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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended July 31, 2002; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-28010
MEDWAVE, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1493458
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
4382 Round Lake Road West
Arden Hills, Minnesota 55112
(Address of principal executive offices,
zip code)
(651) 639-1227
(Registrant's telephone number, including
area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as 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 July 31, 2002, the issuer had 7,250,916 shares of Common Stock
outstanding.
Medwave, Inc.
Form 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - April 30, 2002 and July 31, 2002 3
Statements of Operations - Three Months Ended July 31, 2002 4
and 2001, and Period from June 27, 1984 (Inception)
to July 31, 2002
Statements of Cash Flows - Three Months Ended July 31, 2002 5
and 2001, and Period from June 27, 1984 (Inception)
to July 31, 2002
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities And Use Of Proceeds 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters To A Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Sarbanes-Oxley Certification 10
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDWAVE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
JULY 31 APRIL 30,
2002 2002
------------------------------------------
(unaudited) (see note 2)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,490,578 $ 3,048,051
Accounts receivable 235,561 283,114
Inventories 239,963 252,498
Prepaid expenses 75,309 143,297
------------------------------------------
Total current assets 3,041,411 3,726,960
Property and equipment:
Research and development equipment 210,633 210,633
Office Equipment 100,048 100,048
Manufacturing and engineering equipment 282,158 282,158
Sales and marketing equipment 109,895 109,895
Leasehold improvements 31,613 31,613
------------------------------------------
734,347 734,347
Accumulated depreciation (674,635) (661,691)
------------------------------------------
59,712 72,656
Patents, net ------------------------------------------
Total Assets $ 3,101,123 $ 3,799,616
==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 198,339 $ 252,727
Accrued payroll 43,158 81,097
Deferred revenue 152,344 149,625
------------------------------------------
Total current liabilities 393,841 483,449
Shareholders' equity:
Common Stock, no par value:
Authorized shares--50,000,000
Issued and outstanding shares --7,250,916 21,752,105 21,752,105
Deficit accumulated during the development stage (19,044,823) (18,435,938)
------------------------------------------
Total shareholders' equity 2,707,282 3,316,167
------------------------------------------
Total liabilities and shareholders' equity $ 3,101,123 $ 3,799,616
==========================================
The accompanying notes are an integral part of these financial statements.
3
Medwave, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
Period from
June 27, 1984
Three months ended July 31 (Inception)
---------------------------- to
2002 2001 July 31, 2002
---------------------------- --------------
Revenue:
Net Sales $ 209,615 $ 172,891 $ 3,217,063
Operating expenses:
Cost of sales and product development 160,880 157,895 3,154,249
Research and development 138,164 133,917 9,927,897
Sales and marketing 388,258 412,181 5,604,439
General and administrative 140,071 171,773 6,313,547
---------------------------- --------------
Operating loss (617,758) (702,875) (21,783,069)
Other income:
Interest income 8,873 37,811 1,865,006
Other income -- -- 1,500,000
---------------------------- --------------
Net loss $ (608,885) $ (665,064) $(18,418,063)
============================ ==============
Net loss per share - Basic and diluted $ (0.08) $ (0.10) $ (5.65)
============================ ==============
Weighted average number of common and
common equivalent shares outstanding 7,250,916 6,360,851 3,260,078
============================ ==============
The accompanying notes are an integral part of these financial statements.
