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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 January 31, 2003; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-28010
MEDWAVE, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1493458
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
4382 Round Lake Road West
Arden Hills, Minnesota 55112
(Address of principal executive offices,
zip code)
(651) 639-1227
(Registrant's telephone number, including
area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of January 31, 2003, the issuer had 8,650,916 shares of Common Stock
outstanding.
Medwave, Inc.
Form 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - April 30, 2002 and January 31, 2003 2
Statements of Operations - Three Months Ended January 31, 2003 3
and 2002, Nine Months Ended January 31, 2003 and 2002, and
Period from June 27, 1984 (Inception) to January 31, 2003
Statements of Cash Flows - Nine Months Ended January 31, 2003 4
and 2002 and Period from June 27, 1984 (Inception) to
January 31, 2003
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 5
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
Item 4. Controls and Procedures 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities And Use Of Proceeds 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters To A Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
Sarbanes-Oxley Act of 2002 Section 302 Certification 10
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDWAVE, INC.
(A Development Stage Company)
Balance Sheets
APRIL 30, JANUARY 31,
2002 2003
------------------------------------------
(see note 2) (unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,048,051 $ 3,193,154
Accounts receivable 283,114 119,004
Inventories 252,498 222,044
Prepaid expenses 143,297 147,896
------------------------------------------
Total current assets 3,726,960 3,682,098
Property and equipment:
Research and development equipment 210,633 210,633
Office Equipment 100,048 136,445
Manufacturing and engineering equipment 282,158 282,158
Sales and marketing equipment 109,895 109,895
Leasehold improvements 31,613 31,613
------------------------------------------
734,347 770,744
Accumulated depreciation (661,691) (694,391)
------------------------------------------
72,656 76,353
Patents, net
------------------------------------------
Total Assets $ 3,799,616 $ 3,758,451
==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 252,727 $ 334,324
Accrued payroll 81,097 45,631
Deferred revenue 149,625 44,808
------------------------------------------
Total current liabilities 483,449 424,763
Shareholders' equity:
Common Stock, no par value:
Authorized shares--50,000,000
Issued and outstanding shares - 7,250,916 and 8,650,916, respectively 21,752,105 23,463,114
Deficit accumulated during the development stage (18,435,938) (20,129,426)
------------------------------------------
Total shareholders' equity 3,316,167 3,333,688
------------------------------------------
Total liabilities and shareholders' equity $ 3,799,616 $ 3,758,451
==========================================
The accompanying notes are an integral part of these financial statements.
2
Medwave, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
Period from
June 27, 1984
Three months ended January 31 Nine months ended January 31 (Inception)
----------------------------- ---------------------------- to
2003 2002 2003 2002 January 31, 2003
----------------------------- ---------------------------- ----------------
Revenue:
Net Sales $ 277,088 $ 191,866 $ 788,280 $ 489,706 $ 3,795,728
Operating expenses:
Cost of sales and product development 188,002 199,497 549,362 483,279 3,542,731
Research and development 113,723 154,272 447,780 449,788 10,237,513
Sales and marketing 309,435 334,955 1,050,713 1,158,003 6,266,894
General and administrative 160,571 161,076 454,238 504,932 6,627,708
----------------------------- ---------------------------- ----------------
Operating loss (494,643) (657,934) (1,713,813) (2,106,296) (22,879,118)
Other income:
Interest income 4,152 19,048 20,323 104,699 1,876,456
Other income -- -- 1 -- 1,500,000
----------------------------- ---------------------------- ----------------
Net loss $ (490,491) $ (638,886) $(1,693,490) $(2,001,597) $(19,502,662)
============================= ============================ ================
Net loss per share - Basic and diluted $ (0.07) $ (0.09) $ (0.23) $ (0.30) $ (5.95)
============================= ============================ ================
Weighted average number of common and
common equivalent shares outstanding 7,357,438 6,989,599 7,286,423 6,738,297 3,279,430
============================= ============================ ================
The accompanying notes are an integral part of these financial statements.
