into telephone companies around the world. The Company also derives revenue on the sale of its line of DSL component products, which it has developed in conjunction with the operability of its flagship product. The Company continues to be a development stage company, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development Stage Enterprises”, as it continues to devote substantially all of its efforts to establishing its core business, and it has not yet commenced the significant deployment of its planned principal operations.
 
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the regulations of the Securities Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ending March 31, 2002 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2001.
 
Through March 31, 2002, the Company had incurred development stage losses from inception totaling approximately $99,080,372 and was in a working capital deficit position of $1,577,550. At March 31, 2002, the Company had approximately $310,643 of cash, cash equivalents and approximately $516,984 of trade receivables to fund short-term working capital requirements. The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) the successful wide scale development, deployment and marketing of its products.
 
Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

6

Table of Contents

mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
Reclassifications—Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current period presentation.
 
Earnings Per Share—The Company computes earnings per share in accordance with SFAS No. 128, “Earnings per Share”. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Common equivalent shares have been excluded from the computation of diluted EPS for all periods presented since their affect is antidilutive.
 
Research and Development—Research and development costs are charged to operations as incurred.
 
Revenue Recognition—All revenue included in the accompanying consolidated statements of operations for all periods presented relates to sales of mPhase’s line of POTS Splitter products and other related DSL component products. As required, the Company adopted the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, which provides guidance on applying generally accepted accounting principles to revenue recognition based on the interpretations and practices of the SEC. The Company recognizes revenue for its line of POTS Splitter products at the time of shipment, at which time, no other significant obligations of the Company exist, other than normal warranty support. Deferred revenue relates to prepayments by customers for which the Company’s obligation to deliver products has not been met.
 
Recent Accounting Pronouncements—In July 2001, the Financial Accounting Standards Board, (“FASB”) issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS No. 142 effective July 1, 2002. Adoption of SFAS No. 141 will have no effect on the Company’s results of operations or financial position. Management does not expect that adoption of SFAS No. 142 will have a material effect on the Company’s results of operations or financial position.
 
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, and provides guidance on classification and accounting for such assets when held for sale or abandonment. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management does not expect that adoption of SFAS No. 144 will have a material effect on the Company’s results of operations or financial position.

7

Table of Contents

mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
2.    RELATED PARTY TRANSACTIONS
 
Certain members of the management of the Company are also employees of Microphase Corp. (“Microphase”). On May 1, 1997, the Company entered into a month-to-month agreement with Microphase, pursuant to which the Company uses office space as well as the administrative services of Microphase including the use of accounting personnel. The Company initially paid Microphase $10,000 per month until January 2000, at which time the office space agreement was revised to provide a fee of $11,050 and again in July 2001 this agreement was revised to provide of fee of $11,340 per month. Additionally, in July 1998, the Company entered into an agreement with Microphase, whereby the Company pays Microphase $40,000 per month for technical research and development assistance. Microphase also charges fees for specific projects on a project-by-project basis. During the nine months ended March 31, 2001 and 2002 and for the period from inception (October 2, 1996) to March 31, 2002, $1,794,817, $1,0l0,909 and $6,633,026 respectively, have been charged to expense or inventory at March 31, 2002 under these Agreements.
 
The Company is obligated to pay a 3% royalty to Microphase on revenues from the Company’s proprietary Traverser™ Digital Video and Data Delivery System and related component products. During the nine months ended March 31, 2002, the Company recorded royalties to Microphase totaling $59,613.
 
As a result of the foregoing transactions as of March 31, 2001, the Company had a $6,411 payable to Microphase, which is included in amounts due to related parties in the accompanying consolidated balance sheet. Additionally, at March 31, 2002, approximately $90,000 of undelivered purchase orders remain outstanding to Microphase.
 
The Company purchases products and incurs certain research and development expenses with Janifast, which is owned by U.S. Janifast Holdings, Ltd., a company in which three directors of mPhase are significant shareholders, in connection with the manufacturing of POTS Splitter shelves and component products including cards and filters sold by the Company. As of March 31, 2002 the amount due to Janifast was $478,539, which is included in due to related parties in the accompanying balance sheet. During the nine months ended March 31, 2002, Janifast charged the Company $1,560,221 for product costs, which are included in inventory on the consolidated balance sheet or cost of sales, and for research and development expenses in the statement of operations as of March 31, 2002. Additionally, at March 31, 2002, approximately $1,050,000 of undelivered purchase orders remain outstanding to Janifast.
 
