SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 1998; or
[ ] TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-28010
MEDWAVE, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1493458
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
4382 Round Lake Road West
Arden Hills, Minnesota 55112
(Address of principal executive offices,
zip code)
(651) 639-1227
(Registrant's telephone number, including
area code)
Indicate by mark whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period as the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
As of August 31, 1998, the issuer had 5,392,396 shares of Common Stock
outstanding.
<PAGE>
Medwave, Inc.
Form 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - April 30, 1998 and July 31, 1998 2
Statements of Operations - Three Months Ended July 31, 1998 3
and 1997 and Period from June 27, 1984 (Inception) to
July 31, 1998
Statements of Cash Flows - Three Months Ended July 31, 1998 4
and 1997 and Period from June 27, 1984 (Inception) to
July 31, 1998
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 5
and Results of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risk 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 7
Item 2. Changes in Securities 7
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters To A Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Medwave, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
April 30, July 31,
1998 1998
--------------------------------------
(see note 2) (unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $1,926,697 $ 1,468,705
Short term investments 759,758 1,564,052
Accounts receivable 59,618 175,445
Inventories 249,079 201,267
Prepaid expenses 74,975 44,412
--------------------------------------
Total current assets 3,070,127 3,453,881
Investments 3,484,515 2,661,564
Property and equipment:
Research and development equipment 242,606 239,043
Office Equipment 115,243 115,243
Manufacturing and engineering equipment 65,259 65,259
Sales and marketing equipment 60,183 59,927
Leasehold improvements 31,613 31,613
--------------------------------------
514,904 511,085
Accumulated depreciation (383,802) (399,513)
--------------------------------------
131,102 111,572
Patents, net 53,418 47,069
--------------------------------------
Total Assets $6,739,162 $ 6,274,086
======================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 109,585 $ 130,658
Accrued payroll 57,531 53,707
--------------------------------------
Total current liabilities 167,116 184,365
Shareholders' equity:
Common Stock, no par value:
Authorized shares--50,000,000
Issues and outstanding shares - 16,240,970 16,245,470
July 31, 1998 - 5,384,396
April 30, 1998 - 5,378,376
Unrealized gain/(loss) on investments (14,999) (16,235)
Deficit accumulated during the development stage (9,653,925) (10,139,514)
--------------------------------------
Total shareholders' equity 6,572,046 6,089,721
--------------------------------------
Total liabilities and shareholders' equity $6,739,162 $ 6,274,086
======================================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period from
June 27, 1984
Three months ended July 31 (Inception)
--------------------------------------- to
1998 1997 July 31, 1998
--------------------------------------- -----------------
<S> <C> <C> <C>
Revenue:
Net Sales $ 200,332 $ 186,709 $ 866,286
Operating expenses:
Cost of sales and product development 173,570 188,836 839,391
Research and development 270,670 276,657 5,891,547
Sales and marketing 218,646 252,528 1,958,703
General and administrative 100,714 93,839 2,806,433
--------------------------------------- -----------------
Operating loss (563,268) (625,151) (10,629,788)
Other income:
Interest income 77,678 62,001 1,117,033
--------------------------------------- -----------------
Net loss $ (485,590) $ (563,150) $ (9,512,755)
======================================= =================
Net loss per share - Basic and diluted $ (0.09) $ (0.12) $ (3.88)
======================================= =================
Weighted average number of common and
common equivalent shares outstanding 5,384,396 4,818,738 2,450,331
======================================= =================
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period from
June 27, 1984
Three months ended July 31 (Inception)
------------------------------------ to
1998 1997 July 31, 1998
------------------------------------ ---------------
<S> <C> <C> <C>
Operating activities
Net loss $ (485,590) $ (563,150) $ (9,512,755)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 19,373 17,730 575,991
Amortization 6,349 6,350 88,948
Loss on sale of equipment --- --- 7,375
Issuance of Common Stock for consulting services --- --- 3,413
Changes in operating assets and liabilities:
Accounts receivable (115,827) (110,989) (175,445)
Inventories 47,812 (71,683) (201,267)
Prepaid expenses 30,563 34,458 (44,412)
Accounts payable and accrued expenses 21,073 109,764 130,658
Accrued payroll and related taxes (3,824) (1,205) 53,707
------------------------------------ --------------
Net cash used in operating activities (480,071) (578,725) (9,073,787)
Investing activities
Patent expenditures --- --- (136,017)
Purchase of investments (242,951) (488,006) (33,856,000)
Sales and maturity of investments 260,373 --- 29,615,993
Purchase of property and equipment (3,306) (16,414) (715,799)
Proceeds from sale of equipment 3,463 --- 21,663
------------------------------------ --------------
Net cash used in investing activities 17,579 (504,420) (5,070,160)
Financing activities
Net proceeds from issuance of Convertible Preferred Stock --- --- 4,848,258
Net proceeds from issuance of Common Stock 4,500 --- 10,764,394
------------------------------------ --------------
Net cash provided by financing activities 4,500 --- 15,612,652
------------------------------------ --------------
(Decrease) increase in cash and cash equivalents (457,992) (1,083,145) 1,468,705
Cash and cash equivalents at beginning of period 1,926,697 1,240,100
------------------------------------ --------------
Cash and cash equivalents at end of period $ 1,468,705 $ 156,955 $ 1,468,705
==================================== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
Medwave, Inc.