3
Medwave, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
Period from
June 27, 1984
Nine months ended January 31 (Inception)
------------------------------------ to
2003 2002 January 31, 2003
------------------------------------ -------------------
Net loss $(1,693,490) $(2,001,597) $(19,502,662)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 32,699 100,540 953,728
Amortization -- -- 136,017
Loss on sale of equipment -- -- 7,375
Issuance of Common Stock for consulting services -- -- 3,413
Changes in operating assets and liabilities:
Accounts receivable 164,110 75,257 (119,009)
Inventories 30,454 169,663 (222,044)
Prepaid expenses (4,599) 51,910 (147,896)
Accounts payable and accrued expenses 81,598 (40,553) 334,325
Accrued payroll and related taxes (35,466) 4,370 45,631
Deferred Revenue (104,817) (55,708) 44,808
------------------------------------ ---------------
Net cash used in operating activities (1,529,511) (1,696,118) (18,466,314)
INVESTING ACTIVITIES
Patent expenditures -- -- (136,017)
Purchase of investments -- -- (38,908,724)
Sales and maturity of investments -- -- 38,908,724
Purchase of property and equipment (36,396) (55,701) (1,056,475)
Proceeds from sale of equipment -- -- 21,663
------------------------------------ ---------------
Net cash used in investing activities (36,396) (55,701) (1,170,829)
FINANCING ACTIVITIES
Net proceeds from issuance of Convertible Preferred Stock -- -- 4,848,258
Net proceeds from issuance of Common Stock 1,711,010 4,366,148 17,982,039
------------------------------------ ---------------
Net cash provided by financing activities 1,711,010 4,366,148 22,830,297
------------------------------------ ---------------
(Decrease) increase in cash and cash equivalents 145,103 2,614,329 3,193,154
Cash and cash equivalents at beginning of period 3,048,051 1,116,589 --
------------------------------------ ----------------
Cash and cash equivalents at end of period $3,193,154 $3,730,918 $ 3,193,154
==================================== ================
The accompanying notes are an integral part of these financial statements.
4
Medwave, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
January 31, 2003
1. DESCRIPTION OF BUSINESS
Medwave, Inc. (the "Company"), a development stage company, is engaged
exclusively in the development, manufacturing and marketing of a
proprietary, noninvasive system that continually monitors arterial blood
pressure, and in the development of related technology and products.
2. BASIS OF PRESENTATION
The financial information presented as of January 31, 2003 has been
prepared from the books and records without audit. Financial information
as of April 30, 2002 is based on audited financial statements of the
Company but does not include all disclosures required by generally
accepted accounting principles. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial information for the periods
indicated have been included. For further information regarding the
Company's accounting policies, refer to the financial statements and
related notes included in the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 2002.
3. CAPITAL STOCK
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
$1,711,010.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Statements made in this report that are stated as expectations, plans,
anticipations, prospects or future estimates or which otherwise look forward in
time are considered "forward-looking statements" and involve a variety of risks
and uncertainties, known and unknown, which are likely to affect the actual
results. The following factors, among others, as well as factors discussed in
the Company's other filings with the SEC, have affected and, in the future,
could affect the Company's actual results: resistance to the acceptance of new
medical products, the market acceptance of the Vasotrac system, the Vasotrax
hand-held unit or other products of the Company, hospital budgeting cycles, the
possibility of adverse or negative commentary from clinical researchers or other
users of the Company's products, the Company's success in creating effective
distribution channels for its products, the Company's ability to scale up its
manufacturing process, and delays in product development or enhancement or
regulatory approval. Consequently, no forward-looking statement can be
guaranteed and actual results may vary materially.
The following discussion should be read in conjunction with, and is qualified
by, the Company's financial statements set forth in Item 1 of this Form 10-Q.
GENERAL
The Company, which was formed in 1984, is a development stage company that
currently employs eighteen full-time and two part-time employees. Since our
inception, we have been engaged exclusively in the development and marketing of
devices for monitoring and devices for measuring blood
5
pressure. Utilizing our proprietary technology, we developed the Vasotrac(R)
APM205A system which monitors blood pressure, providing new readings
approximately every fifteen heartbeats. We believe that the continual blood
pressure readings, non-invasive qualities, pediatric capability, interfacing
ability, and performance under difficult conditions such as motion make the
Vasotrac the most advanced approach to blood pressure monitoring. In February
1995, we received clearance from the US Food and Drug Administration (FDA) to
market the Vasotrac system. We have also developed a hand-held blood pressure
monitor, the Vasotrax(R). This hand-held monitor is based on the technology used
in the Vasotrac system. In August 2000, we received FDA clearance, which has
allowed us to begin marketing the Vasotrax in the United States for use on adult
patients by trained medical personnel. In addition, pursuant to an agreement
with Nihon Kohden of Japan, we have developed an OEM module of our Vasotrac
continual non-invasive blood pressure monitor. The module is designed to be
integrated into Nihon Kohden's larger, more comprehensive system and the systems
of other companies. The Ministry of Health and Welfare in Japan has recently
approved the MJ23 OEM Module for use with Nihon Kohden monitoring systems in
Japan, and as a result, shipments to Nihon Kohden have begun.
