UNITED STATES





SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-QSB





x
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 for the quarterly period ended June 30, 2004ORo
TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 for the Transition Period from
  __________ to ____________Commission file number: 001-16781





MICROHELIX, INC(Exact Name of Small Business Issuer as Specified in its Charter)





Oregon

91-1758621(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)





16125 SW 72nd Avenue Portland, Oregon

97224(Address of Principal Executive Offices)

(Zip Code)





(Issuers Telephone Number, Including Area Code): 503-968-1600





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  oNo x





As of June 30, 2004, there were 1,681,806 shares of the issuers common stock outstanding.





Transitional Small Business Disclosure Format (Check One):  Yes o No x








microHelix, Inc.


Quarterly Report on Form 10-QSB


Quarter Ended June 30, 2004





TABLE OF CONTENTS





PagePART I  FINANCIAL INFORMATION
3ITEM 1. FINANCIAL STATEMENTS  UNAUDITEDConsolidated balance sheets as of December 31, 2003 and June 30, 2004
3Consolidated statements of operations for the three and six months ended June 30, 2004 and 2003
4Consolidated statements of cash flows for the three and six months ended June 30, 2004 and 2003
5Notes to consolidated financial statements
6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
10ITEM 3. CONTROLS AND PROCEDURES
13PART II  OTHER INFORMATIONITEM 4. Submission of Matters to a Vote of Securities
  Holders
13ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
13SIGNATURES
15CERTIFICATIONSExhibit 31.1
16Exhibit 32.1
17











2


PART I  FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS  UNAUDITED





The accompanying unaudited consolidated financial statements of
  microHelix, Inc. (the Company) include all adjustments (consisting only of normal recurring accruals) that management considers necessary for fair presentation of financial position as of June 30, 2004 and operating results and cash flows for the three and six month periods ended June 30, 2004 and June 30, 2003.





As described in Note 1 to the unaudited consolidated financial statements of the Company, the independent accountants for the Company have advised the Company that they do not intend to serve as the Company's independent accountants for 2004. As is more fully described in the Company's Current Report on Form 8-K filed on April 29, 2004, the Company's independent accountant's report on the Company's financial statements for each of the past two years contained an explanatory paragraph related to the Companys ability to continue as a going concern; however, there were no disagreements with the Company's former accountants on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. As a result of the resignation of the Company's former accountants, there has been no review by an independent accountant of the unaudited
consolidated financial statements of the Company for the three and six month periods ended June 30, 2004 included in this Quarterly Report on Form 10-QSB as required under Statement of Auditing Standards No. 100, "Interim Financial Information."





MICROHELIX, INC.





CONSOLIDATED BALANCE SHEETS


December 31, 2003


June 30, 2004(unaudited)AssetsCurrent Assets:Cash

$
48,767

$
170,167Accounts receivable, net of allowance of $22,156 and $6,095


425,326


115,805Inventories


343,537


390,415Prepaid expenses


70,085


73,538Assets held for sale


2,402,479


Total current assets


3,290,194


749,925Property and equipment  net


116,536


134,149Other assets  net


9,516


642Total assets

$
3,416,246

$
884,716Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable

$
497,470

$
160,767Accrued liabilities


274,665


119,821Line of credit


249,293


Short-term borrowing


100,000


100,000Liabilities held for sale


598,191


Total current liabilities


1,719,619


380,588Deferred gain on sale-leaseback


213,048


Total liabilities


1,932,667


380,588Shareholders Equity:Preferred Stock, no par value, 5,000,000 shares authorized, zeroissued and outstanding at December 31, 2003 andJune 30, 2004, respectively





Common stock, no par value, 8,333,333 shares authorized,1,681,806 issued and outstanding at December 31, 2003and June 30, 2004


14,359,467


14,359,467Additional paid-in capital


6,487,417


6,487,417Deferred compensation expense


(27,185
)

(16,411
)Accumulated deficit


(19,336,120
)

(20,326,345
)Total shareholders equity


1,483,579


504,128Total liability and shareholders equity

$
3,416,246

$
884,716


See notes to consolidated financial statements.