(A Development Stage Company)
Notes To Financial Statements
July 31, 1998
1. Organization and Description of Business
Medwave, Inc. (the Company) is a development stage enterprise engaged in
the development, manufacturing, and marketing of a proprietary,
non-invasive system that continually monitors arterial blood pressure of
adults and in the development of related technology and products.
2. Basis of Presentation
The financial information presented as of July 31, 1998 has been prepared
from the books and records without audit. Financial information as of
April 30, 1998 is based on audited financial statements of the Company but
does not include all disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial information for the periods indicated have been included. For
further information regarding the Company's accounting policies, refer to
the financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended April 30, 1998.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion should be read in conjunction with, and is qualified
by, the Company's financial statements set forth in Item 1 of this Form 10-Q.
General
The Company, which was formed in 1984, is a development stage company that
currently employs sixteen full-time employees and three part-time employees.
Since its inception, the Company has been engaged in the development of a
non-invasive, continual blood pressure measurement and monitoring system.
Utilizing the Company's proprietary technology, the Vasotrac(R) system provides
new blood pressure readings approximately every fifteen heartbeats. The Company
believes that the continual blood pressure readings and the non-invasive
features of the Vasotrac system make it the most advanced approach to blood
pressure monitoring. In 1997, the Company began development of a hand-held blood
pressure monitor. This hand-held unit is based on the technology used in the
Vasotrac system.
The Company has incurred an accumulated deficit of $10,139,500 from its
inception through July 31, 1998. Additional losses from development, testing,
regulatory compliance, sales, and other expenses are expected to be incurred by
the Company at least until it emerges from the development stage.
The Company's success is dependent upon the successful development and marketing
of the Vasotrac system and/or related technology. However, there can be no
assurance that the Vasotrac system or related technology will be successfully
marketed or sold in sufficient quantities and at margins necessary to achieve or
maintain profitability.
In December 1997, the Company began developing a dealer sales network for
selling the Vasotrac system. To date, the Company has entered into agreements
<PAGE>
with eight dealers whose territories cover the southern and western United
States. The Company is seeking qualified dealers in the northeast portion of the
United States and portions of the Midwest. The success of the Company's Vasotrac
system sales will depend upon the ability of dealers to sell the Vasotrac system
to the hospitals in their area. At this time, dealers have not had enough sales
experience with the Vasotrac to demonstrate that they will be successful.
Furthermore, the Company has limited distribution arrangements and there can be
no assurance that the Company will be able to implement or effectuate other such
arrangements.
The Company's hand-held blood pressure monitor, that is under development, may
have sales potential both in the professional market (doctors, nurses, and
medical technicians) and in the consumer market. The Company does not have
suitable distribution channels for these potential markets and there can be no
assurance that the Company will be able to implement or effectuate suitable
arrangements for such markets.
