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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2004; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 0-28010
MEDWAVE, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1493458
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
435 Newbury Street
Danvers, MA 01923
(Address of principal executive offices,
zip code)
(978) 762-8999
(Registrant's telephone number, including
area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of January 31, 2005 the issuer had 10,072,666 shares of Common Stock
outstanding.
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Medwave, Inc.
Form 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Balance Sheets - September 30, 2004 and December 31, 2004 2
Statements of Operations - Three Months Ended December 31,
2004 and 2003 3
Statements of Cash Flows - Three Months Ended December 31,
2004 and 2003 4
Notes to Unaudited Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Unregistered Sales of Equity Securities And Use Of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters To A Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits 14
Signatures 14
Exhibits 15-16
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Medwave, Inc.
Balance Sheets
(Unaudited)
DECEMBER 31 SEPTEMBER 30
2004 2004
---------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,977,015 $ 4,793,326
Accounts receivable, net 155,814 176,503
Inventories, net 324,159 393,039
Prepaid expenses 108,956 62,351
---------------------------------
Total current assets 4,565,944 5,425,219
---------------------------------
Property and equipment:
Research and development equipment 33,536 31,535
Office equipment 117,089 114,174
Manufacturing and engineering equipment 286,931 285,937
Sales and marketing equipment 113,857 113,482
Leasehold improvements 41,913 41,913
Demonstration equipment 22,897 6,257
---------------------------------
616,223 593,298
Accumulated depreciation and amortization (444,179) (434,798)
---------------------------------
Total net property and equipment 172,044 158,500
---------------------------------
Patents, net 1,917 1,917
---------------------------------
Total assets $ 4,739,905 $ 5,585,636
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 400,030 $ 342,879
Accrued expenses 68,779 113,851
Deferred revenue 68,987 60,197
---------------------------------
Total current liabilities 537,796 516,927
---------------------------------
Stockholders' equity:
Common stock, .01 par value:
Authorized shares--50,000,000
Issued and outstanding shares-
December 31, 2004 - 10,058,916
September 30, 2004 - 10,058,916 100,589 100,589
Additional paid in capital 29,350,188 29,350,188
Accumulated deficit (25,248,668) (24,382,068)
---------------------------------
Total stockholders' equity 4,202,109 5,068,709
---------------------------------
Total liabilities and stockholders' equity $ 4,739,905 $ 5,585,636
=================================
The accompanying notes are an integral part of these unaudited financial
statements.
2
Medwave, Inc.
Statements of Operations
(Unaudited)
Three months ended December 31,
-------------------------------
2004 2003
-------------------------------
Revenue:
Net Sales $ 301,991 $ 224,927
Operating expenses:
Cost of sales and production 285,683 97,810
Research and development 147,392 98,554
Sales 384,916 358,725
General and administrative 159,955 214,901
Finance 34,583 -
Business development 28,618 -
Marketing 76,507 -
Clinical education and support 66,402 -
-------------------------------
Operating loss (882,065) (545,063)
Other income(expense):
Interest income 15,463 2,000
Loss on disposal of equipment (25,302)
-------------------------------
Net loss $ (866,602) $ (568,365)
===============================
Net loss per share - Basic and diluted $ (0.09) $ (0.06)
===============================
Weighted average number of common and
common equivalent shares outstanding - basic
and diluted 10,058,916 8,762,707
===============================
The accompanying notes are an integral part of these unaudited financial
statements.
3
Medwave, Inc.
