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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 EXCHANGE
ACT OF 1934 for the quarterly period ended March 31, 2004
 OR [  ]
    
    TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT 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
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)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 [x] No [  ] As of March 31, 2004, there were 1,681,806 shares of the issuers common stock
outstanding. Transitional Small Business Disclosure Format (Check One): Yes [  ] No [x]




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microHelix, Inc.
Quarterly Report on Form 10-QSB
Quarter Ended March 31, 2004 TABLE OF CONTENTS PagePART I  FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS  UNAUDITEDConsolidated balance sheets as of December 31, 2003 and March 31, 2004
    
    
    3Consolidated statements of operations for the three months ended March 31, 2004 and 2003
    
    
    4Consolidated statements of cash flows for the three months ended March 31, 2004 and 2003
    
    
    5Notes to consolidated financial statements
    
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    10ITEM 3. CONTROLS AND PROCEDURES
    
    
    13ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
    
    13SIGNATURES
    
    
    14CERTIFICATIONS
    
    
    14EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
          2




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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 the financial position as of March 31, 2004 and the operating results and cash
flows for the three month periods ended March 31, 2004 and March 31, 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 quarterly period ended March 31, 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
    
    March 31, 2004(unaudited)AssetsCurrent Assets:Cash
    
    $
    48,767
    
    
    $
    107,833Accounts receivable, net of allowance of $22,156 and $20,363
    
    
    425,326
    
    
    
    386,894Inventories
    
    
    343,537
    
    
    
    288,762Prepaid expenses
    
    
    70,085
    
    
    
    55,197Assets held for sale
    
    
    2,402,479
    
    
    
    2,236,418Total current assets
    
    
    3,290,194
    
    
    
    3,075,104Property and equipment  net
    
    
    116,536
    
    
    
    105,735Other assets  net
    
    
    9,516
    
    
    
    9,516Total assets
    
    $
    3,416,246
    
    
    $
    3,190,355Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    497,470
    
    
    $
    704,828Accrued liabilities
    
    
    274,665
    
    
    
    487,684Line of credit
    
    
    249,293
    
    
    
    298,007Short-term borrowing
    
    
    100,000
    
    
    
    100,000Liabilities held for sale
    
    
    598,191
    
    
    
    534,337Total current liabilities
    
    
    1,719,619
    
    
    
    2,124,856Deferred gain on sale-leaseback
    
    
    213,048
    
    
    
    182,369Total liabilities
    
    
    1,932,667
    
    
    
    2,307,225Shareholders Equity:Preferred Stock, no par value, 5,000,000 shares authorized, zero
issued and outstanding at December 31, 2003 and
March 31, 2004, respectively
    
    
    
    
    
    
    Common stock, no par value, 8,333,333 shares authorized,
1,681,806 issued and outstanding at December 31, 2003
and March 31, 2004
    
    
    14,359,467
    
    
    
    14,359,467Additional paid-in capital
    
    
    6,487,417
    
    
    
    6,487,417Deferred compensation expense
    
    
    (27,185
    )
    
    
    (21,798
    )Accumulated deficit
    
    
    (19,336,120
    )
    
    
    (19,941,956
    )Total shareholders equity
    
    
    1,483,579
    
    
    
    883,130Total liability and shareholders equity
    
    $
    3,416,246
    
    
    $
    3,190,355
 See notes to consolidated financial statements. 3




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MICROHELIX, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three Months EndedMarch 31,2003
    
    2004Sales
    
    $
    480,395
    
    
    $
    279,797Cost of Sales
    
    
    426,700
    
    
    
    358,107Gross profit (loss)
    
    
    53,695
    
    
    
    (78,310
    )Operating Expenses:Research and development
    
    
    30,426
    
    
    
    54,585Sales and marketing
    
    
    9,430
    
    
    
    3,145General and administrative
    
    
    253,150
    
    
    
    321,279Total operating expenses
    
    
    293,006
    
    
    
    379,009Loss from operations
    
    
    (239,311
    )
    
    
    (457,319
    )Other Income (Expense):Interest income
    
    
    4,992
    
    
    
    369Interest expense
    
    
    (9,995
    )
    
    
    (3,981
    )Other income (expense)  net
    
    
    (5,003
    )
    
    
    (3,612
    )Net loss from continuing operations
    
    
    (244,314
    )
    
    
    (460,931
    )Discontinued operations:Loss from operations of wire and cable division
    
    
    (593,237
    )
    
    
    (157,108
    )Net loss
    
    $
    (837,551
    )
    
