10QSB 1 v017811_10qsb.txt PHANTOM FIBER CORPORATION As filed with the Securities and Exchange Commission on May 13, 2005 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ______________ to ________________ Commissions file number 001-15627 PHANTOM FIBER CORPORATION (Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 042451506 (State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
144 FRONT STREET, SUITE 580 TORONTO, ONTARIO, CANADA, M5J 2L7 (Address of Principal Executive Offices) (416) 703-4007 (Issuer's Telephone Number, Including Area Code) PIVOTAL SELF SERVICE TECHNOLOGIES INC. 13980 JANE STREET KING CITY, ONTARIO, CANADA, L7B 1A3 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| The number of shares of common stock outstanding as of May 13, 2005: 268,082,470 ================================================================================ PHANTOM FIBER CORPORATION INDEX PART I FINANCIAL INFORMATION Item 1. Condensed Financial Statements (unaudited) Condensed Consolidated Balance Sheet............................ 1 Condensed Consolidated Statements of Operations and Comprehensive Loss............................................ 2 Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficiency)............................................ 3 Condensed Consolidated Statements of Cash Flows................. 4 Notes to Condensed Consolidated Financial Statements............ 5 Item 2. Management's Discussion and Analysis or Plan of Operation...... 17 Item 3. Controls and Procedures......................................... 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................... 23 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 23 Item 3. Defaults Upon Senior Securities................................. 23 Item 4. Submission of Matters to a Vote of Security Holders............. 23 Item 5. Other Information............................................... 23 Item 6. Exhibits and Reports on Form 8-K................................ 23 A) Exhibit Schedule B) Reports Filed on Form 8-K Signatures and certifications............................................ 24-27
PHANTOM FIBER CORPORATION Condensed Consolidated Balance Sheet March 31, 2005 and December 31, 2004 =================================================================================================== March 31, December 31, 2005 2004 (unaudited) (audited) --------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash $ 64,321 $ 19,400 Amounts receivable (note 3) 473,504 41,244 Marketable securities (note 4) 124,200 962,599 Investment tax credit receivable 118,840 353,340 Prepaid expenses 34,975 14,414 ------------- ------------- TOTAL CURRENT ASSETS 815,840 1,390,997 PROPERTY, PLANT AND EQUIPMENT (note 5) 49,559 53,127 ------------- ------------- TOTAL ASSETS $ 865,399 $ 1,444,124 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 934,518 $ 1,077,179 Short term borrowings (note 6) 79,415 340,920 Current portion of obligation under capital leases (note 5) 26,160 26,274 Notes payable (note 7) 109,725 109,725 Senior subordinated convertible debentures (note 8) -- 66,500 ------------- ------------- TOTAL CURRENT LIABILITIES 1,149,818 1,620,598 ------------- ------------- Obligation Under Capital Leases (note 5) 19,315 24,649 ------------- ------------- 1,169,133 1,645,247 ------------- ------------- STOCKHOLDERS' DEFICIENCY (note 9) PREFERRED STOCK, $100 par value, 8%, non-voting, convertible, redeemable, 2,000 shares authorized, No shares issued and outstanding COMMON STOCK, $.001 par value, 400,000,000 shares authorized, 268,082,470 shares, issued and outstanding at March 31, 2005; 260,689,071 shares, issued and outstanding at December 31, 2004 268,083 260,689 ADDITIONAL PAID-IN CAPITAL 2,966,065 2,532,909 ------------- ------------- 3,234,148 2,793,598 ACCUMULATED DEFICIT (3,365,432) (2,496,674) ACCUMULATED OTHER COMPREHENSIVE LOSS (172,450) (498,047) ------------- ------------- TOTAL STOCKHOLDERS' DEFICIENCY (303,734) (201,123) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 865,399 $ 1,444,124 ============= =============
See accompanying notes. 1
PHANTOM FIBER CORPORATION Condensed Consolidated Statements of Operations and Comprehensive Loss Three Months Ended March 31, 2005 and March 31, 2004 ========================================================================================== 2005 2004 (unaudited) (unaudited) ------------------------------------------------------------------------------------------ REVENUE Consulting services $ 22,986 $ -- User fees and royalties 24,442 14,290 Interest and other income 5,729 2,849 ------------------------------ 53,157 17,139 ------------------------------ OPERATING EXPENSES: Research and development 254,879 128,589 Sales and marketing 79,946 65,882 Interest expense 21,871 6,151 General and administrative 179,206 51,857 ------------------------------ Total operating expenses 535,902 252,479 ------------------------------ OPERATING LOSS BEFORE OTHER INCOME (EXPENSES) (482,745) (235,340) OTHER INCOME (EXPENSES) Loss on disposal of marketable securities (373,786) -- Settlement on loan obligation (12,578) -- Gain (loss) on foreign exchange 351 -- ------------------------------ NET LOSS $ (868,758) $ (235,340) ============================== EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Weighted average number of common shares outstanding (note 2 i)) 263,945,145 147,004,211 Loss per share $ (0.003) $ (0.002) COMPREHENSIVE LOSS Net loss $ (868,758) $ (235,340) Other comprehensive income (loss): Unrealized holding gain on marketable securities 338,637 -- Foreign exchange translation gain (loss) (13,040) 31,484 ------------------------------ Comprehensive loss $ (543,161) $ (203,856) ==============================
