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Form 10QSB for PHANTOM FIBER CORP

Strategic deal positions Phantom Fiber to capitalize on emerging market for downloadable games

Press Release
May 16, 2005

Quarterly Report ITEM 2. 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.

During the quarter ended March 31, 2005, the Company has executed on its strategy and achieved various key milestones and technical advancements, including:

o a significant increase in the number of devices supported by our platform offering.. In an animated application such as interactive games, the number of devices supported by our technology increased from 195 devices at December 31, 2004 to over 600 devices at March 31, 2005. For less animated applications such as Sportsbooks, the number of devices supported by our technology increased by an additional 400 from 600 devices at December 31, 2004 to over 1,000 devices at March 31, 2005.

o completion of an over the air install procedure allowing install links to be embedded in phone text messages and thereby reduce the need to visit a customer internet site to become operational

o full integration of mobile commerce and payment management components with multi-currency support into the platform offering. As a result users in the gaming and entertainment sector or emerging mobile commerce sector now has access to alternate payment methods.

PHANTOM FIBER CORPORATION

The Company deployed eleven (11) new customer sites during the quarter ended March 31, 2005 compared to eight (8) customer sites for the twelve month period ended Dember 31, 2004. In addition each of the previous sites deployed in 2004 were also upgraded to accommodate the increased number of devices supported by our platform offering. The number of client site deployments is a key indicator of our positioning to generate revenue as it indicates the degree of penetration achieved with our various partners' client lists.

Based upon the strong customer responses received to date, management believes that the Company is continues to gain 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 continue to be favorable for an appreciation in shareholder value to occur by virtue of increasing market share and achieving sustained profitability.

RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004

The Company recorded a net loss for the three months ended March 31, 2005 of $868,758 ($0.003 per share) compared to a net loss of $235,340 ($0.002 per share) for the same period in the preceding year.

The net loss for the three months ended March 31, 2005 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 $36,018 from $17,139 for the quarter ended March 31, 2004 to $53,157 for the quarter ended March 31, 2005, an increase of 210%. The largest proportion of revenue in both these periods was derived in North America.

Total operating expenses increased $283,423 from $252,479 for the three months ended March 31, 2004 to $535,902 for the three months ended March 31, 2005, an increase of 106%. The increase includes:

o An increase in net research and development expenses to develop new software products of $126,290 from $128,589 for the quarter ended March 31, 2004 to $254,879 for the quarter ended March 31, 2005. Major increases in various expense categories for the quarter ended March 2005 occurred in salaries, benefits and fees to full-time and contract professional staff (approximately $128,800), offset by net decreases in other expense categories of approximately $2,500.

o An increase in sales and marketing expenses to develop new distribution channels for the Company's products of $14,064 from $65,882 for the three months ended March 31, 2004 to $79,946 for the three months ended March 31, 2005. Major increases in various expense categories for the fiscal year ended 2004 arose in combined salaries and benefits and consulting services (approximately $17,400), advertising and promotions (approximately $3,400) and net increases in other expense categories (approximately $900), offset by reductions in market research of approximately $3,100, and travel of approximately $4,500.

PHANTOM FIBER CORPORATION

o An increase in general and administration and interest expenses of $143,069 from $58,008 for quarter ended March 31, 2004 to $201,077 for the quarter ended March 31, 2005. This change includes increased professional fees incurred in connection with completion of the reverse acquisition, preparation and filing of the Company's Forms 10-KSB and 10-QSB and attendant financial and legal services (approximately $70,100), increased interest on short term borrowings, long-term debt and capital leases (approximately $15,700), increased office rental and occupancy expenses (approximately $21,800), increased filing and share transfer expenses (approximately $16,300), increased amortization expenses (approximately $1,700), an increase in the provision for bad debt expenses (approximately $15,000) and net increases in other expense categories (approximately $2,500).

