Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
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 No.)
435 Newbury Street, Suite 206, Danvers, MA 01923
(Address of Principal Executive Offices, Zip Code)
Registrant's telephone number, including area code: (978) 762-8999
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
(Title of Class)
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 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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 126-2). YES [ ] NO[X]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant, based on the last sale price as of the last
business day of the registrant's most recently completed second fiscal quarter,
March 31, 2004, was approximately $57,039,700
As of December 15, 2004, 10,058,916 shares of common stock, par value $0.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS.............................................................. 3
ITEM 2 PROPERTIES............................................................ 23
ITEM 3 LEGAL PROCEEDINGS..................................................... 23
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 23
PART II
ITEM 5 MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER
PURCHASES OF SECURITIES............................................... 24
ITEM 6 SELECTED FINANCIAL DATA............................................... 26
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULT OF OPERATIONS.................................................. 27
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............ 32
ITEM 8 FINANCIAL STATEMENT AND SUPPLEMENTARY DATA............................ 33
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................. 50
ITEM 9A CONTROLS AND PROCEDURES............................................... 50
ITEM 9B OTHER INFORMATION..................................................... 50
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................... 50
ITEM 11 EXECUTIVE COMPENSATION................................................ 52
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS....................................... 54
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 55
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES................................ 55
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES............................ 56
MEDWAVE(R), VASOTRAC(R) AND VASOTRAX(R) ARE TRADEMARKS OF THE COMPANY.
FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN CONSTITUTE "FORWARD-LOOKING STATEMENTS" AS
THAT TERM IS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
(THE "ACT") AND RELEASES ISSUED BY THE SECURITIES AND EXCHANGE COMMISSIONS AND
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE EXCHANGE ACT OF 1934. THE WORDS "BELIEVE", "EXPECT", "ANTICIPATE",
"INTEND", "ESTIMATE", AND OTHER EXPRESSIONS WHICH ARE PREDICTIONS OF OR INDICATE
FUTURE EVENTS AND
2
TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS IDENTIFY FORWARD-LOOKING
STATEMENTS. RELIANCE SHOULD NOT BE PLACED ON FORWARD-LOOKING STATEMENTS BECAUSE
THEY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF MEDWAVE, INC. (THE
"COMPANY") TO DIFFER MATERIALLY FROM ANTICIPATED FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENT WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY
OF FACTORS, INCLUDING THOSE SET FORTH IN ITEM 1. SOME OF THE RISKS AND
UNCERTAINTIES THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE
GENERAL ECONOMIC CONDITIONS, LENGTHY ACQUISITION CYCLES BY POTENTIAL CUSTOMERS,
OUR ABILITY TO SUCCESSFULLY MARKET OUR PRODUCTS, AS WELL AS THOSE RISKS AND
UNCERTAINTIES SET FORTH UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 16.
PART I
ITEM 1. BUSINESS.
COMPANY PROFILE
Medwave, Inc., or the Company, was organized under Minnesota law in 1984. In
May, 2003, our shareholders voted to re-incorporate the Company under the laws
of the State of Delaware via a merger between the Minnesota corporation and the
Delaware corporation. We are engaged exclusively in the development,
manufacture, and sale of non-invasive, blood pressure measurement and monitoring
systems and of related technologies.
Our principal office is located at 435 Newbury Street, Danvers, Massachusetts
01923 and our telephone number is (978) 762-8999. We also have an office located
at 4382 Round Lake Road West, Arden Hills, Minnesota 55112, and the telephone
number is (651) 639-1227.
BUSINESS
GENERAL
As of December 1, 2004, Medwave employed 31 full-time employees and three
part-time employees. Of the 31 full-time employees, 11 are in sales, one is in
international sales and product marketing, three are in clinical
education/support, one is in finance, one is in business development/product
marketing, 13 are research & development/manufacturing/technical support/quality
assurance, and one is President and Chief Executive Officer. Of the three
part-time employees, two are in finance and one is in administrative
support/human resources. 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 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
3
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 change. 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. It has recently
been reported that approximately sixty-five million (65,000,000) people in the
United States are considered hypertensive (with high blood pressure) and this
number has grown substantially over the past several years.
Utilizing our proprietary technology, we developed the Vasotrac(R) APM205A
system which monitors blood pressure, providing new readings approximately every
fifteen (15) heartbeats. We believe that the continual blood pressure readings
and non-invasive qualities of the Vasotrac system make it one of the more
advanced approaches to blood pressure monitoring. In February 1995, we received
initial clearance from the US Food and Drug Administration, or the FDA, to
market the Vasotrac system. We have also developed a hand-held blood pressure
monitor, the Vasotrax(R). This hand-held monitor is based on the technology used
in the Vasotrac system. In connection with our supplier agreement with Nihon
Kohden of Japan, we have developed a module of our Vasotrac continual
non-invasive blood pressure monitor the MJ23. The MJ23 module is designed to be
integrated into Nihon Kohden's larger, more comprehensive systems. In June 2004,
Medwave signed a supplier agreement with Zoll Medical Corporation, a company
involved in the cardiac resuscitation markets. In September 2004, Medwave signed
a Development Investigation Agreement with a global electronics company, with
the intent of exploring projects of mutual interest and potential benefit.
Current Technology:
Invasive Arterial Catheter:
Currently, both invasive and non-invasive techniques are used to measure blood
pressure. Invasive techniques employ the surgical placement of a catheter
directly into an artery, an A-line. The fluid-filled catheter is connected to a
pressure transducer and assorted tubing to produce beat-by-beat, continual blood
pressure measurements. In addition, the catheter may be used to extract blood
samples from which a number of diagnostic test results, such as blood gas
information, may be obtained. Because our non-invasive Vasotrac system does not
allow for the extraction of blood samples, invasive techniques offer a
competitive advantage in this area. The surgical insertion of the catheter,
however, takes about fifteen to twenty minutes, assuming no complications.
Moreover, while such insertions frequently are performed without incident,
serious complications can occur, including thrombosis (blood clot), air emboli
(air bubble), and infection. Measurement errors may occur due to air bubbles,
catheter clotting or movement, or changes in elevation between the pressure
transducer and the level of the heart. Immediately following catheter
withdrawal, firm pressure must also be applied over the arterial site for an
extended period of time to avoid serious blood loss. Primarily because of its
invasive nature, the A-line is generally used by clinicians in critical cases
and for only relatively short time periods. The cost associated with inserting
an arterial catheter can be significantly higher than non-invasive blood
pressure monitoring.
As a general matter, we believe that non-invasive rather than invasive
treatments and methods are preferred by clinicians for numerous medical
conditions and processes, including the measurement and monitoring of blood
pressure. Non-invasive techniques significantly reduce patient risk and increase
patient comfort. In addition, the time and expense required to set up, maintain,
and remove non-invasive equipment generally is substantially less than with
invasive systems. We believe that, in many cases, patients in emergency
departments and associated environments, critical care, operating rooms,
cardiology departments, and pediatric environments could benefit from
non-invasive continual blood pressure monitoring after the point
4
at which clinicians may now cease obtaining such readings due to concerns
associated with prolonged or indefinite uses of invasive techniques.
Non-Invasive Blood Pressure Cuffs:
Many non-invasive blood pressure measurement techniques utilize a manually
operated occlusive cuff around the upper arm. A relatively simple blood pressure
instrument, called a sphygmomanometer, contains a cuff connected to a hand air
pump and pressure gauge or mercury column. The cuff is inflated to a pressure
above that of systolic pressure until the brachial artery is completely
occluded, and then the cuff is slowly deflated. During deflation, the clinician
must listen to the pulse in the brachial artery. Upon hearing and properly
interpreting the appropriate sounds, the clinician records the pressures shown
on the gauge or mercury column. The cuff pressure occurring simultaneously with
certain observed events within the circulatory or cuff systems are taken as the
systolic and diastolic pressures. This process may take several minutes to
complete, and in some patients will cause significant discomfort due to the
squeezing of the cuff around the upper arm. Numerous clinical studies have been
performed comparing the accuracy of this method with the invasive arterial
catheter, and have shown a wide degree of variation with this method being
caused by such things as environmental noise and movement, improper cuff size,
and readings taken too close in time to one another.
Our Vasotrax hand-held monitor has several advantages over a traditional
sphygmomanometer. The Vasotrax can produce a reading in approximately 15
seconds, whereas the sphygmomanometer may take several minutes to produce a
reading. This can be a significant advantage in emergency situations, or within
busy physician office practices. Also, this time saving of several minutes each
time a blood pressure is obtained can improve staff efficiency, which is
particularly important in light of the current shortage of nursing
professionals. Another advantage is patient comfort because the Vasotrax does
not require a complete obstruction of the artery as does the sphygmomanometer.
Recently, many states have mandated that the reduction of mercury be
accomplished by specified dates. Healthcare systems are searching for an
alternative method to replace the thousands of mercury filled blood pressure
sphygmomanometers currently in use. It is estimated that approximately 125,000
point of care blood pressure devices are sold each year into the professional
markets, which include hospitals, clinics, and physician's offices. Medwave
believes that this is an environment that could significantly benefit from our
technology. However, we also realize that cost of operation and purchase pricing
are drivers in these segments. We have been working to develop a more
universally accepted version of our Vasotrax Handheld. We believe that during
2005, we will introduce this version of the product to the markets, however
there can be no assurance that we will actually do so.
An automated, non-invasive blood pressure monitoring system is already commonly
used throughout hospitals, clinics, nursing homes, out-patient and ambulatory
surgery centers, and physician's offices. In addition, every bedside monitor,
whether configured, stand-alone, or networked, incorporates an automatic blood
pressure cuff. It is estimated that there are approximately 500,000 bedside
monitors installed in the world market, with approximately 75,000 new monitors
sold per year. In addition, within the pre-hospital emergency medicine response
market, most defibrillators are sold with an automatic blood pressure cuff built
into them. It is estimated that approximately 60,000 new defibrillators are sold
each year. The automated non-invasive blood pressure monitoring system currently
dominating the stand-alone market is the Dinamap(R) product, marketed by GE
Medical Systems, a division of General Electric Company. The Dinamap(R) provides
blood pressure measurements via automatic inflation and deflation of an
occlusive cuff at predetermined intervals. It is reasonably reliable and simple
to use. However, the Dinamap(R) product provides only intermittent measurements
at one-to-ninety minute intervals, as selected by the clinician. Some patients
suffer signification discomfort from the frequent cuff inflation. In addition,
with cuff-based systems, arm circulation is cut off during each measurement, the
arm holding the pressure cuff is unavailable for intravenous lines and other
forms of monitoring, and arm bruising and sleep interruption frequently occur.
Also, the manual and automatic cuff systems have not performed well in areas
with a high degree of motion, such as in ambulances or cardiac stress labs. It
is estimated that there are approximately 450,000 stand-alone/vital signs
monitors installed in the market, with approximately 60,000 per year being sold
for expansion or replacement reasons.
5
In contrast to the sphygmomanometer and other cuff-based systems, our Vasotrac
system and Vasotrax hand-held monitor do not require an inflatable cuff but
instead contain a unique pressure sensor that is placed on the wrist. In
addition to the comfort factor and greater versatility of our Vasotrac system
and Vasotrax hand-held monitor, we believe that our Vasotrac has a very
important advantage over cuff-based systems: more rapid readings that allow for
more precise monitoring. The accuracy of the Vasotrac has been compared to an
invasive arterial catheter and has achieved an excellent correlation across a
broad spectrum of patients, and in a variety of settings, including the
emergency medicine areas, bariatric (treatment of morbid obesity), pediatrics,
operating rooms, and other care areas. The Vasotrac produces an arterial
waveform, not available on either manual or automatic cuffs, and provides
significant improvement in patient comfort due to our measurement technique. The
Vasotrac interfaces directly into existing patient monitoring systems by
plugging an interface package (the NIA V-Line) into the invasive pressure
channel normally used for the arterial catheter. Hospitals in the U.S. market
have over 500,000 patient monitoring systems installed with invasive pressure
channels. Most of these monitors have multiple invasive pressure channels.
During the spring of 2001, we introduced a new High Motion Tolerant, or HMT,
software package that has the capability of monitoring a patient's blood
pressure during excessive movement, such as is found in ambulances or cardiac
stress labs. In a recent clinical study presentation that was completed by
researchers from Massachusetts General Hospital in Boston, Massachusetts, the
Vasotrac was compared to an invasive arterial catheter in a hospital trauma
center. The results were favorable and showed that the Vasotrac performed well
compared to the invasive methods in this clinical environment. The Vasotrac was
also compared with an automatic blood pressure cuff in a trauma transport
setting, and performed well in the transport environments when many times the
blood pressure cuff had challenges. Other favorable performance characteristics
highlighted by the researchers were the benefit of the waveform produced from
the Vasotrac and the comfort associated with the sensor versus a blood pressure
cuff. This study has been accepted for publication in 2005 in a major Emergency
Physicians Medical Journal.
The contraindications for our Vasotrac system and Vasotrax hand-held monitor
include patients on cardiopulmonary bypass, and patients with any condition in
which rendering a pulsating pressure signal from the radial artery is not
possible which may occur with severe arterial restrictions. Although there are
contraindications for the system, we believe that, as a general matter,
virtually no medical device is universally applicable for all patients at all
times. As such, this should not be a critical factor for market acceptance.
Moreover, given differences in individual body construction, our products may
not provide consistent readings or be usable on all patients. We do not believe
our products have caused any significant patient complications.
For the hospital based patients who require continual blood pressure monitoring,
invasive methods are currently the clinician's technology of choice. Given the
attractiveness of non-invasive monitoring, however, several companies have
introduced or are introducing products into this market for non-invasive
continual monitoring of arterial pressure based upon several technologies. These
technologies include pulse-wave velocity, partially inflated finger cuffs,
partially inflated arm cuffs, and tonometry. We believe that none of these
alternatives have gained wide acceptance within the clinical community for
continually monitoring arterial pressure. This belief is based on previous,
unsuccessful efforts of other companies to introduce accurate, continuous, and
non-invasive blood pressure monitors, the absence of such products at major
medical and other product shows, the lack of published advertisements, papers or
studies about such products in respected scientific, medical and other journals,
and anecdotal discussions with physicians and other medical personnel by our
management. In addition, all of the devices which have been introduced
historically were intended to be used predominantly in the operating room
environment, as many of these technologies have had a difficult time performing
with patients where motion or animation may be present. Medwave has focused its
efforts on the hospital markets/departments over the past few years in an effort
to introduce and gain clinical acceptance within the hospital setting. We have
been involved in numerous clinical studies, which have been supported within
clinical settings where traditional blood pressure cuffs have had a difficult
time performing. As a result, our sales and marketing focus has been towards
environments such as bariatrics, pediatrics, and emergency room settings, as
well as the operating room. We have believed, and continue to believe, that our
technology performs well in these clinical environments, while a blood pressure
cuff, manual or automatic, is challenged most of the time within these same
environments.
6
We originally attempted to build a dealer network to sell our technology, in an
a effort to seek sales coverage without the commensurate increase in sales staff
and cost that would occur if the same coverage were sought by building our own
employee sales force. However, we did not find this to be an effective manner to
enter and initially penetrate the market, as most medical device dealer
organizations do not have the level of sales time required to sell innovative,
breakthrough technology such as ours. Over the past 24 months, we have been
working to hire a direct sales organization, focused primarily on the hospital
market. When we initially began to hire these sales professionals, we had a
difficult time recruiting and attracting individuals with industry experience in
medical device sales. However, over the past 12 months, we have been increasing
our sales force. Recently, we have been able to recruit and retain individuals
who are experienced in medical device sales, and as a result, we have become
involved in larger projects, and in some cases, we have seen the sales process
shorten. In addition, we have hired a National Sales Manager who is managing our
sales efforts in the U.S. hospital markets. We have terminated all of our U.S.
dealers, and in most cases we will not replace them, due to the reasons stated
above. We do have some distribution agreements outside of the United States, and
over the next 12 months, will place additional focus on expansion in some of
these key international markets. We also continue to have discussions with other
medical device companies about a variety of topics, including the possibility of
expanding our sales channels through larger, more established organizations.
Our success is dependent upon the successful development and marketing of the
Vasotrac system, the MJ23 OEM module, the Vasotrax hand-held monitor as well as
related technology, and additional products which are expected to be introduced
into the markets during 2005. 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. Also, there can be no assurance that we will actually bring any
additional products to the market in 2005.
In September 2000, we signed an OEM module agreement with Nihon Kohden that
required us to develop and produce a Vasotrac module integrated into the Nihon
Kohden patient monitoring product family. As 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, that was received
in October 2000. This payment was accounted for as deferred revenue. We have
been shipping our MJ23 OEM Modules to Nihon Kohden, since November 2001. Nihon
Kohden has experienced challenges in introducing our MJ23 technology. We believe
that this is primarily due to the fact that they are the first company other
than Medwave to promote our technology, and they may not currently possess the
expertise required within their sales organization to effectively promote and
support the products. Medwave has and continues to work with Nihon Kohden in
training their organization, and we have met with their sales, marketing and
engineering management representatives in an ongoing effort, to build plans
around how to become more successful in promoting Medwave technology. As a
result of Nihon Kohden not being able to purchase specified quantities of
modules, Medwave is now able to sell OEM modules to other patient monitoring
companies for resale within the Japanese market. We view this as a positive
result, as Japan is the third largest medical device market in the world. In
June 2004, we signed an additional supplier agreement with Zoll Medical
Corporation. Zoll is a leader in the field of cardiac resuscitation products. We
believe that we will begin to ship products to satisfy the terms of this
supplier agreement during 2005. This is a non-exclusive agreement; therefore we
will attempt to enter into additional agreements in this market segment. We
believe that our market penetration in the hospital market, and the pending
publication of several clinical performance studies about our technology, has
increased the interest level in our technology with these other organizations.
At the end of November 2000, we began shipments of our Vasotrax hand-held
monitor. To date, this product has been sold into hospitals, in conjunction with
Vasotrac sales projects, and in some cases this product has been sold into the
EMS/EMT market segment. We have started to hire additional direct sales
professionals who are going to be focused on the pre and post hospital markets.
In addition, we have been developing additional handheld products, which we
expect to introduce and sell through this new sales channel during 2005.
We have been building our own sales organization to work in smaller geographies.