See accompanying notes 2
PHANTOM FIBER CORPORATION Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficiency) March 31, 2005 (unaudited) and December 31, 2004 (audited) =================================================================================================================================== Accumulated Total Additional Other Other Stockholders Common stock Common stock paid in Shareholders' Accumulated Comprehensive Equity Number Par Value capital Equity Deficit Income (loss) /(Deficiency ----------------------------------------------------------------------------------------------------------------------------------- (#) ($) ($) ($) ($) ($) ($) ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2003 147,004,211 147,004 -- 937,863 (972,625) 55,180 167,422 ----------------------------------------------------------------------------------------------------------------------------------- Issuance of convertible debentures 20,406,524 20,407 605,223 625,630 ----------------------------------------------------------------------------------------------------------------------------------- Adjustment arising from reorganization due to reverse acquisition 93,278,336 93,278 1,927,686 (937,863) 1,083,101 ----------------------------------------------------------------------------------------------------------------------------------- Net loss for the year ended December 31, 2004 (1,524,049) (1,524,049) ----------------------------------------------------------------------------------------------------------------------------------- Adjustment arising from unrealized loss on marketable securities (535,378) (535,378) ----------------------------------------------------------------------------------------------------------------------------------- Adjustment arising from foreign exchange translation loss (17,849) (17,849) ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2004 260,689,071 260,689 2,532,909 -- (2,496,674) (498,047) (201,123) ----------------------------------------------------------------------------------------------------------------------------------- Shares issued for settlement of accounts payable, other debt and services 7,020,714 7,021 340,359 347,380 ----------------------------------------------------------------------------------------------------------------------------------- Shares reserved and to be issued for conversion of senior subordinated convertible debentures 372,685 373 92,797 93,170 ----------------------------------------------------------------------------------------------------------------------------------- Net loss for the three months ended March 31, 2005 (868,758) (868,758) ----------------------------------------------------------------------------------------------------------------------------------- Adjustment arising from reduction in unrealized loss on marketable securities 338,637 338,637 ----------------------------------------------------------------------------------------------------------------------------------- Adjustment arising from foreign exchange translation loss (13,040) (13,040) ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 2005 268,082,470 268,083 2,966,065 -- (3,365,432) (172,450) (303,734) -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes 3
PHANTOM FIBER CORPORATION Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2005 and March 31, 2004 ======================================================================================== 2005 2004 (unaudited) (unaudited) ---------------------------------------------------------------------------------------- OPERATING ACTIVITIES Cash received from customers and governments $ 276,935 $ 1,628 Cash paid to suppliers and employees (330,063) (243,372) Interest received 4,262 2,849 Interest paid (9,152) (692) Foreign exchange gain (loss) (12,689) 31,484 ---------------------- (70,707) (208,103) ---------------------- FINANCING ACTIVITIES Long-term debt -- (22,650) Convertible debenture -- 593,880 Obligation under capital leases (5,197) 1,240 Decrease in short term borrowings (203,375) -- ---------------------- (208,572) 572,470 ---------------------- INVESTING ACTIVITIES Purchase of property, plant and equipment -- (3,537) Loans receivable -- (381,500) Proceeds from the sale of marketable securities 324,200 -- ---------------------- 324,200 (385,037) ---------------------- INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS 44,921 (20,670) CASH, BEGINNING OF PERIOD 19,400 19,742 ---------------------- CASH / (BANK INDEBTEDNESS), END OF PERIOD $ 64,321 $ (928) ====================== NON CASH FINANCING AND INVESTING ACTIVITIES: Proceeds from sale of marketable securities outstanding at end of period $ 425,800 -- Marketable securities disposed of in settlement of accounts payable 53,250 -- Common shares issued on conversion of debenture 66,500 -- Common shares issued in settlement of accounts payable 247,463 -- Common shares issued in settlement of borrowing 58,130 -- Common shares issued in settlement for various services 68,456 --