Included in due to related parties in the accompanying balance sheet as of March 31, 2002 is $65,930 due to affiliates of the Company’s joint venture partner, AlphaStar International, Inc.
 
As consideration for a letter of settlement with a former consultant of mPhase, the Company had loaned the former consultant $250,000 in the form of a Note (the “Note”) secured by 75,000 shares of the former consultants common stock of mPhase. The Note was due April 7, 2001. Accordingly, during the year ended June 30, 2001, the Company charged $212,500 to administrative expense as a result of impairment of the Note. The Company has included the balance of $37,500, representing the estimated fair value of the underlying stock, in long-term assets in the accompanying consolidated balance sheet at March 31, 2002.
 
During the year ended June 30, 2001, the Company converted $2,420,039 of liabilities due to directors and related parties into 4,840,077 shares of the Company’s common stock at $.50 per share pursuant to debt conversion agreements.

8

Table of Contents

mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
During March 2002, the Company converted $420,872 of liabilities due to Piper Rudnick LLP, outside legal counsel to mPhase into a warrant to purchase up to a total of 1,683,000 shares of the Company’s common stock which is intended to be exercised only on a cashless basis; or 1,402,908 shares of the Company’s common stock at a value of $.30 per share, if exercised on the date issued; and a warrant to purchase 550,000 shares of the Company’s common stock at an exercise price of $.30 per share pursuant to the terms of payment agreement. In addition Piper agreed to accept a Promissory note for $420,872 of current payables at an interest rate of 8% with payments of $5,000 per month commencing June 1, 2002 and continuing through December 1, 2003, with a final payment of principal plus accrued interest due at maturity on December 31, 2003.
 
3.    INVENTORY
 
Inventory is stated at the lower of cost, determined on a first-in, first-out basis, or market. Inventory consists mainly of the Company’s POTS Splitter shelves and cards. At March 31, 2002 inventory is comprised of the following:
        
Raw materials
   
$   750,494
 
Work in progress
   
1,121,734
 
Finished goods
   
3,127,206
 
    
Total
   
4,999,434
 
Less: Reserve for Obsolescence
   
(962,030
)
    
Net Inventory
   
$4,037,404
 
    
 
4.    INCOME TAXES
 
The Company accounts for income taxes using the asset and liability method in accordance with SFAS No. 109 “Accounting for Income Taxes”. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Because of the uncertainty as to their future realizability, net deferred tax assets, consisting primarily of net operating loss carryforwards, have been fully reserved for. Accordingly, no income tax benefit for the net operating loss has been recorded in the accompanying consolidated financial statements.
 
Utilization of net operating losses generated through March 31, 2002 may be limited due to changes in ownership that have occurred.
 
5.    ACCRUED EXPENSES
 
Accrued expenses consist of the following:
 
    
June 30, 2001
   
March 31, 2002
Georgia Tech
   
$   400,000
   
$   800,000
Other
   
1,342,138
   
645,390
    
  
    
$1,742,138
   
$1,445,390
    
  

9

Table of Contents

mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
6.    JOINT VENTURE
 
In March 2000, the Company acquired a 50% interest in mPhaseTelevision.Net, Inc. for $20,000 pursuant to a Joint Venture Agreement (the ‘Agreement’). In addition, the Company loaned the joint venture $1,000,000 at 8% interest per annum in March 2000. The loan is repayable to the Company from equity infusions to the subsidiary, but in no event later than such time that mPhase Television qualifies for a NASDAQ Small Cap Market Listing. During April 2000, the Company acquired an additional 6.5% in interest in mPhaseTelevision.Net, Inc. for $1,500,000. The Agreement stipulates for mPhase’s joint venture partner, AlphaStar International, Inc., to provide mPhaseTelevision.Net, Inc. right of first transmission for its transmissions including MPEG-2 digital satellite television.
 
During the nine months ending March 31, 2001 and 2002, mPhaseTelevision.Net, Inc. was charged $806,544 and $64,039, respectively, for fees and costs by AlphaStar International, Inc. and its affiliates.
 