Statements of Cash Flows
(Unaudited)
Three months ended
December 31,
----------------------------
2004 2003
----------------------------
OPERATING ACTIVITIES
Net loss $ (866,602) $ (568,365)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 10,084 7,777
Loss on disposal of equipment 25,302
Changes in operating assets and liabilities:
Accounts receivable 20,689 (52,004)
Inventories 68,879 (51,893)
Prepaid expenses (46,606) (74,800)
Accounts payable 56,448 (43,822)
Accrued expenses (45,071) 7,725
Deferred revenue 8,790 9,154
----------------------------
Net cash used in operating activities (793,389) (740,926)
----------------------------
INVESTING ACTIVITIES
Purchase of patent (1,462)
Purchase of property and equipment (22,922) (32,624)
----------------------------
Net cash used in investing activities (22,922) (34,086)
----------------------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 16,995
----------------------------
Cash provided by financing activities 16,995
----------------------------
Increase in cash and cash equivalents (816,311) (758,017)
Cash and cash equivalents at beginning of
period 13,392,608 1,694,648
----------------------------
Cash and cash equivalents at end of period $ 12,576,297 $ 936,631
============================
The accompanying notes are an integral part of these unaudited financial
statements.
4
Medwave, Inc.
Notes To Unaudited Financial Statements
December 31, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Medwave, Inc.
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X
promulgated under the Securities Exchange Act of 1934. Accordingly, they do
not include all of the information and disclosures required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the financial information have been included for the interim periods
presented. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates. Operating results for interim periods are
not necessarily indicative of results that may be expected for the entire
fiscal year. Accordingly, these interim period condensed financial
statements should be read in conjunction with the financial statements
contained in the Company's Annual Report on Form 10-K for the year ended
September 30, 2004.
2. STOCKHOLDERS' EQUITY
A summary of changes in stockholders' equity for the three months ended
December 31, 2004 is as follows:
- -------------------------------------------------------------------------------------------------------------
COMMON STOCK
.01 PAR VALUE ADDITIONAL ACCUMULATED
- -------------------------------------------------------------------------------------------------------------
SHARES AMOUNT PAID IN CAPITAL DEFICIT TOTAL
- -------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 10,058,916 $100,589 $ 29,350,188 $(24,382,068) $ 5,068,709
- -------------------------------------------------------------------------------------------------------------
Exercise of Stock Options/Warrant - - - - -
- -------------------------------------------------------------------------------------------------------------
Net Loss - - - (866,600) (866,600)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 10,058,916 $100,589 $ 29,350,188 $(25,248,668) $ 4,202,109
- -------------------------------------------------------------------------------------------------------------
Shareholder Rights Agreement
On September 29, 2003, the Company adopted a shareholder rights agreement
in order to obtain maximum value for shareholders in the event that a
person or group of affiliated persons obtain 15% or more of the outstanding
shares of common stock. To implement the agreement, Medwave issued a
dividend of one right for each share of its common stock held by
shareholders of record as of the close of business on September 30, 2003.
Each right initially entitles shareholders to purchase one share of
Medwave's common stock for $50. However, the rights are not immediately
exercisable and will become exercisable only if certain events occur as
discussed above. The rights expire September 30, 2013. The Company, at its
option, also holds certain redemption privileges related to the rights as
described in the agreement.
5
3. RECENT ACCOUNTING PRONOUNCEMENTS
In 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 pronouncement is effective for the Company beginning
October 1, 2005. The Company has not incurred a material impact due to 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.
4. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common shares
outstanding in each year. Diluted earnings per share (EPS) is similar to
basic EPS, except that the weighted average of common shares outstanding is
increased to include the additional common shares that would have been
outstanding if the potential dilutive common shares, consisting of shares
of those stock options and warrants for which market price exceeds exercise
price, had been issued. Such common equivalent shares are excluded from the
calculation of diluted EPS in loss years, as the impact is antidilutive.
Therefore, there was no difference between basic and diluted EPS for each
period presented. The number of common equivalent shares excluded from the
calculation was 3,184,950 as of December 31, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. From time to time, information
provided by Medwave Inc., or the Company, or statements made by our directors,
officers or employees may contain "forward-looking" information subject to
numerous risks and uncertainties. Statements made in this report that are stated
as expectations, plans, anticipations, prospects or future estimates or which
otherwise look forward in time are considered "forward-looking statements" and
involve a variety of risks and uncertainties, known and unknown, which are
likely to affect the actual results. The following factors, among others, have
affected and, in the future, could affect the Company's actual results:
resistance to the acceptance of new medical products, the market acceptance of
the Vasotrac system, the Vasotrax hand-held unit, or other products of the
Company, hospital budgeting cycles, the possibility of adverse or negative
commentary from clinical researchers or other users of the Company's products,
the Company's success in creating effective distribution channels for its
products, the Company's ability to scale up its manufacturing process, the
magnitude of orders under the Company's agreement with Zoll Medical, our ability
to enter into agreements, delays in product development or enhancement or
regulatory approval, and other factors detailed from time to time in the
Company's reports filed with the SEC, including those set forth under the
caption "Risk Factors" in the Company's Annual Report on Form 10-K filed on
January 12, 2005. Consequently, no forward-looking statement can be guaranteed
and actual results may vary materially.
