Intangible asset – Purchased Software consists of the following two software technologies:

The Alpha Predictions purchased software was acquired as further described in Note 4. The Travel Buddhi purchased software was acquired on February 15, 2019, for $115,281 and included all rights, software, and code of the technology platform. During the fiscal year ended June 30, 2019, $55,000 of the Travel Buddhi purchase price was paid and $60,281 remained outstanding. At September 30,December 31, 2019, the Travel Buddhi technology platform has not been placed in service, but is expected to be during fiscal year 2020.

Purchased software costs are amortized on a straight-line basis over three years. Amortization of purchased software costs areis included in depreciationgeneral and amortizationadministration expenses within the consolidated statements of operations.

For the three and six months ended September 30,December 31, 2019, amortization expense was $242,139.$242,139 and $484,278, respectively. There was no amortization expense related to purchased software for the three and six months ended September 30,December 31, 2018.

Future amortization expense related to the existing net carrying amount of purchased software at September 30,December 31, 2019 is expected to be as follows:

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 6: REVENUE FROM CONTRACTS WITH CUSTOMERS

The following table presents our revenue disaggregated by category within our single reporting segment:

For the three and six months ended September 30,December 31, 2019, the Company was subject to revenue and accounts receivable concentration risk as one customer accounted for 99% and 96% of our total revenue and accounts receivable, respectively.for both periods.

Subscription and Application Development and Implementation Revenue

The Company recognizes revenue when, or as, it satisfies a performance obligation to a customer. The Company primarily has one performance obligation, which includes the combined promise to develop, implement, and license customized software. Payment terms for the software include one-time application development and implementation fees, which are generally billed on a time-and-materials basis over the development and implementation period, plus fixed license subscription fees, which may either be billed in full upfront or in monthly installments over the license period, which is generally three years. All of these fees are allocated to the single performance obligation of providing software to the customer.

The performance obligation is fully satisfied at the point in time when the customer has taken control of the completed software, which is when physical possession of the software has transferred to the customer, the customer is able to use and benefit from the software, and the contractual license period has begun. Since the Company has no further obligation to the customer once control of the software has transferred, the Company recognizes revenue in full for all of the development and implementation fees at that point in time. Subscription fees are also recognized when control of the software has transferred to the customer but only to the extent such fees are contractually guaranteed to the Company. Any future monthly subscription fees that the Company would not have a contractually guaranteed right to collect in the event of early termination of the contract are instead recognized as revenue on a straight-line basis over the license period.

Service and Support Revenue

Certain contracts also contain a second performance obligation for service and support. This performance obligation includes the promise to provide future updates, upgrades, and enhancements to the software over the license period, if and when they occur. Service and support fees are fixed as a percentage of total contract value and billed in monthly installments over the license period. The Company recognizes service and support fee revenue over time, on a straight-line basis over the license period, as the customer receives such services on a generally uniform basis throughout the license period.

Allocation of the Transaction Price

Prices allocated to each performance obligation generally correspond with the contractually stated prices, since they equal standalone selling price. In some cases, services may be discounted, which requires the company to allocate the transaction price based on relative standalone selling price. The Company estimates standalone selling price based on comparable industry practices and the costs and margins involved in providing services to its customers.

Contract Liabilities

Contract liabilities include amounts billed to the customer in excess of revenue recognized and are presented as contract liabilities on the condensed consolidated balance sheets. At December 31, 2019 and June 30, 2019 contract liabilities totaled $115,166 and $0, respectively.

Practical Expedient

The Company has elected a practical expedient to omit certain disclosures about the transaction price allocated to remaining performance obligations for contracts with terms of one year or less.

NOTE 7: SHORT TERM NOTES PAYABLE

Short term notes payable is comprised of the following:

[1]effective December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company is required to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 due and payable in March of 2020. The Company has made all payments required as of the date hereof. Failure to make any of the payments, when due, will result in the remaining liability balance of $550,181$559,313 (at September 30,December 31, 2019), to be immediately due and payable by the Company.