4
Medwave, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Period from
June 27, 1984
Three months ended July 31 (Inception)
-------------------------------- to
2002 2001 July 31, 2002
-------------------------------- --------------
OPERATING ACTIVITIES
Net loss $ (608,885) $ (665,064) $(18,418,063)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 12,944 30,987 933,973
Amortization -- -- 136,017
Loss on sale of equipment -- -- 7,375
Issuance of Common Stock for consulting services -- -- 3,413
Changes in operating assets and liabilities:
Accounts receivable 47,553 23,883 (235,561)
Inventories 12,535 (150) (239,963)
Prepaid expenses 67,988 79,000 (75,309)
Accounts payable and accrued expenses (54,388) (151,972) 198,339
Accrued payroll and related taxes (37,939) 841 43,158
Deferred Revenue 2,719 (1,915) 152,344
-------------------------------- --------------
Net cash used in operating activities (557,473) (684,390) (17,494,277)
INVESTING ACTIVITIES
Patent expenditures -- -- (136,017)
Purchase of investments -- -- (38,908,724)
Sales and maturity of investments -- -- 38,908,724
Purchase of property and equipment -- (3,197) 1,020,078
Proceeds from sale of equipment -- -- 21,663
-------------------------------- --------------
Net cash used in investing activities -- (3,197) 905,724
FINANCING ACTIVITIES
Net proceeds from issuance of Convertible Preferred Stock -- -- 4,848,258
Net proceeds from issuance of Common Stock -- 4,366,148 16,271,029
-------------------------------- --------------
Net cash provided by financing activities -- 4,366,148 21,119,287
-------------------------------- --------------
(Decrease) increase in cash and cash equivalents (557,473) 3,678,561 4,530,734
Cash and cash equivalents at beginning of period 3,048,051 1,116,589 --
-------------------------------- --------------
Cash and cash equivalents at end of period $ 2,490,578 $ 4,795,150 $ 4,530,734
================================ ==============
The accompanying notes are an integral part of these financial statements.
5
Medwave, Inc.
(A Development Stage Company)
Notes To Financial Statements
July 31, 2002
1. DESCRIPTION OF BUSINESS
Medwave, Inc. (the "Company"), a development stage company, is engaged
exclusively in the development, manufacturing and marketing of a
proprietary, noninvasive system that continually monitors arterial blood
pressure, and in the development of related technology and products.
2. BASIS OF PRESENTATION
The financial information presented as of July 31, 2002 has been prepared
from the books and records without audit. Financial information as of
April 30, 2002 is based on audited financial statements of the Company but
does not include all disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial information for the periods indicated have been included. For
further information regarding the Company's accounting policies, refer to
the financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended April 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion should be read in conjunction with, and is qualified
by, the Company's financial statements set forth in Item 1 of this Form 10-Q.
GENERAL
The Company, which was formed in 1984, is a development stage company that
currently employs fifteen full-time employees. Since our inception, we have been
engaged exclusively in the development and marketing of devices for monitoring
and devices for measuring blood pressure. Utilizing our proprietary technology,
we developed the Vasotrac(R) APM205A system which monitors blood pressure,
providing new readings approximately every fifteen heartbeats. We believe that
the continual blood pressure readings and non-invasive qualities of the Vasotrac
system make it the most advanced approach to blood pressure monitoring. In
February 1995, we received clearance from the US Food and Drug Administration
(FDA) to market the Vasotrac system. We have also developed a hand-held blood
pressure monitor, the Vasotrax(TM). This hand-held monitor is based on the
technology used in the Vasotrac system. In June 2000, we submitted a 510(k)
notification to the FDA for review of the Vasotrax hand-held monitor. In August
2000, we received FDA clearance, which has allowed us to begin marketing the
Vasotrax in the United States for use on adult patients by trained medical
personnel. In addition, pursuant to an agreement with Nihon Kohden of Japan, we
have developed a module of our Vasotrac continual non-invasive blood pressure
monitor. The module is designed to be integrated into Nihon Kohden's, as well as
other company's larger, more comprehensive systems. The Ministry of Health and
Welfare in Japan has recently approved the MJ23 OEM Module for use with Nihon
Kohden monitoring systems in Japan.
We have incurred an accumulated deficit of $19,044,823 from our inception
through July 31, 2002. We expect to incur additional losses from development,
testing, regulatory compliance, sales, marketing and other expenses at least
until we emerge from the development stage.
