The following discussion should be read in conjunction with mPhase Technologies' financial statements and related notes included elsewhere in this report.
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF THE BUSINESS
mPhase Technologies, Inc. ("mPhase" or the "Company"), a New Jersey
corporation, is a development stage technology company headquartered in
Norwalk, Connecticut with offices in Little Falls, New Jersey and New York, New
York. mPhase shares common office space and common management with Microphase
Corporation, a privately-held company. Microphase is a seller of radio frequency
and filtering technologies to the defense and telecommunication industries.
Microphase has been in operation for over 50 years and supports mPhase with
engineering, administrative and financial resources, as needed. Since our
inception in 1996, mPhase has been a development-stage company.
The
Company is a developer and seller of broadband communications products for
telephone service providers.
mPhase introduced its first TV over DSL platform, the Traverser Digital Video
and Data Delivery System ("DVDDS"), in 1998. The DVDDS is a patented end to end
system that enables a telecommunications service provider to deliver up to
several hundred channels of motion picture experts group two ("MPEG-2") standard
broadcast digital television, high speed internet and voice over copper
telephone lines between a central office facility of the provider and a
customer's premise. The DVDDS is a proprietary technology developed in
conjunction with Georgia Tech Research Corporation (GTRC) and is one of the
first systems of its kind developed. The Company has not earned any material
revenues to date with respect to the DVDDS and has discontinued further
development of the product and replaced it with its TV+ solution.
The
Company's TV+ solution is an open-standards, carrier class solution of
middleware/software enabling telephone service providers to deliver broadcast TV
using internet protocol (IPTV). The TV+ platform also is capable of delivering
video on demand, voice and high-speed internet over any type of existing
infrastructure of a telephone service provider including copper, fiber or coax.
The Company's TV+ solution is highly scalable (compared to other middleware
requires less routers and servers) with significant cost savings. The company
also serves as a systems integrator for its IPTV solution. The Company's
TV+ solution is highly scalable and reliable middleware designed to operate with any
IP based network. In addition the Company designs, manufacturers and sells
digital subscriber line (DSL) component products such as Plain Old Telephone
Splitters (POTS) designed to split a telephone signal into separate analog and
digital streams enabling the delivery of voice and data simultaneously over a
single copper telephone line.
The
Company believes that the demand for the TV+ system will be initially the
greatest in markets primarily outside of the United States that do not have a
hybrid fiber coaxial cable ("HFC") infrastructure necessary for cable TV or
fiber to the curb and are therefore have less competitive solutions for the
delivery of broadcast television. The TV+ solution is highly scalable and
significantly reduces the number of routers and servers a telephone service
provider will need to deploy to upgrade its infrastructure to enable it to
deliver broadcast television. This is especially important outside of the United
States where telephone infrastructure often needs to be significantly upgraded
with routers and servers (hardware) in order to deliver IPTV. The decision to
deploy IPTV by an international service provider is often based upon the cost of
system hardware upgrades that often constitute 95% of the cost of deploying IPTV
on a telephone network.
The
Company's IPTV solution utilizes a communications framework based upon Internet
Protocol (IP) instead of Asynchronous Transfer Mode (ATM) that was utilized in
earlier releases of the product. ATM is an industry standard for transportation
of data based upon a packaging of information into a fixed-size cell format for
transportation across networks. Many telecommunications service providers
currently deploy equipment that handles this protocol because it can support
voice, video, data and multimedia applications simultaneously with a high degree
of reliability. IP is another transport protocol that maintains network
information and routes packets across networks. IP packets are larger and can
hold more data than ATM cells. Historically, there have been concerns that
service providers would be unable to provide the same quality of service with IP
because it is not optimized for time-sensitive signals such as broadcast
television and voice. Nevertheless, there is a greater demand by
telecommunication service providers for IP systems for delivery of television,
voice and high-speed data because such systems are significantly more cost
effective to deploy based upon greater scalability. The Company's TV+ solution
consists of middleware/software that will operate with any IP based network
including DSL, Ethernet, or fiber or any combination thereof. The solution is
transport agnostic and may be deployed with any IP multicast router or DSLAM
transportation method used for the delivery of television and high-speed data
over an IP network.
mPhase also has designed and markets a line of digital subscriber line (DSL)
component products for telecommunications service providers including its new
VDSL (very fast DSL) customer premises POTS Splitter product currently being
used globally by telecommunications service providers that are deploying digital
subscriber to transport data as an additional part of its traditional voice
telephone service. From the inception of the Company, virtually all of its
revenue to date was derived from the sale of ADSL (asymmetric DSL) customer
premises and central office POTS Splitters which have been discontinued as
telephone service providers have migrated to VDSL.
In
February of 2004, mPhase entered the business of developing new products using
the science of nanotechnology. Such science involves the manipulation of
materials of extremely small size (of a magnitude equal to one fifty thousandth
the size of a human strand of hair) that as a result exhibit new and different
properties from their ordinary properties found in nature. The science involves
interdisciplinary areas of science including molecular engineering, quantum
physics and electrochemistry.
The
Company commenced its efforts by entering into a $1.2 million 12 month
Development Agreement with the Bell Labs division of Alcatel/Lucent for
exploratory research of control and manipulation of fluids on super hydrophobic
surfaces to create power cells ( batteries) by controlling wetting behavior of
an electrolyte on nano-structured electrode surfaces. The goal is to develop a
major breakthrough in battery technology creating batteries with longer shelf
lives as the result of no direct electrode contact (meaning no power drain prior
to activation). It is believed that such batteries should have a shelf life of
15-20 years as compared to 5 years for an ordinary battery. In addition such
battery will have a significant advantage in the time it takes to ramp to power
equal to one millisecond to fully active voltage a fraction of the time it
takes for conventional batteries.
The
Company's Development Agreement covering power cell development with Bell Labs
was extended in March of 2005 and April of 2006 respectively each for additional
12 month periods. Upon expiration in March of 2007, Company and Bell Labs
entered into an interim agreement at a cost of $200,000 covered the period from
March 1, 2007 through April 27, 2007. A second interim agreement entered into
covered the period from April 27, 2007 through July 31, 2007 for a total of
$300,000 and has recently expired. The Company is currently negotiating a
further extension of such product research and development.
In
March of 2005, the Company entered into a second Development Agreement using the
science of nanotechnology for 12 months at a cost of $1.2 million with the Bell
Labs to develop ultra sensitive magnetic sensor devices through the science of
nanotechnology. Such agreement was renewed in April of 2006 for another 12
months requiring mPhase to pay Bell Labs the sum of $100,000 per month for
exploratory research. The Company is currently negotiating the renewal for an
additional 12 months at a total cost of approximately $1.2 million.
Magnetometers work by sensing changes in the earth's magnetic field caused by
motion of magnetic objects or changes in electrical currents generated by such
objects. The Company believes that magnetic sensors may have significant
applications in the area of military electronics, cell phones, the food industry
and electronic security and detection devices. The family of magnetometers that
mPhase is developing in collaboration with Lucent Bell Labs is based upon Micro
Electrical Mechanical Systems (MEMS). This is a development technique using a
combination of photolithography and etching with extremely small three
dimensional structures, with the capabilities of movement, can be made on a
wafer of Silicon. The processing of such devices is done in a semi-conductor
clean room located at the New Jersey Nanotechnology Consortium facilities in
Murray Hill, New Jersey. The product development has successfully reached an
early milestone having produced a number MEM's based sensor samples from the
clean room facilities. We are currently working on integrating sensor samples
into the surrounding electronic circuitry so that measurement, characterization
and sensitivity testing can be conducted. We are currently able to achieve
sensitivities at room temperature of better than .1 micro gauss per root hertz
squared and with additional development the goal is improvement of at least one
order of magnitude.
