<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 0-28034
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CardioTech International, Inc.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3186647
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11 State Street, Woburn, Massachusetts 01801
- ----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 933-4772
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 outstanding of the registrant's class of Common Stock as of
August 12, 1998 was 4,272,916. No shares were held in treasury.
<PAGE>
CARDIOTECH INTERNATIONAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1998, unaudited, and March 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months ended
June 30, 1998, and 1997, unaudited 4
Condensed Consolidated Statements of Cash Flows
for the three months ended
June 30, 1998 and 1997, unaudited 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
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(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 2,048,009 $ 2,226,691
Accounts Receivables--Trade 46,434 58,707
Accounts Receivables--Other 367,896 328,318
Prepaid Expenses 11,902 26,502
-------------- --------------
Total Current Assets 2,474,241 2,640,218
Property and Equipment, net 194,971 187,654
Other non-current assets 241,569 211,766
-------------- --------------
Total Assets $ 2,910,781 $ 3,039,638
============== ==============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts Payables $ 186,904 $ 161,243
Accrued Expenses 327,360 435,296
-------------- --------------
Total Current Liabilities 514,264 596,539
Property and Equipment, net
Long Term Obligations
7% convertible senior notes due 2003 $ 1,660,000 1,660,000
10% convertible subordinated notes due 2000 421,831
Stockholders' Equity:
Preferred stock, $.01par value; 5,000,000 shares
authorized, none issued or outstanding
Common Stock, $.01 par value; 20,000,000
shares authorized, 4,272,916 issued and
outstanding at both June 30, 1998 and
March 31, 1998, respectively 42,729 42,729
Additional Paid in Capital 8,232,579 8,232,579
Accumulated Deficit (7,962,785) (7,495,630)
Cumulative Translation Adjustment 2,163 3,421
-------------- --------------
Total Stockholders' Equity 314,686 783,099
-------------- --------------
Total Liabilities and Stockholders' Equity $ 2,910,781 $ 3,039,638
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1997
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<S> <C> <C>
Research Revenue $ 278,343 $ 85,582
Operating Expenses
Research and Development 485,412 302,965
Selling, General and Administrative 244,175 252,369
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Total Operating Expenses 729,587 555,334
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Other Income and Expenses
Interest Expense (39,718) -
Interest Income 23,807 27,155
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(15,911) 27,155
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Net Loss $ (467,155) $ (442,597)
========== ==========
Net Loss Per Common Share Basic and Diluted $ (0.11) $ (0.10)
========== ==========
Basic and Diluted
Weighted Average Number of
Shares Outstanding 4,272,916 4,272,916
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
CARDIOTECH INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (467,155) $ (442,597)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Depreciation and Amortization 23,700 15,671
Changes in assets and liabilities
Accounts receivable (27,305) (22,810)
Prepaid expenses 14,600 44,227
Accounts payable 25,661 39,364
Accrued expenses (107,936) (51,388)
------------ -----------
Net cash flows from operating activities (538,435) (417,533)
============ ===========
Cash flows from investing activities:
Increase in non-current assets (39,597) -
Purchase of property, plant and equipment (19,284) (1,834)
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Net cash flows from Investing activities (58,881) (1,834)
============ ===========
Cash flows from financing activities:
Issuance of notes payable 421,831 -
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Net cash flows from financing activities 421,831 -
============ ===========
Effect of exchange rate changes on cash (3,197) (3,768)
============ ===========
Net increase in cash and cash equivalents (178,682) (423,135)
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Cash and cash equivalents at beginning of period 2,226,691 2,346,366
------------ -----------
Cash and cash equivalents at end of period $ 2,048,009 $ 1,923,231
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The unaudited consolidated financial statements included herein have been
prepared by CardioTech International, Inc. ("the Company" or "CardioTech"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and include, in the opinion of management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of interim period results. The preparation of 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 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. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. The
Company believes, however, that its disclosures are adequate to make the
information presented not misleading. The results for the interim periods
presented are not necessarily indicative of results to be expected for the full
fiscal year. It is suggested that these statements be read in conjunction with
the Company's Consolidated Financial Statements and its notes thereto, for the
year ended March 31, 1998, included in the Company's Annual Report to
shareholders.
