<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended January 31, 1999.
[ ] Transition report under section 13 or 15(d) of the Exchange Act for the
transition period from _________ to _________
Commission file number 0-29248
SmarTire Systems Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
British Columbia, Canada Not Applicable
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150-13151 Vanier Place, Richmond, British Columbia, V6V 2J1
(Address of Principal Executive Offices)
(604) 276-9884
(Issuer's Telephone Number, Including Area Code)
Not Applicable
(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 report(s), and has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of February 28, 1999, the Company had 9,693,735 shares of common stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
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SMARTIRE SYSTEMS INC.
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED) - JANUARY 31, 1999 AND
JULY 31, 1998
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (UNAUDITED) -
THREE MONTHS AND SIX MONTHS ENDED JANUARY 31, 1999 AND JANUARY
31, 1998.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) - SIX MONTHS
ENDED JANUARY 31, 1999 AND JANUARY 31, 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - SIX
MONTHS ENDED JANUARY 31, 1999 AND JANUARY 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements of SmarTire Systems Inc. and its
subsidiaries (the "Company" or "SmarTire") as of January 31, 1999 and for the
three months and six month periods ended January 31, 1999 and January 31, 1998
are attached hereto.
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SMARTIRE SYSTEMS INC.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
January 31, July 31,
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets
Cash $ 4,445,018 $ 8,718,258
Receivables 829,274 802,193
Inventory 2,813,274 1,684,686
Prepaids 243,555 106,957
Supplier prepayments 922,778 1,466,791
-----------------------------------------------------------------------------------
9,253,899 12,778,885
Capital assets 741,808 614,612
Other assets 492,542 792,612
- ----------------------------------------------------------------------------------------
$ 10,488,249 $ 14,186,109
========================================================================================
Liabilities and Shareholders' Equity
Current liabilities
Payables and accruals $ 969,596 $ 801,832
Shareholders' equity
Share capital 31,270,728 30,669,253
Equity component of warrants 4,015,000 4,015,000
Deficit (25,767,075) (21,299,976)
-----------------------------------------------------------------------------------
9,518,653 13,384,277
- ----------------------------------------------------------------------------------------
$ 10,488,249 $ 14,186,109
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Loss and Deficit
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31, January 31, January 31,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenue $ 530,595 $ 683,576 $ 1,223,981 $ 1,004,350
Cost of goods sold 417,457 532,854 1,006,694 773,348
- -------------------------------------------------------------------------------------------------------------------
113,138 150,722 217,287 231,002
Expenses
Marketing 871,927 434,138 1,573,063 670,332
General and administrative 1,099,404 462,771 2,039,437 815,992
Research and development 397,715 260,031 672,103 637,140
Depreciation and amortization 202,638 162,060 406,719 323,860
--------------------------------------------------------------------------------------------------------------
2,571,684 1,319,000 4,691,322 2,447,324
- -------------------------------------------------------------------------------------------------------------------
Loss from operations 2,458,546 1,168,278 4,474,035 2,216,322
Other expense (income)
Interest and finance charges (85,502) 864,862 (191,421) 1,166,350
Foreign exchange 284,208 15,080 184,485 10,678
--------------------------------------------------------------------------------------------------------------
198,706 879,942 (6,936) 1,177,028
- -------------------------------------------------------------------------------------------------------------------
Net loss 2,657,252 2,048,220 4,467,099 3,393,350
Deficit, beginning of period 23,109,823 15,952,341 21,299,976 14,607,211
- -------------------------------------------------------------------------------------------------------------------
Deficit, end of period $ 25,767,075 $ 18,000,561 $ 25,767,075 $ 18,000,561
===================================================================================================================
Loss per share $ 0.28 $ 0.50 $ 0.47 $ 0.87
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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SMARTIRE SYSTEMS INC.
Consolidated Statements of Cash Flow
(Expressed in Canadian Dollars)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Six Months Ended
January 31, January 31,
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (4,467,099) $ (3,393,350)
Items not affecting cash:
Depreciation and amortization 406,719 323,860
Changes in non-cash working capital (580,490) 438,444
-------------------------------------------------------------------------------------
(4,640,870) (2,631,046)
Cash flows from financing activities
Repayment of long-term debt -- (14,400)
Convertible debentures -- 1,868,000
Share capital issued 601,475 1,098,357
-------------------------------------------------------------------------------------
601,475 2,951,957
Cash flows from investing activities
Capital assets (233,845) (79,619)
Other assets -- (77,711)
-------------------------------------------------------------------------------------
(233,845) (157,330)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash (4,273,240) 163,581
Cash, beginning of period 8,718,258 69,761
- ------------------------------------------------------------------------------------------
Cash, end of period $ 4,445,018 $ 233,342
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Six Months ended January 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. UNITED STATES ACCOUNTING PRINCIPLES
The Company's financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. A reconciliation of
financial statement amounts from Canadian generally accepted accounting
principles to United States generally accepted accounting principles is as
follows:
(a) Research and development costs
Under Canadian generally accepted accounting principles development
costs that are expected to provide future benefits with reasonable
certainty may be deferred and amortized to expense in a rational and
systematic manner. United States generally accepted accounting
principles require that all development costs be charged to expense
when incurred.
