NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 and is presently focused on restructuring its debt obligations to be in a position to capitalize
on its existing intellectual property portfolio and endeavor to further develop new “smart surface” products through
the sciences of microfluidics, microelectromechanical systems (MEMS) and nanotechnology. The Company plans to restructure its
business through some combination of raising additional capital, strategic partnerships and or mergers & acquisitions.
BASIS
OF PRESENTATION
The accompanying unaudited condensed 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 considered necessary for a fair presentation have been included. Operating results for the nine months ending March
31, 2016 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, as amended,
for the year ended June 30, 2015.
GOING CONCERN
The
Company’s unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business.
Through March 31, 2016, the Company
had incurred cumulative (a) losses totaling ($211,629,125), (b) stockholders’ deficit of ($4,440,236). At March 31,
2016, the Company had $1,002 of cash and $4,116 of trade receivables to fund short-term working capital requirements. In
addition, the Company relies on the continuation of funding through private placements of its common stock. In the
Company’s form 10k for the period June 30, 2015, the Company’s Auditor stated that” there is substantial
doubt about the Company’s ability to continue as a going concern”.
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) allow the successful wide scale development, deployment
and marketing of its products. There can be no assurance the necessary debt or equity financing will be available, or if so, on
terms acceptable to the Company.
INVENTORY
The Company uses the First In First Out
method (FIFO) to account for inventory which is carried at lower of cost and net realizable value. As of June 30, 2015, inventory
consisted primarily of its various Jump products including the Jump and the mini Jump, and our remaining flashlight inventory,
and was valued at $218,653. As of March 31, 2016, inventory consisted primarily of the Company’s line of Jump products including
the new Jump Plus, and our remaining flashlight inventory, and was valued at $67,895. Subsequently, the Company discontinued its
entire line of Jump products in the 1
st
quarter of fiscal year 2017 owing to increased competition and decreasing margins.
Appropriate reserves have been taken as of June 30, 2015 and March 31, 2016, to assure that the cost of such inventory does not
exceed the expected net realizable value.
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 and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These
include net realizable inventories, prepaid expenses, accrued expenses and changes in and the ending fair value of derivative
liability. Actual results could differ from those estimates.
LOSS
PER COMMON SHARE, BASIC AND DILUTED
Basic
income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed by dividing net loss adjusted for income or loss that would result from
the assumed conversion of potential common shares from contracts that may be settled in stock or cash by the weighted average
number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period.
The Company had no warrants to purchase shares of its common stock and no options to purchase shares of its common stock outstanding
at March 31, 2016.
At March 31, 2016 the Company has convertible
securities held by third parties that are immediately convertible into 440,555,647 shares of common stock (which amount include
one additional assumed monthly conversion by John Fife in April 2016 under the terms of the Forbearance Agreement, as amended).
Under the terms of the Forbearance Agreement, as amended, with John Fife (arrangement #4), Fife may acquire a total of 5,044,264,869
shares of the Company’s common stock based upon the conversion terms; if the forbearance agreement discussed in Note 3 is
settled entirely in stock. In addition, the Company has convertible notes plus accrued interest thereon held by officers of the
Company, subject to availability, convertible into approximately 1,455,462,450, immediately, if available.
The following table illustrates debts
convertible into shares of the Company’s Common Stock at March 31, 2016:
|
|
March 31, 2016
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Note Principle
|
|
|
Accrued Interest
|
|
|
Total Convertible Debt
|
|
|
Shares Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
immediately
|
|
|
over full term/ if available***
|
|
Arrangement #3 - JMJ Financial, Inc
|
|
$
|
802,060
|
|
|
$
|
295,817
|
|
|
$
|
1,097,877
|
|
|
|
274,469,263
|
|
|
|
274,469,263
|
|
Arrangement #4 - St. George Investments/Fife Forbearance Obligation
|
|
|
807,083
|
|
|
|
-
|
|
|
|
807,083
|
|
|
|
125,000,000
|
|
|
|
5,044,264,869
|
|
Arrangement #5 - MH Investment trust II
|
|
|
3,333
|
|
|
|
1,454
|
|
|
|
4,787
|
|
|
|
41,086,385
|
|
|
|
41,086,385
|
|
Total Convertible Notes payable
|
|
$
|
1,612,476
|
|
|
$
|
297,271
|
|
|
$
|
1,909,747
|
|
|
|
440,555,647
|
|
|
|
5,359,820,516
|
|
Notes Payable- Officers***
|
|
$
|
582,185
|
|
|
$
|
-
|
|
|
$
|
582,185
|
|
|
|
-
|
|
|
|
1,455,462,450
|
|
Total
|
|
$
|
2,194,661
|
|
|
$
|
297,271
|
|
|
$
|
2,491,932
|
|
|
|
440,555,647
|
|
|
|
6,815,282,966
|
|
*** convertible if shares available
RECLASSIFICATIONS
Certain reclassifications have been made
in the prior period consolidated financial statements, primarily selling and marketing expense in the prior period, to conform
to the current period presentation. The reclassified financial statement items had no effect on (a) Net Loss for the nine months
ended March 31, 2016 and 2015, or (b), total Stockholders’ Deficit or total Assets as of March 31, 2016 or June 30, 2015.