The
discipline of developing new products utilizing nanotechnology fabrication is in
its early stages of exploratory development making it difficult to predict the
timing of product releases and future revenues. mPhase believes that batteries
with exceptionally long shelf lives, very small size and high power density as
well as electromagnetic sensors may be some of the first products resulting from
nanotechnology research and development to achieve commercial viability. The
Company believes that such expansion into nanotechnology product development is
consistent with its strategy of being a pioneer of high growth technology
products and potentially diversifies its product mix.
Business Development,
Organization, and Acquisition Activities
mPhase was incorporated in New Jersey in 1979 under the name Tecma Laboratory,
Inc. In 1987, the Company changed its name to Tecma Laboratories, Inc. As Tecma
Laboratories, Inc., the Company was primarily engaged in the research,
development and exploitation of products in the skin care field. On February 17,
1997, the Company acquired Lightpaths, Inc., a Delaware corporation, which was
engaged in the development of telecommunications products incorporating DSL
technology, and the Company changed its name to Lightpaths TP Technologies, Inc.
On
January 29, 1997, the Company formed another wholly-owned subsidiary called TLI
Industries, Inc. The shares of TLI were spun off to its stockholders on March
31,1997 after the Company transferred the assets and liabilities, including
primarily fixed assets, patents and shareholder loans related to the prior
business of Tecma Laboratories. As a consequence of these transactions, the
Company became the holding company of its wholly-owned subsidiary, Lightpaths,
Inc. on February 17, 1997.
On
May 5, 1997, the Company completed a reverse merger with Lightpaths TP
Technologies, Inc. and thereafter changed its name to mPhase Technologies, Inc.
on June 2, 1997.
On
March 26, 1998 the Company entered into a Licensing Agreement with Georgia Tech
Research Corporation ("GTRC") in which mPhase became the exclusive licensee of
all patents received by GTRC in connection with development of the legacy
Traverser DVDDS. GTRC is entitled to receive a royalty equal to 5% of gross
sales of the Traverser DVDDS and 30% of any "lump sum payments" received in
connection with revenues received by mPhase from the Traverser DVDDS product the
under the terms of its license, as amended. The Traverser DVDDS has been
replaced by the Company's IPTV solution.
On
June 25, 1998, mPhase acquired Microphase Telecommunications, Inc., a Delaware
corporation, from Microphase Corporation by issuing 2,500,000 shares of its
common stock. Microphase Telecommunications' principal assets were patents and
patent applications utilized in the development of its proprietary Traverser
technology.
In
March 2000, mPhase entered into a joint venture with AlphaStar International,
Inc. to form an entity called mPhaseTelevision.Net, Inc. in which the Company
held a 50% interest. On May 1, 2000, the Company acquired an additional 6.5%
interest in mPhaseTelevision.Net, Inc. and made it one of its consolidated
subsidiaries.
On
March 14, 2000, mPhase entered into an agreement with BMW Manufacturing Corp.,
located in South Carolina. Under the agreement, the Company installed its legacy
Traverser DVDDS product for BMW's telephone transmission network at an
automotive manufacturing plant to enable video broadcast of information to its
employees. Such system was replaced with a competitor's network during fiscal
year 2007.
In
December of 2001, Hart Telephone company located in Hartwell, Georgia completed
the building and development of its digital headend enabling. Hart to test the
Company's legacy Traverser DVDDS product with approximately 20 customers
receiving about 80 channels of television services utilizing such platform.
In
May of 2002 mPhase initiated discussion for development of a cost-reduced set
top box (INI) with the Bell Laboratories division of Lucent Technologies, Inc.
Effective December 1, 2002, mPhase entered into a Development Agreement with the
Bell Laboratories division of Lucent Technologies, Inc. for the development of
mPhase's broadcast television switch as an integrated platform with the Lucent
Stinger DSL Access Concentrator.
On
December 9, 2002, pursuant to a Statement of Work, Lucent commenced development
of the Broadcast Television Switch for mPhase.
On
December 15, 2002, mPhase engaged Lucent for the cost reduction of its Traverser
INI set top box.
On
January 21, 2003 mPhase entered into a Co-Branding Agreement with Lucent
Technologies under which mPhase's INI set top box would be co-branded with the
Lucent Technologies name and logo.
On
April 4, 2003, mPhase entered into a Systems Integration Agreement with Lucent
Technologies. Under the terms of such an agreement mPhase has been given the
exclusive rights to sell worldwide as a 'bundled' solution the Stinger in
connection with mPhases's BTS.
Effective September 15, 2003, mPhase entered into a Development Agreement with
the Bell Laboratories division of Lucent Technologies, Inc. that has been
extended through December of 2005 pursuant to additional Statements of Work
under such Development Agreement for development of its IPTV solution.
Effective February 3, 2004, mPhase entered into a Development Agreement with the
Bell Laboratories division of Lucent Technologies, Inc. for the development of
micro power source arrays fabricated using nanotextured superhydorphobic
materials.
On
November 28,2004, mPhase entered a Software License Agreement with Espial Group,
Inc to be used in the set top box of its TV+ solution. Espial Group, Inc. is a
leader in system operating software for set top boxes used to receive IPTV.
On
January 3, 2005, mPhase entered into a work order with Magpie Telecom Insiders,
Inc. pursuant to the terms of a Software Development Agreement dated September
2, 2004 for purposes of adding video on demand to its TV+ solution.
Effective March 5, 2005, mPhase extended its Development Agreement with Bell
Labs for an additional 12 months for the development of micro power source power
arrays.
Effective March 10, 2005, mPhase entered into a Development Agreement with the
Bell Laboratories division of Lucent Technologies Inc. for the development of a
new generation of magnetic field sensors using the science of nanotechnology.
In
April of 2006, mPhase renewed each of the nanotechnology agreements with Bell
Labs dated March 5, 2005 and March 10, 2005, respectively, for an additional 12
months at the cost of $100,000 per month each.
In
May of 2006, the Development Agreement with the Bell Labs division of Lucent
Technologies, Inc. covering the Company's TV+ solution was not renewed by the
Company and Velankani, a software designer headquartered in India, assumed
responsibilities for development of the system management software object code
and system integration of the Company's TV+ solution. The Company has been
working with Velankani for system integration testing since January of 2006.
On
June 27, 2006, the Company entered into Amendment No. 4 to a Software License
Agreement with Espial Group, Inc. which extended the term of its original
development agreement through 2008 for Software development and support of the
TV+ software in connection with multiple set top boxes of various vendors.
On
September 13, 2006, the Company announced its first test of it IPTV solution
with Comstar/Odessa, a major telecommunications service provider in the Ukraine
for a trial deployment of our IPTV solution. Upon successful completion of such
trial, it is anticipated that a 6,000 subscriber deployment would follow
generating the Company's first revenues with respect to its IPTV solution.
As
of November 14, 2006, the Company entered into a Common Amendment to its
Statement of Work with Velankani Systems Technologies, Inc. rescheduling certain
payments due for software integration services for the Company's IPTV solution
performed by Velankani for mPhase including a conversion of a portion of the
outstanding payable to mPhase common stock at $.17 per share.
On
December 13, 2006, the Company entered into a Non-Exclusive Distribution
Agreement with Netdialogue, a reseller and service integrator of IPTV middleware
for telecommunications service providers located in Russia.
On
January 4, 2007, the Company entered into a Cooperative Research and Development
Agreement for Novel Reserve Cell Technologies and High Sensitivity Magnetometer
Technology with the U.S. Army Armament Research Center located in Picatinny, New
Jersey.
