Form 10QSB for PHANTOM ENTERTAINMENT, INC.
21-Aug-2006
Quarterly Report
ITEM 2. Management's Discussion and Analysis or Plan of Operations
Some of the information in this Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. You should read statements that contain these words carefully because they:
· discuss our future expectations;
· contain projections of our future results of operations or of our financial condition; and
· state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business". See "Risk Factors."
Overview
We are developing and seeking to commercialize the Phantom Lapboard, a wireless, rotating custom keyboard/turntable with integrated mousepad . We have not yet generated any revenue from operations. Our ability to generate revenue in the future is dependent on our ability to successfully develop and commercialize the Phantom Lapboard. We still retain assets with respect to the Phantom Game Service and when various milestones for the manufacturing of the Phantom Lapboard are completed we may shift more of our focus to the Phantom Game Service. The Phantom Game Service is anticipated to be the first end-to-end, on-demand game service for delivery to the living room.
With adequate financing, we intend to launch the Phantom Lapboard in 2006 for sale directly through our Internet website. The Phantom Lapboard is designed with a pc gamer in mind, and is intended to transform the way gamers think about computer keyboards.
Some features of the Phantom Lapboard are: (1) a 360 degree rotating keyboard for left or right-handed users; (2) the first keyboard with a lap board for maximum comfort; (3) the first keyboard with mouse integrated 45 degree lift;
(4) wireless functionality from approximately 30 feet; (5) gaming and media optimized key layout; (6) customized gamer keys for the competitive edge, (7) extended spacebar and (8) intended to have maximum durability to keep up with significant game play.
The Phantom Lapboard's integrated mousepad provides a mousing surface anywhere the keyboard is used. This feature enhances the game experience by bringing the user's hands closer together. The Phantom Lapboard turntable feature enables the user to find their individual "comfort zone" and the turntable and key layout optimizes use by left-handed and right-handed users.
Plan of Operations
We have incurred recurring losses from operations since inception. Our loss from operations for the six months ended June 30, 2006 was $2,176,216. Our loss from operations for the year ended December 31, 2005 was $12,236,530. At June 30, 2006, we had a working capital deficit of $16,837,263 and accumulated deficit (losses from net income since inception) of $68,224,093. In their report on our audited financial statements for the year ended December 31, 2005, our independent auditors expressed substantial doubt about our ability to continue as a going concern.
Our activities to date have been funded by equity and debt investments. As of June 30, 2006, we had received approximately $9,591,099 in equity investments and $7,932,889 in debt and convertible debt financings.
PHANTOM ENTERTATNMENT INC. AND SUBSIDARY
(A DEVELOPMENT STAGE COMPANY)
Development costs for three months ended June 30, 2006, the three months ended June 30, 2005, the six months ended June 30, 2006, the six months ended June 30, 2005 and the period from December 9, 2002 (Inception) to June 30, 2006 were $47,735, $0, $130,682, $0 and $3,652,959, respectively:
At June 30, 2006, we were in default on payment of promissory notes with a principal amount of $2,737,852. Our outstanding debt for borrowed money has generally been provided on a short-term basis, bears interest at rates ranging from 8% to 17% and, in many cases, was accompanied by the grant of common stock or warrants to purchase common stock, which contributed to the costs of the financings.
As of June 30, 2006, the Company currently owes an aggregate of $845,000 to publishers pursuant to their agreements and, if we fail to pay these advances, these agreements may be terminated.
As of June 30, 2006, we have recorded an aggregate of $5,838,852 in debt discount, of which $5,782,271 was amortized as interest expense. In connection with financings aggregating $2.16 million in December 2004, we committed to pay penalties of 2% per month for each month after an agreed upon period (approximately three months) during which we fail to cause a resale registration statement covering the underlying shares to be declared effective by the Securities and Exchange Commission.
Liquidity and Capital Resources
We do not have sufficient cash to continue operations for the next 12 months and are in immediate need of additional capital to fund our plan of operation. Except as previously disclosed, we presently have no commitments for additional financing and may not be able to obtain such financing. To support our working capital needs pending receipt of sufficient financing, we are seeking to settle outstanding liabilities through issuance of equity, and anticipate continuing to grant common stock to fund payroll and certain other ongoing costs.
Unless and until we receive sufficient financing, we expect to continue to be forced to rely on issuances of common stock under similar arrangements in settlement of payroll and such other costs.
Issuances of equity will dilute existing stockholder's ownership and will have a depressive effect on our stock price, which will result in greater dilution for subsequent equity issuances and further downward pressure on our stock price.