MATERIAL FINANCIAL INSTRUMENTS
The Company has material financial instruments
including convertible securities. Such securities have conversion features that are accounted for as derivative liabilities that
are evaluated quarterly for any changes in fair value. (SEE NOTE 3)
DERIVATIVE LIABILITY
The Company has estimated the value of the
derivative liability associated with its convertible debt. Such estimate is based on a Black Scholes calculation at the time the
debt was issued. At each reporting period, the value of this liability is marked to market and adjusted accordingly. Such adjustments
are included in Other Income (Expense).
2.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
For the Nine Months Ended
|
|
|
March 31,
|
|
|
2016
|
|
2015
|
Supplemental Disclosure:
Cash Paid During Period For:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
76,570
|
|
|
$
|
43,568
|
|
Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Conversion of $10,000 of Convertible Debt and Accrued Interest thereon and a $35,000 Demand note into 62,500,000 and 175,000,000 shares respectively, or a total of $45,000 of debt into 237,500,000 shares of the Company’s Common stock.
|
|
$
|
45,000
|
|
|
$
|
-
|
|
Conversion of $18,000 of officer loan in consideration of transfer of vehicle at market value
|
|
$
|
18,000
|
|
|
$
|
-
|
|
Beneficial Conversion of Officers’ Notes
|
|
$
|
91,178
|
|
|
$
|
91,178
|
|
Issuances of Common Stock for services
|
|
$
|
7,804
|
|
|
$
|
17,955
|
|
Non-cash loan charges relating to initial and second funding under factoring agreement(s), including revision.
|
|
$
|
2,295
|
|
|
$
|
-
|
|
Convertible Note payable of $720,157 and $172,127 of accrued interest thereon merged into forbearance obligation
|
|
$
|
-
|
|
|
$
|
892,283
|
|
Non-cash charges relating to Convertible Debt Settlement including $118,950 increase in loan amount and $18,469 increase in corresponding Derivative Liability
|
|
$
|
-
|
|
|
$
|
137,419
|
|
3.
|
EQUITY
TRANSACTIONS, NOTES PAYABLE AND CONVERTIBLE DEBT
|
The Company in its annual meeting of shareholders for the fiscal year ended June
30, 2013 held on February 12, 2014 received shareholder approval to increase its authorized shares to 18 billion shares of common
stock so that as of March 31, 2016 the Company has said number of authorized shares of stock.
Private
Placements
During the nine months ended March 31,
2016, the Company issued 616,666,667 shares of its common stock in connection with private placements, pursuant to Section 4(a)
(2) of the Securities Act of 1933, as amended, raising gross proceeds of $170,000 and incurred finder’s fees in the amount
of $17,000. The proceeds were used by the Company as working capital.
During the nine months ended March 31, 2015, the Company issued
1.533 million shares of its common stock in connection with private placements pursuant to Section 4(a) (2) of the Securities
Act of 1933, as amended, raising gross proceeds of $550,000 and incurring finder’s fees of 50,000,000 shares of common stock
and $34,500. The proceeds were used by the Company as working capital.
Stock
Based Compensation
During the nine months ended March 31,
2016, the Company issued 23,028,000 shares of common stock to employees valued at $7,804, based upon the closing trading price
for each quarter end earned, the entire amount of which is included in selling and marketing expenses in the Condensed Consolidated
Statements of Operations for that period. The Company during such period did not issue any common stock, warrants or options to
officers.
During the nine months ended March 31, 2015,
the Company issued 33,459,857 shares of common stock compensation to an employee valued at $17,955, based upon the closing trading
price for each quarter end earned, the entire amount of which is included in selling and marketing expenses in the Condensed Consolidated
Statements of Operations for that period. The Company during such period did not issue any common stock, warrants or options to
officers.
Other
Short-Term Notes
Note Payable, Director
A Director of the Company loaned the
Company $90,000 in the fourth quarter of fiscal year ended June 30, 2015 and additionally, he advanced the Company $20,000 in
the nine months ended March 31, 2016, net of repayments, together with $3,775 of accrued interest totaled $113,775 which was
outstanding at March 31, 2016.
Other Note payable
An
unaffiliated shareholder advanced the Company $10,000 in September 2015 and $25,000 in December of 2015, totaling $35,000, which
was converted into 175,000,000 shares of the Company’s common stock effective March 31, 2016.
Note Payable Finance Company
The Company Borrowed approximately $66,000
under two advances commencing January 2016, with scheduled repayments of approximately $87,500 originally due through July 2016,
incurring $19,527 of finance charges which are included in interest expense during the nine months ended March 31, 2016. At March
31, 2016, $31851 remains outstanding under this note.
Long
Term Convertible Debentures / Debt Discount
The Company had five separate convertible
debt arrangements with independent investors that were in effect at various times during the fiscal year ended June 30, 2015, three
of which were still active as of March 31, 2016.
During the nine months ended March 31,
2016, the Company incurred the conversion of $10,000 of Convertible Debt and Accrued Interest thereon relating to the forbearance
agreement and a $35,000 Demand note into 62,500,000 and 175,000,000 shares respectively, or a total of 237,500,000 shares; of
the Company’s Common stock.