We currently have a direct sales force of 11 employees. All of our sales
professionals are focused on the hospital environment and
7
typically sell into numerous departments within the same institution. The
exception is the recent hire of the pre and post hospital sales people.
Our short-term and long-term investments are being used primarily to increase
our sales and marketing efforts and increase awareness of Medwave and our
technology in the markets, to continue clinical testing of the Vasotrac system,
the Vasotrax hand-held monitor and related technologies, to continually validate
our technology against traditionally used blood pressure monitoring devices and
to create peer-to-peer consensus regarding our technology. In addition, we have
been in the process of developing additional handheld products and additional
products based on our Vasotrac technology. We have been placing additional
emphasis on our OEM efforts and have developed a kit, which may be purchased by
other companies, so that they may evaluate our technology and its applicability
within their products. We anticipate incurring additional losses from further
development, testing, regulatory compliance and sales and marketing expenses for
the foreseeable future. Over the next twelve months, we expect to spend in
excess of $500,000 for research and development, including amounts expected to
be spent on clinical trials for new products and further clinical studies. Even
assuming only limited sales, we believe that cash and cash equivalents will
allow us to meet our cash requirements for at least twelve months from September
30, 2004. If the development process for our products does not proceed as
expected due to significant product design changes, market acceptance
difficulties, unexpected difficulties in attaining cost-effective
manufacturability or higher than expected sales and marketing costs, we may
require additional capital at an earlier date. We may seek such capital through
bank borrowing, equipment financing, equity financing, and/or 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 levels could significantly
affect the timing and amount of additional financing that may be required.
However, additional financing may not be available when needed or, if available,
may not be on terms that are favorable to our shareholders or us. In addition,
any such financing could result in substantial dilution to our existing
shareholders.
We have incurred an accumulated deficit of $24,382,068 from our inception
through September 30, 2004. We expect to incur additional losses from
development, clinical studies, regulatory compliance, sales, marketing, and
other expenses at least until we complete the development of the technology and
market acceptance begins.
We have financed our activities through an initial public offering, or IPO, in
November 1995, and a series of earlier private placements of equity securities,
including shares of preferred stock that were converted into common stock just
prior to our IPO in November 1995. On March 6, 1998, we completed a private
placement that raised approximately $2,990,000 in net proceeds. On March 20,
2001 and June 13, 2001, we completed the first round and the second round,
respectively, of a private placement that raised approximately $5,300,000 in net
proceeds. On January 23, 2003, we sold an additional 1,400,000 shares of our
common stock, and raised approximately $1,697,000 in net proceeds. On January 8,
2004, we entered into a stock purchase agreement with certain investors. Under
the terms of the agreement, we issued 1,110,000 shares of common stock, yielding
$5,500,343 in net proceeds.
PRODUCTS DESCRIPTION
We believe that the continual blood pressure readings and the efficacious and
non-invasive qualities of our Vasotrac system, Vasotrax hand-held monitor, and
MJ23 OEM Module make them a new, superior approach to blood pressure monitoring.
The system is designed to assist clinicians in the therapeutic management of
their patients by providing frequently updated blood pressure readings in an
easily obtained and comfortable manner. The Vasotrac is a
microprocessor-controlled system consisting of (i) a liquid crystal display, LED
displays, a Central Processing Unit and a key pad, all housed in an aluminum
case, (ii) a patient cable, and (iii) a replaceable pressure sensor.
The Vasotrac system monitors blood pressure using, as a key component, the
pressure sensor placed on the wrist over the radial artery, a main artery in the
arm. Over one thousand (1,000) of our Vasotrac system monitors have been shipped
to customers and distribution partners for use in clinical environments. The
8
monitor has no moving parts and is composed of standard, off-the-shelf
components. These monitors have been subjected to electrical testing of various
duration, including extended life cycle testing, which has shown that the
monitor has an expected useful life of at least 10 years. We believe that
medical devices are expected to have a life expectancy of 7-10 years. The motor
assembly is the only moving part of the Vasotrac system and, as such, it has
received the most attention from us for life testing. The Vasotrac system has
produced very favorable performance results in testing.
The Vasotrac system, Vasotrax hand-held monitor, and the MJ23 OEM Module utilize
our proprietary algorithms and sensors, which applies pressure to the artery as
the pressure waveforms are measured by the sensor. Then, our proprietary
algorithms analyze the pressure waveforms to calculate the systolic, diastolic,
mean pressure readings, and pulse rate approximately every fifteen heartbeats.
The Vasotrac system displays systolic, diastolic, and mean blood pressure in
millimeters of mercury (mmHg) as well as heart rate in beats per minute. The
Vasotrax hand-held monitor displays systolic and diastolic blood pressure as
well as pulse rate. These values are displayed after the clinical user manually
presses the Vasotrax on the subject's radial artery for approximately 15
seconds.
The Vasotrac system is designed to be used by trained medical personnel in
hospitals and other health care settings where automatic blood pressure
monitoring is desirable. Patient pressures can be monitored audibly and visually
by entering limits into the Vasotrac system alarm menu. Those values above or
below the limits will be automatically brought to the attention of the clinician
through audible and visual alarms. Given differences in individual body
characteristics and physical condition, the system may not be usable on all
patients. However, with proper placement, the system has been usable on all
patients participating in our clinical studies conducted to date, and we believe
that the system will continue to be usable on virtually all patients with wrist
sizes larger than 11 cm. We do not believe, however, that market acceptance of
the system is likely to be jeopardized by lack of universal applicability of the
system for the population, although there can be no assurance in this regard.
In the summer of 2001, we introduced the NIA V-Line interface product, which
allows the clinician to plug the Vasotrac directly into the pressure channel of
the clinician's existing, more comprehensive monitoring system, allowing for a
true "Plug and Play" and capture of data into the clinician's central system. In
addition, we introduced the HMT, or High Motion Tolerant, software package,
which is designed to allow the clinician to take continual non-invasive blood
pressure readings on patients in circumstances where motion is prevalent. In
these clinical environments, obtaining a valid blood pressure value with manual
cuffs is a significant challenge for the caregiver, as it requires using a
stethoscope that may be difficult to hear through due to high motion and
accompanying noise. Also, it has been reported to us that automatic cuff systems
have not functioned well in situations involving high motion, even if they are
designed for this application. As a result, our technology has been a topic in
numerous clinical studies in cardiology and emergency departments who are
considering the Vasotrac as a solution. We believe that clinical acceptance of
our technology is eminent, and that the results of so many clinical studies have
been presented very positively. Due to this and the fact that we have entered
into negotiations with other companies regarding integration of our technology
into their larger platforms, as well as the fact that we have become involved in
several customer situations, where our technology is becoming the choice to
replace blood pressure cuffs, we have been developing additional products that
incorporate and utilize our Vasotrac and V-Line technology. We believe these
products will allow us to expand our reach into numerous additional market
segments. We expect these products to be introduced during 2005, however there
can be no assurance that we will actually do so.
During May 2004, we introduced our Vasotrac DS model continual blood pressure
monitor. We developed this model monitor based on feedback and input from our
customers, who asked for a sensor that could be changed after each patient use.
The Vasotrac DS model also affords us the ability to present creative purchase
plans for customers. Since we introduced the Vasotrac DS, we have been able to
develop several centers that had an interest in standardizing a given care area,
and we have established purchase models consisting of a variety of options for
the customer to utilize when purchasing our technology, including making a down
payment on the Vasotrac DS monitor and then purchasing a defined number of
sensors; or strictly committing to a specified number of sensors at a higher
price per unit, and the Vasotrac DS may be given to the customer at no capital
charge. We anticipate that this type of purchasing model will become more
attractive to our customers in the U. S. market over the next several months.
9
Our continued development of the Vasotrax hand-held blood pressure monitor may
result in a product that has sales potential in both the professional market
(doctors, nurses, and medical technicians) and eventually the consumer market.
We have been developing additional handheld based products, and expect to
introduce those to the markets during 2005, however there an be no assurance
that we will actually do so.
CLINICAL STUDIES
We have conducted clinical studies for four purposes: (i) to aid the product
development process, (ii) to obtain data for submission to the regulatory
agencies, (iii) to help us prepare marketing and sales information to promote
greater awareness of the Vasotrac system and Vasotrax hand-held monitor, and
(iv) to gain a peer to peer recommendation for our technology. We have used two
standards of comparison, the automated cuff and the arterial line (A-line). The
automated cuff clinical did not allow synchronization of measurements between
the cuff and our system because of the different number of heartbeats required
to produce readings for each method. Further, the cuff does not meet the
accuracy objectives that we set for the Vasotrac system and Vasotrax hand-held
monitor. For these reasons, the cuff proved to be of limited utility in our
studies. However, since the cuff has been a clinical tool for numerous years,
and is still relied on by thousands of caregivers, we have started to do more
comparisons. In addition, there have been a few studies where our technology was
compared to a blood pressure cuff, purely from a comfort perspective. In these
studies, our technology was rated to be overwhelmingly more comfortable than a
conventional blood pressure cuff. This is a factor, which we feel provides us a
significant clinical advantage in areas such as sleep medicine and for patients
in acute care settings, where proper rest is a prerequisite of healing. In a
recent press release, UCLA Medical Center announced that it chose the Vasotrac
technology for an intensive clinical study in the sleep laboratory environment.
This announcement came after years of searching for a method to use to monitor
blood pressure during sleep. Other previously used methods, including a blood
pressure cuff were not adequate, due to the fact that they disturbed sleep,
thereby affecting the validity of the study. In addition, Virginia Polytechnic
Institute and State University, Blacksburg, VA announced that a study "Self
reported sensitivity to continuous noninvasive blood pressure monitoring via the
radial artery", was published in the Journal of Psychosomatic Research during
2004. The conclusions stated that the Vasotrac technology was non-intrusive
during extended wear, and the Vasotrac's sampling rate far exceeds that of the
traditional blood pressure cuff methods.
A-lines are believed to provide more accurate blood pressure measurements than
automated cuffs. In contrast to automated cuffs, the A-line studies allow for
data synchronization. By inserting an arterial catheter in the radial artery on
one wrist and by placing the Vasotrac system (or the Vasotrax hand-held monitor)
sensor on the radial artery of the other wrist, data was simultaneously recorded
on a beat-by-beat basis. Our clinical studies were conducted at teaching
hospitals under institutional review board controls and protocols. Generally,
such review boards represent their respective hospital and include physicians
that can make appropriate judgments regarding the safety of the study. The
boards periodically review protocols for medical devices and maintain meeting
minutes, which are subject to audit by the FDA.
Our initial clinical studies were performed on approximately 30 subjects, some
of whom were healthy and some of whom were undergoing surgery. Results from a
series of these studies comparing the Vasotrac system's readings with the
A-line's readings were used in our 510(k) submissions to the FDA. Subsequent to
the 510(k) submissions, we have conducted clinical trials on over 500 additional
individuals. During our clinical trials conducted to date, the variance between
synchronized Vasotrac system readings obtained from one arm of the patient and
the comparative A-line readings obtained from the other arm was calculated by
computing the standard deviation of error from more than 30,000 paired readings
from the patients. Based on these measurements (which excludes a certain number
of paired readings because we believe that these readings have been affected by
artifact, patient level differences, arm-to-arm differences, or experimental
error) the magnitude of this variance was calculated as a standard deviation of
approximately 7, 5, and 7 mmHg for systolic, mean and diastolic blood pressure
measurements, respectively. As such, the Vasotrac system compares favorably with
those found in previous generations of non-invasive blood pressure measurement
devices, such as the Dinamap(TM) cuff-based system with which we claimed
"substantial equivalence" in our 510(k) submission to the FDA. In addition,
these standard deviation values are below the crucial 8 mmHg standard deviation
limit of clinical acceptability as defined
10
by the Association for the Advancement of Medical Instrumentation ("AAMI") as
the national standard for electronic or automated sphygmomanometers.
In our original 510(k) Vasotrac submission to the FDA, we included not only
clinical data, but also outlined a plan to continue testing and integrating the
results from into the Vasotrac system. Based on the foregoing and, most
importantly, the improvement in the overall results of the system's performance
subsequent to its 510(k) submission, we believe that applicable FDA regulations
do not require, and therefore at this point do not anticipate any need to submit
to the FDA, the post-510(k) clinical studies.
We expect to continue conducting or supervising on-going clinical studies of the
system on individuals with different characteristics and under various
conditions until such time as the Vasotrac system receives general market
acceptance. We cannot currently estimate the number of individuals to be tested
or the amount of time and expense that will be required to perform and analyze
these additional clinical studies in order to achieve general market acceptance
for the system. However, based on the results from several of the studies which
have already been completed, or that are underway, we believe the performance of
the blood pressure cuff is suspect in numerous clinical settings and on a
variety of patient types. Conversely, the performance of our technology in these
same environments and/or patient types could prove to be more consistent and
clinically useful. Therefore, we will continue to promote our strategy of
supporting clinical studies, which are targeted towards our plans of becoming
the technology of choice for non-invasive blood pressure monitoring.
In March 2001, we completed clinical testing of the Vasotrac system in pediatric
applications. We used this clinical information to file a 510(k) to the FDA
requesting clearance to allow for the use of the Vasotrac system on pediatric
patients. In June 2001, we received 510(k) clearance from the FDA for use of the
Vasotrac system in pediatric applications. To date, additional studies involving
pediatric patients are ongoing, and in some cases, completed with favorable
results. One study from Arkansas Children's Hospital in Little Rock, Arkansas,
which was performed in the pediatric intensive care unit, compared the
performance of the Vasotrac with the invasive arterial catheter. Continual blood
pressure monitoring is often required in a pediatric intensive care unit,
however in the past, the only way to obtain this level of data collection and
comparison was to insert an invasive catheter into the patient. The Vasotrac
technology performs favorably in regards to accuracy and frequency of updates to
the invasive methods. This study was accepted for publication in the Journal of
Clinical Monitoring and Computing.
We are currently expanding our studies of our systems to determine if the
possibility exists to use the current sensor technology on different sites of
the patient's body.
The object of our continued studies is to refine the design of the system and to
test the system on a greater number of patients with different characteristics
and under various conditions, such as a wide range of blood pressure readings,
until such time, if ever, the Vasotrac system, the Vasotrax hand-held monitor
and any future products may receive general market acceptance. In addition, we
believe that the studies will help us to prepare better marketing, sales, and
training information as well as to promote greater awareness and market
acceptance of our products toward the goal of attaining commercial viability for
them.
Below is a summary of the clinical studies completed and currently underway on
the Vasotrac sensor-based non-invasive blood pressure system:
STUDY AND INSTITUTION DATE COMPLETED
- --------------------- --------------
a. Volunteer Study - University of Minnesota June 1994
b. International Multi Center Study December 1997
Tokyo's Women's Medical College, University of California, University of
Vienna, University of Lille, St. Antoine Hospital and University of Minnesota
c. Induced Hypotension - University of Vienna August 1998
d. Morbidly Obese Patients - University of Minnesota September 1998
e. Patient Comfort - University of Vienna December 1999
f. Volunteer Study II - University of Minnesota June 2000
g. Pediatric vs. Cuff - University of Minnesota August 2000
11
STUDY AND INSTITUTION DATE COMPLETED
- --------------------- --------------
h. Patient Comfort - Virginia Polytechnic Institute Published; Journal of September 2000
Psychosomatic Research-Fall 2004
i. Vasotrac vs. Arterial Catheter - University of Arkansas, Children's' Hospital To February 2001
be published Journal of Clinical Monitoring & Computing-Winter 2004-2005
j. Vasotrac vs. Arterial Catheter - Children Cardiology - Boston Children's Hospital April 2004
Awaiting publication during 2005
k. Arkansas Children's - Sensor Options-Vasotrax Handheld Validation In Process
l. LDS Hospital-Vasotrac in Sleep Lab Patients-Nocturnal Hypertension episodes Study ended
m. Mayo Clinic-Liver Transplant Correlation Results presented in Japan-Spring 2004 April 2003
n. Univ. of UT-Primary Children's using the Vasotrac in Cath Lab instead of Catheters In Process
o. Massachusetts General Hospital-Vasotrac in Trauma Patients/EMS-EMT Environ. June 2004
Presented at several meetings during 2004, published in spring 2005
p. Washington University in St. Louis-Comparing Vasotrac to Cuff in Obese Patients August 2004
Presented ASA Oct. 2004, PGA in NYC December 2004, awaiting publication
q. Children's Hospital of Chicago-Vasotrac versus Femoral Artery Pressure in Children In Process
r. Children's Hospital of Boston-Vasotrac instead of A-Line in Scoliosis Patients March 2003
Awaiting Publication 2005
s. University of Arizona Tucson-Comparison of Vasotrac to A-line in post-operative In Process
cardiac patients
We have also conducted clinical studies to develop and validate the Company's
Vasotrax hand-held blood pressure measurement technology. These clinical studies
included 60 healthy subjects. For each subject an arterial catheter was inserted
in one arm and several operators performed repeated blood pressure measurements
from the opposite arm using the hand-held monitor. For each one of the
operator's blood pressure measurements, the corresponding arterial blood
pressure measurements were determined and compared for accuracy. The raw
waveform data from the arterial line as well as the raw data from the hand-held
device were also recorded and stored into our clinical database for further
processing. The data from the first 45 subjects was used for product development
purposes. The data from the last set of 15 subjects was recorded with the final
design of the hand-held monitor. The results of the comparison between the
arterial line blood pressure readings and the hand-held device on these 15
subjects was then referenced as part of our filing with the FDA for the
hand-held device's 510(k) submission, which was filed in June 2000. As was the
case for the Vasotrac system, the standard deviation values for the Vasotrax
hand-held monitor were below the 8mmHg standard deviation limit for clinical
acceptability as established by AAMI. In August 2000, we received FDA clearance
to begin marketing the Vasotrax hand-held monitor in the United States for use
on adult patients by trained medical personnel. We are now undertaking studies
to determine the usefulness and accuracy of the Vasotrax hand-held monitor for
use in pediatric patients.
Introduction of the Vasotrac system and Vasotrax hand-held monitor to additional
foreign markets and/or market segments may require us to conduct further
clinical studies in order to achieve both regulatory and general market
acceptance. These clinical studies and the results obtained thereby may require
us to undertake additional product development efforts in order to sell the
Vasotrac system and Vasotrax hand-held monitor in these countries and/or market
segments.