3





MICROHELIX, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)




**Three Months Ended****June 30,**

**Six Months Ended****June 30,**2003


2004


2003


2004Sales

$
461,313

$
187,867

$
943,204

$
469,211Cost of Sales


432,758


328,904


858,696


688,712Gross profit (loss)


28,555


(141,037
)

84,508


(219,501
)Operating Expenses:Research and development


53,083


8,375


83,509


62,958Sales and marketing


46,910


(463
)

84,848


30,396General and administrative


274,229


181,196


527,379


502,475Total operating expenses


374,222


189,108


695,736


595,829Loss from operations


(345,667
)

(330,145
)

(611,228
)

(815,330
)Other Income (Expense):Interest & other income


4,316


29,053


9,308


29,421Interest expense


(6,649
)

(11,403
)

(16,045
)

(15,410
)Other income (expense)  net


(2,333
)

17,650


(6,737
)

14,011Net loss from continuing operations


(348,000
)

(312,495
)

(617,965
)

(801,319
)Loss on Sale of Cable and Wire Division





(78,233
)




(78,233
)Discontinued operations:Gain (loss) from operations of wire and cable division


(49,302
)

6,337


(616,888
)

(122,877
)Net loss

$
(397,302
)
$
(384,391
)
$
(1,234,853
)
$
(1,002,429
)Loss per common share  basic and dilutedNet loss from continuing operations


(.23
)

(.19
)

(.40
)

(.48
)Net loss from discontinued operations


(.03
)

(.04
)

(.40
)

(.12
)Net loss

$
(.26
)
$
(.23
)
$
(.80
)
$
(.60
)Shares used in per share calculation  basic and diluted


1,539,962


1,681,806


1,539,962


1,681,806





See notes to consolidated financial statements.


4





MICROHELIX, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Three Months EndedJune 30,
Six Months Ended
June 30,2003


2004


2003


2004Cash Flows from Operating Activities:Net loss from continuing operations

$
(348,000
)
$
(312,495
)
$
(617,965
)
$
(801,319
)Adjustments to reconcile net loss to cash usedin operating activities:Depreciation and amortization


120,452


21,305


256,760


39,805Stock compensation expense


5,387


5,387


10,774


10,774Amortization of deferred inventory charges


1,540


1,540


3,080


3,080Change in:Gain on sale of equipment


(30,249
)




(30,249
)Accounts receivable, net


146,523


271,089


346,910


309,521Due from affiliates


(3,515
)




(7,647
)Inventories


(14,965
)

(101,653
)

(110,970
)

(46,879
)Prepaid expenses


(4,966
)

(18,340
)

(3,345
)

(3,453
)Property, plant & equipment





(28,414
)




(17,613
)Intangible and other assets


(33,736
)

8,874


(56,489
)

8,874Accounts payable


224,232


(566,905
)

38,599


(367,383
)Deferred gain on sale-leaseback





(182,369
)




(213,048
)Accrued liabilities


59,133


(367,863
)

(40,884
)

(154,844
)Cash (used) sourced from operating activities


121,836


(1,269,844
)

(211,426
)

(1,232,485
)Cash Flows from Investing Activities:Capital expenditures








(12,193
)Proceeds from sale of equipment


419,000





419,000Cash (used) sourced from investing activities


419,000





406,807Cash Flows from Financing Activities:Proceeds from borrowings against notes payableand lines of credit


1,319,866


128,501


2,394,151


1,002,786Principal payments on notes payable and lines of credit


(1,236,896
)

(426,508
)

(3,273,431
)

(1,252,079
)Principal payments on capital lease obligations


(8,249
)




(8,249
)Repurchase of common stock








(20,000
)Gain (loss) from operations of wire & cable


(49,302
)

6,337


(616,888
)

(122,877
)Loss from sale of wire & cable division





(78,233
)




(78,233
)Assets sold





2,236,418





2,402,479Liabilities sold





(534,337
)




(598,191
)Cash (used) sourced from financing activities


25,419


1,332,178


(1,524,417
)

1,353,885Change in cash


566,255


62,334


(1,329,036
)

121,400Cash, beginning of period


236,258


107,833


2,131,549


48,767Cash, end of period

$
802,513

$
170,167

$
802,513

$
170,167Supplemental disclosure of cash flow information Cash paid for interest

$
30,656

$
1,239

$
70,189

$
18,093





See notes to consolidated financial statements.


