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 1,000 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 six months ended June 30, 2005, the Company has executed on its strategy and achieved various key milestones and technical advancements, including:

• 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 June 30, 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 June 30, 2005.
• completion of an install wizard in which a user only needs to know their cellular phone number in order to install our application over the air. This allows us to embed our install links and procedure into phone text messages (SMS) and thereby eliminate the need to visit a customer internet site to become operational.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements Six Months Ended June 30, 2005

• The Company completed the 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. The production release of this software to FirePay, Citadel and Navaho Networks is scheduled for the third quarter of this year.
• The Company completed the development and successful deployment of its Horse Racing (pare-mutual) product. It was successfully launched to a first client. It is anticipated all current and subsequent deployments of Sportsbook will now also include the horse racing product.
• The Company completed the development of its fully interactive Poker product. In response to signing a multi-year Poker agreement with a large poker software provider, Phantom Fiber anticipates deploying its first production, multi-player Poker product in the Third Quarter of this year.
• The Company deployed fourteen (14) new customer sites during the six months ended June 30, 2005 compared to eight (8) customer sites for the twelve month period ended December 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 continuing 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 June 30, 2005 and June 30, 2004

The Company recorded a net loss for the three months ended June 30, 2005 of $363,728 ($0.027 per share) compared to a net loss of $348,741 ($0.047 per share) for the same period in the preceding year.

Total revenue increased $82,134 from $24,331 for the quarter ended June 30, 2004 to $106,465 for the quarter ended June 30, 2005, an increase of about 338%.

Total operating expenses increased $178,775 from $372,949 for the three months ended June 30, 2004 to $551,724 for the three months ended June 30, 2005, an increase of 48%. The increase includes:

• An increase in net research and development expenses to develop and expand technology products of $179,060 from $180,242 for the quarter ended June 30, 2004 to $359,302 for the quarter ended June 30, 2005. Major increases in various expense categories for the quarter ended June 2005 occurred in salaries, benefits and fees to full-time and contract professional staff (approximately $182,400), offset by net decreases in other expense categories of approximately $3,300.
• A decline in sales and marketing expenses of $5,258 from $65,032 for the three months ended June 30, 2004 to $59,774 for the three months ended June 30, 2005. Reductions arose in various expense categories

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements Six Months Ended June 30, 2005

for the quarter ended June 2005 such as combined salaries and benefits and consulting services (approximately $14,300) and market research (approximately $6,500), offset by increases in advertising and promotions of approximately $6,000, travel of approximately $6,700 and meals and entertainment of approximately $2,800.

• An aggregate increase in general and administration and interest expenses of $4,973 from $127,675 for quarter ended June 30, 2004 to $132,648 for the quarter ended June 30, 2005. This change includes increased professional fees incurred in connection with preparation and filing of the Company's Forms 10-KSB and 10-QSB and attendant financial and legal services (approximately $22,100), increased interest on short term borrowings, long-term debt and capital leases (approximately $16,700), increased filing and share transfer expenses (approximately $11,900) and increased amortization expenses (approximately $4,400), offset by recovery of amounts established as a provision for bad debt expenses of approximately $15,000, reductions in salaries and benefits of approximately $22,100 and net reductions in other expense categories of approximately $13,000.

Results of operations Six Months Ended June 30, 2005 and June 30, 2004

The Company recorded a net loss for the six months ended June 30, 2005 of $1,232,486 ($0.093 per share), compared to a net loss of $584,060 ($0.079 per share) for the same period in the preceding year.

Total revenue increased $118,152 from $41,470 for the six months ended June 30, 2004 to $159,622 for the six months ended June 30, 2005, an increase of about 285%. The largest proportion of revenue in both these periods was derived in North America.

Total operating expenses increased $462,219 from $625,407 for the six months ended June 30, 2004 to $1,087,626 for the six months ended June 30, 2005, an increase of 74%. The increase includes:

• An increase in net research and development expenses to develop and expand technology products of $305,350 from $308,831 for the six months ended June 30, 2004 to $614,181 for the six months ended June 30, 2005. Major increases in various expense categories for the six months ended June 2005 occurred in salaries, benefits and fees to full-time and contract professional staff (approximately $311,200), offset by net decreases in other expense categories of approximately $5,900.
• An increase in sales and marketing expenses of $8,806 from $130,914 for the six months ended June 30, 2004 to $139,720 for the six months ended June 30, 2005. Increases in various expense categories for the six months ended June 30, 2005 arose in combined salaries and benefits and consulting services (approximately $3,100) advertising and promotions (approximately $9,300) and net increases in other expense categories (approximately $6,000), offset by reductions in market research of approximately $9,600.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements Six Months Ended June 30, 2005