We have incurred an accumulated deficit of $20,129,426 from our inception
through January 31, 2003. We expect to incur additional losses from development,
testing, regulatory compliance, sales, marketing and other expenses at least
until we emerge from the development stage.
Our success is dependent upon the successful development and marketing of the
Vasotrac system, the MJ23 module, and the Vasotrax hand-held monitor as well as
related technology. However, there can be no assurance that our products or
related technology will be successfully marketed or sold in sufficient
quantities and at margins necessary to achieve and/or maintain profitability.
In September 2000, we signed an OEM module agreement with Nihon Kohden that
calls for us to develop and produce a Vasotrac module that will be integrated
into the Nihon Kohden patient monitoring product family. As a part of this
agreement, Nihon Kohden placed an initial order for Vasotrac OEM modules, to be
delivered over the initial 18 months, and paid us a down payment of $125,000,
which has been treated as deferred revenue on our financial statements. In
November 2001, we shipped our first Vasotrac module prototype products to Nihon
Kohden. As a result of the Japanese Ministry of Health and Welfare approval, we
have shipped the first production batch to Nihon Kohden in October 2002.
Subsequently, in January 2003, we delivered another production batch of MJ23
Modules to Nihon Kohden, and as a result, we recognized a large portion,
$116,555 of the $125,000, of deferred revenue.
We have been adding our own sales employees with the goal of building a direct
sales force of approximately 10 employees that will work to penetrate
geographically dense areas, and when appropriate, work with regional dealers to
expand overall coverage. We are also currently looking for a distribution
partner for the Vasotrax hand-held monitor outside the hospital market. The
success of our product sales will depend upon the ability of dealers and/or
sales representatives to sell the products to the hospitals, their affiliates,
and other markets.
The initial response regarding our Vasotrax hand-held monitor from limited
showings has been favorable. During this past quarter, we have seen an increase
in sales activity for the Vasotrax. However, we may need to establish additional
distribution arrangements, and complement those arrangements with a number of
Medwave employees who will act as "in-house" experts. The Vasotrax hand-held
monitor is currently targeted at the pre-hospital (EMT and EMS) market, the
hospital market, and the post-hospital markets (sub-acute, skilled nursing
homes, homecare, and physician offices).
We are using cash and cash equivalents primarily to increase our sales and
marketing efforts and increase awareness of Medwave and our technology in the
market, to continue clinical testing of the Vasotrac system, the Vasotrax
hand-held monitor and related technologies, to continue to validate our
technology against traditionally used blood pressure monitoring devices, to
create peer-to-peer consensus regarding Medwave's technology, and to provide
working capital. Over the next twelve months, we will also continue research and
development. Specifically, we expect to use funds to develop alternative sensors
6
(including sensors for use on infants, and disposable sensors), to sustain
engineering support for manufacturing, and to continue development of the
Vasotrax hand-held monitor. During the next year, we do not expect to spend any
material amount on equipment in connection with these initiatives. Even assuming
only limited sales, we believe that our cash and cash equivalents should allow
us to meet our cash requirements for approximately nineteen months from January
31, 2003. On January 23, 2003, we sold an additional 1,400,000 shares of common
stock at $1.25 per share. This transaction netted an additional $1.75 million of
capital. We may seek additional capital through bank borrowing, equipment
financing, equity financing, and other methods. Our financing needs are subject
to change depending on, among other things, market conditions and opportunities,
equipment or other asset-based financing that may be available, and cash flow
from operations. Any material, favorable or unfavorable, deviation from our
anticipated expenditures could significantly affect the timing and amount of
additional financing that we may require. However, additional financing may not
be available when needed or, if available, may not be on terms that are
favorable to us or our security holders. In addition, any such financing could
result in substantial dilution to our existing security holders.
RESULTS OF OPERATIONS
The results of operations compares the three months and nine months ended
January 31, 2003 and 2002, respectively. The analysis of liquidity and capital
resources compares January 31, 2003 to April 30, 2002.
Operating revenue was $277,088 and $191,866 for the quarters ended January 31,
2003 and 2002, respectively, an increase of 44%. Operating revenue was $788,280
and $489,706 for the nine months ended January 31, 2003 and 2002, respectively,
an increase of 61%. The operating revenue increase was attributed to the
increase of direct sales employees, as well as a result of shipments of our MJ23
Module to Nihon Kohden of Japan.