6
This discussion summarizes the significant accounting policies, accounting
estimates and other significant factors affecting the liquidity, capital
resources and results of operations of the Company for the three-month period
ended December 31, 2004 and 2003. This discussion should be read in conjunction
with the financial statements and other financial information included in our
September 30, 2004 Annual Report on Form 10-K filed with the SEC.
OVERVIEW
Operating revenue was $301,991 and $224,927 for the three-month periods ended
December 31, 2004 and 2003, respectively, an increase of 34%. Revenue from the
North American market was approximately $242,517 and $164,387 for the
three-month periods ended December 31, 2004 and 2003, respectively, representing
an increase of 48%. Revenue generated from patient sensors increased 125% to
$73,624 for the three-month period ended December 31, 2004 compared to $32,672
for the three-month period ended December 31, 2003. Revenue from international
markets remained consistent.
We recently announced the signing of an OEM agreement with ZOLL Medical
Corporation. ZOLL Medical is a leader in cardiac resuscitation devices and an
innovator in their field. We anticipate that we will begin to ship products to
fulfill this agreement in the quarters ahead.
During September 2004, we signed a Joint Investigation Agreement with a global
electronics company. We have been working with this company since that time to
implement and achieve specific milestones that are called out in the agreement.
We continue to place a tremendous amount of management time and focus on other
potential OEM agreements, distribution and sales channel expansion
possibilities. The number of non-disclosure agreements that we have signed with
other companies has increased, as has the scope of the discussions, as we pursue
alternate avenues for Medwave to supply products and technology, including
licensing, distribution, private labeling, and co-development opportunities. We
believe that these agreements with other organizations may provide a significant
possibility to sell large volumes of our technology, as well as complement our
direct sales force's activities by further validating our technology in the
market, across multiple market segments.
We continue to add new sales professionals to our United States sales force. We
have recently hired two Alternate Care Sales Professionals, who will focus on
selling and marketing our technology to physicians offices, outpatient centers,
EMS/EMT organizations, and other non-hospital settings. Blood pressure is the
one vital sign that is measured in virtually every healthcare setting, and we
believe that our technology has application in most, if not all, of these
environments. We believe that with the numerous product validation studies, both
formal and anecdotal, the recent signing of major group purchasing contracts
with AmeriNet, Novation, and Mayo Foundation, and the technology recognition
which we have received in the form of the Child Health Corporation Seal of
Acceptance and the Frost and Sullivan Technology Innovation Award, that we will
now benefit by continuing to invest in additional sales professionals to
increase our market penetration and revenue generating capabilities. We have
been recruiting higher level sales professionals in our hospital sales force,
and have recently hired several very seasoned sales professionals from companies
in the medical device industry who have tremendous experience in selling into
healthcare systems and selling complex medical technology. Several of these
individuals have experience selling into multiple departments within the
hospital market and selling into very competitive market segments.