See accompanying notes 4 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION a) Description of Business The business of Phantom Fiber Corporation (the "Company") (formerly known as Pivotal Self Service Technologies Inc, Wireless Ventures Inc. and Hycomp, Inc.) is conducted through its wholly-owned Canadian subsidiary Phantom Fiber Inc. headquartered in Toronto, Canada. It is engaged in the business of the sale and licensing of its proprietary wireless software platform and integration services. Phantom Fiber uses its software platform to extend the rich multimedia content and user experience of its customers' existing Internet web sites securely and instantly to the PDAs and cell phones of mobile users. Phantom Fiber derives its revenue from direct sales of various licensing and revenue sharing plans that allow its revenues to grow based upon the adoption rate of its customer's end users. b) Reverse Acquisition Transaction On July 7, 2004, the Company (formerly known as "Pivotal Self-Service Technologies Inc.") completed a reverse acquisition of privately held Phantom Fiber Corporation, an Ontario corporation. The merger was effected pursuant to a Share Exchange Agreement dated April 22, 2004 (the " Agreement") by and among the Company and Phantom Fiber Corporation. In accordance with the terms of the Agreement, the Company merged with and into Phantom Fiber Corporation, with Phantom Fiber Corporation remaining as the surviving corporation and a wholly owned subsidiary of the Company. Pursuant to the Agreement, the outstanding shares of common stock of Phantom Fiber Corporation, converted into an aggregate of 167,410,735 shares of the Company's common stock, which represented 64 percent of the Company's outstanding voting stock after giving effect to the merger. An aggregate of 27,482,147 common shares have been placed in escrow for a period of one year following the date of closing of the transaction in support of indemnifications by the pre-merger stockholders of Phantom Fiber Corporation to Pivotal Self-Service Technologies Inc. The transaction is recorded as a reverse acquisition since the Phantom Fiber Corporation stockholders became the controlling stockholders of the Company. Accordingly, the transaction is accounted for as the issuance of stock by Phantom Fiber Corporation for the net monetary assets of the Company accompanied by a recapitalization of Phantom Fiber Corporation and no goodwill or any intangible assets are recorded. Prior period results and comparatives are those of Phantom Fiber Corporation and its subsidiary. Based on the price of the Company's common stock on July 7, 2004 of $0.08 per share, the purchase price approximated $13,393,000. In connection with the merger, the Company changed its name from "Pivotal Self-Service Technologies Inc." to "Phantom Fiber Corporation". Pursuant to the terms of the share exchange agreement between the Company and Phantom Fiber, upon Closing on July 7, 2004, the holders of an aggregate of CAD1, 200,000 (approximately $919,750) principal amount of convertible debentures of Phantom Fiber Corporation received warrants exercisable until the second anniversary of the Closing to purchase 15,000,000 shares of the Company's common stock at an exercise price of $0.084 per share (see Note 9 (c)).. The Company also issued stock options to replace 2,000,000 Phantom Fiber Corporation stock options existing prior to the merger. Each stock option will allow the holder to purchase 5.5 post-merger common shares (11,000,000 common shares in aggregate) for an exercise price equal to the exercise price of the Phantom Fiber Corporation stock options previously held divided by 5.5, and with an expiry date and vesting provisions similar to those of the previously outstanding stock options. 5 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (continued) c) Disposition of Prime Battery The Company disposed of the all of the shares of its Prime Battery Products Limited ("Prime Battery") subsidiary plus additional assets and liabilities (together, the "Battery Business") in a transaction that was signed and consummated on September 15, 2004. The Battery Business was sold to Wireless Age Communications Inc. ("Wireless Age") for the following consideration: (i) 700,000 restricted common shares of Wireless Age; and (ii) 200,000 additional restricted common shares ("Earnout Shares") of Wireless Age as an earnout over a one year period. The Earnout Shares are issuable on November 30, 2004 (see Note 4), February 28, 2005, May 31, 2005 and August 31, 2005 if Prime Battery continues to earn royalties under existing agreements with Simmtronics Limited and SureCells Portable Power Ltd. d) Going Concern and Basis of Presentation These financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business, notwithstanding the significant operating losses for the three months ended March 31, 2005 and the deficit as at March 31, 2005. The ability of the Company to continue as a going concern is dependent on the Company's ability to generate future profitable operations and receive continued support from its lenders, shareholders and raise external financing for which there can be no assurance regarding the success thereof. e) Comparative figures: Certain comparative figures have been reclassified to conform with the financial statement presentation adopted in the current period. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Use of estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results may differ from these estimates. b) 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. 6 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) c) Acquisitions and business combinations The Company accounts for acquisitions and business combinations under the purchase method of accounting. The Company includes the results of operations of the acquired business from the acquisition date. Net assets of the companies acquired are recorded at their fair value at the acquisition date. The excess of the purchase price over the fair value of net assets acquired are included in intangible assets in the accompanying consolidated balance sheets. d) 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. e) Intangibles and goodwill The Company regularly reviews all of its long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company's overall business, and significant negative industry or economic trends. When management determines that an impairment review is necessary based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in our current business model. Significant judgment is required in the development of projected cash flows for these purposes including assumptions regarding the appropriate level of aggregation of cash flows, their term and discount rate as well as the underlying forecasts of expected future revenue and expense. To the extent that events or circumstances cause assumptions to change, charges may be required which could be material. f) Investments The Company's investment in marketable securities is classified as available for sale securities and is recorded at their fair value. Unrealized holding gains and losses are reported as a net amount in a separate component of shareholders' equity until realized. g) Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on temporary differences between the financial statement 7 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. A provision for income tax expense is recognized for income taxes payable for the current period, plus the net changes in deferred tax amounts. h) Financial instruments The fair values of the financial assets and liabilities are indicated by their carrying value. The fair value of non-interest bearing advances and notes payable approximate their carrying value because they are due on demand, have no terms of payment and are treated as payable on demand. i) Net loss per share For both 2005 and 2004, net loss per share has been computed using the net loss for the period divided by the weighted average number of shares outstanding. Diluted loss per share is not presented as the effects of convertible debentures, warrants and options are anti-dilutive. j) Foreign currency The functional currency of the company is the U.S. dollar and the functional currency of the wholly owned subsidiary located in Canada is the Canadian dollar. Assets and liabilities of this subsidiary are translated to U.S. dollars at year-end exchange rates and income statement items are translated at the exchange rates present at the time such transactions arise. Resulting translation adjustments, if material, are recorded as a separate component of accumulated other comprehensive income, a component of stockholders' equity (deficiency). k) Investment tax credits The Company's subsidiary is entitled to Canadian tax credits which are earned as a percentage of eligible research and development expenditures incurred in each taxation year. Investment tax credits earned relating to research and development expenses and property, plant and equipment purchases are accounted for as a reduction of the respective expenses and the cost of such assets. l) Comprehensive income Comprehensive Income includes the net exchange differences arising from the translation of Canadian dollar denominated subsidiaries into US dollars and accumulated unrealized holding gains and losses on the Company's available for sale securities. m) Recent accounting pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement No. 123(R), Share-Based Payments, which will require compensation costs related to share-based payment transactions to be recognized in the financial statements. As permitted by the predecessor Statement No.123, the Company does not recognize compensation expense with respect to stock options issued because the option price was no greater than the market price at the time the option was issued. Statement 123(R) will be effective in the fiscal quarter beginning January 1, 2006. The 8 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) m) Recent accounting pronouncements (continued) Company has not completed an evaluation of the impact of adopting Statement 123(R). 