##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2007;
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-28010
 MEDWAVE, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    41-1493458
(IRS employer
identification number)
 
 
 þ o
  o o þ
 o þ




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Balance Sheets  June 30, 2007 (unaudited) and September 30, 2006
    
    
    3Statements of Operations (unaudited)  Three and Nine Months Ended June 30, 2007 and 2006
    
    
    4Statements of Cash Flows (unaudited)  Nine Months Ended June 30, 2007 and 2006
    
    
    5Notes to Unaudited Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    20Item 6. Exhibits
    
    
    20Signatures
    
    
    22Exhibits
    
    
    23-24Certification of the Principal Executive Officer and Principal Financial OfficerSection 1350 Certifications
  1




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 2




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##### Table of Contents



June 30
    
    September 302007
    
    2006(unaudited)
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,465,233
    
    
    $
    4,698,115Accounts receivable, net
    
    
    78,015
    
    
    
    154,146Inventories, net
    
    
    501,494
    
    
    
    860,435Prepaid expenses and other current assets
    
    
    83,077
    
    
    
    113,112Total current assets
    
    
    2,127,819
    
    
    
    5,825,808Property and equipment:Research and development equipment
    
    
    46,295
    
    
    
    36,814Office equipment
    
    
    161,115
    
    
    
    175,011Manufacturing and engineering equipment
    
    
    173,336
    
    
    
    599,592Sales and marketing equipment
    
    
    13,932
    
    
    
    71,540Leasehold improvements
    
    
    57,524
    
    
    
    71,109Demonstration equipment
    
    
    
    
    
    
    25,418452,202
    
    
    
    979,484Accumulated depreciation
    
    
    (315,115
    )
    
    
    (528,837
    )Property and equipment, net
    
    
    137,087
    
    
    
    450,647Total assets
    
    $
    2,264,906
    
    
    $
    6,276,455Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    50,594
    
    
    $
    557,405Accrued expenses
    
    
    162,093
    
    
    
    843,573Accrued payroll and other related expenses
    
    
    231,592
    
    
    
    95,062Deferred revenue
    
    
    43,469
    
    
    
    75,713Total current liabilities
    
    
    487,748
    
    
    
    1,571,753Stockholders equity:Common stock, .01 par value:Authorized shares50,000,000
Issued and outstanding shares
June 30, 2007 13,104,280
September 30, 2006 13,094,280
    
    
    131,042
    
    
    
    130,942Additional paid in capital
    
    
    39,095,153
    
    
    
    38,907,977Accumulated deficit
    
    
    (37,449,037
    )
    
    
    (34,334,217
    )Total stockholders equity
    
    
    1,777,158
    
    
    
    4,704,702Total liabilities and stockholders equity
    
    $
    2,264,906
    
    
    $
    6,276,455
 The accompanying notes are an integral part of these unaudited financial statements.
 3




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(Unaudited)
 Three months ended June 30
    
    Nine months ended June 302007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Net sales
    
    $
    117,080
    
    
    $
    365,984
    
    
    $
    582,091
    
    
    $
    1,135,679Operating expenses:Cost of sales and
production
    
    
    588,082
    
    
    
    243,714
    
    
    
    1,160,378
    
    
    
    803,563Research and development
    
    
    208,225
    
    
    
    250,440
    
    
    
    525,013
    
    
    
    719,036Sales and marketing
    
    
    152,433
    
    
    
    636,601
    
    
    
    928,453
    
    
    
    1,633,994General and administrative
    
    
    314,822
    
    
    
    500,220
    
    
    
    1,176,383
    
    
    
    1,441,770Total operating expenses:
    
    
    1,263,562
    
    
    
    1,630,975
    
    
    
    3,790,227
    
    
    
    4,598,363Operating loss
    
    
    (1,146,482
    )
    
    
    (1,264,991
    )
    
    
    (3,208,136
    )
    
    
    (3,462,684
    )Interest income
    
    
    20,433
    
    
    
    71,968
    
    
    
    93,316
    
    
    
    167,722Net loss
    
    $
    (1,126,049
    )
    
    $
    (1,193,023
    )
    
    $
    (3,114,820
    )
    
    $
    (3,294,962
    )Net loss per share  Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.09
    )
    
    $
    (0.24
    )
    
    $
    (0.27
    )Weighted average number of common and
common equivalent shares outstanding  basic and
diluted
    
    
    13,104,280
    
    
    
    13,094,280
    
    
    
    13,102,522
    
    
    
    12,240,268
 The accompanying notes are an integral part of these financial statements.
 4




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(Unaudited)
 Nine months ended June 30,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (3,114,820
    )
    
    $
    (3,294,962
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash share-based compensation expense
    