The following table summarizes notes
payable under convertible debt and debenture agreements as of:
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Arrangement #3 - JMJ Financial, Inc
|
|
$
|
802,060
|
|
|
$
|
802,060
|
|
Arrangement #4 - St. George Investments/Fife Forbearance Obligation
|
|
|
807,083
|
|
|
|
902,253
|
|
Arrangement #5 - MH Investment trust II
|
|
|
3,333
|
|
|
|
3,333
|
|
Total Convertible Notes payable
|
|
$
|
1,612,476
|
|
|
$
|
1,707,646
|
|
Convertible Notes payable-short term portion
|
|
|
1,612,476
|
|
|
|
355,479
|
|
Convertible Notes payable-long term portion
|
|
$
|
-
|
|
|
$
|
1,352,167
|
|
Included in accrued expenses is $297,271
and $231,944 interest accrued on these notes at March 31, 2016 (unaudited) & June 30, 2015, respectively.
These
transactions are intended to provide liquidity and capital to the Company and are summarized below.
Arrangement
#1, #2 &, #3 (JMJ Financial, Inc.)
Arrangement
#1
The Company entered
into a convertible note on November 17, 2009, the Company received a total of $186,000 of proceeds in connection with a new financing
agreement with JMJ Financial. This transaction consists of the following: 1) a convertible note in the amount of $1,200,000 plus
a one-time interest factor of 12% ($144,000) and a maturity date of September 23, 2012 and (2) a secured promissory note in the
amount of $1,100,000 plus a one-time interest rate factor of 13.2% ($144,000 each) and a maturity date of September 23, 2012 due
from the holder of the convertible note.
At June 30, 2012
this convertible note had $372,060 outstanding which was combined with arrangement #3 JMJ Financial, Inc.
Arrangement
#2
On December 15,
2009 the Company entered into a new financing agreement with JMJ Financial that consists of the following: 1) a convertible note
issued by the Company in the amount of $1,500,000 plus a one-time interest factor of 12% ($180,000) and a maturity date of December15,
2012 and (2) a secured promissory note in the amount of $1,400,000 plus a one-time interest rate factor of 13.2% ($180,000) and
a maturity date of December 15, 2012 due from the holder of the convertible note. To date the Company has received a total of $300,000
cash under this note and has issued no shares of common stock to the holder upon conversions.
The Company
and the holder entered into a Forbearance Agreement amendment, as amended, and funding and conversions have not occurred
since April 2011. As of June 30, 2012, this convertible note had $321,000 outstanding which was combined with arrangement #3
JMJ Financial, Inc.
Arrangement
#3
On April 5, 2010,
the Company entered into a new financing agreement with JMJ Financial that consists of the following: 1) a convertible note issued
by the Company in the principal amount of $1,200,000 plus a one-time interest factor of 12% ($144,000) and a maturity date of December
15, 2012, and (2) a secured promissory note from the holder of the convertible note in the amount of $1,100,000 plus a one-time
interest rate factor of 13.2% ($144,000 each) and a maturity date of December 15, 2012. To date the Company has received a total
of $100,000 cash under this note and has issued no shares of common stock to the holder upon conversions. The remaining $1,144,000
of cash to be received from the holder plus accrued and unpaid interest is convertible into shares of common stock at the option
of the holder.
During the year ended
June 30, 2012 the Company reduced the debt discount for this note by $91,000 to $9,000, and as a result $109,000 was combined
with Arrangements 1&2 for a total of $ 802,060 principle due from the combined notes payable, with a revised interest rate
of 9%, to JMJ.
As of June 30,
2015, and as of March 31, 2016, the combined arrangements with JMJ in this note would be convertible into 258,208,588 into
274,469,385 common shares at the conversion floor price of $.004; and would be required to do so if the Company does not make
the scheduled payments pursuant to the June 1, 2012 amended agreement.
The Company has not made any payments of
the $37,018 installment payments commencing October 1, 2012 and the holder has continued to accrue interest on the outstanding
balance. At March 31, 2016 the amount recorded in Current Liabilities for all three convertible notes and accrued interest thereon
previously issued to JMJ Financial was $1,097,877.
Arrangement
#4 (John Fife dba St. George Investors)/Fife Forbearance
The Company entered
into an amended agreement on June 1, 2012, when principle of $557,500 accrued interest of $66,338 and $95,611 of contractual charges
for previous notes with John Fife totaled $719,449; whereby, the Company agreed to make payments of principle and interest of
$33,238 per month commencing October 1, 2012 through September 1, 2014 at 8% interest and so long as the payments are not in default
then no conversions into the Company’s common stock would be available to the holder.
On
November 20, 2012, mPhase Technologies, Inc. (the “Company”) formally received an Event of Default and Redemption
Notice dated November 16, 2012 with respect to an 8% Convertible Note dated September 13, 2011 issued by the Company to St. George
Investments LLC and assigned to John Fife. The notice included alleged defaults with respect to payments owed by the Company under
the Convertible Note and the failure to convert the Note into shares of the Company’s common stock. The alleged amount owed
according to the notice is approximately $902,279.
