MPHASE TECHNOLOGIES, INC. Item 4.02 Non-Reliance on Previously Issued Financial Statements.
As previously disclosed, onJanuary 4, 2023 , the board of directors (the "Board") ofmPhase Technologies (the "Company"), formed a special committee of the Board (the "Special Committee") to investigate allegations of inaccurate disclosures, misappropriation and other potential fraudulent actions (the "Investigation") byAnshu Bhatnagar (the "Former CEO"), who had been the Company's Chief Executive Officer untilJuly 11, 2022 , when he was terminated with cause, and to complete the review of the factual matters related to such allegations as had been previously conducted by the Board from the Company's 2022 third fiscal quarter to the present. OnMarch 10, 2023 , based on the preliminary results of the Investigation, the Board met with the Company's newly appointed (as ofNovember 22, 2022 ) independent registered public accounting firm,Prager Metis CPAs LLP ("Prager Metis") and it was determined that previously filed financial statements of the Company should not be relied upon. This includes financial statements beginning with theSeptember 30, 2019 , Form 10-Q and each 10-Q and 10-K throughMarch 31, 2022 (the "Previously Issued Financial Statements"). The conclusion that the Previously Issued Financial Statements cannot be relied upon resulted from the determination that such statements reported inaccurate activity and balances as a result of the fraudulent actions of the Former CEO. Specifically, the Company has determined that:
? The Company reported revenue from customer contracts that were fraudulent.
Specifically, the Company reported revenues from a single customer contract
identified in filings as the "primary technology contract with its channel
partner." All evidence indicates that the Former CEO of the Company fabricated
all transactions related to this customer by creating a sophisticated paper
trail of transactions without substance, including fabrication of bank
statements reporting cash receipts of
million, and other documents to support such fraud. The Company has no evidence
the products or services that were reported to have been delivered under the
Company's revenue agreements were ever in fact developed, delivered, or
supported. This fraud was further supported by a separate vendor contract to
provide a platform that was to be enhanced and sold to the primary customer.
The Company has no evidence that any services were actually provided to the
Company although the Company had previously reported amounts in Cost of Sales.
The effect of correcting the Company's Financial Statements for this fraud is
presented in tables below. The Company acknowledges that the Former CEO received significant stock-based compensation of 37,390,452 common shares as a result of having fraudulently reported revenue. Under the Former CEO's employment agreement, he vested into certain warrants (which were subsequently exchanged into the aforementioned common shares) by achieving recurring revenue metrics of$15 million . Such employment agreement does not include "clawback" provisions; however, the Company is currently pursuing all available legal options to reclaim these shares. As there is not currently a mechanism to recall these shares, they remain reported as issued and outstanding.
? For the quarters ended
reported an immaterial amount of revenue from its consumer engagement platform.
Although the amounts were not material for disclosure at the time, the amounts
included in Revenue were
small, the implications of these fraudulently reported revenues was significant
as it signaled that the consumer engagement platform was building success.
Although certain customers were charged, the Company provided no product or
service to these entities and the amounts were inappropriately reported as
Revenue. The effect of correcting the Company's Financial Statements for this
fraud is presented in tables below.
? As a result of the Investigation, the Company identified numerous instances of
misappropriation of assets by the Former CEO. Specifically, the Former CEO used
Company funds to pay for personal credit card charges and direct payments to
personal vendors of the Former CEO for transactions unrelated to the business.
Additionally, the Former CEO, while he was also CEO of Verus International, a
separate public company, transacted between the entities without support for
the transactions with transactions totaling approximately
Certain of these amounts were reported and disclosed as legitimate expenses of
the Company. As part of the restatement, these amounts will be removed from the
Company's operating expenses and disclosed separately in the financial
statements as assets misappropriated by the Former CEO. The Special Committee
is completing its analysis of these transactions and they will be included in
the restated financial statements when available.