7.    EQUITY TRANSACTIONS
 
In July 2001, the Company sold 75,000 shares of its common stock and a like amount of warrants to purchase one share each of the Company’s common stock at an exercise price of $3.00 generating gross proceeds of $75,000 in a private transaction with accredited investors.
 
In September 2001, certain Board members subscribed to purchase 2,000,000 restricted shares of the Company’s common stock for $1,000,000.
 
In December 2001, the Company issued 3,474,671 shares of its common stock and a like amount of warrants to purchase one share each of the Company’s common stock at an exercise price of $.30 generating gross proceeds of $1,042,400 in a private transaction pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended with accredited investors, which included a subscription receivable of $440,200, which was collected in January 2002.
 
In connection with the private placement, the Company issued 277,975 shares of its common stock and a like amount of warrants to purchase one share each at an exercise price of $.30 to finders and consultants whom assisted in the transaction in December 2001.
 
In January 2002, the Company issued 2,754,503 shares of its common stock and a like amount of warrants to purchase one share each of the Company’s common stock at an exercise price of $.30 generating gross proceeds of $826,351 in a private transaction pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended with accredited investors.
 
The Company granted 1,115,000 options, 48,068 shares of its common stock and 48,068 warrants to employees and 4,453,000 options to consultants for services performed during the nine months ending March 31, 2002. Compensation expense for the options granted to consultants was recorded based on the fair value of the options at the date of grant. Also, during the nine months ending March 31, 2002, the Company granted 823,000 shares of its common stock and 1,675,000 warrants to consultants for services performed.
 
8.    DEBT EXTINGUISHMENTS
 
During the nine months ending March 31, 2002, pursuant to debt conversion agreements, the Company converted the $1,278,658 of liabilities due to certain vendors into 1,342,996 shares of the Company’s common stock and 120,000 warrants in addition to the warrants discussed in Note 2, which resulted in extraordinary gains on extinguishments of $123,858.

10

Table of Contents

mPHASE TECHNOLOGIES, INC.
(A Development Stage Company)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
9.    COMMITMENTS AND CONTINGENCIES
 
The Company has entered into various agreements with Georgia Tech Research Corporation (“GTRC”), pursuant to which the Company receives technical assistance in developing the commercialization of its Digital Video and Data Delivery System (DVDDS). The amounts incurred by the Company for GTRC technical assistance with respect to its research and development activities and included in the accompanying consolidated statement of operations for the nine months ending March 31, 2001 and 2002 and for the period from inception through March 31, 2002 totaled approximately $3,175,850, $400,000 and $13,374,300, respectively. If and when sales commence utilizing this particular technology, the Company will be obligated to pay to GTRC a royalty of 5% of product sales, as defined. As of March 31, 2002, $977,248 and $800,000 are included in accounts payable and accrued expenses, respectively to GTRC.
 
The Company is currently renegotiating with Alphastar International, Inc., its joint venture partner in mPhaseTelevision.Net, Inc., the current joint venture agreement.
 
From time to time, the Company may be involved in various legal proceedings and other matters arising in the normal course of business. Management does not believe the outcome of any proceedings will have a material impact on the Company’s financial position or results of operations.

11

Table of Contents
 
 
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 and the related notes.
 
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE 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 is a development-stage company that has designed, patented and is currently engaged in the initial rollout of the Company’s flagship product, the Traverser™. The Company believes that the Traverser™ provides a unique turnkey broadband equipment solution that enables telephone companies to deliver real time digital video programming, high-speed Internet and voice telephony service over existing copper telephone lines. The Company believes that the Traverser™ will, in many instances, provide the most cost effective, reliable and scaleable solution for many telephone companies to provide a comprehensive suite of bundled or unbundled services, utilizing Asymmetric Digital Subscriber Line, or ADSL technology. mPhase also manufactures and sells a line of POTS Splitters and other related DSL component products, which are currently being deployed by telephone companies both in the United States and abroad.
 
mPhase was organized on October 2, 1996. On February 17, 1997, the Company acquired Tecma Laboratories, Inc., a public corporation in a reverse merger transaction. This resulted in the Company’s stock becoming publicly traded on the NASDAQ Over-the-Counter Bulletin Board. On June 25, 1998, the Company acquired Microphase Telecommunications, Inc. in a stock for stock exchange, whose principal assets included patents related to the mPhase line of DSL component products and patent applications utilized in the Company’s Traverser™ product. On March 2, 2000, mPhase acquired an interest in mPhaseTelevision.Net, Inc., a joint venture organized to provide digital television programming content.
 