5





MICROHELIX, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1. Summary of Significant Policies and Basis of Presentation





The accompanying three and six month consolidated financial statements of
  microHelix, Inc. and its wholly owned subsidiary, BioElectric Corporation (collectively, the Company) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and are unaudited. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They include all adjustments (consisting only of normal recurring accruals) considered necessary by management to present a fair statement of the results of operations, financial position and cash flows.





These financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring losses and had negative cash flows from operations during each of the past two years and at June 30, 2004 had an accumulated deficit of $20,326,345. This indicates that the Company may be unable to continue as a going concern for a reasonable period of time. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is contingent upon its ability to obtain additional financing, and to generate revenue and cash
flow to meet its obligations on a timely basis.


Deloitte & Touche LLP, the Company's independent accountants since 1997 have advised the Company that they do not intend to serve as the Company's independent accountants for 2004. As is more fully described in the Company's Current Report on Form 8-K filed on April 29, 2004, the Company's independent accountant's report on the Company's financial statements for each of the past two years contained an explanatory paragraph related to the Companys ability to continue as a going concern; however, there were no disagreements with the Company's former accountants on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. As a result of the resignation of the Company's former accountants, there has been no review by an independent accountant of the unaudited consolidated financial statements of the Company for the
three or six month period ended June 30, 2004 included in this Quarterly Report on Form 10-QSB under Statement of Auditing Standards No. 100, "Interim Financial Information," as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of 1934. The Company expects to appoint a replacement auditor as promptly as reasonably practicable and intends to arrange for a review of these interim financial statements by its new auditor. Upon completion of that review, the Company will file an amendment to this report, which will include a discussion of any material changes from the un-reviewed financial statements contained in the initial filing of this report.


The Company's Form 10-QSB for the quarterly period ended June 30, 2004 is considered deficient because the required review by an independent public accountant has not been obtained. This means that the Company is not current in its filings under the Securities Exchange Act of 1934. The filing of an amendment to this report when a review by the Company's new independent public accountant is complete will eliminate certain consequences of a deficient filing, but the Company would remain ineligible to use Form's SB-2 and S-3 to register securities until all required reports under the Exchange Act have been timely filed for the 12 months preceding the filing of the registration statement for those securities. As a result of the absence of the of the review required under SAS 100 for the quarter ended June 30, 2004, the Section 906 certification required by 18 U.S.C. Section 1350 and
included as Exhibit 32.1 to this Form 10-QSB has been qualified by reference to the absence of that review.





The results of operations for the three month and six month periods ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in the Companys Form 10-KSB for the year ended December 31, 2003.





Use of Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. This includes, among other things, evaluation of the remaining life and recoverability of long-lived assets. Actual results could differ from those estimates.





6







Stock Based Compensation  The Company generally does not recognize compensation expense relating to employee stock options because it generally grants options with an exercise price equal to the fair value of the stock on the effective date of grant. If the Company had elected to recognize compensation expense using a fair value approach, and therefore determined the compensation based on the value as determined by the Black-Scholes option pricing model, the pro forma net loss and pro forma loss per share would have been as follows:








Three Months EndedJune 30,
Six Months EndedJune 30,2003


2004


2003


2004Net loss, as reported

$
(397,302
)
$
(384,391
)
$
(1,234,853
)
$
(1,002,429
)Add/(Deduct): Total stock-based employeecompensation expense determined underfair value based method for all awards,net of tax

$
(2,225
)
$
(60,782
)
$
(96,742
)
$
(95,264
)Net loss, pro forma

$
(399,527
)
$
(445,173
)
$
(1,331,595
)
$
(1,097,693
)Net loss per common share  basicand diluted

$
(0.26
)
$
(0.23
)
$
(0.80
)
$
(0.60
)Net loss per common share  basicand diluted, pro forma

$
(0.26
)
$
(0.26
)
$
(0.86
)
$
(0.65
)








The pro forma amounts may not be indicative of the effects on reported net loss for future periods due to the effect of options vesting over a period of years and the granting of stock compensation awards in future years.