We are developing new products for the future, and we will work with clinical
partners to test the functionality and validate the technology in various
clinical settings.
MARKETING
Our success depends primarily on gaining physician and hospital acceptance of
our products. Gaining clinical acceptance of our technology usually requires our
employees to participate in non-formal (not requiring IRB
12
approval) clinical trials or evaluations. These evaluations usually compare our
technology's performance to either a blood pressure cuff or to invasive arterial
catheters. Having clinical studies and papers, which have been presented and/or
published is essential and is usually the beginning of initial discussions with
a prospective customer. In addition, it has become increasingly more important
to gather and present economic data, which states and proves that our technology
can reduce cost, improve patient through-put, and provide more efficiency for a
hospital staff.
During our evaluation of potential formal clinical study proposals, which are
routinely submitted to us for review, we evaluate the environment and determine
if the clinical environment or setting has historically experienced challenges
with either blood pressure cuffs or invasive catheters. We believe that there
are several of these environments where our technology provides a logical step
forward, such as bariatrics, pediatrics, and areas with a high degree of motion,
such as cardiology and emergency medicine. Therefore, a significant portion of
our clinical studies have been involved within these areas in an effort to
further exploit the benefits of our technology. In addition, we encourage our
sales professionals to enter the hospital through these environments, and once
we are considered clinically acceptable or superior to existing options, then
our sales professionals are to move to other departments to sell our solutions.
Over the past 12 months, we have been directing our sales professionals to begin
the process of approaching hospitals for either complete or partial
standardization to our technology. We have been successful in at least entering
into such discussions, when we have become clinically acceptable or preferred in
one of the environments mentioned above. For our technology to become a standard
with the entire hospital environment, we will need several more OEM module
agreements, like the ones with Nihon Kohden and Zoll, coupled with additional
products of our own, which offer more bundling of parameters. Blood pressure is
monitored everywhere within a healthcare system. We believe we have and will
continue to expand our offering to the point of care areas with our handheld
products; and with our Vasotrac Monitor and future products, we believe that we
will be able to effectively compete for some of the patient monitoring market
segments. With our OEM solutions, we believe we will be able to partner with
other companies to integrate our technology into larger more comprehensive
systems.
We continue to attend industry trade shows, and selectively advertise in
industry journals. We believe that we will need to hire several individuals who
will be focused outside of the hospital market and selling into physician's
offices, outpatient centers, ER clinics, EMS providers, and skilled nursing
facilities.
In May 2004, we introduced a single-use patient sensor for our Vasotrac
monitoring system. This product was developed as a result of input from our
customers and potential customers, requesting the need for a disposable type of
sensor. We believe that the single-use patient sensor offers several advantages
to our customers. It allows for more security and isolation in regards to
infection control and for a flexible purchasing model to be created, which will
allow us to sell multi-year sensor programs to hospitals and alternative care
facilities and offer them the monitoring solution from us for little or no
capital money expense. We believe this is a very attractive model based on the
initial response, and this is in synchrony with how these customers have
purchased other breakthrough technology, without a large capital equipment
outlay of funds. We believe that capital funds are becoming more difficult to
obtain. This acquisition model may shorten sales cycles, and allow customers to
purchase without needing to go through long approval processes. This model also
provides a great deal of flexibility for our sales professionals, while they are
qualifying potential customers, to determine if they have acquired other
technology in this type of purchase model in the past. Having a single patient
use, or disposable sensor, allows us flexibility in what hardware we develop,
produce and ultimately, sell in the future both independently and with business
partners.
EMPLOYEES
As of December 1, 2004, Medwave employed 31 full-time employees and three
part-time employees. Of the 31 full-time employees, 11 are in sales, one is
international sales and product marketing, three are in clinical
education/support, one is in finance, one is in business development/product
marketing, 13 are research & development/manufacturing/technical support/quality
assurance, and one is President & CEO. Of the three part-time employees, two are
in finance and one is in administrative support/human resources. We also use
contract employees to satisfy some development and administrative functions.
13
We anticipate we will hire additional employees within the next 12-month period,
primarily in finance, business development, sales, marketing, product
development, and support positions. However, such requirements are subject to
change and are highly dependent on the market acceptance of our products, our
distribution methods, and existing employment market conditions.
PRICING AND DISTRIBUTION
We are constantly evaluating the marketable price of the Vasotrac system and the
Vasotrax hand-held monitor. Our pricing strategy takes into consideration the
marketing process for the Vasotrac system and the Vasotrax hand-held monitor and
can be expected to remain dependent on a number of factors, including
manufacturing costs, prices of competitive products, distribution methods,
volume discounts, and market acceptance. We believe that the Vasotrac system is
currently priced slightly higher than the high-end automatic cuffs sold by our
competitors. Conversely, the Vasotrax hand-held monitor is priced considerably
lower than most automatic cuff products. The Vasotrax is priced slightly higher
than most manual cuffs on the market. We believe, however, that our higher price
is supportable due to the superior clinical performance associated with our
product over such automatic and manual cuff devices. In addition, because many
departments at hospitals use disposable blood pressure cuffs, there can be an
added cost to using these products. We have developed cost benefit models that
highlight the savings related with the use of the Vasotrac. We believe that as
we gain more clinical acceptance, and as we introduce more products, which will
have a broader reach into the markets, that our competition may respond by
reducing their customer pricing. We believe that once mass-market appeal begins,
the small difference in price will be neutralized by the superior performance of
our technology. We also believe that with the addition of our Vasotrac DS
Platform (single patient use sensors), we will be able to offer flexibility that
our customers ultimately want and require when they purchase medical devices. We
believe competitive products cannot offer the degree of product or acquisition
options that we can.
In comparison to the costs associated with A-line procedures, we believe that
the Vasotrac system, on a per-procedure basis, results in significant savings
for healthcare providers. Insertion of an A-line is an invasive surgical
procedure requiring a physician. No matter how routine any such procedure may
become, all invasive procedures retain the inherent risk of complications and
have attendant direct and indirect costs associated with them. We believe that
the cost for non-invasively monitoring the blood pressure of a patient with the
Vasotrac system will be less than with an invasive A-line. We believe that this
gives the Vasotrac a competitive edge in an increasingly cost-conscious
healthcare industry. We are currently preparing and presenting cost benefit
models to potential customers. Recently, a hospital that has been using the
Vasotrac technology for a number of months reported that it has been able to
substitute the Vasotrac for invasive catheters in certain patients. In addition,
the cost of running an operating room, an area where invasive catheters are
inserted routinely, is rising. In a recent Medical Advisory Board meeting, one
of Medwave's Medical Advisors informed the group that operating room time has
increased to $30 per minute in his institution. Therefore, any technology, which
can affect start times in this environment, will be looked at favorably. We
believe that our technology does improve start times, because if an invasive
catheter is inserted, it could take up to 20 minutes to insert; however the
Vasotrac sensor, only requires 20 seconds to apply in most situations.
Our Vasotrax hand-held monitor is priced slightly higher than a manual cuff,
however, this price is significantly lower than an automatic cuff system. We
believe that the process of taking a manual blood pressure reading has the
potential of introducing significant error for a number of reasons. Errors in
obtaining manual blood pressures with a cuff-based system may occur due to
improper cuff size, motion, or cardiac disturbance. The Vasotrax improves the
workflow process of taking a manual blood pressure by taking an accurate reading
in just 15 seconds.
We believe that a market also exists for us to sell our Vasotrac OEM module to
other equipment companies, such as companies who manufacture patient monitoring,
defibrillators, sleep systems, and cardiology systems. In November of 2001, we
began to ship production MJ23 Modules to Nihon Kohden of Japan, a market leader
in the Japanese market with approximately 50% market share in patient
monitoring. In addition, in June 2004 we entered into an OEM Agreement with Zoll
Medical Corporation,
14
a leader in the cardiac resuscitation markets. We expect to begin to ship
products to Zoll during 2005. These types of agreements offer the potential for
widespread market penetration without the tremendous investment in resources
that would be expected if we were to attempt entry on such a wide scale our
self. In addition, we expect that the volume commitments from such agreements
could be multi-year and offer yields that would take a direct sales organization
years to accomplish. We are pursuing other such agreements with other
organizations, and have numerous Non Disclosure Agreements signed and are
involved in active discussions.
For additional information concerning our product distribution efforts and
arrangements, see "General" above.
PATENTS AND PROPRIETARY TECHNOLOGY
We have applied for U.S. patents covering various aspects of Medwave's blood
pressure technology. As of December 2004, twenty-five U.S. patents relating to
Medwave's blood pressure technology have been granted, and three U.S. patent
applications are pending. We have also been granted patents in the European
Patent Office and Japan, and have pending patent applications in the European
Patent Office, China, Hong Kong, India, and Japan. Most of our patents and
patent applications relate to the Vasotrac system, the MJ23 OEM Module and to
the Vasotrax hand-held blood pressure monitor.
There can be no assurance that any pending U.S. or any foreign patents will be
granted or, if obtained, that they, or those already granted to us, will
sufficiently protect our proprietary rights. Although patents have been granted
to us, and even if the patents for which we apply are granted, they do not
confer on us the right to manufacture and market products if such products
infringe on patents held by others. While we have reviewed prior art in
connection with our patent applications, we have not undertaken or conducted any
comprehensive patent infringement searches or studies. If any third parties hold
any such conflicting rights, we may be required in the future to stop making,
using or selling our products or to obtain licenses from or pay royalties to
others, which could entail significant expense and have a material, adverse
effect upon us. Further, in such event, there can be no assurance that we would
be able to obtain or maintain any licenses on acceptable terms, if at all. We
have, throughout the development process for the Vasotrac and Vasotrax products,
been associated with various companies, institutions and individuals. Although
we have no knowledge that any such companies, institutions or individuals have
claimed, or have any basis for claiming, interests in our proprietary rights,
there can be no assurance that such claims will not be threatened, asserted or
perfected. Such claims, even if we ultimately prevail on the merits, could have
a material, adverse effect upon us.
In addition to patent protection, we rely, to the extent possible, on trade
secrets, confidentiality agreements, un-patented proprietary know-how, and our
continuing development of new products.
GOVERNMENT REGULATION
We are subject to FDA and other government regulations, including regulations
with respect to marketing approval, manufacturing practices, packaging, labeling
and complaint reporting. Medical devices "substantially equivalent" to existing
systems continuously marketed since May 1976 may be marketed pursuant to a
Pre-Market Notification Submission with the FDA. The FDA finding of "substantial
equivalence" for the Vasotrac system and the Vasotrax hand-held monitor does not
in any way denote official approval of the device. Further, any representation
that creates an impression of official approval of a device because it complies
with the pre-market notification regulations is misleading and constitutes
misbranding. Certain devices, including those which are not "substantially
equivalent" to predicate devices, are subject to Pre-Market Approval
Application, or PMA, requirements and more stringent FDA reviews. In contrast to
the 510(k) process, the PMA process generally occurs over a more protracted time
period and requires more extensive clinical data.
Like all medical device manufacturers, we must implement, maintain and follow
the FDA's Quality System Regulation, or QSR, and Good Manufacturing Practices,
or GMP. We believe our primary manufacturing costs are driven by initial
scale-up and ultimate production levels and will not be significantly impacted
by
15
such requirements. Should we intend to market the Vasotrac system or the
Vasotrax hand-held monitor for new or different uses, or should we significantly
modify the system in a way that could significantly affect its safety or
effectiveness, we would be required to again file a new 510(k) Submission with
the FDA. Moreover, it is anticipated that any new product concepts developed by
us will require various government clearances prior to being sold.
In our initial 510(k) Submission to the FDA, we included not only clinical data,
but also outlined our plans to continue testing and integrating the results from
into the Vasotrac system. We do not believe that FDA regulations require, and
therefore at this point do not anticipate, submission to the FDA of our
post-510(k) clinical studies. Although the FDA has stated that a manufacturer is
best qualified to make an initial determination of whether a new 510(k)
submission is necessary, the FDA can overrule a manufacturer's decision not to
submit a new 510(k) submission and take appropriate regulatory action. If we
determine we do not need to submit any such new 510(k) submission, including
with respect to our post-510(k) clinical studies, and the FDA consequently takes
regulatory action, we could be materially and adversely affected.
WARRANTY AND SERVICE
Our products are generally available with limited 12-month parts and labor
warranty commencing at the date of shipment. Some of our OEM agreements may have
different terms to the warranty. When warranty repairs are necessary, we
generally perform them at our Arden Hills, Minnesota facility. We also provide
on-call technical support. We also service equipment on a time and materials
basis.
RISK FACTORS
Our business and an investment in our company are subject to a number of risks,
including those described in the preceding sections as well as those highlighted
below.
WE MUST FURTHER DEVELOP A MARKET FOR OUR PRODUCTS.
We presently depend on our Vasotrac, Vasotrax, and/or our MJ23 OEM module
product line, the market acceptance of which is in its early stages. Our future
is dependent upon the success of these products and similar products that are
based on the same core technology. The market for these products is in an early
stage of development and may never fully develop as we expect. We have
sponsored, and will continue to sponsor or conduct clinical trials.
OUR SUCCESS IS DEPENDENT ON MARKET ACCEPTANCE.
Our success depends on market acceptance of the Vasotrac system, the MJ23 OEM
modules thereof, and/or the Vasotrax hand-held monitor. Such acceptance depends
primarily on gaining customer (end-user) and institutional (hospitals,
outpatient centers, ambulance companies, nursing homes and physician offices)
acceptance of these products. We believe that testing of the Vasotrac system and
Vasotrax hand-held monitor has yielded favorable results compared to other
non-invasive blood pressure monitors. However, improper placement of the
pressure sensor or improper use of the system may cause the readings produced by
the Vasotrac system and Vasotrax hand-held monitor to be questionable. As a
result, another key component of our marketing strategy has been to focus on
training and education of clinicians in the correct use of the Vasotrac system
and Vasotrax hand-held monitor. Also, given differences in individual bone
physiology, body weight and physical condition, the Vasotrac system, the MJ23
OEM modules thereof, and the Vasotrax hand-held monitor may not provide adequate
readings or be usable on all patients. For example, if a patient's peripheral
blood flow to his or her arms has been compromised, these products may not
function as specified. Other contraindications for these products may result
from patients on cardiopulmonary bypass and patients with any condition in which
rendering a pulsating pressure signal from the radial artery is not possible. To
date, we believe we have not detected significant patient complications caused
by any of our products. However, as with any relatively new product,
complications may occur as the Vasotrac system, the MJ23 OEM modules thereof,
and the Vasotrax hand-held monitor are used on a greater number of patients with
different characteristics and under various conditions. The presence of any
significant complications would
16
necessitate additional research and evaluation to determine the impact of such
complications. Finally, we must overcome the resistance of the medical community
to the introduction of new techniques or technology. We believe that this
resistance may be exacerbated due to the fact that the blood pressure cuff has
been in use for more than 100 years, and virtually all medical professionals are
trained using cuff technology. Therefore, there can be no assurance that the
Vasotrac system, MJ23 OEM modules thereof, or the Vasotrax hand-held monitor
will gain market acceptance. If these products do not gain market acceptance,
our future would be jeopardized.
WE MUST MAINTAIN AND DEVELOP STRATEGIC RELATIONSHIPS WITH THIRD PARTIES TO
INCREASE MARKET PENETRATION OF OUR PRODUCT LINES.
We distribute our products to domestic hospitals with our direct sales
organization and in some cases with regional dealers or sales agents, and to
targeted international markets primarily through distributors. We have a
Vasotrac system OEM module sales agreement in place with Nihon Kohden, a well
known medical device company in the Japanese market. We have also signed an OEM
Agreement with Zoll Medical Corporation in June 2004, and expect to begin
shipping products to Zoll during 2005. We intend to enter into similar
agreements with other major medical device companies and to establish technology
partnerships with other medical product and technology companies. We have been
involved in discussions with several other companies, and have signed
non-disclosure agreements with the majority of these organizations. In September
2004, Medwave signed a Development Investigation Agreement with a global
electronics company, with the intent of exploring projects of mutual interest
and potential benefit. Widespread acceptance of technology is dependent on our
establishing and maintaining these strategic relationships with third parties
and on the successful distribution efforts of our direct sales organization.
Many aspects of our relationships with third parties, and the success with which
third parties promote distribution of our products, are beyond our control. We
may be unsuccessful in maintaining our existing strategic relationships and in
identifying and entering into future development and distribution agreements
with third parties.
OUR INTERNATIONAL SALES EXPOSE US TO UNIQUE RISKS.
In fiscal year 2004, international sales of our stand-alone products accounted
for approximately 20% of our revenue. The sale of MJ23 Modules accounted for
approximately 7% of revenue.
We believe that international sales will represent a meaningful portion of our
revenue in the future. We rely on distributors to assist us with our
international operations. In addition, we are exposed to risks from
international sales, which include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions and reduced protection
for intellectual property rights. Moreover, fluctuations in the rates of
exchange may increase the price in local currencies of our products in foreign
markets and may price us out of special foreign markets.
In July 2003, a dealer that we had in the Middle East encompassing the Gulf
Coast Cooperative countries placed an order for 30 Vasotrac monitors with a
value of $104,075. We had previously conducted business with this particular
dealer without problems. However, after shipping our monitors, it became
apparent that there were problems with this order. The end user was the Ministry
of Health in Kuwait. Since we shipped the monitors, the order was recognized as
revenue at the time of shipment. Later, we experienced problems with this order,
and as a result, we requested that at least a portion of the monitors to be
returned. The dealer paid for 18 Vasotrac monitors and returned 12 Vasotrac
monitors to us. Therefore, we have reversed the revenue ($43,633) related to the
returned monitors during the fiscal year ending September 30, 2004.
All transactions performed in the international markets are now based on the
Company receiving all the money prior to any product materially being shipped.
The exception to this is with established business partners.
WE MAY NOT HAVE ADEQUATE INTELLECTUAL PROPERTY PROTECTION.
Although we believe that we have effective patent protection, our patents and
proprietary technology may not be able to prevent competition by others. In
addition, in the future our products may be found to
17
infringe upon the rights of others. Any claims resulting in intellectual
property litigation, whether defensive or offensive, could drain our resources
and, if decided against us, materially adversely affect our business.
WE RELY ON A SINGLE TECHNOLOGY PLATFORM.