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 8:Convertible Debt Arrangements

JMJ Financial

At September 30,December 31, 2019 and June 30, 2019, the amount recorded in current liabilities for this one convertible note and accrued interest thereon due to JMJ Financial was $197,178$201,148 and $193,287, respectively. During the threesix months ended September 30,December 31, 2019 and 2018 the Company recorded $3,892$7,861 and $3,571,$7,212, respectively of interest for the outstanding convertible note.

As of September 30,December 31, 2019 and June 30, 2019, the aggregate remaining amount of convertible securities held by JMJ could be converted into 9,85910,057 and 9,664 shares, respectively, with a conversion price of $20.

Power Up LendingAccredited Investors

On June 19, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Groupan accredited investor (“Lender”) and issued an 8% convertible promissory note in the principal amount of $78,000 to the Lender with a maturity date of June 19, 2020. The Company received net proceeds in the amount of $45,800, with $25,000 refinancing a prior convertible promissory note due to the Lender that had been in default, $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note and $4,200 being paid to the Company’s Transfer Agent to satisfy an outstanding balance. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $103,161, deferred financing costs of $3,000 and debt discount of $75,000. The deferred financing costs and debt discount are being amortized over the term of the note. TheDuring December 2019, the Company paid-off the aggregate balance of the convertible promissory note, andincluding accrued interest was $78,000 and $1,761, respectively, at September 30, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30, 2019 was $22,011.prepayment penalty.

On July 30, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Groupan accredited investor (“Lender”), and issued an 8% Convertible Promissory Note in the principal amount of $53,000 to the Lender with a maturity date of July 30, 2020. The Company received net proceeds in the amount of $50,000 as a result of $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $114,380, deferred financing costs of $3,000 and debt discount of $50,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $53,000 and $720,$1,789, respectively, at September 30,December 31, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30,December 31, 2019 was $9,003.$22,362.

On September 5, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Groupan accredited investor (“Lender”), and issued an 8% Convertible Promissory Note in the principal amount of $53,000 to the Lender with a maturity date of September 5, 2020. On September 9, 2019, the Company received net proceeds in the amount of $46,800 as a result of $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note and $3,200 being paid to the Company’s Transfer Agent to satisfy an outstanding balance. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $104,860, deferred financing costs of $3,000 and debt discount of $50,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $53,000 and $290,$1,359, respectively, at September 30,December 31, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at September 30,December 31, 2019 was $3,630.$16,989.

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 8:Convertible Debt Arrangements (continued)

Platinum Point Capital and Jefferson Street Capital

On September 24, 2019, the Company entered into a Securities Purchase Agreement with accredited investors (“Lenders”), and issued 8% Convertible Promissory Notes in the principal amount of $124,200 (including an aggregate of $9,200 in original issue discounts) to the Lenders with maturity dates of September 24, 2020. On September 27, 2019, the Company received net proceeds in the amount of $112,000 as a result of $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Notes. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $208,335, original issue discount of $9,200, deferred financing costs of $3,000 and debt discount of $112,000. The original issue discount, deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $124,200 and $163,$2,668, respectively, at September 30,December 31, 2019. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at September 30,December 31, 2019 was $2,042.$33,347.

On December 2, 2019, the Company entered into a Securities Purchase Agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Note in the principal amount of $200,000 (including a $7,500 original issue discount) to the Lender with a maturity date of December 2, 2020. On December 2, 2019, the Company received net proceeds in the amount of $182,500 as a result of $10,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note. This convertible debenture converts at the greater of (i) $0.50 per share or (ii) 60% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $200,000, original issue discount of $7,500, deferred financing costs of $10,000 and debt discount of $182,500. The original issue discount, deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $200,000 and $1,271, respectively, at December 31, 2019. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at December 31, 2019 was $15,890.

On December 2, 2019, the Company entered into a Securities Purchase Agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Note in the principal amount of $78,000 to the Lender with a maturity date of December 2, 2020. On December 4, 2019, the Company received net proceeds in the amount of $75,000 as a result of $3,000 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $78,629, deferred financing costs of $3,000 and debt discount of $75,000. The deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $78,000 and $496, respectively, at December 31, 2019. The aggregate balance of the convertible promissory note, net of deferred financing costs and debt discount at December 31, 2019 was $6,197.

