##### 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 March 31, 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 _______________
  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 StatementsBalance Sheets  March 31, 2007 (unaudited) and September 30, 2006
    
    
    3Statements of Operations (unaudited)  Three and Six Months Ended March 31, 2007 and 2006
    
    
    4Statements of Cash Flows (unaudited)  Six Months Ended March 31, 2007 and 2006
    
    
    5Notes to Unaudited Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 1A. Risk Factors
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 6. Exhibits
    
    
    19Signatures
    
    
    21CertificationCertification
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PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 2




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March 31
    
    
    September 302007
    
    
    2006(unaudited)
    
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,211,490
    
    
    $
    4,698,115Accounts receivable, net
    
    
    98,962
    
    
    
    154,146Inventories, net
    
    
    754,075
    
    
    
    860,435Prepaid expenses and other current assets
    
    
    98,740
    
    
    
    113,112Total current assets
    
    
    3,163,267
    
    
    
    5,825,808Property and equipment:Research and development equipment
    
    
    46,295
    
    
    
    36,814Office equipment
    
    
    177,465
    
    
    
    175,011Manufacturing and engineering equipment
    
    
    597,966
    
    
    
    599,592Sales and marketing equipment
    
    
    82,264
    
    
    
    71,540Leasehold improvements
    
    
    71,109
    
    
    
    71,109Demonstration equipment
    
    
    25,418
    
    
    
    25,4181,000,517
    
    
    
    979,484Accumulated depreciation
    
    
    (590,941
    )
    
    
    (528,837
    )Property and equipment, net
    
    
    409,576
    
    
    
    450,647Total assets
    
    $
    3,572,843
    
    
    $
    6,276,455Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    194,192
    
    
    $
    557,405Accrued expenses
    
    
    367,014
    
    
    
    843,573Accrued payroll and other related expenses
    
    
    82,152
    
    
    
    95,062Deferred revenue
    
    
    61,358
    
    
    
    75,713Total current liabilities
    
    
    704,716
    
    
    
    1,571,753Stockholders equity:Common stock, .01 par value:Authorized shares50,000,000Issued and outstanding shares-
March 31, 2007 -13,104,280
September 30, 2006 -13,094,280
    
    
    131,042
    
    
    
    130,942Additional paid in capital
    
    
    39,060,073
    
    
    
    38,907,977Accumulated deficit
    
    
    (36,322,988
    )
    
    
    (34,334,217
    )Total stockholders equity
    
    
    2,868,127
    
    
    
    4,704,702Total liabilities and stockholders equity
    
    $
    3,572,843
    
    
    $
    6,276,455
 The accompanying notes are an integral part of these unaudited financial statements.
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(Unaudited)
 Three months ended March 31
    
    
    Six months ended March 312007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Net sales
    
    $
    252,327
    
    
    $
    522,109
    
    
    $
    465,011
    
    
    $
    769,695Operating expenses:Cost of sales and production
    
    
    274,951
    
    
    
    393,378
    
    
    
    572,296
    
    
    
    559,849Research and development
    
    
    138,154
    
    
    
    239,254
    
    
    
    316,788
    
    
    
    468,596Sales and marketing
    
    
    265,739
    
    
    
    520,791
    
    
    
    776,020
    
    
    
    997,393General and administrative
    
    
    356,316
    
    
    
    526,103
    
    
    
    861,561
    
    
    
    941,550Total operating expenses:
    
    
    1,035,160
    
    
    
    1,679,526
    
    
    
    2,526,665
    
    
    
    2,967,388Operating loss
    
    
    (782,833
    )
    
    
    (1,157,417
    )
    
    
    (2,061,654
    )
    
    
    (2,197,693
    )Interest income
    
    
    29,830
    
    
    
    54,186
    
    
    
    72,883
    
    
    
    95,754Net loss
    
    $
    (753,003
    )
    
    $
    (1,103,231
    )
    
    $
    (1,988,771
    )
    
    $
    (2,101,939
    )Net loss per share  Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.09
    )
    
    $
    (0.15
    )
    
    $
    (0.18
    )Weighted average number of common and
common equivalent shares outstanding  basic and diluted
    
    
    13,104,280
    
    
    
    12,158,617
    
    
    
    13,101,643
    
    
    
    11,813,263
 The accompanying notes are an integral part of these financial statements.
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(Unaudited)
 Six months ended March 31,2007
    
    
    2006Operating activitiesNet loss
    
    $
    (1,988,771
    )
    
    $
    (2,101,939
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash share-based compensation expense
    
    
    144,796
    
    
    
    251,128Depreciation and amortization
    
    
    62,104
    
    
    
    54,251Changes in operating assets and liabilities:Accounts receivable
    
    
    55,184
    
    
    
    (56,956
    )Inventories
    
    
    106,360
    
    
    
    (196,011
    )Prepaid expenses and other current assets
    
    
    14,372
    
    
    
    (66,710
    )Accounts payable
    
    
    (363,213
    )
    
    
    453,957Accrued liabilities
    
    
    (489,469
    )
    
    
    (11,583
    )Deferred revenue
    
    
    (14,355
    )
    
    
    (649
    )Net cash used in operating activities
    
    
    (2,472,992
    )
    
    
    (1,674,512
    )Investing ActivitiesPurchase of property and equipment
    
    
    (21,033
    )
    
    
    (272,616
    )Net cash used in investing activities
    
    
    (21,033
    )
    
    
    (272,616
    )Financing ActivitiesProceeds from issuance of common stock
    
    
    7,400
    
    
    
    4,072,854Net cash provided by financing activities
    
    
    7,400
    
    
    
    4,072,854Decrease in cash and cash equivalents
    
    
    (2,486,625
    )
    
    
    2,125,726Cash and cash equivalents at beginning of period
    
    
    4,698,115
    
    
    
    5,424,078Cash and cash equivalents at end of period
    
    $
    2,211,490
    
    
    $
    7,549,804
 The accompanying notes are an integral part of these unaudited financial statements.
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1. Basis of Presentation
     6




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2. Inventories
  March 31,
    
    
    September 30,2007
    
    
    2006Raw materials
    
    $
    496,987
    
    
    $
    587,770Finished goods
    
    
    317,088
    
    
    
    332,665Obsolescence reserve
    
    
    (60,000
    )
    
    
    (60,000
    )Total
    
    $
    754,075
    
    
    $
    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
    
    
    
    
    
    
    
    
    
    
    144,796
    
    
    
    
    
    
    
    144,796Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,988,771
    )
    
    
    (1,988,771
    )Balance at March 31, 2007
    
    
    13,104,280
    
    
    $
    131,042
    
    
    $
    39,060,073
    
    
    $
    (36,322,988
    )
    
    $
    2,868,127
   7




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Three months ended March 31
    
    
    Six months ended March 312007
    
    
    2006
    
    
    2007
    
    
    2006Cost of sales and production
    
    $
    1,572
    
    
    $
    2,035
    
    
    $
    3,464
    
    
    $
    5,583Research and development
    
    
    10,033
    
    
    
    16,918
    
    
    
    20,519
    
    
    
    34,538Sales and marketing
    
    
    6,566
    
    
    
    26,385
    
    
    
    16,049
    
    
    
    57,195General and administrative
    
    
    52,288
    
    
    
    68,809
    
    
    
    104,764
    
    
    
    153,812Net share-based compensation expense
    
    $
    70,459
    
    
    $
    114,147
    
    
    $
    144,796
    
    
    $
    251,128Effect on loss per share
Basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
   Three months ended March 31
    
    
    Six months ended March 312007
    
    
    2006
    
    
    2007
    
    
    2006Expected option term (1)
    
    6.25 yrs
    
    
    5.88
    
    
    6.25 yrs
    
    
    5.88Expected volatility factor (2)
    
    
    85.07
    %
    
    
    66.50
    %
    
    
    85.07
    %
    
    
    66.50
    %Risk-free interest rate (3)
    
    
    4.54
    %
    
    
    4.38
    %
    
    
    4.67
    %
    
    
    4.38
    %Expected annual dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    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.
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Options OutstandingWeightedAverageWeighted
    
    
    RemainingNumber of
    
    
    Average
    
    
    ContractualShares
    
    
    Exercise Price
    
    
    TermBalance at September 30, 2006
    
    
    1,557,702
    
    
    $
    3.78
    
    
    
    5.9Granted
    
    
    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
    
    
    
    7.0
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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
    
    
    Price0.33 - 0.80
    
    
    
    
    
    
    450,000
    
    
    7.0 years
    
    $
    0.57
    
    
    
    200,000
    
    
    $
    0.741.14 - 1.60
    
    
    
    
    
    
    52,500
    
    
    5.4 years
    
    
    1.43
    
    
    
    52,500
    
    
    
    1.432.04 - 2.80
    
    
    
    
    
    
    125,000
    
    
    6.8 years
    
    
    2.12
    
    
    
    83,750
    
    
    
    2.083.00 - 4.75
    
    
    
    
    
    
    337,077
    
    
    7.4 years
    
    
    4.06
    
    
    
    200,394
    
    
    
    4.145.06 - 7.13
    
    
    
    
    
    
    21,000
    
    
    5.6 years
    
    
    6.88
    
    
    
    20,750
    
    
    
    6.898.94 - 9.13
    
    
    
    
    
    
    32,000
    
    
    1.0 years
    
    
    8.95
    
    
    
    32,000
    
    
    
    8.951,017,577
    
    
    7.0 years
    
    
    2.36
    
    
    
    589,394
    
    
    
    2.81
   WeightedNumber 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
    
    
    
    1.05
  10




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3. Accrued expenses
  March 31
    
    
    September 302007
    
    
    2006Accrued severance
    
    $
    
    
    
    $
    426,628Professional fees
    
    
    95,744
    
    
    
    87,047Customer refunds
    
    
    245,430
    
    
    
    173,150Contract settlement
    
    
    
    
    
    
    125,000Other
    
    
    25,840
    
    
    
    31,748$
    367,014
    
    
    $
    843,573
 4. Net Loss Per Share
  5. Recent Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes Accounting for Income
Taxes
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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
 Fusion TM TM TM TM TM
 Discontinuance of Primo TM
 Vasotrac® ® ® TM
 OEM module
 14




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Results of Operations
   Cost of Sales and Production
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of Sales and Production
    
    $
    275,000
    
    
    $
    393,400
    
    
    $
    572,300
    
    
    $
    559,800Percent change from previous year:Incr/-Decr
    
    
    -30.1
    %
    
    
    
    
    
    
    2.2
    %
  Research and Development
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Research and Development
    
    $
    138,200
    
    
    $
    239,300
    
    
    $
    316,800
    
    
    $
    468,600Percent change from previous year:Incr/-Decr
    
    
    -42.2
    %
    
    
    
    
    
    
    -32.4
    %
  Sales and Marketing
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales and Marketing
    
    $
    265,700
    
    
    $
    520,800
    
    
    $
    776,000
    
    
    $
    997,400Percent change from
previous year:Incr/-Decr
    
    
    -49.0
    %
    
    
    
    
    
    
    -22.2
    %
  15




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General and Administrative
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2006
    
    
    2007
    
    
    2006General and Administrative
    
    $
    356,300
    
    
    $
    526,100
    
    
    $
    861,600
    
    
    $
    941,500Percent change from previous
year:Incr/-Decr
    
    
    -32.3
    %
    
    
    
    
    
    
    -8.5
    %
   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 YEARS
    
    
    3-5 YEARSOperating lease commitments
    
    $
    372,200
    
    
    $
    113,000
    
    
    $
    230,200
    
    
    $
    29,000
 Critical Accounting Policies and Estimates
  Revenue Recognition.
 17




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Inventory Valuation.
 Warranty Reserves
 Income Taxes
  Stock-Based Compensation
   Impairment of Long-Lived Assets
  18




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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.
  Ramon Burton, our Chief Financial Officer, recently submitted his resignation which may adversely
impact our business.
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  20




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ITEM 6. Exhibits
  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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SIGNATURES
  Date: May 29, 2007
    Medwave, Inc.By:
    /s/ Frank A. KatarowFrank A. KatarowChief Executive Officer (interim)
(Principal Executive Officer and
Principal Accounting Officer) 
 22