On
January 23, 2007, the Company entered into Memorandum of Understanding with
Latens Systems Limited under which Latens grants to mPhase a license to use its
conditional access software (encoding and encryption for IPTV delivery).
On
February 3, 2007, the Company entered into Amendment No. 4 to a Development
Agreement effective February 3, 2004, with Lucent Technologies, Inc. extending
research and development through April 27, 2007, relating to micro-power source
arrays fabricated using nano-textured superhydrophobic materials.
On
February 17, 2007, the Company extended a Cooperative Research Agreement through
December 31, 2007 originally entered into on July 15, 2005 with Rutgers, The
State University of New Jersey governing cooperative research on a Lithium
nanostructured reserve battery.
On
February 22, 2007, the Company entered into a new Statement of Work with Espial
Group, Inc for Integration of its EVO software to the Bitband Server for two
set top boxes manufactured by Amino and Tilgin respectively in connection with
mPhase's IPTV solution. The Company simultaneously entered into a Payment
Agreement with Espial Group, Inc rescheduling certain payments owed by the
Company for services performed in connection with software development of its
IPTV solution.
On
March 28, 2007, the Company entered into a Reseller Agreement with Steeleye
Technology, Inc. for software utilized for high use rollover redundancy for IPTV. On
April 17, 2007, the Company announced that it had formed AlwaysReady, Inc., a
New Jersey Corporation, as a new wholly-owned subsidiary. The Company plans to
transfer all of its nanotechnology assets and appropriate liabilities to such
company as a first step in the separation of its nanotechnology product line
from its IPTV product. The Company plans to staff AlwaysReady, Inc with a new
management team experienced in the nanotechnology area in order to unlock and
maximize overall shareholder value. On May 29, 2007, AlwaysReady, Inc announced
the hiring of Source Capital Group, an investment banking firm specializing in
the raising of private equity, to raise a minimum of $1.5 million in a Private
Placement in which the Company would sell up to a 10% interest in AlwaysReady,
Inc. to institutional and accredited investors. In addition the Company announced
that it planned to eventually transform AlwaysReady, Inc. into a publicly traded
company. mPhase plans to retain a 90% interest in Always Ready, Inc. and the
shares of common stock of Always Ready, Inc. will be registered on appropriate
filings with the SEC under the Securities Act of 1933, as amended, as well as
the Securities Exchange Act of 1934, as amended, and listed for trading on the
over the counter bulletin board.
On
April 28, 2007, the Company extended its Development Agreement with Lucent
Technologies relating to micro-power source arrays fabricated using nano-textured
superhydrophobic materials originally entered into in February of 2004 with
Amendment #5 through July 31, 2007.
On May 10, 2007, the Company entered into a Consulting Agreement
with CT NanoBusiness Alliance to produce a report and assist the Company with respect to
its strategy for development and marketing of its nano power cell product.
On
May 11, 2007, the Company entered into an Escrow Agreement with Bitband
Technologies, Inc. governing certain payments to be made by the Company to
Bitband in connection with certain servers provided and services rendered for
the Company’s IPTV product testing. On June 20, 2007,
the Company announced that it is forming a new subsidiary, Granita Media, Inc. (“Granita”),
a Delaware corporation, that will provide targeted advertising to users of the
TV+ middleware solution. Through the use of specific viewer demographics such as
age, gender and defined consumer preferences, the Company believes that a new
form of broadcast television advertising could develop that is more powerful and
focused than is currently being used by broadcasters. It is believed that
targeted advertising software to be developed by Granita will enhance mPhase's
middleware by offering a source of additional revenues for a telephone service
provider deploying IPTV. mPhase plans to fund the new company initially through
up to $500,000 of equity to be provided by employees and additional outside
institutional financing which will involve the sale of up to 10% of the common
stock of Granita with mPhase retaining 90% of the stock of Granita On July 6, 2007
the Company announced that it has executed with Double U. Master Fund, L.P., a
limited partnership organized under the laws of the British Virgin Islands, a
Private Equity Credit Agreement for an aggregate of up to $6 million in
financing through the sale, from time to time of the common stock of the Company
at a 14% discount to its market value (determined as set forth in detail in the
Private Equity Credit Agreement). The terms of the Agreement provide that mPhase
will have the option to "PUT" up to $300,000 of its common stock to the
Partnership per month upon the effectiveness of a Form S-1 Registration
Statement covering such shares of common stock. Under the terms of the
Agreement, the Company is not obligated to draw any minimum amount of money
under the Private Equity Credit Line On July 17, 2007, the Company announced the
award of a Phase I US Army Small Business Technology Transfer (STTR) Program
Grant. This award is a Phase I six month research effort to develop a 30 plus
year shelf life, low power, green battery (coin cell or similar) that will
continuously power a static random access memory circuit for a computer device.
SRAM is a common type of digital memory chip used in a wide variety of
electronic systems for data storage. During the six month research period, the
team will characterize the design, conduct capacity and stability measurements
of a reserve style power cell based on Lithium chemistry. Long term stability
and shelf life is achieved by initially separating the active materials of the
power cell during storage, and controlling the activation of the cell until
needed to provide power. This research program extends the design of the
company's smart battery to support the use of non-water based electrolytes that
are commonly used in lithium based batteries. Lithium batteries are favored for
powering many different types of electronic devices due to their higher voltage
and power requirements that can be supplied by more common alkaline batteries.
The Phase I grant, valued at $100,000, will enable the Company to competitively
compete for a Phase II award as an avenue used by
U.S. government defense agencies to adopt advanced technology for
commercialization and use. Rutgers University will support the Company and its
newly formed subsidiary AlwaysReady, Inc. during the award period as a
subcontractor under the award guidelines. On August 21, 2007, the Company announced the
acquisition of a 10% stock ownership position in Sovereign Tracking Systems LLC, a
company located in New Jersey with a patent covering active, real-time, tracking
systems that uses radio frequency identification tags to secure high-end personnel tracking and monitoring systems. The Company believes that such
patent substantially enhances the Company's smart battery application being
developed through AlwaysReady, Inc. a wholly-owned subsidiary.
Our
revenue, historically, has been derived exclusively from sales of DSL component
telephone equipment parts, the majority of which has come from our sales of POTS
Splitter Shelves. We have derived no material revenue to date with respect to
our iPOTS and broadband loop products (which have been discontinued).
We are currently exploring the development of VDSL (very fast DSL) CPE (customer
premises equipment) Splitters as a new DSL component product line. Neither our
TV+ solution or our nanotechnology products have generated to date any material
revenues other than $280,000 of revenue with respect to the sale of 1000 set top
boxes together with software for Release 2.0 (that uses asynchronous transfer
mode protocol) of our TV+ solution in fiscal year 2005 to a major Russian
telecommunications service provider. Such provider has not continued deploying
our TV+ solution. In our fiscal years ended June 30, 2007 and June 30, 2006 we
generated approximately $154,000 and $975,000 in revenue, respectively, from the
commercial sale of our component products and overall losses for such years of
$16,851,562 and $24,450,650, respectively. These component products, included
filters and ADSL Central Office POTS Splitter Shelves, were marketed to other DSL
equipment vendors. In addition certain minor revenues were recognized for
consulting services provided in connection with the possible application of its
nanotechnology power cell to create an active “smart” credit card for a leading
credit card company.