From mPhase’s inception, the operating activities have related primarily to research and development, establishing third-party manufacturing relationships, developing product brand recognition and effectively positioning mPhase’s products in the international marketplace. These activities included establishing trials and field tests of the Traverser™ product with telephone companies in the U.S. and abroad, e.g., Hart Telephone Company in Georgia, and establishing a core administrative and sales organization.
 
Revenues.    To date, all material revenues have been generated from sales of the POTS Splitter product line and other related DSL component products to a number of telecommunications companies. mPhase believes that future revenues are difficult to predict because of the overall depressed state and current volatility of the telecommunications industry. In addition, the Company believes that there may be a significant international market for the Traverser™ involving multiple countries, each with a different regulatory structure, and commercial practice. As a result, future revenues are highly subject to the changing variables and uncertainties associated with international telecommunications markets.
 
        Cost of revenues.    The costs necessary to generate revenues from the sale of POTS Splitter products and other related DSL components include direct material, labor and manufacturing. mPhase paid these costs to Janifast Corporation, which has facilities in the People’s Republic of China and is owned by and managed by certain senior executives of the Company. The cost of revenues also includes certain royalties paid to Microphase Corporation, a privately held corporation organized in 1955, which shares certain common management with the Company. Costs for future production of the Traverser™ product will consist primarily of payments to manufacturers to acquire the necessary components and assemble the products and future patent royalties payable to Georgia Tech Research Corporation, or GTRC and Microphase.

12

Table of Contents
 
Research and development. Research and development expenses consist principally of payments made to GTRC and Microphase Corporation for development of the Traverser™ product. All research and development costs are expensed as incurred.
 
General and administrative. Selling, general and administrative expenses consist primarily of salaries and related expenses for personnel engaged in direct marketing of the Traverser™, the POTS Splitter product line and other related DSL component products, as well as support functions including executive, legal and accounting personnel. Certain administrative activities are outsourced on a monthly fee basis to Microphase Corporation. Finally, mPhase leases the principal office from Microphase Corporation.
 
Non-cash compensation charge. The Company makes extensive use of stock options and warrants as a form of compensation to employees, directors and outside consultants.
 
Three Months Ended March 31, 2002 vs. March 31, 2001
 
Revenue:
 
Total revenues were $865,797 for the three months ended March 31, 2002 compared to $2,958,635 for the three months ended March 31, 2001. The decrease in revenue for the current quarter ended March 31, 2002 as compared to the quarter ended March 31, 2001 was due to slowing sales of the Company’s POTS Splitter product line, caused by the general downturn in the DSL equipment market, including customers that order component products from the Company. The Company continues to believe that its line of POTS Splitter products is positioned to be competitively priced with high reliability and connectivity, and as such has the potential to be a significant part of DSL deployment worldwide. The Company cannot say when the current contraction of DSL deployments will subside.
 
Cost of Revenues:
 
Cost of sales was $724,699 for the three months ending March 31, 2002 as compared to $1,688,753 in the prior period, representing 84% and 57%, for the quarters ended March 31, 2002 and 2001 respectively, of gross revenues. These margins have varied dramatically as the worldwide telecommunications markets have experienced volatility in DSL deployments, which utilize our component products. Additionally, the Company has offered discounts to certain customers in the period ended March 31, 2002 causing the margin to decrease.
 
Research and Development:
 
Research and development expenses were $538,826 for the three months ending March 31, 2002 as compared to $2,219,933 during the comparable period in 2001. This includes $50,000, incurred with GTRC for the three months ended March 31, 2002 as compared to $968,450 during the comparable period in 2001 and $488,826 incurred primarily with Microphase and other strategic vendors for the three months ending March 31, 2002 as compared to $1,251,483 during the comparable period in 2001.
 
The decrease in research expenditures is due to the Company’s nearing completion of the design and manufacture of prototypes of the set top box and the central office equipment associated with its Traverser™ product.
 
