**SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.   20549**

 

**FORM 10-Q**

** **

**(MarkOne)**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
|       | **For  the Quarterly Period Ended January 31 2002; 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.**(Exact name of registrant as specified in its charter)

 

| **Minnesota**                                                          |   | **41-1493458**                          |
|------------------------------------------------------------------------|--------|-----------------------------------------|
|  (State or other jurisdiction   of incorporation or organization) |   | (IRS  employer   identification number) |
|                                                                   |   |                                    |
| **4382 Round Lake Road West Arden Hills, Minnesota 55112**             |
| (Address  of principal executive offices, zip code)                    |
|                                                                   |   |                                    |
| **(651) 639-1227**                                                     |
| (Registrant’s  telephone number, including  area  code)      |
|                                                                        |        |                                         |  |

 

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period as the registrant was requiredto file such reports) and (2) has been subject to such filing requirements forthe past 90 days.

Yes ý   No o

 

As of January 31, 2002, the issuer had 6,989,599 shares of Common Stockoutstanding.

 

 

Medwave, Inc.

 

Form 10-Q

 

INDEX

 
|     |                                                                                         |                                                                                                                                                                                   |   |
|----------|----------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                         |                                                                                                                                                                                   |   |
| PART I.  | FINANCIAL INFORMATION                                                                        |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item 1.  | Financial Statements                                                                         |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
|     |                                                                                         | Balance Sheets - April 30, 2001 and  January 31, 2002                                                                                                                                  |   |
|     |                                                                                         |                                                                                                                                                                                   |   |
|     |                                                                                         | Statements  of Operations - Three Months Ended January 31, 2002 and  2001, Nine Months Ended January 31, 2002 and 2001, and Period from  June 27, 1984 (Inception) to January 31, 2002 |   |
|     |                                                                                         |                                                                                                                                                                                   |   |
|     |                                                                                         | Statements  of Cash Flows - Three Months Ended January 31, 2002 and  2001, Nine Months Ended January 31, 2002 and 2001 and Period from June  27, 1984 (Inception) to January 31, 2002  |   |
|     |                                                                                         |                                                                                                                                                                                   |   |
|     |                                                                                         | Notes to Financial  Statements                                                                                                                                                         |   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                  |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| PART II. | OTHER INFORMATION                                                                            |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item  1. | Legal  Proceedings                                                                           |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item  2. | Changes  in Securities And Use Of Proceeds                                                   |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item 3.  | Defaults Upon  Senior Securities                                                             |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item  4. | Submission  of Matters To A Vote of Security Holders                                         |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item 5.  | Other Information                                                                            |                                                                                                                                                                                   |
|     |                                                                                         |                                                                                                                                                                                   |   |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                            |                                                                                                                                                                                   |
|          |                                                                                              |                                                                                                                                                                                        |        |  |

** **

 

1

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** **

**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.  FinancialStatements**

 