The success of our sales force in penetrating and ultimately changing the way
blood pressure monitoring is accomplished is highlighted by two recent accounts
of hospitals converting at least a portion of their automatic blood pressure
cuff technology to Medwave's technology. SwedishAmerican Hospital purchased
several Medwave Vasotrac monitors for their general floor and bariatric patient
environments. Medwave, in conjunction with SwedishAmerican Hospital, issued
press releases regarding the hospital's purchase of Medwave's "State-of-the-Art
Technology" for their patients. As a result, local news stations in Rockford,
Illinois picked up coverage of the story, and profiled the Vasotrac in their
news story. In
7
addition, we recently announced a purchase agreement that Medwave entered into
with Arkansas Children's Hospital in Little Rock, Arkansas. This agreement
called for the complete standardization of the pediatric intensive care unit at
this award winning hospital. Each PICU bed will have the Vasotrac technology to
monitor the patients in this care unit. In addition, several additional
departments purchased Vasotrac monitors for their care areas. We anticipate that
these agreements, and others like them, will help drive sales volume in the
quarters ahead.
We continue to hear favorable results from clinical studies, which have been
ongoing for the past few years. Several of these studies are scheduled to be
published in prominent medical journals in the next several months, highlighting
the excellent performance of Medwave's technology in a variety of healthcare
settings, and some of these are considered the most challenging of environments
for measuring vital signs, and specifically blood pressure. A study titled
"Intraoperative Blood Pressure Measurement on the Wrist is more Accurate than on
the Upper Arm in Morbidly Obese Patients" was presented by Dr. Helmut Hager of
Washington University Hospital and School of Medicine in conjunction with the
American Society of Anesthesiology Meeting, held in Las Vegas, Nevada, October
24-26, 2004. Dr. Hager also presented the results of this study during the Post
Graduate Assembly Anesthesia Meeting, held in New York City during December
2004. In summary, the results of this study showed that an automatic blood
pressure cuff correlated to the "Gold Standard" arterial catheter with a factor
of 0.32, while the Vasotrac correlated with a factor of 0.81. In conclusion, the
authors stated that "Patients reported significantly better comfort with
Vasotrac. The Vasotrac is a valuable tool for monitoring of morbidly obese
patients without the possible negative side effects of the arterial canula
(catheter)."
GENERAL
As of December 31, 2004, Medwave employed 31 full-time employees and three
part-time employees. Of the 31 full-time employees, 14 are in sales and field
support, one is in international sales and product marketing, 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. In the quarters
ahead, we intend to hire a business development executive and additional direct
sales professionals in our continuing effort to penetrate both the U.S. hospital
market as well as the pre and post hospital market. In addition, we will most
likely need to hire additional engineering and support staff to successfully
introduce new products as well as optimize our OEM agreements. Since our
inception, we have been engaged exclusively in the development of devices for
monitoring and measuring blood pressure.
Blood pressure or, more precisely, arterial pressure, is the pressure that the
blood exerts against the interior of the arterial walls. The level of the
pressure depends upon the strength of the heart's contraction, the volume of
blood in the circulatory system, the elasticity of the arteries, and the degree
of capillary constriction impeding circulation. During the heart's relaxation
phase, (the diastole), blood pressure falls. When the heart muscle contracts,
(the systole), blood pressure rises. Clinically, blood pressure is commonly
reported as three different values. Systolic and diastolic pressures are the
maximum and minimum pressures during a single cardiac cycle, respectively.
Systolic pressure is also often referred to as contracting pressure, when the
heart muscle is contracting and pumping blood through the blood vessels of the
body. Diastolic pressure is also often referred to as the resting or relaxation
pressure of the heart muscle. Mean pressure is the average pressure during the
cardiac cycle.
Blood pressure and changes in blood pressure are critical indicators of the
health and performance of the body's cardiovascular system. Blood pressure
varies with age and by gender, such that young adults tend to have lower blood
pressures than older adults, and men tend to have higher blood pressures than
women of the same age. Even in healthy bodies, blood pressure normally
fluctuates during the day. For example, exercise, emotion, and exposure to the
cold tend to cause blood pressure to rise, while it falls in instances of
warmth, fainting, hemorrhage, and certain diseases. All hospital patients
require measurement of their blood pressure and many surgical or critically ill
patients require frequent or continual monitoring of their blood pressure.