We believe that significant and expanding markets exist for the Vasotrac system,
the Vasotrax hand-held monitor, the MJ23 OEM module, and for additional products
incorporating our proprietary technology. Currently we utilize one technology
platform in the Vasotrac system, the MJ23 OEM module, and the Vasotrax hand-held
monitor. The technology platform is our sensor technology and the software
algorithms. In addition, in September 2000 we entered into an agreement to
incorporate the Vasotrac system technology into an OEM module. Reliance on a
single technology platform creates substantial risks for us. If, for example,
the Vasotrac system and the Vasotrax hand-held monitor are not successfully
marketed, if they fail to meet customer needs, or if they are not accepted in
the marketplace, we would be materially and adversely affected, our primary
business focus would require re-evaluation, and our ability to continue
operations would be jeopardized. We have not undertaken any comprehensive patent
infringement searches or studies. If the Vasotrac system or the Vasotrax
hand-held monitor were found to infringe on the patent rights of others or if
third parties successfully asserted rights to these products, we would be
materially adversely affected.
We also intend to develop additional products based on our core technology. The
technology employed in the Vasotrac system may be useful in developing products
for other markets.
WE MUST CONTINUE TO EVALUATE THE DESIGN OF OUR PRODUCTS.
While our initial product development and clinical testing program for the
Vasotrac system, Vasotrax hand-held monitor, and MJ23 OEM module are complete,
extensive use and evaluation of the design is necessary in order to assess
whether the products, as currently configured, will broadly meet customer needs
or be accepted as a viable alternative in the marketplace. We will continue to
test the Vasotrac system and Vasotrax hand-held monitor, as well as future
products to enhance their market acceptance. If the configuration of the system
must be modified, there can be no assurance such modifications will be
acceptable to customers or be technically feasible. Even if feasible, such
modifications could result in significant delays and significant expenses. If
such modifications require regulatory approval, additional significant delays
could result. We could be materially and adversely affected by any of these
developments.
We have entered into two agreements to incorporate the Vasotrac system
technology into an OEM module, and we are hopeful that we will enter into
additional agreements of this type. Although sale of the Vasotrac system as an
OEM module is intended to complement sales of the system as a stand-alone
product, it is possible that configuration as an OEM module will be the
principal or customer preferred way of purchasing and using this product. It is
also likely that OEM modules will require regulatory approval, which may result
in additional delays. Any regulatory application must be submitted by any of the
third party companies that use the OEM module. We could be materially and
adversely affected by any of these developments.
OUR PRODUCTS MAY REQUIRE SERVICING AND WE MAY BE SUBJECT TO PRODUCT LIABILITY
CLAIMS.
Our goal is to produce highly reliable Vasotrac systems, OEM modules thereof,
Vasotrax hand-held monitors, and future products that do not require excessive
subsequent servicing. There can be no assurance, however, that we will be
successful in achieving such goal. There also can be no assurance that
additional problems will not occur, that additional servicing requirements will
not be necessary or that any additional problems or servicing requirements,
individually or in the aggregate, will not be significant, difficult to correct,
time-consuming or prohibitively expensive. Further, the need for any such
additional servicing may not be readily apparent to clinicians using the
Vasotrac system, OEM modules thereof, or the Vasotrax hand-held monitor. We
believe that actual or perceived excessive servicing requirements for the
Vasotrac system, OEM modules thereof, or the Vasotrax hand-held monitor could
materially and adversely affect market acceptance of the system and could raise
product liability concerns. See "Risk Factors -- We may be subject to product
liability claims that exceed insurance coverage." Although we plan to continue
testing our products to determine the
18
extent of their servicing requirements, there can be no assurance that we can
precisely identify the exact scope of such servicing requirements.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND CAPABILITY.
We currently have little manufacturing experience or capability, other than a
limited ability to produce relatively small quantities of the Vasotrac system
and Vasotrax hand-held monitor. We have not developed, arranged for, or invested
in any significant production tooling, nor have we contractually arranged for
any significant third-party manufacturing capacity or agreements. There can be
no assurance that we will be able to scale-up manufacturing of the Vasotrac
system, OEM modules thereof, or the Vasotrax hand-held monitor for commercial
production at quantities required to meet cost targets and profitability goals.
If our manufacturing costs are higher than anticipated or if a lower-priced
competitive product becomes available, we may not be able to produce and sell
the Vasotrac system, OEM modules thereof, or the Vasotrax hand-held monitor
competitively. In addition, there can be no assurance that subcontractors, on
whom we will rely for functions we will not perform internally, will produce
sufficient products at required quality and cost levels. We will be materially
adversely affected if we are unable to scale-up manufacturing successfully or
effectuate manufacturing arrangements on acceptable terms.
WE CURRENTLY HAVE LIMITED OR SINGLE SOURCES OF SUPPLY.
We currently purchase from outside vendors, on a purchase order basis,
quantities of virtually all components and subassemblies for the Vasotrac
system, MJ23 OEM modules and Vasotrax hand-held monitor. Should production rates
increase, the supply of components and subassemblies will become more critical.
Furthermore, we have no formal agreements with any of our vendors. Should a key
vendor be unwilling or unable to supply any components or subassemblies required
by us in a timely manner, we may be materially adversely affected.
WE FACE SUBSTANTIAL COMPETITION.
We currently know of two other continual non-invasive blood pressure monitoring
devices on the market. However, one of those devices uses a cuff to calibrate
the blood pressure readings and we therefore do not consider the device to be
directly competitive. The other device uses a wrist sensor mechanism; however,
this device has only been marketed to the operating room environment. We face
substantial competition from numerous companies that manufacture and market
noninvasive and invasive instruments for blood pressure measurement and
monitoring. Several companies competing in the traditional cuff and catheter
blood pressure monitoring market have significantly greater resources as well as
established technologies and product reputations in the blood pressure
monitoring field. Our ability to compete successfully in this market will depend
on our ability to develop and market a technologically superior blood pressure
monitoring or measurement system that provides cost-benefit, patient benefit,
and improved staff effectiveness.
To compete successfully, we likely will need to develop and introduce new
products and/or enhancements that keep pace with technological advancements,
respond to evolving consumer requirements and achieve market acceptance. We may
be unable to develop new products that address our competition.
Our business plan contemplates an income stream from sales of replacement
sensors that are compatible with only our monitors and OEM modules. We may be
subject to price competition from other sensor manufacturers whose products are
also compatible with our monitors. To mitigate this, we developed proprietary
sensor technology that provides and promotes the exclusive use of our
proprietary sensors with our equipment. There can be no assurance, however, that
such measures will preclude replacement sensor competition in the future.
The current widespread acceptance of non-invasive cuff technology and of the
arterial line, and the lack of widespread acceptance of non-invasive
technologies like ours, is an important competitive disadvantage that we must
overcome in order to gain general market acceptance. In addition, the current
technology involving cuffs and arterial lines has established cooperative
relationships with large medical equipment companies and buying groups that we
must also overcome in order to successfully compete. If we are not
19
successful at overcoming such competition, our primary business focus would
likely require re-evaluation with our ability to continue operations being
jeopardized. We have however entered into a national group purchasing agreement
with AmeriNet, one of the largest GPO's in the US, with approximately 15,000
members. In addition, we are recognized by the Alliance of Children's Hospitals
as the most efficacious, non-invasive blood pressure monitoring system, and was
awarded their Seal of Acceptance. During 2003, we entered into a one-year group
purchasing agreement with Novation, which consists of a membership of
approximately 2,500 hospitals and whose membership includes approximately 75% of
the teaching hospitals in the United States. In September 2004, we extended this
agreement for two additional years. In December 2003, we signed a group
purchasing agreement with the Mayo Foundation. This is a highly regarded
hospital system, consisting of approximately 35 hospitals. During 2003, Frost
and Sullivan honored Medwave with their Technology Innovation Award. This award
is given each year to the company that shows the ability to successfully develop
and introduce new technology, formulate a well-designed product family, and make
significant product performance contributions to the industry.
OUR TECHNOLOGY MAY BECOME OBSOLETE.
The medical device industry is subject to rapid technological innovation and,
consequently, the life cycles of products tend to be relatively short. We are
engaged in a field characterized by extensive research efforts. There can be no
assurance that new developments or discoveries in the field will not render the
Vasotrac system or Vasotrax hand-held monitor obsolete. The greater resources of
many of the companies currently engaged in research of blood pressure management
may permit such companies to create, or respond more rapidly than Medwave to,
technological innovations or advances.
THIRD-PARTY PAYERS MAY NOT APPROVE PAYMENT FOR USE OF OUR PRODUCTS, AND WE MAY
BE AFFECTED BY CHANGES IN HEALTH CARE LAWS.
Our success in the United States may be related to the number of third party
payers, such as Medicare, private insurance companies, health maintenance
organizations, and other payers, that approve payment or reimbursement for the
use of the Vasotrac system, OEM modules thereof, and the Vasotrax hand-held
monitor and the amount of any such payments or reimbursements. If, for example,
hospitals are not able to recover the cost of these products through
reimbursement, they may be reluctant to purchase these products, with the result
that our sales may be adversely affected. The health care industry and
associated regulatory environment are dynamic and rapidly changing, particularly
with respect to proposals to reform Medicare and to control health care costs.
This environment makes it impossible to predict the effects, including costs or
impediments to development, that adoption of and changes in health care laws,
rules and regulations may have on us and on our operations. Such developments
could, however, materially and adversely affect our ability to market our
products.
WE DEPEND ON MANAGEMENT.
Our success currently depends on the services of Timothy J. O'Malley, our
President and Chief Executive Officer and Principal Financial Officer. The loss
of Mr. O'Malley may hurt our business if we are unable to identify other
individuals to provide us with similar services. We do not maintain "key person"
insurance on any of our employees.
WE MAY NOT BE ABLE TO MANAGE GROWTH.
If successful, we will experience a period of growth that could place a
significant strain upon our managerial, financial and operational resources. Our
infrastructure, procedures and controls may not be adequate to support our
operations and to achieve the rapid execution necessary to successfully market
our products. Our future operating results will also depend on our ability to
expand our direct sales force and our internal sales, marketing and support
staff. If we are unable to manage future expansion effectively, our business,
results of operations and financial condition will suffer, our management will
be less effective, and our revenues and product development efforts may
decrease.
20
WE MAY NOT CONTINUE TO RECEIVE NECESSARY FDA CLEARANCES OR APPROVALS.
Our products and activities are subject to extensive, ongoing regulation by the
Food and Drug Administration and other governmental authorities. Delays in
receipt of, or failure to obtain or maintain, regulatory clearances and
approvals, or any failure to comply with regulatory requirements, could delay or
prevent our ability to market our product line.
WE MAY NOT RECEIVE APPROVALS BY FOREIGN REGULATORS THAT ARE NECESSARY FOR
INTERNATIONAL SALES.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary from country to country. If we, or our
international distributors, fail to obtain or maintain required pre-market
approvals or fail to comply with foreign regulations, foreign regulatory
authorities may require us to file revised governmental notifications, cease
commercial sales of our products in the applicable countries or otherwise cure
the problem. Such enforcement action by regulatory authorities may be costly.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT EXCEED INSURANCE COVERAGE.
We have obtained product liability insurance, including excess umbrella
coverage, in the aggregate amount of $12,000,000 covering the Vasotrac system,
OEM Module and Vasotrax hand-held monitor. However, there can be no assurance
that we will be able to maintain such insurance in amounts and with coverage
that will adequately cover associated risks or that such insurance will be
available in the future at premiums that can be economically justified. Lack of
such insurance could expose us to substantial damages, which could have a
material adverse effect upon us.
WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE CONTINUED LOSSES.
We have experienced losses every year since our incorporation. These losses have
resulted because we have expended more money in the course of researching,
developing and enhancing our technology and products and establishing our sales
and marketing organization than we have generated in revenues. We expect that
our operating expenses will remain relatively stable in the foreseeable future
even as we increase our sales and marketing activities, and expand our
operations. It is possible that we will never achieve or sustain the revenue
levels required for profitability.
WE MAY NEED ADDITIONAL CAPITAL, WHICH MAY BE UNAVAILABLE.
The commercialization of our product line and the development and
commercialization of any additional products may require greater expenditures
than expected in our current business plan. Our capital requirements will depend
on numerous factors, including:
- - our rate of sales growth--fast growth may actually increase our need for
additional capital to hire additional staff, purchase additional component
inventories, finance the increase in accounts receivable and supply
additional support services;
- - our progress in marketing-related clinical evaluations and product
development programs, all of which will require additional capital;
- - our receipt of, and the time required to obtain, regulatory clearances and
approvals--the longer regulatory approval takes, the more working capital
we will need to support our regulatory and development efforts in advance
of sales;
- - the level of resources that we devote to the development, manufacture and
marketing of our products--any decision we make to improve, expand or
simply change our process, products or technology will require increased
funds;
21
- - our facilities requirements--as we grow we may need additional
manufacturing, warehousing and administration facilities and the costs of
the facilities would be borne long before any increased revenue from
growth would occur;
- - market acceptance and demand for our products--although growth may
increase our capital needs, the lack of growth and continued losses would
also increase our need for capital; and
- - financing strategies--our attempt to accelerate the otherwise lengthy
purchasing processes of hospitals by offering programs as an alternative
to outright purchasing and by providing purchasers with extended payment
terms, single-use sensor programs and financing options will require
additional capital.
We may be unable to predict accurately the timing and amount of our capital
requirements. We may be required to raise additional funds through public or
private financing, bank loans, collaborative relationships or other arrangements
earlier than expected. It is possible that banks, venture capitalists and other
investors may perceive our capital structure, our history of losses or the need
to achieve widespread acceptance of our technology as too great a risk to bear.
As a result, additional funding may not be available on attractive terms, or at
all. If we cannot obtain additional capital when needed, we may be forced to
agree to unattractive financing terms, to change our method of operation or to
curtail our operations.
COMMON STOCK WHICH IS AVAILABLE FOR IMMEDIATE RESALE MAY DEPRESS OUR MARKET
PRICE.
We have filed registration statements with the Securities and Exchange
Commission covering the potential resale by some of our shareholders of up to
4,165,793 shares of common stock. The existence of a substantial number of
shares of common stock subject to immediate resale could depress the market
price for our common stock and impair our ability to raise needed capital.
A LOW STOCK PRICE OR FAILURE TO MAINTAIN A MINIMUM OF $2.5 MILLION OF
STOCKHOLDERS' EQUITY COULD RESULT IN OUR BEING DE-LISTED FROM THE NASDAQ MARKET
AND SUBJECT US TO REGULATIONS THAT COULD REDUCE OUR ABILITY TO RAISE FUNDS.
If our stock price were to drop below $1.00 per share and remain below $1.00 per
share for an extended period of time, or if we fail to maintain stockholders'
equity of at least $2.5 million (and do not meet alternative tests of either
having $35 million in market capitalization or $500,000 in annual net income),
or if we fail to maintain other Nasdaq continued listing criteria, Nasdaq may
de-list our common stock from the Nasdaq Market. In such an event, our shares
could only be traded on over-the-counter bulletin board systems. This method of
trading could significantly impair our ability to raise new capital.
In the event that our common stock was de-listed from the Nasdaq Market due to
low stock price, we may become subject to special rules, called penny stock
rules, that impose additional sales practice requirements on broker-dealers who
sell our common stock. The rules require, among other things, the delivery,
prior to the transaction, of a disclosure schedule required by the Securities
and Exchange Commission relating to the market for penny stocks. The
broker-dealer also must disclose the commissions payable both to the
broker-dealer and the registered representative and current quotations for the
securities, and monthly statements must be sent disclosing recent price
information.
In the event that our common stock becomes characterized as a penny stock, our
market liquidity could be severely affected. The regulations relating to penny
stocks could limit the ability of broker-dealers to sell our common stock and
thus the ability of purchasers in this offering to sell their common stock
favorably in the secondary market.
22
OUR COMMON STOCK IS SUBJECT TO PRICE VOLATILITY.
The market price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to various factors beyond our control, including:
- - quarterly variations in operating results;
- - announcements of technological innovations, new products or pricing by our
competitors;
- - changes in, or failure to meet, financial estimates of securities
analysts;
- - the rate of adoption by physicians of Medwave's technology in targeted
markets;
- - the timing of patent and regulatory approvals;
- - the timing and extent of technological advancements;
- - results of clinical studies;
- - the sales of our common stock by affiliates or other shareholders with
large holdings; and
- - general market conditions.
Our future operating results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock. In addition, the stock market
has experienced significant price and volume fluctuations that have affected the
market prices of the stock of many medical device companies and that often have
been unrelated to the operating performance of such companies. These broad
market fluctuations may directly and adversely influence the market price of our
common stock.
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE.
We have never declared or paid a cash dividend on our common stock. We currently
intend to retain any earning for use in the operation and expansion of our
business and therefore do not anticipate paying any cash dividends in the
foreseeable future.
MEDWAVE DOES NOT CURRENTLY EMPLOY A CHIEF FINANCIAL OFFICER.
In connection with their audit of our 2004 financial statements, BDO Seidman,
LLP, our independent registered public accounting firm, advised management and
our Audit Committee of the following significant deficiencies which did not
individually or in the aggregate raise to the level of material weakness: The
Company lacks a full-time Chief Financial Officer to ensure consistently timely
reporting of financial information. We are currently in the process of
recruiting a Chief Financial Officer to ensure consistently timely reporting of
financial information. We believe this effort will address the conditions raised
by BDO Seidman, LLP.
ITEM 2. PROPERTIES.
We lease property in Arden Hills, Minnesota and Danvers, Massachusetts. Our
Minnesota building lease expires in May 2007. The monthly lease payment is
approximately $4,600. The Massachusetts building lease expires April 2007. The
monthly lease payment is approximately $4,670. We are generally responsible for
taxes, insurance, maintenance, and other expenses related to the operation of
the Danvers, MA facility, but said expenses are included in the Arden Hills, MN
facility lease. Our production capacity is adequate for our short-term needs. We
believe that the properties have been adequately maintained and are suitable for
our business as presently conducted.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF SECURITIES.