**Medwave, Inc.**

**(A Development Stage Company)**

**BalanceSheets**

 
|                                             |   | **April 30,   2001** |      | **January 31,   2002** |   |
|--------------------------------------------------|--------|----------------------|-----------|------------------------|--------|
|                                             |   | **(see  note 2)**    |      | **(unaudited)**        |   |
| **Assets**                                       |   |                 |      |                   |   |
| Current Assets:                                  |   |                 |      |                   |   |
| Cash and cash equivalents                        |   | $                    | 1,116,589 |                   | $      | 3,730,918 |   |
| Accounts receivable                              |   | 208,009              |      | 132,752                |   |
| Inventories                                      |   | 467,632              |      | 297,969                |   |
| Prepaid expenses                                 |   | 193,609              |      | 141,699                |   |
| Total current assets                             |   | 1,985,839            |      | 4,303,338              |   |
|                                             |   |                 |      |                   |   |
| Property and equipment:                          |   |                 |      |                   |   |
| Research and development equipment               |   | 218,292              |      | 209,523                |   |
| Office Equipment                                 |   | 113,086              |      | 103,678                |   |
| Manufacturing and engineering equipment          |   | 285,504              |      | 282,158                |   |
| Sales and marketing equipment                    |   | 54,269               |      | 104,719                |   |
| Leasehold improvements                           |   | 31,613               |      | 31,613                 |   |
|                                             |   | 702,764              |      | 731,691                |   |
| Accumulated depreciation                         |   | (557,813             | )         | (631,581               | )      |
|                                             |   | 144,951              |      | 100,111                |   |
| Patents, net                                     |   |                 |      |                   |   |
| Total Assets                                     |   | $                    | 2,130,790 |                   | $      | 4,403,450 |   |
| **Liabilities and shareholders’  equity**   |   |                 |      |                   |   |
| Current liabilities:                             |   |                 |      |                   |   |
| Accounts payable                                 |   | $                    | 278,887   |                   | $      | 238,334 |   |
| Accrued payroll                                  |   | 45,666               |      | 50,036                 |   |
| Deferred revenue                                 |   | 199,690              |      | 143,982                |   |
| Total current liabilities                        |   | 524,243              |      | 432,352                |   |
|                                             |   |                 |      |                   |   |
| Shareholders’ equity:                       |   |                 |      |                   |   |
| Common Stock, no par value:                      |   |                 |      |                   |   |
| Authorized shares-50,000,000                     |   |                 |      |                   |   |
| Issued and outstanding shares —             |   | 17,385,956           |      | 21,752,104             |   |
| April 30, 2001 — 5,734,049                  |   |                 |      |                   |   |
| January 31, 2002 — 6,989,599                |   |                 |      |                   |   |
| Deficit accumulated during the development stage |   | (15,779,409          | )         | (17,781,006            | )      |
| Total shareholders’ equity                  |   | 1,606,547            |      | 3,971,098              |   |
|                                             |   |                 |      |                   |   |
| Total liabilities and shareholders’ equity  |   | $                    | 2,130,790 |                   | $      | 4,403,450 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

2

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Medwave, Inc.

(A Development Stage Company)

Statements of Operations

*(Unaudited)*

 
|                                                                     |   | **Three months ended January 31** |     | **Nine months ended January 31** |   | **Period from   June 27, 1984 (Inception) to** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|----------|----------------------------------|--------|------------------------------------------------|--------|
|                                                                     |   | **2002**                          |     | **2001**                         |   | **2002**                                       |   | **2001** |   | **January 31, 2002** |   |
| Revenue:                                                                 |   |                              |     |                             |   |                                           |   |   |   |   |   |
| Net Sales                                                                |   | $                                 | 191,866  |                             | $      | 164,707                                        |   | $ | 489,707 |   | $ | 344,437 |   | $ | 2,706,555 |   |
| Operating expenses:                                                      |   |                              |     |                             |   |                                           |   |   |   |   |   |
| Cost of sales and product  development                                   |   | 199,497                           |     | 189,778                          |   | 483,281                                        |   | 421,931 |   | 2,893,393 |   |
| Research and development                                                 |   | 154,272                           |     | 332,275                          |   | 449,788                                        |   | 895,366 |   | 9,565,669 |   |
| Sales and marketing                                                      |   | 334,955                           |     | 259,294                          |   | 1,158,003                                      |   | 827,457 |   | 5,733,735 |   |
| General and administrative                                               |   | 161,076                           |     | 147,503                          |   | 504,932                                        |   | 466,274 |   | 5,011,607 |   |
| Operating loss                                                           |   | (657,934                          | )        | (764,143                         | )      | (2,106,297                                     | )      | (2,266,591 | ) | (20,497,849 | ) |
| Other income:                                                            |   |                              |     |                             |   |                                           |   |   |   |   |   |
| Interest income                                                          |   | 19,048                            |     | 20,467                           |   | 104,700                                        |   | 103,360 |   | 1,843,603 |   |
| Other income                                                             |   | —                            |     | —                           |   | —                                         |   | — |   | 1,500,000 |   |
| Net Loss                                                                 |   | $                                 | (638,886 | )                                | $      | (743,676                                       | )      | $ | (2,001,597 | ) | $ | (2,163,231 | ) | $ | (17,154,246 | ) |
| Net loss per share — basic  and diluted                             |   | $                                 | (0.09    | )                                | $      | (0.14                                          | )      | $ | (0.30 | ) | $ | (0.39 | ) | $ | (5.52 | ) |
| Weighted average number of   shares outstanding — Basic and Diluted |   | 6,989,599                         |     | 5,449,596                        |   | 6,738,297                                      |   | 5,499,596 |   | 3,107,545 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

3

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Medwave, Inc.