Products & Services
IPTV Solution
mPhase is a developer and seller of broadband communications products for
telephone service providers. The Company's TV+ solution is the
middleware/software necessary for the delivery by telephone service providers of
broadcast quality television, video on demand, high speed internet and voice
utilizing internet protocol (IPTV). mPhase believes that its IPTV solution is
the most cost-effective, standards based, scalable solution with carrier class
quality and security available for telecommunications service providers around
the world. mPhase believes that telecommunication service providers will find
the cost-effective, scalable architecture of the TV+ middleware will result in
significant cost savings in the number of servers and routers necessary to
deploy IPTV to its customers on a significant scale. This is especially true for
telephone service providers outside of the United States that face substantial
hardware costs to upgrade their existing backbone and infrastructure necessary
for the delivery of broadcast television. Since such hardware costs constitute
up to 95% of the capital expenditures in deploying IPTV, the savings are often a
key financial ingredient enabling a telecommunications service provider to
deploy IPTV. Thus the Company believes its software can be a compelling solution
for such deployments. The deployment of a full range of converged broadband
services is critical for many telecommunications service providers to retain
traditional telephone customers by offering a full package of services. Our TV+
solution enables a telephone service provider to provided a “triple play” of
voice, broadcast television and high speed internet over any existing
infrastructure including copper, fiber or coax. Our current release of the TV+
solution is a culmination of years of development of a world-class television
delivery solution for telecommunication service providers.
Our
TV+ solution is currently part of a test deployment of IPTV by Comstar/Odessa, a
major telecommunications service provider in the Ukraine. The Company faces
significant technical and financial challenges in order to achieve the
successful completion of acceptance testing criteria. However, upon the TV+
solution successfully meeting the technical and features criteria of the
acceptance test. Comstar/Odessa has indicated that it will commence deployment
of IPTV to 6,000 customers. Such a deployment would constitute the first major deployment of its TV+
solution and could constitute a
significant breakthrough for additional deployments of its IPTV solution in the
Ukraine and Russia. The Company has also recently established a significant
reseller relationship with Net Dialogue, a major integrator and reseller of
telecommunications products and services for several large telephone service
providers in Russia.
Since our inception in 1996, we have been a development-stage company. During the
past three years, mPhase has transformed itself from a developer of closed end
proprietary technology for the delivery of broadcast television over DSL to a
Company that has developed a carrier class middleware/software solution for the
delivery of IPTV. mPhase's IPTV solution is designed for operation with any
transport mechanism using IP protocol including multicast routers, digital
subscriber line access multiplexers and set top boxes of all major vendors.
Our
goal is to achieve wide acceptance of our TV+ solution in developing markets
outside of the United States for multi-channel digital broadcast IP television
at significant gross margins by creating an extremely cost-effective product.
Our TV+ solution consists of highly scalable system management
middleware/software designed to deliver IP television, video on demand, high
speed internet and voice over any IP based network. The solution is carrier
class and standards based designed to work with hardware of many different
vendors that manufacture DSLAM's, Multicasters, set top boxes, as well as any
backbone of hardware servers or topology that are key components that form part
of a system for the delivery of IPTV. It is important to note that the Company
has shifted its focus from a proprietary end to end hardware and software
platform for the delivery of broadcast television over DSL to the development of
middleware/software for carrier class delivery of IPTV over any IP network
infrastructure of a telecommunications service provider. This shift has taken
place over the past three years in response to advancements in IP deliver of
television and the current requirements of telecommunications service providers
for IPTV solutions.
On June 20, 2007, the Company
announced that it is forming a new subsidiary, Granita Media, Inc. (“Granita”), a
Delaware corporation, that will provide targeted advertising to users of the TV+
middleware solution. Through the use of specific viewer demographics such as
age, gender and defined consumer preferences, the Company believes that a new
form of broadcast television advertising could develop that is more powerful and
focused than is currently being used by broadcasters. It is believed that
targeted advertising software to be developed by Granita will enhance mPhase's
middleware by offering a source of additional revenues for a telephone service
provider deploying IPTV. mPhase plans to fund the new company initially through
up to $500,000 of equity to be provided by employees and additional outside
institutional financing which will involve the sale of up to 10% of the common
stock of Granita with mPhase retaining 90% of the stock of Granita
Other DSL Products
POTS Splitter Shelves
Although the Company has repositioned itself mainly as a software/middleware
provider of IPTV solutions, mPhase also designs and markets a line of DSL
component products including POTS Splitters which has generated almost all of
the Company's revenue from inception to date. A Plain Old Telephone Service
("POTS") Splitter Shelf is a low pass/high pass filter that separates voice and
data transmissions. POTS Splitter Shelves are necessary to permit simultaneous
voice and data transmissions over the same twisted copper wire pair. POTS
splitter shelves and the individual cards that populate the shelf separate and
combine traffic traveling along each twisted pair of wires into the analog voice
portion of a transmission and the digital data portion, so that each signal can
travel independent of the other.
The
Company's new VDSL customer premises splitter designed to facilitate the
roll-out of broadband services by telecommunications service providers such as
AT&T that are using a combination of fiber to the curb and VDSL over existing
copper lines to the home to solve the “last mile” for delivery of such
services. The Company is using the combination of capabilities of its own prior
experience with respect to central office and customer premises POTS Splitters
for ADSL with those of Microphase Corporation and Janifast Ltd. to develop a new
line of VDSL customer premises splitters in what appears to be a new and
evolving market. As telephone service providers have migrated to VDSL, the
Company has discontinued its traditional POTS Splitter product
Nanotechnology Products
As
noted above, the Company is in the process of negotiating an extension of each
of its Nanotechnology Development Agreements covering the Battery and
Magnetometer products respectively and will assign such contracts to Always
Ready, Inc.
Highly Sensitive Magnetometers
The
enhanced sensitivity of these devices results from two scientific advances
recently made researchers at Lucent Bell Labs. Presently, the highest
sensitivity magnetometers commercially available require cooling to cryogenic
temperatures. Called SQUIDs (for Superconducting Quantum Interference Devices)
these devices only work at the temperature where liquid helium boils, -455
degrees below zero Fahrenheit, making such magnetometers expensive and bulky and
therefore ill-suited for remote-sensing applications. Room temperature
magnetometers, on the other hand, are less sensitive, and use technology that
was developed in World War II for detecting submarines.
The
new technology being developed by Bell Labs and mPhase employs a number of
different designs based on Micro-Mechanical Systems (MEMS). These designs use
the very high "Quality Factor (Q)" of the mechanical resonance in single
crystals of silicon. A resonance is similar to the fundamental frequency of a
tuning fork. When tapped, a tuning fork will vibrate for a length of time
inversely proportional to the internal friction of vibration within the metal of
the tuning fork. A comparable tuning fork made from single crystal silicon,
which has less internal friction than the hardest metal, will vibrate almost a
thousand times longer. Based on this principal, a device employing a high Q
resonator will have enhanced amplitude of vibration at the resonance frequency,
and hence will display a greater sensitivity to external perturbations that
affect its resonance frequency. By coupling the mechanical motion of a bar or a
paddle constructed from silicon to the ambient magnetic field, this high
mechanical sensitivity can be converted to high magnetic field sensitivity. The
technical approach that the team is developing can be achieved either statically
with an integrated magnetic film, or dynamically through motion of the silicon
bar or paddle.
The Benefits of MEMS
Commercial magnetometers using purely electronic detection, such as Hall,
magneto-resistance or flux-gate devices, have sensitivities limited by their
electronic Q-factor. This Q-factor depends on the natural electrical
resistance, or electronic friction, of the metal in the circuit. For
room-temperature operations it is therefore difficult to reduce the electrical
Q-factor. Mechanical resonators made from semiconductor-grade silicon, on the
other hand, exhibit mechanical Q-factors, approaching 100,000 at room
temperature. In all, these new, smaller and less costly magnetometers should be
100-1000 times more sensitive than existing commercial devices, thus enabling a
new class of sensor systems that mPhase plans on commercializing.