    
    179,876
    
    
    
    374,686Depreciation and amortization
    
    
    93,417
    
    
    
    93,704Asset impairment
    
    
    241,178
    
    
    
    Provision for inventory obsolescence
    
    
    250,000
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    76,131
    
    
    
    (85,354
    )Inventories
    
    
    108,941
    
    
    
    (266,096
    )Prepaid expenses and other current assets
    
    
    30,035
    
    
    
    (35,662
    )Accounts payable
    
    
    (506,812
    )
    
    
    (110,835
    )Accrued liabilities
    
    
    (544,949
    )
    
    
    2,648Deferred revenue
    
    
    (32,244
    )
    
    
    (7,884
    )Net cash used in operating activities
    
    
    (3,219,247
    )
    
    
    (3,329,755
    )Investing ActivitiesPurchase of property and equipment
    
    
    (21,035
    )
    
    
    (290,755
    )Net cash used in investing activities
    
    
    (21,035
    )
    
    
    (290,755
    )Financing ActivitiesProceeds from issuance of common stock
    
    
    7,400
    
    
    
    4,072,854Net cash provided by financing activities
    
    
    7,400
    
    
    
    4,072,854Increase (decrease) in cash and cash equivalents
    
    
    (3,232,882
    )
    
    
    452,344Cash and cash equivalents at beginning of period
    
    
    4,698,115
    
    
    
    5,424,078Cash and cash equivalents at end of period
    
    $
    1,465,233
    
    
    $
    5,876,422
 The accompanying notes are an integral part of these unaudited financial statements.
 5




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1.
    
    Basis of PresentationThe 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, 2006.Our cash and cash equivalents were $1,465,233 and $4,698,115 at June 30, 2007 and September 30,
2006. Management is presently implementing strategies designed to contain costs and improve
the financial results of the Companys operations. The Company believes that net proceeds from
its private placement completed in February 2006 (see note 8 to financial statements in the
Companys Annual Report on Form 10-K for the year ended September 30, 2006 filed with the SEC
on January 16, 2007), together with achieving its operating budget for 2007, will be sufficient
to fund its operations through at least October 1, 2007. Management has taken steps to reduce
cash expenditures; including closing its Danvers, Massachusetts office and employee layoffs.The Company continues to experience net losses and has an accumulated deficit of approximately
$37,500,000 through June 30, 2007. The report of our independent registered public accounting
firm contained an explanatory paragraph regarding substantial doubt about the Companys ability
to continue as a going concern at September 30, 2006.We will need to raise additional capital to fund our long-term operations. We have begun a
process to explore strategic alternatives to enhance shareholder value, including but not
limited to the raising of capital through the sale of securities or assets of the Company, a
recapitalization, strategic acquisitions, and the combination, sale or merger of the Company
with another entity. There can be no assurance that the exploration of strategic alternatives
will result in a transaction. We do not intend to disclose developments with respect to the
exploration of strategic alternatives unless and until the Board of Directors has approved a
specific transaction.
 6




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2.
    
    InventoriesInventories 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:
 June 30,
    
    
    September 30,2007
    
    
    2006Raw materials
    
    $
    603,347
    
    
    $
    587,770Finished goods
    
    
    205,469
    
    
    
    332,665Obsolescence reserve
    
    
    (310,000
    )
    
    
    (60,000
    )Total
    
    $
    501,494
    
    
    $
    860,435
 3.
    
    Stockholders Equity
  Common Stock.01 Par Value
    
    Additional
    
    AccumulatedShares
    
    Amount
    
    Paid in Capital
    
    Deficit
    
    TotalBalance at September 30,
2006
    
    
    13,094,280
    
    
    $
    130,942
    
    
    $
    38,907,977
    
    
    $
    (34,334,217
    )
    
    $
    4,704,702Exercise of Stock Options
    
    
    10,000
    
    
    
    100
    
    
    
    7,300
    
    
    
    
    
    
    
    7,400Share Based Compensation
    
    
    
    
    
    
    
    
    
    
    179,876
    
    
    
    
    
    
    
    179,876Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,114,820
    )
    
    
    (3,114,820
    )Balance at June 30, 2007
    
    
    13,104,280
    
    
    $
    131,042
    
    
    $
    39,095,153
    
    
    $
    (37,449,037
    )
    
    $
    1,777,158
   7




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Three months ended June 30
    
    Nine months ended June 302007
    
    2006
    
    2007
    
    2006Cost of sales and production
    
    $
    903
    
    
    $
    2,295
    
    
    $
    4,367
    
    
    $
    7,878Research and development
    
    
    7,583
    
    
    
    15,836
    
    
    
    28,102
    
    
    
    50,374Sales and marketing
    
    
    5,753
    
    
    
    28,555
    
    
    
    21,802
    
    
    
    85,750General and administrative
    
    
    20,841
    
    
    
    76,872
    
    
    
    125,605
    
    
    
    230,684Net share-based compensation expense
    
    $
    35,080
    
    
    $
    123,558
    
    
    $
    179,876
    
    
    $
    374,686Effect on loss per share
Basic and diluted
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
   Nine months ended
    
    Nine months endedJune 30,
    
    June 30,2007
    
    2006Expected option term (1)
    
    6.25 yrs.
    