There were no options exercised or granted during the three months ended June 30, 2004.





Recent Accounting Pronouncements  In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , which was adopted on January 1, 2002. SFAS No. 144 addresses accounting and reporting of long-lived assets, except goodwill, that are either held and used or disposed of through sale or other means. As discussed in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003, the Company recorded an impairment loss of $3,811,767 and $149,242 on certain patents during the years ended December 31, 2002 and 2003, respectively.





In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others . FIN No. 45 is an interpretation of FASB Statements No. 5, 57 and 107 and rescinds FIN No. 35. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The disclosure requirements in FIN No. 45 were effective for the year ended December 31, 2002. The adoption of this interpretation did not have a material effect on the Companys financial statements.





In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities (revised December 2003). FIN No. 46 addresses when a company should include in its financial statements the assets, liabilities and activities of a variable interest entity. FIN No. 46 defines variable interest entities as those entities with a business purpose that either do not have any equity investors with voting rights or have equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN No. 46 consolidation requirements are effective for all variable interest entities created after January 31, 2003, and to pre-existing entities

 in the first fiscal year or interim period ending after December 15, 2003. Certain disclosure requirements are effective for financial statements issued after January 31, 2003. The adoption of FIN No. 46 had no effect on the Companys financial position, results of operations or cash flows.





In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity , effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had a material impact on the Companys financial position, results of operations, or cash flows.





7




Reclassifications  Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 financial statement presentation.





2.     Inventories


Inventories are as follows:





December 31,


June 30,2003


2004Raw Materials

$
343,537

$
326,015Finished Goods - Probes

$
0

$
64,400Total Inventories

$
343,537

$
390,415








3.     Line of Credit and Notes Payable to Shareholder





In December 2002, the Company entered into a revolving line of credit with an asset-based lender. The line of credit was secured by accounts receivable and inventory. The line of credit was paid in full on April 22, 2004 and terminated at the Companys request. As of June 30, 2004, the Company had no revolving line of credit in place.





In March 2003, the Company borrowed $200,000 on a short-term unsecured note at a 12 percent interest rate to finance short-term working capital requirements. During 2003, the Company repaid $100,000 on the short-term note. The current balance as of June 30, 2004 was $100,000.





4.     Related-Party Transactions





During 2003, the Company wrote-off $44,941 of doubtful receivables from related parties controlled by a shareholder. In addition the Company also wrote-off $57,940 of notes receivable from shareholders that it believed to be questionable. As of December 31, 2003, a government grant payment of $4,359 had been incorrectly routed to one of the parties controlled by a shareholder. Upon notification, these funds were returned to the Company.





There are no transactions with the affiliates or related parties that impact sales or expenses.





Significant transactions and balances with shareholders are summarized below:





December 31,2003


June 30,
  2004Notes payable to shareholder

$
227,000

$
0





Three Month Period Ended
June 30,
Six Month Period Ended
June 30,2003


2004


2003


2004Interest expense to shareholder

$
18,493

$
0

$
27,842

$
5,094





After the completion of the sale of the wire and cable division to ANS, the shareholder note was paid off in full on April 22, 2004.





5.    Loss Per Share





Basic net loss per share has been computed by dividing net loss by the weighted average number of shares outstanding during each period. Diluted loss per share has been computed by dividing net loss by the weighted average common stock and common stock equivalent shares outstanding during each period using the treasury stock method for employee stock option plans and warrants, if the common equivalent shares were not anti-dilutive. Common stock equivalents were anti-dilutive for all periods presented.