    $
    (618,039
    )Loss per common share  basic and dilutedNet loss from continuing operations
    
    
    (.16
    )
    
    
    (.27
    )Net loss from discontinued operations
    
    
    (.38
    )
    
    
    (.09
    )Net loss
    
    $
    (.54
    )
    
    $
    (.36
    )Shares used in per share calculation  basic and diluted
    
    
    1,539,962
    
    
    
    1,681,806
 See notes to consolidated financial statements. 4




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MICROHELIX, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months EndedMarch 31,2003
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (837,551
    )
    
    $
    (618,039
    )Adjustments to reconcile net loss to cash used
in operating activities:Depreciation and amortization
    
    
    136,349
    
    
    
    122,757Stock compensation expense
    
    
    5,387
    
    
    
    5,387Amortization of deferred inventory charges
    
    
    1,540
    
    
    
    1,540Change in:Accounts receivable, net
    
    
    200,337
    
    
    
    38,432Due from affiliates
    
    
    (4,132
    )
    
    
    Inventories
    
    
    (96,005
    )
    
    
    83,667Prepaid expenses
    
    
    1,621
    
    
    
    14,888Intangible and other assets
    
    
    (22,753
    )
    
    
    9,986Accounts payable
    
    
    (185,583
    )
    
    
    200,973Accrued liabilities
    
    
    (100,017
    )
    
    
    213,019Cash used in operating activities
    
    
    (900,807
    )
    
    
    72,610Cash Flows from Investing Activities:Capital expenditures
    
    
    (12,234
    )
    
    
    (4,789
    )Cash provided by (used in) investing activities
    
    
    (12,234
    )
    
    
    (4,789
    )Cash Flows from Financing Activities:Proceeds from borrowings against notes payable
and lines of credit
    
    
    207,694
    
    
    
    874,285Principal payments on notes payable and lines of credit
    
    
    (1,169,944
    )
    
    
    (825,571
    )Principal payments on capital lease obligations
    
    
    
    
    
    
    (57,469
    )Repurchase of common stock
    
    
    (20,000
    )
    
    
    Cash used in financing activities
    
    
    (982,250
    )
    
    
    (8,755
    )Change in cash
    
    
    (1,895,291
    )
    
    
    59,066Cash, beginning of period
    
    
    2,131,549
    
    
    
    48,767Cash, end of period
    
    $
    236,258
    
    
    $
    107,833Supplemental disclosure of cash flow information 
Cash paid for interest
    
    $
    39,533
    
    
    $
    16,854
 See notes to consolidated financial statements. 5




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MICROHELIX, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Policies and Basis of Presentation The accompanying quarterly 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 March 31, 2004 had an accumulated deficit of $19,941,956.
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 quarterly period ended March 31, 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 unreviewed financial statements contained in
the initial filing of this report. The Companys Form 10-QSB for the quarterly period ended March 31, 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
review required under SAS 100 for the quarter ended March 31,
2004, Section 906 certifications required by 18 U.S.C. Section 1350 and included as Exhibits
32.1 and 32.2 to this Form 10-QSB have been qualified by reference to the
absence of that review. The results of operations for the three month period ended March 31, 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




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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 EndedMarch 31,2003
    
    2004Net loss, as reported
    
    $
    (837,551
    )
    
    $
    (618,039
    )Add/(Deduct): Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of tax
    
    $
    (94,517
    )
    
    $
    (60,782
    )Net loss, pro forma
    
    $
    (932,068
    )
    
    $
    (678,821
    )Net loss per common share  basic
and diluted
    
    $
    (0.54
    )
    
    $
    (0.36
    )Net loss per common share  basic
and diluted, pro forma
    
    $
    (0.61
    )
    
    $
    (0.40
    )
 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
March 31, 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




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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,
    
    March 31,2003
    
    2004Raw materials
    
    $
    343,537
    
    
    $
    288,762
 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 is secured by accounts receivable and
inventory. The line of credit bears interest at the prime rate plus 6.25%
(13.00% at March 31, 2004) and allows the Company to borrow up to $500,000. At
March 31, 2004, $298,007 was outstanding on the line of credit. As of March 31, 2004, the Company was in compliance with the terms of the
line of credit. 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 March 31, 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,
    
    March 31,2003
    
    2004Notes payable to shareholder
    
    $
    227,000
    
    
    $
    227,000
 Three Month Period EndedMarch 31,2003
    
    2004Interest expense to shareholder
    
    $
    18,493
    
    
    $
    5,094
 Subsequent to the end of the period, the note payable to shareholder was
repaid as part of the sale of the Companys wire and cable division. 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. 6. Subsequent 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. Subsequent to
the end of 8




