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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
/ / Transition report pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from __________________ to __________________
Commission file number 000-24119
THE PATHWAYS GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1617556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14201 N.E. 200TH STREET, WOODINVILLE, WA 98072
(Address of principal executive offices)
(425) 483-3411
(Issuer's telephone number, including area code)
(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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court.
Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: AS OF NOVEMBER 11,1999:
13,565,662 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE.
Transitional Small Business Disclosure Format (check one):
Yes No X
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The financial statements for the Company's fiscal quarter
ended September 30, 1999 are attached to this Report, commencing at page F-1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Except for historical information, the material contained in
this Management's Discussion and Analysis or Plan of Operation is
forward-looking. This discussion includes, in addition to historical
information, forward looking statements which involve risks and uncertainties.
The Company's actual results could differ materially from the results discussed
in the forward looking statements. Factors that could cause or contribute to
such differences are discussed below and in the Company's Annual Report on Form
10-K for the year ended December 31, 1998, as filed with the Securities and
Exchange Commission. These risks and uncertainties include the rate of market
development and acceptance of smart card technology, the unpredictability of the
Company's sales cycle, the limited revenues and significant operating losses
generated to date, the ability of the Company to achieve adequate levels of
revenue to recover its investment in capitalized software development costs and
software licenses, the possibility of significant ongoing capital requirements,
and the ability of the Company to secure additional financing as and when
necessary. For the purposes of the safe harbor protection for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995,
readers are urged to review the list of certain important factors set forth in
"Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995."
GENERAL
The Pathways Group, Inc. and its subsidiaries collectively
("Pathways" or the "Company") designs, markets and services custom smart card
applications. The Company develops unique solutions for creating and processing
data and ensuring secure electronic transactions by utilizing proprietary
hardware and application software systems. Pathways' technology establishes
electronic commerce in closed system environments. A key element of the
Company's business plan is the processing of transactions associated with its
current and prospective smart card installations. The Company also manufactures
and markets automated ticketing kiosks that the Company anticipates will be
integrated with its smart card applications.
The Company was organized in 1993 as a Washington corporation
whose operations are the successor to Pathways International, Ltd., which was
incorporated in Washington in June 1988. In May 1997 the Company reincorporated
in Delaware. The Company's executive offices are located at 14201 NE 200th
Street, Woodinville, Washington 98072 and its telephone number is (425)
483-3411. A primary processing center is located at 1221 North Dutton Avenue,
Santa Rosa, California 95404, and its telephone number is (707) 546-3010. A
sales and marketing office is located at Grosvenor Center, 2500 Makai Tower, 733
Bishop Street, Honolulu, Hawaii 96813.
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RESULTS OF OPERATIONS
REVENUES. The Company has generated limited revenues from
operations to date as it has continued to develop and market its smart card
systems. The Company believes it will continue to report minimal revenues until
additional significant contracts are signed or until the existing contracts,
discussed below, proceed through the pilot stage to a full rollout. Revenues
generated in the three month and nine month periods ended September 30, 1999 and
1998, primarily relate to credit card processing fees from its unattended
ticketing kiosks installed in several ski area and amusement park venues.
Revenues increased $46,453 or 534% for the three months ending September 30,
1999, compared to the corresponding period in 1998, due to an increase in the
number of kiosks installed and operating, which resulted in higher volumes of
transactions being processed. Revenues increased $90,223, or 400%, for the nine
months ended September 30, 1999, compared to the same period in 1998, due to the
increased transaction volumes being realized, and the consummated sales of
unattended kiosks to Deer Valley Ski Area in Utah ($17,990), and to Blue & Gold
Fleet in San Francisco ($30,885). In addition, the spring and summer season and
extended hours at amusement parks at which the Company's kiosks are installed
resulted in a higher volume of transactions, and higher processing fees for the
Company. In the first nine months of 1999, the Company processed a total of
$1,983,139 (22,246 transactions or fees realized of $60,757) through the
installed base of kiosks, compared to $654,534 (8,455 transactions or fees
realized of $21,282) for the same period in 1998.
In late 1997 and during 1998, the Company developed an
upgraded version of its unattended kiosk to, among other things, accommodate
acceptance and vending of smart cards and also engineered and developed an
indoor kiosk to be utilized as a smart card recharge device. The Company began
marketing efforts of its new indoor and outdoor kiosk products in the first
quarter of 1999. The Company has also changed its marketing strategy for its
unattended kiosks. Previously, the Company leased the kiosks to a customer and
collected gross transaction charges of approximately 5% throughout the lease
term. The Company's current marketing strategy is to sell the kiosk to a
customer for cash and collect ongoing gross transaction fees of approximately
1.75% to 2%. The Company believes this model is more profitable and eliminates
negative cash flow required to install and sell the kiosk products.
The Company has installed its Tikitbox II unattended ticketing
system at the following locations:
Winter Park Ski Resort in Colorado
Six Flags Great Adventure in New Jersey
Six Flags Magic Mountain Amusement Parks in California.
Blue & Gold Fleet in San Francisco
Deer Valley Ski Area in Utah
These contracts are accompanied by transaction processing arrangements at fees
generally ranging from 2% to 5%. In addition, the Company has a number of units
installed on a pilot basis, and is involved in negotiations with those customers
for the purchase of multiple units. These pilot agreements provide for the
Company to charge transaction fees of generally 5% during the pilot period.