8


6.    Material Events





On March 8, 2004, the Company announced an agreement to sell its Portland, Oregon wire and cable division to Advanced Neuromodulation Systems, Inc.
  (ANS). The transaction was subject to microHelix shareholder approval. On April 21, 2004, the shareholders of
  microHelix approved the transaction, and the transaction closed on the same day. See Note 7 to these quarterly unaudited consolidated financial statements.





7.    Discontinued Operations





On April 21, 2004 the Company announced the completion of the sale of the wire and cable division assets to ANS. Since the transaction was completed during the second fiscal quarter ended June 30, 2004, we were required under GAAP to classify this pending transaction as a discontinued operation at the end of the first fiscal quarter of 2004. The results of operations for the wire and cable division for the
  first and second quarters of 2004 are reported as a single line item on the statement of operations under the heading discontinued operations. In addition, for comparative purposes, we are required to reclassify  the results of the
  first and second quarters of 2003 as well. Since the transaction was completed on April 21, 2004, the  loss  recognized on the sale was recorded in the second quarter ending June 30, 2004. The details relating to
this transaction are outlined in the footnote below.





Summarized results relating to discontinued operations are reflected as follows for the three and six month periods ended June 30:









**Three Months Ended June 30,**

**Six Months Ended June 30,**2003

2004

2003

2004Sales


$1,016,889


$190,529


$1,546,218


$749,195Cost of Sales


862,489


94,610


1,506,545


599,340Gross Profit


154,400


95,919


39,673


149,855Operating Expenses:Research and development


83,100


38,691


356,298


133,614Sales and marketing


87,111


17,950


206,067


59,188General and administrative


39,733


21,377


70,301


55,325Total Operating Expenses


209,944


78,018


632,666


248,127Total Other Expense-net


6,242


(11,564
)

(23,895
)

(24,605
)Net Income
  (Loss)


($49,302
)

$6,337


($616,888
)

($122,877
)





The following assets and liabilities were classified as held for sale as of December 31, 2003 and June 30, 2004





December 31,
  2003

June 30,2004Assets Held For Sale:Inventories

$
263,332

$
0Property, Plant and Equipment


1,174,044

$
0Intangible Assets


965,103

$
0Total Assets Held for Sale

$
2,402,479

$
0Liabilities Held For Sale:Accounts Payable

$
79,805

$
0Capital Lease Obligation


291,386

$
0Note Payable to Shareholder


227,000

$
0Total Liabilities Held for Sale

$
598,191

$
0





9




As of April 21, 2004, in exchange for the purchased assets from
  microHelix, ANS paid the Company an amount equal to the following:





(1)  $1,500,000 in cash;

(2)  $227,000 note payable to a shareholder;

(3)  $233,917, plus $45,634 of interest to pay off an equipment capital lease; and

(4)  $79,401 assumption of trade payables.

Assets Held for Sale:


Inventories represent all the raw materials and work-in-progress inventories held at the Portland, Oregon facility.


Property, plant and equipment represent all machinery and equipment, leased equipment, building leasehold improvements, office equipment, computer equipment and software located at the Portland, Oregon facility.


Intangible Assets represent the assigned value of patents and trade secrets. During the year ended December 31, 2002, as a result of recurring losses and a change in the direction of the Company to focus on short-term activities, the Company tested certain patents in the wire and cable segment for impairment. As a result of the Companys tests, $3,811,767 was recorded as an impairment loss on intangibles in the consolidated statements of operations. The Company developed a net cash flow forecast specifically related to the patents in question, applied a royalty stream to the forecast, and discounted the resulting stream in order to determine the estimated fair value of the patents. The estimated fair value was then compared to the carrying value of the related patents, which resulted in the impairment loss of $3,811,767. Based on the ANS asset purchase agreement, the Company
determined that the value of the inventory and the property and equipment was fully reflected in the purchase price offered by ANS. Based on this assumption and the fact that all patents will be transferred to ANS as part of the purchase agreement, it was then determined that there was an impairment loss of $149,242 on the intangibles in the consolidated statement of operations for the year ended December 31, 2003.