    5.81 yrs.Expected volatility factor (2)
    
    
    85.07
    %
    
    
    81.18
    %Risk-free interest rate (3)
    
    
    4.67
    %
    
    
    4.53
    %Expected annual dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 
 (1)
    
    The option life was determined using the simplified method for estimating expected option
life, which qualify as plain-vanilla options.(2)
    
    The stock volatility for each grant is determined based on the weighted average of historical
monthly price changes of the Companys stock over the expected option term.(3)
    
    The risk-free interest rate for periods equal to the expected term of the stock option is
based on the U.S. Treasury yield curve in effect at the time of the grant. 8




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Options OutstandingWeightedAverageWeighted
    
    RemainingNumber of
    
    Average
    
    ContractualShares
    
    Exercise Price
    
    TermBalance at September 30, 2006
    
    
    1,557,702
    
    
    $
    3.78
    
    
    5.9 yrs.Granted
    
    
    100,000
    
    
    
    0.45Exercised
    
    
    (10,000
    )
    
    
    0.74Canceled
    
    
    (773,125
    )
    
    
    4.64Balance at December 31, 2006
    
    
    874,577
    
    
    
    2.68
    
    
    
    6.6Granted
    
    
    150,000
    
    
    
    0.43Exercised
    
    
    Canceled
    
    
    (7,000
    )
    
    
    2.16Balance at March 31, 2007
    
    
    1,017,577
    
    
    
    2.36
    
    
    
    7.0Granted
    
    
    Exercised
    
    
    Canceled
    
    
    (45,827
    )
    
    
    3.53Balance at June 30, 2007
    
    
    971,750
    
    
    
    2.30
    
    
    
    6.8
 9




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Options Outstanding
    
    Vested OptionsWeighted
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Average of
    
    Average
    
    
    
    
    
    AverageRange of
    
    Shares
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Contract Life
    
    Price
    
    Exercisable
    
    Price$0.33 - 0.80
    
    
    450,000
    
    
    7.5 years
    
    $
    0.57
    
    
    
    200,000
    
    
    $
    0.741.14 - 1.60
    
    
    52,500
    
    
    4.9 years
    
    
    1.43
    
    
    
    52,500
    
    
    
    1.432.04 - 2.80
    
    
    110,000
    
    
    6.2 years
    
    
    2.12
    
    
    
    96,250
    
    
    
    2.083.00 - 4.75
    
    
    307,250
    
    
    6.9 years
    
    
    4.05
    
    
    
    218,000
    
    
    
    4.045.06 - 7.13
    
    
    20,000
    
    
    5.0 years
    
    
    6.94
    
    
    
    20,000
    
    
    
    6.948.94 - 9.13
    
    
    32,000
    
    
    1.8 years
    
    
    8.95
    
    
    
    32,000
    
    
    
    8.95971,750
    
    
    6.8 years
    
    
    2.30
    
    
    
    618,750
    
    
    
    2.80
   Non-Vested OptionsWeightedNumber of
    
    AverageShares
    
    Fair ValueNon-vested at September 30, 2006
    
    
    338,952
    
    
    $
    2.11Granted
    
    
    100,000
    
    
    
    0.34Vested (with intrinsic value of $188)
    
    
    (5,250
    )
    
    
    1.23Forfeited
    
    
    (128,125
    )
    
    
    2.26Non-vested at December 31, 2006
    
    
    305,577
    
    
    
    1.48Granted
    
    
    150,000
    
    
    
    0.32Vested (with intrinsic value of $0)
    
    
    (20,394
    )
    
    
    1.93Forfeited
    
    
    (7,000
    )
    
    
    1.57Non-vested at March 31, 2007
    
    
    428,183
    
    
    
    1.05Granted
    
    
    Vested (with intrinsic value of $0)
    
    
    (51,375
    )
    
    
    1.65Forfeited
    
    
    (23,808
    )
    
    
    1.88Non-vested at June 30, 2007
    
    
    353,000
    
    
    
    0.91
  10




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3. Accrued expenses
  June 30
    
    
    September 302007
    
    
    2006Accrued severance
    
    $
    
    
    
