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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
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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
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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
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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.
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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.
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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
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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
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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
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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 o