For the Company to emerge from the development stage, it will depend on its
ability to hire additional employees for key operating positions, including
sales and marketing positions. Competition for such employees is intense and
there can be no assurance that the Company will be successful in hiring such
employees on acceptable terms or when required, or in maintaining the services
of its present employees. The Company preliminarily estimates that these
employees will increase employee-related expenses in excess of $850,000 during
the next twelve months. However, such requirements are subject to change and are
highly dependent on the development process for the system, including the
manufacturing scale-up process, market acceptance, and the Company's
distribution methods.
Cash, cash equivalents, and short and long-term investments are being used
primarily to continue clinical testing of the Vasotrac system, for manufacturing
and marketing, to conduct any additional research and product development
efforts that may be necessary, and to provide working capital. Over the next
twelve months, the Company expects to spend in excess of $900,000 for research
and development. Specifically the funds are expected to be used to develop an
improved sensor and to sustain engineering support for manufacturing and for the
continued development of a hand-held unit. No significant amount of equipment is
expected to be required. Even assuming limited sales, the Company believes that
the Company's cash, cash equivalents, and short and long-term investments will
allow the Company to meet its cash requirements for approximately one and a half
years from July 31, 1998. If the development process for the Company's products
does not proceed as expected because significant product design changes are
required to achieve market acceptance, unexpected difficulties are encountered
in attaining cost-effective manufacturability, or the sales and marketing costs
are higher than expected, the Company may require additional capital at an
earlier date. Such capital may be sought through bank borrowing, equipment
financing, equity financing, and other methods. The Company's 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 its anticipated expense 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 the Company or its security holders. In addition, any such
financing could result in substantial dilution to then existing security
holders.
Results of Operations
The results of operations compares the three months ended July 31, 1998 and
1997, respectively. The analysis of liquidity and capital resources compares
July 31, 1998 to April 30, 1998.
Operating revenue was $200,300 and $186,700 for the quarter ended July 31, 1998
and 1997, respectively. The operating revenue increase was attributed to the
switch from direct sales over to a dealer network and included a marketing
incentive program to help provide customer feedback on the Vasotrac system.
<PAGE>
Cost of sales and product development was $173,500 and $188,800 for the quarter
ended July 31, 1998 and 1997, respectively. The cost of sales and product
development decrease was attributed to increased efficiencies in product
manufacturing as the Company improves its manufacturing processes.
The Company incurred $270,700 and $276,700 for research and development expenses
for the quarter ended July 31, 1998 and 1997, respectively. The research and
development expense decrease was attributed to a decrease in clinical costs as a
result of the completion of the multi-site clinical study.
The Company incurred $218,600 and $252,500 for sales and marketing expenses for
the quarter ended July 31, 1998 and 1997, respectively. The sales and marketing
expense decrease was attributable to a decrease in the number of sales
representatives employed by the Company as the Company converted over to a
dealer network.
The Company incurred $100,700 and $93,800 for general and administrative
expenses for the quarter ended July 31, 1998 and 1997, respectively. The
increase in general and administrative expenses was attributed to a general
increase in expenses.
Interest income was $77,700 and $62,000 for the quarter ended July 31, 1998 and
July 31, 1997, respectively. The increase reflects higher cash, cash
equivalents, and short and long-term investments as a result of the Company's
private placement in March 1998.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and short-and long-term investments were
$5,694,300 and $6,171,000 at July 31, 1998 and April 30, 1998, respectively. The
Company incurred cash expenditures of $480,100 for operations for the quarter
ended July 31, 1998.
With the Company's cash, cash equivalents, and short and long-term investments,
the Company believes that sufficient liquidity is available to satisfy its
working capital needs for approximately one and a half years from July 31, 1998.
The Company has no significant capital expenditure commitments.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Use of proceeds for the period ending: July 31, 1998 (Final Report)
(1) Effective Date: November 9, 1995
SEC File Number: 0-28010-6
(2) Offering Date: November 9, 1995
(4)(ii) Managing Underwriter: Miller, Johnson & Kuehn, Inc.
