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| XDSL.OB > SEC Filings for XDSL.OB > Form 10-K on 7-Oct-2009 | All Recent SEC Filings |
7-Oct-2009
Annual Report
The following is management's discussion and analysis of certain significant factors, which have affected mPhase's financial position and should be read in conjunction with the accompanying financial statements, financial data and the related notes.
RESULTS OF OPERATIONS
OVERVIEW
mPhase Technologies, Inc. (OTC BB: XDSL.OB) is a development company
specializing in microfluidics, microelectromechanical systems (MEMS) and nano-
technology. Through its wholly owned subsidiary AlwaysReady, Inc., mPhase is
focused on commercializing its first nanotechnology-enabled product for military
and commercial applications - The Smart NanoBattery providing Power On
CommandTM. Our new well-patented battery technology, based on the phenomenon of
electrowetting, offers a unique way to store energy and manage power that will
revolutionize the battery industry. Features of the Smart NanoBattery include:
potentially infinite shelf life, environmentally friendly design, fast ramp to
power, programmable control, and direct integration with microelectronic
devices.
The platform technology behind the Smart NanoBattery is a porous nanostructured material used to repel and precisely control the flow of liquids. The material has a Smart Surface that can potentially be designed for self- cleaning applications, water purification/desalination, liquid filtration/separation, and drug delivery. mPhase has been awarded a Phase II Small Business Technology Transfer Program (STTR) grant, part of the Small Business Innovation Research (SBIR) program, from the U.S. Army for continued development of a reserve Smart Nano- Battery for a critical computer memory application. mPhase Technologies, Inc. was founded in 1996 and is headquartered in Little Falls, New Jersey, with additional offices in Norwalk, Connecticut, and New York City.
mPhase Technologies, Inc., is an inventive and innovative development company specializing in microfluidics, micro- electromechanical systems (MEMS) and nanotechnology.A public company trading under the stock symbol OTC BB: XDSL, mPhase was founded in 1996 and is headquartered in Little Falls, New Jersey, with additional offices in Norwalk, Connecticut, and New York City.In 2004, mPhase Technologies collaborated with the renowned Bell Laboratories to develop a new technology called the Smart NanoBattery that has the potential to revolutionize the battery industry. This well-patented technology is based on a phenomenon known as electrowetting that provides a unique way to activate the battery to gain access to energy stored and manage power. The platform technology behind the Smart NanoBattery is a porous nanostructured component that repels and precisely controls the flow of certain liquid.
mPhase's Smart NanoBattery technology has been incorporated in leading-edge research and development projects supported by various groups within the U.S. Army for mission critical static random access memory (SRAM) backup and guided munitions applications. mPhase also sees opportunities beyond batteries given the versatility of its enabling platform technology.
m Phase received a Small Business Technology Transfer (STTR) Program Phase I grant last year for $100,000 from the U.S. Army and in September 2008 was awarded a prestigious $750,000 (net $500,000) Phase II STTR grant to continue battery development work for the SRAM project. The company has also been working with the U.S. Army as part of a Cooperative Research and Development Agreement (CRADA).
Recently, through its wholly-owned subsidiary, mPhase has focused on development of a lithium Smart NanoBattery. Working closely with Rutgers University, mPhase introduced the first version of the lithium Smart NanoBattery designed for portable electronics and microelectronic applications.
One version of the lithium battery based on a breakable separator is being developed for an emergency flashlight application. mPhase collaborates with other companies and organizations and is actively seeking partners interested in using the Smart NanoBattery or its platform technology for power systems and other applications.
The surface is an important part of virtually every physical object and often plays an overriding role in many processes, beyond just connectivity and structural support, but more deeply into areas involving chemical and biological interactions. In some instances, the surface provides an easy entry into the chemical or biological systems, in others it protects the internal elements of the object, surrounded by the surfaces.
Microscopic Changes, World-Changing Innovation mPhase's platform technology is the Smart Surface. By being able to control the surface properties of materials down to the nanometer scale, new and improved devices can be designed and built that may lead to compelling business opportunities. One type of smart surface of particular interest allows the properties to be changed in response to an external stimulus.
Initially, mPhase's development focused on MEMS devices by manipulating the surface of silicon materials - the same material used to make microelectronic materials and devices. Using physical and chemical processes, the surface of the silicon is modified to make solid porous structures known as membranes. This is where microfluidics comes into play. These membranes can be used to selectively control the flow of liquids through the pores or openings at the micrometer length scale.