Liabilities Held for Sale:





Accounts Payable primarily represents trade payables incurred in the ordinary course of business by the wire and cable division. The  amount of these trade payables  assumed  at closing on April 21, 2004
  was $79,401.





Capital Lease Obligation covered four laser machines and selected cabling equipment that were used as collateral under a sale leaseback arrangement signed in June 2003.





Notes Payable to Shareholder represents the principal value of a note that was due on December 31, 2004





* * * * * *





ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The following discussion provides information that management believes is relevant to an assessment and understanding of the Companys operations and financial condition. This discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes.





Forward-Looking Statements





Statements in this filing which are not historical facts are forward-looking statements under the provisions of the Private Securities Litigation Reform Act of 1995. Such statements reflect managements current views and estimates of future economic and market circumstances, industry conditions, company performance and financial results. Words such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, intends, potential, continue, and variations of such words and similar expressions are intended to identify such forward looking statements. These statements are subject to risks and uncertainties that could cause the Companys actual future results to differ materially from the results
discussed herein. Factors that could adversely affect future events, transactions or results include, but are not limited to our ability to compete successfully in the medical ultrasound business; our ability to execute our business plan; the delay in the sale of commercial quantities of our products caused by regulatory review of our customers products into which they are incorporated; the concentrated nature of our customer base which causes fluctuations in our revenue and earnings and adds unpredictability of our quarterly sales and earnings; the uncertain market acceptance of our new ultrasound products; and competition form larger competitors with more financial resources; and other risks and factors as are described from time to time in the Companys Securities and Exchange Commission filings, including but not limited to, the risks detailed in the Risk Factors section of the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003. The forward-looking
 statements
 contained in this Form 10-QSB speak only as of the date on which they are made, and the Company undertakes no obligation and does not intend to update or revise these forward-looking statements to reflect events or circumstances that occur after the date of this filing. If the Company does update or correct one or more forward-looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements.


10




Sale of Wire and Cable Division


On April 21, 2004 we announced the completion of the sale of the wire and cable division assets to ANS of Dallas, Texas for approximately $2.0 million in cash and assumed liabilities. We initially announced a signed agreement with ANS on March 8, 2004, subject to the approval of the
  microHelix shareholders and fulfillment of certain other conditions. Since this transaction was completed on April 21, 2004, it has been recorded in our second fiscal quarter ending on June 30, 2004. Therefore, as of March 31, 2004, the end of the first fiscal quarter, the proposed sale of the cable and wire division was classified as a pending transaction requiring that it be accounted for as a discontinued operation under Generally Accepted Accounting Principles (GAAP). For the quarter ended June 30, 2004, the Statement of Operations has been
presented in the format that reflects the continuing ultrasound operations and the related
  microHelix corporate functions. Accordingly, the description of the results of operations will follow this format as well. The balance sheet as of June 30, 2004 represents the ongoing ultrasound operations.





Critical Accounting Policies and Estimates





The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to product returns, bad debts, inventories, prepaid expenses, intangible assets, income taxes, warranty obligations, and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and related judgments and estimates affect the preparation of our consolidated financial statements.





Revenue Recognition  The Company recognizes revenue from commercial sales of cable assemblies, complete ultrasound probes and related products when title passes, which is upon shipment. Commercial sales are made F.O.B. point of shipment. The products must be physically shipped from the factory. In some cases, tooling that has been paid for by a customer may remain at the Company or at a vendor. Returns are limited to nonconforming products and the volume of returns to the Company has been insignificant. The Company does not establish reserves for returns because they are minimal.





Development contracts are structured on a cost reimbursement or cost plus basis. Revenue from development contracts for non-recurring engineering is recognized using the percentage of completion method as time and materials costs are incurred. Revenue from contracts for the production of prototypes is recognized when the title passes, which is upon shipment. In some cases, customers pre-pay for product and services, which is classified as deferred revenue until the services are performed, at which time it is recognized as revenue.





Government grant sales are recognized as time and materials costs are incurred using the percentage of completion method. The government generally provides grants to perform specific research and is not the ultimate customer. The Company closed out all government grants at the end of 2003.


