November 14, 2005
VIA EDGAR AND FEDERAL EXPRESS
Mail Stop 6010
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Attn: Mr. Kevin L. Vaughn, Reviewing Accountant
Mr. David Burton, Staff Accountant
Re: Phantom Fiber Corporation
Form 10-KSB for the year ended December 31, 2004
Filed April 15, 2005
File No. 1-15627
Form 10-QSB for the quarter ended June 30, 2005
Filed August 15, 2005
File No. 1-15627
Gentlemen:
The following responses address the comments of the reviewing Staff of
the Commission as set forth in a comment letter dated October 28, 2005 (the
"Comment Letter") relating to the above reference filings of Phantom Fiber
Corporation (the "Company"). On behalf of the Company, we respond as follows.
Form 10-KSB for the year ended December 31, 2004
Item 8A. Controls and Procedures, page 12
1. You state that your "system of disclosure controls and procedures is
designed to provide reasonable assurance that information, which is
required to be disclosed, is accumulated and communicated to management
in a timely manner." Please revise to state clearly, if true, that your
principal executive officer and principal financial officer concluded
that your disclosure controls and procedures are effective at that
reasonable assurance level. Please note this comment also applies to
your Form 10-QSB as of June 30, 2005.
Response
The Company has revised the disclosure under Item 8A of its Form
10-KSB for the year
Securities and Exchange Commission
November 14, 2005
Page 2 of 5
ended December 31, 2004 and under Item 3 of its Form 10-QSB for the
quarter ended June 30, 2005 to state clearly that as of the end of the
period covered by each respective report, the Company's chief executive
officer and chief financial officer concluded that the Company's
disclosure controls and procedures are effective.
2. We note that management has reviewed the system of disclosure controls
and procedures and has concluded that they are "operating in an
effective way to ensure appropriate and timely disclosure." It does not
appear that your certifying officers have reached a conclusion that
your disclosure controls and procedures are effective. Please revise to
address your officers' conclusions regarding the effectiveness of your
disclosure controls and procedures. Please note this comment also
applies to your Form 10-QSB as of June 30, 2005.
Response
Please see the Company's response to comment 1 above.
Consolidated Statement of Operations, page F-3
3. If you elect to continue to include language after your conclusion
regarding your disclosure controls and procedures, please revise to
ensure that the language is consistent with the full definition of
disclosure controls and procedures as set forth in Rule 13a-15(e) of
the Exchange Act. Please note this comment also applies to your Form
10-QSB as of June 30, 2005.
Response
The revised disclosure under Item 8A of the Company's Form 10-KSB for
the year ended December 31, 2004 and under Item 3 of the Company's Form
10-QSB for the quarter ended June 30, 2005 is consistent with the full
definition of disclosure controls and procedures as set forth in Rule
13a-15(e).
Note 2. Summary of Significant Accounting Policies, page F-7
(d) Revenue Recognition, page F-8
4. Please tell us why you believe your classification of interest income
as revenues and interest expense as operating expenses is appropriate.
As appropriate, please revise the filing to present interest income and
interest expense as separate components of other income (expense).
Response
The revised disclosure of the Company's Form 10-KSB for the year ended
December 31,
Securities and Exchange Commission
November 14, 2005
Page 3 of 5
2004 reclassifies interest income of $6,906 (December 31, 2003:
$4,955) and aggregate interest expenses on borrowings, capital
leases and long-term debt of $111,495 (December 31, 2003: $6,182) as
separate components of other income (expense) in the Company's
consolidated Statements of Operations.
The revised disclosure of the Company's Form 10-QSB for the three
months ended June 30, 2005 reclassifies interest and other income of
$295 (June 30, 2004: $nil) and aggregate interest expenses on
borrowings, capital leases and long-term debt of $37,689 (June 30,
2004: $23,857) as separate components of other income (expense) in the
Company's consolidated Statements of Operations.
The revised disclosure of the Company's Form 10-QSB for the six months
ended June 30, 2005 reclassifies interest and other income of $6,024
(June 30, 2004: $3) and aggregate interest expenses on borrowings,
capital leases and long-term debt of $59,560 (June 30, 2004: $27,162)
as separate components of other income (expense) in the Company's
consolidated Statements of Operations
5. We note that you generate revenue from software licensing fees and
related service revenues. Please tell us and revise this note to
disclose how you meet each of the criteria for revenue recognition
outlined in SOP 97-2. Discuss how you allocate revenue amounts between
the elements of your software arrangements. Demonstrate to us that you
have vendor specific objective evidence of the fair value of the
undelivered elements in your software arrangements.
