The following discussion should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto, and our audited
consolidated financial statements and related notes for our fiscal year ended
June 30, 2020 found in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission ("SEC") on January 5, 2021.
Overview
mPhase Technologies, Inc., was incorporated in the state of New Jersey in 1979
under the name Tecma Laboratory, Inc. and has subsequently operated under Tecma
Laboratories, Inc., and Lightpaths TP Technologies, Inc., until June 2, 1997
when the Company changed its name to mPhase Technologies, Inc.
Since January 11, 2019, when the Company underwent a complete change in
management and control, the new management has continued to broaden the
Company's product mix to include artificial intelligence and machine learning
products.
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.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon its unaudited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP"). The preparation of these
unaudited consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. On an
on-going basis, management evaluates past judgments and estimates, including
those related to bad debts, potential impairment of intangible assets, accrued
liabilities and contingencies. Management bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The accounting policies and
related risks described in Note 3 above and the Company's Annual Report on Form
10-K as filed with the SEC on January 5, 2021, are those that depend most
heavily on these judgments and estimates. As of September 30, 2020, there had
been no material changes to any of the critical accounting policies contained
therein.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Results of Operations
Three months ended September 30, 2020 compared to three months ended September
30, 2019
Continuing Operations
Revenue
Our revenue increased to $7,586,864 for the three months ended September 30,
2020, compared to $7,569,612 for the three months ended September 30, 2019, an
increase of $17,252. The consistent revenue is the result of continued
deployment of our learning track technology platform and services which
generated $6,180,000 of subscription revenue, $897,264 of service and support
revenue and $509,600 of application development and implementation revenue.
Cost of Revenue
Cost of revenue totaled $5,625,389 for the three months ended September 30,
2020, compared to $5,706,514 for the three months ended September 30, 2019.
Operating Expenses
Our operating expenses decreased to $765,846 for the three months ended
September 30, 2020, compared to $11,945,636 for the three months ended September
30, 2019, a decrease of $11,197,790, or 94%. The decrease is primarily due to
$9,832,326 of stock-based compensation expense recognized during 2019 related to
the Company's Chief Executive Officer and Chief Financial Officer, and lower
operating expenses of $1,326,282.
Other (Expense) Income
Our other expense, net, increased by $252,162, or 113%, for the three months
ended September 30, 2020. The increase is primarily the result of increases in
initial derivative expense, amortization of debt discount, and interest expense,
partially offset by the gain on the change in fair value of derivative liability
associated with the convertible promissory notes and gain on extinguishment of
debt.
Net Income from Continuing Operations
We had net income from continuing operations of $720,494 for the three months
ended September 30, 2020, compared to a net loss of $10,305,511 for the three
months ended September 30, 2019, an increase of $11,026,005, or 107%. The
increase in net income is primarily driven by the increase in gross profit,
coupled with the decrease in operating expenses, and partially offset by the
increase in other expense, net, as disclosed above.
Discontinued Operations
For the three months ended September 30, 2020 and 2019, there are no revenue,
cost of revenue, operating expenses, other income (expense), or net income from
discontinued operations comparatives.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Liquidity and Capital Resources
At September 30, 2020, we had $46,514 of cash on-hand, a decrease of $95,899
from $142,413 at June 30, 2020.
Net cash used in operating activities of continuing operations was $306,368 for
the three months ended September 30, 2020, an increase of $114,998 from $191,370
used during the three months ended September 30, 2019. This increase was
primarily due to increases in accounts receivable, partially offset by a net
increase in non-cash charges and an increase in accounts payable and accrued
expenses.
Net cash used in investing activities of continuing operations was $968 for the
three months ended September 30, 2020 as compared to no net cash used in or
provided by investing activities of continuing operations for the three months
ended September 30, 2019.
Financing activities of continuing operations increased by $97,400 to $332,600
for the three months ended September 30, 2020, compared to $235,200 for the
three months ended September 30, 2019. This increase was primarily due to
increased proceeds from issuances of convertible promissory notes, coupled with
decreased repayments under settlement agreement and notes payable to related
parties, partially offset by no proceeds from the sale of common stock or notes
payable to related parties, and repayments of convertible promissory notes.
Going Concern
We have incurred net income of $720,494 and a net loss of $10,305,511, and have
used cash in operating activities of $306,368 and $191,370 for the three months
ended September 30, 2020 and 2019, respectively. At September 30, 2020, we had a
working capital surplus of $4,427,531, and an accumulated deficit of
$227,006,926. 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 unaudited consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts nor to the amounts and classification of liabilities that might be
necessary should 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.
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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2020,
filed with the SEC on January 5, 2021. Even after the pandemic has subsided, we
may continue to experience adverse impacts to our business as a result of any
economic recession or depression that has occurred as a result of the pandemic.
Therefore, we cannot reasonably estimate the impact at this time. We continue to
actively monitor the pandemic and may determine to take further actions that
alter our business operations as may be required by federal, state, or local
authorities or that we determine are in the best interests of our employees,
customers, vendors, and shareholders.
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