On December 15, 2014, a Memorandum Opinion and Order was issued by the
United States District Court Northern District of Illinois Eastern Division granting the motion of John Fife, plaintiff (“Plaintiff”),
for summary judgment against mPhase Technologies, Inc. (the “Company”) for breach of contract (the “Opinion”).
All other claims and counterclaims were dismissed. The Company commenced settlement negotiations with the Plaintiff after we explored
options with regard to an appeal and other alternatives, which there is no guarantee of success. As discussed in Note 7, effective
February 10, 2015, the Company entered into a Forbearance Agreement with the Holder. The agreement provides that the Holder would
forego his right to enforce its remedies pursuant to the judgment, which include demand for immediate payment of approximately
$1.6 million, provided the Company satisfy its forbearance obligation of $1,003,943, and after accounting for a payment of $15,000
the Company paid, under the terms of the agreement.
The
terms of the agreement, as amended, provide for interest to accrue on the unpaid portion at 9% per annum with monthly payments
in cash or conversions into common stock of the Company; commencing with an initial $15,000 payment due on February 15, 2015,
and thereafter and on or before the 15
th
day of each month thereafter the Company agrees to pay to Holder the
following amounts ; $30,000.00 per month on each of the following dates: March 15, 2015, April 15, 2015, May 15, 2015, June 15,
2015, and July 15, 2015; $15,000.00 per month on each of the following dates: August 15, 2015 and September 15, 2015; $20,000.00
per month on each of the following dates: October 15, 2015, November 15, 2015, and December 15, 2015; $35,000.00 per month on
each of the following dates: January 15, 2016 and February 15, 2016 and March 15, 2016; and $50,000.00 per month thereafter until
the Forbearance Amount has been paid in full. The Company has been able to meet its monthly payment obligations through November,
2015.
The
value of the forbearance debt obligation on June 30, 2015 is $902,253. At June 30, 2015, given the changes in the
Company’s stock price during the 20 day look-back period for June 30, 2015, the estimated derivative liability had
decreased to $232,423, a decrease from June 30, 2014 of $548,906 totaling $316,493, which when added to the $18,469 increase
at the time the forbearance agreement resulted in a non-cash credit to earnings of $334,962 for the year ended June 30, 2015.
The Forbearance agreement requires the Company to place, and the Company has done so, 1,000,000,000 shares in reserve with
its transfer agent, to satisfy the conversion provisions for any unpaid monthly cash payments. The original agreement also
provided that the Company file a Proxy statement before June 1, 2015 should additional shares be needed for the conversion
reserve. The Company has not filed such a proxy statement due to cost prohibitions. The Company had not issued any stock for
conversions since entering into the forbearance agreement and during the year ended June 30, 2015 and has made cash
payments repaying $69,081 of principle and $41,019 of interest under the agreement. During the nine months ended March 31,
2016 the Company repaid $95,170 of principle and $54,830 of interest under the agreement, which included a non-cash
conversion of 62,500,000 shares of the Company’s common stock valued at $10,080 of which $3,907 represented accrued
interest and $6,093 represented principle. The value of the forbearance debt obligation on March 31, 2016 is
$807,083.
As of August 11, 2015 the Company entered into
an Amendment No. 1 with Fife to the Forbearance Agreement rescheduling the monthly payment schedules
At December 31, 2015, the derivative liability
was estimated to be $716,543, an increase of $484,120 from $232,423, the balance as of our last fiscal year end, creating a charge
to expense of a like amount during the six months then ended.
As of January 19, 2016 the Company entered
into a Second Amendment to the Forbearance Agreement again rescheduling certain of the monthly payments.
As of March 31, 2016 the derivative liability
was estimated to be $207,957, a decrease of $508,586 for the three months ended March 31, 2016 resulting in a net credit for the
three months period of that amount and a $24,467 net credit for the nine months ended March 31, 2016.
As of March 31, 2016 this forbearance obligation,
as amended, would only be convertible for monthly obligations the Company elects to/or does not pay in cash in part or in full,
for: (i) up to281, 250,000 shares, for the satisfaction of the next required monthly payment, (ii) up to 2,824,375,000 shares,
for the satisfaction of the next 12 required monthly payments; and (iii) up to 5,044,264,869 shares of our common stock should
the entire obligation be converted.
On August 18, 2017 the Company entered
into a Judgment Settlement Agreement with John Fife with respect to the Judgment in favor of Fife, which reduces the balance under
the amended agreement to $360, 000, without conversion rights, in connection with the default by the Company under a Convertible
Debenture dated September 13, 2011.
Arrangement
#5 (MH Investment trust II)
On
August 26, 2014, the Company issued to the MH Investment Trust. a Convertible Note in a Private Placement pursuant to Section
4(2) of the Securities Act of 1933 in which the Company received $40,000 in gross proceeds on September 1, 2014. The instrument
is in the principal amount of $40,000 and matures on May 1, 2015. Interest only is payable at the rate of 12% per annum by the
Company to the holder until maturity. The instrument is convertible into the Company’s common stock at 60% of the volume
weight average price of the stock based upon the average of the three lowest trading days in the 10 day trading period immediately
preceding such conversion, or 65 % when the trading price exceeds $.0020 for the five days before such conversion. All proceeds
received in connection with the above financing have been used by the Company as working capital.