Our common stock began trades on the Nasdaq SmallCap Market under the symbol
"MDWV." The following table sets forth the high and low closing sales price for
the common stock during each specified period as reported by the Nasdaq Stock
Market, Inc.:
FISCAL 2004(1) HIGH LOW
- ------------ ---- ---
First Quarter $8.10 $ 5.25
Second Quarter 7.25 5.35
Third Quarter 8.10 4.13
Fourth Quarter 6.11 4.16
INTERIM PERIOD HIGH LOW
- -------------- ---- ---
May, 2003 - Sept, 2003 $7.62 $ 2.00
FISCAL 2003(2) HIGH LOW
- ------------ ---- ---
First Quarter $2.01 $ 0.74
Second Quarter 1.50 1.00
Third Quarter 2.75 0.80
Fourth Quarter 3.09 1.40
On May 1, 2003, we changed our fiscal year end from April 30 to September 30.
There were approximately 142 record holders of our common stock as of December
15, 2004. We believe the number of beneficial owners to be substantially higher.
On December 15, 2004, the closing price for our common stock was $4.65. We have
never paid a dividend on our common stock and do not intend to pay dividends in
the foreseeable future.
In a private placement conducted from March to June, 2001, we issued units
consisting of common stock and warrants to 67 accredited investors. In the first
round of the private placement, on March 20, 2001 we issued 181,125 units, each
unit consisting of one share of common stock and a five-year warrant to purchase
one and one-half shares of common stock, for aggregate cash consideration of
$1,154,672. The warrants became exercisable six months after the date of
issuance at an exercise price of $6.425 per share. In the second round of the
private placement, on June 13, 2001 we issued 1,235,777 units, each unit
consisting of one share of common stock and a five-year warrant to purchase one
share of common stock, in consideration of $4,867,164 cash. The warrants became
exercisable six months after the date of issuance at an exercise price of $4.25
per share. Miller Johnson Steichen Kinnard, Inc., which acted as our agent in
the private placement, received a commission of $602,184, a five-year warrant to
purchase 13,603 shares at $6.425 per share and a five-year warrant to purchase
121,287 shares at $4.25 per share. We relied on Rule 506 under the Securities
Act of 1933 for the offer and sale of these securities. Each investor
represented in writing that the securities were being acquired for investment
and, in addition, the certificates representing the securities bear a
restrictive securities legend.
- --------------------
(1) October 1, 2003 to September 30, 2004
(2) May 1, 2002 to April 30, 2003
24
On January 23, 2003, we sold an additional 1,400,000 shares of our common stock
for $1.25 per share, raising $1,697,009 in net proceeds. On January 8, 2004, we
entered into a stock purchase agreement with certain investors. Under the terms
of the agreement, we issued 1,110,000 shares of common stock, yielding
$5,500,343 in net proceeds.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about the options, warrants and
rights and other equity compensation under our equity plans as of September 30,
2004.
NUMBER OF NUMBER OF SECURITIES
SECURITIES TO REMAINING AVAILABLE
BE ISSUED UPON WEIGHTED-AVERAGE FOR FUTURE ISSUANCE
EXERCISE EXERCISE PRICE OF UNDER EQUITY
OF OUTSTANDING OUTSTANDING COMPENSATION PLANS
OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES
WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN(a))
PLAN CATEGORY (a) (b) (c)
- ------------------------------------- ------------------- ---------- -----------------------
Equity compensation plans approved by
security holders 1,593,500 $3.36 247,500
Equity compensation plans not approved
by security holders -- -- --
--------- ----- -------
Total 1,593,500 $3.36 247,500
========= ===== =======
25
ITEM 6. SELECTED FINANCIAL DATA
Year Ended 5 Months Ending
September 30, September 30, Year Ended April 30,
------------- ------------- ---------------------------------------------
2004 2003 2003 2002 2001
----------- ----------- ----------- ----------- -----------
Revenue:
Net Sales $ 863,851 $ 436,692 $ 1,148,745 $ 790,599 $ 555,233
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of sales and product development 599,054 251,479 683,812 583,255 622,011
Research and development 505,107 156,798 520,716 673,852 1,142,685
Sales and marketing 1,688,252 586,107 1,400,356 1,597,744 1,157,149
General and administrative 906,867 429,049 704,308 709,506 602,564
----------- ----------- ----------- ----------- -----------
Total operating expenses 3,699,280 1,423,433 3,309,192 3,564,357 3,524,409
----------- ----------- ----------- ----------- -----------
Operating loss (2,835,429) (986,741) (2,160,447) (2,773,758) (2,969,176)
Other income:
Interest income (other expense) 29,667 5,877 26,245 117,229 116,532
Loss on disposal of equipment (25,302) - - - -
----------- ----------- ----------- ----------- -----------
Net loss $(2,831,064) $ (980,864) $(2,134,202) $(2,656,529) $(2,852,644)
=========== =========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.29) $ (0.11) $ (0.28) $ (0.39) $ (0.52)
=========== =========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 9,622,191 8,662,926 7,622,971 6,841,991 5,522,363
=========== =========== =========== =========== ===========
BALANCE SHEET DATA: SEP 30, 2004 SEP 30, 2003 APR 30, 2003 APR 30, 2002 APR 30, 2001
- ------------------- ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents $4,793,326 $1,694,648 $2,597,649 $3,048.051 $1,116,589
Working capital 4,908,292 1,900,387 2,816,124 3,243,511 1,461,596
Total assets 5,585,636 2,462,406 3,329,307 3,799,616 2,130,790
Total shareholders' equity 5,068,709 1,977,147 2,878,974 3,316,167 1,606,547
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
With the Vasotrac monitor, Medwave is emerging as a technological alternative to
invasive arterial blood pressure monitoring in many surgical procedures and
other clinical environments where rendering a cuff-based blood pressure reading
is difficult. In addition, the Vasotrac monitor is being used in situations
where a conventional blood pressure cuff is simply not effective. This can occur
for a number of reasons, which make the Vasotrac product an excellent
alternative to a conventional blood pressure cuff. Pediatric patients, morbidly
obese and frail patients are all becoming very good candidates for the Vasotrac
within hospital settings. We believe that in time, sensor based blood pressure
monitoring, due to its clinical flexibility, as well as improved accuracy,
comfort and speed, will promote the change of the market away from the use of
invasive catheters within specific patient groups, and completely eliminate the
automatic blood pressure cuff found throughout many hospital settings. With the
ability to interface our Vasotrac monitor into larger more comprehensive patient
monitoring systems via the use of our NIA V-Line, the addition of the High
Motion Tolerant, or HMT, software in areas where a high degree of motion exist,
and the capability of monitoring patient groups from pediatric to the morbidly
obese, we believe that the Vasotrac monitor is the most advanced non-invasive
blood pressure measurement instrument available in the market today. We have
also been working on additional products, which will offer expanded
functionality, and we are hopeful that this will allow for penetration into
additional market segments. We anticipate launching these products during 2005.
The Vasotrax Handheld monitor is an alternative product for mercury based
sphygmomanometers, which are pervasive in the market today in all aspects of the
healthcare spectrum. There is a desire to replace the mercury sphygmomanometers,
as there are concerns about the environmental impact of a potential mercury
spill, and the effects that such a spill may have on the well being of the
healthcare providers. Healthcare professionals have expressed a general
resistance to changing from mercury, due to good reliability, and the general
in-expensive nature of these devices. We believe that products like the
Vasotrax, which are small and lightweight, operate on batteries, offer more
comfort, faster time to readings, digital storage capabilities, and are sensor
based will change the market away from manual blood pressure cuffs, such as the
mercury sphygmomanometers. In addition, the technology in the Vasotrax Handheld
monitor may be attractive in a home based setting in the future. This is a
market, which currently has more than 25 million people who are monitoring their
own blood pressure values, as they have been diagnosed with blood pressure
irregularities. In addition, recent published reports have estimated that
approximately 65 million people in the United States are hypertensive. There is
a great deal of user error which may occur with the self-application of a blood
pressure cuff in a home setting. We believe that the technology in the Vasotrax
allows us to adapt the current Vasotrax Handheld monitor into a home-based,
self-applicable device in the future. We have been developing a device based on
our current Vasotrax product, which we are planning to launch to the market
during 2005.
We have also invested in developing the MJ23 OEM Module over the past few years.
The purpose of this product is to incorporate blood pressure measurement into
other companies' devices, which may offer other physiologic monitoring
parameters, therapeutic treatments, or other general monitoring functions in a
variety of clinical environments. We believe that over time, as we continue to
achieve success in having major institutions purchase the Vasotrac technology,
and as additional studies are published and/or presented which are in favor of
our technology, that other companies will feel compelled to convert at least a
portion of their blood pressure measurement products to the same functionality
as is offered in the Vasotrac. There are an estimated 500,000 physiologic
monitoring systems installed in hospital settings in the United States, which
currently offer an automatic blood pressure cuff for measuring patients blood
pressure. It is estimated that 75,000 new patient monitoring systems and an
additional 65,000 defibrillator units are sold each year into EMS and hospital
markets, all of which incorporate an automatic blood pressure cuff.
We have intentionally designed our business plans and activities over the past
few years, around a tiered approach to the market. Tier one is to enter and
become a well-known alternative to both
27
invasive catheters and automatic blood pressure cuffs in the hospital settings.
In an effort to gauge the success of this strategy, we have attempted to
penetrate larger more prestigious medical centers. These are typically involved
in educating the clinicians of the future, and perform clinical research to
validate the usefulness of new technologies. The success of this strategy will
allow us to branch out into the smaller markets, and smaller hospitals, as they
will have the endorsement and support of the larger academic medical centers.
Another benefit from this initial strategy is that we have the ability to
provide exposure to a medical staff, which may move around from center to
center. Therefore, positive exposure in one center may lead to activity in other
centers in the future.
Tier two of the business approach is to focus on the pre and post hospital
markets. We believe that the emergency medical market segments may prove to be a
popular segment for our technology. Several problems exist for caregivers in the
emergency environment, such as the inability to monitor with a blood pressure
cuff at times of motion, or when a patient's heart rhythm is disturbed. Field
reports from users of our technology have been very favorable in these
situations. During the past few years, the company invested in developing an
advanced motion tolerance algorithm, specifically for this environment. The
other area which may prove beneficial is the physician office market. Patients
are living longer, and are becoming better educated about their own health care
and treatment. As the use of our technology becomes more pervasive, the more
consumers will be exposed to the technology and its associated benefits. We have
started to hire and train sales people, who will strictly focus on these market
segments. In addition, we have been developing extension products to our
Vasotrax Handheld Monitor, which will be introduced during 2005.
The third tier of our business approach will be to use the success from tiers
one and two to enter the consumer market. We believe that there are numerous
benefits that a home-based patient will experience with our technology, such as
speed to readings, accuracy and consistency, comfort and data transmission.
In 2002, the Company received the prestigious Seal of Acceptance from the
Alliance of Children's Hospitals. This award is presented only to those products
that are considered more efficacious than others for the treatment of children.
The Alliance of Children's Hospitals is an alliance of 40 of the largest, most
prestigious children's hospitals in the U.S. and Canada.
In addition, during 2003, the Company was honored with Frost and Sullivan's
Technology Innovation Award. This award is presented each year to the company
that has demonstrated excellence in technology innovation in the market. The
award recognizes the ability of the company to successfully develop and
introduce a new technology, formulate a well-designed product family, and make
significant product performance contributions to the industry.
We believe that these prestigious accomplishments, along with the increasing
number of clinical studies that are being completed within a multitude of
clinical settings and the group purchasing agreements with AmeriNet, Novation,
and the Mayo Foundation, endorse the fact that our technology is cutting a new
path to standardization using non-invasive sensors while monitoring blood
pressure.
28
RESULTS OF OPERATIONS
Year Ended 5 Months Ending
September 30, September 30, Year Ended April 30,
------------- ------------- ----------------------------
2004 2003 2003 2002
----------- ----------- ----------- -----------
Revenue:
Net Sales $ 863,851 $ 436,692 $ 1,148,745 $ 790,599
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales 599,054 251,479 683,812 583,255
Research and development 505,107 156,798 520,716 673,852
Sales and marketing 1,688,252 586,107 1,400,356 1,597,744
General and administrative 906,867 429,049 704,308 709,506
----------- ----------- ----------- -----------
Total operating expenses 3,699,280 1,423,433 3,309,192 3,564,357
----------- ----------- ----------- -----------
Operating loss (2,835,429) (986,741) (2,160,447) (2,773,758)
Other income:
Interest income (other expense) 29,667 5,877 26,245 117,229
Loss on disposal of equipment (25,302) - - -
----------- ----------- ----------- -----------
Net loss $(2,831,064) $ (980,864) $(2,134,202) $(2,656,529)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.29) $ (0.11) $ (0.28) $ (0.39)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding
- basic and diluted 9,622,191 8,662,926 7,622,971 6,841,991
=========== =========== =========== ===========
Fiscal year ended September 30, 2004 compared to fiscal years ended April 30,
2003 and April 30, 2002
Operating revenue for fiscal 2004 was $863,851, a decrease of $284,894 or 24.8%
from fiscal 2003 operating revenue of $1,148,745. Operating revenue for fiscal
2003 of $1,148,745 was an increase of $358,146 or 45.3% from fiscal year 2002
operating revenue of $790,599. The decrease in operating revenue for fiscal year
2004 was due to the lack of follow-up orders from Nihon Kohden for our MJ23 OEM
Module, and a reduction in dealer orders. The increase in operating revenue from
fiscal year 2002 to fiscal year 2003 was due to the addition of direct sales
specialists and the commencement of shipping our MJ23 Modules to Nihon Kohden.
29
Operating expense for fiscal 2004 was $3,699,280, an increase of $390,088 or
11.8% from fiscal year 2003 operating expense of $3,309,192. Operating expense
for fiscal 2003 was $3,309,192, a decrease of $255,165 or 7.2% from fiscal year
2002 operating expense of $3,564,357. The increase in operating expense from
fiscal 2003 to fiscal 2004 was primarily due to increased numbers of sales
people and associated expenses to operate within their positions. The decrease
in operating expense from fiscal 2002 to fiscal 2003 was primarily due to a
reduction in Research and Development expenses, as well as a change in the
profile for our sales team such that it is more incentive-based.
The cost of sales for fiscal 2004 was $599,054, a decrease of $84,758 or 12.4%
from fiscal year 2003 cost of sales and product development expense of $683,812.
This decrease is attributable to less investment in our research and development
department. The cost of sales and product development for fiscal 2003 was
$683,812, an increase of $100,557 or 17.2% from fiscal year 2002 cost of sales
and product development expense of $583,255. This increase is attributable to
the increase in product shipments and increased sales.
Research, development, and clinical expense for fiscal year 2004 was $505,107, a
decrease of $15,609 or 3.0% from fiscal year 2003 research, development and
clinical expense of $520,716. Research, development, and clinical expense for
fiscal year 2003 was $520,716, a decrease of $153,136 or 22.7% from fiscal year
2002 research, development and clinical expense of $673,852. Both decreases in
research, development, and clinical expense are attributed to a decrease in
research and development activity as we progressed from product development to
focusing on sales and marketing.
Sales and marketing expense for fiscal year 2004 was $1,688,252, an increase of
$287,896 or 20.6% from fiscal year 2003 sales and marketing expense of
$1,400,356. Sales and marketing expense for fiscal year 2003 was $1,400,356, a
decrease of $197,388 or 12.4% from fiscal year 2002 sales and marketing expense
of $1,597,744. The increase in sales and marketing expense from fiscal 2003 to
fiscal 2004 relates to further investment in market penetration activities and
hiring more sales people to sell into the U.S. hospital market. The decrease in
sales and marketing expense from fiscal 2002 to fiscal 2003 relates to a
decrease in marketing activity, specifically, reduced expenses associated with
management of our trade show booth, as we moved this responsibility inside the
company. In addition, we also had a decrease in the number of trade shows which
we attended.
General and administrative expense for fiscal year 2004 was $906,867, an
increase of $202,559 or 28.8% from fiscal year 2003 general and administrative
expense of $704,308. General and administrative expense for fiscal year 2003 was
$704,308, a decrease of $5,198 or 0.7% from fiscal year 2002 general and
administrative expense of $709,506. The increase in general and administrative
expenses from 2003 to 2004 was due to continued increases in corporate and
employee health insurance. In addition, expenses associated with being a public
company continue to increase. The decrease in general and administrative
expenses from 2002 to 2003 was due to a decrease in salaries as a result of not
hiring a new CFO offset by an increase in legal and outside contracted
accounting expenses. The increase in legal expenses had to do with preparation
for the annual shareholders meeting and expenses associated with
re-incorporation into the state of Delaware.
Interest income for fiscal year 2004 was $29,667 an increase of $3,422 or 13.0%
from fiscal year 2003 interest income of $26,245. Interest income for fiscal
year 2003 was $26,245 a decrease of $90,984 or 77.6% from fiscal year 2002
interest income of $117,229. The increase in interest income in fiscal 2004 from
fiscal 2003 was due to proceeds received from January 2004 private placement.
The decrease in interest income in fiscal 2003 from fiscal 2002 was due to a
decreased level of invested cash.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, and cash equivalents were $4,793,326 and $1,694,648 at
September 30, 2004 and September 30, 2003, respectively. The increase is
primarily due to our financing activities. We incurred cash expenditures of
$2,678,910 for operations for the fiscal year ended September 30, 2004.
30
With the cash and cash equivalents, we believe that sufficient liquidity is
available to satisfy our working capital needs until at least December 31, 2005.
We have no significant capital expenditure commitments.
Cash flows used in operations increased to $2,678,910 in fiscal year ending
September 30, 2004 from $2,115,897 in fiscal year ending April 30, 2003, an
increase of $563,013 or 27%. In both periods cash flows were used primarily to
fund operating losses, which were partially offset by non-cash expenses for
depreciation and amortization. The primary use of cash in operations for fiscal
year 2002 was also to fund operating losses, which were partially offset by
non-cash expenses for depreciation and amortization.
Net investing activities used $145,038 and $31,514 of cash in fiscal years 2004
and 2003, respectively, for the upgrade of accounting software, office equipment
purchases and improvements to new office space. In 2002, net investing
activities used cash of $61,987, due to property and equipment additions,
primarily sales equipment.
Financing activities provided $5,922,626 and $1,697,009 of cash in fiscal years
2004 and 2003, respectively. In fiscal year 2004, the proceeds were primarily
from the January 2004 private placement of common stock and exercise of stock
options. In fiscal year 2003, the proceeds were primarily from the January 2003
private placement of common stock. In fiscal year 2002, the proceeds were
primarily from the June 2001 second round of the private placement of common
stock and warrants as well as the exercise of stock options.
