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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 June 30, 2004; 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)
Delaware 41-1493458
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
435 Newbury Street
Danvers, MA 01923
(Address of principal executive offices,
zip code)
(978) 762-8999
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 6, 2004 the issuer had 10,058,916 shares of Common Stock
outstanding.
Medwave, Inc.
Form 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Balance Sheets - September 30, 2003 and June 30, 2004 2
Statements of Operations - Three Months Ended June 30, 2004 3
and 2003 & Nine Months Ended June 30, 2004 and 2003
Statements of Cash Flows - Nine Months Ended June 30, 2004 4
and 2003
Notes to Unaudited Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 6
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities And Use Of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters To A Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Exhibits 15-16
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Medwave, Inc.
Balance Sheets
(Unaudited)
JUNE 30 SEPTEMBER 30
2004 2003
-------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,504,266 $ 1,694,648
Accounts receivable, net 193,330 232,676
Inventories, net 392,027 404,306
Prepaid expenses 78,794 54,016
-------------------------------------------
Total current assets 6,168,417 2,385,646
-------------------------------------------
Property and equipment:
Research and development equipment 31,535 31,535
Office equipment 111,758 76,836
Manufacturing and engineering equipment 281,205 247,824
Sales and marketing equipment 62,365 62,365
Leasehold improvements 31,613 31,613
Demonstration equipment - 25,302
-------------------------------------------
518,476 475,475
Accumulated depreciation and amortization (424,791) (398,715)
-------------------------------------------
93,685 76,760
-------------------------------------------
Patents, net 1,917 -
-------------------------------------------
Total assets $ 6,264,019 $ 2,462,406
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 315,482 $ 380,380
Accrued expenses 80,482 66,794
Deferred revenue 44,130 38,085
-------------------------------------------
Total current liabilities 440,094 485,259
-------------------------------------------
Stockholders' equity:
Common stock, .01 par value:
Authorized shares--50,000,000
Issued and outstanding shares-
June 30, 2004 - 10,033,916
September 30, 2003 - 8,744,666 100,339 87,446
Additional paid in capital 29,294,188 23,440,705
Accumulated deficit (23,570,602) (21,551,004)
-------------------------------------------
Total stockholders' equity 5,823,925 1,977,147
-------------------------------------------
Total liabilities and stockholders' equity $ 6,264,019 $ 2,462,406
===========================================
The accompanying notes are an integral part of these unaudited financial
statements.
2
Medwave, Inc.
Statements of Operations
(Unaudited)
Three months ended June 30 Nine months ended June 30
----------------------------------- --------------------------------------
2004 2003 2004 2003
----------------------------------- --------------------------------------
Revenue:
Net Sales $ 223,611 $ 355,629 $ 660,393 $ 989,925
Operating expenses:
Cost of sales and product development 178,723 259,092 461,632 556,432
Research and development 123,621 76,561 364,948 330,178
Sales and marketing 489,389 360,663 1,212,087 1,013,466
General and administrative 217,864 193,034 633,424 553,675
----------------------------- ---------------------------------
Operating loss (785,986) (533,721) (2,011,698) (1,463,826)
Other income(expense):
Interest income 8,154 4,823 17,402 15,344
Loss on disposal of equipment - - (25,302) -
----------------------------- ---------------------------------
Net loss $ (777,832) $ (528,898) $(2,019,598) $(1,448,482)
============================= =================================
Net loss per share - Basic and diluted $ (0.08) $ (0.06) $ (0.21) $ (0.18)
============================= =================================
Weighted average number of common and
common equivalent shares outstanding -
basic and diluted 9,958,647 8,650,916 9,472,360 8,061,172
============================= =================================
The accompanying notes are an integral part of these unaudited financial
statements.
3
Medwave, Inc.