Although there can be no assurance of the successful outcome of the pilot
programs or negotiations, the Company expects to increase its kiosk sales in
1999 compared to previous years. The Company has signed contracts for sale of
one additional kiosk in Deer Valley ($12,995), and one kiosk at Big Mountain Ski
& Summer Resort in Montana ($17,566), both of which are scheduled for
installation in November 1999.
In July 1999, the Company signed agreements with the State of
Hawaii Millennium Commission to design, develop and maintain the official WEB
site for its Hawaii millennium celebration, and to be the official transaction
processor for the transactions over the WEB site. In addition, the Company will
issue commemorative smart cards to be used for discounts, promotions and
ticketing to special events.
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In October 1999, the Company announced that it has signed
agreements to provide smart card transaction processing as well as Software and
Hardware maintenance and support services to MyChoice Health Services, Inc.
MyChoice is a Portland, Oregon-based company offering technological strategies
for the access of alternative medicine network services in Oregon. The
agreements provide for Pathways to provide smart card transaction processing and
reporting in addition to software and hardware maintenance services, including
help desk and technical phone support for MyChoice and its membership and
provider network. The agreements are for three years.
In August 1999 the Company signed an agreement with Funtastic
Travelling Shows, one of the largest carnival operators in the United States, to
implement a smart card system that removes all cash from the midway. In October
1999, the Company sold 5,000 smart cards ($20,000) to Funtastic and successfully
installed and operated the system at a carnival in San Bruno, California. Based
upon the success of this pilot, the Companies have agreed to a limited rollout
to three additional venues in November 1999. At the conclusion of these carnival
shows, the Company expects to negotiate a comprehensive business agreement with
Funtastic providing for the sale of cards and terminals for calendar year 2000.
With the exception of the installation of its initial smart
card system and resulting sales cards and terminals in 1996, the Company has not
realized meaningful revenues from its smart card system products. The Company's
marketing efforts have resulted in a number of letters of intent and pilot
agreements. Although these efforts have not resulted in significant revenues to
date, the Company believes that its agreements and activities demonstrate the
substantial market for smart card systems in the United States.
The Company's business model is based upon the Company's
contracting with large membership based businesses to be a turnkey provider of
smart card based systems. The Company anticipates licensing its software for use
by its clients and entering into agreements whereby the Company will perform all
backroom processing of the transactions that occur over the system in addition
to selling smart cards and smart card readers programmed by the Company. The
Company expects to receive transaction-processing fees for its backroom
processing services. The Company anticipates that revenue generated from
contracts will be dominated initially by the sales of smart card terminals,
readers and smart cards in order to develop an appropriate concentration of
merchants and smart card users in a market area. After this initial phase, the
sales mix for a contract is expected to consist of a relatively high
concentration of transaction processing fees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses decreased $8,442 or 0.6% during the three months
ended September 30, 1999, and increased $689,466 or 18.3% during the nine months
ended September 30, 1999, as compared to the corresponding periods in 1998. The
increase experienced in the first nine months is primarily the result of
expanded payroll and employee support costs associated with an increased number
of full-time employees. The decrease in the three months ended September 30,
1999 compared to 1998 results primarily from the inclusion in the 1998 expenses
of $215,443 of Company bonuses and retroactive pay increases recorded during
that time. Excluding these 1998 bonuses and retroactive pay increases, the SG&A
costs would show an increase from 1998 to 1999 of $207,001 or 16.2%, again
reflecting the ongoing expansion of payroll and employee support costs. The
Company had fifty-five full-time employees at September 30, 1999, as compared to
fifty on September 30, 1998. In addition, the Company has incurred increases in
sales and marketing related expenditures commensurate with the increase in
marketing personnel. The level of selling, general and administrative costs is
expected to continue to increase, although at a reduced rate, as a result of
ongoing marketing and customer support activities, and an increase in the number
of operating and technical personnel necessary to support the Company's expected
sales, product development, and customer support activities.
The Company has leased an 8,700 square foot facility in Santa
Rosa, California, which has been refurbished into a new state-of-the-art
transaction-processing center. The Company, through its wholly owned subsidiary,
opened a sales and marketing office in Honolulu, Hawaii, during the third
quarter of 1997 and expanded the office in September 1998. In October 1998, the
Company also leased and
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occupied a 6,390 square foot research and development facility. This space is
also utilized in the assembly and testing of Tikitbox II unattended ticketing
and smart card systems. Consequently the selling, general, and administrative
expenses for the three months and the nine months ended September 30, 1999
reflect the costs of operating the Company's expanded Hawaii office and new
research and development facility whereas the corresponding periods in 1998 do
not reflect these operating expenses. The Company anticipates substantial
investments in its sales, marketing and product development activities in the
foreseeable future as it seeks to expand sales of its smart card systems. Below
is a detail of the changes in selling, general, and administrative expenses in
major categories for the three month and nine month periods ended September 30,
1999 and 1998.
<TABLE>
<CAPTION>
Increase (decrease) for the three Increase (decrease) for the nine
months ended September 30, 1999 vs. months ended September 30, 1999
the three months ended September 30, vs. the nine months ended
SG&A change attributable to: 1998 September 30, 1998
------------------------------- --------------------------------------- ------------------------------------
<S> <C> <C>
Payroll and payroll related
expenses (71,958) 251,839
Rent, office, and facility
(including equipment) expenses 30,094 158,829
Marketing, selling, and
travel related expenses (21,117) 167,260
Other SG&A related expenses 54,539 111,538
Total (decrease) increase in
SG&A
</TABLE>
RESEARCH AND DEVELOPMENT. Research and development increased
$38,840 in the three months ended September 30, 1999 and increased $219,771 in
the nine months ended September 30, 1999, as compared to the same periods in
1998. The increase in 1999 over 1998 reflects the increase in programming staff
and their related research and development efforts, and expenditures on
equipment and software used for testing new product technologies and offerings.