We have incurred an accumulated deficit of $24,382,068 from our inception
through September 30, 2004. We expect to incur additional losses from
development, clinical studies, regulatory compliance, sales, marketing, and
other expenses at least until we complete the development of the technology and
market acceptance begins.
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at September 30, 2004 and
the effect these contractual obligations are expected to have on our liquidity
and cash flows in future periods.
PAYMENTS DUE BY PERIOD
---------------------------------------
TOTAL 1 YEAR OR LESS 1-3 YEARS
-------- -------------- ---------
Operating lease commitments........... $ 299,272 $ 112,226 $ 187,046
========== ========== ==========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. On an ongoing basis, management evaluates the
Company's estimates and assumptions including but not limited to those related
to revenue recognition, inventory valuation, warranty reserves and income taxes.
Management bases its estimates on historical experience and various other
assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
1. Revenue Recognition. Revenue from the sales of products is recognized when
products are shipped to customers provided that title has passed, there
are no uncertainties regarding customer acceptance, there is persuasive
evidence of an arrangement, the sales price is fixed or determinable and
collection of the related receivable is probable. The Company accounts for
shipping and handling fees passed on to customers as sales. The
corresponding costs are recorded as cost of sales.
2. Inventory Valuation. The Company values its inventory at the lower of
actual cost or the current estimated market value. It regularly reviews
inventory quantities on hand and records a provision for
31
excess and obsolete inventory based primarily on historical usage for the
prior twelve month period and future sales forecasts. Although the Company
makes every effort to ensure the accuracy of its forecasts of future
product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact of the value of
its inventory and its reported operating results.
3. Patent Costs. We have capitalized external legal costs incurred in the
defense of our patents where we believe that the future economic benefit
of the patent will be increased. We monitor the legal costs incurred and
the anticipated outcome of the legal action and, if changes in the
anticipated outcome occur, write off capitalized costs, if any, in the
period the change is determined. Patent costs are amortized over the
remaining life of the patents.
4. Warranty Reserves. The Company's warranties require it to repair or
replace defective products returned to it during the applicable warranty
period at no cost to the customer. It records an estimate for
warranty-related costs based on actual historical return rates,
anticipated return rates, and repair costs at the time of sale. A
significant increase in product return rates, or a significant increase in
the costs to repair products, could have a material adverse impact on
future operating results for the period or periods in which such returns
or additional costs materialize and thereafter.
5. Income Taxes. The Company accounts for income taxes under the liability
method in accordance with SFAS N. 109, "Accounting for Income Taxes"
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and income tax bases of assets and
liabilities as well as net operating loss and tax credit carryforwards and
are measured using the enacted tax rates and laws that will be in effect
when the differences reverse. Deferred tax assets may be reduced by a
valuation allowance to reflect the uncertainty associated with their
ultimate realization.
Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The valuation allowance is based
on the Company's estimates of taxable income and the period over which its
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or the Company adjusts these estimates in future periods.
It may need to establish an additional valuation allowance or reduce its current
valuation allowance that could materially impact its tax provision.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handing costs, and spoilage. This statement requires
that those items be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal" which was the criterion specified in
ARB No. 43. In addition, this Statement requires that allocation of fixed
production overheads to the cost of production be based on normal capacity of
the production facilities. This pronoucement is effective for the Company
beginning October 1, 2005. The Company has not yet assessed the impact on
adopting this new standard.
In December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. The new standard will be effective for the Company in the first
interim or annual reporting period beginning after December 15, 2005. The
Company expects the adoption of this standard will have a material impact on its
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
None.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Medwave, Inc.
Financial Statements
As of September 30, 2004 and 2003, and for the Years Ended September 30, 2004,
April 30, 2003 and 2002, and the Five Months Ended September 30, 2003
CONTENTS
Report of Independent Registered Public Accounting Firm.... 34
Report of Independent Registered Public Accounting Firm.... 35
Audited Financial Statements
Balance Sheets............................................. 36
Statements of Operations................................... 38
Statement of Changes in Stockholders' Equity............... 39
Statements of Cash Flows................................... 40
Notes to Financial Statements.............................. 41
33
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Medwave, Inc.
Danvers, Massachusetts
We have audited the accompanying balance sheets of Medwave, Inc. as of September
30, 2004 and 2003 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended September 30, 2004 and
April 30, 2003 and for the period from May 1, 2003 to September 30, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Medwave, Inc. at September 30,
2004 and 2003, and the results of its operations and its cash flows for the
years ended September 30, 2004 and April 30, 2003, and for the period from May
1, 2003 to September 30, 2003 in conformity with accounting principles generally
accepted in the United States of America.
BDO Seidman, LLP
Boston, Massachusetts
December 21, 2004
34
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Medwave, Inc.
We have audited the statements of operations, changes in stockholders' equity
and cash flows of Medwave, Inc. for the year ended April 30, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of Medwave, Inc.'s operations and its cash
flows for the year ended April 30, 2002, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
June 21, 2002
35
Medwave, Inc.
Balance Sheets
SEPTEMBER 30,
----------------------------
2004 2003
----------- -----------
Assets
Current Assets:
Cash and cash equivalents $ 4,793,326 $ 1,694,648
Accounts receivable, net of allowance for doubtful
accounts of $20,000 and $30,000 for 2003 and 2004,
respectively 176,503 232,676
Inventories, net 393,039 404,306
Prepaid expenses 62,351 54,016
----------- -----------
Total current assets 5,425,219 2,385,646
----------- -----------
Property and equipment:
Research and development equipment 31,535 31,535
Office Equipment 114,174 76,836
Manufacturing and engineering equipment 285,937 247,824
Sales and marketing equipment 113,482 62,365
Leasehold improvements 41,913 31,613
Demonstration Equipment 6,257 25,302
----------- -----------
593,298 475,475
Accumulated depreciation (434,798) (398,715)
----------- -----------
Property and equipment, net 158,500 76,760
Patents 1,917 -
----------- -----------
Total Assets $ 5,585,636 $ 2,462,406
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
Medwave, Inc.
Balance Sheets (continued)
SEPTEMBER 30,
-----------------------------
2004 2003
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 342,879 $ 380,380
Accrued payroll 113,851 66,794
Deferred revenue 60,197 38,085
------------ ------------
Total current liabilities 516,927 485,259
------------ ------------
Commitments (Notes 5 and 11)
Shareholders' equity:
Common Stock, .01 par value:
Authorized shares--50,000,000
Issued and outstanding shares -
September 30, 2003 - 8,744,666
September 30, 2004 - 10,058,916 100,589 87,447
Additional paid in capital 29,350,188 23,440,704
Accumulated deficit (24,382,068) (21,551,004)
------------ ------------
Total shareholders' equity 5,068,709 1,977,147
------------ ------------
Total liabilities and shareholders' equity $ 5,585,636 $ 2,462,406
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
37
Medwave, Inc.
Statements of Operations
YEAR ENDED 5 MONTHS ENDED YEAR ENDED
----------------------------- ----------------------------
SEPTEMBER 30, APRIL 30,
----------------------------- ----------------------------
2004 2003 2003 2002
----------- ----------- ----------- -----------
Revenue:
Net Sales $ 863,851 $ 436,692 $ 1,148,745 $ 790,599
Operating expenses:
Cost of sales 599,054 251,479 683,812 583,255
Research and development 505,107 156,798 520,716 673,852
Sales and marketing 1,688,252 586,107 1,400,356 1,597,744
General and administrative 906,867 429,049 704,308 709,506
----------- ----------- ----------- -----------
Operating loss (2,835,429) (986,741) (2,160,447) (2,773,758)
Other income:
Interest income 29,667 5,877 26,245 117,229
Loss on disposal of equipment (25,302) - - -
----------- ----------- ----------- -----------
Net loss ($2,831,064) ($ 980,864) ($2,134,202) ($2,656,529)
=========== =========== =========== ===========
Net loss per share - basic and diluted ($ 0.29) ($ 0.11) ($ 0.28) ($ 0.39)
=========== =========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding 9,622,191 8,662,926 7,622,971 6,841,991
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
38
Medwave, Inc.
Statement of Changes in Stockholders' Equity
COMMON STOCK
.01 PAR VALUE ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID IN CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------
Balance at April 30, 2001 5,734,049 $ 57,340 $ 17,328,616 $(15,779,409) $ 1,606,547
Exercise of Stock Options 19,773 198 12,302 - 12,500
Private Placement of Common Stock, in June
2001 at $4.25, net of expenses 1,235,777 12,358 4,341,291 - 4,353,649
Private Placement look- back provision 261,317 2,613 (2,613) - -
Net Loss - - - (2,656,529) (2,656,529)
------------ ------------ ------------ ------------ ------------
Balance at April 30, 2002 7,250,916 72,509 21,679,596 (18,435,938) 3,316,167
Private Placement of Common Stock, in
January 2003 at $1.25, net of expenses 1,400,000 14,000 1,683,009 - 1,697,009
Net Loss - - - (2,134,202) (2,134,202)
------------ ------------ ------------ ------------ ------------
Balance at April 30, 2003 8,650,916 86,509 23,362,605 (20,570,140) 2,878,974
Exercise of Stock Options 93,750 938 78,099 - 79,037
Net Loss - - - (980,864) (980,864)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2003 8,744,666 87,447 23,440,704 (21,551,004) 1,977,147
Exercise of Stock Options 194,250 1,942 377,841 - 379,783
Exercise of Stock Warrants 10,000 100 42,400 - 42,500
Private Placement of Common Stock, in January,
2004 at $5.00 per share, net of expenses 1,110,000 11,100 5,489,243 - 5,500,343
Net Loss - - - (2,831,064) (2,831,064)
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2004 10,058,916 $ 100,589 $ 29,350,188 $(24,382,068) $ 5,068,709
============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
39
Medwave, Inc.
Statements of Cash Flows
Year Ended 5 Months Ended Year Ended
September 30, April 30,
------------------------------ -----------
2004 2003 2003 2002
----------- ----------- ----------- -----------
OPERATING ACTIVITIES
Net loss $(2,831,064) $ (980,864) $(2,134,202) $(2,656,529)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 36,079 11,392 41,320 134,282
Loss on sale of equipment 25,302 - - -
Changes in operating assets and liabilities:
Accounts receivable 56,173 62,115 (11,677) (75,105)
Inventories 11,267 (134,188) (17,620) 215,134
Prepaid expenses (8,335) 49,883 39,398 50,312
Accounts payable (37,501) 70,200 57,453 (26,160)
Accrued payroll and related expenses 47,057 (34,509) 20,206 35,431
Deferred income 22,112 (765) (110,775) (50,065)
----------- ----------- ----------- -----------
Net cash used in operating activities (2,678,910) (956,736) (2,115,897) (2,372,700)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Patent expenditures (1,917) - - -
Purchase of property and equipment (143,121) (25,302) (31,514) (61,987)
----------- ----------- ----------- -----------
Net cash used in investing activities (145,038) (25,302) (31,514) (61,987)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net proceeds from issuance of Common Stock 5,922,626 79,037 1,697,009 4,366,149
----------- ----------- ----------- -----------
Net cash provided by financing activities 5,922,626 79,037 1,697,009 4,366,149
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 3,098,678 (903,001) (450,402) 1,931,462
Cash and cash equivalents at beginning of period 1,694,648 2,597,649 3,048,051 1,116,589
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 4,793,326 $ 1,694,648 $ 2,597,649 $ 3,048,051
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
40
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
1. BUSINESS ACTIVITY
Medwave, Inc. (the Company) is engaged exclusively in the development,
manufacturing, and marketing of a proprietary, noninvasive system that monitors
arterial blood pressure, and in the development of related technology and
products. Utilizing the Company's proprietary technology, the VASOTRAC(R) system
monitors blood pressure continually, providing new readings approximately every
15 heartbeats. In 1997, the Company began development of a hand-held blood
pressure measurement device. This hand-held device is based upon the technology
used in the Vasotrac System, and was introduced to the market in 2001 as the
Vasotrax Handheld Monitor. The Company has also developed an OEM module version
of the Vasotrac Monitor. During the year ended April 30, 2003, the MJ23 OEM
Module accounted for approximately 21% of the Company's revenue. During the year
ended September 30, 2004, the MJ23 OEM Module accounted for approximately 7% of
the Company's revenue.
The Company has a fiscal year that begins on October 1 and ends on September 30.
The Company emerged from the development stage during the year ended April 30,
2003. Subsequent to April 30, 2003, the board of directors approved a plan to
change the fiscal year to October 1 through September 30. The reason for making
this change is to align the Company's business cycles with the business cycles
of its customers.
In May 2003, the shareholders voted to re-incorporate the Company under the laws
of the State of Delaware.
2. MANAGEMENT'S PLANS CONCERNING CASH FLOWS AND ONGOING OPERATIONS
The Company continues to experience net losses and has an accumulated deficit in
stockholders' equity of $24,382,068 through September 30, 2004. The Company
believes that net proceeds from its private placements completed in January 2003
and January 2004 (see Note 4) together with achieving its operating budget for
2005 will be sufficient to fund its operations through at least December 31,
2005.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with a remaining
maturity of three months or less to be cash equivalents. Cash equivalents are
carried at cost which approximates market value.
INVENTORIES
Inventories which consist of material, labor and overhead are valued at the
lower of cost or market on the first-in, first-out (FIFO) method and consist of
the following at September 30, :
2004 2003
-------- --------
Raw materials $277,726 $306,348
Work-in-process - 28,867
Finished goods 115,313 69,091
-------- --------
Total $393,039 $404,306
======== ========
41
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over estimated useful lives of the assets as follows:
Research and development equipment 3 - 5 years
Office equipment 3 - 7 years
Manufacturing and engineering equipment 18 months to 5 years
Sales, and marketing and demonstration equipment 18 months to 5 years
Leasehold improvements are amortized over the related lease term or estimated
useful life of the assets, whichever is shorter.
Depreciation and amortization expense related to property and equipment was
$36,079 for the year ending September 30, 2004, $11,392 for the five-months
ending September 30, 2003, and $41,320 and $134,282 for the years ended April
30, 2003 and 2002, respectively.
PATENT COSTS
We have capitalized external legal costs incurred in the defense of our patents
where we believe that the future economic benefit of the patent will be
increased. We monitor the legal costs incurred and the anticipated outcome of
the legal action and, if changes in the anticipated outcome occur, write off
capitalized costs, if any, in the period the change is determined. Patent costs
are amortized over the remaining life of the patents.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between the financial reporting and the
tax bases of assets and liabilities. A valuation allowance is provided when
management believes it is more likely than not that there will be sufficient
future taxable income to utilize deferred tax assets.
REVENUE RECOGNITION
The Company recognizes revenue upon product shipment, provided that there exists
persuasive evidence of an arrangement, the fee is fixed or determinable, and
collectability of the related receivable is reasonably assured.
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 financial
statements and accompanying notes. Actual results could differ from those
estimates.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to operations as incurred.
PRODUCT WARRANTY COST
The Company's policy is to make provisions in the year of sale for the estimated
future repair costs on products covered by warranty.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common shares
outstanding in each year. Diluted 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.
42
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
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 the years
ended September 30, 2004, April 30, 2003 and 2002 and the period from May 1,
2003 to September 30, 2003: risk-free interest rates ranging from 3.83 - 4.73%
for September 30, 2004, 3.96% for April 30, 2003, rates ranging from 5.11% -
6.00% for April 30, 2002, and rates ranging from 3.57 - 3.98% for the period
from May 1, 2003 to September 30, 2003, respectively; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
..57, 1.45, .57, and 1.60, respectively, and a weighted average expected life of
the option of five years.
The weighted average fair value of options granted during the years ended
September 30, 2004, April 30, 2003 and 2002 and the period from May 1, 2003 to
September 30, 2003 was $4.14, $0.66, $1.32, $2.60 per share, respectively.
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:
PERIOD FROM
MAY 1, 2003 TO
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, APRIL 30,
2004 2003 2003 2002
------------- ------------- --------- ----------
Net loss as reported $(2,831,064) $ (980,064) $(2,134,202) $(2,656,529)
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 (441,672) (143,168) (125,062) (510,827)
----------- ----------- ----------- -----------
Pro forma net loss $(3,272,736) $(1,123,232) $(2,259,264) $(3,167,356)
=========== =========== =========== ===========
Basis and diluted loss per share
As reported $ (0.29) $ (0.11) $ (0.28) $ (0.39)
Pro forma $ (0.34) $ (0.13) $ (0.30) $ (0.46)
43
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
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.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $68,214 for
the year ending September 30, 2004, $54,458 for the five-months ending September
30, 2003, $105,295 and $180,678 for the years ending April 30, 2003 and 2002,
respectively.
SHIPPING AND HANDLING
The Company classifies shipping and handling costs as costs of goods sold.
Shipping costs are defined as the costs to get the finished product from the
seller to the buyer. Handling costs are defined as the costs to store, move, and
prepare finished goods for shipment. All amounts billed to a customer in a sale
transaction are classified as revenues.
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 uncollectable. The Company includes any reserves
for specific accounts receivable balances that are determined to be
uncollectable, 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
September 30, 2004 is adequate. However, actual write-offs may exceed the
recorded allowance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handing costs, and spoilage. This statement requires
that those items be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal" which was the criterion specified in
ARB No. 43. In addition, this Statement requires that allocation of fixed
production overheads to the cost of production be based on normal capacity of
the production facilities. This pronoucement is effective for the Company
beginning October 1, 2005. The Company has not yet assessed the impact on
adopting this new standard.
In December 2004, the FASB issued SFAS No. 123 (revised 2004). Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Pro forma disclosure is no longer
an alternative. The new standard will be effective for the Company in the first
interim or annual reporting period beginning after December 15, 2005. The
Company expects the adoption of this standard will have a material impact on its
financial statements.
44
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
4. CAPITAL STOCK
In March 2001, the Company sold 181,125 shares of common stock in the first
round of a private placement for $6.38 per share, resulting in net proceeds of
$949,086.
The March 2001 round of the private placement contained a "look-back" provision
in which the participants could receive an additional 297,555 shares for no
additional consideration in the event that certain conditions exist at specified
dates through July 30, 2002. In fiscal 2002, the Company issued 261,317 shares
as a result of this "look-back" provision.