Research expenditures incurred with Microphase were related to the continuing development of the Company’s DSL component products, including the Company’s line of POTS Splitters and Microfilters and the Company’s newest product, the iPOTS™. The mPhase iPOTS™ offers a solution for the DSL industry; the iPOTS™ enables telcos to remotely and cost-effectively perform loop management and maintenance including line testing, qualification and troubleshooting. Prior to the introduction of the iPOTS™, loop management could not be remotely performed through a conventional POTS Splitter without the use of expensive cross connects or relay banks because of the mandatory DC blocking

13

Table of Contents
capacitors in traditional POTS splitters, as required by the ITU, ANSI and ETSI. The unique (patent pending) iPOTS™ circuit allows most test heads to perform both narrow and wideband testing of the local loop through the central office POTS Splitter without having to physically disconnect the POTS Splitter, thereby eliminating the need to dispatch personnel and a truckroll. The Company believes that this product has the potential to significantly reduce the cost of deploying and maintaining DSL services.
 
General And Administrative Expenses:
 
Selling, general and administrative expenses were $1,261,713 for the three months ending March 31, 2002 down from $2,873,437 for the comparable period in 2001. The decrease in the selling, general and administrative costs are primarily the result of, despite a modest increase of non-cash charges relating to the issuance of common stock and options to consultants which totaled $737,407 for the three months ended March 31, 2002 as compared to $615,386 during the comparable period in 2001; the reduction in workforce in Fiscal 2002 and the reduction in marketing expenses in Fiscal 2002 in response to the current contraction in the telecommunications equipment market.
 
Net Loss:
 
The Company recorded a net loss of $1,807,547 for the three months ended March 31, 2002 as compared to a loss of $4,251,473 for the three months ended March 31, 2001. This represents a loss per common share of $(.03) for the three month period ended March 31, 2002 as compared to a loss per common share of $(.12) for the three months ending March 31, 2001.
 
Nine Months Ended March 31, 2002 Vs. March 31, 2001
 
Revenue:
 
Total revenues were $1,948,351 for the nine months ending March 31, 2002 compared to $10,055,006 for the nine months ending March 31, 2001. The decrease in revenue for the nine month period ended March 31, 2002 as compared to the nine month period ended March 31, 2001 was due to slowing sales of the Company’s POTS Splitter product line, caused by the general downturn in the DSL equipment market, including customers that order component products from the Company. The Company continues to believe that its line of POTS Splitter products is positioned to be competitively priced with high reliability and connectivity, and as such has the potential to be a significant part of DSL deployment worldwide. The Company cannot say when the current contraction of DSL deployments will subside.
 
Cost Of Revenues:
 
Cost of sales was $1,711,811 for the nine months ending March 31, 2002 as compared to $5,339,634 in the prior period, representing 12% and 47% for the nine month periods ended March 31, 2002 and 2001 respectively, of gross revenues. These margins have varied dramatically as the worldwide telecommunications markets have experienced volatility in DSL deployments, which utilize our component products. Additionally, the Company has offered discounts to certain customers in the period ended March 31, 2002 causing the margin to decrease.
 
Research And Development:
 
Research and development expenses were $2,907,256 for the nine months ending March 31, 2002 as compared to $8,699,948 during the comparable period in 2001 this includes $400,000 incurred with GTRC for the nine months ended March 31, 2002 as compared to $3,175,850 during the comparable period in 2001 in addition to $2,507,256 incurred primarily with Microphase and other strategic vendors for the nine months ending March 31, 2002 as compared to $5,524,098 during the comparable period in 2001.

14

Table of Contents
 
The decrease in research expenditures incurred with GTRC is due to the Company’s nearing completion of the design and manufacture of prototypes of the set top box and the central office equipment associated with its Traverser™ product in 2001.
 
Research expenditures incurred with Microphase were related to the continuing development of the Company’s DSL component products, including the Company’s line of POTS Splitters and Microfilters and the Company’s newest product, the iPOTS™. The mPhase iPOTS™ offers a much needed solution for the DSL industry; the iPOTS™ enables telcos to remotely and cost-effectively perform loop management and maintenance including line testing, qualification and troubleshooting. Prior to the introduction of the iPOTS™, loop management could not be remotely performed through a conventional POTS Splitter without the use of expensive cross connects or relay banks because of the mandatory DC blocking capacitors in traditional POTS splitters, as required by the ITU, ANSI and ETSI. The unique (patent pending) iPOTS™ circuit allows most test heads to perform both narrow and wideband testing of the local loop through the central office POTS Splitter without having to physically disconnect the POTS Splitter, thereby eliminating the need to dispatch personnel and a truckroll. The Company anticipates tremendous demand for this product, as it significantly reduces the cost of deploying and maintaining DSL services.
 