The
mPhase and Lucent magnetometer team has successfully reached an early milestone
and have produced a number MEM based sensor samples from the clean room
facilities and are working on integrating them into the surrounding electronic
circuitry so that measurement, characterization and sensitivity testing can be
conducted.
On April 17, 2007, the Company
announced that it had formed AlwaysReady, Inc., a New Jersey Corporation, as a
new wholly-owned subsidiary. The Company plans to transfer all of its
nanotechnology assets and appropriate liabilities to such company as a first
step in the separation of its nanotechnology product line from its IPTV product.
The Company plans to staff AlwaysReady, Inc with a new management team
experienced in the nanotechnology area in order to unlock and maximize overall
shareholder value. On May 29, 2007, AlwaysReady, Inc announced the hiring of
Source Capital Group, an investment banking firm specializing in the raising of
private equity, to raise a minimum of $1.5 million in a Private Placement in
which the Company would sell up to a 10% interest in AlwaysReady, Inc to
institutional and accredited investors. In addition the Company announced that
it planned to eventually transform AlwaysReady, Inc. into a publicly traded
company. mPhase plans to retain a 90% interest in Always Ready, Inc. and the
shares of common stock of Always Ready, Inc. will be registered on appropriate
filings with the SEC under the Securities Act of 1933, as amended, as well as
the Securities Exchange Act of 1934, as amended, and listed for trading on the
over the counter bulletin board.
On July 17, 2007 mPhase
announced that it had been awarded a Phase I US Army Small Business Technology
Transfer (STTR) Program Grant. This award is a Phase I six month research effort
to develop a 30 plus year shelf life, low power, green battery (coin cell or
similar) that will continuously power a static random access memory circuit for
a computer device. SRAM is a common type of digital memory chip used in a wide
variety of electronic systems for data storage. During the six month research
period, the team will characterize the design, conduct capacity and stability
measurements of a reserve style power cell based on Lithium chemistry. Long term
stability and shelf life is achieved by initially separating the active
materials of the power cell during storage, and controlling the activation of
the cell until needed to provide power. This research program extends the design
of the mPhase smart battery to support the use of non-water based electrolytes
that are commonly used in lithium based batteries. Lithium batteries are favored
for powering many different types of electronic devices due to their higher
voltage and power requirements than can be supplied by more common alkaline
batteries. The Phase I grant, valued at $100,000, will enable mPhase to
competitively compete for a Phase II grant for up to $800,000 to continue future
advancements in the design. Successful completion of the Phase II award is an
avenue used by U.S. government defense agencies to adopt advanced technology for
commercialization and use. Rutgers University will support mPhase, and its newly
formed subsidiary AlwaysReady, Inc., during the award period as a subcontractor
under the award guidelines.
Target Markets
mPhase's initial target market for its IPTV+ solution is primarily large
international telephone service providers and rural U.S. telephone service
providers in areas in which an extensive fiber infrastructure has not been
developed. We believe our IPTV solution is most competitive in markets that
currently have limited access to multi-channel television services such as many
parts of Eastern Europe, Russia, the Ukraine, Turkey and other countries in the
Middle East. We believe that our IPTV solution will also be competitive in the
United States as we continue to add features required by large American
telecommunications service providers and will become especially attractive in
the U.S. upon the addition of targeted advertising capabilities to the TV+
middleware.
Our
nanotechnology products have potential military and commercial applications. Our
micro power cell has potential application for usage on credit cards as well as
potential military applications as a power source with a much longer shelf life
prior to activation, than conventional batteries. Our magnetometer has potential
military and commercial applications including cell phones and the food industry
for detection of needles used for injection of hormones in cattle and other
animals consumed grown for meat products. Potential military applications could
include electronic security devices and detection devices of enemy mines and
soldiers.
Competitive Business Conditions
During the past 5 years, the market for the delivery of TV by telephone service
providers has been marked by significant technological change. During the
robust spending period in the late 1990's into the year 2000, the theme of
“convergence” focused strictly on the “last mile to the home” in the United
States. Telephone service providers were beginning to deliver high-speed
internet over digital subscriber lines (DSL) using their copper infrastructure
and examining methods to deliver broadcast television together with voice as a
“triple play” to increase revenues and margins as traditional revenues and
margins from wire line telephone services declined with the advent of wireless
and voice over IP competition from cable providers. The industry has evolved
from an initial focus on proprietary end to end systems such as the Traverser
DVDDS developed by mPhase to the need for standards-based open architecture with
carrier class quality and security which are features of mPhase's TV+ solution
for the delivery of IP television. During such period, telephone service
providers concluded that in order to achieve minimum cost of delivery and
maximum scalability, any solution for delivery of broadcast television and video
on demand would need to be based upon a transport mode utilizing the new
Internet Protocol as opposed to the services provider's traditional asynchronous
transfer mode (ATM protocol). The evolution of mPhase's TV+ solution is targeted
to meet the new market realities and requirements of major telecommunications
service providers for the delivery of a “triple” play of converged services.
Despite significant market “noise” and fanfare about IPTV, major deployments of
true broadcast television by telecommunications service providers are relatively
few, but have increased during the past 12 months. The complexity of designing
the software/middleware solution of low cost, high reliability, scalability,
security and open architecture to allow service providers to “custom tailor” and
grow into a system based upon such provider's network topology, take rate among
customers and specific feature requirements has proved to be a significant
challenge for all of the major players in such market place including Microsoft,
Alcatel, Minerva, Myrio and Motorola. In addition, the delivery of IPTV by
telephone service providers with robust features may require a simultaneous
investment in routers and servers to upgrade a system's backbone which may
entail significant additional cost. It is estimated that the cost of the IPTV
middleware sold by mPhase may constitute only 5% of the overall investment a
telecommunications service provider will need to upgrade its overall system for
IPTV delivery. The story is still being played out in the market with
considerable uncertainty as to who the final dominant players will be on the
middleware/software market which is the driving focus of mPhase's of its TV+
solution. In 2007, the telecommunications sector has continued its slow recovery
that
began in 2004 from the significant downturn and weakness in capital spending by
service providers globally that began at the end of calendar year 2000. The
dramatic pull back in equipment purchased by service providers from its peak
commencing at the end of calendar year 2000, has significantly reduced earnings
and resulted in dramatically reduced stock prices of telecommunications
equipment vendors. This, together with the tremendous correction of stock prices
in general during the past four years, has halted the growth of the sector. The
Company remains optimistic about the future of the industry and the potential of
its IPTV platform and solutions since we believe that it offers the most
scalable solution requiring less routers and servers to upgrade a
telecommunications service provider's existing infrastructure for delivery of
broadcast television. Since hardware for deployment of IPTV consists of 95% of
the cost to a service provider of upgrading its backbone, we believe our
middleware can be a key factor in the decision of a company to add IPTV to its
existing telephone voice services. This is especially true outside of the United
States where the existing networks of many service providers will need
substantial upgrades to be able to deliver broadcast television with robust
features.
The
Company has responded to the market challenges in the past several years to
reconfigure its video product line from a narrow, proprietary, DSL platform
solution to an open systems standard for the delivery of Broadcast Television,
high speed internet and voice over a medium agnostic and delivery agnostic
solution. The Company's IPTV solution enables telephone service providers to
deliver a triple play of services over both a fiber, coaxial or copper transport
medium with a transport mode not tied to any particular DSLAM, multiplexer or
other transport vendor of Broadcast TV, but rather based upon an open standards
system delivery and management system software. We anticipate an eventual upturn
in capital spending by telephone service providers seeking to provide a “triple
play” of voice, data and video delivery even though such upturn may be
constrained by the fact that service providers still face significant challenges
of overcapacity and declining margins for traditional services globally. The
worldwide rollout of VDSL data delivery services should also provide a market
for the Company's component products such as its newly designed VDSL Splitters
necessary in customer premises of service providers.