On December 2, 2019, the Company entered into a Securities Purchase Agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Note in the principal amount of $135,000 (including a $6,750 original issue discount) to the Lender with a maturity date of December 2, 2020. On December 3, 2019, the Company received net proceeds in the amount of $122,000 as a result of $6,250 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note. This convertible debenture converts at the greater of (i) $0.50 per share or (ii) 60% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $135,000, original issue discount of $6,750, deferred financing costs of $6,250 and debt discount of $122,000. The original issue discount, deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $135,000 and $858, respectively, at December 31, 2019. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at December 31, 2019 was $10,726.

mPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 8:Convertible Debt Arrangements (continued)

On December 17, 2019, the Company entered into a Securities Purchase Agreement with an accredited investor (“Lender”) and issued an 8% Convertible Promissory Note in the principal amount of $81,000 (including a $6,000 original issue discount) to the Lender with a maturity date of December 17, 2020. On December 17, 2019, the Company received net proceeds in the amount of $73,500 as a result of $1,500 being paid to reimburse the Lender for legal and due diligence fees incurred with respect to this Securities Purchase Agreement and Convertible Promissory Note. This convertible debenture converts at 62% of the lowest trading price during the 20 days prior to conversion. Due to the variable conversion provisions contained in the convertible promissory note, the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $81,599, original issue discount of $6,000, deferred financing costs of $1,500 and debt discount of $73,500. The original issue discount, deferred financing costs and debt discount are being amortized over the term of the note. The aggregate balance of the convertible promissory note and accrued interest was $81,000 and $249, respectively, at December 31, 2019. The aggregate balance of the convertible promissory note, net of original issue discount, deferred financing costs and debt discount at December 31, 2019 was $3,107.

At September 30,December 31, 2019 and June 30, 2019, there was $308,200$724,200 and $78,000 of convertible notes payable outstanding, net of discounts of $271,515$615,582 and $75,649, respectively.

During the threesix months ended September 30,December 31, 2019 and 2018, amortization of original issue discount, deferred financing costs, and debt discount amounted to $34,335$184,266 and $0, respectively.

At September 30,December 31, 2019, the Company was in compliance with the terms of the Power Up Lending and Platinum Point Capital and Jefferson Street CapitalAccredited Investors convertible promissory notes.

NOTE 9: DERIVATIVE LIABILITY

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operation as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.

The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from June 30, 2018 to September 30,December 31, 2019:

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 9: DERIVATIVE LIABILITY (continued)

Total derivative liability at September 30,December 31, 2019 and June 30, 2019 amounted to $495,441$586,073 and $133,669, respectively. The change in fair value included in earnings of $65,803$470,400 is due in part to the quoted market price of the Company’s common stock decreasingincreasing from $0.85 at June 30, 2019 to $0.76$0.91 at September 30,December 31, 2019, coupled with substantially reducedslightly increased conversion prices due to the effect of “ratchet” provisions incorporated within the convertible notes payable.

The Company used the following assumptions for determining the fair value of the convertible instruments granted under the binomial pricing model with Binomialbinomial simulations at September 30,December 31, 2019:

NOTE 10: STOCKHOLDERS’ EQUITY

The total number of shares of all classes of stock that the Company shall have the authority to issue is 100,001,000 shares consisting of 100,000,000 shares of common stock, $0.01 par value per share, of which 12,363,73212,667,367 are issued and outstanding and 44,899564,900 are to be issued at September 30,December 31, 2019 and 1,000 shares of preferred stock, par value $0.01 per share of which 1,000 shares have been designated as Series A Super Voting Preferred of which 1,000 are issued and outstanding at September 30,December 31, 2019.

Common Stock

Private Placements

During the threesix months ended September 30,December 31, 2019, the Company received $64,500$197,000 of net proceeds from the issuancesale of 258,000788,000 shares of common stock and 10,000 shares of common stock to be issued in private placements with accredited investors, incurring no finder’s fees.fees, of which 530,000 shares of common stock were issued subsequent to December 31, 2019.

During the threesix months ended September 30,December 31, 2018, the Company received $10,000$30,000 of net proceeds from the issuance of 40,000120,000 shares of common stock in private placements with accredited investors, incurring no finder’s fees.