Surfaces may be characterized as hydrophilicor hydrophobic depending on whether or not they attract or repel water (or other liquids). A hydrophilic surface can be wet and adsorbs water. A hydrophobic surface, on the other hand, cannot be wet. Hydrophilic and hydrophobic surfaces are abundant in nature and in synthetic materials, both organic and inorganic in chemical composition.
A familiar example of a hydrophilic surface is a sponge that readily soaks up water. By contrast, many plant leaves and flower petals are hydrophobic, as are insect parts and bird feathers. Synthetic hydrophobic surfaces include ScotchgardTM treated fabric, Teflon® coated metal, or Rain-X® coated glass. On a hydrophobic surface, water beads up and can move around without being absorbed by the solid material that it is resting on.
But there is more. So-called superhydrophobicsurfaces are also found in nature and can now be replicated in the lab. The lotus leaf and rose petal, for example, exhibit superhydrophobicity. Here water droplets form almost perfect spheres with hardly any contact with the underlying solid surface. This makes the liquid even easier to move and manipulate.
The synthesis of superhydrophobic surfaces has recently been made possible by advances in nanotechnology and mPhase is leading the way to better understand and create materials and devices incorporating these unique surface properties.
As mPhase's research and development efforts evolve, in addition to silicon materials, the ability to control the surface properties of materials can be extended to other substances such as polymers, ceramics, metals and fibers as examples, providing opportunities for our platform technology to be used in a range of potential applications such as energy storage and power management for portable electronics and microelectronics, self-cleaning surfaces, filters for water purification or desalination systems, materials for environmental remediation that separate liquids or solvents, and other situations where the control of the interaction of a solid surface exposed to a liquid is vitally important.
Battery technology has changed little in its fundamentals over the past 150 years. As a result, ordinary batteries begin dissipating energy as soon as they are assembled and therefore have limited shelf life. Chemistries are fixed inside the package so the user cannot interact with the contents to program functionality. The size and form of batteries have not kept pace with the miniaturization of electrical components, microprocessors and integrated circuits. As a result, the optimal implementation of an electronic device is not always achieved. Some batteries contain chemicals that are not considered safe or environmentally friendly ("green"). This makes disposal a potential issue.
mPhase is challenging this convention by using their proprietary superhydrophobic porous silicon membrane technology as the basis to build the Smart NanoBattery providing Power On CommandTM.
Superhydrophobicity initially keeps the liquid electrolyte physically separated from the solid electrodes of the battery, thus preventing the chemical reactions from occurring that cause the battery to provide power. This gives the Smart NanoBattery the benefit of potentially infinite shelf life.
A conventional battery loses some capacity while sitting on the shelf in its package or stored in an electronic or electrical device, even before being used for the first time. On the other hand, the Smart NanoBattery is built so that it is inactive and remains that way indefinitely until it is turned on. No power is lost to self-discharge or leakage current prior to activation. When needed, the Smart NanoBattery can be activated on command via the phenomenon of electrowetting. The surface properties of the porous silicon membrane are selectively controlled to shift instantly from a superhydrophobic to hydrophilic state. In other words, electrowetting acts as the triggering mechanism.
By incorporating the phenomenon of electrowetting on nanostructured surfaces into a revolutionary way of storing energy, the Smart NanoBattery provides power to portable electronic and microelectronic devices exactly when and where it is needed. It is an alternative and an augmentation to conventional batteries, still converting stored chemical energy into usable electrical energy, but in a way that is potentially more reliable, more versatile, more environmentally friendly, and less expensive than the industry norm.
New Products developed during Fiscal Year 2009
mPhase has successfully fabricated and demonstrated its first 3-volt lithium-based based upon a mechanical and industrial engineering design allowing manual instead of electrical activation by the user, a feature known as Power on CommandTM. The battery will be used as a reserve battery in the Company's new emergency flashlight being developed by and Co-Branded with Porsche Design Studio that designs high-end accessory products for the Porsche automobile company. By separation of the electrolyte in a proprietary pouch that is triggered by a patent-pending designed trigger mechanism, the battery also has a shelf life far longer than conventional batteries. The Company has completed a prototype design and is anticipating commercial production and distribution of its emergency flashlight during the third quarter of fiscal year 2010.
mPhase is exploring military and commercial applications of smart surfaces in which the properties can be accurately and precisely controlled down to the nanometer scale. Electrowetting allows the switching from a hydrophobic to hydrophilic state as a result of an electronic stimulus.