If we are unable to obtain additional financing as and when needed, we will need to scale back and/or reprioritize our planned operations, our assets may be foreclosed upon by secured lenders and we may be forced to cease operations completely.
Our development activities have been and continue to be constrained by shortages in working capital. As a result, we have experienced delays in bringing our Phantom Game Service to market, which in turn has triggered the need for additional efforts to address changing design and engineering standards, as well as the need for renegotiation of arrangements with game content providers as existing arrangements lapse in advance of commercial launch. Due to the foregoing factors, in the fourth quarter of 2005, we restructured our business and our resources to focus predominantly on the Phantom Lapboard. Subject to obtaining sufficient financing, we anticipate focusing our efforts over the next 12 months on the following principal activities:
Completing Development of the Phantom Lapboard - The Phantom Lapboard was originally intended for retail launch in 2004 and its design was based upon that premise. Itron Technology, Inc. is presently providing services to build the Phantom Lapboard. We are currently in the prototype stage with a model that takes advantage of newer technology to ensure that the product is technically compelling and that we are able to have an adequate supply of components.
Completing Development of the Lapboard Distribution Network - Working with our partners, Integrated Network Cable of St. Louis, Missouri, to provide logistics, warehousing/distribution and fulfillment services to support the marketing of the Phantom Lapboard and ShowMeCables, the e-commerce marketing division of Integrated Network Cable, will provide its e-commerce shopping cart to support the marketing and sales of the Phantom Lapboard.
As a pre-cursor to the commercial launch of the Phantom Lapboard, we entered into a Product Development and Manufacturing Agreement with Itron Technology, Inc. In the event of the loss of Itron, it would require us to identify and contract with alternate sources of manufacturing, which we may be unable to do and which could prove time-consuming and expensive. The use of any third party manufacturer, entails investing in pre-manufacturing activities, including the purchase of tooling and components, as well as ancillary operations around the manufacturing and distribution of the Phantom Lapboard such as logistics, service and support.
PHANTOM ENTERTATNMENT INC. AND SUBSIDARY
(A DEVELOPMENT STAGE COMPANY)
The commercial launch of the Phantom Lapboard will require investment in marketing and sales activities. We expect to sell these units direct to consumer. We may also secure distribution agreements with retail partners as well as promoting consumer awareness of the Phantom Lapboard through typical marketing channels: advertising, public relations, and in-store promotions.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. The Company re-evaluates its estimates on an on-going basis. The Company's estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes the following are its critical accounting policies which affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Derivative Liabilities
Estimating gains and losses from derivatives. We believe our most critical accounting policies include the gain / loss recognition related to convertible debentures, which are convertible into the Company's stock at the option of the note holders. These derivatives require a periodic valuation of their fair value and a corresponding recognition of gain / loss and liabilities associated with such derivatives. The recognition of derivative liabilities related to the issuance of debt convertible into shares of common stock is applied first to the proceeds of such issuance, at the date of issuance, and the excess of derivative liabilities over the proceeds is recognized as a loss on derivatives in the accompanying consolidated financial statements. Any subsequent increase or decrease in the fair value of the derivative liabilities is recognized as a gain / loss on derivatives.
Accounting for these instruments requires a determination of all of the embedded derivatives. Certain instruments may become derivatives once a Company is unable to assert it has enough authorized shares to satisfy conversion of all outstanding debt, warrants, options and all other stock obligations. Once identified, an estimate is made for the number of shares each derivative would convert into as of the date of valuation. Theses shares are then valued using a Black-Scholes model based on the assumptions around volatility along with the current stock price, conversion price, interest rate, dividend rate, and term to maturity. Once valued the amount is compared to the prior period with "gains / losses on derivatives" and related liability recorded in the current period. While we believe that the systems and procedures used by the Company do provide a sound basis for our estimates, actual results will differ from management's estimates. The complexity of identifying and estimating derivative liabilities and corresponding gains / losses affects the amounts reported in our financial statements.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. In March 2005 the SEC issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods. On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS 123R. Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under SFAS 123. Effective January 1, 2006, the Company has fully adopted the provisions of SFAS No. 123R and related interpretations as provided by SAB 107. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. The Company applies this statement prospectively.
PHANTOM ENTERTATNMENT INC. AND SUBSIDARY
(A DEVELOPMENT STAGE COMPANY)
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. This Statement replaces APB Opinion No,. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 also requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. This Statement is effective in fiscal years beginning after December 15, 2005.
SFAS 155, "Accounting for Certain Hybrid Financial Instruments" and SFAS 156, "Accounting for Servicing of Financial Assets" were recently issued. SFAS 155 and 156 have no current applicability to the Company and have no effect on the financial statements.