The effects of the above difference between Canadian and United States
generally accepted accounting principles are as follows:
<TABLE>
<CAPTION>
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1999 1998
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<S> <C> <C>
Total assets in accordance with Canadian generally
accepted accounting principles $ 10,488,249 $ 3,256,705
Deferred development costs (1,292) (147,366)
- --------------------------------------------------------------------------------------------------------------
Total assets in accordance with United States generally
accepted accounting principles $ 10,486,957 $ 3,109,339
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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1999 1998
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<S> <C> <C>
Shareholders' equity in accordance with Canadian generally
accepted accounting principles $ 9,518,653 $ (3,458,408)
Deferred development costs (1,292) (147,366)
- --------------------------------------------------------------------------------------------------------------
Shareholders' equity in accordance with United States
generally accepted accounting principles $ 9,517,361 $ (3,605,774)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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1999 1998
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<S> <C> <C>
Net loss in accordance with Canadian generally
accepted accounting principles $ (4,467,099) $ (3,393,350)
Deferred development costs 71,946 75,420
- --------------------------------------------------------------------------------------------------------------
Net loss in accordance with United States generally
accepted accounting principles $ (4,395,153) $ (3,317,930)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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SMARTIRE SYSTEMS INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian Dollars)
(Unaudited)
Six Months ended January 31, 1999 and 1998
- --------------------------------------------------------------------------------
2. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
financial statement presentation adopted for the current year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not based on historical facts are
forward-looking statements subject to uncertainties and risks including, but not
limited to, product demand and acceptance, economic conditions, the impact of
competition and pricing, results of financing efforts, and other risks.
OVERVIEW
The following discussion of the financial condition, changes in financial
condition and results of operations of the Company for the three months and six
months ended January 31, 1999 and 1998 should be read in conjunction with the
consolidated financial statements of the Company.
The Company's consolidated financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP), the application of which, in the case of the
Company, conforms in all material respects for the periods presented with United
States GAAP except as indicated in the notes to the financial statements. All
per share amounts reflect an 8 to 1 reverse split effected on December 24, 1997.
Herein all references to the "$" and "CDN$" refer to Canadian Dollars; and all
references to "US$" refer to United States Dollars.
In this Report, unless otherwise specified, all dollar amounts are expressed in
Canadian Dollars. The Government of Canada permits a floating exchange rate to
determine the value of the Canadian Dollar against the U.S. Dollar.
Set forth below is the rate of exchange for the Canadian Dollar at the end of
the most recent fiscal year ended July 31, 1998 and the six months ended January
31, 1999 and 1998, average rates for the periods, and the range of high and low
rates for the periods. For purposes of this table, the rate of exchange means
the noon buying rate in New York City for the cable transfers in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of New
York.
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The table sets forth the number of Canadian Dollars required under that formula
to buy one U.S. dollar. The average rate means the average of the exchange rates
on the last day of each month during the period.
U.S. Dollar/Canadian Dollar
<TABLE>
<CAPTION>
Average Close High Low
------- ----- ---- ---
<S> <C> <C> <C> <C>
Six Months Ended 01/31/99 1.53 1.51 1.58 1.50
Six Months Ended 01/31/98 1.41 1.46 1.46 1.37
Fiscal Year Ended 7/31/98 1.43 1.51 1.51 1.37
</TABLE>
Since its inception, the Company has reported net losses arising from general
expenses and research/development expenditures. The Company has sustained itself
through the sale of securities, including common shares and convertible
debentures, and the exercise of share purchase warrants and share purchase
options.
SmarTire is engaged in the development and marketing of a line of Tire
Monitoring Systems (TMS) incorporating proprietary patented technology designed
to improve the tire life, fuel efficiency, vehicle productivity and safety.
During the six months ended January 31, 1999, the Company earned revenues from
the sale of TMS for passenger cars, racing applications and industrial
applications.
The passenger car TMS are sold to two distinct and separate markets: the
Replacement Tire Market (Aftermarket) and the Original Equipment Manufacturer
(OEM) Market. The Company sells OEM passenger car systems to Ford Motor Company,
where they are packaged as an optional accessory with run-flat tires and other
safety features on the Lincoln Continental. Aftermarket systems may be added to
existing vehicles as an accessory and are distributed primarily through
independent tire dealers and distributors, and automotive service centers.