11





RESULTS OF OPERATIONS





THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2003 AND JUNE 30, 2004





The discussion that follows relates primarily to the activities of the Companys ultrasound division as all activity for the wire and cable division was classified for reporting purposes as discontinued operations as of March 31, 2004. Sales for the second quarter of 2004 were $187,867 compared to sales of $461,313 recorded in the second quarter a year ago, a decrease of $273,446 that can be substantially attributed to a single customer that adjusted
  its finished goods inventory levels during the quarter. We anticipate demand from this major customer will resume in the third quarter, but can offer no assurances or guarantees that this will occur. As a result of this significant drop in shipments, gross profit for the second quarter of 2004 was a negative $141,037 compared to a positive gross profit of $28,555 earned in the same quarter a year ago.





Total sales for the six month period ending June 30, 2004 were $469,211, compared to total sales of $943,204 reported in the first six months of last year, a decrease of $473,993 or 50%. Gross margin for the six month period ending June 30, 2004 was a negative $219,501, compared to a positive gross margin of $84,508 recorded in the six month period ending June 30, 2003. Generally, the same factors that contributed to the unfavorable comparison between the second quarter of 2004 and the second quarter of 2003 contributed to the unfavorable comparison of gross margin for the first six months of 2004 compared to the first six months of 2003. As a supplier to Original Equipment Manufacturers, we are subject to short term changes in demand. We are actively working to expand our customer base to minimize the impact of these demand changes by any one customer.





Total operating expenses for the second quarter of 2004 were $189,108 compared to a total of $374,222 incurred during the second quarter of 2003, a decline of $185,114 or 49%. Research and development expense for the second quarter of 2004 was $8,375 compared to $53,083 for the same quarter a year ago. This decrease can be primarily attributed to the completion of development and market introduction in May 2004 of our own line of replacement ultrasound probes for sale to medical group purchasing organizations, distributors and end-users. The development of new ultrasound probes represents a logical expansion of the ultrasound cable business that we have operated in Tucson, Arizona and Nogales, Mexico, taking advantage of a market we have served for the last five years. Sales and marketing expenses actually show a slightly negative value for the second quarter of 2004 primarily due
to reduced expenses after the completion of the ANS sale that was more than offset by a reversal of accrued commission expenses that are no longer required. General and administrative expenses were $181,196 for the second quarter of 2004 compared to $274,229 incurred during the second quarter of 2003. As anticipated, general and administrative expenses have been reduced as a result of decreased staff requirements due to the ANS transaction, reduced facility costs and reclassification of legal and banking fees related to the ANS transaction.





Total operating expenses were $595,829 for the first six months of 2004, compared to $695,736 in total operating expenses for the first six months of 2003, a reduction of $99,907 or 14%. This decrease in expense can be attributed to cost reduction initiatives initiated during the 4 th quarter of 2003 and reductions in staff, facilities expenses and services during the second quarter
  of  2004 after the completion of the ANS transaction.





The loss from operations for the second quarter of 2004 was $330,145 compared to a loss from operations of $345,667 for the same quarter a year earlier. This resulted from
  a decrease in gross margin of $169,592, offset by a decrease in operating expenses of $185,114, resulting in a modest reduction in overall loss from operations of $15,552. For the six month period ending June 30, the loss from operations in 2004 was $815,330, compared with a loss from operations of $611,228 in 2003. The
  Company incurred significant one-time expenses associated with the sale of the wire and cable division during the first six months of 2004. The loss from operations was also significantly impacted by a net reduction in gross margin of $304,009, the result of reduced shipments to a single customer during this period.





During the second quarter of 2004, the Company completed the sale of the wire and cable division to ANS. The Company recorded a net loss on the sale of $78,233 after the transfer of all assets and liabilities and recognizing all expenses associated with the transaction. In addition, the operating losses on discontinued operations of $122,877 were also recognized during the first six months of 2004.