Statements of Cash Flows
(Unaudited)
Nine months ended June 30
------------------------------------
2004 2003
------------------------------------
OPERATING ACTIVITIES
Net loss $(2,019,598) $(1,448,482)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 26,076 24,718
Loss on disposal of equipment 25,302 -
Changes in operating assets and liabilities:
Accounts receivable 39,346 (68,777)
Inventories 12,279 (156,240)
Prepaid expenses (24,778) (34,152)
Accounts payable (64,898) 3,153
Accrued expenses 13,688 32,458
Deferred revenue 6,045 (97,600)
------------------------------------
Net cash used in operating activities (1,986,538) (1,744,922)
------------------------------------
INVESTING ACTIVITIES
Purchase of patent (1,917) (2,475)
Purchase of property and equipment (68,303) (29,851)
------------------------------------
Net cash used in investing activities (70,220) (32,326)
------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 5,866,376 1,697,010
------------------------------------
Cash provided by financing activities 5,866,376 1,697,010
------------------------------------
Increase in cash and cash equivalents 3,809,618 (80,238)
Cash and cash equivalents at beginning of period 1,694,648 2,219,851
------------------------------------
Cash and cash equivalents at end of period $5,504,266 $2,139,613
====================================
The accompanying notes are an integral part of these unaudited financial
statements.
4
Medwave, Inc.
Notes To Unaudited Financial Statements
June 30, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Medwave, Inc.
have been prepared in accordance with accounting principles generally
accepted in the United States of America ("United States ") for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X promulgated under the Securities Exchange Act of 1934.
Accordingly, they do not include all of the information and disclosures
required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial information have been included for the
interim periods presented. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates. Operating results for
interim periods are not necessarily indicative of results that may be
expected for the entire fiscal year. Accordingly, these interim period
condensed financial statements should be read in conjunction with the
financial statements contained in the Company's Annual Report on Form 10-K,
for the year ended April 30, 2003.
In May of 2003, the board of directors changed the Company's fiscal year
from May 1- April 30 to October 1- September 30. In addition, on August 1,
2003, the Company completed a reorganization in which the Company's state
of incorporation was changed from Minnesota to Delaware.
2. STOCKHOLDERS' EQUITY
A summary of changes in stockholders' equity for the nine months ended
June 30, 2004 is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
.01 PAR VALUE ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID IN CAPITAL DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 8,744,666 $ 87,446 $ 23,440,705 $ (21,551,004) $ 1,977,147
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options/Warrant 179,250 1,793 364,240 - 366,033
- ------------------------------------------------------------------------------------------------------------------------------------
Private Placement - January, 2004
Net of Issuance Cost 1,110,000 11,100 5,489,243 5,500,343
- ------------------------------------------------------------------------------------------------------------------------------------
Net Loss - - - (2,019,598) (2,019,598)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004 10,033,916 $100,339 $ 29,294,188 $(23,570,602) $5,823,925
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholder Rights Agreement
On September 29, 2003, the Company adopted a shareholder rights agreement
in order to obtain maximum value for shareholders in the event that a
person or group of affiliated persons obtain 15% or more of the
outstanding shares of common stock. To implement the agreement, Medwave
issued a dividend of one right for each share of its common stock held by
shareholders of record as of the close of business on September 30, 2003.
Each right initially entitles shareholders to purchase one share of
Medwave's common stock for $50. However, the rights are not immediately
exercisable and will become exercisable only if certain events occur as
discussed above. The rights expire September 30, 2013. The Company, at its
option, also holds certain redemption privileges related to the rights as
described in the agreement.
5
3. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS 150"). SFAS No. 150 provides guidance on how an entity
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances), because that instrument represents an obligation.
Many of these instruments were previously classified as equity. SFAS 150
is 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 150 did not
have a material effect on the Company's operations, financial position or
cash flows.
4. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
shares outstanding in each year. Diluted earnings per share (EPS) is
similar to basic EPS, except that the weighted average of common shares
outstanding is increased to include the additional common shares that
would have been outstanding if the potential dilutive common shares,
consisting of shares of those stock options and warrants for which market
price exceeds exercise price, had been issued. Such common equivalent
shares are excluded from the calculation of diluted EPS in loss years, as
the impact is antidilutive. Therefore, there was no difference between
basic and diluted EPS for each period presented. The number of common
equivalent shares excluded from the calculation was 3,269,950 as of June
30, 2004.