2. Effective April 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130 porting Comprehensive Income." This Statement
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. This Statement requires the classification of
items of comprehensive income by their nature in a financial statement and the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. Financial statements for prior periods have been restated.
The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
For The Three Months Ended
June 30,
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1998 1997
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<S> <C> <C>
Net income (467,155) (442,597)
Other comprehensive expense, net of tax:
Currency translation adjustment (1,258) (4,439)
--------- ---------
Total other comprehensive expense (1,258) (4,439)
--------- ---------
Total comprehensive income (468,413) (447,036)
========= =========
</TABLE>
3. On April 1, 1998 the Company's wholly owned subsidiary CardioTech
International, Ltd., signed a collaborative research and development agreement
with the Royal Free Hospital School of Medicine. This research and development
is funded by a loan of GBP 252,942 from Freemedic PLC, a subsidiary of the Royal
Free Hospital, to CardioTech International, Ltd. The loan has a fixed rate of
interest of 10% and both principal and interest are payable in full before April
01, 2000.
The loan is convertible at Freemedic's option, into Common Stock of the
Company at $3.70 per share from April 1, 1998 until March 20, 2000. During this
period, the loan is also convertible at the Company's option into Common Stock
of the Company at $3.70 per share, provided that the market price for the
Company's Common Stock exceeds $3.70 from the day that the Company gives notice
of such conversion until seven business days thereafter. The loan is secured by
a pledge of all the assets of CardioTech International, Ltd. and is guaranteed
by the Company.
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<PAGE>
4. The Company computes basic and diluted earnings per share ("ESP") in
accordance with Statement of Financial Accountings Standards No. 128, "Earnings
Per Share", which the Company adopted on October 1, 1997. Basic earnings per
share is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share is based upon the weighted average
number of common shares outstanding during the period plus additional weighted
average common equivalent shares outstanding during the period. Common
equivalent shares have been excluded from the computation of diluted loss per
share for all periods presented, as their effect would have been anti-dilutive.
Common equivalent shares result from the assumed exercise of outstanding
stock options and warrants, the proceeds of which are then assumed to have been
used to repurchase outstanding common stock using the treasury stock method.
The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
For the quarters ended June 30,
1998 1997
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In thousands, except
for per share data
<S> <C> <C>
BASIC AND DILUTED EPS
Numerator:
Net income (loss).................. $ (467) $ (443)
Denominator:
Common shares outstanding.......... 4,273 4,273
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Basic and Diluted EPS............... $ (0.11) $ (0.10)
</TABLE>
Options to purchase 1,064,730 and 911,876 shares of common stock outstanding
during the periods ended June 30, 1998 and 1997, respectively, were excluded
from the calculation of diluted earnings per share because the effect of their
inclusion would have been anti-dilutive.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
CardioTech synthesizes, designs and manufactures medical-grade polymers,
particularly polyurethanes that it believes are useful in the development of
vascular graft technology and other implantable medical devices because they can
be synthesized to exhibit compatibility with human blood and tissue. CardioTech
is using proprietary manufacturing technology to develop and fabricate small
bore synthetic vascular grafts made of ChronoFlex(R), a family of polyurethanes
that has been demonstrated to be biodurable, blood and tissue compatible and
non-toxic.
In addition to the graft research and development program, CardioTech,
since 1990, has been engaged in various internal programs and joint venture
programs with corporate partners and internal programs for the development and
sale of ChronoFlex and other proprietary biomaterials for use in medical devices
manufactured by third parties. This activity has generated research revenues
for CardioTech.
As CardioTech is now focusing most of its research and development
resources on the vascular graft program, period to period comparisons of changes
in research revenues are not necessarily indicative of results to be expected
for any future period.
CardioTech is headquartered in Massachusetts and operates from
manufacturing and laboratory facilities located in Woburn, Massachusetts and
Tarvin, Cheshire, United Kingdom. CardioTech was spun off by PolyMedica
Industries, Inc. (PMI) in June, 1996.
-8-
<PAGE>
RESULTS OF OPERATIONS:
Comparison for the Three Months Ended June 30, 1998 and 1997.