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the period, 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 not completed
during the first fiscal quarter ended March 31, 2004, we are required under
GAAP to classify this pending transaction as a discontinued operation.
Following this reporting format the results of operations for the wire and
cable division for the first quarter 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 quarter of 2003 as well. The balance sheet as of March 31, 2004
must classify all assets and liabilities that are related to this transaction
while it was pending as held for sale. Since the transaction was completed
on April 21, 2004, the gain or loss to be recognized on the sale will be
recorded in the second quarter ending June 30, 2004. The details relating to
the wire and cable division are outlined in the footnote below. Summarized results relating to discontinued operations are reflected as
follows for the quarters ended March 31: 2003
    
    2004Sales
    
    $
    530,823
    
    
    $
    560,212Cost of Sales
    
    
    643,296
    
    
    
    506,431Gross Profit
    
    
    (112,473
    )
    
    
    53,781Operating Expenses:Research and development
    
    
    273,198
    
    
    
    94,924Sales and marketing
    
    
    147,464
    
    
    
    68,952General and administrative
    
    
    30,567
    
    
    
    33,947Total Operating Expenses
    
    
    451,229
    
    
    
    197,823Total Other Expense-net
    
    
    (29,535
    )
    
    
    (13,066
    )Net Loss
    
    $
    (593,237
    )
    
    $
    (157,108
    )
 The following assets and liabilities were classified as held for sale as of
December 31, 2003 and March 31, 2004 December 31,
    
    March 31,2003
    
    2004Assets Held For Sale:Inventories
    
    $
    263,332
    
    
    $
    232,900Property, Plant and Equipment
    
    
    1,174,044
    
    
    
    1,030,811Intangible Assets
    
    
    965,103
    
    
    
    972,707Total Assets Held for Sale
    
    $
    2,402,479
    
    
    $
    2,236,418Liabilities Held For Sale:Accounts Payable
    
    $
    79,805
    
    
    $
    73,420Capital Lease Obligation
    
    
    291,386
    
    
    
    233,917Note Payable to Shareholder
    
    
    227,000
    
    
    
    227,000Total Liabilities Held for Sale
    
    $
    598,191
    
    
    $
    534,337
 As of March 31, 2004, in exchange for the purchased assets from
microHelix, ANS will pay the Company an amount equal to the following:  (1)
    
    $1.5 million 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)
    
    $73,420 assumption of trade payables. 9




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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. It should be noted
that the exact amount of these trade payables to be assumed will be determined
at the time of closing on April 21, 2004, but under no circumstances can the
amount exceed $100,000. Capital Lease Obligation covers 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
is 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 to our
quarterly sales and earnings; the uncertain market acceptance of our new
ultrasound products; and competition from 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 10




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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. Sale of Wire and Cable Division Subsequent to the end of the first quarter, 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 will be
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 March 31, 2004, the
Statement of Operations will be presented in the format that will provide
details concerning 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 March 31,
2004 must classify all assets and liabilities related to the sale of the wire
and cable division as held for sale and, therefore, the balance sheet details
presented relate to 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 micro cables, connectors, ultra-thin film wire, assemblies 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. RESULTS OF OPERATIONS THREE MONTH PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 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
must be classified for reporting purposes as discontinued operations. Sales
for the first quarter of 2004 were $279,797 compared to sales of $480,395
recorded in the first quarter a year ago, or a decrease of $200,598 or 42% that
can be attributed to a 11