(4)(iii) Title of Security: Common Stock
(4)(iv) Amount Registered: 1,610,000
Aggregate Offering Price: $8,050,000
Amount Sold: 1,610,000
Aggregate Offering Price Sold: $8,050,000
<PAGE>
(4)(v) Underwriting Discount and Commissions: $ 805,000
Expenses paid to or for underwriters: $ 194,169
Other expenses: $ 217,263
Total expenses: $ 1,216,432
All 4(v) are direct or indirect payments to others
(4)(vi) Net offering proceeds: $ 6,833,568
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(4)(vii) Temporary Investments (specify)
Construction of Plant, building and (A) Direct or indirect payments to directors,
Facilities officers, general partners of issuer or their
associates, to persons owning ten percent
(10%) or more of any class of equity securities
of the issuer and to affiliates of the issuer: None
(B) Direct or indirect payment to others: $ 31,613
Purchases and installation of (A) Direct or indirect payments to directors,
machinery and equipment officers, general partners of issuer or their
associates, to persons owning ten percent
(10%) or more of any class of equity securities
of the issuer and to affiliates of the issuer: None
(B) Direct or indirect payment to others: $ 218,476
Reserve Asset Management Account: (A) Direct or indirect payments to directors,
officers, general partners of issuer or their
associates, to persons owning ten percent
(10%) or more of any class of equity securities
of the issuer and to affiliates of the issuer: None
(B) Direct or indirect payment to others: None
Marketing & Manufacturing: (A) Direct or indirect payments to directors,
officers, general partners of issuer or their
associates, to persons owning ten percent
(10%) or more of any class of equity securities
of the issuer and to affiliates of the issuer: $ 439,516
(B) Direct or indirect payment to others: $2,383,236
Research & Development: (A) Direct or indirect payments to directors,
officers, general partners of issuer or their
associates, to persons owning ten percent
(10%) or more of any class of equity securities
of the issuer and to affiliates of the issuer: $ 236,868
(B) Direct or indirect payment to others: $2,227,084
General & Administrative: (A) Direct or indirect payments to directors,
officers, general partners of issuer or their
associates, to persons owning ten percent
(10%) or more of any class of equity securities
of the issuer and to affiliates of the issuer: $ 245,881
(B) Direct or indirect payment to others: $1,050,894
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Statements made in this report that are stated as expectations, plans,
anticipations, prospects or future estimates or which otherwise look forward in
time are considered "forward-looking statements" and involve a variety of risks
and uncertainties, known and unknown, which are likely to affect the actual
results. The following factors, among others, as well as factors discussed in
the Company's other filings with the SEC, have affected and, in the future,
could affect the Company's actual results: resistance to the acceptance of new
medical products, the market acceptance of the Vasotrac system or other products
of the Company, hospital budgeting cycles, the possibility of adverse or
negative commentary from clinical researchers or other users of the Company's
products, the Company's success in creating effective distribution channels for
its products, the Company's ability to scale up its manufacturing process, and
delays in product development or enhancement or regulatory approval.
Consequently, no forward-looking statement can be guaranteed and actual results
may vary materially.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBITS DESCRIPTION
27 Financial data schedule
(B) REPORTS ON FORM 8K:
No reports on Form 8-K were filed by the Company during
the quarter ended July 31, 1998
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 11, 1998 Medwave, Inc.
By: /s/ G. Kent Archibald
G. Kent Archibald
President and Chief Executive Officer
/s/ Mark T. Bakko
Mark T. Bakko
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
MEDWAVE, INC.
FORM 10-Q
FOR QUARTER ENDED
JULY 31, 1998
Exhibit No. Description
27 Financial Data Schedule (filed in electronic format only)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FOR QUARTER ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,468,705
<SECURITIES> 1,564,052
<RECEIVABLES> 175,445
<ALLOWANCES> 0
<INVENTORY> 201,267
<CURRENT-ASSETS> 3,453,881
<PP&E> 511,085
<DEPRECIATION> 399,513
<TOTAL-ASSETS> 6,274,086
<CURRENT-LIABILITIES> 184,365
<BONDS> 0
0
0
<COMMON> 16,245,470
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,274,086
<SALES> 200,332
<TOTAL-REVENUES> 200,332
<CGS> 0
<TOTAL-COSTS> 173,570
<OTHER-EXPENSES> 590,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (485,590)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (485,590)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