General And Administrative Expenses:
 
Selling, general and administrative expenses were $5,376,709 for the nine months ending March 31, 2002 down from $8,966,355 for the comparable period in 2001. The decrease in the selling, general and administrative costs are a result of, a gain despite a modest increase of non-cash charges relating to the issuance of common stock and options to consultants which totaled $2,441,659 for the nine months ending March 31, 2002 as compared to $2,319,638 during the comparable period in 2001; the reduction in workforce in Fiscal 2002 and the reduction in marketing expenses in Fiscal 2002 in response to the current contraction in the telecommunications equipment market.
 
Net Loss:
 
The Company recorded a net loss of $8,959,447 for the nine months ended March 31, 2002 as compared to a loss of $14,319,653 for the nine months ended March 31, 2001. This represents a loss per common share of $(.19) for the nine months ending March 31, 2002 as compared to a loss per common share of $(.44) for the nine months ending March 31, 2001.
 
Liquidity And Capital Resources
 
At March 31, 2002, mPhase had a working capital deficit of $1,577,550 as compared to a working capital deficit of $1,458,227 on June 30, 2001.
 
Through March 31, 2002, the Company had incurred development stage losses totaling approximately $99,080,372 and was in a working capital deficit position of $1,577,550. At March 31, 2002, the Company had approximately $310,643 of cash and cash equivalents and approximately $516,984 of trade receivables to fund short-term working capital requirements. The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) the successful wide scale development, deployment and marketing of its products.
 
Historically, the Company has funded its operations and capital expenditures primarily through private placements of common stock. Management expects that its ongoing financial needs will be provided by financing activities and believes that the sales of its line of POTS Splitter products and other related DSL component products will provide some offset to cash flows used in operations, although there can be no assurance as to the level and growth rate of such sales in future periods as seen with quarter to quarter fluctuations in components sales.

15

Table of Contents
 
At March 31, 2002, the Company had cash and cash equivalents of $310,643, compared to $31,005 at June 30, 2001, accounts receivable and inventory of approximately $517,000 and $4.03 million, compared to approximately $300,000 of accounts receivable and inventory of $4.3 million at June 30, 2001.
 
Cash used in operating activities was $2,565,517 during the nine months ending March 31, 2002. The cash used by operating activities principally consists of the net loss, the net increase in accounts receivable offset by the increase in depreciation and amortization, the net decrease in inventory, and by non-cash charges for common stock options and warrants issued for services and increased accrued expenses.
 
The Company has entered into various agreements with GTRC, pursuant to which the Company receives technical assistance in developing the Digital Video and Data Delivery System. The Company has incurred expenses in connection with technical assistance from GTRC totaling approximately $400,000 and $3,175,850 for the nine months ending March 31, 2002 and 2001 respectively and $13.4 million from the period from inception through March 31, 2002. If and when sales commence utilizing this technology, the Company will be obligated to pay GTRC a royalty of 5% of product sales.
 
In September 2001, certain Board members subscribed to purchase up to 2,000,000 restricted shares of the Company’s common stock for $1,000,000, the balance was collected in full by December 31, 2001.
 
The Company plans to continue to invest in technology, hardware and software in connection with enhancing the functionality of the Traverser™, as well as in achieving wide scale, commercial deployment. (In addition, the company anticipates future investments in mPhaseTelevision.Net, Inc.) The timing, nature and scope of such continued investment is dependent upon the Company’s ability to raise sufficient capital.
 
During the nine months ending March 31, 2002, the Company issued 75,000 and 6,797,643 shares of its common stock, together with a like amount of warrants with an exercise price of $3.00 and $.30 respectively, in private placements including generating gross proceeds of $1,943,754 in private transactions pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended with accredited investors. In addition, certain strategic vendors converted $1,263,062 of accounts payable and accrued expenses into 1,342,996 shares of the Company’s common stock and 2,353,000 warrants.
 
As of March 31, 2002, mPhase had no material commitments for capital expenditures.
 
