UNITED STATES

FORM 10-Q

Commission File Number: 0-28010

MEDWAVE, INC.

435 Newbury Street
Danvers, MA 01923
(Address of principal executive offices,
zip code)

(978) 762-8999
(Registrant’s telephone number, including
area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 6, 2005 the issuer had 11,424,166 shares of Common Stock outstanding.

Medwave, Inc.

Form 10-Q

INDEX

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PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

Medwave, Inc.

Balance Sheets

The accompanying notes are an integral part of these unaudited financial statements.

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Medwave, Inc.

Statements of Operations

The accompanying notes are an integral part of these unaudited financial statements.

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Medwave, Inc.

Statements of Cash Flows

The accompanying notes are an integral part of these unaudited financial statements.

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Medwave, Inc.

Notes To Unaudited Financial Statements

March 31, 2005

1.	Basis of Presentation
	The financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information have been included for the interim periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Operating results for interim periods are not necessarily indicative of results that may be expected for the entire fiscal year. Accordingly, these interim period condensed financial statements should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2004.
2.	Inventories
	Inventories which consist of material, labor and overhead are valued at the lower of cost or market on the first-in, first-out (FIFO) method and consist of the following:

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3.	Stockholders’ Equity
	A summary of changes in stockholders’ equity for the six months ended March 31, 2005 is as follows:

	Stock Based Compensation
	Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these 2005 options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates of 4.36% for the period ended March 31, 2005; dividend yield of 0%; volatility factor of the expected market price of the Company’s common stock of .41, and a weighted average expected life of the option of five years.
	The Company granted options to purchase 89,000 shares and 48,000 shares during the six-month periods ended March 31, 2005 and 2004 respectively.
	For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information is as follows:

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	Shareholder Rights Agreement
	On September 29, 2003, the Company adopted a shareholder rights agreement in order to obtain maximum value for shareholders in the event that a person or group of affiliated persons obtain 15% or more of the outstanding shares of common stock. To implement the agreement, Medwave issued a dividend of one right for each share of its common stock held by shareholders of record as of the close of business on September 30, 2003. Each right initially entitles shareholders to purchase one share of Medwave’s common stock for $50. However, the rights are not immediately exercisable and will become exercisable only if certain events occur as discussed above. The rights expire September 30, 2013. The Company, at its option, also holds certain redemption privileges related to the rights as described in the agreement.
4.	Net Loss Per Share
	Net loss per share is based on the weighted average number of common shares outstanding in each year. Diluted earnings per share (EPS) is similar to basic EPS, except that the weighted average of common shares outstanding is increased to include the additional common shares that would have been outstanding if the potential dilutive common shares, consisting of shares of those stock options and warrants for which market price exceeds exercise price, had been issued. Such common equivalent shares are excluded from the calculation of diluted EPS in loss years, as the impact is antidilutive. Therefore, there was no difference between basic and diluted EPS for each period presented. The number of common equivalent shares excluded from the calculation was 3,127,450 and 3,244,950 as of March 31, 2005 and 2004, respectively.
5.	Stock Purchase Agreement
	On February 11, 2005 the Company entered into a Securities Purchase Agreement with certain investors. Under the terms of the agreement, the Company issued 1,300,000 shares of common stock yielding $4,769,738 net of issuance costs and issued additional investment rights for the option to purchase 575,000 shares of Common Stock at a purchase price of $4.00 per share.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Private Securities Litigation Reform Act of 1995 contains certain safe harbors regarding forward-looking statements. From time to time, information provided by Medwave Inc., or the Company, or statements made by our directors, officers or employees may contain “forward-looking” information subject to numerous risks and uncertainties. Statements made in this report that are stated as expectations, plans, anticipations, prospects or future estimates or which otherwise look forward in time are considered “forward-looking statements” and involve a variety of risks and uncertainties, known and unknown, which are likely to affect the actual results. The following factors, among others, have affected and, in the future, could affect the Company’s actual results: resistance to the acceptance of new medical products, the market acceptance of the Vasotrac system, the Vasotrax hand-held unit, or other products of the Company, hospital budgeting cycles, the possibility of adverse or negative commentary from clinical researchers or other users of the Company’s products, the Company’s success in creating effective distribution channels for its products, the Company’s ability to scale up its manufacturing process, the magnitude of orders under the Company’s agreement with Nihon Kohden, Zoll Medical and Analogic Corp., the Company’s ability to enter into additional agreements, delays in product development or enhancement or regulatory approval, and other factors detailed from time to time in the Company’s reports filed with the SEC, including those set forth under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K filed on January 12, 2005. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.

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This discussion summarizes the significant accounting policies, accounting estimates and other significant factors affecting the liquidity, capital resources and results of operations of the Company for the three-month and six-month periods ended March 31, 2005 and 2004. This discussion should be read in conjunction with the financial statements and other financial information included in our Annual Report on Form 10-K for the year ended September 30, 2004 filed with the SEC.