As
has been seen during the past several years, in addition to the very volatile
economic climate, the telecommunications software and hardware equipment market
is also characterized by swift technological change. Currently, communications
service providers have the option to offer several broadband solutions for the
“last mile to the home”, including the existing ISDN or T-1 technologies, fiber
optics or hybrid coaxial cable and wireless and satellite delivery methods.
Communications service providers may use these other technologies instead of DSL
to offer their subscribers broadband access. Based upon current
telecommunications industry standards and deployment methodologies, mPhase
believes that it has broadened its competitive capabilities beyond the
traditional DSL and copper market with the development of its IPTV product in
its TV+ solution that operates over any form of IP network.
Where DLSAM (digital subscriber line access multiplexes) continue to be a key
transport instrument for the delivery by telephone service providers of
converged services, it should be noted that Alcatel is the leading supplier of
DSLAMS (digital subscriber line access multiplexers) around the globe having
deployed several video over DSL installations with telephone service providers.
Historically, Alcatel has worked with multiple equipment vendors to create a
complete, end-to-end video solution, including middleware (i.e., software) and
has announced a major joint venture with Microsoft to develop middleware for
IPTV deliver by telecommunications service providers. The recent merger of
Alcatel and Lucent Technologies, Inc. reflects the continuing industry trend of
consolidation of telecommunications equipment vendors.
There are a number of middleware providers competing in the IPTV solutions
market including a number of competitors that are much larger, better known and
with far greater financial resources than mPhase. Such competitors include
Minverva, Orca Interactive, Siemens Corporation, VBrick Systems, Alcatel and
Microsoft Corporation.
Bell
South has recently awarded a major contract to the Alcatel/ Microphase joint
venture to develop an IP network capable of delivering an IP TV solution with
robust features.
To
date, there are several deployments of IPTV worldwide including a deployment in
Italy by Fastweb an Italian corporation. In Spain, Imagenio, operated by
Telefonica has completed a significant deployment. Other major deployments of
IPTV worldwide also include Yahoo BB/Softbank in Japan, Supersun in Hong Kong
and Media on Demand in the Republic of China operated by Chunghwa Telecom.
Other vendors that offer complete platforms for delivery of IPTV hardware or
software portions of such platforms that incorporate broadband solutions
include: ADC, Advanced Fiber Communications, Innovia, NEC, Motorola, Huawei
Technologies Corporation Limited, Paradyne Networks, Samsung, 2Wire, Siemens,
TUT Systems, Motorola, UTSTARCOM and Westell. In addition, we also compete with
Minerva and Myrio Corporation, which provide infrastructure software products to
deliver multi-channel digital television over telephone networks.
Cable television providers are also competing in the space for converged
services using analog and digital cable connections that have been upgraded for
digital two-way services. In the United States, the majority of cable
connections have already been upgraded and can support the delivery of
television and high-speed Internet, and in many cases, cable telephony. In fact,
the imposing threat that cable companies present has created a catalyst among
telephone companies to expand their service offering to include advanced
services such as digital television.
While satellite delivered television services in the U.S. have experienced
significant growth over the past several years, the ability for satellite
providers to offer reliable, consistent and cost- effective high speed data is
still in its infancy and too expensive to commercially deploy. Furthermore,
satellite providers are not typically equipped to offer telephony services,
unless they were to partner with a telephony provider. Beyond that, particularly
outside of the U.S., the direct-to-home satellite options are limited due to
either low channel counts or unreliable quality. Satellite signals are often
affected by weather events such as severe snow or rain, unlike DSL-delivered
services which remain unaffected by weather patterns.
Manufacturing
mPhase subcontracts all of the manufacturing of its products to outside sources
including related parties such as Janifast Ltd. and Microphase Corporation. We
currently have no contracts in place for the manufacturing of our products with
either Microphase Corporation or Janifast Ltd. or any other non-affiliated third
party manufacturers. We periodically execute purchase orders for the manufacture
of quantities of component DSL products that are produced by Janifast Ltd. By
using contract manufacturers, mPhase will avoid the substantial capital
investments required for internal production.
Outsourcing
The
Company practices an outsourcing model whereby it contracts with third party
vendors to perform certain functions rather than performing those functions
internally. For instance, mPhase outsourced the digital engineering development
for the legacy Traverser DVDDS to GTARC. It also out sources analog engineering
development and certain administrative functions to Microphase Corporation.
mPhase currently outsources its hardware integration and different components
of its middleware development for its TV+ solution to Bitband Technologies Inc
to Latens Systems Ltd., as well as Magpie Telecom Insiders, Inc., Velankani
Communications Technology, Inc. and Espial Group, Inc. The agreement with
respect to development of portion of the TV+ system management being performed
by Bell Labs expired in May of 2006 and has not been renewed. The Company has
transferred the portions of software being developed by Bell Labs and systems
integration to Velankani.
mPhase has also outsourced to the Bell Laboratories Division of Lucent
Technologies its research and development efforts in the nanotechnology area
aimed at developing power cells and batteries with enhanced shelf lives and
other features not currently available in batteries. Such focus is initially
upon the development of batteries for military applications using nanotextured
materials. In addition, as noted above, mPhase expanded its efforts in product
development using the science of nanotechnology extensions of its original
Development Agreement with Bell Labs for power cell and battery development for
another 12 months as well as extending its Development Agreement with Bell Labs
originally entered into in March of 2005 to develop electronic magnetic sensors
(the Magnetometer) product line.
Patents and Licenses
We
have filed and intend to file United States patent and/or copyright applications
relating to some of our proposed products and technologies, either with our
collaborators, strategic partners or on our own. There can be no assurance,
however, that any of the patents obtained will be adequate to protect our
technologies or that we will have sufficient resources to enforce our patents.
Because we may license our technology and products in foreign markets, we may
also seek foreign patent protection. With respect to foreign patents, the patent
laws of other countries may differ significantly from those of the United States
as to the patentability of our products or technology. In addition, it is
possible that competitors in both the United States and foreign countries, many
of which have substantially greater resources and have made substantial
investments in competing technologies, may have applied for, or may in the
future apply for and obtain, patents, which will have an adverse impact on our
ability to make and sell our products. There can also be no assurance that
competitors will not infringe on our patents or will not claim that we are
infringing on their patents. Defense and prosecution of patent suits, even if
successful, are both costly and time consuming. An adverse outcome in the
defense of a patent suit could subject us to significant liabilities to third
parties, require disputed rights to be licensed from third parties or require us
to cease our operations.
The
Company has intellectual property as follows:
In
June of 2007, the Company filed a provisional patent for certain unique delivery
aspects of its IPTV middleware.
The
Company has recently decided not to incur the cost of maintaining patents
originally obtained by Georgia Tech Research Corporation in connection with its
Traverser DVDDS legacy product in which the Company was the exclusive worldwide
licensee for a 5 % royalty. As previously noted, the TV+ solution has replaced
the legacy product.
The
Company had filed seven (7) additional patents that consist of a combination of
(a) patents granted to mPhase from the Bell Labs division of Lucent
Technologies, Inc. and (b) joint patents development by mPhase and employees of
Bell Labs relating to the micro power cells and magnetometers currently under
development by the Company. mPhase has obtained the licensing rights from Bell
Labs to use the prior art patents after expiration of the development period for
each of the nanotechnology products.
On
July 12, 2005, mPhase announced that it had been granted a U.S. patent that
covers a series of techniques for splitting different voice and data signals in
DSL access networks that is used in its Broadband Loop Watch product. The
Company is not currently pursuing further development and marketing of this
product owing to the lack of demand for loop diagnostics systems by telephone
service providers.