In June 2001, the Company sold 1,235,777 shares of its common stock in a private
placement for $4.25 per share, resulting in net proceeds of $4,353,649.
In January 2003, the Company sold 1,400,000 shares of its common stock in a
private placement for $1.25 per share, resulting in net proceeds of $1,697,009.
In January 2004, the Company sold 1,110,000 shares of its common stock in a
private placement for $5.00 per share, resulting in net proceeds of $5,500,343.
5. COMMITMENTS
The Company leases its office, research and development, sales, and production
facilities under operating leases that expire through May 2007. Operating
expenses, including maintenance, utilities, real estate taxes, and insurance,
are paid by the Company in Massachusetts and are included in the Minnesota
lease. Total rent expense under operating leases was $94,253 for the year ended
September 30, 2004, $34,402 for the period May 1, 2003 to September 30, 2003,
and $80,160, $69,778 for the years ended April 30, 2003 and April 30, 2002,
respectively.
Future minimum rental payments required under leases that have remaining terms
in excess of one year as of September 30, 2004 are as follows:
2005 $112,226
2006 114,664
2007 72,382
========
$299,272
========
6. INCOME TAXES
At September 30, 2004, the Company had net operating loss carryforwards of
approximately $25 million and research and development tax credit carryforwards
of approximately $600,000. These carryforwards are available to offset future
taxable income expiring at various dates through 2024.
Included in the NOL is approximately $741,000 of deductions resulting from
disqualifying dispositions of stock options. These deductions currently have a
full valuation allowance and when realized for financial statement purposes they
will not result in a reduction in income tax expense. Rather, the benefit will
be recorded as additional paid-in capital.
The Company's ability to utilize its net operating loss carryforwards to offset
future taxable income is subject to certain limitations under Section 382 of the
Internal Revenue Code due to changes in the equity ownership of the Company.
45
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
No income taxes were paid for the year ended September 30, 2004, the period
ended May 1, 2003 to September 30, 2003 and for the years ended April 30, 2003,
and April 30, 2002, respectively.
Components of deferred tax assets are as follows:
September 30, September 30, April 30,
2004 2003 2003 2002
------------ ------------ ------------ ------------
Net operating loss carryforwards $ 11,482,897 $ 8,688,769 $ 7,709,000 $ 6,754,000
Research and development credit carryforwards 637,000 616,000 600,000 540,000
Other 36,936 1,395 44,000 136,000
Less valuation allowance (12,156,833) (9,306,164) (8,353,000) (7,430,000)
------------ ------------ ------------ ------------
Net deferred tax assets $ - $ - $ - $ -
============ ============ ============ ============
The Federal and state income tax benefit computed at the statutory rates is
offset by the valuation allowance of the deferred tax assets as it is more
likely than not that future taxable income will not be sufficient to utilize the
deferred tax assets.
7. SHAREHOLDER'S EQUITY
Common stock: On September 29, 2003, the Company's Board of Directors adopted a
Shareholder Rights Plan. In connection with the Shareholder Rights Plan, the
Board of Directors declared a dividend distribution of one common stock purchase
right for each outstanding share of common stock to stockholders of record as of
the close of business day on September 30, 2003. Initially, these rights are not
exercisable and trade with the shares of the Company's common stock. Under the
Shareholder Rights Plan, the rights generally become exercisable if a person
becomes an "acquiring person" by acquiring 15% or more of the common stock of
Medwave, or if a person commences a tender offer that would result in that
person owning 15% or more of the common stock of Medwave. Under the Shareholder
Rights Plan, a shareholder of ZOLL who beneficially owns 15% or more of the
Company's common stock as of September 30, 2004 generally will be deemed an
"acquiring person" if such shareholder acquires additional shares of the
Company's common stock. In the event that a person becomes an "acquiring person"
or is declared an "adverse person" by the Board, each holder of a right (other
than the acquiring person or the adverse person) would be entitled to acquire
such number of shares of common stock equivalent to a value of twice the
then-current exercise price of the right. If Medwave is acquired in a merger or
other business combination transaction after any such event, each holder of a
right would then be entitled to purchase, at the then-current exercise price,
shares of the acquiring company's common stock having a value twice the exercise
price of the right.
Stock Options and Warrants: The Company has a stock option plan that includes
both incentive stock options and non-statutory stock options to be granted to
certain eligible employees, non-employee directors, or consultants of the
Company. The maximum number of shares of common stock currently reserved for
issuance is 2,200,000 shares. A majority of the options granted have ten-year
terms and vest annually over a four year term and become fully exercisable at
the end of four years of continued employment.
In April 2002 the plan was amended to (a) increase the number of shares reserved
for issuance under the Plan by 500,000 shares, (b) provide for discretionary
grants of options to non-employee directors, and (c) extend to February 26,
2012, the term during which incentive stock options can be granted under the
Plan.
In April 2004 the plan was amended to increase the number of shares reserved for
issuance under the Plan by 250,000 shares.
46
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
Option activity is summarized as follows:
SHARES OPTIONS OUTSTANDING WEIGHTED AVERAGE
AVAILABLE -------------------------- EXERCISE PRICE
FOR GRANT PLAN NON-PLAN PER SHARE
--------- ---------- ---------- ----------------
Balance at April 30, 2001 190,000 1,199,000 20,000 4.28
Reserved for issuance 500,000 - - -
Granted (395,000) 395,000 - 2.72
Exercised - (30,000) - 1.92
Canceled 475,000 (475,000) - 3.66
---------- ---------- ----------
Balance at April 30, 2002 770,000 1,089,000 20,000 4.06
Granted (284,000) 284,000 - 0.81
Exercised - - - -
Canceled 90,000 (90,000) - 6.96
---------- ---------- ----------
Balance at April 30, 2003 576,000 1,283,000 20,000 $ 3.22
Granted (500,500) 500,500 - 3.15
Exercised - (93,750) - 0.84
Canceled 32,500 (32,500) - 1.46
---------- ---------- ----------
Balance at September 30, 2003 108,000 1,657,250 20,000 3.37
Reserved for issuance 250,000 - - -
Granted (178,000) 178,000 - 5.18
Exercised - (194,250) - 1.96
Canceled 67,500 (67,500) - 6.08
---------- ---------- ----------
Balance at September 30, 2004 247,500 1,573,500 20,000 $ 3.36
========== ========== ==========
The following table summarizes information about the stock options outstanding
at September 30, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- -------------- ----------- --------------
$ 0.74 - 0.98 222,000 7 years $ .59 111,000 $ .74
1.14 - 1.60 190,250 9 years 1.45 93,750 1.48
2.15 - 2.25 366,750 5 years 1.62 200,750 2.21
3.00 - 4.75 440,000 7 years 3.04 137,500 4.23
5.06 - 7.13 307,500 7 years 5.94 240,750 6.74
8.94 - 10.00 67,000 5 years 9.50 67,000 9.50
--------- --------- -------
1,593,500 6.8 years 850,750
========= ========= =======
Options outstanding expire at various dates during the period from 2004 through
2013. The number of options exercisable as of September 30, 2004, September 30,
2003, April 30, 2003, and April 30, 2002 was 850,750, 741,500, 731,750, 542,000,
respectively at weighted average exercise prices of $4.12, $4.18, $4.01, and
$5.26 per share, respectively.
47
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
In connection with the March 2001 round of the private placement, the Company
issued warrants to purchase 289,799 shares of common stock at an exercise price
of $6.43 per share. The warrants expire in March 2006.
In connection with the June 2001 round of the private placement, the Company
issued warrants to purchase 1,334,151 shares of common stock at an exercise
price of $4.25 per share. The warrants expire in June 2006. During 2004, 10,000
warrants were exercised.
8. SEGMENT REPORTING
The Company's business activities are aggregated into one reportable segment,
given the similarities of economic characteristics between the activities and
the common nature of the Company's products and customers. The total sales
outside the United States account for approximately 20%, 42%, and 33% of the
Company's sales in fiscal years ended September 30, 2004, April 30, 2003, and
April 30, 2002, and 32% for the period from May 1, 2003 to September 30, 2003,
respectively. Japan accounted for approximately 8% of the Company's net sales
for the year ended September 30, 2004, approximately 13% for the period from May
1, 2003 to September 30, 2003, approximately 36% of the Company's net sales for
the year ended April 30, 2003, and approximately 25% of the Company's net sales
for the year ended April 30, 2002.
9. CONCENTRATIONS AND SIGNIFICANT CUSTOMERS
CONCENTRATION OF CREDIT RISK ARISING FROM CASH DEPOSITS IN EXCESS OF INSURED
LIMITS
The Company has cash on deposit with a bank, which exceeds federally insured
limits by approximately $4,693,000 as of September 30, 2004. The Company has not
experienced any losses in such accounts, and management believes they are not
exposed to any significant credit risk on cash.
SIGNIFICANT CUSTOMERS
There were no customers that accounted for more than 10% of net sales for the
year ended September 30, 2004. For the period form May 1, 2003 to September 30,
2003, one customer accounted for approximately 27% of net sales and another
customer accounted for approximately 13% of net sales. During the year ended
April 30, 2003, one customer accounted for approximately 36% of net sales.
During the year ended April 30, 2002, one customer accounted for approximately
24% of net sales.
10. VALUATION AND QUALIFYING ACCOUNTS
The following is a summary of the Company's valuation and qualifying account
activity:
BALANCE AT CREDIT BALANCE
BEGINNING OF CHARGED TO COSTS ACCOUNTS END OF
PERIOD AND EXPENSES RECEIVABLE PERIOD
----------- ---------------- ---------- -------
Allowance for doubtful accounts
receivable - Trade for the year ended:
September 30, 2004 $20,000 $ 10,00 $ - $30,000
May 1, 2003 to Sept 30, 2003 15,000 5,000 - 20,000
April 30, 2003 18,013 5,519 8,532 15,000
April 30, 2002 13,203 12,000 7,190 18,013
48
Medwave, Inc.
Notes to Financial Statements
September 30, 2004
11. PENSION PLAN
The Company adopted a simplified employee pension plan that covers all eligible
employees. The plan states, among other things, that the Company will match up
to the first three percent of the employee's salary contribution. Pension
expense was $11,342 for the year ending September 30, 2004, $2,943 for the five
months ending September 30, 2003, $7,282 and $12,446 for the years ending April
30, 2003 and 2002, respectively.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
SEPTEMBER 30, 2004 QUARTER QUARTER QUARTER QUARTER
------------------ ------- ------- ------- -------
Net sales $ 224,927 $ 211,856 $ 223,611 $ 203,457
Operating loss (545,063) (680,649) (785,986) (823,731)
Net loss (568,365) (673,401) (777,832) (811,466)
Basic and diluted net loss per share (.06) (.07) (.08) (.08)
APRIL 30, 2003
--------------
Net sales $ 209,615 $ 301,577 $ 277,088 $ 360,465
Operating loss (617,758) (601,406) (494,643) (446,640)
Net loss (608,885) (594,108) (490,501) (440,708)
Basic and diluted net loss per share (.08) (.08) (.07) (.05)
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
ITEM 9A: CONTROLS AND PROCEDURES:
As of the end of the period covered by this report, an evaluation had been
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (who is also the Company's
Chief Financial Officer), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based upon that evaluation,
the Company's management, including the CEO, concluded that the Company's
disclosure controls and procedures were effective as of September 30, 2004.
There have been no significant changes in the Company's internal controls over
financial reporting that occurred during the quarter ended September 30, 2004,
that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
In connection with their audit of our 2004 financial statements, BDO Seidman,
LLP, our independent registered public accounting firm, advised management and
our Audit Committee of the following significant deficiencies which did not
individually or in the aggregate raise to the level of material weakness: The
Company lacks a full-time Chief Financial Officer to ensure consistently timely
reporting of financial information. We are currently in the process of
recruiting a Chief Financial Officer to ensure consistently timely reporting of
financial information. We believe this effort will address the conditions raised
by BDO Seidman, LLP.
ITEM 9B: OTHER INFORMATION:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the directors
and executive officers of the Company as of December 1, 2004. A summary of the
background and experience of each individual is set forth after the table.
The directors and executive officer of the Company are:
Name Age Position
- -------------------------------- --- -------------------------------------
William D. Corneliuson(1,2) 61 Chairman and Director
Frank A. Katarow (2) 46 Director
John L. Miclot(1) 46 Director
Solomon Aronson(1,2) 47 Director
Timothy J. O'Malley 43 President, Chief Executive Officer,
and Director, Secretary
1-Member of the Compensation Committee
2-Member of the Audit Committee
The Board of Directors is currently comprised of five members and is divided
into three classes, with the directors in each class serving for a term of three
years and until their successor is duly elected and qualified. The Class I
director is Solomon Aronson and his term expires at the 2007 Annual Meeting of
Shareholders. The Class II directors will hold office for a term expiring at the
2005 Annual Meeting of shareholders. Tim O'Malley and Bill Corneliuson are the
Class II directors. The Class III directors will hold office for a term expiring
at the 2006 Annual Meeting of shareholders. Frank Katarow and John Miclot are
the Class III directors. There are no family relationships among the directors
and executive officers. The Board of Directors has an Audit Committee, which (i)
reviews the Company's annual financial statements, (ii) makes recommendations
regarding the Company's independent auditors and scope of auditor services,
(iii) reviews the adequacy of accounting and audit policies, compliance
assurance procedures and internal
50
controls, (iv) reviews non-audit service performed by auditors to maintain
auditors' independence, and (v) reports to the Board on the adequacy of
disclosures and adherence to accounting principles. The Board of Directors has
determined that each of the members of the Audit Committee is "independent" as
defined in Rule 4200 of the Nasdaq Listing Requirements. At this stage, the
financial statements and accounting issues of the Company tend to be relatively
straightforward and the Board of Directors has concluded not to appoint an audit
committee financial expert of the Audit Committee. The Board of Directors also
has formed a Compensation Committee, which (i) reviews compensation philosophy
and major compensation benefits for executives, (ii) administers the Company's
Stock Option Plan, and (iii) approves executive officers' compensation.
TIMOTHY J. O'MALLEY is the President, Chief Executive Officer, and a Director of
the Company. He has served in these positions since October 1999. From 1984
until 1999, Mr. O'Malley was an employee of Siemens Medical Systems, Inc. At the
time of his departure from Siemens, Mr. O'Malley was Vice President/Division
Manager of Siemens Medical Systems, Electromedical Division for North America.
Mr. O'Malley received his Associates of Applied Science degree in 1983 from
Oakton College in Des Plaines, Illinois and attended DePaul University of
Chicago from 1986 until 1991, with an emphasis in Business Management and
Marketing.
WILLIAM D. CORNELIUSON, has been a Director of the Company since May 1999 and
Chair of the Board since February 2002. Mr. Corneliuson is President of B.C.
Holdings, Inc., a private investment company. Mr. Corneliuson has been with B.C.
Holdings, Inc. since 1993. From 1976 to 1993, Mr. Corneliuson was President,
Co-Founder, and Vice Chairman of the Board of Strong/Corneliuson Capital
Management, Inc. He was also co-founder of the Strong family of mutual funds.
FRANK A. KATAROW, a Director of the Company since 2002, has been President and
Chief Operating Office of BCI, Inc., a designer, manufacturer and distributor of
patient monitoring equipment, since November 1993. Mr. Katarow has been employed
by BCI since October 1980 serving in various capacities, including Executive
Vice President from January 1993 to November 1993, Senior Vice President and
General Manager from March 1992 to January 1993, and Vice President of
Operations from June 1990 to March 1992. In addition, Mr. Katarow is the
President of SurgiVet, Inc. the wholly owned veterinary division of BCI, Inc.
BCI, then a public company, was successfully sold to Smiths Group, plc., in
1999, a public company traded on London exchange.
JOHN L. MICLOT, a director of the Company since 2002, became President and CEO
of Respironics, Inc. on December 1, 2003. In November 2002, he was appointed the
company's Chief Strategic Officer responsible for developing and implementing
strategic business and growth initiatives, both domestically and
internationally, for each of Respironics' four divisions. In May 2003, he was
elected to the Board of Directors. Prior to his position as Chief Strategic
Officer, he was the President of the Homecare Division from July 1999 to
November 2002. Mr. Miclot joined Respironics in 1998 when it acquired Healthdyne
Technologies where he had served as Senior Vice President, Sales and Marketing
from 1995-1998. He was appointed Group Vice President, Sleep Disorders, and was
quickly promoted to Senior Vice President, Sales, Marketing and Manufacturing.
Mr. Miclot began his career in sales for both DeRoyal Industries and the
Edward's Critical Care Division of Baxter Healthcare. In 1988, he joined the
Ohmeda Division of BOC Healthcare as Director of Marketing and was appointed
Director of International Marketing and Service in 1992 and assumed the position
of Vice President of International Marketing in 1993. In 1994, Mr. Miclot joined
Medex Inc., a medical device company specializing in cardiovascular pressure
monitoring, as Vice President of Marketing. Mr. Miclot earned a Bachelor of
Business Administration degree in Marketing from the University of Iowa. He is
currently a member of the Young Presidents Organization.