Research revenues for the quarter ended June 30, 1998 were $278,343,
compared to $85,582 for the quarter ended June 30, 1997, an increase of
$192,761, or 225.2%. This increase was primarily generated by higher research
revenues ($107,031) earned under research grants from the National Institute of
Health ("NIH"), higher sales of medical grade polyurethanes ($50,229) and
increased earned royalty income ($37,501).
Research and development expenses for the quarter ended June 30, 1998 were
$485,412, compared to $302,965 for the quarter ended June 30, 1997, an increase
of $182,447, or 60.2%. This increase was principally due to increased cost of
European clinical trials ($113,200), increased production cost of medical grade
polyurethanes and clinical materials ($70,318) and increased travel expenses.
Selling, general and administrative expenses for the quarter ended June 30,
1998 were $244,175, compared to $252,369, for the quarter ended June 30, 1997, a
decrease of $8,194 or 3.3%. This decrease was primarily due to lower outside
consultant and service charges ($12,130) offset by higher salary costs ($4,446).
Other income and expenses for the quarter ended June 30, 1998 were expenses
of $15,911 compared to income of $27,155 for the quarter ended June 30, 1997.
The Company incurred $39,718 of interest expense on loans. Interest expense was
partially offset by interest income of $23,807. In the quarter ended June 30,
1997 the Company earned interest income of $27,155.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company used $538,435 to fund operations during the three months ended
June 30, 1998, compared to $417,533 for the three months ended June 30, 1997.
The principal use of funds for the three months ended June 30, 1998 was to fund
a net loss of $467,155, a pay down of current liabilities of $82,275, increases
in accounts receivable of $27,305, the purchase of machinery and equipment for
$19,284, and an increase in non current assets of $39,597. These uses were
partially offset by a decrease in prepaid expenses.
CardioTech's future growth will depend on its ability to raise capital to
support research and development activities and to commercialize its vascular
graft technology. To date, CardioTech has not generated revenues from the sale
of vascular grafts, although it has received a minor amount of research revenues
relating to its other biomaterial sales and from the NIH to support graft
research. Since inception, funding has come from PolyMedica Corporation, 7%
Senior convertible notes with a face value of $1,660,000 issued on March 31,
1998, and a 10% convertible loan from Freemedic in the amount of GBP 252,942,
approximately $420,000. CardioTech expects to continue to incur operating losses
unless and until product sales and/or royalty payments generate sufficient
revenue to fund its continuing operations.
CardioTech will require substantial funds for further research and
development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing
of its products. CardioTech's capital requirements depend on numerous factors,
including but not limited to, the progress of its research and development
programs, the progress of pre-clinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any intellectual property rights, competing
technological and market developments, changes in CardioTech's development of
commercialization activities and arrangements, and the purchase of additional
facilities and capital equipment.
CardioTech is currently conducting its operations with approximately
$2,048,000 in cash. CardioTech estimates such amount will be sufficient to fund
its working capital and research and development activities through June 1999.
However, CardioTech's spending level may increase depending on the Company's
ability to raise additional capital.
Past spending levels are not necessarily indicative of future spending
levels. From the inception of CardioTech's business through March 31, 1996,
PolyMedica Corporation has funded approximately $4.0 million in operating losses
to support CardioTech's research activities. Future expenditures for product
development, especially relating to outside testing and clinical trials, are
discretionary and, accordingly, can be adjusted based on availablity of cash.
CardioTech will seek to obtain additional funds through public or private
equity or debt financing, collaborative arrangements, or from other sources.
There can be no assurance that additional financing will be available at all or
on acceptable terms to permit successful commercialization of CardioTech's
technology and products. If adequate funds are not available, CardioTech may
be required to curtail significantly one or more of its research and development
programs, or obtain funds through arrangements with collaborative partners or
others that may require CardioTech to relinquish rights to certain of its
technologies, product candidates or products.
The Company's shares are currently listed and traded on the American Stock
Exchange ("AMEX"). To continue listing on the AMEX the Company must obtain
additional equity funds to satisfy normal minimum listing requirements. If these
funds are not obtained, there is no assurance that the Company will be able to
maintain it's listing on the AMEX.