5. REINCORPORATION
In August of 2003, the Company completed its reincorporation into the
State of Delaware. All assets and liabilities of the Company, as
originally organized in the state of Minnesota, have been assumed by the
newly formed Delaware Corporation. Each share of common stock issued and
outstanding immediately prior to the re-incorporation was converted into
one share of common stock of the newly formed corporation. The Company's
name remains Medwave, Inc.
6. STOCK PURCHASE AGREEMENT
On January 8, 2004, the Company entered into a Stock Purchase Agreement
with certain investors. Under the terms of the agreement, the Company
issued 1,110,000 shares of common stock yielding $5,500,343 net of
issuance costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by the Company or statements made by our directors, officers or
employees may contain "forward-looking" information subject to numerous risks
and uncertainties. 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,
6
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.
This discussion summarizes the significant accounting policies, accounting
estimates and other significant factors affecting the liquidity, capital
resources and results of operations of the Company for the three-month and
nine-month periods ended June 30, 2004 and 2003. This discussion should be read
in conjunction with the financial statements and other financial information
included in our April 30, 2003 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
OVERVIEW
Operating revenue for the nine months ended June 30, 2004 decreased 33% from the
nine months ended June 30, 2003. Revenue from the North American market was
approximately $505,195 for the nine-month period ended June 30, 2004. Revenue
from the North American market for the nine-month period ended June 30, 2003 was
approximately $600,074, which included revenue from dealers who purchased
demonstration equipment. There were no such orders during the nine months ended
June 30, 2004. Revenue from international markets, including OEM revenue from
Nihon Kohden, was approximately $155,199 and $389,851 for the nine-month periods
ended June 30, 2004 and 2003, respectively.
We recently announced the signing of another OEM agreement with ZOLL Medical
Corporation. ZOLL Medical is a leader in cardiac resuscitation devices and an
innovator in their field. We anticipate that we will begin to ship products to
fulfill this agreement in the months ahead. Also, should ZOLL decide to sell
into the Japanese market in the future, there are no restrictions within the
existing agreement with Nihon Kohden.
We continue to place a tremendous amount of management time and focus on
potential OEM agreements and additional third party discussions. We believe that
these agreements with other organizations provide a significant possibility to
sell large volumes of our technology, as well as compliment our direct sales
force's activities by further validating our technology in the market.
We continue to add new sales professionals to our United States sales force. We
have been, and will be in the months ahead, working to fill open sales
territories. We believe that with the numerous product validation studies, both
formal and anecdotal, the recent signing of the major group purchasing contracts
with AmeriNet, Novation, and Mayo Foundation, and the technology recognition
which we have received in the form of the Child Health Corporation Seal of
Acceptance and the Frost and Sullivan Technology Innovation Award, that we will
now benefit by investing in additional sales professionals to increase our
market penetration and revenue generating capabilities.
GENERAL
As of June 30, 2004, Medwave employed twenty-six (26) full-time employees and
three (3) part-time employees. Of the 26 full-time employees, 9 are in sales, 1
is international sales and product marketing, 2 are field clinical/technical
support, 3 are administrative support/order management/marketing & business
development, 10 are research & development/manufacturing/technical support, and
1 is President & CEO. Of the 3 part-time employees, 2 are in accounting and 1 is
administrative support/human resources. In the months ahead, we intend to hire
additional direct sales professionals in our continued effort to penetrate both
the U.S. hospital market as well as the pre and post hospital market. In
addition, we will most likely need to hire additional engineering and support
staff to successfully introduce new products as well as optimize our OEM
agreements. Since our inception, we have been engaged exclusively in the
development of devices for monitoring and measuring blood pressure.