Overview

Operating revenue was $541,400 and $436,800 for the six-month periods ended March 31, 2005 and 2004, respectively, an increase of 24%. Revenue from the North American market was approximately $452,800 and $290,000 for the six-month periods ended March 31, 2005 and 2004, respectively, representing an increase of 56%. Revenue generated from patient sensors and service increased 90% to $211,900 for the six-month period ended March 31, 2005 compared to $111,300 for the six-month period ended March 31, 2004. Revenue from international markets was approximately $88,600 and $146,800 for the six-month periods ended March 31, 2005 and 2004, respectively, representing a decrease of 40%. All international sales are transacted in U.S. dollars.

During March 2005, we announced that we entered into a Supplier and License Agreement with Analogic Corporation. Analogic is a designer and manufacturer of patient monitoring products. Analogic has been a supplier to some of the largest, most well-known patient monitoring companies for many years. This agreement allows Analogic to integrate Medwave’s sensor based technology into their patient monitoring family of products. We are working with Analogic to insure timely and smooth implementation of our technology into their products.

During June 2004, we announced the signing of an OEM agreement with ZOLL Medical Corporation. ZOLL Medical is a leader in cardiac resuscitation devices and an innovator in their field. We have been working with Zoll to determine implementation schedules regarding our technology and its incorporation into their products. We anticipate that we will begin to ship products to fulfill this agreement in the quarters ahead.

During September 2004, we signed a Joint Investigation Agreement with a global electronics company. We have been working with this company since that time to implement and achieve specific milestones that are called out in the agreement. To date, we have completed all of the identified milestones and are in the process of discussing the next phases of this agreement and the business arrangement, which may come from the next aspect of this agreement.

We continue to place a tremendous amount of management time and focus on other potential OEM agreements, distribution, and sales channel expansion possibilities. The scope of the discussions has increased as we pursue alternate avenues for Medwave to supply products and technology, including licensing, distribution, private labeling, and co-development opportunities. We believe that these agreements with other organizations may provide a significant possibility to sell large volumes of our technology, as well as complement our direct sales force’s activities by further validating our technology in the market, across multiple market segments. We also believe that we have superior clinical validation across a multitude of clinical settings and on patients who are traditionally very difficult to monitor blood pressure. With this ongoing clinical validation and the growing market presence that we have created with our direct sales force, we believe that our technology has established significant momentum in the non-invasive blood pressure monitoring marketplace. Many of the clinical studies which have been performed, most notably the ones concerning obese, pediatric and emergency patients, have highlighted the benefits our technology brings to these challenging environments and patient types. Based on these activities, we are progressing with our business strategy to sell our products into the point-of-care and low-end vital signs markets, while simultaneously partnering with other companies regarding integration of our technology into their products. We believe that higher acuity care areas within healthcare have clinically accepted our technology, as evidenced by our Group Purchasing Agreements and the positive

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results from the studies and customer discussions within these areas. However, we also believe that the demand from these environments is more geared towards an integrated module of a larger more comprehensive bedside monitoring system. Hospitals have moved towards a “systems” approach in high acuity environments, and as a result, desire integrated parameters.

To fulfill our point-of-care strategy, we have recently introduced our solution for this market. We have exhibited a new product, Primo, to the nursing community at the National Teaching Institute’s annual meeting, held in New Orleans, May 10-12, 2005. Primo is a spot point-of-care blood pressure monitoring device designed to be able to take a blood pressure of a patient in the pediatric to adult range, in settings where manual or automatic blood pressure measurements are required. The advantages which are offered by Primo include: speed of readings (seconds not minutes); significant improvement in patient comfort (because it does not completely occlude blood flow as a cuff does); and ease of use. Primo can be applied with one hand in most cases, and activated with the same hand. Once activated, Primo takes blood pressure automatically and displays the results within 12 seconds on an accessible user screen. The benefits and performance capabilities of Primo offer economic benefits for our customers by increasing throughput of patients, allowing caregivers to potentially see more patients per day due to workflow improvements. The ergonomics of Primo are unlike any other Medwave product ever produced. We hired an outside industry design firm, therefore the look of the Primo is as state-of-the-art as is its performance. The Primo does not comply with the United States FDA premarket notification regulations. Medwave, Inc. does not intend to introduce the Primo into commercial distribution at this time. The Primo is an investigational device only.

It has been estimated in industry market reports that the point-of-care blood pressure monitoring market, including manual and automatic blood pressure cuff products, is a several hundred million dollars per year market segment. We believe that Primo addresses all of the performance requirements and the aesthetics to become a leader within these markets.

Over the past year, we have been recruiting higher level sales professionals in our hospital sales force, and have hired several very seasoned sales professionals from companies in the medical device industry who have tremendous experience in selling into healthcare systems and selling complex medical technology. Several of these individuals have experience selling into multiple departments within the hospital market and selling into very competitive market segments. In addition, we have hired a few sales people to address the alternate care markets. We believe that the Primo product will have an excellent presence in both the hospital and alternative care market segments.

We continue to hear favorable results from clinical studies, which have been ongoing for the past few years. Some clinical studies remain incomplete or have been terminated due to changes in objective or personnel, but to date, we have not received negative results from any completed study. Several of the completed studies have been published in prominent medical journals. Following is an updated listing of these studies, along with others which are still in the process of being completed, presented and/or published.

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Medwave Bibliography

A. Published Studies

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B. Abstracts and Poster Presentations