The Smart NanoBattery, mPhase's first smart surface product, has a unique
architecture that enables a shelf life of decades, remote activation,
programmable control, scalable manufacturing, and adaptability to multiple
configurations. The value proposition to the end user is to have a source of
energy or power that is literally always ready - reliable, convenient, low cost
- a battery guaranteed to work at full capacity when and where needed
The Smart NanoBattery can conceivably supply power "on command" to a wide variety of portable electronic and microelectronic devices used in military, medical, industrial, and consumer applications.
mPhase has already proven that the battery works in lab tests as well as in a significant field test conducted for the U.S. Army as part of a guided munitions project. The relationship with the Army also includes a $850,000 funded project to develop a battery for a mission critical computer memory backup application. The target is a small footprint, 3-volt lithium battery with a minimum shelf life of 20 years and uninterruptible power output during this time period. No other battery technology available today can deliver the long-term performance requirements specified by the U.S. Army for this application.
The Smart NanoBattery can potentially be designed to accommodate a variety of sophisticated portable electronic and microelectronic devices including next- generation cell phones and PDAs, handheld gaming devices, wireless sensor systems, RFID tags, high-tech flashlights and beacons, health alert alarms, and non- implantable and implantable medical devices such as pacemakers.
Initial applications will address the need to supply emergency and backup power to a range of products for defense and security, with future applications in the commercial and consumer arenas.
As its first commercial product, mPhase is developing an emergency flashlight using a simplified version of the Smart NanoBattery with a patent-pending breakable separator in place of the electrowettable membrane. The emergency flashlight is envisioned as a compact device that would be activated with a simple push-button switch to provide Power On CommandTM in the event of an emergency. The device would be ideal for storing in the glove compartment of a car, on boats, trains or planes, coupled with fire extinguishers, or packed with safety, first aid and survival kits.
Electrowetting is the physical phenomenon by which a voltage is used to change the wetting properties of a liquid/solid interface. An example of this is a water droplet on a hydrophobic (water repelling) surface. A water droplet will minimize its contact with such a surface. In its battery application, mPhase uses electrowetting as a new technique to activate a battery once it is ready for first time use.
TWELVE MONTHS ENDED JUNE 30, 2009 VS. JUNE 30, 2008
Revenues. Total revenues for the year ended June 30, 2009 increased from $112,928 in 2008 to $186,579 in 2009. The Revenue for the FYE was derived from the testing of the Company's nanotechnology battery
Cost of sales.Cost of sales decreased $949 for the year ended June 30, 2009. In addition, grants and fees received in connection with our Nanotechnology power cell have relatively low associated cost of sales.
Research and Development. Research and development expenses were $1,255,665 for the year ended June 30, 2009 as compared to $988,091 in the year ended June 30, 2008, an increase of $267,574. During the year, as a result of the refocus of efforts exclusively into the nanotechnology battery research cost dropped significantly.
General and Administrative Expenses. Selling, general and administrative expenses were $9,554,190 for the year ended June 30, 2009 up from $4,031,618 for the comparable period in 2008, an increase of $5,522,572. During fiscal year ended June 30, 2009, the Company incurred non-cash charges amounting to $7,596,963 for stock based compensation awarded to officers, employees and consultants. During fiscal year ended June 30, 2008, such charges amounted to $185,874 ;an increase of $7,411,089 in fiscal year ended June 30, 2009. This was partially offset by the reduction of salaries of employees in September of 2008 resulting in lower payroll of approximately $229,963 as compared to $600,000 for fiscal year ended June 30, 2008. Expenses were reduced across the board, including a reduction in legal expense of $99,980, marketing related expenses of $30,770 and rent expense of $102,049.
Other Income and Expense. The current FYE 2009 reflects non cash charges of $380,172 for reparations, and net settlement income of $141,266. During the prior FYE 2008, reparation expense amounted to $392,038 and settlement income was $200,890.In addition, during FYE 2009, the Company realized a non-cash net losses of approximately of $3,199,854 compared to $1,838,748 in FYE 2008 resulting from the issuance and the changes in value relative to convertible debt. Included is a gain resulting from the change in derivative value of $184,292 offset in part by amortization of debt discount, stock issuance cost and other charges amounting to $3,014,927. This compares to a gain resulting from the change in derivative value $3,837,960 offset in part by amortization of debt discount, stock issuance cost and other charges amounting to $1,899,212 as well as a non cash interest charge of $100,000 for FYE 2008.