We
also rely on unpatented proprietary technology, and we can make no assurance
that others may not independently develop the same or similar technology to ours
or otherwise obtain access to our unpatented technology.
Government Regulation
The
Federal Communication Commission, or FCC, and various state public utility and
service commissions, regulate most of mPhase's potential domestic customers for
our IPTV solution and DSL component products. Changes to FCC regulatory policies
may affect the accessibility of communications services, and otherwise affect
how telecommunications providers conduct their business. These regulations may
adversely affect the Company's potential penetration into certain markets. In
addition, its business and results of operations may also be adversely affected
by the imposition of certain tariffs, duties and other import restrictions on
components, which mPhase obtains from non-domestic component suppliers. Changes
in current or future laws or regulations, in the U.S. or elsewhere, could
materially adversely affect the Company's business.
To
the best of our knowledge, there is no state or local laws to which we are
subject that are relevant to our system from a regulation and certification
standpoint. At the Federal level, we are subject to Federal Communications
Commission (FCC) Regulations Under the Code of Federal Regulations, Title 47,
Chapter 1, Part 15-RADIO FREQUENCY DEVICES, and Part 68-CONNECTION OF TERMINAL
EQUIPMENT TO THE TELEPHONE NETWORK. Part 15 sets out the requirements to obtain
a license for operating a radiator of electromagnetic energy, and the technical
and administrative specifications relating to the marketing of such radiators.
Part 68 sets out the rules and regulations to provide for uniform standards for
the protection of the telephone network from harms caused by the connection of
terminal equipment and associated wiring thereto, and for the compatibility of
hearing aids and telephones so as to ensure that persons with hearing aids have
reasonable access to the telephone network.
Our
products and equipment were designed to comply with the aforementioned rules and
regulations. The POTS splitter and filter products were already certified with
FCC Part 68. The TV+ is FCC Part 15 compliant.
Compliance with FCC rules and regulations allows our equipment to be marketed
and sold in the United States. While the certification process and costs
associated have no material effect on mPhase's financial condition, failure to
comply with FCC rules and regulations would result in loss of revenue and
additional costs on product revision and/or redesign.
Research and Development
mPhase has designed the legacy Traverser DVDDS and its ancillary component parts
in conjunction with multiple research and development partners. As of June 30,
2007, we had been billed a cumulative total of approximately $13,563,000 for
research and development conducted by GTARC.
mPhase originally contracted with Lucent in fiscal year 2002 to reduce the cost
of its INI set top box used with the Traverser DVDDS platform. During fiscal
year 2003, the Company engaged Lucent to develop an integrated system with the
Lucent Stinger DSLAM and mPhase middleware for the delivery of Television, high
speed internet and voice on an open standards system to replace the proprietary
Traverser product. Releases 1.0 and 2.0 of the TV+ solution were designed by
Bell Labs to be ATM systems that operated exclusively with the Lucent Stinger
DSLAM to enable a telecommunications service provider to deliver broadcast
television, voice and high speed internet over DSL.
Release 3.0 of our TV+ system that replaces the ATM protocol that was used in
prior releases of the TV+ uses internet protocol and is referred to as out IPTV
solution. It was completed during May of 2006 by the Bell Labs division of
Alcatel/Lucent Technologies, Inc. under a contract extended in August of 2005,
for an aggregate cost of approximately $1.6 million. We have not renewed our
contract for software development of our TV+ product with Bell Labs. We have
engaged and expect to continue to engage Velankani Communications, Magpie Telecom
Insiders, Inc, Espial Telecommunications, Inc and other software vendors
and developments for future assistance with our development including product
refinements and enhancements. As of June 30, 2007 we have been billed and paid a
cumulative total of approximately $4,882,345 for research and development
conducted by Lucent for our TV+. During the period from July 1, 2006 through
June 30, 2007 we have incurred approximately $3.1 million for research and
development of our IPTV product from major vendors such as Velankani, Espial and
Magpie.
In
addition, our advanced battery and power cell technology research and
development is being performed by the Bell Labs division of Alcatel/Lucent under
the terms of a Development Agreement for a cost of approximately $300,000
covering the period from April 27, 2007 through July 30,2007. Previously mPhase
had paid Lucent the sum of $200,000 from the period of expiration of the prior
12 month Development Agreement that occurred at the end of February of 2007 to
cover the period through April 27, 2007. From February of 2004 through February
of 2006, the Company had paid a total of $3.6 million to Bell Labs at the
rate of $100,000 under its initial contract for development of
advanced battery power cell technology. In
March of 2005, the Company further engaged Bell Labs in a separate Development
Agreement for the development of a new generation of ultra magnetic sensors
using the science of nanotechnology with a total cost of $1.2 million also
payable in monthly installments of $100,000 for a period of 12 months which was
extended through March of 2007 at the cost of $100,000 per month. We are
currently negotiating with Bell Labs an extension of such contract upon the
same similar
terms for an additional 12 months.
Employees
mPhase and its subsidiary companies presently have a total of 19 full-time
employees, two of whom are also employed by Microphase Corporation. See the
description in the section entitled "Certain Relationships and Related
Transactions." Subsequently to June 30, 2007, 3 of our employees have been
transferred to work full time at Always Ready, Inc and 7 employees have been
transferred to work full time at Granita Media, Inc.
In addition to the Risk Factors set forth herein it is important for you to
consider the following:
mPhase was advised in April 2002 that following an investigation by the staff of
the Securities and Exchange Commission, the staff intended to recommend that the
Commission file a civil injunctive action against Packetport.com, Inc. ("Packetport")
and its Officers and Directors. Such recommendation related to alleged civil
violations by Packetport and such Officers and Directors of various sections of
the Federal Securities Laws. The staff has alleged 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 1934. As noted in other public filings of mPhase,
the Chief Executive Officer and Chief Operating Officer of mPhase also serve as
Directors and Officers of Packetport. At that time these persons advised mPhase
that they deny any violation of law on their part and intend to vigorously
contest such recommendation or action, if any.
On November 15, 2005, the Commission filed a civil enforcement action 3:05 CV
1747 against 6 individuals and 4 companies as a result of its investigation in
federal district court in the State of Connecticut alleging various violations
of the Securities Act of 1933 including Sections 5, Section 17(a) and the
Securities Exchange Act of 1934 including Sections 10b, Rule 10b-5, Sections,
12,Section 13, Section 16 in connection with the purchase and sale of stock of
Packetport.com in the period on or about December 14, 1999 into February of
2000. The defendants include the Chief Executive Officer and Chief Operating
Officer of mPase as well as Microphase Corporation, a privately held Connecticut
corporation that shares common management with mPhase. mPhase Technologies,
Inc. is not named as a party in the enforcement action. The Chief Executive
Officer and Chief Operating Officer of mPhase, and Microphase Corporation, each
deny any violation of the law by each or any of them and intend to vigorously
contest all charges set forth in such enforcement action by the Commission.
In a ruling (3:05 CV 1747 (PCD)), dated March 21, 2007, the Honorable Peter C.
Dorsey, Senior U.S. District Court Judge for the United States District Court
For The District Of Connecticut, granted a motion by defendants, Ronald A.
Durando and Packetport Inc. joined by defendants Gustave T. Dotoli , Microphase
Corporation and Packetport.com, Inc. to dismiss under Federal Rule 41(b) of the
Federal Rules of Civil Procedure the civil lawsuit filed on November 15, 2005 by
the Securities and Exchange Commission against Packetport.com, Inc. et. al for
lack of prosecution.
On April 4, 2007, the Securities and Exchange Commission filed a motion with the
United States District Court requesting a reconsideration of the motion to
dismiss granted by the Court in favor of the defendants.
