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Form 10KSB for PHANTOM FIBER CORP

Change in Directors or Principal Officers, Other Events

Annual Report
April 15, 2005

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

Certain matters discussed in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and as such may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future

performance, perceived opportunities in the market and statements regarding the Company's goals. The Company's actual results, performance, or achievements expressed or implied in such forward-looking statements may differ.

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Investor Relations

Alexander S. Bosika
Tel : 416.703.4007 Fax : 416.703.0900

  CURRENT BUSINESS AND OUTLOOK

Phantom Fiber develops interactive mobile technology that allows users to experience internet-like graphics and internet-like speed in an end-to-end secure solution for multiple mobile platforms. Phantom Fiber's customers include network carriers such as Wind (Italy) and Telus Mobility (Canada), and online casino and sports book service providers such as Golden Palace, Real-Time Gaming, WagerWorks, Interactive Gaming and Wagering, Digital Gaming Solutions, 1X Sportsmarkets, IQ-Ludorum, CaribSports, and Parlay Entertainment. It also has clients in the financial and mobile payments vertical and security and remote-monitoring industry. Phantom Fiber's gaming and sports book customers typically enter into exclusive multi-year, revenue-sharing agreements, under which they use Phantom Fiber's technology to offer games to their subscribers and are charged a monthly user fee or percentage of the revenues or income generated from those games.

In the latter half of 2004, the Company shifted its focus and resources to the areas of marketing, brand-awareness, client expansion and site deployment. In the past year, the number of mobile phones and Personal Digital Assistants (PDA's) supported by Phantom Fiber's software has increased from 20 devices to over 600 handheld mobile phones and PDA's. Management believes that ongoing success will stem from two areas: contract fulfillment through client deployments; and ongoing product development to expand its technical differentiators and increase its industry advantages. The Company intends to continue to enhance its product offering and to introduce new features and products, as the market demands. As part of its product development process, the Company works closely with its customers and its distribution channels to ensure that such market needs are met or exceeded.

Based upon the strong customer responses received to date, management believes that the Company is steadily gaining recognition as a leading provider of advanced presentation and internet speed to the mobile market. Phantom Fiber has concentrated on establishing revenue-sharing arrangements in a rapidly growing market sector and believes that the prospects are favorable for an appreciation in shareholder value to occur by virtue of increasing market share and achieving sustained profitability.

RESULTS OF OPERATIONS

The Company recorded a net loss during its fiscal year ended December 31, 2004 of $1,524,049 ($0.008 per share) compared to a net loss of $273,743 ($0.002 per share) for the same period in the preceding year. The Company's transition from a predominantly product development enterprise commenced in the second half of the fiscal year ended December 31, 2004. The net loss for the year ended December 31, 2004 had been anticipated by management as a result of the reverse acquisition, investing in product development and support, organizational infrastructure and establishing new customer outlets for product distribution.

Total revenue increased $46,580 from $51,837 for the year ended December 31, 2003 to $98,417 for the year ended December 31, 2004. The largest proportion of revenue in both these periods was derived in North America.

Total operating expenses increased $1,593,536 from $325,580 for the year ended December 31, 2003 to $1,919,116 for the year ended December 31, 2004, an increase of 489%. The increase includes:

* An increase in net research and development expenses to develop new software products of $668,808 from $(96,550) for the year ended December 31, 2003 to $572,258 for the year ended December 31, 2004. Major increases in various expense categories for the fiscal year ended 2004 occurred in salaries, benefits and fees to full-time and contract professional staff (approximately $350,400) and third-party software licensing expenses (approximately $4,200), offset by net decreases in other expense categories of approximately $1,000. In addition, research and development expenses for the year ended December 31, 2004 were reduced by approximately $303,200 with respect to cash refundable government tax credits on qualified research and development activity. By comparison, research and development expenses for the year ended December 31, 2003 were reduced by approximately $618,400 with respect to cash refundable government tax credits on qualified research and development activity. In 2004 and upon becoming a public company, the Company's became entitled only to cash refundable provincial tax credits for eligible expenditures, whereas in 2003 the Company was entitled to cash refundable federal and provincial government tax credits.

* An increase in sales and marketing expenses to develop new distribution channels for the Company's products of $175,939 from $149,162 for the year ended December 31, 2003 to $325,101 for the year ended December 31, 2004. Major increases in various expense categories for the fiscal year ended 2004 arose in salaries and benefits (approximately $206,700), advertising and promotions (approximately $5,300) market research (approximately $9,800) and net increases in other expenses categories (approximately $100) offset by reductions in consulting services of approximately $39,100 and in travel expenses of approximately $6,900.