Response
The revised disclosure of the Company's Form 10-KSB for the year ended
December 31, 2004 and Form 10-QSB for the six months ended June 30,
2005 contains expanded disclosure in the "Revenue Recognition" note and
addresses the Company's compliance with criteria for revenue
recognition as outlined in SOP 97-2.
The Company derives revenue from three sources: (i) product revenue,
which includes software licensing and revenue sharing agreements, (ii)
maintenance revenue from software and (iii) services revenue. As
described below, significant management judgments and estimates are
made and used to determine the revenue recognized in any accounting
period.
The Company applies the provisions of Statement of Position 97-2,
"Software Revenue Recognition," as amended by Statement of Position
98-9, to all transactions involving the sale of software products and,
services where the software is not incidental.
The Company recognizes product revenue when persuasive evidence of an
arrangement exists, the product has been delivered, the fee is fixed
and determinable, collection of the resulting receivable is probable
and vendor specific objective evidence exists to allocate
Securities and Exchange Commission
November 14, 2005
Page 4 of 5
the total fee among all delivered and undelivered elements in the
arrangement. Vendor specific objective evidence of fair value is
defined as the value of each element of an arrangement if sold
separately and is established when a software vendor demonstrates a
history of having sold the element separately and of collecting on
that element from a representative sample of arrangements on a
consistent basis. If vendor-specific objective evidence of fair
value does not exist for all elements to support the allocation of
the total fee among all delivered and undelivered elements of the
arrangement, revenue is deferred until such evidence does exist for
the undelivered elements, or until all elements are delivered,
whichever is earlier.
The Company sells its software using term license under which its
software is licensed for a specific time period, generally one to five
years, with no rights to return or exchange the licensed software. The
Company uses a signed contract as evidence of an arrangement. For
revenue sharing arrangements, the Company uses monitoring software that
reports end-user activity on a transaction-by-transaction basis. For
services, the Company uses a signed statement of work to evidence an
arrangement.
The Company assesses whether the fee is fixed and determinable based on
the payment terms associated with the transaction. The Company assesses
collectibility based on a number of factors, including the customer's
past payment history and its current credit-worthiness. If the Company
determines that collection of a fee is not reasonably assured, the
revenue is deferred and recognized at the time collection becomes
reasonably assured, which is generally upon receipt of cash payment.
Provided all the related conditions discussed above are met, the
Company recognizes revenue for term licenses upon the effective date of
the license and recognizes maintenance revenue ratably over the
contract term regardless of the software license agreement type.
Services revenue consists primarily of revenue received for performing
methodology and system integration services. Fixed-price methodology
and design service contracts are accounted for using contract
accounting, which is generally the percentage-of-completion method
rather than the completed-contract method, and time and materials
contracts are accounted for on a monthly basis as work is performed.
Exhibit 31.1 and 31.2
6. We note that the certifications filed as Exhibits 31.1 and 31.2 were
not in the proper form. The required certifications must be in the
exact form prescribed. The wording of the required certifications may
not be changed in any respect except for the modification temporarily
permitted to be made to the fourth paragraph of the certification
required to be filed as Exhibit 31.1 pursuant to Part III.E of Release
No. 8238. Accordingly, please file amendments to your Forms 10-KSB as
of December 31, 2004 and 10-QSB as of June 30, 2005 that includes the
entire filings together with the certifications of each of your current
CEO and CFO in the form currently set forth in Item 601(b)(31) of
Regulation S-B.
Securities and Exchange Commission
November 14, 2005
Page 5 of 5
Response
On November 7, 2005, the Company filed amendments to its Form 10-KSB
for the year ended December 31, 2004 and to its Form 10-QSB for the
quarter ended June 30, 2005, as appropriate, in response to all
comments set forth above.
We trust that the foregoing appropriately addresses the issues raised
by the Staff's recent comment letter. Thank you in advance for your prompt
review and assistance.
Very truly yours,
/s/ David Schubauer
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David Schubauer
enclosures