• An aggregate increase in general and administration and interest expenses of $148,063 from $185,662 for six months ended June 30, 2004 to $333,725 for the six months ended June 30, 2005. This change includes increased professional fees incurred in connection with preparation and filing of the Company's Forms 10-KSB and 10-QSB and attendant financial and legal services (approximately $92,200), increased interest on short term borrowings, long-term debt and capital leases (approximately $32,400), increased filing and share transfer expenses (approximately $28,200), increased amortization expenses (approximately $6,000) and increased premises rent and utilities expenses (approximately $18,200), offset by reductions in salaries and benefits of approximately $23,200 and net reductions in other expense categories of approximately $5,700.

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, 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.

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.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements Six Months Ended June 30, 2005

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 $740,679 from $1,444,124 as at December 31, 2004 to $703,445 as at June 30, 2005, a decrease of 52%. The decrease is due primarily to an decrease in marketable securities ($766,499), decreased investment tax credits receivable ($304,386), decreased cash and cash deposits ($22,018) and a reduction in property, plant and equipment ($6,921), offset by increases in trade and other receivables of approximately $68,769, an increase in amounts due on a sale of marketable securities of $275,800, and an increase in prepaid expenses of $11,958.

At June 30, 2005, the Company held 370,000 common shares (December 31, 2004: 1,145,000 common shares) of Wireless Age Communications, Inc., 650,000 common shares (December 31, 2004: nil) of Midland International Corporation (formerly Azonic Corporation) and nil shares (December 31, 2004: 3,000,000 shares) of Trackpower Inc., all publicly traded entities whose share price is quoted on the NASD's over-the-counter Electronic Bulletin Board under the symbols "WLSA", "MLIC" 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 $196,100 at June 30, 2005 ($0.53 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.

Total liabilities decreased $643,339 from $1,645,247 as at December 31, 2004 to $1,001,908 as at June 30, 2005, a decrease of 39%. Major reductions arose in accounts payable and accrued liabilities (approximately $312,800), short-term borrowings (approximately $255,000), senior subordinated convertible debentures ($66,500) and total capital lease obligations (approximately $11,700).

Stockholders' deficiency increased $97,340 from ($201,123) at December 31, 2004 to ($298,463) as at June 30, 2005, an increase of 48%. The increase is the result of:

1. Shares issued for settlement of trade and other indebtedness as well as for services received in the amount of $386,902;

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements Six Months Ended June 30, 2005

2. Shares reserved and subscribed under conversion of amounts outstanding under senior subordinated convertible debentures of $93,170;

3. Common stock subscribed in connection with two private placements of $300,000 in aggregate; and,

4. Net adjustment arising from reduction in unrealized loss on marketable securities and foreign exchange of $355,074 (recorded in accumulated other comprehensive income (loss))

offset by:

1. The net loss of $1,232,486 for the six months ended June 30, 2005; and

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 $326,073 at June 30, 2005 compared with a negative working capital of $229,601 at December 31, 2004, representing a decrease of $96,472 or approximately 42%. As of June 30, 2005, the Company had bank indebtedness of $2,618 compared with cash and cash equivalents of $19,400 at December 31, 2004, representing an decrease in cash of $22,018.

For the six months ended June 30, 2005, cash used in operating activities amounted to $516,278, compared with cash used in operating activities in the same period of the prior year of $764,189.. Cash used in financing activities during the six months ended June 30, 2005 amounted to $33,190 resulting from a decrease in borrowings and capital lease obligations of $333,190, offset by cash provided from the issuance of capital stock of $300,000.. By comparison, cash provided by financing activities during the six months ended June 30, 2004 amounted to $755,285 resulting from issuance of common stock of $593,816 and increases in borrowings and capital lease obligations of $161,469.

Cash provided by investing activities for the six months ended June 30, 2005 was $527,450 and was derived from proceeds of sale of marketable securities. By way of comparison, cash used in investing activities for the six months ended June 30, 2004 amounted to $714 and resulted from an investment in property, plant and equipment..

At June 30, 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.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements Six Months Ended June 30, 2005

The Company has been liquidating its investment in Wireless Age Communications, Inc. common shares. These securities, which have been valued at $196,100 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 - August 15, 2005