Blood pressure or, more precisely, arterial pressure, is the pressure that the
blood exerts against the interior of the arterial walls. The level of the
pressure depends upon the strength of the heart's contraction, the volume of
blood in the circulatory system, the elasticity of the arteries, and the degree
of
7
capillary constriction impeding circulation. During the heart's relaxation
phase, (the diastole), blood pressure falls. When the heart muscle contracts,
(the systole), blood pressure rises. Clinically, blood pressure is commonly
reported as three different values. Systolic and diastolic pressures are the
maximum and minimum pressures during a single cardiac cycle, respectively.
Systolic pressure is also often referred to as contracting pressure, when the
heart muscle is contracting and pumping blood through the blood vessels of the
body. Diastolic pressure is also often referred to as the resting or relaxation
pressure of the heart muscle. Mean pressure is the average pressure during the
cardiac cycle.
Blood pressure and changes in blood pressure are critical indicators of the
health and performance of the body's cardiovascular system. Blood pressure
varies with age and by gender, such that young adults tend to have lower blood
pressures than older adults, and men tend to have higher blood pressures than
women of the same age. Even in healthy bodies, blood pressure normally
fluctuates during the day. For example, exercise, emotion, and exposure to the
cold tend to cause blood pressure to rise, while it falls in instances of
warmth, fainting, hemorrhage, and certain diseases. All hospital patients
require measurement of their blood pressure and many surgical or critically ill
patients require frequent or continual monitoring of their blood pressure.
Continual monitoring of blood pressure is important for patients in operating
rooms, surgical recovery rooms, intensive care units, emergency departments and
other critical care sites because of the acuteness of these patients' conditions
and rapidity with which their conditions can deteriorate. Trend information
obtained from successive blood pressure measurements plays an important role in
the diagnosis, prognosis, and treatment of diseases. Blood pressure is one vital
sign that is measured in every clinical location of the healthcare spectrum,
including a patient's own home environment. Recently, reports have been
published, exploiting challenges with conventional blood pressure cuff
technology. The cuff has been reported to have difficulty monitoring people with
fairly large or small arms as well as people with relatively high or low blood
pressure and people who may be in motion or have tremors. Medwave is confident
that its blood pressure monitoring technology will overcome these traditional
challenges, and as a result, continues to work on products that will allow for
broader market penetration, eventually including the personal monitoring
markets. In the near future, Medwave believes that it will have products that
address the pre and post hospital market, additional OEM business opportunities,
and the consumer blood pressure market. It is estimated that approximately 25
million people in the United States are measuring their personal blood pressure
each day.
Medwave Inc. develops, manufactures, and distributes non-invasive blood pressure
products. Its Vasotrax(R) Hand Held Monitor, the Vasotrac(R) APM205A NIBP
Monitor, the Vasotrac DS APM205A and the MJ23 OEM Module are new approaches to
non-invasive blood pressure monitoring. Medwave has received the necessary
regulatory clearances to market its technology in Europe, Asia, and the United
States. Medwave is ISO13485/ISO9001/MDD93/42/EEC certified, and all of its
products are CE marked.
RECENT DEVELOPMENTS
In June, 2004, Medwave signed an OEM Supplier Agreement with ZOLL Medical
Corporation. ZOLL Medical is a market leader in cardiac resuscitation. In the
months ahead, Medwave expects to begin shipping products as a part of this
agreement. In September, 2003, Medwave signed an agreement with Novation, the
leading supply chain management company in healthcare, to offer our sensor-based
blood pressure measurement solutions to the more than 2,300 health care
organizations that purchase supplies through Novation. This contract covers our
Vasotrac and Vasotrax technology. Subsequent to this, in April, 2004, Medwave
was chosen by Novation as one of only 10 suppliers to showcase its products in
Novation's Technology Pavilion at the Novation Leadership Conference. More than
700 suppliers were invited to be considered for this showcase. The conference
was attended by leaders of Novation member hospitals. During December, 2003, we
signed a corporate purchasing agreement with the Mayo Foundation Hospital and
its 35 affiliate hospitals. As a result of this agreement, Medwave's technology
is now listed as an alternative for the 35 Mayo Foundation hospitals. Several
Mayo hospitals currently use Medwave's technology and have recently purchased
additional products from Medwave. Prior to signing the agreement, the Mayo
Foundation Hospital in Rochester, MN performed an 18-month clinical study
comparing the Vasotrac system to an invasive catheter.