    $
    426,628Professional fees
    
    
    50,917
    
    
    
    87,047Customer refunds
    
    
    65,718
    
    
    
    173,150Contract settlement
    
    
    
    
    
    
    125,000Other
    
    
    45,458
    
    
    
    31,748$
    162,093
    
    
    $
    843,573
 4. Net Loss Per Share
  5. Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes Accounting for Income
Taxes
 11




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Fair Value Measures
 The Fair Value Option for Financial Assets and
Financial Liabilities
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Certain statements contained herein constitute forward-looking statements as that term is defined
under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities
and Exchange Commission 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 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 to
differ materially from anticipated future results, performance or achievements expressed or implied
by such forward-looking statements. Medwave 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. Some of the risks and uncertainties that
may cause our actual results to differ materially are those described in Risk Factors in Part 1,
Item 1A. in our Annual Report on Form 10-K for the year ended September 30, 2006 filed with the
SEC on January 16, 2007.
  Overview
  12




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TM TM
 13




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General
   Recent Developments
 Exploration of Strategic Alternatives
  Fusion TM TM TM TM TM
 Discontinuance of Primo TM TM
 Vasotrac® ® ® TM
 OEM module
 14




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Results of Operations
   Cost of Sales and Production
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Cost of Sales and Production
    
    $
    588,100
    
    
    $
    243,700
    
    
    $
    1,160,400
    
    
    $
    803,600Percent change from previous
year:Incr/-Decr
    
    
    141.3
    %
    
    
    
    
    
    
    44.4
    %
  Research and Development
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Research and Development
    
    $
    208,200
    
    
    $
    250,400
    
    
    $
    525,000
    
    
    $
    719,000Percent change from
previous year:Incr/-Decr
    
    
    -16.9
    %
    
    
    
    
    
    
    -27.0
    %
  Sales and Marketing
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Sales and Marketing
    
    $
    152,400
    
    
    $
    636,600
    
    
    $
    928,500
    
    
    $
    1,634,000Percent change from
previous year:Incr/-Decr
    
    
    -76.1
    %
    
    
    
    
    
    
    -43.2
    %
  15




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General and Administrative
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006General and Administrative
    
    $
    314,800
    
    
    $
    500,200
    
    
    $
    1,176,400
    
    
    $
    1,441,800Percent change from
previous year:Incr/-Decr
    
    
    -37.1
    %
    
    
    
    
    
    
    -18.4
    %
  Interest Income
  Liquidity and Capital Resources
      16




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Off-Balance Sheet Arrangements
  Contractual Obligations
  PAYMENTS DUE BY PERIODTOTAL
    
    1 YEAR OR LESS
    
    1-3 YEARSOperating lease commitments
    
    $
    344,300
    
    
    $
    113,400
    
    
    $
    230,900
 Critical Accounting Policies and Estimates
  Revenue Recognition.
 Inventory Valuation.
 17




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Warranty Reserves
 Income Taxes
  Stock-Based Compensation
   18




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Impairment of Long-Lived Assets
  Accounts Receivable
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  19




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PART II. OTHER INFORMATION
 
 ITEM 1A. Risk Factors.
  The report of our independent registered public accounting firm that was filed with our
Annual Report on Form 10-K for the year ended September 30, 2006 contained an explanatory paragraph
regarding substantial doubt about the Companys ability to continue as a going concern.
  Our common stock now trades on the Pink Sheets LLC, rather than the NASDAQ Capital Market, which
will reduce our ability to raise funds and could limit the trading volume of our common stock and
your ability to sell shares of our common stock at an acceptable price, or at all.
   
 ITEM 6. Exhibits
  20




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##### Table of Contents



ExhibitNumber
    
    Description3.1
    
    Certificate of Incorporation (1)3.3
    
    Bylaws (1)4.1
    
    Shareholders Rights Plan dated September 29, 2003 (2)10.1
    
    2007 Retention Program (3)31.1
    
    Certification of the principal executive officer and principal financial officer, pursuant to Rule
13a  14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (4)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (4)
 
 (1)
    
    Incorporated by reference to Medwave, Inc.s Form 8-A12G filed on August 4, 2003.(2)
    
    Incorporated by reference to Medwave, Inc.s Form 8-A12G filed on October 3, 2003.(3)
    
    Incorporated by reference to Medwave, Inc.s Current Report on Form 8-K filed on April 20, 2007.(4)
    
    Filed herewith. 21




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##### Table of Contents



SIGNATURES
  Date: August 14, 2007
    Medwave, Inc.By:
    /s/ Frank A. KatarowFrank A. KatarowChief Executive Officer (interim)
(Principal Executive Officer and Principal
Accounting Officer) 22