AMORTIZATION OF SOFTWARE COSTS. Amortization of software costs
increased $26,444 for the three months ended September 30, 1999, and increased
$76,793 for the nine months ended September 30, 1999, compared to the
corresponding periods in 1998. This increase results from a reevaluation of the
amortization schedules being used for various projects, and the shortening of
the amortization period for some projects, as discussed in the notes to the
financial statements. This results in a higher amortization amount for 1999
compared to 1998.
DEPRECIATION. Depreciation increased $7,900 for the three
months ended September 30, 1999, and increased $64,034 for the nine months ended
September 30, 1999, as compared to the corresponding periods in 1998 primarily
due to continued increases in capital expenditures. Capital expenditures in 1999
and 1998 relate to the addition of computer equipment to support an increase in
marketing and technical activities and personnel, the leasehold improvements at
the Company's Santa Rosa, California transaction processing center and research
and development facility, and the opening and expansion of its Hawaii office.
INTEREST INCOME / EXPENSE (NET). The Company had an increase
of $32,653 in net interest expense for the three months ended September 30,
1999, and an increase of $1,672 in net interest income for the nine months ended
September 30, 1999, as compared to the same periods in 1998. The increase in net
interest expense in the quarter ended September 30, 1999 is due to the reduction
in funds invested during that period. Similarly, the net increase realized in
the nine months of 1999 results from reductions in the total debt outstanding
and increased interest income from the investment in the first part of the year
of available funds from common stock sales.
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PROTON WORLD LICENSING AGREEMENT. In May 1999, The Company
entered into a License Agreement with Proton World International S.A. Under the
terms of the Agreement, the Company, acquired a non-exclusive, non-transferable
license to use the Proton technology in the United States including its
territories. In exchange for its licensing rights under the Agreement and for
the issuance of up to 2,500,000 smart cards, the Company has agreed to pay
licensing fees. The Agreement provides for additional license fees to be paid
for additional card issuance levels over 2,500,000 cards. In addition, a royalty
fee will be paid on each smart card and smart card capable reader or terminal
sold or issued. Through September 30, 1999, the Company has incurred a licensing
fee of $1,000,000, which has been recorded as Software Licenses in the
consolidated balance sheet. Of this $1,000,000, $300,000 was due and payable at
the time of the signing of the license agreement. The remaining balance of the
license fees are payable upon the initiation of a pilot project and upon the
rollout of the project as defined in the Agreement. The Agreement also requires
the Company to pay ongoing certification, maintenance and support service fees
and expenses as those services are provided by Proton World. The license
agreement has a term of ten years and is automatically renewable for successive
five year periods subject to the achievement by the Company of certain
performance goals.
Proton World is the world's largest electronic purse platform
with over thirty million cards issued in 15 countries. The licensed technology
from Proton World smart card provides a secure open-platform system which
enables issuers and sponsors of smart card programs to have their cards be
accepted at other issuers/sponsors terminals and readers as long as they are
issued under Proton technology. The system also encompasses back room
transaction processing and clearing functions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $311,197 at September 30,
1999 and $3,819,466 at December 31, 1998. The decrease in working capital at
September 30, 1999 compared to December 31, 1998 is primarily due to the
Company's net loss in the first nine months of the year, and the resulting use
of cash for operating expenses and the payment of accrued expenses. In addition,
the current liabilities at September 30, 1999 reflect an accrued license fee of
$700,000 due to Proton World.
In March 1999, the Company received a firm commitment for
additional funding of $3,000,000 through the sale of common stock. Due to a
significant decline in the price of the Company's common stock, the Company
subsequently determined that closing this transaction was not its most
advantageous financing alternative. Consequently, in August 1999, the Company
entered into an agreement with Mitchum Jones and Templeton, an investment bank
in San Francisco, CA, whose chief executive officer is a director of the
Company, for a firm commitment financing for $3,000,000 of units, with each unit
comprised of one share of redeemable preferred stock financing and four common
stock purchase warrants. Each unit has a subscription price of $10.00, and each
warrant has an exercise price of $2.50 per share and a term of three years. In
the aggregate, the firm commitment offering will require the Company to issue
300,000 shares of preferred stock and warrants to purchase 1,200,000 shares. In
addition, Mitchum Jones and Templeton has agreed to a best efforts offering of
units for an additional $3,000,000 on the same terms and conditions as the
committed financing. The preferred stock is redeemable at any time, but no later
than December 31, 2001; requires quarterly dividends payable at six percent per
annum or an in kind dividend at a rate of ten percent per annum; contains
provisions relating to preferential liquidation rights, voting rights for the
warrants issuable under the preferred stock and registration provisions. In
addition, in the event the Company does not redeem the preferred shares before
December 31, 1999, the Company will be required to issue during each quarter the
shares remain unredeemed an additional warrant for each six shares of preferred
stock held (or a total of 50,000 warrants for each 300,000 shares of preferred
stock outstanding). The terms of the preferred stock also prohibit the Company
from issuing further debt, or increasing its bank obligations without approval
of preferred stockholders. In connection with the sale of the units, the Company
paid a placement fee to Mitchum Jones and Templeton of warrants to purchase
150,000 shares of common stock at $2.50 per share. If the best efforts offering
is concluded, Mitchum Jones and Templeton will receive an additional placement
fee on the same terms. On August 13, 1999, the Company closed the sale of
$1,000,000 of units (100,000 shares of preferred stock and 400,000 warrants) and
closed the additional $2,000,000
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(200,000 shares of preferred stock and 800,000 warrants) on September 3, 1999.