Net loss. mPhase recorded a net loss of $15,529,677 for the year ended June 30, 2009 as compared to a loss of $3,956,721 million for the same period ended June 30, 2008. This represents a loss per common share of ($.03) in 2009 as compared to $(.01) in 2008, based upon weighted average common shares outstanding of 592,455,950 and 405,032,339 during the periods ending June 30, 2009 and June 30, 2008 respectively.
Revenues. Total revenues for the year ended June 30, 2008 decreased from $153,504 to $112,928. The decrease was primarily attributable the phasing out of Company's IPTV products. Revenue for the FYE was derived from the testing the Company's nanotechnology battery
Cost of sales.Cost of sales was declined by approximately $89,000 for the year ended June 30, 2008. The decrease results from the shift in strategy related to the IPTV segment and the sale of component parts (POTS Splitters etc) to an IPTV solution system based product such as (Comstar/Odessa). In addition, advisory fees received in connection with our Nanotechnology power cell have no associated cost of sale.
Research and Development. Research and development expenses were $988,091 for the year ended June 30, 2008 as compared to $6,393,215 in the year ended June 30, 2007, a decrease of $5,405,124. During the year, as a result of the refocus of efforts exclusively into the nanotechnology battery research cost dropped significantly. The phasing out of research efforts relative to IPTV and the magnetometer reduced cost by approximately $3.1 million and $1.2 million, respectively. In addition, included in 2008 results, is the reversal of a $400,000 accrual recorded in June of 2007, after a reassessment of our strategy related to the Magnetometer and the lack of a contractual obligation.
General and Administrative Expenses. Selling, general and administrative expenses were $4,031,618 for the year ended June 30, 2008 down from $8,684,053 for the comparable period in 2007, a decrease of $4,652,435. During fiscal year ended June 30, 2008, the company incurred non-cash charges amounting to $185,874 for stock based compensation awarded to officers, employees and consultants. During fiscal year ended June 30, 2007, such charges amounted to $3,363,218 a decrease of $3,016,233. In addition, the number of employees decreased by 15 resulting in lower payroll of approximately $600,000 and reduced level of expenses across the board including: legal $400,000, marketing related $250,000 and travel $320,000.
Other Income and Expense. The current FYE 2008 reflects non cash charges of $392,038 for reparations, $505,910 charges related to the impairment of Granita Inventory and net settlement income of $200,890 During the prior FYE 2007, reparation expense amounted to $1,874,020 and settlement income was $336,009.In addition, during FYE 2008, the Company realized a non-cash net gains of approximately $1,838,748 resulting from the issuance and the changes in value relative to convertible debt. Included is a gain resulting from the change in derivative value of $3,837,960 offset in part by amortization of debt discount, stock issuance cost and other charges amounting to $1,899,212 as well as a non cash interest charge of $100,000
Net loss. mPhase recorded a net loss of $3.956,721 million for the year ended June 30, 2008 as compared to a loss of $16.9 million for the same period ended June 30, 2007. This represents a loss per common share of ($.01) in 2008 as compared to $(.05) in 2007, based upon weighted average common shares outstanding of 405,032,339 and 310,395,562 during the periods ending June 30, 2008 and June 30, 2007 respectively.
The Company is currently finalizing the design and development of its first generation emergency flashlight product containing its manually-activated reserve battery. The Company expects that limited commercial production and distribution for sale of such flashlight will occur not later than the third quarter of fiscal year 2010.
Expanded Market Potential for Proprietary Membrane Technology -
The core membrane technology used to enable the Smart NanoBattery's propriety membrane design can potentially be used to develop other non-power source applications and products. The Company's market potential for using the membrane design of this patent pending core technology broadens the application areas outside the portable power energy field.