During the three months ended March 31, 2005, the Company recorded a loss on disposal of marketable securities of $373,786 (March 31, 2004: $nil) and expenses associated with settlement of a loan obligation of $12,578 (March 31, 2004: $nil) offset by a foreign exchange gain of $351 (March 31, 2004: $nil) arising from the translation of the Company's Canadian dollar denominated assets into US dollars.

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.

PHANTOM FIBER CORPORATION

Revenue Recognition

The Company's revenue consists of software licensing fees and related service revenues which are recognized when the 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 decreased $578,725 from $1,444,124 as at December 31, 2004 to $865,399 as at March 31, 2005, a decrease of 40%. The decrease is due primarily to an decrease in marketable securities (approximately $838,400), decreased investment tax credits receivable (approximately $234,500) and a reduction in property, plant and equipment (approximately $3,600), offset by increases in trade and other receivables of approximately $21,500, an increase in amounts due on a sale of marketable securities of $425,800, increased prepaid expenses of approximately $20,600 and an increase in cash and deposits of approximately $44,900.

At March 31, 2005, the Company held 270,000 common shares (December 31, 2004: 1,145,000 common shares) of Wireless Age Communications, Inc., and nil shares (December 31, 2004: 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 $124,200 at March 31, 2005 ($0.46 per share) compared to $812,950 ($0.71 per share) as at December 31, 2004. The Trackpower securities were obtained as partial payment for a receivable. The Company valued these shares at $149,649 ($0.05) as at December 31, 2004.

PHANTOM FIBER CORPORATION

Total liabilities decreased $476,113 from $1,645,247 as at December 31, 2004 to $1,169,134 as at March 31, 2005, a decrease of 29%. Major reductions arose in accounts payable and accrued liabilities (approximately $142,700), short-term borrowings (approximately $261,500), senior subordinated convertible debentures (approximately $66,500) and total capital lease obligations (approximately $5,400).

Stockholders' equity decreased $102,611 from ($201,123) at December 31, 2004 to ($303,734) as at March 31, 2005, a decrease of 51%. The decrease is the result of:
  1. Shares issued for settlement of trade and other indebtedness as well as for services received in the amount of $347,380;
  2. Shares reserved and subscribed under conversion of amounts outstanding under senior subordinated convertible debentures of $93,170; and
  3. Adjustment arising from reduction in unrealized loss on marketable securities of $338,637 (recorded in accumulated other comprehensive income (loss))
offset by:
  1. The net loss of $868,758 for the quarter ended March 31, 2005; and
  2. Unrealized foreign exchange translation losses of $13,040 (recorded in accumulated other comprehensive income (loss)).
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 $318,979 at March 31, 2005 compared with a negative working capital of $229,601 at December 31, 2004, representing a decrease of $89,378 or approximately 39%. As of March 31, 2005, the Company had cash and cash equivalents of $64,321 compared with cash and cash equivalents of $19,400 at December 31, 2004, representing an increase in cash of $44,921.

For the three months ended March 31, 2005, cash used in operating activities amounted to $70,707, compared with cash used in operating activities in the same period of the prior year of $208,103. Cash used by financing activities during the three months ended March 31, 2005 amounted to $208,572 resulting from a decrease in short term borrowings of $203,375 and a decrease under capital lease obligations of $5,197. By way of comparison, cash provided by financing activities for the three months ended March 31, 2004 amounted to $572,470 and resulted from issuance of convertible debentures of $593,880 and increased obligations under capital leases of $1,240, offset by repayment of long-term debt of $22,650.

PHANTOM FIBER CORPORATION Cash provided by investing activities for the three months ended March 31, 2005 was $324,200 and was derived from proceeds of sale of marketable securities. By way of comparison, cash used in investing activities for the three months ended March 31, 2004 amounted to $385,037 and resulted from the reduction of loans receivable of $381,500 and investment in property, plant and equipment of $3,537.

At March 31, 2005, 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 $124,200 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.

Original Source: Yahoo Financial - May 16, 2002

144 Front St. W., Suite 580, Toronto, ON. M5J 2L7 Tel: 416.703.4007, Fax: 416.703.0900

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