At the time of the transaction, the estimated
derivative liability of this security and the warrant was calculated to be $37,778 and the company recorded a loan discount of
the same amount. During the year ended June 30, 2015 the Company amortized $37,778 to loan discount expense and the unamortized
loan discount was reduced to $0. As of June 30, 2015, which given the changes in the Company’s stock price during the 10
day look-back period for this date the estimated liability had decreased to $3,002, a decrease for this period of $34,776 and
creating a non-cash credit to earnings of that amount. Based upon the price of the Company’s common stock and partial principle
payments during the year ended June 30, 2015 of $36,667; on June 30, 2015 this Note is convertible into approximately 25,016,667
shares of common stock. As of March 31, 2016, which given the changes in the Company’s stock price during the 10 day look-back
period for this date the estimated liability had increased to $7,396, an increase for this period of $4,394 and creating a non-cash
charge to earnings of that amount during the nine months ended March 31, 2016. At March 31, 2026 the note balance was $3,333 and
accrued interest of $1,597, at 12%, remained due under this agreement. Based upon the price of the Company’s common stock
on March 31, 2016 this Note is convertible into approximately 41,086,385 shares of common stock.
EQUITY
LINE OF CREDIT
The Company entered
a $10,000,000 equity line of Credit with Dutchess Opportunity Fund II, LLC in December of 2011. Under the equity line, the Company
is eligible to “PUT” to the fund, 20,000,000 shares of its common stock during any pricing period. The Company had
registered a total of 250,000,000 shares of its common stock on a Form S-1 Registration Statement with the Securities and Exchange
Commission that was declared effective on January 17, 2012 relating to the Dutchess Equity Line.
Through June 30,
2014, the Company has received $227,744 of proceeds under the Equity Line relating to the resale of 135,990,000 shares of the Company’s
common stock, net of $22,920 transaction fees. No proceeds under this line were received in the year ended June 30, 2015.
As of February 13,
2015, the Equity line of Credit expired, and the Company may no longer draw any funds under such equity line.
RESERVED SHARES
The Forbearance agreement connected with arrangement
#4 above requires the Company to place, and the Company has done so, 1,000,000,000 shares in reserve with its transfer agent,
to satisfy the conversion provisions for any unpaid monthly cash payments. During the nine months ended March 31, 2016, 62,500,000
shares were issued upon conversion of $10,000 of monthly payments as requested by holder and 937,500,000 shares remained in reserve
for conversion under this agreement at March 31, 2016. Through August 31, 2016, the remaining 937,500,000 shares from this reserve
have been issued to satisfy the conversion of $150,000 of scheduled payments due under the forbearance agreement through that
date.
During the Fiscal Year Ended June 30, 2014
the Company advanced 40,000,000 shares distributable under the Equity Line of Credit discussed above, of which 3,990 shares of
the Company’s common stock were resold and 36,010,000 shares were unsold when the agreement expired in February 2015, and
remain subject to be returned to the Company’s treasury for cancellation.
4.
|
COMMITMENTS
AND CONTINGENCIES
|
COMMITMENTS
Our corporate headquarters had been located
in Clifton, New Jersey since August 15, 2014., The Company initially rented the Clifton premise under a one year lease with monthly
rent of $4,020, which was renewed with monthly rent of $4,132 per month through July, 2016, when this lease terminated by mutual
agreement with landlord. The Company cancelled its security deposit and no amounts remain due under the agreement.
The Company had leased a warehouse and
limited office space in Norwalk, Connecticut, commencing in April of 2015 with a monthly rental of $2,200 per month. The Company
vacated the Norwalk premise in April 2016 and the Company moved its warehouse contents, primarily inventory and associated shipping
materials of its mPower battery products into the Clifton premise. The Company has $22,000 of unpaid rent in accounts payable
at March 31, 2016.
Presently the Company has relocated its
office, which includes modest office space, limited storage and utilities, to 688 New Dorp Lane, Staten Island, New York, on May
1, 2017, the rental terms included a three-month commitment; renewable 3 months at a time, with monthly rent of $400.
The
Company entered into a conditional lease for a production facility located in Passaic, New Jersey, the commencement of which was
contingent upon the Company obtaining funding from investors pursuant to an economic development program within governmental guidelines.
During the six months ended December 31, 2015 the Company canceled this lease and received the deposit.
CONTINGENCIES
The
Company had been in litigation with John Fife with respect to a Convertible Note originally issued on September 13, 2011 in the
principal amount of $557,000. Fife sought damages on a Motion for Summary Judgment in the amount in excess of $1,300,000 attorney’s
fees. On December 15, 2014 the federal district court in the North East District of Illinois found in favor of Fife on a motion
for Summary Judgment. The Company has entered into a Forbearance Agreement with Fife as a result of negotiations to settle such
Judgment.