The Company's permeable membrane design consisting of both micro and nano scale silicon features, that are coated with a monolayer chemistry used to repel liquids. The membrane works using microfluidics principle that permits the dynamic control of surfaces when interacting with liquids, and as a result, the membrane can be tuned to filter out certain types of materials. In the reserve battery application, the properties of the membrane are used to create a super hydrophobic that prevents the batteries electrolyte from coming into contact with the dry electrodes of the battery until activation. In a similar way, the membrane can be designed so that it can control the passing of liquids through the pores of the membrane, acting as a filter, allowing and restricting materials to pass through the membrane. This ability opens up the potential to use the membrane's design in new configurations for applications that require controlled filtering of materials used in the health, environmental, food services as well as other industries.
RESEARCH AND DEVELOPMENT
mPhase throughout its history has outsourced its research and development activity with respect to all of its product lines. The Company engaged the Bell Labs division of Lucent Technologies in February of 2004 to development a power cell using the science of nanotechnology. The Company terminated its development efforts with Lucent Bell Labs in fiscal years 2008 with respect to micro power cell products using the science of nanotechnology since the facilities at Bell Labs were only able to provide development of zinc based batteries. The Company has determined that in order to develop a commercially viable product that higher energy lithium based batteries are required and has established a research relationship with Rutgers University that has facilities capable of handling development of lithium batteries.
From March of 2005 through March of 2007, the Company pursuant to the terms of a Project Development Agreement engaged Bell Labs to development a magnetometer or electronic sensor products using the science of nanotechnology. Such Project Development Agreement was not renewed by the Company in order to conserve financial resources. No further development has occurred on the magnetometer, however, the Company, believes that the intellectual property created may have significant value in the future depending upon further scientific progress in the field and market developments.
Since inception, but prior to the end fiscal year 2006, the Company incurred $13.5 million for research and development conducted by Georgia Tech Research Corporation in connection with its legacy Traverser DVDDS technology that was a proprietary end to end solution of hardware and software enabling telecommunications service providers to delivery broadcast television, high-speed internet and voice over copper telephone lines In fiscal year 2003 the Company began the transition of its product to development of a carriers standard open platform using middleware platform and transferred its research and development from Georgia Tech Research Corporation to the Bell Labs division of Lucent Technologies Inc. In May of 2007, the Company decided not to renew its Project Development Agreement for its TV+ solution with Bell Labs and chose a number of new software vendors to finalize its IPTV solution. The Company incurred research and development expenses with Lucent for fiscal years ended June 30, 2007 and 2006 of $2.3 million and $4.4 million. It should be noted that all such expenditures during with Lucent/Bell Labs in FYE 2007, have been in connection with Nanotechnology.
During the year ended June 30, 2008, the Company incurred research and development expenses of $188,000 related to the development IPTV solutions compared to $4.1 million for the same period ended June 30, 2007. In addition the Company incurred research and development expenses for the fiscal year June 30, 2008 of $800,000 for its nanotechnology products as compared to $2.3 million for fiscal year ended June 30, 2007.
The amount of research and development costs the Company has expended from its inception through June 30, 2009 is $60,216,173. During the fiscal year ended June 30, 2009, the Company incurred research and development expenses of $1,225,655 all of which was in connection with its nanotechnology, manually activated battery and emergency flashlight products.
STRATEGIC ALLIANCES IMPLEMENTED
The Company and Lucent share jointly in certain intellectual property developed with respect to nanotechnology products. The Company has established a working relationship with Rutgers University for development and testing of Lithium based batteries. In addition, the Company has a co-branding agreement with Porsche Design Studio for its emergency flashlight product.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred in accordance with Statement of Financial Accounting Standards ("SFAS"), No.2, "Accounting for Research and Development Cost."
STOCK-BASED COMPENSATION
On July 1, 2005, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 123R, "Share-Based Payment" (SFAS 123R). SFAS 123R revised SFAS 123, "Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires companies to measure and recognize compensation expense for all employee stock-based payments at fair value over the service period underlying the arrangement. Therefore, the Company is now required to record the grant-date fair value of its stock-based payments (i.e., stock options and other equity-based compensation) in the statement of operations. Effective, July 1,2005, the Company adopted FAS 123R using the "modified prospective" method, and has recorded as an expense the fair value of all stock based grants to employees after such date The Company has not restated its operating results for any prior fiscal year end or quarter.
REPARATION EXPENSE
As an incentive for additional equity contributions, the Company will from time to time, adjust the cost of past private purchases of common stock through the issuance of additional shares in such magnitude as to reduce an investor's cost . . .
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