(A Development Stage Company)

Statements of Cash Flows

* (Unaudited)*

 
|                                                                                     |   | **Three months ended January 31** |      | **Nine months ended January 31** |   | **Period from June 27, 1984 (Inception) to** |   |
|------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|----------------------------------|--------|----------------------------------------------|--------|
|                                                                                     |   | **2002**                          |      | **2001**                         |   | **2002**                                     |   | **2001** |   | **January 31, 2002** |   |
| **Operating  activities**                                                                |   |                              |      |                             |   |                                         |   |   |   |   |   |
| Net loss                                                                                 |   | $                                 | (638,886  | )                                | $      | (743,676                                     | )      | $ | (2,001,597 | ) | $ | (2,163,231 | ) | $ | (17,154,246 | ) |
| Adjustments to reconcile  net loss to  net cash provided (used) in operating activities: |   |                              |      |                             |   |                                         |   |   |   |   |   |
|                                                                                     |   |                              |      |                             |   |                                         |   |   |   |   |
| Depreciation                                                                             |   | 37,674                            |      | 36,207                           |   | 100,540                                      |   | 70,257 |   | 890,718 |   |
| Amortization                                                                             |   |                              |      | 2,657                            |   |                                         |   | 7,972 |   | 136,017 |   |
| Loss on sale of equipment                                                                |   |                              |      |                             |   |                                         |   |   |   | 7,375 |   |
| Issuance of Common Stock  for consulting services                                        |   |                              |      |                             |   |                                         |   |   |   |   |   |
|                                                                                     |   |                              |      |                             |   |                                         |   |   | 3,413 |   |
| Changes in operating assets  and liabilities:                                            |   |                              |      |                             |   |                                         |   |   |   |   |   |
| Accounts receivable                                                                      |   | 5,823                             |      | (11,187                          | )      | 75,257                                       |   | (28,714 | ) | (132,752 | ) |
| Inventories                                                                              |   | 120,531                           |      | (32,688                          | )      | 169,663                                      |   | (323,654 | ) | (297,969 | ) |
| Prepaid expenses                                                                         |   | (78,840                           | )         | (195,015                         | )      | 51,910                                       |   | (150,106 | ) | (141,699 | ) |
| Accounts payable and  accrued expenses                                                   |   | 98,802                            |      | (6,050                           | )      | (40,553                                      | )      | 94,287 |   | 235,334 |   |
| Accrued payroll and related  taxes                                                       |   | (2,885                            | )         | 30,758                           |   | 4,370                                        |   | 15,915 |   | 50,036 |   |
| Deferred income                                                                          |   | (54,943                           | )         | 79,586                           |   | (55,708                                      | )      | 218,001 |   | 143,982 |   |
| Net cash used in operating  activities                                                   |   | (512,724                          | )         | (839,408                         | )      | (1,696,118                                   | )      | (2,259,273 | ) | (16,259,791 | ) |
|                                                                                     |   |                              |      |                             |   |                                         |   |   |   |   |   |
| **Investing  activities**                                                                |   |                              |      |                             |   |                                         |   |   |   |   |   |
| Patent expenditures                                                                      |   | —                            |      | —                           |   | —                                       |   | — |   | (136,017 | ) |
| Purchase of investments                                                                  |   |                              |      |                             |   |                                         |   |   |   | (38,907,724 | ) |
| Sales and maturity of  investments                                                       |   |                              |      | 243,647                          |   |                                         |   | 1,631,918 |   | 38,908,724 |   |
| Purchase of property and  equipment                                                      |   | (326                              | )         | (2,723                           | )      | (55,701                                      | )      | (140,224 | ) | (1,015,218 | ) |
| Proceeds from sale of  equipment                                                         |   |                              |      |                             |   |                                         |   |   |   | 21,663 |   |
| Net cash provided (used) in  investing activities                                        |   | (326                              | )         | 240,924                          |   | (55,701                                      | )      | 1,491,694 |   | (1,128,572 | ) |
|                                                                                     |   |                              |      |                             |   |                                         |   |   |   |   |   |
| **Financing  activities**                                                                |   |                              |      |                             |   |                                         |   |   |   |   |   |
| Net proceeds from issuance  of Convertible Preferred Stock                               |   | —                            |      | —                           |   | —                                       |   | — |   | 4,848,258 |   |
| Net proceeds from issuance  of Common Stock                                              |   | —                            |      | —                           |   | 4,366,148                                    |   | — |   | 16,271,028 |   |
| Net cash provided by financing  activities                                               |   | —                            |      | —                           |   | 4,366,148                                    |   | — |   | 21,119,286 |   |
|                                                                                     |   |                              |      |                             |   |                                         |   |   |   |   |   |
| (Decrease) increase in cash  and cash equivalents                                        |   | (513,050                          | )         | (598,484                         | )      | 2,614,329                                    |   | (767,579 | ) | 3,730,918 |   |
| Cash and cash equivalents  at beginning of period                                        |   | 4,243,968                         |      | 986,829                          |   | 1,116,589                                    |   | 1,155,924 |   | — |   |
| Cash and cash equivalents  at end of period                                              |   | $                                 | 3,730,918 |                             | $      | 388,345                                      |   | $ | 3,730,918 |   | $ | 388,345 |   | $ | 3,730,918 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