6
Our success is dependent upon the successful development and marketing of the
Vasotrac system, the Vasotrac module, and the Vasotrax hand-held monitor as well
as related technology. However, there can be no assurance that our products or
related technology will be successfully marketed or sold in sufficient
quantities and at margins necessary to achieve or maintain profitability.
In September 2000, we also signed an OEM module agreement with Nihon Kohden that
calls for us to develop and produce a Vasotrac module that will be integrated
into the Nihon Kohden patient monitoring product family. As a part of this
agreement, Nihon Kohden placed an initial order for Vasotrac OEM modules, to be
delivered over the initial 18 months, and paid us a down payment of $125,000,
which has been treated as deferred revenue on our financial statements. In
November 2001, we shipped our first Vasotrac module prototype products to Nihon
Kohden. As a result of the Japanese Ministry of Health and Welfare approval, we
plan to ship MJ23 Modules to Nihon Kohden in the next quarter.
We are currently adding our own sales employees to work with dealers in order to
provide better product support. We currently anticipate a direct sales force of
approximately 10 employees that will work with and support a distribution
network focused on the pre-hospital, hospital, and post-hospital environments.
We are also currently looking for a distribution partner for the Vasotrax
hand-held monitor outside the hospital market. The success of our product sales
will depend upon the ability of dealers and/or sales representatives to sell the
products to the hospitals, their affiliates, and other markets. Over the past
several months, we have entered into several regional distribution agreements
with specialty distribution companies.
The initial response regarding our Vasotrax hand-held monitor from focus groups
and limited showings has been favorable. However, we may need to establish
additional distribution arrangements, and complement those arrangements with a
number of Medwave employees who will act as "in-house" experts. The Vasotrax
hand-held monitor will be targeted at the pre-hospital (EMT and EMS) market, the
hospital market, and the post-hospital markets (sub-acute, skilled nursing
homes, homecare, and physician offices).
We are using cash and cash equivalents primarily to increase our sales and
marketing efforts and increase awareness of Medwave and our technology in the
market, to continue clinical testing of the Vasotrac system, the Vasotrax
hand-held monitor and related technologies, to continue to validate our
technology against traditionally used blood pressure monitoring devices, to
create peer-to-peer consensus regarding Medwave's technology, and to provide
working capital. Over the next twelve months, we will also continue research and
development. Specifically, we expect to use funds to develop alternative sensors
(including sensors for use on infants, and disposable sensors), to sustain
engineering support for manufacturing, to continue development of the Vasotrax
hand-held monitor, and to complete the MJ23 OEM module. During the next year, we
do not expect to spend any material amount on equipment in connection with these
initiatives. Even assuming only limited sales, we believe that our cash and cash
equivalents should allow us to meet our cash requirements for approximately
fifteen months from July 31, 2002. We may seek additional capital through bank
borrowing, equipment financing, equity financing, and other methods. Our
financing needs are subject to change depending on, among other things, market
conditions and opportunities, equipment or other asset-based financing that may
be available, and cash flow from operations. Any material favorable or
unfavorable deviation from our anticipated expense could significantly affect
the timing and amount of additional financing that we may require. However,
additional financing may not be available when needed or, if available, may not
be on terms that are favorable to us or our security holders. In addition, any
such financing could result in substantial dilution to our existing security
holders.
RESULTS OF OPERATIONS
The results of operations compares the three months ended July 31, 2002 and
2001. The analysis of liquidity and capital resources compares July 31, 2002 to
April 30, 2002.
Operating revenue was $209,600 and $172,900 for the quarter ended July 31, 2002
and 2001, respectively, an increase of 21%. The operating revenue increase was
attributed to the increase of both direct sales employees and regional specialty
distribution companies.
7
Cost of sales and product development was relatively unchanged at $160,900 and
$157,900 for the quarters ended July 31, 2002 and 2001, respectively.