Continual monitoring of blood pressure is important for
8
patients in operating rooms, surgical recovery rooms, intensive care units,
emergency departments and other critical care sites because of the acuteness of
these patients' conditions and rapidity with which their conditions can
deteriorate. Trend information obtained from successive blood pressure
measurements plays an important role in the diagnosis, prognosis, and treatment
of diseases. Blood pressure is one vital sign that is measured in every clinical
location of the healthcare spectrum, including a patient's own home environment.
Recently, reports have been published, exploiting challenges with conventional
blood pressure cuff technology. The cuff has been reported to have difficulty
monitoring people with fairly large or small arms as well as people with
relatively high or low blood pressure and people who may be in motion or have
tremors. Medwave is confident that its blood pressure monitoring technology will
overcome these traditional challenges, and as a result, continues to work on
products that will allow for broader market penetration, eventually including
the personal monitoring markets. In the near future, Medwave believes that it
will have products that address the pre and post hospital market, additional OEM
business opportunities, and the consumer blood pressure market. It is estimated
that approximately 65 million people in the United States are considered
hypertensive. This number has increased approximately 30% over the past decade.
In addition, another study conducted by researchers from Tulane University that
was recently published estimates that by the year 2025, almost 1 billion people
in the world population will be hypertensive. We believe that with the clinical
validation, which has been and continues to be accomplished regarding our
technology, the acceptance of our technology in some of the most prestigious
medical centers in the United States, and our ability to incorporate our
technology into handheld devices, we will have the potential to compete for the
very large and growing personal-use market for blood pressure monitoring.
Medwave Inc. develops, manufactures, and distributes non-invasive blood pressure
products. Its Vasotrax(R) Hand Held Monitor, the Vasotrac(R) APM205A NIBP
Monitor, the Vasotrac DS APM205A and the MJ23 OEM Module are new approaches to
non-invasive blood pressure monitoring. Medwave has received the necessary
regulatory clearances to market its technology in Europe, Asia, and the United
States. Medwave is ISO13485/ISO9001/MDD93/42/EEC certified, and all of its
products are CE marked.
RECENT DEVELOPMENTS
In September 2004, Medwave signed a Joint Investigation Agreement with a global
electronics company. The purpose of this agreement is to explore potential areas
where the companies' could work together to examine the possibility of new
products. We have been working on the implementation of this agreement over the
past several months.
In June 2004, Medwave signed an OEM Supplier Agreement with ZOLL Medical
Corporation. ZOLL Medical is a market leader in cardiac resuscitation. In the
months ahead, Medwave expects to begin shipping products as a part of this
agreement. In September 2003, Medwave signed an agreement with Novation, the
leading supply chain management company in healthcare, to offer its sensor-based
blood pressure measurement solutions to the more than 2,300 healthcare
organizations that purchase supplies through Novation. This contract covers our
Vasotrac and Vasotrax technology. Subsequent to this, in April 2004, Medwave was
chosen by Novation as one of only 10 suppliers to showcase its products in
Novation's Technology Pavilion at the Novation Leadership Conference. More than
700 suppliers were invited to be considered for this showcase. The conference
was attended by leaders of Novation member hospitals. During December 2003, we
signed a corporate purchasing agreement with the Mayo Foundation Hospital and
its 35 affiliate hospitals. As a result of this agreement, Medwave's technology
is now listed as an alternative for the 35 Mayo Foundation hospitals. Several
Mayo hospitals currently use Medwave's technology in a variety of clinical
environments, such as the operating room, cardiology, recovery, and in their
international medical efforts as well.
SwedishAmerican Hospital in Rockford, Illinois recently purchased several
Vasotrac monitors for its care areas where a blood pressure cuff was not
performing adequately. Also, during December 2004, Arkansas Children's Hospital
purchased numerous Vasotrac monitors and disposable sensors. The pediatric
intensive care unit at Arkansas Children's now has a Vasotrac located at each
bed, and the Vasotrac monitors are interfaced into the existing bedside
monitoring systems. Other patient care areas in
9
the hospital that replaced traditional non-invasive blood pressure cuff
technology include the day surgery center, neurological ICU, and the general
medicine area. This purchase occurred after an extensive multi-department
evaluation took place and a multi-question evaluation survey was completed by
more than 50 clinicians. The Vasotrac technology scored between 4 and 5 out of a
total possible rating of 5 in every category.