The Company has agreed to register the shares of Common Stock underlying the
warrants.
The Company has also entered into a letter of intent with
Advice! Investment Services GmbH of Vienna, Austria with respect to an offering
of shares of the Company's Common Stock pursuant to Regulation S under the
Securities Act of 1933. Pursuant to the Regulation S offering, the Company
intends to offer and sell up to a maximum of 4,000,000 shares at prices based on
the market price of the Common Stock prior to closing. As of the date of this
Report, the Company has not consummated the sale of any shares pursuant to the
Regulation S offering, although subscriptions have been deposited in escrow
pending receipt of subscriptions for 1,200,000 shares, which is the minimum
number of shares to be sold in the offering.
The Company believes that its existing cash reserves, revenues
and proceeds from the firm and the best efforts financings described above will
be adequate to fund the Company's operations through 1999. The Company considers
the proceeds from the sale of the units of preferred stock and warrants to be
bridge financing and intends to pursue aggressively further equity financing to
continue to expand its sales and marketing efforts and operations.
On July 23, 1998, the Company commenced a private offering of
its Common Stock and completed the offering on August 21, 1998. The offering was
conducted pursuant to Rule 506 of Regulation D under the Securities Act. The
Company sold 654,508 shares at $13.75 per share to accredited investors
including GE Capital, a wholly owned investment management subsidiary of General
Electric Company, and Whittier Trust. The Company engaged Allen & Company
Incorporated and Mitchum Jones & Templeton to act as placement agents for the
offering, each of which received a placement fee of 5% of the purchase price per
share for shares placed by them. These shares were subsequently registered for
resale via the Company's Form SB-2 filed with the Securities and Exchange
Commission on September 24, 1998. The registration statement became effective on
October 9, 1998.
In May 1999, the Company entered into a License Agreement with
the Proton World International, S.A. of Brussels, Belgium. The Company intends
to incorporate this technology into its core product offerings which will
require substantial investments in the following: up front licensing fees;
substantial ongoing royalty fees; expenditures on training, certification,
maintenance and support services; expansion of computer hardware at its
transaction processing centers; and additional technical and marketing staff to
capitalize on the market opportunity the Company believes has been created as a
result of the Agreement.
The Company's capital expenditures for the three months ended
September 30, 1999 increased $27,141 compared to the same period in 1998. The
capital expenditures for the nine months ended September 30, 1999 decreased by
$235,438 as compared to the same period in 1998. The increase in the quarter
ended September 30, 1999 results from increasing investment in equipment to
support increased sales and marketing staff and additional software engineering
personnel. The decrease for the nine months ended September 30, 1999 is
primarily due to significant costs incurred in the first half of 1998 for
computer equipment and leasehold improvements for its transaction processing
center in Santa Rosa, California. The Company expects continued investments in
capital expenditures for increased personnel, and transaction processing
infrastructure to support more complex operations and high volumes.
The Company has historically relied upon proceeds from the
sale or issuance of its common shares and from the issuance of notes payable and
lease financing to satisfy its working capital requirements. The Company expects
to continue to depend upon equity financing to fund operations and satisfy its
working capital
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needs until it is able to generate significant sales or achieve profitability.
There can be no assurance that the Company will achieve sales of the magnitude
to generate sufficient cash flow from operations to continue to execute its
business plans. However, the Company believes that the potential revenue to be
realized from the rollout of its current contracts, its current cash resources,
including proceeds from the pending private placement, reduction in expenditures
(if necessary) and available trade and other credit facilities are sufficient to
meet its present anticipated working capital needs for the next twelve months.
In the event the Company is unable to generate significant revenues from the
rollout of its current contracts or additional contracts the Company may
negotiate, the Company will be required to seek alternative sources of financing
to fund its operations. The Company's estimate of its cash requirements and its
ability to meet them are forward-looking statements, and there can be no
assurance that the Company's cash requirements will be met without additional
debt or equity financing. There can be no assurance that, if needed, additional
financing will be available on acceptable terms to the Company, if at all.
YEAR 2000
During recent years, there has been significant global
awareness raised regarding the potential disruption to business operations
worldwide resulting from the inability of current technology to process properly
the change from the year 1999 to 2000. The Company is aware of the potential
year 2000 problem, and has undertaken a Year 2000 project to address the
Company's readiness and exposure to Year 2000 issues. The Year 2000 project
addresses the Company's products; internally used operating systems, software,
and other technology; and third party vendors and suppliers. Each of these areas
is discussed below.
The Company believes that it has substantially identified and
resolved all potential Year 2000 problems with any of the products that it
develops and markets. In order to confirm its belief, the Company has
implemented an ongoing program to test its products for Year 2000 issues. The
Company believes that if any Year 2000 issues are identified, the Company will
be able to correct the problem with a minimal cost or time investment. However,
management also believes that it is not possible to determine with complete
certainty that all Year 2000 problems affecting the Company's products have been
identified or corrected due to the fact that these products interact with other
third party vendor systems not under the Company's control (see below). In
addition, the Company's evaluation is based on a limited number of actual
customer installations.