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, which is effective for us at the beginning of 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 issued Statement No. 151, Inventory Costs, an amendment of ARB No.43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be recognized as current period charges, and that fixed production overheads should be allocated to inventory based on normal capacity of production facilities 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. n) Stock Options The Company applies the disclosure provisions of SFAS No.123, "Accounting for Stock-Based Compensation." Stock option awards continue to be accounted for in accordance with APB Opinion No.25. As the number of shares to be issued and the per share strike price are not subject to uncertainty, stock option grants are accorded fixed accounting treatment. As a result, the Company does not record compensation expense in connection with the granting of these stock options. Had compensation cost for the employee and non-employee director stock options been determined based on the fair value at the grant date for awards for the three months ended March 31, 2005 and March 31, 2004 consistent with the provisions of SFAS No.123, net earnings would have been reduced to the pro forma amounts indicated below (amounts in thousands): March 31, March 31, 2005 2004 -------------------- Net loss as reported $ (869) $ (235) Pro forma compensation expense 5 5 -------------------- Pro forma net loss $ (874) $ (240) ==================== There is no effect on loss per share. 9 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used in the model: March 31, March 31, 2005 2004 -------------------- Dividend yield nil nil Expected volatility 90% 90% Risk free interest rates 3.5% 2.6% Expected lives (years) 3.0 3.0 o) Property, Plant and Equipment Property, plant and equipment are carried at cost less accumulated amortization. Amortization is calculated using the declining-balance method as follows. Computer hardware 30% Office furniture and equipment 20% Additions during the period are amortized at one-half the usual rate. p) Capital leases Leases that transfer the substantial obligations and benefits of ownership are recorded as capital assets and a related obligation under capital leases. NOTE 3. AMOUNTS RECEIVABLE:
March 31, 2005 December 31, 2004 -------------------------------------------------------------------------------------------- Trade, net of allowance of $15,000 (2004-$Nil) $ 41,248 $ 41,244 Due from former officer and director 425,800(a) -- Other receivable 6,456 -- -------------------------------------------------------------------------------------------- $ 473,504 $ 41,244 --------------------------------------------------------------------------------------------
(a) On January 13, 2005, the Company entered into a private sales transaction with a former officer, director and shareholder of Pivotal Self-Service Technologies Inc. under which the Company agreed to sell 800,000 shares of common stock of Wireless Age Communications Inc. for cash consideration of $600,000 and 3,000,000 shares of common stock of Trackpower Inc. for cash consideration of $150,000. The transaction, as amended March 30, 2005, provides for periodic delivery of these shares in quantities proportionate to cash payments received as a percentage of the total proceeds of the transaction. As at March 31, 2005, the Company has received $324,200 under this transaction and has delivered 345,813 shares of common stock of Wireless Age Communications Inc. and 1,296,800 shares of common stock of Trackpower Inc. 10 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 4. MARKETABLE SECURITIES The Company's available for sale marketable securities consist of the following:
ORIGINAL BOOK UNREALIZED NUMBER COST VALUE GAIN/ (LOSS) ======================================================================================================== March 31, 2005: Wireless Age Communications Inc. 270,000 (b) $ 320,941 $ 124,200 $ (196,741) --------- ========================================= December 31, 2004: Trackpower Inc. 3,000,000 (c) $ 136,950 $ 149,649 $ 12,699 Wireless Age Communications Inc. 1,145,000 (a) 1,361,027 812,950 (548,077) --------- ----------------------------------------- $ 1,497,977 $ 962,599 $ (535,378) =========================================