We have continued to focus on building our direct sales organization. As of
December 31, 2004, we employed fourteen hospital-based sales/clinical support
specialists and one marketing/international sales manager. Over the next few
months, we plan to hire additional hospital and alternative care sales
professionals to expand our reach into the U.S. market.
RESULTS OF OPERATIONS
The results of operations compares the three months ended December 31, 2004 and
2003. The analysis of liquidity and capital resources compares December 31, 2004
to September 30, 2004.
Operating revenue was $302,000 and $224,900 for the quarters ended December 31,
2004 and 2003, respectively, an increase of 34%. This increase is due to growth
in the Disposable and Service markets. The increased revenue in the Service
market results from an agreement with the global electronics company previously
mentioned.
Cost of sales and production was $285,700 and $97,800 for the quarters ended
December 31, 2004 and 2003, respectively, an increase of 192%. This increase is
due in part to an additional $40,100 in expenses associated with adding three
employees to our manufacturing operations. The implementation of the new
accounting system updates inventory automatically offsetting the need for
quarterly adjustments, which accounted for a $63,500 reduction to COGS in
December 31, 2003.
We incurred $147,400 and $98,600 for research and development expenses for the
quarters ended December 31, 2004 and 2003, respectively, an increase of 50%.
This increased cost was in support of new product development. Legal and
consulting charges associated with patents are approximately $36,000 higher
compared to last year, because of our continued commitment to the development
and protection of our innovative ideas and products.
We incurred $527,800 as of quarter ended December 31, 2004 for expenses from the
combination of the sales department and the addition of two new departments,
marketing and clinical education support. When compared to $358,700 for quarter
ended December 31, 2003, this was an increase of 47%. Since December 31, 2003,
we have been building our workforce to align with the growth of a developing
company. The addition of 5 employees in this area (3 in sales and 2 in clinical
education) substantially increased such items as salaries, benefits, travel,
telephone and supplies.
We incurred $223,200 as of quarter ended December 31, 2004 for expenses from the
combination of the general administration department and the addition of two new
departments, finance and business development. When compared to $214,900 for
quarter ended December 31, 2003, this was an increase of 4%.
Interest income was $15,463 and $2,000 for the quarters ended December 31, 2004
and 2003, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $3,977,000 and $4,793,300 at December 31,
2004 and September 30, 2004. With the cash and cash equivalents of approximately
$3,977,000, we believe that sufficient liquidity is available to satisfy our
working capital needs through at least December 31, 2005.
10
Beginning in January, 2004, we began the process of upgrading our accounting
software. Four additional modules, which include inventory, bill of materials,
sales order processing, and purchase order processing, that were not being
utilized have been activated, and computer hardware has been upgraded as well.
Prior to this upgrade, those four modules were being handled off-line. As
business growth continues, this project is a necessary building block to support
that growth and facilitate the smooth and concurrent processing of all of our
business functions. Total cost to date is approximately $40,000 for the software
up-grade, implementation, and training, and approximately $5,000 for hardware.
We expect to spend an additional $25,000 to complete the project and to possibly
add more functionality.
We will need to raise additional capital to fund our long-term operations if we
do not begin to realize an operating profit. There can be no assurance that we
will be able to receive such funds on acceptable terms.
Cash flows used in operations increased to $793,400 for the quarter ended
December 31, 2004 from $740,900 for the quarter ended December 31, 2003, an
increase of $52,500. In both periods, we used cash flows to fund operating
losses, which were partially offset by non-cash expense for depreciation. The
use of cash in operations for the three-month period ended December 31, 2004
included an increase in prepaids with decreases in accounts receivable,
inventory, and accounts payable. The use of cash in operations for the
three-month period ended December 31, 2003 included increases in accounts
receivable, inventory and prepaids as well as a decrease in accounts payable.