Stock Award Payable

During the threesix months ended September 30,December 31, 2019, the Company did not issue any shares of common stock to former officers, outside directors, or strategic consultants.

During the threesix months ended September 30,December 31, 2018, three former officers of the Company, Mr. Biderman as an outside director, and certain strategic consultants, who provided services to the Company, received a total of 1,150,000 shares of common stock, which were valued at $0.50 or $575,000, based on the closing price of the Company’s common stock on September 24, 2018, and was included in accrued expenses at June 30, 2018.

Stock Based Compensation

During the threesix months ended September 30,December 31, 2019, the Company did not issue any common stock to employees or officers. During the three months ended September 30, 2019, the Company recorded $49,391issued 231,635 restricted shares of stock-based compensation expense related to a June 1, 2019 grant of 231,635 shares ofits common stock to Mr. Cutchens, the Company’s Chief Financial Officer, which vestswere granted on June 1, 2019 (the “Grant Date”), pursuant to the terms of an employment agreement with the Company. The restricted shares of common stock vest 25% on the six month,six-month, 1 year, 2 year, and 3 year anniversaries of the grant date.Grant Date. During the six months ended December 31, 2019, the Company recorded $90,193 of stock-based compensation expense related to the vested portion of this award.

During the threesix months ended September 30,December 31, 2018, the Company did not issue any common stock to employees or officers or record any stock-based compensation expense.

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 10: STOCKHOLDERS’ EQUITY (continued)

Conversion of Debt SecuritiesService Fees

During the threesix months ended September 30,December 31, 2019, there were nothe Company issued 62,000 shares of common stock issued to related parties or strategic consultantsa former officer who provided services to the Company.

During the threesix months ended September 30,December 31, 2018, former officers converted $538,777$671,787 accrued wages into 1,077,5541,609,594 shares and $702,105 of notes payable and accrued interest into 1,404,210 shares and a director converted $186,000 of accrued fees into 372,000 shares and $126,364 of a note and accrued interest into 252,728 shares, of the Company’s common stock. Also, on September 24, 2018 accounts payable to strategic vendors totaling $99,500$114,800 were converted into 199,000260,200 shares of common stock.

Reserved Shares

The convertible promissory notes entered into with Power Up Lending, Platinum Point Capital and Jefferson Street Capitalthe accredited investors require the Company to reserve 18,910,75128,226,605 shares of its Common Stock for potential future conversions under such instruments.

At September 30,December 31, 2019, 7,202 shares of the Company’s Common Stock remain subject to be returned to the Company’s treasury for cancellation. Such shares were not sold as part of 8,000 shares of the Company’s Common Stock that was advanced during fiscal year 2014 under an Equity Line of Credit.

Common Stock Warrants

Warrant Agreement – Earned Warrants

Mr. Bhatnagar, the Company’s President and CEO, is entitled to receive warrants to acquire 4% of the outstanding fully diluted common stock of the Company (the “Earned Warrants”) each time the Company’s revenue increases by $1,000,000. The exercise price of the Earned Warrants is equal to $0.50 per share, and he may not receive Earned Warrants to the extent that the number of Signing Shares (as defined in the Warrant Agreement) and Earned Warrants exceed 80% of the fully diluted common stock of the Company (“Warrant Cap”).

Warrant Agreement – Accelerated Warrants

Mr. Bhatnagar, the Company’s President and CEO, shall immediately receive the remaining amount of warrants necessary to acquire up to 80% of the outstanding fully diluted common stock of the Company (“Accelerated Warrants”) when either of the following occur:

For the threesix months ended September 30,December 31, 2019, since the Company’s revenue was $7,569,612,$15,131,579, Mr. Bhatnagar earned warrants to acquire 19,941,57332,405,058 shares of the Company’s common stock under the provisions of the Warrant Agreement. At September 30,December 31, 2019, under the current Warrant Cap, there remains approximately 12,500,000no additional shares of the Company’s common stock that Mr. Bhatnagar can earn.