4

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Medwave, Inc.

(A Development Stage Company)

 

Notes To FinancialStatements

 

January  31, 2002

 

 

1.       **Description of Business**

 

Medwave,Inc. (the “Company”), a development stage company, is engaged exclusively inthe development, manufacturing and marketing of a proprietary, noninvasivesystem that continually monitors arterial blood pressure, and in thedevelopment of related technology and products.

 

2.       **Basis of Presentation**

 

          The financialinformation presented as of January 31, 2002 has been prepared from the booksand records without audit.  Financialinformation as of April 30, 2001 is based on audited financial statements ofthe Company but does not include all disclosures required by generally acceptedaccounting principles.  In the opinionof management, all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of the financial information forthe 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’sAnnual Report on Form 10-K for the fiscal year ended April 30, 2001.

 

3.       **Shareholders’ Equity**

 

**         **On June 13, 2001, theCompany completed the sale of 1,212,865 shares of its Common Stock in thesecond and final round of the private placement at a price of $4.25 per share,resulting in net proceeds of approximately $4.4 million.  In connection with this round of the privateplacement, the Company issued warrants to purchase 1,334,151 shares of CommonStock at an exercise price of $4.25 per share. The warrants expire in June 2006.

 

          The March 2001 round ofthe private placement contains a “look-back” provision in which theparticipants can receive up to approximately 303,410 additional shares for noadditional consideration in the event that certain conditions exist atspecified dates through July 2002.  Asof January 31, 2002, certain shareholders have exercised their “look-back”rights requiring the Company to issue 269,657 of such additional shares.  As of January 31, 2002, those shares havenot been issued but the Company expects the shares will be issued by March 31,2002.

 

**ITEM 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operation**

 

The following discussion should be read in conjunction with, and isqualified by, the Company’s financial statements set forth in Item 1 of thisForm 10-Q.

 

**General**

 

The Company, which was formed in 1984, is a development stage companythat currently employs seventeen full-time employees.  Since the Company’s inception, we have been engaged exclusivelyin the development of devices for monitoring and devices for measuring bloodpressure.  Utilizing the Company’sproprietary technology, The Company developed the Vasotrac® APM205Asystem which monitors blood pressure, providing new readings approximatelyevery fifteen heartbeats.  The Companybelieves that the continual blood pressure readings and non-invasive qualitiesof the Vasotrac system make it the most advanced approach to blood pressuremonitoring.  In February 1995, wereceived clearance from the US Food and Drug Administration (FDA) to market theVasotrac system.  The Company has alsodeveloped a hand-held blood pressure monitor, the VasotraxTM.  This hand-held monitor is based on thetechnology used in the Vasotrac system. In June 2000, a 510(k) notification was submitted to the FDA for reviewof the Vasotrax hand-held monitor.  InAugust 2000, the FDA clearance was received, which has allowed the marketing tobegin with the Vasotrax in the United States for use on adult patients bytrained medical personnel.  In addition,and as a result of our supplier agreement with Nihon Kohden of Japan, we aredeveloping a module of our Vasotrac continual non-invasive blood pressuremonitor. The module is designed to be integrated into the other company’slarger, more comprehensive systems.

 

 

5

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The Company has incurred an accumulated deficit of $17,781,006 from theinception through January 31, 2002.  Anadditional loss from development, testing, regulatory compliance, sales, andother expenses is expected to incur at least until we emerge from thedevelopment stage.