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LIQUIDITY AND CAPITAL RESOURCES





On April 21, 2004, the shareholders of the Company approved the sale of the Companys wire and cable division to ANS. As a result of this transaction the Company was able to completely pay off its line of credit, pay off its shareholder note, pay off all its capital leases, pay down trade accounts payable to customary terms and  substantially reduce accrued expenses.





As a result of the ANS transaction and operating activities in the second quarter, cash increased by $62,334. As of June 30, 2004, the Company had $170,167 of cash compared to a cash balance of $107,833 as of March 31, 2004. In the second quarter the Company used $1,269,844 of cash for operating activities compared to $121,836 of cash generated during the same quarter a year ago, a difference of $1,391,680. Of this total difference of $1,391,680, $791,137 can be attributed to a change in accounts payable and another $426,996 can be identified with a reduction in accrued expenses. These changes are a direct result of the sale of the wire and cable division as previously described.





For purposes of statement presentation we have included the sale of the wire and cable division to ANS, as well as the operating results of the division as part of the Cash Flow from Financing Activities. During the second quarter of 2004, $1,332,178 of cash was generated from financing activities compared to $25,419 of cash generated in the second quarter of 2003. Of this difference of $1,306,759, $1,702,081 is related to the ANS transaction offset by a $380,977 pay down of the line of credit and notes payable for a net difference of $1,321,104.





In summary for the quarter $1,269,844 of cash was used in operating activities and $1,332,178 was generated from financing activities for a net increase in cash for the quarter of $62,234.
  As of June 30, 2004, the cash balance was $170,167 or an increase of $121,400 over the fiscal year end balance as of December 31, 2003 of $48,767. The increase in cash on a six month basis represents the net of $1,232,485 of cash used in operating activities offset by $1,353,885 generated from financing activities, or a net increase of $121,400.





The following table discloses the Companys contractual cash obligations as of June 30, 2004:





Payments Due by PeriodContractual Obligations


Total


Less than1 Year


1-3 Years


4-5 YearsOperating leases, net of sublease income

$
0

$
0

$
0

$
Line of credit


0








Short-term borrowing


100,000


100,000





Total contractual cash obligations

$
100,000

$
100,000

$
0

$






After the completion of the sale of the wire and cable division to ANS, all leases and the line of credit were paid off in full.





ITEM 3. CONTROLS AND PROCEDURES


The Companys Chief Executive Officer/Chief Financial Officer has reviewed the disclosure controls and procedures relating to the Company at June 30, 2004 and concluded that such controls and procedures were effective to provide reasonable assurance that all material information about the financial and operational activities of the Company were made known to
  him. There were no changes in the Companys internal control over financial reporting during the quarter ended June 30, 2004 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special shareholders meeting was held on April 21, 2004 at
  which the shareholders of the Company approved the sale of assets associated
  with the Company's  cable and wire division to Advanced Neuromodulation
  Systems, Inc. ("ANS") under the terms of an asset purchase agreement dated
  March 5, 2004 between the Company and ANS. This sale was approved by a vote of
  931,498 shares for and 35,936 shares against, and there were 1,400 abstentions
  and broker non-votes.





ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K




(a)  Exhibits:


Exhibit 31.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 Of The Sarbanes-Oxley Act of 2002Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002




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(b) Reports on Form 8-K:





In the period extending from
  April 1, 2004 through June 30, 2004 the following Form 8-Ks have been filed.





(1) On April 22, 2004, the Company issued a press release announcing that it had completed the previously announced sale of its
  cable and wire division assets, operated out of Portland, Oregon, to Advanced Neuromodulation Systems, Inc. (2)    On April 29, 2004, the Company announced
  that Deloitte & Touche LLP had resigned as its independent accountants.





(2) On May 19, 2004, the Company announced that it was introducing a new line of ultrasound probes for the replacement market. All
  microHelix probes have 510(k) clearances from the FDA.




















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SIGNATURES





In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Signature
Title
Date/s/ Tyram H. Pettit

Tyram H. Pettit
President, Chief Executive Officer, Chief Financial Officer
  
  and Director (Principal Executive, Financial and Accounting Officer)
August 13, 2004

























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