You should read this discussion together with the financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K. The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under "Risk Factors," and elsewhere in this Annual Report on Form 10-K. To the extent that this Annual Report on Form 10-K contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of our Company, please be advised that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in forward-looking statements and thus you should not unduly rely on these statements.





Overview

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

Since announcing the formation of mPhase Technologies India, Pvt, Ltd during February 2019, the Company has expanded its focus on software and technology development for new and existing projects through the creation and expansion of its "Center of Excellence" India division. This "Center of Excellence" consists of a team in India of highly qualified software and technology experts in the fields of artificial intelligence and machine learning.

In addition to the foregoing, since our acquisition of Travel Buddhi during February 2019, we have continued developing the software platform which enhances travel via ultra-customization tools that tailor a planned trip experience in ways not previously available by making it "smart" and "connected" as part of the internet of things.

Furthermore, since our acquisition of CloseComms during May 2020, pursuant to which we acquired certain assets and assumed certain liabilities, we have continued advancing our patented, software application platform that can be integrated into a retail customer's existing Wi-Fi infrastructure, giving the retailer important customer data and enabling AI-enhanced, targeted promotions to drive store traffic and sales.





Recent Developments

Common Stock Purchase Agreement

On July 13, 2020, we entered into a common stock purchase agreement (the "Purchase Agreement") and a registration rights agreement (the "Rights Agreement") with White Lion Capital, LLC (the "Investor") pursuant to which the Investor agreed to invest up to three million dollars ($3,000,000) to purchase the Company's common stock, par value $0.01 per share (the "Common Stock"), at a purchase price of 95% of the market price of the Company's Common Stock during a valuation period as defined in the Purchase Agreement. The shares of Common Stock to be issued and sold to the Investor pursuant to the Purchase Agreement were issued in reliance upon the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"), and Rule 506 of Regulation D promulgated thereunder. The Rights Agreement was an inducement to the Investor to execute and deliver the Purchase Agreement, whereby the Company agreed to provide certain registration rights under the Securities Act with respect to the shares of Common Stock issuable for Investor's investment pursuant to the Purchase Agreement.

On August 14, 2020, we filed a preliminary registration statement in accordance with the Rights Agreement entered into with the Investor on July 13, 2020. On October 13, 2020, the preliminary registration statement was withdrawn.





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Financings

On July 24, 2020, we issued a convertible note in the principal amount of $105,000 (including a $5,000 original issuance discount) which note accrues interest at a rate of 8% per annum (increasing to 24% per annum upon the occurrence of an event of default), matures on July 24, 2021 and is convertible into shares of our common stock at a conversion price as specified in the note, subject to adjustment.

On July 31, 2020, we issued a convertible note in the principal amount of $68,000 which note accrues interest at a rate of 8% per annum (increasing to 22% per annum upon the occurrence of an event of default), matures on July 31, 2021 and is convertible into shares of our common stock at a conversion price as specified in the note, subject to adjustment.

On August 19, 2020, we issued a convertible note in the principal amount of $99,225 (including a $4,725 original issuance discount) which note accrues interest at a rate of 8% per annum (increasing to 24% per annum upon the occurrence of an event of default), matures on August 19, 2021 and is convertible into shares of our common stock at a conversion price as specified in the note, subject to adjustment.

On August 20, 2020, we prepaid a convertible promissory note, including principal, accrued interest, and prepayment amount as set forth within such convertible promissory note dated February 24, 2020 in the principal amount of $53,000.

On August 20, 2020, we issued a convertible note in the principal amount of $63,000 which note accrues interest at a rate of 8% per annum (increasing to 22% per annum upon the occurrence of an event of default), matures on August 20, 2021 and is convertible into shares of our common stock at a conversion price as specified in the note, subject to adjustment.

On August 27, 2020, we issued a convertible note in the principal amount of $105,000 (including a $5,000 original issuance discount) which note accrues interest at a rate of 8% per annum (increasing to 24% per annum upon the occurrence of an event of default), matures on August 27, 2021 and is convertible into shares of our common stock at a conversion price as specified in the note, subject to adjustment.

On August 28, 2020, we prepaid a convertible promissory note, including principal, accrued interest, and prepayment amount as set forth within such convertible promissory note dated March 3, 2020 in the principal amount of $63,000.