The Company has conducted a process to identify all internally
used operating systems, software, and other technology that may be impacted by
the Year 2000 problem. This process is now substantially complete. For the
internally used operating systems, software, and technology the Company has
identified as material, the Company is assessing the Year 2000 exposure through
testing and vendor inquiry. Material operating systems, software, and other
technology deemed to be adversely affected by the Year 2000 problem has been
upgraded or replaced. The Company currently estimates the range of costs to
upgrade or replace systems it believes may be impacted by the Year 2000 issues
to be from $50,000 to $150,000. In addition to operating systems, software, and
other technology, the operation of office and facilities equipment, such as fax
machines, photocopiers, telephone systems, security systems, elevators, and
other common devices may be affected by the Year 2000 problem.
The Company has identified major suppliers and other third
party vendors integral to the operations of the Company's business. The Company
has initiated communications with those suppliers and third party vendors to
assess their readiness to deal with Year 2000 problems. As part of the Year 2000
project, the Company will identify alternative providers of products and
services deemed material to the Company's operations. However, the Company has
no control over and cannot predict the corrective actions of these third party
vendors and suppliers. The Company intends to arrange, to the extent available,
alternate supplier arrangements in the event a third party vender is materially
impacted by Year 2000 issues. While the Company expects that it will be able to
resolve any significant Year 2000 problems related to third party products and
services, there can be no assurance that it will be successful in resolving any
such problems. Any failure of these third party vendors and suppliers to resolve
Year 2000 problems with their systems in a timely manner could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
The discussions of the Company's efforts relating to Year 2000
compliance are forward-looking statements. The Company's ability to achieve Year
2000 compliance and the associated level of incremental costs could be adversely
impacted by, among other things, the availability and cost of
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programming and testing resources, vendors' ability to modify proprietary
software, and other unanticipated problems. The failure to correct a material
Year 2000 problem could result in an interruption of certain normal business
activities or operations. Such failures could materially affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, the Company is unable at this
time to determine those consequences. The Company believes that, with the
completion of the Year 2000 project as scheduled, the possibility of significant
interruptions of normal operations should be reduced or eliminated.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this quarterly report contain
"forward-looking statements" within the meaning of the private Securities
Litigation Reform Act of 1995. These are statements that do not relate strictly
to historical or current facts. Such forward-looking statements involve known
and unknown risks and uncertainties. The Company's actual results could differ
materially from the results discussed in the forward looking statements. Factors
that could cause or contribute to such differences are discussed below and in
the Company's Registration Statements on Form 10K, which Statements have been
previously filed with the Securities and Exchange Commission. These risks and
uncertainties include, without limitation:
- The rate of market development and acceptance of smart card
technology;
- The unpredictability of the Company's sale cycle;
- The limited revenues and significant operating losses
generated to date;
- The possibility of significant ongoing capital requirements;
- The loss of any significant customer;
- The ability of the Company to compete successfully with the
other providers of smart cards and smart card services;
- The ability of the Company to secure additional financing as
and when necessary;
- The ability of the Company to retain the services of its key
management, and to attract new members of the management team;
- The ability of the Company to effect and retain appropriate
patent, copyright and trademark protection of its products;
- The ability of the Company to achieve adequate levels of
revenue to recover its investment in capitalized software
development costs and software licenses.
For the purposes of the safe harbor protection for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995, readers are
urged to review the list of certain important factors set forth in "Cautionary
Statement for Purposes of the `Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995."
The Company undertakes no obligation to release publicly any
revisions to the forward-looking statements or to reflect events or
circumstances after the date of this Report.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1999, the Company entered into an agreement with
Mitchum Jones and Templeton, an investment bank in San
Francisco, CA, whose chief executive officer is a director of
the Company, for a firm commitment financing for $3,000,000 of
units, with each unit comprised of one share of redeemable
preferred stock and four common stock purchase warrants. Each
unit has a subscription price of $10.00, and each warrant has
an exercise price of $2.50 per share and a term of three
years. In the aggregate, the firm commitment offering will
require the Company to issue 300,000 shares of preferred stock
and warrants to purchase 1,200,000 shares. In addition,
Mitchum Jones and Templeton has agreed to a best efforts
offering of units for an additional $3,000,000 on the same
terms and conditions as the committed financing. The preferred
stock is redeemable at any time, but no later than December
31, 2001; requires quarterly dividends payable at six percent
per annum or an in kind dividend at a rate of ten percent per
annum; contains provisions relating to preferential
liquidation rights, voting rights for the warrants issuable
under the preferred stock and registration provisions. In
addition, in the event the Company does not redeem the
preferred shares before December 31, 1999, the Company will be
required to issue during each quarter the shares remain
unredeemed, an additional warrant for each six shares of
preferred stock held (or a total of 50,000 warrants for each
300,000 shares of preferred stock outstanding). The terms of
the preferred stock also prohibit the Company from issuing
further debt, or increasing its bank obligations without
approval of preferred stockholders. In connection with the
sale of the units, the Company paid a placement fee to Mitchum
Jones and Templeton of warrants to purchase 150,000 shares of
common stock at $2.50 per share with respect to the committed
portion of the offering. If the best efforts offering is
concluded, Mitchum Jones and Templeton will receive an
additional placement fee on the same terms. On August 13,
1999, the Company closed the sale of $1,000,000 of units
(100,000 shares of preferred stock and 400,000 warrants) and
closed the additional $2,000,000 on September 3, 1999. The
Company believes that the offer and sale of the units are
exempt from registration under the Securities Act of 1933
pursuant to the provisions of Section 4(2). The Company has
agreed to register the shares of Common Stock underlying the
warrants.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a. Exhibits
<S> <C>
Exhibit 3.1** Certificate of Designations for Series A Preferred Stock of The
Pathways Group, Inc., filed with the Secretary of State of
Delaware on August 12, 1999
Exhibit 10.1** Amended Bank Lease Agreement, dated as of June 22, 1999,
between Union Bank of California and The Pathways Group, Inc.