(a) In September, 2004 the Company received 700,000 restricted shares of Wireless Age at a market price of $1.01 through the disposition of its Battery Business as described in Note 1(c). In November, 2004, the Company received 50,000 restricted shares of Wireless Age at a market price of $0.71 pursuant to its earnout resulting from the disposition of its Battery Business as described in Note 1(c). The remaining 395,000 shares of Wireless Age were acquired in conjunction with the reverse acquisition transaction described in note 1 (b). (b) As described in note 3, on January 13, 2005, the Company entered into a private sales transaction with a former officer, director and shareholder of Pivotal Self-Service Technologies Inc. under which the Company agreed to sell 800,000 shares of common stock of Wireless Age Communications Inc. for cash consideration of $600,000. On January 23, 2004, the Company transferred 50,000 of the Wireless Age shares to an affiliate of the Company who, per note 10, had provided a loan of $162,000 to the Company in November 2002. The transfer of these shares was in payment of the loan. The Company also agreed to adjust the number of shares in event that the closing share price is less than $3.00 on the earlier of; i) the date which the shares become freely trading under securities legislation, or ii) the date the shares are freely tradable under a registration statement. On February 18, 2005, the Company negotiated a final settlement of this matter under which it agreed to issue 500,000 shares of its capital stock and to transfer 75,000 shares of common stock of Wireless Age Communications Inc. (c) During July, 2004 the Company received 3,000,000 restricted shares of Trackpower Inc. as partial payment for an amount due from a third party. As described in note 3, on January 13, 2005, the Company entered into a private sales transaction with a former officer, director and shareholder of Pivotal Self-Service Technologies Inc. under which the Company agreed to deliver 3,000,000 shares of common stock of Trackpower Inc. for cash consideration of $150,000. 11 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 5. PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipment comprises the following: March 31, December 31, 2005 2004 ----------- ----------- Computers and office equipment - cost $ 71,386 $ 71,671 Less: accumulated amortization (21,827) (18,544) ----------- ----------- $ 49,559 $ 53,127 =========== =========== Included in the above property, plant and equipment are assets under capital lease with a cost of $61,353 (December 31, 2004: $61,353) and accumulated amortization of $14,718 (December 31, 2004: $11,898). These leases bear interest at varying rates from 9%-21%. The future minimum payments due under these capital leases are: Years ending December 31: 2005 $ 26,274 2006 19,348 2007 5,301 NOTE 6. SHORT TERM BORROWINGS
March 31, December 31, 2005 2004 ----------- ----------- Advance from a shareholder, on demand, unsecured and non-interest bearing $ 17,165 $ 27,595 Advance from a party related to the principal shareholder, on demand, unsecured with monthly interest of 3% 62,250 62,250 Advances from unrelated parties, on demand, unsecured at varying rates -- 100,422 Bridge loan, on demand, unsecured with monthly interest payments of 3% -- 150,653 ----------- ----------- Total $ 79,415 $ 340,920 =========== ===========
NOTE 7. NOTES PAYABLE
March 31, 2005 and December 31, 2004 ------------------------------------ Non-interest bearing note payable (a) $ 57,500 5 year non-interest bearing note payable (b) 52,225 ----------- Total $ 109,725 ===========
12 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 7. NOTES PAYABLE (CONTINUED) (a) In 2001, the Company restructured a $416,821 payable with a creditor, whereby $76,821 was forgiven, $180,000 was satisfied through the issuance of 1.8 million shares of the Company's common stock, and a note payable of $160,000 was issued and has since been paid down to $57,500. This amount is due on demand and has therefore not been discounted. (b) In 2002, the Company issued a non-interest bearing note payable to an affiliate for $120,000 payable over 5 years at $2,000 per month commencing July 1, 2002 (this note was discounted to $106,000 representing its present value using a 5% discount rate and has been paid down to $52,225). The Company issued this note as part of the acquisition of Prime Wireless that was later disposed of on March 13, 2003. NOTE 8. SENIOR SUBORDINATED CONVERTIBLE DEBENTURES The senior subordinated convertible debentures totaling $66,500 at December 31, 2004, bear interest at 8% payable in arrears annually commencing March 6, 2001. Each $0.25 of principal is convertible into one share of common stock and one three year warrant to purchase an additional share of common stock at an exercise price of $0.50 per share. Management had determined that the value attached to the conversion feature and the related warrants is insignificant and, therefore has not made an adjustment to the debentures' carrying amount for these features. No payments of interest have been made by the Company. The notes are technically in default and therefore have been classified as current liabilities at December 31, 2004. On March 6, 2005, these debentures matured and amounts outstanding were automatically converted into 372,685 shares of common stock of the Company. Also see note 9 (c). NOTE 9. CAPITAL STRUCTURE (a) Authorized:\ 2,000 preference shares $100 par value; 8%, non-voting, convertible, redeemable 400,000,000 voting common shares, $0.001 par value (b) Issued and outstanding (Number of shares) at March 31, 2005: 268,082,470 (December 31, 2004: 260,689,071) 13 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 9. CAPITAL STRUCTURE (continued) (c) Warrants: The Company has granted 16,880,759 warrants to purchase an aggregate of 16,880,759 common shares. All warrants are vested. The composition and exercise prices of the warrants outstanding at March 31, 2005 are as follows:
========================================================================================= Weighted Number average of warrants exercise price Expiry date ----------------------------------------------------------------------------------------- December 31, 2004 17,508,074 $ 0.193 -- Warrants granted 372,685 0.500 -- Warrants expired (1,000,000) (0.002) -- ----------------------------------------------------------------------------------------- March 31, 2005 16,880,759 $ 0.096 -- ----------------------------------------------------------------------------------------- Comprised of: 1,250,000 $ 0.040 November 14, 2005 (a) 15,000,000 0.084 July 7, 2006 (b) 102,172 0.500 August 13, 2006 77,951 0.500 October 8, 2006 77,951 0.500 November 20, 2006 372,685 0.500 March 6, 2008 (c) ----------------------------------------------------------------------------------------- 16,880,759 $ 0.096 -- ========================================================================================= (a) Includes warrants to purchase 1,250,000 common shares at $0.04 per share issued under a warrant agreement for which another 1,250,000 warrants, exercisable at $0.10 per share are issuable upon exercise of the initial warrants. (b) Warrants issued on July 7, 2004 in connection with the Reverse Acquisition described in note 1b) to purchase 15,000,000 common shares at $0.084 (c) Warrants issued on March 6, 2005 per note 8 in connection with maturity and conversion of 8% Senior Subordinated Convertible Debentures, to purchase 372,685 common shares at $0.50 per share.,
14 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 9. CAPITAL STRUCTURE (continued) (d) Stock options: In connection with the Reverse Acquisition described in note 1b), the Company's stock option plan was amended to increase the number of options to be issued under the plan from a maximum of 3,000,000 options to a maximum of 20,000,000 options. Options granted under the amended plan are being accounted for under Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), "Accounting for Stock Issued to Employees". All options have been granted at a price equal to or greater than the fair value of the Company's common stock at the date of the grant. A summary of the changes in the Company's stock option plan for the three months ended March 31, 2005 and year ended December 31, 2004 is as follows:
Three Months Ended Year Ended March 31, 2005 December 31, 2004 ------------------------------------------------------------------------------------------------------- Weighted Weighted Number average Number average of shares exercise price of shares exercise price ------------------------------------------------------------------------------------------------------- Balance at beginning of period 11,600,000 $0.02 1,000,000 $0.12 Options granted -- -- 11,000,000 (a) 0.01 ------------------------------------------------------------------------------------------------------- Options cancelled (1,750,000) (0.03) (400,000) (0.10) ------------------------------------------------------------------------------------------------------- BALANCE, END OF PERIOD 9,850,000 0.02 11,600,000 0.02 ======================================================================================================= EXERCISABLE, END OF PERIOD 9,850,000 $0.02 10,988,889 $0.02 =======================================================================================================
Weighted Weighted Weighted Number average average Number average Exercise of options remaining life exercise of options exercise Price outstanding (years) price exercisable price ------------------------------------------------------------------------------- $0.01 9,350,000 1.89 $0.01 9,350,000 $0.01 0.10 500,000 6.41 0.10 500,000 0.10 ------------------------------------------------------------------------------- $.01 - 0.10 9,850,000 2.12 $0.02 9,850,000 $0.02 ===============================================================================
(a) Options issued on July 7, 2004 in connection with the Reverse Acquisition described in note 1b) to purchase 11,000,000 common shares at $0.0114 per common share 15 PHANTOM FIBER CORPORATION Notes to the Condensed Consolidated Financial Statements Three Months Ended March 31, 2005 ================================================================================ NOTE 10. RELATED PARTY TRANSACTIONS On January 23, 2004, the Company transferred 50,000 Wireless Age Communications, common shares (marketable securities) to a related party (related by virtue of their ownership position in the Company), in repayment of a promissory note of $162,000. The Company also agreed to adjust the number of shares in event that the closing share price is less than $3.00 on the earlier of; i) the