* An increase in general and administration expenses of $748,789 from $272,968 for year ended December 31, 2003 to $1,021,757 for the year ended December 31, 2004. This change includes increased office and general (approximately $557,000, of which $420,000 pertained to an augmentation of the Company's investor relations program and $108,000 pertained to accruals for wage arrears and vacation pay), professional fees incurred in connection with completion of the reverse acquisition, preparation and filing of the Company's Form 10-KSB and attendant financial and legal services (approximately $51,000), increased interest on long-term debt and capital leases (approximately $69,400), increased office rental and occupancy expenses (approximately $39,400), increased salaries and benefits chiefly as a result of adding two administrative staff (approximately $30,000), increased bank charges and interest on short-term borrowings (approximately $29,800), and net increases in other expense categories (approximately $12,400), offset by a reduction in consulting services of approximately $40,200).

During the year ended December 31, 2004, the Company recorded a gain on disposal of its Battery Division of $391,874 (2003: $nil), a further earnout relating to the divestment of the Battery Division of $35,500 (2003: $nil) and a foreign exchange gain of $62,060 (2003: $nil) arising from the translation of the Company's Canadian dollar denominated assets into US dollars during periods of weakening of the US dollar vis-a-vis the Canadian dollar, offset by a loss on disposal of marketable securities of $109,534 (2003: $nil) and settlement of a loan obligation of $83,250 (2003: $nil).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of results of operations and financial condition are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management evaluates the estimates on an on-going basis, including those related to bad debts, inventories, investments, customer accounts, intangible assets, income taxes, and contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that they believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Note 2 of the "Notes to Consolidated Financial Statements" of the Company's annual audited Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of the consolidated financial statements. The following is a brief description of the more significant accounting policies and methods the Company uses.

Investments

The Company's investment in marketable securities is classified as available for sale securities. Unrealized holding gains and losses are reported as a net amount in a separate component of shareholders' equity until realized.

Revenue Recognition

The Company's revenue consists of software licensing fees and related service revenues which are recognized when the "wireless middleware" product is delivered or the service has been rendered and when the rights of ownership of the product are transferred to the purchaser and collection is reasonably assured.

Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. The criteria for allowance provision are determined based on historical experience and the Company's assessment of the general financial conditions affecting its customer base. If the Company's actual collections experience changes, revisions to the allowance may be required.

Intangible Assets

Long-lived assets, including intangible assets, are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimated fair value based on the best information available. Fair value is determined by estimated future cash flows and appraised value of the assets.

FINANCIAL CONDITION

Total assets increased $932,200 from $511,924 at December 31, 2003 to $1,444,124 as at December 31, 2004, an increase of 182%. The increase is due primarily to an increase in marketable securities (approximately $962,600), accounts receivable (approximately $20,900), prepaid expenses (approximately

$10,700) and increased property, plant and equipment (approximately $32,900), offset by a reduction in cash of approximately $300 and a reduction in investment tax credits receivable of approximately $94,600.

At December 31, 2004, the Company held 1,145,000 common shares of Wireless Age Communications, Inc., and 3,000,000 shares of Trackpower Inc., both publicly traded entities whose share price is quoted on the NASD's over-the-counter Electronic Bulletin Board under the symbols "WLSA" and "TPWR" respectively. The Wireless Age securities were obtained in the sale of the Prime Wireless subsidiary on March 13, 2003 and in the sale of the battery business on September 14, 2004. The Company has valued these securities at $812,950 ($0.71 per share). The Trackpower securities were obtained as partial payment for a receivable. The Company has valued these shares at $149,649 ($0.05).

Total liabilities increased $1,300,745 from $344,502 at December 31, 2003 to $1,645,247 as at December 31, 2004, an increase of 378%, and reflects liabilities assumed in the reverse acquisition as well as an increase in short-term borrowings and accounts payable from operations. Major increases arose in accounts payable and accrued liabilities (approximately $887,800), short-term borrowings (approximately $203,800), notes payable (approximately $109,700), senior subordinated convertible debentures (approximately $66,500) and increases in capital lease obligations (approximately $33,000).