8
We have continued to focus on building our direct sales organization, adding or
upgrading hospital-based sales professionals. As of June 30, 2004, we employed
nine hospital-based Sales Specialists, two Clinical/Technical Support
Specialists, and one Marketing / International Sales Manager. Over the next few
months, we plan to hire additional hospital and alternative care sales
professionals to expand our reach into the U.S. market.
RESULTS OF OPERATIONS
The results of operations compares the three months and nine months ended June
30, 2004 and 2003. The analysis of liquidity and capital resources compares June
30, 2004 to September 30, 2003.
Operating revenue was $223,600 and $355,600 for the quarters ended June 30, 2004
and 2003, respectively, a decrease of 37%. Operating revenue was $660,400 and
$989,900 for the nine-month periods ended June 30, 2004 and 2003, respectively,
a decrease of 33%. This decrease is due to a reduction in U.S. distributor
demonstration equipment orders, as well as to the inability to ship additional
OEM modules and Vasotrac monitors to our Japanese partner, Nihon Kohden, because
of internal delays in their product launch plans.
Cost of sales and product development was $178,700 and $259,100 for the quarters
ended June 30, 2004 and 2003, respectively, a decrease of 31%. Cost of sales and
product development was $461,600 and $556,400 for the nine-month periods ended
June 30, 2004 and 2003, respectively, a decrease of 17%.
We incurred $123,600 and $76,600 for research and development expenses for the
quarters ended June 30, 2004 and 2003 respectively, an increase of 61%. Salary
and benefit expenses increased approximately $8,000 due to the addition of a
full time software engineer in June, 2003 and a full time electronic design
engineer in April, 2004. Also, patent activity charges are approximately $35,000
higher compared to last year, because we are reviewing our patent positions, as
well as performing legal examinations for additional patents. We incurred
$364,900 and $330,200 for research and development expenses for the nine-month
periods ended June 30, 2004 and 2003 respectively, an increase of 11%. This
increase is mainly due to an increase in patent activity charges of
approximately $38,000. Salary expense increased but was offset by the
elimination of engineering contractors.
We incurred $489,400 and $360,700 for sales and marketing expenses for the
quarters ended June 30, 2004 and 2003, respectively, an increase of 36%. We
incurred $1,212,100 and $1,013,500 for sales and marketing expenses for the
nine-month periods ended June 30, 2004 and 2003, respectively, an increase of
20%. Since September 30, 2002, we have been building up our direct sales force
from 8 to a maximum of 15 people. This increase in employees has substantially
increased sales and marketing expenses such as salaries, benefits, travel,
telephone and sales supplies.
We incurred $217,900 and $193,000 for general and administrative expenses for
the quarters ended June 30, 2004 and 2003, respectively, an increase of 13%. We
incurred $633,400 and $553,700 for general and administrative expenses for the
nine-month periods ended June 30, 2004 and 2003, respectively, an increase of
14%. The increase in general and administrative expenses was attributable to an
increase in outside services of approximately $40,000 associated with the costs
of being a public company. We have recently performed an internal analysis of
the cost to fulfill our responsibilities as a public company, and we anticipate
that the cost will continue to rise in the quarters ahead. In addition, bad debt
expense increased approximately $18,000 due to an increase in our reserve
account of $10,000 and the write off of some old uncollectible accounts. General
insurance, as well as employee health insurance, has increased approximately
$14,000 in the past 9 months, and is expected to continue to increase. In the
past 12 months, our employee health insurance expenses have risen by
approximately 100%.
Interest income was $8,200 and $4,800 for the quarters ended June 30, 2004 and
2003, respectively. Interest income was $17,400 and $15,300 for the nine-month
periods ended June 30, 2004 and 2003, respectively.
9
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $5,504,300 and $1,694,600 at June 30, 2004
and September 30, 2003, respectively reflecting the additional capital received
from the January 8, 2004 Private Placement. This increase is offset by a
continued investment in sales and marketing as well as the increase in general
and administrative expenses.