The Company incurred $138,200 and $133,900 for research and development expenses
for the quarters ended July 31, 2002 and 2001 respectively continuing to reflect
the shift in focus from research and development to sales and marketing.
The Company incurred $388,300 and $412,200 for sales and marketing expenses for
the quarter ended July 31, 2002 and 2001, respectively. The decrease was a
result of hiring sales professionals who have a lower fixed and higher variable
cost.
The Company incurred $140,100 and $171,800 for general and administrative
expenses for the quarter ended July 31, 2002 and 2001, respectively. The
decrease in general and administrative expenses was attributable to a reduction
in legal costs and as a result of transferring our accounting functions to our
Danvers, Massachusetts office. .
Interest income was $8,800 and $37,800 for the quarter ended July 31, 2002 and
2001, respectively. The decrease reflects the reduction in cash, and cash
equivalents balances and declining interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, and cash equivalents were $2,490,600 and $3,048,100 at July
31, 2002 and April 30, 2002, respectively reflecting the continued investment in
sales and marketing.
With the cash and cash equivalents, and short and long-term investments, the
Company believes that sufficient liquidity is available to satisfy its working
capital needs for approximately fifteen months from July 31, 2002. The Company
has no significant capital expenditure commitments.
Cash flows used in operations decreased to $557,500 for the quarter ended July
31, 2002 from $684,400 for the quarter ended July 31, 2001, a decrease of
$126,900. In both periods, we used cash flows primarily to fund operating
losses, which were partially offset by non-cash expense for depreciation. The
primary use of cash in operations for the quarter ended July 31, 2002 was for
decreases in accounts receivable and prepaid expenses. The primary use of cash
in operations for the quarter ended July 31, 2001 was for decreases in accounts
payable and prepaid expenses.
Financing activities provided nothing for the quarter ended July 31, 2002, and
$4,366,100 for the quarter ended July 31, 2001 as a result of the proceeds from
our private placement of common stock and warrants.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect amounts reported in the financial statements. The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of the financial
statements.
Revenue Recognition
The Company recognizes revenue from the sale of products at the time of shipment
of the product. Amounts received from customers in advance of the shipment of
the products are recorded as deferred revenue.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based on historical
collections of accounts receivable. The Company continually monitors its
accounts receivable balances. If the financial condition
8
of customers deteriorate, additional allowances may be required.
Deferred Taxes
The Company has recorded a full valuation allowance on deferred tax assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Statements made in this report that are stated as expectations, plans,
anticipations, prospects or future estimates or which otherwise look forward in
time are considered "forward-looking statements" and involve a variety of risks
and uncertainties, known and unknown, which are likely to affect the actual
results. The following factors, among others, as well as factors discussed in
the Company's other filings with the SEC, have affected and, in the future,
could affect the Company's actual results: resistance to the acceptance of new
medical products, the market acceptance of the Vasotrac system, the Vasotrax
hand-held unit or other products of the Company, hospital budgeting cycles, the
possibility of adverse or negative commentary from clinical researchers or other
users of the Company's products, the Company's success in creating effective
distribution channels for its products, the Company's ability to scale up its
manufacturing process, and delays in product development or enhancement or
regulatory approval. Consequently, no forward-looking statement can be
guaranteed and actual results may vary materially.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBITS DESCRIPTION
NONE
(B) REPORTS ON FORM 8K:
No reports on Form 8-K were filed by the Company during the quarter
ended July 31, 2002.
9
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 13, 2002 Medwave, Inc.
By: /s/ Timothy J. O'Malley
-------------------------------------
Timothy J. O'Malley
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
CERTIFICATIONS
I, Timothy O'Malley, certify that:
1. I have reviewed this quarterly report on Form 10-Q for Medwave, Inc.
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition and results of operations of
the Registrant as of, and for, the periods presented in this quarterly
report.
Date: September 13, 2002 Medwave, Inc.
By: /s/ Timothy J. O'Malley
-------------------------------------
Timothy J. O'Malley
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
10