Stockholders' equity decreased $368,545 from $167,422 at December 31, 2003 to ($201,123) at December 31, 2004, a decrease of 220%. The decrease is the result of:

  1. A reorganization of the equity accounts resulting from the reverse acquisition of the Company. This reorganization resulted in an increase to equity based upon the value of the net assets acquired from Pivotal Self-Service Technologies Inc. of $1,083,101;
  2. Issuance of convertible debentures totaling 625,630;
offset by
  1. Unrealized loss on available for sale marketable securities of $535,378;
  2. The net loss of $1,524,049 during the year ended December 31, 2004; and
  3. Unrealized foreign exchange translation losses of $17,849 (recorded in accumulated other comprehensive income).
The consolidated financial statements of the Company are prepared in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the significant estimates required to be made by management include the realizable value of intangible assets and the fair value of common stock and common stock equivalents issued for services or in settlement of obligations. Actual results could differ from those estimates.

LIQUIDITY AND CAPITAL RESOURCES

The Company reported a negative working capital of $229,601 at December 31, 2004 compared with a positive working capital of $154,748 at December 31, 2003 representing a decrease of $384,349, approximately 248%. As of December 31, 2004, the Company had cash and cash equivalents of $19,400 compared with cash and cash equivalents of $19,742 at the end of the prior year, representing a decrease in cash of $342.

For the year ended December 31, 2004, cash used in operating activities amounted to $849,455, primarily as a result of operating losses. Cash provided by financing activities during the year ended December 31, 2004 amounted to $689,368 resulting from an increase in short term borrowings of $203,784, increases under capital lease obligations of $32,954 and increased common stock under the convertible debenture of $625,630, offset by a reduction in notes payable of $173,000. Cash provided by investing activities was $159,745 and was chiefly derived from proceeds of sale of Wireless Age Communications, Inc. common shares of $199,989 and cash assumed on the reverse acquisition of $5,541, offset by an investment in property, plant and equipment during the year of $45,785.

At December 31, 2004, the Company did not have sufficient cash flow from operations to satisfy its operational requirements and other cash commitments. The Company has introduced expense reductions and anticipates receiving further funding through term debt and/or the sale of its securities by private placement and the exercise of outstanding warrants and options. There can be no assurance that such funding sources will be secured or that the necessary regulatory approval or closing of a private placement will occur, or that such funding will be sufficient to eliminate the Company's reliance on additional sources and quantities of funding. The Company has commenced liquidating its investment in Wireless Age Communications, Inc. common shares. These securities, which have been valued at $812,950 for balance sheet purposes, have certain resale restrictions. Management believes that it will be in a position to sell all of these securities within the next twelve months and utilize the proceeds for working capital purposes.

In addition, the Company has been successful in raising capital through private placements of its common shares. Although, this type of financing continues to be dilutive to the existing common shareholders, it may be necessary to continue to do so in the interim before certain resale restrictions on its marketable securities lapse.

The Company does not have any material sources of liquidity on off balance sheet arrangements or transactions with unconsolidated entities.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), "Shared-Based Payment." Statement 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for Stock Issued to Employees", which was permitted under Statement 123, as originally issued. The revised Statement requires entities to disclose information about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. The Company has not yet evaluated the impact of adoption of this pronouncement which is effective for the quarter beginning January 1, 2006.

In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets-amendment of APB Opinion No. 29". Statement 153 eliminates the exception to fair value for exchanges of similar productive assets and

replaces it with a general exception for exchange transactions that do not have commercial substance, defined as transactions that are not expected to result in significant changes in the cash flows of the reporting entity. This statement is effective for exchanges of nonmonetary assets occurring after June 15, 2005. The Company will adopt this Statement in fiscal 2005 and adoption is not expected to have a material impact on the Company's financial position, results of operations, or cash flows.

In November 2004, the FASB ratified the Emerging Issues Task Force ("EITF") consensus on Issue 03-13, "Applying the Conditions in Paragraph 42 of FASB Statement No. 144. "Accounting for the Impairment or Disposal of Long-lived Assets," in Determining Whether to Report Discontinued Operations." The Company will adopt this Statement in fiscal 2005 and adoption is not expected to have a material impact on the Company's financial position, results of operations, or cash flows.

In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - an amendment of ARB No. 43, Chapter 4". Statement No. 151 requires that certain abnormal costs associated with the manufacturing, freight, and handling costs associated with inventory be charged to current operations in the period in which they are incurred. Statement No. 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the Company's financial position, results of operations, or cash flows.

Original Source: Yahoo Financial - April 15, 2005

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