The value of the forbearance obligation
on March 31, 2016 is $807,083 (See Note 3). At March 31, 2016, the derivative liability was estimated to be $207,957, and as such
a total of $1,015,040 liabilities have been recorded in the unaudited condensed consolidated financial statements to reflect this
obligation, $807,083 which is included in current liabilities and $207,957 non-current. The value of the judgment totaled approximately
$1.6 million as of December 31, 2014 and bears a punitive interest rate of 16%, and would become payable in full if the Company
defaults under the forbearance obligation reduced by payments under the Forbearance Agreement, which through March 31, 2016 totals
$204,150 or approximately, 1.4 million. Through March 31, 2016 the Company has not defaulted under the agreement. The Forbearance
agreement requires the Company to place, and the Company has done so, 1,000,000,000 shares in reserve with its transfer agent,
to satisfy the conversion provisions for any unpaid monthly cash payments, which through March 31, 2016, 62,500,000 shares from
this reserve have been issued to satisfy the conversion provisions.
As of March 31, 2016, this forbearance
obligation would only be convertible for monthly obligations the Company elects to/or does not pay in cash in part or in full,
for: (i) up to 281,250,000 shares, for the satisfaction of the next required monthly payment, (ii) up to 2,825,375,000 shares,
for the satisfaction of the next 12 required monthly payments; and (iii) up to 5,044,264,869 shares of our common stock should
the entire obligation be converted.
5.
|
FAIR VALUE
MEASUREMENTS
|
Effective
July 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820-10-20,
Fair Value Measurements
,
which provides a framework for measuring fair value under GAAP. ASC 820-10-20 defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10-20 requires that
valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820-10-20 also establishes
a fair value hierarchy, which prioritizes the valuation inputs into three broad levels. Financial assets and liabilities valued
using level 1 inputs are based on unadjusted quoted market prices within active markets. Financial assets and liabilities valued
using level 2 inputs are based primarily on quoted prices for similar assets or liabilities in active or inactive markets. For
certain long-term debt, the fair value was based on present value techniques using inputs derived principally or corroborated
from market data. Financial assets and liabilities using level 3 inputs were primarily valued using management’s assumptions
about the assumptions market participants would utilize in pricing the asset or liability. Valuation techniques utilized to determine
fair value are consistently applied.
The
table below presents reconciliation for liabilities measured at fair value on a recurring basis at March 31, 2016 and 2015:
|
|
Fair Value Measurements
|
|
|
|
Using Significant
|
|
|
|
Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
|
Derivative Liability
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
Balance at July 1,
|
|
$
|
235,425
|
|
|
$
|
637,543
|
|
Increase (Decrease) in Derivative and associated liabilities
|
|
|
(20,072
|
)
|
|
|
(102,972
|
)
|
Debt discounts
|
|
|
-
|
|
|
|
37,778
|
|
Balance at March 31,
|
|
$
|
215,353
|
|
|
$
|
572,349
|
|
Financial
instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also
include those for which the determination of fair value requires significant management judgment or estimation.
Some
of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that
approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables.
W
e
have determined that it is not practical to estimate the fair value of our notes payable because of their unique nature and the
costs that would be incurred to obtain an independent valuation. We do not have comparable outstanding debt on which to base an
estimated current borrowing rate or other discount rate for purposes of estimating the fair value of the notes payable and we
have not been able to develop a valuation model that can be applied consistently in a cost efficient manner. These factors all
contribute to the impracticability of estimating the fair value of the notes payable. At March 31, 2016, the carrying value of
the notes payable and accrued interest for convertible agreements and officers’ notes was approximately $2.2 million The
JMJ convertible notes, which were originally due at various times through December 31, 2012, yield an interest rate of 12%, the
Fife Forbearance obligation is 9%. Refer to Note 3 of these unaudited condensed consolidated financial statements for more information
about the Company’s notes payable as of March 31, 2016.
6.
|
RELATED
PARTY TRANSACTIONS
|
MICROPHASE
CORPORATION
mPhase’s President was also an officer
and shareholder of Microphase and mPhase’s Chief Operating Officer was also an employee of Microphase. On May 1, 1997, the
Company entered into an agreement with Microphase whereby it would use office space as well as the administrative services of Microphase,
including the use of accounting personnel. This agreement was modified during subsequent period based upon Microphase involvement
each year. As of July 1, 2011, the fees had been revised to $3,630 per month. In addition, Microphase also charged fees for specific
projects on a project-by-project basis, providing the Company with limited services in our most recent fiscal years, primarily
warranty repairs on our mPower product line and charges for delivery equipment. On April 15, 2015 the Company moved its Connecticut
Office and no longer shares office space with Microphase.
During the nine months ended March 31,
2016 and 2015, $0 and $29,725 have been charged for rent and $4,500 and $15,327 have been charged for other expenses, respectively,
to the Company by Microphase. As a result of the foregoing transactions, as of March 31, 2016, the Company owed $32,945 to Microphase.
Mr. Durando was Microphase’s Chief
Operating Officer since May 1, 1995 and a Director since March 31, 2010.
Mr.
Durando resigned as both an Officer and Director of Microphase Corporation on January 2, 2015. On February 9, 2015 Mr. Durando
assigned all his interests in the Capital Stock of Microphase for a period of not less than three years RCKJ Trust as the Grantor.
The beneficial owners for economic purposes are Mr. Durando’s children. Mr. Durando was a strategic employee of Microphase
Corporation from January 2, 2015 through May 31, of 2017. On June 2, 2017 the RCKJ Trust exchanged all its shares of stock in Microphase
in exchange for shares of stock in Digital Power Corporation, a publicly-held company then listed on the New York Stock exchange.