Run-flat tires allow drivers to drive up to 50 miles on a tire that has lost all
its air pressure. Run-flat tires perform so well without any air pressure that
an approved tire pressure monitoring system is required with the purchase of
each set of tires. Otherwise, the operator may unknowingly drive on the tire
until it fails or is no longer repairable. The Company's advanced tire
monitoring system is approved for sale with run-flat tires by Goodyear,
Michelin, and Bridgestone/Firestone.
There is some seasonality to product sales which matches the advertising and
promotion programs of the major tire manufacturers. During the fall and winter
months, a number of advertising programs switch from conventional and run-flat
tires to the promotion of winter tires, which impacts on the Company's sales
during the first half of the year. The Company expects increased sales of
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<PAGE> 11
aftermarket systems in the last six months of the fiscal year. The Company is
undertaking direct marketing campaigns in both North America and Europe. Most of
the sales to be generated by these programs are anticipated to occur in the
months of May through July.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1999 AND JANUARY 31, 1998
Gross revenue for the three months ended January 31, 1999 was $530,595 compared
to $683,576 for the three months ended January 31, 1998. Sales of aftermarket
passenger car systems were $212,016 for the quarter ended January 31, 1999
compared to $345,966 sales for the three months ended January 31, 1998. The 1998
sales number reflects the early purchase of systems in support of planned
advertising for the initial launch of a run-flat program by one of the major
tire companies. Sales of the OEM passenger car system decreased marginally to
$172,449 for the quarter ended January 31, 1999 compared to $175,871 for the
comparable period of the previous year. Sales of the Racing TMS product
decreased to $134,324 for the three months ended January 31, 1999 from $149,240
in the three months ended January 31, 1998. Sales of Industrial TMS systems
decreased slightly to $11,806 during the three months ended January 31, 1999
from $12,499 in the comparable period of the previous year.
Gross margin decreased from 22% for the three months ended January 31, 1998 to
21.3% for the three months ended January 31, 1999 due to a lower profit margin
on the sale of aftermarket passenger car systems.
Expenses increased to $2,571,684 for the three months ended January 31, 1999
from $1,319,000 for the comparable period of the previous fiscal year due to
increases in marketing, general and administration, research and development
expenses and depreciation and amortization. Marketing expenses increased from
$434,138 for the three month period ended January 31, 1998 to $871,927 for the
comparable period of 1999 as a result of increased expenditures on point of sale
materials, technical manuals, trade shows, and advertising and promotion
relating to the aftermarket passenger car product. In particular, costs
increased due to preparations for the direct marketing campaigns in North
America and Europe. These campaigns will run during the next six months. Trade
show costs also increased due to participation in the Specialty Equipment Market
Association (SEMA) show in November. The creation and operation of the Company's
European marketing subsidiary, SmarTire (Europe) Limited, also contributed to
the increase in marketing expenses.
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<PAGE> 12
General and administrative expenses increased to $1,099,404 for the three months
ended January 31, 1999 as compared to $462,771 for the three month period ended
January 31, 1998. The increase was attributed to increases in public relations,
compensation, legal, insurance and travel expenses. In particular, costs
increased for production of the Company's annual report, proxy materials and
other items associated with the Company's annual general meeting. Legal and
other professional fees increased due to the finalization and approval of the
Company's listing on Nasdaq. Expenses also increased from the prior year due to
costs to obtain product approvals in Europe. The creation and operation of
Smartire (Europe) also contributed to the increase in general and administrative
expenses.
Research and development expenses increased to $397,715 for the three months
ended January 31, 1999 from $260,031 for the three months ended January 31, 1998
due to an increase in costs for prototype development related to product
enhancements and next generation products.
Interest income of $85,502 resulted from the cash balances generated from the
Company's financing activities in 1998. This compares with interest expense of
$864,862 for the three months ended January 31, 1998.
SIX MONTHS ENDED JANUARY 31, 1999 AND JANUARY 31, 1998
Gross revenue for the six months ended January 31, 1999 was $1,223,981 compared
to $1,004,350 for the six months ended January 31, 1998. Sales of aftermarket
passenger car systems were $764,981 for the six months ended January 31, 1999
compared to $462,501 sales for the six months ended January 31, 1998. Sales of
the OEM passenger car system decreased to $287,529 for the period ended January
31, 1999 compared to $346,473 for the comparable period of the previous year.
Sales of the Racing TMS product decreased to $150,355 for the six months ended
January 31, 1999 from $162,318 in the six months ended January 31, 1998. Sales
of Industrial TMS systems decreased to $21,116 during the six months ended
January 31, 1999 from $33,058 in the comparable period of the previous year.
Gross margin decreased from 23% for the six months ended January 31, 1998 to
17.75% for the six months ended January 31, 1999 due to a lower profit margin on
the sale of aftermarket passenger car systems.