Cost of sales and product development decreased to $188,002 vs. $199,497 for the
quarters ended January 31, 2003 and 2002, respectively. Cost of sales and
product development increased to $549,362 vs. $483,279 for the nine months ended
January 31, 2003 and 2002, respectively. This is attributed to higher cost
associated with the initial release and shipment of the MJ23 module.
The Company incurred $113,723 and $154,272 for research and development expenses
for the quarters ended January 31, 2003 and 2002, respectively. The Company
incurred $447,780 and $449,788 for research and development for the nine months
ended January 31, 2003 and 2002, respectively. The decrease was primarily due to
our shift in focus from research and development to sales and marketing.
The Company incurred $309,435 and $334,955 for sales and marketing expenses for
the quarters ended January 31, 2003 and 2002, respectively. The Company incurred
$1,050,713 and $1,158,003 for sales and marketing expenses for the nine months
ended January 31, 2003 and 2002, respectively. The decrease was a result of
hiring sales professionals who have a lower fixed and higher variable cost, and
who are also focussing on smaller, more densely populated geographic
territories.
The Company incurred $160,571 and $161,076 for general and administrative
expenses for the quarters ended January 31, 2003 and 2002, respectively. The
Company incurred $454,238 and $504,932 for general and administrative expenses
for the nine months ended January 31, 2003 and 2002, respectively. The decrease
in general and administrative expenses was primarily attributable to
transferring our accounting functions to our Danvers, Massachusetts office.
Interest income was $4,152 and $19,048 for the quarters ended January 31, 2003
and 2002, respectively. Interest income was $20,323 and $104,699 for the nine
months ended January 31, 2003 and 2002, respectively. The decrease reflects the
reduction in cash and cash equivalents balances and declining interest rates.
7
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $3,193,154 and $3,048,051 at
January 31, 2003 and April 30, 2002, respectively reflecting the continued
investment in sales and marketing. In addition, on January 23, 2003, the Company
sold 1,400,000 shares of its common stock at a price of $1.25 per share, raising
$1,750,000.
With the cash and cash equivalents, and short and long-term investments, the
Company believes that it has sufficient liquidity to satisfy its working capital
needs for approximately nineteen months from January 31, 2003. The Company has
no significant capital expenditure commitments.
Cash flows used in operations decreased to $1,529,511 for the nine months ended
January 31, 2003 from $1,696,118 for the nine months ended January 31, 2002, a
decrease of $166,607. In both periods, cash flows were used primarily to fund
operating losses, which were partially offset by non-cash expense for
depreciation.
Financing activities provided $1,750,000 for the quarter ended January 31, 2003,
and nothing for the quarter ended January 31, 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect amounts reported in the financial statements. The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of the financial
statements.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of products at the time of shipment
of the product. Amounts received from customers in advance of the shipment of
the products are recorded as deferred revenue.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts based on historical
collections of accounts receivable. The Company continually monitors its
accounts receivable balances. If the financial condition of customers
deteriorate, additional allowances may be required.
DEFERRED TAXES
The Company has recorded a full valuation allowance on deferred tax assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The
Company's President and Chief Executive Officer (who is the
Company's principal executive officer and principal financial
officer), Tim O'Malley, has reviewed the Company's disclosure
controls and procedures within 90 days prior to filing this
report. Based upon this review, this officer believes that the
Company's disclosure controls and procedures are effective in
ensuring that material information related to the Company is
made known to him by others within the Company.
(b) Changes in internal controls. There were no significant
changes in the Company's internal controls or in other factors
that could significantly affect these controls during the
quarter covered by this report or from the end of the
reporting period to the date of this Form 10-Q.
8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBITS DESCRIPTION
Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
(B) REPORTS ON FORM 8K:
Form 8-K filed on January 28, 2003 announcing the
Company's sale of 1,400,000 shares of common stock for
aggregate proceeds of $1,750.000.
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 28, 2003 Medwave, Inc.
By: /s/ Timothy J. O'Malley
-------------------------------------
Timothy J. O'Malley
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
9
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Timothy J. O'Malley, President and Chief Executive Officer, certify
that:
1. I, (the "Registrant"), have reviewed this quarterly report on Form 10-Q
of Medwave, Inc.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in the quarterly report, fairly present in all
material respects the financial condition, results of operation and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filling date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 28, 2003 By: /s/ Timothy J. O'Malley
-------------------------
President and Chief Executive Officer
(Principal Executive Officer and
Principal Financial Officer)
10