OTHER
RELATED PARTIES
A director of the Company, was employed until
September 30, 2003 by our former investment-banking firm Lipper & Company. On March 31, 2016, The Director’s affiliated
firms of Palladium Capital Advisors and Eagle Strategic Advisers were owed unpaid finders’ fees in the amount of $177,000,
which is included in due to related parties. Also The Director loaned the Company $90,000 in the fourth quarter of the fiscal
year ended June 30, 2015 and additionally, he advanced the Company $20,000 in the nine months ended March 31, 2016, net of repayments,
together with $3,775 accrued interest and $113,775 remains outstanding as of March 31, 2016.
T
ransactions
with Officers
At various points during past fiscal years
the Messrs. Durando, Dotoli and Smiley provided bridge loans to the Company evidenced by individual promissory notes and deferred
compensation so as to provide working capital to the Company. All of these notes are payable on demand and summarized in the tables
below.
During
the nine months ended March 31, 2016 the Company transferred a fully-depreciated sales vehicle to its Chief Operating Officer,
Gus Dotoli, valued at $18,000 as partial repayment of his Officer’s loan. Included in Other Income is $18,000 recorded as
a gain on sale in connection with such transfer by the Company.
Total
compensation and payables to related parties and to officers is summarized below:
Summary
of compensation to related parties for the Nine Months Ended March 31, 2016
|
|
Durando
|
|
|
Dotoli
|
|
|
Smiley
|
|
|
Officers
|
|
|
K. Durando
|
|
|
Director
|
|
|
Microphase
|
|
|
Total
|
|
Consulting / Salary
|
|
$
|
130,000
|
|
|
$
|
62,000
|
|
|
$
|
62,000
|
|
|
$
|
254,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
254,000
|
|
Interest
|
|
$
|
15,929
|
|
|
$
|
6,805
|
|
|
$
|
5,131
|
|
|
$
|
27,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
27,865
|
|
Rent
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Selling & marketing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
50,000
|
|
|
|
-
|
|
|
$
|
4,500
|
|
|
$
|
54,500
|
|
Finders Fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
17,000
|
|
|
|
-
|
|
|
$
|
17,000
|
|
Total compensation for the Nine Months
Ended March 31, 2016
|
|
$
|
145,929
|
|
|
$
|
68,805
|
|
|
$
|
67,131
|
|
|
$
|
281,865
|
|
|
$
|
50,000
|
|
|
$
|
17,000
|
|
|
$
|
4,500
|
|
|
$
|
353,365
|
|
Summary of compensation
to related parties for the Nine Months Ended March 31, 2015
|
|
Durando
|
|
|
Dotoli
|
|
|
Smiley
|
|
|
Officers
|
|
|
K. Durando
|
|
|
Director
|
|
|
Microphase
|
|
|
Total
|
|
Consulting / Salary
|
|
$
|
150,000
|
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
300,000
|
|
Interest
|
|
$
|
39,703
|
|
|
$
|
26,609
|
|
|
$
|
22,573
|
|
|
$
|
88,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88,885
|
|
Rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
29,725
|
|
|
$
|
29,725
|
|
Selling & marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
$
|
54,000
|
|
|
|
|
|
|
$
|
15,327
|
|
|
$
|
69,327
|
|
Finders Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
34,500
|
|
|
|
|
|
|
$
|
34,500
|
|
Total compensation for the Nine
Months Ended March 31, 2015
|
|
$
|
189,703
|
|
|
$
|
101,609
|
|
|
$
|
97,573
|
|
|
$
|
388,885
|
|
|
$
|
54,000
|
|
|
$
|
34,500
|
|
|
$
|
45,052
|
|
|
$
|
522,437
|
|
Summary of amounts payable to related parties as of March 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Durando
|
|
|
Dotoli
|
|
|
Smiley
|
|
|
Payable-Officers
|
|
|
K. Durando
|
|
|
Director
|
|
|
Microphase
|
|
|
Total
|
|
Notes Payable Officers & Director
|
|
$
|
306,793
|
|
|
$
|
109,056
|
|
|
$
|
8,800
|
|
|
$
|
424,649
|
|
|
|
-
|
|
|
$
|
113,775
|
|
|
|
-
|
|
|
$
|
538,425
|
|
Accrued Wages Officers/Accrued Fees
|
|
$
|
154,389
|
|
|
$
|
75,194
|
|
|
$
|
75,194
|
|
|
|
-
|
|
|
$
|
22,000
|
(i)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
326,777
|
(i)
|
Due to Affiliates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
177,000
|
|
|
$
|
32,545
|
|
|
$
|
209,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Payable
|
|
$
|
41,240
|
|
|
$
|
17,548
|
|
|
$
|
98,748
|
|
|
$
|
157,536
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
157,536
|
|
Total Payable to Officers / Affiliates as of March 31, 2016
|
|
$
|
502,423
|
|
|
$
|
201,797
|
|
|
$
|
182,742
|
|
|
$
|
582,185
|
|
|
$
|
22,000
|
|
|
$
|
290,775
|
**
|
|
$
|
32,545
|
|
|
$
|
1,232,282
|
|
|
(i)
|
Amount
due to K. Durando of $22,000 is included in Accounts payable and $304,777 of wages accrued for officers are included in Accrued
expenses at March 31, 2016
|
Summary of payables to related parties as of June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
Total Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Durando
|
|
|
Dotoli
|
|
|
Smiley
|
|
|
Payable-Officers
|
|
|
Director
|
|
|
Microphase
|
|
|
Total
|
|
Notes Payable Officers & Director
|
|
$
|
283,565
|
|
|
$
|
115,915
|
|
|
$
|
5,000
|
|
|
$
|
404,480
|
|
|
$
|
90,000
|
|
|
|
-
|
|
|
$
|
494,480