 

The Company has focused on building a dealernetwork so that nationwide and ultimately worldwide sales coverage can besought after without the commensurate increase in sales staff and cost thatwould occur if the same coverage were sought by building an employee basedsales force.  In October 2000, hiring beganwith a core team of sales professionals to work with the dealer network.  The success of the product sales will dependupon the ability of dealers and/or sales professionals to sell the products tothe pre-hospital (EMT/EMS) environment, hospitals, the post-hospitalenvironment such as physician offices, and other markets.  At this time, the dealers have notdemonstrated that they will be successful. However, within the past several months the number has been expanded andbroadened the type of dealers with which we are working with.

 

The Company’s success is dependent upon the successful development andmarketing of the Vasotrac system, the Vasotrac module, and the Vasotraxhand-held monitor as well as related technology.  However, there can be no assurance that our products or relatedtechnology will be successfully marketed or sold in sufficient quantities andat margins necessary to achieve or maintain profitability.

 

In late December 1999, The Company enteredinto an exclusive distribution agreement with 3Ci of Atlanta, Georgia, ahospital - based distributor sales company with nationwide coverage forcritical care departments, for selling the Vasotrac system to the hospitalmarket in the United States.  The Companyconverted this agreement to a non-exclusive distribution agreement in December2000 so that it could increase the number of the direct sales employees andexpand the distribution network.  Inaddition, in the fall of 2000,   anon-exclusive agreement was entered into with 3Ci for the sale of the Vasotraxhand-held monitor to the hospital market in the United States.  In March 2001, Allegiance Healthcare —Respiratory Care acquired 3Ci.

 

Between February 2000 and January 2002 theCompany entered into several international distribution agreements in Austria,Canada, China, Germany, Hong Kong, Italy, Japan, Norway, South Korea, SouthAfrica, Pakistan, Australia,  Spain,Sweden, the United Kingdom, and Taiwan. In October 2001, the requirements werecompleted for, and were granted, ISO 9001 certification, allowing sales intoEuropean Union countries and display the CE mark on all of Medwave’sproducts.  In January 2001, thenecessary clearances were received to be able to sell into the Canadian market.  Although a distribution agreement has been inplace in South Korea, currently the Company is exploring additionaldistribution alternatives due to low initial market penetration and localconcerns in the South Korean healthcare market.  Notification in the spring of 2001, that South Korean governmentclearance was received to market the Vasotrac system in South Korea.

 

In June 2000, an agreement was signed fordistribution of the Vasotrac system with Nihon Kohden of Tokyo, Japan.  Nihon Kohden is a very well known medicaldevice company in the Japanese market, with close to 50% market share inpatient monitoring.  During January2002, we were granted the Japanese Ministry of Health and Welfareclearance.  This now allows us the tosell the Vasotrac monitor into the Japanese market in conjunction with NihonKohden.  As part of the agreement withNihon Kohden, Nihon Kohden issued a purchase order valued at $250,000, whichthe Company has started to fill with the shipment of monitors in January 2002.

 

InSeptember 2000, the Company also signed an OEM module agreement with NihonKohden that calls for Medwave to develop and produce a Vasotrac module thatwill be integrated into the Nihon Kohden patient monitoring product family. Asa part of this agreement, Nihon Kohden placed an initial order for Vasotrac OEMmodules, to be delivered over the initial 18 months, and paid a down payment of$125,000, which has been treated as deferred revenue on our financialstatements. In November 2001, the first Vasotrac module prototype products wereship to Nihon Kohden.  During February2002, additional modules were shipped. The Company will continue to ship modules to Nihon Kohden once Ministryof Health and Welfare clears the Vasotrac module, because it is to beconsidered a component of Nihon Koden’s products.  This is the reason why the Vasotrac module requires separateclearance.  In discussions with NihonKohden it is anticipate that these approvals may be granted later this year.

 

The Company is currently adding its own salesemployees to work with the dealers in order to provide better productsupport.  Currently it is anticipatedthat a direct sales force of approximately 10 employees will work with andsupport a distribution network focused on the pre-hospital, hospital, andpost-hospital environments.  Also currentlythe Company is looking for a distribution partner for the Vasotrax hand-heldmonitor outside the hospital market. The success of the product sales will depend upon the ability of dealersand/or sales representatives to sell the products to the hospitals, theiraffiliates, and other markets. Over the past several months, the Company hasentered into several regional distribution agreements with specialtydistribution companies.

 

 

6

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The initial response regarding the Vasotraxhand-held monitor from focus groups and limited showings has also beenfavorable.  However, it may be requiredto establish additional distribution arrangements, and complement thosearrangements with a number of “in-house” experts.  The Vasotrax hand-held product will be targeted at thepre-hospital (EMT and EMS) market, the hospital market, and the post-hospitalmarkets (sub-acute, skilled nursing homes, homecare, and physician offices).

 

The Company’s ability to emerge from the development stage is alsodependent on its ability to hire additional employees for key operatingpositions, including sales and marketing positions.  Competition for such employees is intense and there can be noassurance that it will be successful in hiring such employees on acceptableterms or when required, or in maintaining the services of its presentemployees.  The Company preliminarilyestimates that these additional employees will increase employee-related expensesin excess of $500,000 over the next several quarters.

 

TheCompany is using cash and cash equivalents primarily to increase our sales andmarketing efforts and increase awareness of Medwave and its technology in themarket, to continue clinical testing of the Vasotrac system, Vasotrax hand-heldmonitor and related technologies, to continue to validate the technologyagainst traditionally used blood pressure monitoring devices, to createpeer-to-peer consensus regarding Medwave’s technology, and to provide workingcapital.  Over the next twelve months,the Company expects to spend in excess of $700,000 for research anddevelopment.  Specifically, the expecteduse of funds to develop alternative sensors (including sensors for use oninfants, and disposable sensors), to sustain engineering support formanufacturing, to continue development of the Vasotrax hand-held monitor, andto develop the Vasotrac OEM module. During the next 12 months, it is not expected to spend any materialamount on equipment in connection with these initiatives.  Even assuming only limited sales, we believethat our cash and cash equivalents should allow us to meet our cashrequirements for approximately 16 months from January 31, 2002.  Since last July, the Company started toimplement cost containment efforts, including hiring sales people with lessfixed income, eliminating high cost positions and outsourcing these functionsand streamlining our R&D expenses. If the development process for the products does not proceed as expectedbecause significant product design changes are required to achieve marketacceptance, unexpected difficulties are encountered in attaining cost-effectivemanufacturability, the sales and marketing costs are higher than expected, orthe products are not accepted by the market place, the Company may requireadditional capital at an earlier date. The Company may seek such capital through bank borrowing, equipmentfinancing, equity financing, and other methods.  The financing needs are subject to change depending on, amongother things, market conditions and opportunities, equipment or otherasset-based financing that may be available, and cash flow fromoperations.  Any material favorable orunfavorable deviation from the anticipated expense could significantly affectthe timing and amount of additional financing that may be required.  However, additional financing may not beavailable when needed or, if available, may not be on terms that are favorableto The Company or our security holders. In addition, any such financing could result in substantial dilution tothe existing security holders.

 

 

7

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**Results ofOperations**

 

The results of operations compares the three months and nine monthsended January 31, 2002 and 2001, respectively. The analysis of liquidity and capital resources compares January 31,2002 to April 30, 2001.

 

Operatingrevenue was $191,900 and $164,700 for the quarter ended January 31, 2002 and2001, respectively. Operating revenue was $489,700 and $344,300 for the ninemonths ended January 31, 2002 and 2001, respectively.  The operating revenue increase was attributed to the increase ofboth direct sales employees and specialty distribution companies, and ourability to ship backlog in Europe and Japan as a result of recent regulatoryclearances.

 

Cost of sales and product development was $199,500 and $189,800 for thequarter ended January 31, 2002 and 2001, respectively.  Cost of sales and product development was$483,300 and $421,900 for the nine months ended January 31, 2002 and 2001,respectively.  The cost of sales andproduct development increase for the quarter ended January 31, 2002, and theincrease for nine months ended January 31, 2002 was attributed to an increasein unit sales during the third quarter and the cost of increasing production ofthe Vasotrac.

 

TheCompany incurred $154,300 and $332,300 for research and development expensesfor the quarter ended January 31, 2002 and 2001 respectively. The Companyincurred $449,800 and $895,400 for research and development expenses for thenine months ended January 31, 2002 and 2001, respectively.  The research and development expensedecrease for the nine months was attributed to the completion of numerousdevelopment projects, including pediatric applications, the NIA V-Line Interface,and High Motion Tolerant Software.

 

The Company incurred $335,000 and $259,300 for sales and marketingexpenses for the quarter ended January 31, 2002 and 2001, respectively.   The Company incurred $1,158,000 and$827,500 for sales and marketing expenses for the nine months ended January 31,2002 and 2001, respectively.  The salesand marketing expense increase was attributable to the increase in the numberof sales representatives employed by the Company and increased marketingactivities.

 

The Company incurred $161,100 and $147,500 for general andadministrative expenses for the quarter ended January 31, 2002 and 2001,respectively. The Company incurred $505,000 and $466,300 for the nine monthsended January 31, 2002 and 2001, respectively. The increase in general andadministrative expenses was attributable to higher insurance costs.

 

Interest income was $19,000 and $20,467 for the quarter ended January31, 2002 and 2001, respectively. Interest income was $104,700 and $103,400 for the nine months endedJanuary 31, 2002 and 2001, respectively.

 

**Liquidityand Capital Resources**

 

TheCompany’s cash and cash equivalents were $3,731,000 and $388,300 at January 31,2002 and January 31, 2001, respectively.

 

With the cash and cash equivalents, and short and long-terminvestments, the Company believes that sufficient liquidity is available tosatisfy its working capital needs for approximately sixteen months from January31, 2002.  The Company has nosignificant capital expenditure commitments.

 

 

Cash flows used in operations decreased to $513,000 for the quarterended January 31, 2002 from $839,400 for the quarter ended January 31, 2001, adecrease of $326,400.  In both periods,we used cash flows primarily to fund operating losses, which were partiallyoffset by non-cash expense for depreciation. The primary source of cash in operations for the quarter ended January31, 2002 was from decreases in deferred revenue and prepaid expenses.  A decrease in inventory and an increase inaccounts payable were the primary source of cash from operations for thequarter ended January 31, 2002.

 

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Net investing activities provided nothing for the quarter ended January31, 2002 and $240,900 for the quarter ended January 31, 2001 primarily due tothe conversion of marketable securities into cash, which was used foroperations.

 

Financing activities provided nothing for the quarter ended January 31,2002, and nothing for the quarter ended January 31, 2001.

 

 

 

**ITEM 3.    Quantitative and Qualitative DisclosuresAbout Market Risk**

   Not applicable.

 

**PART II.                OTHERINFORMATION**

 

 

**ITEM 1.  LegalProceedings**

**  **Not applicable.

 

**ITEM 2.  ChangesIn Securities And Use Of Proceeds**

   Not applicable.

 

**ITEM 3.  DefaultsUpon Senior Securities**

   Not applicable.

 

**ITEM 4.  SubmissionOf Matters To A Vote Of Security Holders**

   Not applicable.

 

 

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**ITEM 5.  OtherInformation**

 

Statementsmade in this report that are stated as expectations, plans, anticipations,prospects or future estimates or which otherwise look forward in time areconsidered “forward-looking statements” and involve a variety of risks anduncertainties, known and unknown, which are likely to affect the actualresults.  The following factors, amongothers, as well as factors discussed in the Company’s other filings with theSEC, have affected and, in the future, could affect the Company’s actualresults:  resistance to the acceptanceof new medical products, the market acceptance of the Vasotrac system, theVasotrax hand-held unit or other products of the Company, hospital budgetingcycles, the possibility of adverse or negative commentary from clinicalresearchers or other users of the Company’s products, the Company’s success increating effective distribution channels for its products, the Company’sability to scale up its manufacturing process, and delays in productdevelopment or enhancement or regulatory approval.  Consequently, no forward-looking statement can be guaranteed andactual results may vary materially.

 

 

**ITEM 6.  ExhibitsAnd Reports On Form 8-K**

 

                (A)          EXHIBITS:

                                NONE

 

                (B)           REPORTS ON FORM 8-K:

                                          Noreports on Form 8-K were filed by the Company during the quarter ended January31, 2002

 

 

 

 

**SIGNATURES**

 

 

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 

 

| Date:   March 15, 2002 | Medwave, Inc. |
|----------------------------------|---------------|
|                             |          |   |
|                             | By:           |    /s/ Timothy J. O’Malley |
|                             |          | Timothy J. O’Malley |
|                             |          | President and Chief  Executive |
|                             |          | (principal financial &  chief accounting officer) |

 

 

 

 

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