On August 31, 2020, we issued a convertible note in the principal amount of $68,000 which note accrues interest at a rate of 8% per annum (increasing to 22% per annum upon the occurrence of an event of default), matures on August 31, 2021 and is convertible into shares of our common stock at a conversion price as specified in the note, subject to adjustment.

Results of Operations for the Years Ended June 30, 2020 and 2019





Continuing Operations



Revenue

Our revenue increased to $30,276,422 for the year ended June 30, 2020, compared to $2,500,000 for the year ended June 30, 2019, an increase of $27,776,422 or 1,111%. The increase is the result of deployment and growth of our learning track technology platform and services which generated $24,720,000 of subscription revenue, $3,515,438 of service and support revenue and $2,040,984 of application development and implementation revenue.





Cost of Revenue

Cost of revenue totaled $22,579,544 for the year ended June 30, 2020, compared to $0 for the year ended June 30, 2019. The increase is the result of higher costs to support such revenue growth with $22,500,000 attributable to a single supplier contract.





Operating Expenses

Our operating expenses increased to $20,273,109 for the year ended June 30, 2020, compared to $4,265,886 for the year ended June 30, 2019, an increase of $16,007,223, or 375%. The increase is primarily due to $16,335,671 of stock-based compensation expense recognized during 2020 related to the Company's Chief Executive Officer and Chief Financial Officer, partially offset by a decrease in operating expenses of $328,448.





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Other Income (Expense)

Our other expense, net, increased by $1,309,121, or 629%, for the year ended June 30, 2020. The increase is primarily the result of increases in initial derivative expense, amortization of debt discount, loss on extinguishment of debt, and loss on settlement of debt, partially offset by a gain on the change in fair value of derivative liability associated with the convertible promissory notes.

Net Loss from Continuing Operations

We had a net loss of $14,093,567 for the year ended June 30, 2020, compared to a net loss of $1,974,101 for the year ended June 30, 2019, an increase of $12,138,406. The increase in net loss is primarily driven by the increase in operating expenses and other income (expense), partially offset by the increase in gross profit.





Discontinued Operations

For the year ended June 30, 2020, there are no revenue, cost of revenue, operating expenses, other income (expense), or net income from discontinued operations. For the year ended June 30, 2019, income from discontinued operations was $18,940.

Liquidity and Capital Resources

At June 30, 2020, we had $142,413 of cash on-hand, an increase of $108,417 from $33,996 at June 30, 2019.

Net cash used in operating activities of continuing operations was $1,344,033 for the year ended June 30, 2020, an increase of $1,140,063 from $203,970 used during the year ended June 30, 2019. This increase was primarily due to increases in accounts receivable and net loss, partially offset by a net increase in non-cash charges and an increase in accounts payable and accrued expenses.

Net cash provided by investing activities of continuing operations was $69,447 for the year ended June 30, 2020, compared to net cash used in investing activities of continuing operations of $59,852 for the year ended June 30, 2019. The increase was due to the cash acquired from the CloseComms acquisition, partially offset by payments toward the Travel Buddhi purchased software intangible during the year ended June 30, 2019.

Financing activities of continuing operations increased by $972,376 to $1,269,933 for the year ended June 30, 2020, compared to $297,557 for the year ended June 30, 2019. This increase was primarily due to increased proceeds from issuances of convertible promissory notes, proceeds from the sale of common stock, and proceeds from notes payable, partially offset by increases in payments toward convertible promissory notes, payments toward notes payable, and payments under settlement agreements.





Going Concern

We have incurred net losses of $14,093,567 and $1,955,161 and have used cash in operating activities of $1,344,033 and $203,970 for the years ended June 30, 2020 and 2019, respectively. At June 30, 2020, we had a working capital surplus of $2,801,942, and an accumulated deficit of $227,727,420. It is management's opinion that these facts raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the date of this filing, without additional debt or equity financing. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

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





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Impact of COVID-19 Pandemic

A novel strain of coronavirus, COVID-19, surfaced during December 2019 and has spread around the world, including to the United States. During March 2020, COVID-19 was declared a pandemic by the World Health Organization. During certain periods of the pandemic thus far, a number of U.S. states and various countries throughout the world had been under governmental orders requiring that all workers remain at home unless their work was critical, essential, or life-sustaining. As a result of these governmental orders, we temporarily closed our domestic and international offices and required all of our employees to work remotely. Although these temporary office closures created minor disruption to our business operations, such disruptions to date have not been significant.