Expenses increased to $4,691,322 for the six months ended January 31, 1999 from
$2,447,324 for the comparable period of the previous fiscal year, due to
increases in marketing, general and administration expenses and depreciation and
amortization. Marketing expenses increased from $670,332 for the six month
period ended January 31, 1998 to $1,573,063 for the comparable period of 1999 as
a result of increased expenditures on point of sale materials,
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<PAGE> 13
technical manuals, trade shows, and advertising and promotion relating to the
aftermarket passenger car product. Marketing compensation increased as a result
of additional employees hired or assigned to marketing functions. Marketing
travel increased as a result of increased activity relating to the marketing of
the aftermarket passenger car product line and participation in trade shows. The
creation and operation of the Company's European marketing subsidiary, SmarTire
(Europe) Limited, contributed to the increase in the above marketing expenses.
General and administrative expenses were $2,039,437 for the six months ended
January 31, 1999 as compared to $815,992 for the six month period ended January
31, 1998. The increase was attributed to increases in public relations,
compensation, legal, insurance and travel expenses. Compensation increased due
to increases in the number of administrative staff and increases in
administrative wage levels. Professional fees increased as a result of the
Company's U.S. securities filings and Nasdaq listing application, recruitment
costs for staff of SmarTire (Europe) and product approval costs in Europe. The
creation and operation of SmarTire (Europe) also contributed to the increase in
general and administrative expenses.
Research and development expenses increased to $672,103 for the six months ended
January 31, 1999 from $637,140 for the six months ended January 31, 1998 due to
an increase in costs for prototype development.
Interest income of $191,421 resulted from the cash balances generated from the
Company's financing activities in 1998. This compares with interest expense of
$1,166,350 for the six months ended January 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities through revenue from operations and the
placement of securities. Financing has been accomplished in the form of private
placements of common shares and common share purchase warrants; private
placements of convertible debentures; the exercise of incentive stock options;
the exercise of common share purchase warrants; and issuance of common stock in
exchange for settlement of liabilities.
The Company's cash position at January 31, 1999 was $4,445,018 as compared to
$8,718,258 at July 31, 1998. This decrease was due to funding of the Company's
operating, financing and investing activities described herein.
Subsequent to January 31, 1999 the Company received net cash proceeds of
$5,410,402 from the exercise of 1,540,321 share purchase warrants.
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<PAGE> 14
The Company used $4,640,870 for operating activities during the six months ended
January 31, 1999 as compared with $2,631,046 for the six months ended January
31, 1998. This difference was attributed to an increase in the loss for the
period and a $580,489 decrease in non-cash operating working capital, including
a $167,765 increase in payables and accruals, a $27,081 increase in receivables,
a $544,013 decrease in supplier prepayments, a $1,128,588 increase in inventory
and a $136,598 increase in prepaids.
For the six months ended January 31, 1999, the Company received $601,475 from
the exercise of stock options and warrants.
Investing activities consisted of $233,845 during the six months ended January
31, 1999 for the purchase of capital assets.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company commenced trading its common shares on the NASDAQ SmallCap Market
at the opening of trading on December 16, 1998. The trading symbol is "SMTR".
Effective March 29, 1999, Mr. Mark Desmarais, Director of Marketing, Planning
and Business Development for TRW Automotive Electronics, TRW Inc., will join the
Company's North American subsidiary, SmarTire USA Inc. as President and Chief
Executive Officer. The current President, Joseph Merback, has been named
Chairman of the Board of SmarTire USA.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following exhibits are filed hereunder:
27 Financial Data Schedule (electronic filing only)
(b) Reports of Form 8-K -Six months ended January 31, 1999:
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SMARTIRE SYSTEMS INC.
----------------------------------
(Registrant)
Date March 16, 1999 /s/ ROBERT V. RUDMAN
-------------------------------- ----------------------------------
Robert V. Rudman
President and
Chief Executive Officer
Date March 16, 1999 /s/ KEVIN A. CARLSON
-------------------------------- ----------------------------------
Kevin A. Carlson
Chief Financial Officer (Principal
Financial Officer)
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<EXCHANGE-RATE> 1.51
<CASH> 4,445,018
<SECURITIES> 0
<RECEIVABLES> 829,274
<ALLOWANCES> 0
<INVENTORY> 2,813,274
<CURRENT-ASSETS> 9,253,899
<PP&E> 1,273,743
<DEPRECIATION> 531,935
<TOTAL-ASSETS> 10,488,249
<CURRENT-LIABILITIES> 969,596
<BONDS> 0
0
0
<COMMON> 35,285,728
<OTHER-SE> (25,767,075)
<TOTAL-LIABILITY-AND-EQUITY> 10,488,249
<SALES> 1,223,981
<TOTAL-REVENUES> 1,223,981
<CGS> 1,006,694
<TOTAL-COSTS> 1,006,694
<OTHER-EXPENSES> 4,684,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,467,099)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,467,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,467,099)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