With the cash and cash equivalents of approximately $5,500,000, we believe that
sufficient liquidity is available to satisfy our working capital needs through
June 30, 2005.
Beginning in January of this year, we began the process of upgrading our
accounting software, Great Plains. Four additional modules, which include
inventory, bill of materials, sales order processing, and purchase order
processing, that were not being utilized have been activated, and computer
hardware has been upgraded as well. Prior to this upgrade, those four modules
were being handled off-line. As business growth continues, this project is a
necessary building block to support that growth and ensure that all business
functions work concurrently. Total cost to date is approximately $40,000 for the
software up-grade, implementation, and training, and approximately $5,000 for
hardware. We expect to spend an additional $25,000 to complete the project and
to possibly add more functionality.
We will need to raise additional capital to fund our long-term operations if we
do not begin to realize an operating profit. There can be no assurance that we
will be able to receive such funds on acceptable terms.
Cash flows used in operations increased to $1,986,500 for the nine months ended
June 30, 2004 from $1,744,900 for the nine months ended June 30, 2003, an
increase of $241,600. In both periods, we used cash flows to fund operating
losses, which were partially offset by non-cash expense for depreciation. The
use of cash in operations for the nine-month period ended June 30, 2004 included
a decrease in accounts receivable as well as an increase in prepaid expenses and
a decrease in accounts payable. The use of cash in operations for the nine-month
period ending June 30, 2003 included an increase in inventory and accounts
receivable as well as a decrease in deferred revenue.
Cash flows used in investing activities increased to $70,200 for the nine months
ended June 30, 2004 from $32,300 for the nine months ended June 30, 2003. This
increase reflects the cost of the upgrade to our accounting software.
Financing activities provided $5,866,376 from the exercise of stock options and
a stock warrant as well as the January, 2004 Private Placement during the nine
months ended June 30, 2004, and $1,697,010 from the January, 2003 Private
Placement during the nine months ended June 30, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
Our only off-balance sheet arrangements are non-cancelable operating leases
entered into in the ordinary course of business. The table under the following
caption "Contractual Obligations" shows the amount of our operating lease
payments by year.
10
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at June 30, 2004 and the
effect these contractual obligations are expected to have on our liquidity and
cash flows in future periods. We recently renewed our operating lease
commitments for our Danvers, MA and Arden Hills, MN locations. Both leases were
extended for a three-year period.
PAYMENTS DUE BY PERIOD
-------------------------------------------
TOTAL 1 YEAR OR LESS 1-3 YEARS
----- -------------- ---------
Operating lease commitments........... $327,081 $111,589 $215,492
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Medwave's financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the United States of America
(U.S. GAAP). Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions are affected
by management's application of accounting policies. Critical accounting policies
for Medwave include revenue recognition, stock-based compensation, impairment of
long-lived assets, and allowance for doubtful accounts.
Revenue Recognition
The Company recognizes revenue upon product shipment, provided there exists
persuasive evidence of an arrangement, the fee is fixed or determinable, and
collectibility of the related receivable is reasonably assured.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
As discussed above, the Company has elected to follow APB No. 25, and related
Interpretations in accounting for employee stock options and has adopted the
disclosure provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation (Statement 123), relating to the fair value method of accounting
for stock options.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for 2004 and
2003: risk-free interest rates of 3.96% and 5.60% for the periods ending June
30, 2004 and 2003, respectively; dividend yield of 0%; volatility factor of the
expected market price of the Company's common stock of 1.60 and .64,
respectively, and a weighted average expected life of the option of five years.
The Company granted options to purchase 155,500 shares and 292,500 shares during
the nine months ended June 30, 2004 and 2003 respectively.