date which the shares become freely trading under securities legislation, or ii) the date the shares are freely tradable under a registration statement. On March 31, 2004, the Company transferred 40,000 Wireless Age Communications, Inc. common shares of marketable securities, each to two related parties (related by virtue of being children of a director) in repayment of $50,000 loans. An officer of the Company, provided $35,903 in a prior period to fund operations of the Company. This loan is included in short term borrowings. It is unsecured, non-interest bearing and has no formal repayment terms. NOTE 11. COMMITMENTS The Company is committed to the following annual amounts in respect to its lease of office space: Years ending December 31: 2005 $ 34,772 2006 38,746 2007 42,720 2008 46,695 2009 11,922 NOTE 12. SUBSEQUENT EVENTS a) Private Placement On April 26, 2005, the Company completed a private placement of 5,000,000 units at a price of $0.05 per unit. Each unit is comprised of one common share of and one share purchase warrant. Each share purchase warrant will entitle the holder to purchase one additional common share at a price of $0.10 if exercised within 30 months from closing of the private placement. b) Reverse Stock Split On May 5, 2005, and pursuant to an announcement made April 25, 2005, the Company implemented a one-for- twenty (1-for-20) reverse stock split of its Common Stock. As a result of this reverse stock split, 268,082,470 issued and outstanding common shares immediately prior to the reverse stock split became restated on a 1-for 20 basis to 13,404,124 issued and outstanding common shares. 16 PHANTOM FIBER CORPORATION 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. 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. 17 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. 18 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. 19 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. 20 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. 21 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. ITEM 3. CONTROLS AND PROCEDURES. The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed, is accumulated and communicated to management in a timely manner. Management has reviewed this system of disclosure controls and procedures, and believes that the system is operating in an effective way to ensure appropriate and timely disclosure. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 PHANTOM FIBER CORPORATION PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. To the knowledge of the Company, there are no material pending legal proceedings to which the Company is a party or of which any of its property is subject. As described in Note 11 (b) of the Company's audited financial statements for the year ended December 31, 2004, a specified level of working capital was to be available to fund the Company's operations on a post-merger basis to December 31, 2004. The Company also indicated that management was negotiating terms and performing further assessments on this matter and that the Corporation might be required to issue up to 40,000,000 additional compensatory shares of common stock to the pre-merger stockholders of Phantom Fiber Corporation. The Company has completed its investigation and assessment of the matter and has determined that compensatory shares to the pre-merger stockholders of Phantom Fiber Corporation should not be issued on the basis of the documents as executed and filed with the Definitive Proxy Statement on June 16, 2004. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. On February 18, 2005, 500,000 shares of restricted common stock of the Company was issued to Neil Greenburg, an affialiate of the Company, for the partial repayment of a loan. On March 6, 2005, 372,685 shares of restricted common stock of the Company were issued to various holders of senior subordinated convertible debentures which matured and were automatically converted into restricted common shares in accordance with the terms of the debenture agreements. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Prior to conversion, the Company was technically in default of the senior subordinated convertible debentures. As a result, they have been classified as current liabilities as at December 31, 2004. These debentures were converted into 372,685 common shares on March 6, 2005. In addition, the Company did not make certain principal and interest repayments on a note payable in its wholly owned subsidiary (classified as discontinued operations) when they became due. The Company retired the note subsequent to June 30, 2004. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A Form 8-K current report was filed by the Company on April 25, 2005. A Form 8-K current report was filed by the Company on May 12, 2005. 23 PHANTOM FIBER CORPORATION SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATE: MAY 13, 2005 BY: /s/ Jeffery Halloran ---------------------------- Jeffery Halloran President/CEO/Director /s/ Gordon Focoler ------------------------------ Gordon Focoler Director /s/ Graham Simmonds ------------------------------ Graham Simmonds Director 24