SOLOMON ARONSON M.D., FACC, FCCP, FAHA, joined the Board of Directors at Medwave
in August 2003. Prior to joining Medwave, Dr. Aronson was Professor of
Anesthesia and Critical Care at the University of Chicago and Chief of the
Cardiothoracic and Vascular Anesthesia Division of the University of Chicago
Hospitals and Clinics. In 1983, Dr. Aronson received his MD with honors in
research from the
51
Medical College of Wisconsin. In 1986, after completing his residency at the
University of Texas where he served as Chief Resident in 1985, he was awarded a
fellowship in cardiac and vascular anesthesia at the Texas Heart Institute in
Houston. Following his fellowship in Texas, Dr. Aronson was recruited to the
University of Chicago, Department of Anesthesia and Critical Care where he
served as an instructor, assistant professor, and associate professor before
being promoted to full professor in 1999. Dr Aronson is active in many
professional organizations, including the American College of Cardiology, the
American College of Chest Physicians, the American Heart Association, the
American Society of Echocardiography for which he is Chair of the Intraoperative
Council, the Society of Cardiovascular Anesthesiology for which he has been
elected to serve on the Board of Directors, the National Board of
Echocardiography for which he has also served on the Board of Directors, the
American Society of Anesthesiology for which he serves on the Economic
Committee, and the International Anesthesia Research Society. Dr. Aronson has
recently been honored to serve through 2007 on the Anesthetic and Life Support
Drug Advisory Committee for the FDA. He has also been honored with listings in
"Who's Who" & "How to Find the Best Doctors in America". In 2000, 2001, and
2003, he was elected by his piers to "The Best Doctors in America". Dr. Aronson
has authored more than 75 journal articles, 40 book chapters, one textbook, and
over 100 abstracts, and he has lectured extensively at universities throughout
the United States and in many foreign countries.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and directors,
and persons who beneficially own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the SEC. Officers, directors, and greater than 10% shareholders
are required by Exchange Act regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5 was
required for such persons, the Company believes that during the fiscal year
ending September 30, 2004 and the five-month period from May 1, 2003 to
September 30, 2003, all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with, except for
the following: William D. Corneliuson, a Director of the Company, filed a Form 4
reporting the grant of options after the applicable filing deadline and filed a
form 4 reporting the purchase of the Company's common stock after the applicable
filing deadline; Timothy J. O'Malley, a Director and the President and Chief
Executive Officer of the Company, filed a Form 4 reporting the grant of options
after the applicable filing deadline and filed a Form 4 reporting the purchase
of the Company's common stock after the applicable filing deadline; Solomon
Aronson, a Director of the Company, filed a Form 4 reporting the purchase of the
Company's common stock after the applicable filing deadline; John L. Miclot, a
Director of the Company, filed a Form 4 reporting the purchase of the Company's
common stock after the applicable filing deadline.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer and controller. This Code of Ethics was
ratified by the Board of Directors on February 18, 2004. This policy became
effective for all of Medwave's employees Directors on February 18, 2004. This
Code of Ethics is available on our website, www.medwave.com, under the heading
Investor Relations, and is called "Code of Ethics".
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation earned
by or awarded to Timothy J. O'Malley, the President and Chief Executive Officer,
during the Company's last three fiscal years ended September 30, 2004, April 30,
2003, April 30, 2002 and the period from May 1, 2003 to September 30, 2003. No
other executive officer of the Company received total salary and bonus
compensation in excess of $100,000 for the fiscal year ended 2004.
52
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying Options All Other
Name and Principal Position Year Salary Bonus (# of shares)(1) Compensation
- ----------------------------------- ---------------------- ----------- ------------ --------------------- -----------------
Timothy J. O'Malley 2004 $225,000 ---- 30,000 ----
President and Chief Executive May 1-Sep 30, 2003 93,750 ---- 100,000 ----
Officer 2003 225,000 ---- ---- ----
2002 219,375 ---- 185,000 ----
- --------------
(1) Number of shares of common stock subject to options that were granted during
the year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
30,000 stock options were granted during fiscal year 2004 and 100,000 stock
options were granted during the five-month period from May 1, 2003 to September
30, 2003 to the executive officer named in the above Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth certain information concerning each exercise of
stock options during the year ended September 30, 2004 and the five-month period
from May 1, 2003 to September 30, 2003 by the executive officer named in the
above Summary Compensation Table and the aggregated fiscal year-end value of the
unexercised options of such executive officer.
Number of Unexercised Value of Unexercised
Securities Underlying In-the-Money Options at Fiscal
Shares Options at Fiscal Year-End (#) Year- End ($)1
Acquired on Value -------------------------------- --------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- -------------- ------------- --------------- ---------------- -------------- -----------------
Timothy J. O'Malley - 0 - $ - 0 - 365,000 175,000 $212,425 $214,425
(1) Based on the differences between the closing price of our common stock at
fiscal year-end and the option exercise price.
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings. Under the
Company's Stock Option Plan, each non-employee director receives an option to
purchase 30,000 shares of common stock upon his or her initial election to the
Board. Pursuant to such provision, in May 1999 Mr. Corneliuson received a
non-qualified option to purchase 30,000 shares of common stock at an exercise
price of $8.94 In February 2002, Mr. Katarow and Mr. Miclot each received a
non-qualified option to purchase 30,000 shares of common stock at an exercise
price of $1.60. In July 2003, Mr. Aronson received a non-qualified option to
purchase 50,000 shares of common stock at an exercise price of $4.25. Mr.
Aronson received the additional amount of shares due to the fact that Medwave
will be utilizing his expertise as a physician and medical expert. Each such
option is for a term of ten years and vests over a four-year period. In
addition, after three years of service each non-employee director receives a
ten-year non-qualified option for 10,000 shares, vesting after one year, each
year he or she continues to serve as a director. Mr. Corneliuson received an
option for 10,000 shares in May 2002 at an exercise price of $1.28 per share, an
option for 10,000 shares in May 2003 at an exercise price of $2.23 and an option
for 10,000 shares in May 2004 at an exercise price of $6.75.
53
The Company has non-compete and confidentiality agreements with its employees.
In addition, the Company has a letter agreement of employment with Mr. O'Malley.
The letter agreement outlines the terms of Mr. O'Malley's stock options and
compensation plan but does not include a non-compete agreement. An Executive
Severance Agreement between Medwave and Mr. O'Malley was finalized on June 4,
2004. The Company does not have key man life insurance on Mr. O'Malley. The
Company does not have an employment agreement with or key man life insurance on,
any other individual.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of shares of common
stock of the Company on December 22, 2004, by each of the executive officers
named in the Summary Compensation Table set forth in Item 11, by each director,
by all directors and current executive officers as a group and by all persons
known by us to be beneficial owners of more than 5% of the our common stock.
Except as otherwise indicated, each of the shareholders listed in the table or
included within a group listed in the table possesses sole voting and investment
power with respect to the shares indicated.
Shares Beneficially Percent of
Name and Address Owned(1) Ownership
- ------------------------------------ ---------------------- ---------------
Heartland Value Fund
c/o Heartland Advisors
789 North Water Street
Milwaukee, WI 53202 900,000(2) 9.0%
William D. Corneliuson
1045 West Glen Oaks Lane
Suite 203
Mequon, WI 53092 1,067,550(3) 10.6%
David B. Johnson
Miller Johnson Steichen Kinnard
1400 Kinnard
Financial Center
920 2nd Avenue South
Minneapolis, MN 55402 646,037(4) 6.4%
Frank Katarow 15,000(5) *
John Miclot 35,000(6) *
Timothy J. O'Malley 377,450(7) 3.8%
Solomon Aronson 14,500(8) *
All Current Executive Officers and
Directors as a Group (5 persons) 1,509,500(9) 15.0%
* Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person to acquire them as of December 22, 2004, or within 60
days of such date are treated as outstanding only when determining the
percent owned by such individual and when determining the percent owned by
a group.
54
(2) The information reported is based on a Joint Schedule 13G filed with the
SEC on February 12, 2004 reporting beneficial information.
(3) Includes options to purchase 155,000 shares of common stock which are
exercisable as of December 22, 2004, or will become exercisable within 60
days of such date. Also includes 244,250 shares held by Duchess Limited
Partnership, an entity in which Mr. Corneliuson holds a pecuniary
interest. Pursuant to a domestic relations order in 2002, Mr. Corneliuson
transferred 20,000 shares of common stock underlying certain stock options
awards to his ex-wife.
(4) Includes 91,797 shares and 30,000 units (consisting of 30,000 shares and
warrants to purchase 30,000 shares) owned by David B. Johnson; 269,840
shares owned by Betty L. Johnson, wife of David B. Johnson; 7,800, 8,000,
and 4,600 shares owned respectively by each Todd, Molly, and Joel Johnson,
children of David B. Johnson; and 214,000 shares and 20,000 units
(consisting of 20,000 shares and warrants to purchase 20,000 shares) owned
by a foundation controlled by David B. Johnson. (All given amounts based
on information provided as of February 17, 2004.)
(5) Includes an option to purchase 15,000 shares of common stock which is
exercisable as December 22, 2004, or will become exercisable within 60
days of such date.
(6) Includes an option to purchase 15,000 shares of common stock which is
exercisable as December 22, 2004, or will become exercisable within 60
days of such date.
(7) Includes options to purchase 365,000 shares of common stock which are
exercisable as of December 22, 2004, or will become exercisable within 60
days of such date. Includes 600 shares held by Mr. O'Malley's three
children.
(8) Includes options and warrants to purchase 12,500 shares of common stock
which are exercisable as of December 22, 2004, or will become exercisable
within 60 days of such date.
(9) Includes 562,500 shares, which may be purchased upon exercise of options
and warrants which are exercisable as of December 22, 2004, or will become
exercisable within 60 days of such date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 8, 2004, the Company sold 1,100,000 shares of its common stock in a
private placement. William D. Corneliuson, the Chairman of the Board of
Directors of the Company, purchased 100,000 of such shares, which sale was
approved by the shareholders of the Company at the Annual Meeting of
Shareholders on April 8, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. During fiscal year ended September 30, 2004, the aggregate fees and
expenses billed for professional services rendered by BDO Seidman, LLP for the
audit of the Company's annual financial statements, review of the Company's
quarterly financial statements and accounting consultations totaled $25,146.00.
For the five months ended September 30, 2003 and for the year ended April 30,
2003, the aggregate fees and expenses billed for professional services rendered
by BDO Seidman, LLP for the audit of the Company's annual financial statements,
review of the Company's quarterly financial statements and accounting
consultations totaled $39,425.00 and the aggregate fees and expenses billed for
professional services rendered by Ernst & Young LLP for the audit of the
Company's annual financial statements, review of the Company's quarterly
financial statements and accounting consultations totaled $12,538.00.
Audit-Related Fees. During fiscal year ended September 30, 2004, the aggregate
fees and expenses billed for assurance and related services rendered by BDO
Seidman and Ernst & Young that were reasonably related to the performance of the
audit or review of the Company's annual financial statements, review of the
Company's quarterly financial statements and accounting consultations totaled
$3,589.00. For the five months ended September 30, 2003 and for the year ended
April 30, 2003, the aggregate fees and expenses billed for assurance and related
services that were reasonably related to the performance of the audit of the
Company's annual financial statements, review of the Company's quarterly
financial statements and accounting consultations totaled $7,600.00.
55
Tax Fees. During fiscal year ended September 30, 2004, the aggregate fees and
expenses billed for professional services rendered by BDO Seidman for tax
compliance, tax advice and tax planning totaled $17,915.00. For the five months
ended September 30, 2003 and for the year ended April 30, 2003, the aggregate
fees and expenses billed for professional services rendered by BDO Seidman for
tax compliance, tax advice and tax planning totaled $4,500.00. For the five
months ended September 30, 2003 and for the year ended April 30, 2003, the
aggregate fees and expenses billed for professional services rendered by Ernst &
Young for tax compliance, tax advice and tax planning totaled $0.00.
All Other Fees. During fiscal year ended September 30, 2004 and for the five
months ended September 30, 2003 and for the year ended April 30, 2003, there
were no fees and expenses billed for professional services rendered by BDO
Seidman or Ernst & Young to the Company not covered in the three preceding
paragraphs.
The Audit Committee must pre-approve all audit and permitted non-audit services
to be provided by our independent public accounting firm unless an exception to
such pre-approval exists under the Exchange Act or the rules of the Securities
and Exchange Commission. Each year, the Audit Committee approves the appointment
of the independent auditors to audit our financial statements, including the
associated fee. Of the services described in the four preceding paragraphs, 100%
of such services were approved by the Audit Committee. The Audit Committee has
considered whether the provisions of such services, including non-audit
services, by BDO Seidman and Ernst & Young is compatible with maintaining BDO
Seidman's and Ernst & Young's independence and has concluded that it is.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1) The following Financial Statements, Notes thereto and Independent
Auditors' Reports are set forth under Item 8:
Report of Registered Public Accounting Firm
Report of Registered Public Accounting Firm
Audited Financial Statements
Balance Sheets
Statements of Operations
Statement of Changes in Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(a)(2) No Financial Statements Schedules are included herein, because either
the amounts are not sufficient to require submission of the schedules
or because the information is included in the financial statements or
notes thereto.
(a)(3) Exhibits
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amendment of Articles of Incorporation. (2)
3.3 Amended and Restated Bylaws. (1)
3.4 Amendments to Bylaws. (2)
4.1 Shareholder Rights Plan dated September 29, 2003. (9)
10.1 2004 Amended and Restated Stock Option Plan. (4)
10.2 Form of Incentive Stock Option Agreements. (3)
56
Exhibit
Number Description
- ------ -----------
10.3 Form of Non-Qualified Stock Option Agreement for Non-Employee Directors. (3)
10.4 Letter agreement of employment with Timothy O'Malley dated September 9, 1999 and amendment dated
September 16, 1999. (5)
10.5 Critical Care Concepts Distributor Agreement. (5)
10.6 Agreement of Lease extension dated November 30, 1999 between the Company and AMB Property, L.P. (7)
10.7 Agreement of Lease extension dated March 21, 2002, between the Company and AMB Property, L.P. (8)
10.8 Agreement of Lease dated December 20, 2001 between the Company and Hawthorne North Realty Trust. (8)
10.9 Second Lease Modification and Extension Agreement dated April 12, 2004 between the Company and AMB
Property, L.P. (3)
10.10 Commercial Lease dated April 12, 2004 between the Company and Hawthorne North Realty. (3)
10.11 The Agreement and Plan of Merger by and between Medwave, Inc., a Minnesota Corporation and Medwave,
Inc., a Delaware Corporation dated as of April 30, 2003. (8)
10.12 Supply Agreement entered into September 14, 2000 by and between the Registrant and Nihon Kohden
Corporation. (8)
10.13 Code of Ethics. (3)
10.14 Severance Agreement with Timothy J. O'Malley dated June 4, 2004. (3)
23.1 Consent of Ernst & Young LLP. (3)
23.2 Consent of BDO Seidman, LLP. (3)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)
- ------------------------
(1) Incorporated by reference to Medwave, Inc.'s Registration Statement on
Form SB-2, Reg. No. 33-96878C
(2) Incorporated by reference to Medwave, Inc.'s Registration Statement on
Form S-3, Reg. No. 333-103477
(3) Filed herewith.
(4) Incorporated by reference to Medwave, Inc.'s Schedule 14A filed on
March 9, 2004.
(5) Incorporated by reference to Medwave, Inc.'s Quarterly Report on Form
10-Q for the quarter ended October 1, 1999.
(6) Incorporated by reference to Medwave, Inc.'s Quarterly Report on Form
10-Q for the quarter ended January 31, 2000.
(7) Incorporated by reference to Medwave, Inc.'s Annual Report on Form 10-K
for the fiscal year ended April 30, 2000.
(8) Incorporated by reference to Medwave, Inc.'s Annual Report on Form 10-K
for the fiscal year ended April 30, 2003.
(9) Incorporated by reference to Medwave, Inc.'s Form 8-A12G filed on
October 3, 2003.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MEDWAVE, INC.
Date: January 11, 2005 By /s/ Timothy J. O'Malley
----------------------------------
Timothy J. O'Malley, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Timothy J. O'Malley President, CEO, and Director January 11, 2005
- -------------------------------- (principal executive officer and principal
Timothy J. O'Malley financial officer)
/s/ William D. Corneliuson Chairman January 11, 2005
- --------------------------------
William D. Corneliuson
/s/ Solomon Aronson Director January 11, 2005
- --------------------------------
Solomon Aronson
/s/ Frank A. Katarow Director January 11, 2005
- --------------------------------
Frank A. Katarow
/s/ John L. Miclot Director January 11, 2005
- --------------------------------
John L. Miclot
58
MEDWAVE, INC.
EXHIBIT INDEX
TO
FORM 10-K FOR FISCAL YEAR ENDED SEPTEMBER 30, 2004
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amendment of Articles of Incorporation. (2)
3.3 Amended and Restated Bylaws. (1)
3.4 Amendments to Bylaws. (2)
4.1 Shareholder Rights Plan dated September 29, 2003. (9)
10.1 2004 Amended and Restated Stock Option Plan. (4)
10.2 Form of Incentive Stock Option Agreements. (3)
10.3 Form of Non-Qualified Stock Option Agreement for Non-Employee Directors. (3)
Letter agreement of employment with Timothy O'Malley dated September 9, 1999 and amendment dated
10.4 September 16, 1999. (5)
10.5 Critical Care Concepts Distributor Agreement. (5)
10.6 Agreement of Lease extension dated November 30, 1999 between the Company and AMB Property, L.P. (7)
10.7 Agreement of Lease extension dated March 21, 2002, between the Company and AMB Property, L.P. (8)
10.8 Agreement of Lease dated December 20, 2001 between the Company and Hawthorne North Realty Trust. (8)
10.9 Second Lease Modification and Extension Agreement dated April 12, 2004 between the Company and AMB
Property, L.P. (3)
10.10 Commercial Lease dated April 12, 2004 between the Company and Hawthorne North Realty. (3)
10.11 The Agreement and Plan of Merger by and between Medwave, Inc., a Minnesota Corporation and Medwave,
Inc., a Delaware Corporation dated as of April 30, 2003. (8)
10.12 Supply Agreement entered into September 14, 2000 by and between the Registrant and Nihon Kohden
Corporation. (8)
10.13 Code of Ethics. (3)
10.14 Severance Agreement with Timothy J. O'Malley dated June 4, 2004. (3)
23.1 Consent of Ernst & Young LLP. (3)
23.2 Consent of BDO Seidman, LLP. (3)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (3)
32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)
59
- -----------------------
(1) Incorporated by reference to Medwave, Inc.'s Registration Statement on
Form SB-2, Reg. No. 33-96878C
(2) Incorporated by reference to Medwave, Inc.'s Registration Statement on
Form S-3, Reg. No. 333-103477
(3) Filed herewith.
(4) Incorporated by reference to Medwave, Inc.'s Schedule 14A filed on March
9, 2004.
(5) Incorporated by reference to Medwave, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended October 1, 1999.
(6) Incorporated by reference to Medwave, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended January 31, 2000.
(7) Incorporated by reference to Medwave, Inc.'s Annual Report on Form 10-K
for the fiscal year ended April 30, 2000.
(8) Incorporated by reference to Medwave, Inc.'s Annual Report on Form 10-K
for the fiscal year ended April 30, 2003.
(9) Incorporated by reference to Medwave's Form 8-A12G filed on October 3,
2003.
60