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 10: STOCKHOLDERS’ EQUITY (continued)

For the threesix months ended September 30,December 31, 2019, the Company recognized $9,970,787$16,202,529 of stock-based compensation expense related to the earned warrants.warrants, based upon a value of $0.50 per warrant. At September 30,December 31, 2019, there remains approximately $6,232,000 ofno additional stock-based compensation expense related to the Warrant Agreement that the Company expects to recognize over the next six months.

The Company estimates the fair value of each option award on the date of grant using a black-scholes option valuation model that uses the assumptions noted in the table below. Because black-scholes option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were utilized during the threesix months ended September 30,December 31, 2019:

The following table sets forth common stock purchase warrants outstanding at September 30,December 31, 2019:

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 10: STOCKHOLDERS’ EQUITY (continued)

Settlement and New Funding Share Reserves

The Company agreed to reserve a total of 3,000,000 shares of its common stock of which 532,040 shares of common stock were reserved for and issued concurrently for the conversion of 75% of outstanding accounts payables to officers’ and a director (discussed below), 1,967,960 shares of common stock were reserved to reduce liabilities outstanding December 31, 2018 (“Settlement Reserve”), and 500,000 shares of common stock were reserved to fund continuing operations (“Funding Reserve”). At September 30,December 31, 2019, 1,225,949315,949 shares of common stock remained available from the initial Settlement Reserve to settle prior liabilities and 185,063, shares of common stock remained available from the Funding Reserve to fund continuing operations.

Prior Liabilities – Settlement Reserve

1,967,960 shares of the Company’s common stock have been reserved to settle the debts of the Company that were outstanding at December 31, 2018, in the following priority; the Judgement Settlement Agreement (formerly Fife forbearance Agreement), JMJ Financial, Inc., MH Investment Trust, Power Up Lending Ltd, as well as other liabilities satisfactory to the CEO of the Company and the Company (as per Section 2(a) of the Reserve Agreement concurrent with “Change in Control Agreements”, dated January 11, 2019). At September 30,December 31, 2019, 1,225,949315,949 shares of common stock remain available under this reserve category.

Officer’s and Director’s – Conversion Share Reserve

532,040 shares of the Company’s common stock were reserved for the conversion of 75% of payables to officers’ and a director that were outstanding December 31, 2018, (as per Section 2(a) of the Reserve Agreement concurrent with “Change in Control Agreements”, dated January 11, 2019). All these shares were issued effective December 31, 2018 and no shares remain available under this reserve category.

Continuing Operations Share Reserve

500,000 shares of the Company’s common stock were reserved as per Section 2(c) to be sold at a price, not less than $0.25 per share in periodic Private Placements, (as per Section 2(a) of the Reserve Agreement concurrent with “Change in Control Agreements”, dated January 11, 2019). At September 30,December 31, 2019, 185,063 shares of common stock remain available under this reserve category.

Final Adjustment for Liabilities Eliminated by Settlement Reserve

On October 9, 2019, the Company and its CEO entered into Amendment No. 1 to the original Reserve Agreement dated January 11, 2019, to extend the date whereby the Company is able to eliminate the above-mentioned liabilities from July 11, 2019 to March 31, 2020. In the event the Company is not able to eliminate the above-mentioned liabilities, or the cost to do so requires more than the funding provided by the Warrant Cap pertaining to Warrants to be issued to Mr. Bhatnagar, the Settlement Reserve shares shall be increased by that number of shares at $0.25, which equals the amount of the remaining liabilities.

Series A Preferred Stock

On January 11, 2019, the Company issued 1,000 shares of Series A Preferred Stock to Mr. Bhatnagar as the Company’s new President and CEO, to effectuate voting control of the Company pursuant to the terms of the Transition Agreement. The Series A Preferred shares were recorded at par value, are not tradeable, and have a nominal liquidation value.

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTENOTE 11: RELATED PARTY TRANSACTIONS

Microphase Corporation

At September 30,December 31, 2019, the Company owed $32,545 to Microphase for previously leased office space at its Norwalk location and for certain research and development services and shared administrative personnel from time to time, all through December 31, 2015.

Former Director

On September 24, 2018, a former outside director converted $126,364 of his note payable into 252,728 shares of common stock.

During the threesix months ended September 30,December 31, 2019 and 2018, the Company recorded $0 and $1,831$1,915 of accrued interest.