Cash flows used in investing activities decreased to $22,900 for the three
months ended December 31, 2004 from $34,100 for the three months ended December
31, 2003. This decrease reflects our effort to maintain cash reserve.
There were no financing activities for the quarter ended December 31, 2004.
Financing activities provided $16,995 from the exercise of stock options for the
quarter ended December 31, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
Our only off-balance sheet arrangements are non-cancelable operating leases
entered into in the ordinary course of business. The table under the following
caption "Contractual Obligations" shows the amount of our operating lease
payments by year.
CONTRACTUAL OBLIGATIONS
The following summarizes our contractual obligations at December 31, 2004 and
the effect these contractual obligations are expected to have on our liquidity
and cash flows in future periods. We recently renewed our operating lease
commitments for our Danvers, MA and Arden Hills, MN locations. Both leases were
extended for a three-year period.
PAYMENTS DUE BY PERIOD
--------------------------------------
TOTAL 1 YEAR OR LESS 1-3 YEARS
----- -------------- ---------
Operating lease commitments........... $271,462 $112,864 $158,598
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Medwave's financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the United States of America
(U.S. GAAP). Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions are affected
by management's
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application of accounting policies. Critical accounting policies for Medwave
include revenue recognition, stock-based compensation, impairment of long-lived
assets, and allowance for doubtful accounts.
Revenue Recognition
The Company recognizes revenue upon product shipment, provided there exists
persuasive evidence of an arrangement, the fee is fixed or determinable, and
collectibility of the related receivable is reasonably assured.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
As discussed above, the Company has elected to follow APB No. 25, and related
Interpretations in accounting for employee stock options and has adopted the
disclosure provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation (Statement 123), relating to the fair value method of accounting
for stock options.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these 2003 options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rates of 5.60% for the periods ended December 31, 2003; dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .64, and a weighted average expected life of the option of five years.
The Company granted options to purchase 0 shares and 48,000 shares during the
three-month periods ended December 31, 2004 and 2003 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:
-----------------------------------------
Three months ended December 31,
-----------------------------------------
2004 2003
-----------------------------------------
Net loss as reported $ (866,602) $ (568,365)
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 - (202,968)
-----------------------------------------
Pro forma net loss $ (866,602) $ (771,333)
=========================================
Basis and diluted loss per share
As reported (0.09) (0.06)
Pro forma (0.09) (0.09)
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.
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Accounts Receivable
Accounts receivable are customer obligations due under normal trade terms. The
Company reviews accounts receivable on a monthly basis to determine if any
receivables will potentially be uncollectible. The Company includes any reserves
for specific accounts receivable balances that are determined to be
uncollectible, along with a general reserve, in the overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information
available, the Company believes the allowance for doubtful accounts as of
December 31, 2004 is adequate. However, actual write-offs may exceed the
recorded allowance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934,
the Company has evaluated, with the participation of management, including the
Chief Executive Officer (who is also the Company's acting Chief Financial
Officer), the effectiveness of its disclosure controls and procedures as of the
end of the period covered by this report. Based on such evaluation, the Chief
Executive Officer has concluded that such disclosure controls and procedures are
effective in ensuring that material information relating to the Company is made
known to the certifying officer by others within the Company during the period
covered by this report.
From time to time, the Company reviews the disclosure controls and procedures,
and may from time to time make changes aimed at enhancing their effectiveness
and to ensure that the Company's systems evolve with its business. There was no
change in the Company's internal control over financial reporting that occurred
during the three-month period ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not repurchase any equity securities in the period covered by
this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 5. OTHER INFORMATION
(A) Not applicable
(B) During the period covered by this report, there were no material
changes to the Company's procedures by which security holders may
recommend nominees to the Company's Board of Directors.
ITEM 6. EXHIBITS
(A) EXHIBITS:
Exhibit
Number Description
- ------- -----------
31.1 Certification of the principal executive officer and principal financial
officer, pursuant to Rule
13a - 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 4, 2005 Medwave, Inc.
By: /s/ Timothy J. O'Malley
-------------------------------------
Timothy J. O'Malley
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
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