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single customer adjusting their finished goods inventory levels during the
quarter. We anticipate demand from this major customer to resume in the second
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 first
quarter of 2004 was a negative $78,310 compared to a positive gross profit of
$53,695 earned in the same quarter a year ago. Total operating expenses for the first quarter of 2004 were $379,009 compared
to a total of $293,006 incurred during the first quarter of 2003. Research and
development expense for the first quarter of 2004 was $54,585 compared to
$30,426 for the same quarter a year ago. This increase can be entirely
attributed to the development of our own line of replacement ultrasound probes
for sale to OEMs, distributors and end-users. We view this program as an
extension of the ultrasound cable business that we have been operating in
Tucson, Arizona and Nogales, Mexico for the past four years. General and administrative expenses were $321,279 for the first quarter of 2004
compared to $253,150 incurred during the first quarter of 2003. This increase
in expense can be entirely attributed to the additional cost related to
accounting and legal fees, printing expenses and investment banking fees
associated with the sale of the wire and cable division to ANS. After the
completion of the ANS transaction in the second fiscal quarter of this year,
these expenses should be significantly reduced. The loss from operations for the first quarter of 2004 was $457,319 compared to
a loss from operations of $239,311 for the same quarter a year earlier. This
change resulted from an increased loss in gross margin of $132,005 plus an
increase in expenses of $86,003, primarily related to costs associated with
the sale of the wire and cable division to ANS. The wire and cable division financial results have been reported as
discontinued operations. For the first quarter of 2004, the net loss for this
division was $157,108 compared to a net loss of $593,237 for the first quarter
of 2003. This improvement resulted from an improvement in gross margin and a
reduction in operating expenses in the first quarter of 2004 compared to the
same quarter a year earlier. The net loss for the Company was $618,039 for the first quarter of 2004
compared with a net loss of $837,551 for the same quarter a year ago. This
reduction in losses for the Company can be attributed to an improvement of
$436,129 in the operations of the wire and cable division in the quarter
compared to the same quarter last year offset by an increase in the loss of the
ultrasound division of $216,617 in the first quarter of 2004 compared to this
same quarter last year. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2004, the Company had $107,833 of cash compared to a cash
balance as of December 31, 2003 of $48,767. During the first quarter of 2004, the Company generated $72,610 cash from
operations compared to using $900,807 of cash in operations during the first
quarter of 2003. This improvement in cash over the corresponding quarter last
year can be primarily attributed to a reduction in net losses of $219,512 and
an increase in accounts payable and other liabilities of $699,592. During the first quarter of 2004, the Company used only $8,755 in financing
activities compared to $982,250 in the same quarter of 2003. During the first
quarter of 2003, the Company made a $635,000 principal payment on a loan from a
shareholder and reduced the Companys line of credit by $528,000, offset by a
$200,000 short term borrowing arrangement Subsequent to the end of the period, the shareholders of the Company approved
and the Company completed the sale of its wire and cable division to ANS. As a
result of this transaction, the Company was able to pay down debt, including a
note payable to a shareholder, pay down trade receivables to customary terms,
and provide approximately $600,000 in working capital to fund the growth of the
former ultrasound division, which is now the Companys principal business.
Although we expect that the proceeds from the asset sale will provide a portion
of the resources we will need to expand our ultrasound division as
contemplated, we may need additional capital that we have not yet secured and
we cannot assure you that the proceeds of the asset sale will be sufficient to
fund these plans. If the proceeds are not sufficient, we may be required to
seek additional financing. Such financing could be dilutive to our existing
shareholders or may not be available on reasonable terms, or at all. 12




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The following table discloses the Companys contractual cash obligations as of
March 31, 2004: Payments Due by PeriodLess thanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    4-5 YearsOperating leases, net of sublease income
    
    $
    441,829
    
    
    $
    258,430
    
    
    $
    183,399
    
    
    $
    Line of credit
    
    
    298,007
    
    
    
    298,007
    
    
    
    
    
    
    
    Short-term borrowing
    
    
    100,000
    
    
    
    100,000
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    839,836
    
    
    $
    656,437
    
    
    $
    183,399
    
    
    $
    
 
 ITEM 3. CONTROLS AND PROCEDURES The Companys Chief Executive Officer and Chief Financial Officer have
reviewed the disclosure controls and procedures relating to the Company at
March 31, 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 them.
There were no changes in the Companys internal control over financial
reporting during the quarter ended March 31, 2004 that materially affected, or
are reasonably likely to materially affect, the Companys internal control over
financial reporting. 
 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 31.2
    
    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 2002Exhibit 32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 Of The Sarbanes-Oxley Act of 2002
 (b) Reports on Form 8-K: In the period extending from January 1, 2004 through March 31, 2004 the
following Form 8-Ks have been filed.  (1)
    
    On February 17, 2004 the Company issued a press release announcing
that their securities will be quoted on the OTC Bulletin Board under the
trading symbol MHLX .OB for common stock and MHLXZ for the Class B
warrants.(2)
    
    On March 8, 2004 the Company issued a joint press release with
Advanced Neuromodulation Systems, Inc. (ANS) announcing that the Company
and ANS entered into an agreement whereby ANS would purchase the assets
of the microHelix wire and cable division located in Portland, Oregon. 13




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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
and Director (Principal Executive Officer)
    
    April 29,
2004/s/ Terrence A. Rixford

Terrence A. Rixford
    
    Senior VP-Finance, Chief Financial
Officer and Director (Principal Financial
and
Accounting Officer)
    
    April 29,
2004
 14