|
|
Accrued Wages Officers
|
|
$
|
29,167
|
|
|
$
|
14,583
|
|
|
$
|
14,583
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
$
|
58,333
|
(i)
|
Due to Affiliates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
160,000
|
|
|
$
|
28,045
|
|
|
$
|
188,045
|
|
Interest Payable
|
|
$
|
25,311
|
|
|
$
|
10,743
|
|
|
$
|
93,617
|
|
|
$
|
129,671
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
129,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Payable to Officers / Affiliates as of June 30, 2015
|
|
$
|
338,043
|
|
|
$
|
141,241
|
|
|
$
|
113,200
|
|
|
$
|
534,151
|
|
|
$
|
250,000
|
|
|
$
|
28,045
|
|
|
$
|
870,529
|
|
(i)
|
$58,333 of wages accrued for officers
are included in Accrued expenses at June 30, 2015
|
|
●
|
In April of 2016, the Company closed its warehouse and office space located in Norwalk, Connecticut as a cost cutting measure. On July 16, 2016 the Company closed its office in Clifton, New Jersey to further conserve financial resources. The Company moved to its present address on May 1, 2017 (See Note 4-Commitments & Contingencies)
|
|
|
|
|
●
|
Commencing January 1, 2016 and continuing through May 31, 2017 the Company has accrued but not paid Officer Salaries at the rate of $120,000 per annum for its President and Chief Executive Officer Ron Durando and $48,000 per annum respectively for its Chief Operating Officer Mr. Gustave Dotoli and its Chief Financial Officer and General Counsel Martin Smiley. Previously the Company had accrued but not paid salaries of $200,000 to its President and Chief Executive Officer and $100,000 each to its Chief Operating Officer and Chief Financial Officer and General Counsel respectively for the period commencing in April of 2015 through December 31, 2015.
|
|
|
|
|
●
|
From April 1, 2016 through the date hereof, the Company issued 1,500,000,000 shares of its common stock in private placements pursuant to Section 4(a)(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder raising gross proceeds aggregate of $75,000 all of which was used for working capital and general corporate purposes.
|
|
|
|
|
●
|
In July of 2016, the Company sold a patent covering a portion of its jump starter product line to a competitor for $25,000 which was paid in two installments of $ 12,500 each during the quarter ending September 30, 2016.
|
|
|
|
|
●
|
The Company reserved 1 billion shares of its common stock with its transfer agent, to satisfy the conversion provisions for any unpaid monthly cash payments required under the terms of a Forbearance Agreement with John Fife dated February 10, 2015, which through August 31, 2016, the entire 1 billion shares from this reserve have been issued to satisfy the conversion provisions through that date. No payments have been made under this agreement since August of 2016. On August 18, 2017 the Company entered into a Judgment Settlement Agreement with John Fife with respect to the Judgment in favor of Fife, which reduces the balance under the amended agreement to $360,000, without conversion rights, relating to the default by the Company under a Convertible Debenture dated September 13, 2011. At March 31, 2016 we had recorded $1,015,040 of liabilities, including $807,082 for the forbearance agreement and $207,957 for the derivative liability associated with the Conversion feature with respect to this arrangement, as amended.
|
|
|
|
|
●
|
On September 26, 2016, March 24, 2017 and September 24, 2017, Karen Durando, the wife of Ron Durando; and on September 19, 2017 Mr. Smiley returned back to the Company 299,569,203,800 million and 295,430,797; and 1,367,226,450 shares respectively, of previously issued common stock of the Company to provide the Company with sufficient authorized but unissued shares of stock to enable the Company to have additional authorized shares of its common stock to complete present private placements to provide operating capital for the Company.
|
|
|
|
|
●
|
In April of 2017, the Company received a judgment from the Federal District Court of Northern Illinois Eastern Division in its favor with prejudice dismissing a claim by River North Equity covering Convertible Securities of the Company which effectively negated the two notes River North Equity obtained from JMJ Financial. At March 31, 2016 the amount recorded in Current Liabilities for all three convertible notes and accrued interest thereon previously issued to JMJ Financial was $1,097,877. At March 31, 2016 the amount recorded in Current Liabilities for the two notes and accrued interest thereon subject to the River North Equity claim was $689,822.
|
|
●
|
Subsequent to March 31, 2016, through September 20, 2016, Messrs. Durando,
Biderman, Smiley and Dotoli loaned the Company approximately $35,760, $5000, $15,050 and $1,850 to provide
general working capital to commence the filings necessary to bring the Company’s
financial statements and required periodic each reports pursuant to section 13 or 15(d) of the
securities exchange act of 1934 current.
|