? In the previously issued financial statements, the Company reported in its
"Consolidated Statements of Stockholders' Equity" 1,000 shares of
value Series A Preferred Stock (the "Series A Preferred"). As a result of the
Investigation, the Company determined that the creation of the Series A
Preferred was not authorized under the Company's Certificate of Incorporation
(the "Certificate") and, accordingly, the Series A Preferred was never duly
authorized. Specifically, the Certificate does not grant authority to the Board
to issue preferred stock, as such authority is neither in the original
Certificate of Incorporation, nor is it in any amendment to the Certificate
that had been duly approved, having received the vote of the majority
shareholders of the Company. Furthermore, even if the Series A Preferred Stock
were to be effective, the Investigation failed to uncover any documented
evidence of the Board's approval of the issuance of such 1,000 shares of Series
A Preferred. Accordingly, the Company will restate the previously issued
financial statements to remove reference to the Series A Preferred. The effect
of correcting this error on the Company's Financial Statements is shown in the
tables below.
We continue to work on the corrected and restated financial statements for the Company and have engaged the newly appointed independent registered public accounting firm,Prager Metis , to re-audit prior periods, for whichPrager Metis had no prior association with. The effect of correcting the Company's Financial Statements (unaudited) for this fraud (excluding the removal of the misappropriated operating expenses as such amounts are preliminary and require further analysis) is presented in the following tables: For the three months ended on September 30, 20191 (As Previously Reported) Adjustments (As Restated) Revenue$ 7,569,612 $ (7,569,612 ) $ 0 Cost of Revenue 5,706,514 (5,706,514 ) 0 For the six months ended on December 31, 20191 (As Previously Reported) Adjustments (As Restated) Revenue$ 15,131,579 $ (15,131,579 ) $ 0 Cost of Revenue 11,330,444 (11,330,444 ) 0 For the nine months ended on March 31, 20201 (As Previously Reported) Adjustments (As Restated) Revenue$ 22,688,086 $ (22,688,086 ) $ 0 Cost of Revenue 16,955,320 (16,955,320 ) 0 For the fiscal year ended on June 30, 20201 (As Previously Reported) Adjustments (As Restated) Revenue$ 30,276,422 $ (30,276,422 ) $ 0 Cost of Revenue 22,579,544 (22,579,544 ) 0
1 The effect of restating Revenue and Cost of Revenue for the year ended on
For the three months ended on September 30, 2020
(As Previously
Reported) Adjustments (As Restated)
Revenue $ 7,586,864 $ (7,586,864 ) $ 0
Cost of Revenue 5,625,389 (5,625,389 ) 0
For the six months ended on December 31, 2020
(As Previously
Reported) Adjustments (As Restated)
Revenue $ 15,223,300 $ (15,223,300 ) $ 0
Cost of Revenue 11,250,399 (11,250,399 ) 0
For the nine months ended on March 31, 2021
(As Previously Reported) Adjustments (As Restated)
Revenue $ 22,882,648 $ (22,882,648 ) $ 0
Cost of Revenue 16,876,480 (16,876,480 ) 0
For the fiscal year ended on June 30, 2021
(As Previously Reported) Adjustments (As Restated)
Revenue $ 30,672,314 $ (30,672,314 ) $ 0
Cost of Revenue 22,501,496 22,501,496 ) 0
For the three months ended on September 30, 2021
(As Previously
Reported) Adjustments (As Restated)
Revenue $ 8,225,710 $ (8,225,710 ) $ 0
Cost of Revenue 5,625,033 (5,625,033 ) 0
For the six months ended on December 31, 2021
(As Previously
Reported) Adjustments (As Restated)
Revenue $ 16,565,587 $ (16,565,587 ) $ 0
Cost of Revenue 11,250,033 (11,250,033 ) 0
For the nine months ended on March 31, 2022
(As Previously Reported) Adjustments (As Restated)
Revenue $ 25,066,056 $ (25,066,056 ) $ 0
Cost of Revenue 16,986,353 (16,986,353 ) 0
Preferred Stock
$0.01 Par
Shares Value
Balance June 30, 2020 1,000 $ 10
Balance adjustments due to restatement (1,000 ) (10 )
Restated Balance June 30, 2020 - $ -
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