In a ruling dated May 23, 2007, the Judge Peter C. Dorsey granted the motion for
reconsideration filed by the Securities and Exchange Commission and reversed his
earlier ruling of March 21, 2007 and reinstated the case on the judicial
calendar to proceed to trial. On August 17, 2007, such
action was dismissed with prejudice against Durando with the approval by the
SEC.
RISK FACTORS
RISKS RELATED TO FINANCIAL ASPECTS OF OUR
BUSINESS
The Company has entered into the new and emerging business of nanotechnology,
which entails significant exploratory development and commercial risk.
The
Company has expended approximately $4 million from February of 2004 through the
date hereof pursuant to 12 month contracts with the Bell Labs division of Lucent
Technologies, Inc. during such period to develop longer life battery cells for
military applications as well as commercial applications such as RFID (Radio
Frequency Identification) tags. The Company expects to continue exploratory
research with Lucent Technologies, Inc. and is currently in negotiations for an
extension of such contract for an additional 12 months at the rate of $100,000
per month. Even though a feasibility prototype product has been successfully
developed, pure research involves a high degree of risk with significant
uncertainty as to whether a commercially viable product will result
From
March 10, 2005 through the date hereof, the Company has spent over $2.4 million
with the Bell Labs division of Lucent Technologies, Inc for new research and
development of uncooled magnetic ultra sensors using the science of
Nanotechnology. The Company is currently negotiating to extend its Development
Agreement with Bell Labs for the Magnetometer research for another 12
months through June of 2008 at $100,000 per month each. The Company does not
expect significant revenues from either product for at least 2 years.
mPhase's stock price has suffered significant declines during the past seven
years and remains volatile.
The
market price of our common stock closed at $7.88 on July 26, 2000 and closed at
$.095 on June 29, 2007. During such period the number of shares outstanding of
the Company increased from approximately 30 million shares to 388 million
shares. Such increase was the result of periodic private placements by the
Company in order to finance company operations. Stocks in telecommunications
equipment providers of DSL products have been very volatile during such period.
Our common stock is a highly speculative investment and is suitable only for
such investors with financial resources that enable them to sustain the loss of
their entire investment in such stock. Because the price of our common stock is
less than $5.00 per share and is not traded on the NASDAQ National or NASDAQ
Small Cap exchanges, it is considered to be a “penny stock” limiting the type of
customers that broker/dealers can sell to. Such customers consist only of
“established customers” and “Accredited Investors” (within the meaning of Rule
501 of Regulation D of the Securities Act of 1933, as amended-generally
individuals and entities of substantial net worth) thereby limiting the
liquidity of our common stock.
We have reported net losses for each of our fiscal years from our inception in
1996 through the fiscal year ended June 30, 2007 and may not be able to operate
profitability in the future.
We
have had net losses of $168,311,619 since our inception in 1996 including
$16,851,562 and $24,450,650 for the fiscal year ended June 30, 2007 and June 30,
2006, respectively and cannot be certain when or if we will ever be profitable.
We expect to continue to have net losses for the foreseeable future and have a
need to raise not less than $5-10 million in additional cash in the next 12
months through further offerings to continue operations. As of June 30, 2007 we
have negative working capital of $3,088,439 and a stockholders deficit of
$2,754,498. Cumulative cash flow from operations since inception has amounted to
a negative $75,730,471.
Our independent auditor's report expresses doubt about our ability to continue
as a going concern.
The
reports of the Company's outside auditors, Rosenberg, Rich, Baker, Berman &
Company with respect to its latest audited 10K for the fiscal years ended June
30, 2007, June 30, 2006, June 30, 2005, stated that "there is substantial doubt of the Company's
ability to continue as a going concern." Such opinion from our outside auditors
makes it significantly more difficult and expensive for the Company to raise
additional needed capital necessary to continue our operations.
Our common stock is subject to significant dilution upon issuance of shares we
have reserved for future issuance.
As
of June 30, 2007, we have warrants and options outstanding convertible into
approximately 196 million shares of mPhase common stock, which, upon conversion,
may adversely affect the future price of our common stock. As of June 30, 2007
we have warrants and options convertible into approximately 112 million shares
of our common stock at $.20 per share or less that, upon exercise may result in
significant dilution to many of our current shareholders and may adversely
affect the future price of our common stock. We may be forced to raise
additional cash for operations by selling additional shares of our common stock
to shareholders at depressed prices resulting in further dilution to our
shareholders.
RISK FACTORS RELATED TO OUR OPERATIONS
We have been a development-stage company since our inception in 1996 and have
not to date had a significant or successful deployment of any of our solutions
for the delivery of broadcast television, high-speed internet and voice by a
major telephone service provider.
We
have had to date no material revenues derived from sales of our TV+ solution.
There has been to date only one sale of our IPTV solution for 1000 customers of
a telecommunications service provider in Russia which has discontinued
deployment of our TV+ solution. In addition a lab test trial by a major
telecommunications service provider in the Ukraine currently faces significant
financial and technical challenges in order to pass a technical acceptance test
that requires many product features currently still in development by the
Company. There are no other deployments of our TV+ Solution by telephone
service providers globally and there currently is uncertainty as to the extent,
if at all, that deployments of IPTV will occur in the future
We depend upon outsourcing of our research and product development of our TV+
Solution and Nanotechnology products to Lucent Technologies Inc.
We
depend upon Lucent Technologies Inc. for the successful development of our
Nanotechnology products and our business would be materially adversely affected
if Lucent Technologies Inc. were to terminate our relationship or fail to renew
our Development Agreement for the Magnetometer that is currently being
negotiated.
The loss of key personnel could adversely affect our business
Management and employment contracts with all of our officers have expired and no
assurances can be given that such executives will remain with the Company or
that the Company will be able to successfully enter into agreements with such
key executives. All of our officers have been granted stock options that are
intended to represent a key component of their compensation. Such options may
not provide the intended incentives to such officers if our stock price declines
or experiences significant volatility.
Economic support from affiliated companies has been significant.
During the downturn in the telecommunications industry beginning in 2001, both
Microphase Corporation, and Janifast Ltd. provided significant financial support
to mPhase in the form of either cash infusions or conversions of related party
debt. Such companies, which share common management with mPhase, are under no
legal obligation to and may not be able to sustain such economic support of
mPhase in the future should such support be necessary.
We may incur substantial expenditures in the future in order to protect our
intellectual property.
We
have recently filed a provisional patent with respect to our TV+ solution in
order to protect our product, however a final patent has not yet been applied
for or granted. Even if a U.S. patent is ultimately granted there are
significant risks regarding enforcement of patents in international markets. The
telecommunications industry are characterized by a large number of patents and
frequent patent litigation based upon claims of patent infringement when
compared to other industries.
Historically the sale of infrastructure products to telecommunication providers
in the international markets has a long lead-time and a multiplicity of risks.
We
expect initially that revenues from our TV+ solution to be derived from
international emerging markets and our success depends upon our ability to sell
our flagship television platform outside of the United States where political,
currency and regulatory risks are significantly greater. As a result of their
distance from the United States, different time zones, culture, management and
language differences, these operations pose greater risk than selling in the
United States. Our sales cycle for our TV+ solution is lengthy (since it
involves a major strategic decision by an international telecommunications
service provider) and we may incur significant marketing expenses with no
guarantee of future sales. A significant market for our legacy Traverser DVDDS
never developed and may never develop for our TV+ solution if international
telephone service providers fail to successfully deploy broadband services
including high speed data and television. Increased consolidation of telephone
service providers worldwide have significantly limited the current recovery of
capital expenditures for broadband and other deployment from the economic
downturn that began in 2001in the industry
RISKS RELATED TO OUR TARGETED MAKETS