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





Critical Accounting Policies

We have identified the policies below as critical to our understanding of the results of our business operations. We discuss the impact and any associated risks related to these policies on our business operations throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

In the ordinary course of business, we have made a number of estimates and assumptions in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). Actual results could differ significantly from those estimates and assumptions. The following critical accounting policies are those that are most important to the portrayal of our consolidated financial statements. For a summary of our significant accounting policies, including the critical accounting policies discussed below, refer to Note 3 - "Summary of Significant Accounting Policies" included in the notes to consolidated financial statements for the year ended June 30, 2020 included elsewhere in this Annual Report on Form 10-K.

We consider the following accounting policies to be those most important to the portrayal of our results of operations and financial condition:





Revenue Recognition

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

Revenue is derived from the sale of artificial intelligence and machine learning focused technology products and related services. The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. In the event any discounts, sales incentives, or similar arrangements are agreed to with a customer, such amounts are estimated at time of sale and deducted from revenue. Sales taxes and other similar taxes are excluded from revenue (see Note 8).

Contract liabilities include amounts billed to customers in excess of revenue recognized and are presented as contract liabilities on the consolidated balance sheets (see Note 8).





Income Taxes

We accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Accordingly, deferred tax assets and liabilities arise from the difference between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Deferred tax amounts are determined using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under currently enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period plus or minus the change in deferred tax assets and liabilities during the period. We have recorded a full valuation allowance for our net deferred tax assets as of June 30, 2020 and 2019 because realization of those assets is not reasonably assured.

We will recognize a financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

We believe our income tax filing positions and deductions will be sustained upon examination and, accordingly, no reserves, or related accruals for interest and penalties has been recorded at June 30, 2020 and 2019.





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Share-Based Compensation

We compute share based payments in accordance with the provisions of ASC Topic 718, Compensation - Stock Compensation and related interpretations. As such, compensation cost is measured on the date of grant at the fair value of the share-based payments. Such compensation amounts, if any, are amortized over the respective vesting periods of the grants.

Restricted stock awards are granted at the discretion of the compensation committee of our board of directors (the "Board of Directors"). These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods (vesting on a straight-line basis). The fair value of a stock award is equal to the fair market value of a share of our common stock on the grant date.

We estimate the fair value of stock options and warrants by using the Black-Scholes option valuation model. The Black-Scholes option valuation model requires the development of assumptions that are inputs into the model. These assumptions are the expected stock volatility, the risk-free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our common stock over the expected term of the option. Risk-free interest rates are calculated based on continuously compounded risk-free rates for the appropriate term.

Determining the appropriate fair value model and calculating the fair value of equity-based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity-based payment awards represent management's best estimates, which involve inherent uncertainties and the application of management's judgment. We are required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest.

We account for share-based payments granted to non-employees in accordance with ASC 505-50, "Equity Based Payments to Non-Employees." We determine the fair value of the stock-based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily determinable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete.





Derivative Instruments

We enter into financing arrangements that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. We recognize derivative instruments as either assets or liabilities in the balance sheet and measure such derivative instruments at fair values with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The fair values of derivative financial instruments are estimated using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, the nature of the instrument, the market risks that it embodies and the expected means of settlement are considered. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes.





Accounts Receivable

We regularly review outstanding receivables and provide for estimated losses through an allowance for doubtful accounts. In evaluating the level of established loss reserves, we make judgments regarding our customers' ability to make required payments, economic events, and other factors. As the financial condition of these parties' change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts may be required. We maintain reserves for potential credit losses, and such losses traditionally have been within our expectations. Additionally, to date, the Company has entered into three separate tri-party settlement and offset agreements with its largest customer and largest vendor, whereby the Company's largest customer has agreed to direct funds due the Company for certain outstanding invoices, to the Company's largest vendor to satisfy payment on behalf of the Company for certain outstanding invoices. To date, the aggregate amount of the three tri-party settlement and offset agreements has totaled $22,500,000. At June 30, 2020 and 2019, we determined there was no requirement for an allowance for doubtful accounts.





New Accounting Standards

Refer to Note 3 to our audited consolidated financial statements including in this Annual Report on Form 10-K for a discussion of recently adopted and to be adopted accounting standards.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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