Exhibit 10.2** Agreement, dated July 20, 1999, between Hawaiian Millenium
Commission and The Pathways Group (Hawaii)
Exhibit 27 Financial Data Schedule
** Incorporated by reference from the Company's Form 10Q for the
fiscal quarter ended June 30, 1999.
b. Reports on Form 8-K
None.
</TABLE>
11
<PAGE>
THE PATHWAYS GROUP, INC.
Index to Consolidated Financial Statements (Unaudited)
for the Fiscal Quarter Ended September 30, 1999
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-5
F-1
<PAGE>
THE PATHWAYS GROUP, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,286,370 $ 4,628,544
Accounts and interest receivable 120,901 102,793
Inventories 420,409 361,467
Prepaid expenses and deposits 66,660 168,779
------------ -----------
Total current assets 1,894,340 5,261,583
Restricted cash 272,000 222,000
Software, net 854,666 1,256,020
Property and equipment, net 1,029,843 1,100,061
Software license 1,000,000 0
Deposits and other assets 153,017 139,024
------------ -----------
TOTAL ASSETS $5,203,866 $ 7,978,688
============ ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable to banks, current maturities 106,111 336,947
Accounts payable 553,582 251,140
Accrued expenses and deferred revenue 223,450 854,030
Software license fee payable 700,000 0
------------ -----------
Total current liabilities 1,583,143 1,442,117
Notes payable to banks, net of current maturities 89,099 170,903
------------ -----------
TOTAL LIABILITIES 1,672,242 1,613,020
------------ -----------
Commitments and contingencies
Series A mandatorily redeemable preferred stock, $0.01 par value;
1,000,000 shares authorized; 300,000 shares issued and
outstanding; aggregate liquidation preference of $3,000,000 1,287,649
------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value; 50,000,000 shares authorized;
13,565,662 issued and outstanding at September 30, 1999 and at
December 31, 1998 135,657 135,657
Additional paid in capital 28,098,295 26,439,081
Accumulated deficit (25,989,977) (20,209,070)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 2,243,975 $ 6,365,668
------------ -----------
TOTAL LIABILITIES, MANDATORILY REDEEMABLE PREFERRED $ 5,203,866 $ 7,978,688
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE>
THE PATHWAYS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Sales, net $ 55,151 $ 8,698
----------- -----------
Direct cost of sales 13,790 3,199
Selling, general and administrative expenses 1,488,432 1,496,874
Research and development 162,462 123,622
Amortization of software 198,359 171,915
Depreciation 118,372 110,472
----------- -----------
Total operating expenses 1,981,415 1,906,082
Loss from operations (1,926,264) (1,897,384)
Interest income (expense), net (2,698) 29,955
----------- -----------
NET LOSS $(1,928,962) $(1,867,429)
=========== ===========
Basic and diluted net loss per share $ (0.15) $ (0.14)
Shares used in per share calculations 13,565,662 13,213,151
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Sales, net $ 112,801 $ 22,578
----------- -----------
Direct cost of sales 24,275 6,700
Selling, general and administrative expenses 4,462,449 3,772,983
Research and development 514,688 294,917
Amortization of software and intangible assets 575,913 499,120
Depreciation 353,086 289,052
----------- -----------
Total operating expenses (5,930,411) (4,862,772)
----------- -----------
Loss from operations (5,817,610) (4,840,194)
Interest income, net 36,703 35,031
----------- -----------
NET LOSS $ (5,780,07) $(4,805,163)
=========== ===========
Basic and diluted net loss per share $ (0.43) $ (0.37)
Shares used in per share calculations 13,565,662 13,008,505
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
THE PATHWAYS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss (5,780,907) (4,805,163)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 353,086 289,052
Amortization of software 575,913 499,120
Effects of changes in operating assets and liabilities:
Accounts and interest receivable (18,108) (43,987)
Inventories (58,942) (63,944)
Prepaid expenses and deposits 102,119 25,651
Accounts payable 302,442 343,326
Accrued expenses and deferred revenue (630,580) (46,265)
----------- -----------
Net cash used in operating activities (5,154,977) (3,802,210)
----------- -----------
Cash flows from investing activities:
Capital expenditures (282,868) (518,306)
Capitalized software development costs (172,416) (242,771)
Restricted cash (50,000) (129,500)
Issuance of Note Receivable to Scrip Advantage 0 (50,000)
Software licenses (300,000) 0
Other assets (16,136) 498
----------- -----------
Net cash used in investing activities (821,420) (940,079)
Cash flows from financing activities:
Net proceeds from common stock sold in private placement 8,401,504
Net proceeds from preferred stock sold in private placement 2,946,863
Proceeds from stock option exercise 0 7,134
Principal payments on notes payable to banks (312,640) (411,380)
----------- -----------
Net cash provided by financing activities 2,634,223 7,997,258
(Decrease) Increase in cash and cash equivalents (3,342,174) 3,254,969
Cash and cash equivalents, beginning of period 4,628,544 3,759,720
----------- -----------
Cash and cash equivalents, end of period 1,286,370 7,014,689
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE PATHWAYS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying consolidated financial statements are unaudited, but
include all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the financial position at such dates and of the operations and cash flows for
the periods then ended. The financial information is presented in a condensed
format, and it does not include all of the footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles. Operating results for the periods ended
September 30, 1999 and 1998 are not necessarily indicative of results that
may be expected for the entire year. The preparation of financial statements
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities and reported amounts of revenue and expenses during
the reporting period. Actual results could differ materially from such
assumptions and estimates. The accompanying financial statements and related
footnotes should be read in conjunction with the Company's audited financial
statements, included in its December 31, 1998 Form 10-K filed with the
Securities and Exchange Commission.