11
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
Three months ended June 30 Nine months ended June 30
-----------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------
Net loss as reported $ (777,832) $ (528,898) $ (2,019,598) $ (1,448,482)
Add: Stock-based employee compensation expense
included in reported net loss - - - -
Deduct: Total stock-based employee compensation
determined under fair value method for all awards (112,062) (87,677) (329,750) (350,750)
----------------------------------------------------------
Pro forma net loss $ (889,894) $ (616,575) $ (2,349,348) $ (1,799,232)
==========================================================
Basis and diluted loss per share
As reported (0.08) (0.06) (0.21) (0.18)
Pro forma (0.09) (0.07) (0.25) (0.22)
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms. The
Company reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The Company includes any reserves
for specific accounts receivable balances that are determined to be
uncollectible, along with a general reserve, in the overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information
available, the Company believes the allowance for doubtful accounts as of June
30, 2004 is adequate. However, actual write-offs may exceed the recorded
allowance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934,
the Company has evaluated, with the participation of management, including the
Chief Executive Officer (who is also the Company's acting Chief Financial
Officer), the effectiveness of its disclosure controls and procedures as of the
end of the period covered by this report. Based on such evaluation, the Chief
Executive Officer has concluded that such disclosure controls and procedures are
effective in ensuring that material information relating to the Company is made
known to the certifying officer by others within the Company during the period
covered by this report.
From time to time, the Company reviews the disclosure controls and procedures,
and may from time to time make changes aimed at enhancing their effectiveness
and to ensure that the Company's systems evolve with its business. There was no
change in the Company's internal control over financial reporting that occurred
during the three-month period ended June 30, 2004 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 28, 2004, the Company entered into a stock purchase agreement
pursuant to which it has sold 1,110,000 shares of common stock at $5.00 per
share, yielding proceeds of $5,500,000. These securities were sold only to
accredited investors pursuant to an exemption from registration under Regulation
D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Results from April 8, 2004 Annual Meeting of Shareholders
The Company's Annual Meeting of Stockholders, held April 8, 2004, imparted
results of a vote FOR Solomon Aronson, M.D. (electing one Class I Director to
complete a three-year term), votes FOR William D. Corneliuson and Timothy J.
O'Malley (electing two Class II Directors for three-year terms), a vote FOR the
approval of the sale of common stock to William D. Corneliuson, Chairman of the
Board of Directors and a vote FOR the approval of an amendment to the Company's
Stock Option and Grant Plan (the "Option Plan") that will increase the number of
shares that can be issued under the Option plan by 250,000 shares.
There were 9,801,416 shares of Common Stock entitled to vote at the meeting and
a total of 7,433,385 shares (75.83%) were represented at the meeting.
1. Election of Directors:
-------------------------------------------------------------------------------
FOR WITHHOLD
-------------------------------------------------------------------------------
Solomon Aronson M.D. 7,424,735 8,650
-------------------------------------------------------------------------------
William D. Corneliuson 7,353,935 79,450
-------------------------------------------------------------------------------
Timothy O'Malley 7,424,735 8,650
-------------------------------------------------------------------------------
2. Approving the sale of common stock to William D. Corneliuson,
Chairman of the Board:
--------------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN BROKER NON-VOTE
--------------------------------------------------------------------------------------------------------
4,774,954 44,021 31,611 2,582,799
--------------------------------------------------------------------------------------------------------
3. Approving an amendment to the Company's Stock Option and Grant
Plan (the "Option Plan") that will increase the number of shares
that can be issued under the Option Plan by 250,000 shares:
--------------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN BROKER NON-VOTE
--------------------------------------------------------------------------------------------------------
4,659,714 153,783 37,089 2,582,799
--------------------------------------------------------------------------------------------------------
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ITEM 5. OTHER INFORMATION
(A) Not applicable
(B) During the period covered by this report, there were no
material changes to the Company's procedures by which security
holders may recommend nominees to the Company's Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit
Number Description
- ------- -----------
31.1 Certification of the principal executive officer and principal financial officer, pursuant to
rule 13a - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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 8K:
(1) N/A
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: August 12, 2004 Medwave, Inc.
By: /s/ Timothy J. O'Malley
--------------------------------
Timothy J. O'Malley
President and Chief Executive
Officer (Principal Executive
Officer and Principal Financial
Officer)
14