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<PAGE>
FORWARD LOOKING STATEMENTS
The Company believes that this Form 10-Q contains forward-looking
statements that are subject to certain risks and uncertainties. These forward-
looking statements include statements regarding the sufficiency of the Company's
liquidity and capital. Such statements are based on management's current
expectations and are subject to a number of factors that could cause actual
results to differ materially from the forward-looking statements. The Company
cautions investors that there can be no assurance that actual results or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements, as a result of various factors including but
not limited to the following: the timely development of products by the
Company, the Company's ability to obtain financing to support its working
capital needs, intense competition related to the development of synthetic
grafts and difficulties inherent in developing synthetic grafts. As a result,
the Company's further development involves an high degree of risks. For further
information, refer to the more specific risks and uncertainties discussed
throughout this report.
ChronoFlex(R) is a registered trademark of PolyMedica Corporation that has
-------------
been licensed to CardioTech.
YEAR 2000 COMPLIANCE
The Year 2000 Issue refers to potential problems with computer systems or
any equipment with computer chips or software that use dates where the date has
been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating the date sensitive software
which uses only two digits to represent the year may recognize a date using 00
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar business activities.
The Company has conducted a review of its information systems to determine
the extent of any Year 2000 problem. Based on such review, the Company does not
currently believe that it has material exposure to the Year 2000 Issue with
respect to its own information systems, since its core existing business
information systems correctly define the year 2000.
The Company is in the process of contacting its major customers in an
effort to determine the extent to which the Company may be vulnerable to those
parties' failure to timely correct their own Year 2000 problems. To date, the
Company is unaware of any situations of noncompliance that would materially
adversely affect its operations or financial condition. There can be no
assurance, however, that instances of noncompliance which could have a material
adverse effect on the Company's operations or financial condition will not be
identified; that the systems of other companies with which the Company transacts
business will be corrected on a timely basis; or that a failure by such entities
to correct a Year 2000 problem or a correction which is incompatible with the
Company's information systems would not have a material adverse effect on the
Company's operations or financial condition.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
To be considered for inclusion in the proxy statement relating to the
Annual Meeting of stockholders to be held in 1999, stockholder proposals must be
received on or before April 1, 1999. To be considered for presentation at the
Annual Meeting, although not included in the proxy statement, proposals must be
received no later than July 5, 1999 and no earlier than June 7, 1999. All
stockholder proposals should be marked for the attention of: Clerk, CardioTech
International, Inc., 11 State Street, Woburn, Massachusetts 01801.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On April 15, 1998 the Company filed a report on Form 8-K with the
Securities and Exchange Commission announcing that (i) on March 31, 1998 the
Company issued and sold to Dresdner Kleinwort Benson Private Equity Partners LP
$1,660,000 principal amount of 7% Convertible Senior Notes due 2003 and (ii) on
April 1, 1998, pursuant to a Loan and Option Agreement dated April 1, 1998 by
and among the Company, CardioTech International Ltd. ("CTI Ltd.") and the Royal
Free Hospital School of Medicine and Freemedic PLC (together with its
affiliates, "Freemedic") Freemedic, CTI Ltd. borrowed (pound sterling) 252,942
from Freemedic.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CardioTech International, Inc.
/s/ Michael Szycher
----------------------------------------
Michael Szycher, Ph.D.
Chairman and Chief Executive Officer
/s/ John Mattern
----------------------------------------
John E. Mattern
Chief Financial Officer and Chief Operating Officer
(Principal Financial and Accounting Officer)
Dated: August 13, 1998
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,048,009
<SECURITIES> 0
<RECEIVABLES> 414,330
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,474,241
<PP&E> 194,971
<DEPRECIATION> 13,906
<TOTAL-ASSETS> 2,910,781
<CURRENT-LIABILITIES> 514,264
<BONDS> 0
0
0
<COMMON> 42,729
<OTHER-SE> 271,957
<TOTAL-LIABILITY-AND-EQUITY> 2,910,781
<SALES> 0
<TOTAL-REVENUES> 278,343
<CGS> 0
<TOTAL-COSTS> 729,587
<OTHER-EXPENSES> (23,807)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,718
<INCOME-PRETAX> (467,155)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (467,155)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