Losses During the Development Stage and Management’s Plans
 
The Company believes that it will be able to complete the necessary steps in order to meet its cash flow requirements throughout fiscal 2002 and continue its development and commercialization efforts. The Company has successfully converted and is in negotiation with certain strategic vendors to convert additional outstanding current liabilities into equity. The Company presently has ongoing discussions and negotiations with a number of additional financing alternatives, one or more of which it believes will be able to successfully close to provide necessary working capital, while maintaining sensitivity to shareholder dilution issues.
 
The Company is currently negotiating with several organizations for the commencement of commercial sales of its Traverser™ products, including deployment at existing test sites. The Company is also negotiating the co-branding of specific applications of its DSL component products, continuing the sale of its existing line of DSL component products, and intends to expand its customer base as a result of the introduction of it revolutionary new product, the iPOTS.

16

Table of Contents
 
Management believes that actions presently being taken to complete the Company’s development stage through the introductory rollout of its Traverser™ Digital Video and Data Delivery System will be successful. However, there can be no assurance that mPhase will generate sufficient revenues to provide positive cash flows from operations or that sufficient capital will be available, when required, to permit the Company to realize its plans. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
The Company’s current planned cash requirements for fiscal 2002 are based upon certain assumptions, including its ability to raise additional financing and increased sales of its line of POTS Splitter products. mPhase has made significant reductions in expenses including marketing and research and development expenses. Should these cash flows not be available, mPhase believes it would have the ability to revise its operating plan and make further reductions in expenses.
 
 
The Company is not exposed to changes in interest rates as the Company has no debt arrangements and no investments in certain held-to-maturity securities. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of any financial instruments at March 31, 2002.

17

Table of Contents
 
PART II    OTHER INFORMATION
 
 
The Company has recently been advised that following an investigation by the staff of the Securities and Exchange Commission, the staff intends to recommend that the Commission file a civil injunctive action against Packetport and its Officer’s and Directors. Such recommendation relates to alleged civil violations by Packetport and such Officers and Directors of various sections of the Federal Securities Laws. The staff has alledged civil violations of Sections 5 and 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(d) of the Securities Exchanges Act of 1034. As noted in other public filings of mPhase, the CEO and COO of mPhase also serve as Directors and Officers of Packetport. Such persons have advised mPhase that they deny any violation of law on their part and intend to vigorously contest such recommendation.
 
From time to time mPhase may be involved in various legal proceedings and other matters arising in the normal course of business.
 
 
In December 2001, the Company issued 3,474,671 shares of its common stock and a like amount of warrants to purchase one share each of the Company’s common stock at an exercise price of $.30 generating gross proceeds of $1,042,400 in a private transaction pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended with accredited investors, which included a subscription receivable of $440,200, which was collected in January 2002.
 
In January 2002, the Company issued 2,754,503 shares of its common stock and a like amount of warrants to purchase one share each of the Company’s common stock at an exercise price of $.30 generating gross proceeds of $826,351 in a private transaction pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended with accredited investors.
 
In connection with these private placements, the Company issued 277,975 and 290,494 shares of its common stock and a like amount of warrants to purchase one share each at an exercise price of $.30 to finders and consultants whom assisted in these transactions in December and January, respectively.
 
 
None.
 
 
None.
 
 
None.
 
 
(a)    Exhibits.
 
None.
 
(b)    Reports on Form 8–K.
 
None.

18

Table of Contents
 
 
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MPHASE TECHNOLOGIES, INC.
BY:
  
/s/    RONALD A. DURANDO        
   
Ronald A. Durando
President, CEO
 
Dated: May 14, 2002
 
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
Name
   
Title
  
Date
/s/    NECDET F. ERGUL        
Necdet F. Ergul
   
Chairman of the Board
  
May 14, 2002
/s/    RONALD A. DURANDO        
Ronald A. Durando
   
Chief Executive Officer, Director
  
May 14, 2002
/s/    GUSTAVE T. DOTOLI        
Gustave T. Dotoli
   
Chief Operating Officer, Director
  
May 14, 2002
/s/    MARTIN S. SMILEY        
Martin S. Smiley
   
Chief Financial Officer
  
May 14, 2002
/s/    ANTHONY GUERINO        
Anthony Guerino
   
Director
  
May 14, 2002
/s/    ABRAHAM BIDERMAN        
Abraham Biderman
   
Director
  
May 14, 2002
 

19
-----END PRIVACY-ENHANCED MESSAGE-----