2. THE COMPANY
The accompanying consolidated financial statements include the
accounts of The Pathways Group, Inc. ("TPG") and its wholly owned
subsidiaries. All intercompany balances and transactions have been
eliminated. TPG's subsidiaries include Pathways International, Ltd. ("PIL"),
SPRINTICKET, Inc. ("ST"), PT Link, Inc. ("PT Link") and The Pathways Group,
Inc., a wholly owned subsidiary incorporated in the State of Hawaii. TPG and
its subsidiaries (the "Company") are primarily engaged in providing
specialized transaction processing services through the development of
proprietary software and hardware systems including credit card and multiple
application smart card technologies. The Company derives its revenue
principally from transaction processing fees charged to the merchant and the
sale of related terminals, hardware systems and smart cards. The Company has
invested heavily in designing and developing its proprietary hardware and
application software systems and in establishing and expanding its sales and
marketing capabilities. The Company plans to continue these efforts in
preparation for, and in anticipation of, the growth in smart card-based
electronic commerce that the Company anticipates will create a substantial
market for its data and transaction processing services.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1999 1998
---- ----
<S> <C> <C>
Smart cards and related packaging $160,305 $158,917
Smart card terminals and computer hardware 65,365 61,846
Assembled unattended kiosks and components 194,739 140,704
-------- --------
$420,409 $361,467
======== ========
</TABLE>
4. USE OF ESTIMATES AND ASSUMPTIONS
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 as the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those
estimates and assumptions.
F-5
<PAGE>
It is reasonably possible that the estimates of anticipated future
gross revenues and the remaining estimated economic lives used to calculate
depreciation and amortization of the Company's long lived assets and software
and license may be reduced significantly in the near term. As a result, the
carrying amount of the capitalized software costs ($854,666) may be reduced
entirely in the near term. In addition, the carrying amount of long lived
assets may be reduced materially in the near term.
5. CAPITAL STOCK TRANSACTIONS
In August 1999, the Company entered into an agreement with Mitchum
Jones and Templeton, an investment bank in San Francisco, CA, whose chief
executive officer is a director of the Company, for a firm commitment
financing for $3,000,000 of units, with each unit comprise of one share of
redeemable preferred stock financing and four common stock purchase warrants.
Each unit has a subscription price of $10.00, and each warrant has an
exercise price of $2.50 per share and a term of three years. In the
aggregate, the firm commitment offering will require the Company to issue
300,000 shares of preferred stock and warrants to purchase 1,200,000 shares
of common stock. In addition, Mitchum Jones and Templeton has agreed to a
best efforts offering of units for an additional $3,000,000 on the same terms
and conditions as the committed financing. The preferred stock is redeemable
at any time, but no later than December 31, 2001; requires quarterly
dividends payable at six percent per annum or an in kind dividend at a rate
of ten percent per annum; contains provisions relating to preferential
liquidation rights, voting rights for the warrants issuable under the
preferred stock and registration provisions. In addition, in the event the
Company does not redeem the preferred shares before December 31, 1999, the
Company will be required to issue during each quarter the shares remain
unredeemed, an additional warrant for each six shares of preferred stock held
(or a total of 50,000 warrants for each 300,000 shares of preferred stock
outstanding). The terms of the preferred stock also prohibit the Company from
issuing further debt, or increasing its bank obligations without approval of
preferred stockholders. In connection with the sale of the units, the Company
paid a placement fee to Mitchum Jones and Templeton of warrants to purchase
150,000 shares of common stock at $2.50 per share with respect to the
committed portion of the offering. If the best efforts offering is concluded,
Mitchum Jones and Templeton will receive an additional placement fee on the
same terms. On August 13, 1999, the Company closed the sale of $1,000,000 of
units (100,000 shares of preferred stock and 400,000 warrants) and closed the
additional $2,000,000 (200,000 shares of preferred stock and 800,000
warrants) committed to the Company on September 3, 1999. The Company believes
that the offer and sale of the units are exempt from registration under the
Securities Act of 1933 pursuant to the provisions of Section 4(2). The
Company has agreed to register the shares of Common Stock underlying the
warrants. Prior to this closing, the Company's CEO advanced $300,000 to pay
certain operating and payroll costs of the Company. This advance was repaid
out of the proceeds of the sale of preferred shares.
In accordance with generally accepted accounting principles, the Company has
allocated the proceeds from the sale of preferred stock between the common stock
warrants issued and the redeemeable preferred stock based on their relative fair
market values. Accordingly, the Company has recorded $1,445,244 as discount on
preferred stock and as additional paid in capital. In addition, the Company has
recorded the estimated fair value of warrants issued for investment banking
services of $253,681 as offering costs of preferred stock and additional paid in
capital. The difference between the recorded amount of preferred stock and the
amount mandatorily redeemable on December 31, 2001 is being amortized through
periodic accretion, which increases preferred stock and reduces additional paid
in capital. The following table summarizes the recording of the sale of
redeemable preferred stock:
<TABLE>
<S> <C>
Preferred Stock
Gross proceeds of preferred stock $3,000,000
Discounts recorded on preferred stock (1,445,244)
Cash paid for offering costs (53,137)
Value of warrants issued for investment banking fee (253,681)
----------
Net carrying cost of preferred stock at issuance $1,247,938
F-6
<PAGE>
Paid in Capital
Increase in paid in capital for value of warrants issued to investors $1,445,244
Increase in paid in capital for value of warrants issued for investment banking services 253,681
Accretion on preferred stock (39,711)
----------
Net increase in paid in capital $1,659,214
</TABLE>
In August 1998, the Company received net proceeds of $8,401,504 from
the sale of 654,508 shares of common stock. The offering was conducted
pursuant to Rule 506 of Regulation D under the Securities Act. These shares
were subsequently registered for sale pursuant to a Registration Statement on
Form SB-2 that was declared effective by the Securities and Exchange
Commission on October 9, 1998.
6. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTHS NINE MONTHS
ENDING ENDING
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998
---- ----
<S> <C> <C>
Cash paid for interest $ 26,576 $ 85,341
Discounts recorded on preferred stock $(1,445,244)
Value of warrants issued for investment banking fee $ (253,681)
</TABLE>
In May 1999, the Company entered into a software license agreement in
exchange for an obligation to pay $1,000,000. Software licenses of $1,000,000
and software license fee payable of $700,000 have been recorded in the
consolidated balance sheet at September 30, 1999, as a result of this
non-cash transaction.
7. BANK AGREEMENTS
In 1997, the Company entered into a master lease agreement with a Bank
which provided up to $400,000 of credit to the Company for the lease of
certain computer and office equipment and furniture for a period of three
years, and which contains an option to acquire the equipment at the end of
the lease term. The lease provisions require the Company to maintain $200,000
in a certificate of deposit at the bank as collateral for the lease and to
deposit additional funds if the Company's available cash and cash equivalents
are not maintained above $850,000. In June 1999, the Company amended its
lease agreement with the Bank. Under the revised agreement, the Bank reduced
its minimum cash requirement from $850,000 to $250,000, and the Company
deposited an additional $50,000 in a certificate of deposit with the Bank as
additional collateral for the lease agreement.
8. EARNINGS PER SHARE
The Company calculates earnings per share based on SFAS No.128,
"Earnings Per Share." Basic earnings per share is calculated using the
average number of common shares outstanding. Potentially dilutive shares
resulting from common stock options and from common stock warrants have been
excluded from the computation of diluted earnings per share for the nine
months ended September 30, 1999 and 1998 as they are antidilutive. The number
of common stock options outstanding at September 30, 1999 and 1998 that could
be potentially dilutive are 749,788 and 401,166 respectively. The total
common stock warrants outstanding at September 30, 1999 that could be
potentially dilutive is 1,350,000.
F-7
<PAGE>
The calculation of earnings per share includes the effect of accretion for
preferred stock discounts as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended Nine months ended Nine months ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $ (1,928,962) $ (1,867,429) $ (5,780,907) $ (4,805,163)
Accretion of mandatorily (39,711) (39,711)
redeemable preferred
stock
Net loss for common $ (1,968,673) $ (1,867,429) $ (5,820,618) $ (4,805,163)
stock
Weighted average 13,565,662 13,213,151 13,565,662 13,008,505
shares of common
stock outstanding
(shares used in
computing basic and
diluted net loss per
share)
Basic and diluted net $ (0.15) $ (0.14) $ (0.43) $ (0.37)
loss per share
</TABLE>
9. SOFTWARE LICENSE AGREEMENT
In May 1999 the Company entered into an agreement with Proton
World, the leading international provider of end-to-end smart card solutions,
based in Brussels, Belgium. Licensing fees paid or accrued at September 30, 1999
are $1,000,000 and have been capitalized in the consolidated balance sheet. This
amount includes $925,000 of license fees and $75,000 of implied maintenance
fees.
The Company's amortization of the $925,000 license fees will
be the greater of the straight line amortization over two years, or $0.37 per
smart card sold. The amortization of the implied maintenance fees will be
straight line over a six month period. There was no amortization expense
recorded for the nine months ending September 30, 1999, as the testing and
acceptance of the system had not been completed and the underlying system had
not been placed into service.
10. CHANGE IN ACCOUNTING ESTIMATE
In the first quarter of 1999, the Company changed the
estimated economic life of capitalized software costs for certain applications
from five years to three years due to new information and developments arising
from recent customer negotiations. The cumulative impact of this change in
estimated economic life on net loss for nine and three months ended September
30, 1999 was $117,927 (or $.0087 per share) and $43,419 (or $.0032 per share).
F-8
<PAGE>
SIGNATURE
In accordance with 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.
THE PATHWAYS GROUP, INC.
By /s/ MARK T. SCHUUR
-------------------------------------------
Mark T. Schuur
Senior Vice President and Chief Financial Officer
Date: November 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,286,370
<SECURITIES> 0
<RECEIVABLES> 120,901
<ALLOWANCES> 0
<INVENTORY> 420,409
<CURRENT-ASSETS> 1,894,340
<PP&E> 2,154,974
<DEPRECIATION> (1,125,131)
<TOTAL-ASSETS> 5,203,866
<CURRENT-LIABILITIES> 1,583,143
<BONDS> 89,099
1,287,649
0
<COMMON> 135,657
<OTHER-SE> 2,108,318
<TOTAL-LIABILITY-AND-EQUITY> 5,203,866
<SALES> 112,801
<TOTAL-REVENUES> 112,801
<CGS> 24,275
<TOTAL-COSTS> 24,275
<OTHER-EXPENSES> 5,906,136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,703
<INCOME-PRETAX> (5,780,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,780,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,780,907)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