Transactions With Officers

At various points during past fiscal years certain officers and former officers of the Company provided bridge loans to the Company evidenced by individual promissory notes and deferred compensation so as to provide working capital to the Company. All of these notes accrue interest at the rate of 6% per annum, and are payable on demand. During the threesix months ended September 30,December 31, 2019 and 2018, the officers and former officers advanced $20,952$48,052 and $42,531$42,880 to provide working capital to the Company and $11,137$1,447 and $563$2,294 has been charged for interest on loans from officers and former officers.

At September 30,December 31, 2019 and June 30, 2019, these outstanding notes including accrued interest totaled $78,095$76,419 and $58,165, respectively. At September 30,December 31, 2019, these promissory notes are not convertible into shares of the Company’s common stock.

During the threesix months ended September 30,December 31, 2018, three former officers of the Company, Mr. Biderman as a former outside director, and certain strategic consultants, who provided services to the Company, received a total of 1,150,000 shares of common stock, which were valued at $0.50 or $575,000, based on the closing price of the Company’s common stock on September 24, 2018, and was included in accrued expenses at June 30, 2018.

During the threesix months ended September 30,December 31, 2019, the Company incurred $10,500$15,500 of expense related to legal and consulting services provided by Mr. Smiley, the Company’s former CFO and legal counsel. During October 2019, the entire balance of $15,500 was converted into 62,000 shares of common stock.

Office Lease

Effective May 1, 2019, the Company relocated its corporate office to 9841 Washingtonian Blvd., Suite 390, Gaithersburg, MD 20878, and incurs rent expense of $1,350 per month, which is payable to a related party. The lease term with the related party is a month-to-month arrangement.

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 12: COMMITMENTSCOMMITMENTS AND CONTINGENCIES

Commitments

Effective May 1, 2019, the Company relocated its corporate office to 9841 Washingtonian Blvd., Suite 390, Gaithersburg, MD 20878, and incurs rent expense of $1,350 per month, which is payable to a related party. The lease term with the related party is a month-to-month arrangement.

Contracts and Commitments Executed Pursuant to the Transition Agreement

In the transaction whereby, Mr. Bhatnagar acquired control of the Company on January 11, 2019, the Company entered into material commitments including an employment agreement and a warrant agreement (see Note 10).

Contingencies

Judgment Settlement Agreement

Effective December 10, 2018, the Company entered into a “Judgment Settlement Agreement” to satisfy in full the Forbearance Agreement with Fife that was previously in effect. As a result, under the Judgment Settlement Agreement, no shares of the Company’s common stock are issuable or eligible to be converted into. Under the terms of the Judgment Settlement Agreement, the Company is required to pay $15,000 per month from January 15, 2019 through and including February 15, 2020, with a final payment of $195,000 due and payable in March of 2020. The Company has made all payments required as of the date hereof. Failure to make any of the payments, when due, will result in the remaining liability balance of $550,181$559,313 (at September 30,December 31, 2019), to be immediately due and payable by the Company (see Note 7).

Should the Company satisfy the liability as described within the Judgement Settlement Agreement above, the Company would realize a gain on such settlement of approximately $550,000.$560,000.

Amounts Contingent upon Certain Terms of Change in Control Agreements Effective January 11, 2019

To the extent Company does not eliminate the certain liabilities within six months of the effective date, the Warrant Cap for warrants issued to Mr. Bhatnagar shall increase by such number of shares at a price of $0.25 per share to equal the amount of the remaining liability.

The Change inControl Agreements, effective January 11, 2019, also have certain provisions that may accelerate the warrant “earn out” formula contained in the Transition Agreement.

MPHASEmPHASE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREESIX MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2019 AND 2018

(UNAUDITED)

NOTE 13:DISCONTINUED OPERATIONS

The Company has classified the operating results and associated assets and liabilities from its Jump line of products, which ceased generating material revenue during the first quarter of fiscal year 2017, as discontinued operations in the consolidated financial statements for the threesix months ended September 30,December 31, 2019 and 2018.

The assets and liabilities associated with discontinued operations included in our consolidated balance sheets were as follows: