**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.   20549**

** **

**FORM 10-Q**

** **

** **

**(Mark One)**

**ý****     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For the Quarterly Period Ended October 31,2001; or**

** **

**o****     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 whetherthe registrant:  (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period as theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý   No o

 

As of November 30, 2001, theissuer had 6,989,599 shares of Common Stock outstanding.

 

 

**Medwave, Inc.**

** **

**Form 10-Q**

** **

**INDEX**

 
| PART I.         | FINANCIAL INFORMATION                                                                                                                                                                      |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |                                                                                                                                                                                       |
|   Item 1.  | Financial Statements                                                                                                                                                                       |
|            |                                                                                                                                                                                       |
|            | Balance  Sheets - April 30, 2001 and October 31, 2001                                                                                                                                      |
|            |                                                                                                                                                                                       |
|            | Statements of Operations - Three Months Ended October 31, 2001 and  2000, Six Months Ended October 31, 2001 and 2000, and Period from June 27,  1984  (Inception) to October 31, 2001 |
|            |                                                                                                                                                                                       |
|            | Statements of Cash Flows - Three Months Ended October 31, 2001 and  2000, Six Months Ended October 31, 2001 and 2000 and Period from June 27,  1984 (Inception) to October 31, 2001        |
|            |                                                                                                                                                                                       |
|            | 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                                                                                                                                                           |

 

 

 

**PART I - FINANCIAL INFORMATION**

**ITEM 1.                  FinancialStatements**

** **

**Medwave, Inc.**

**(A Development Stage Company)**

** **

**BalanceSheets**

 
|                                             |   | **April 30,** |      | **October  31,** |   |
|--------------------------------------------------|--------|---------------|-----------|------------------|--------|
|                                             |   | **2001**      |      | **2001**         |   |
|                                             |   | (see note 2)  |      | (unaudited)      |   |
| **Assets**                                       |   |          |      |             |   |
| Current  Assets:                                 |   |          |      |             |   |
| Cash and cash equivalents                        |   | $             | 1,116,589 |             | $      | 4,243,968 |   |
| Accounts receivable                              |   | 208,009       |      | 138,575          |   |
| Inventories                                      |   | 467,632       |      | 418,500          |   |
| Prepaid expenses                                 |   | 193,609       |      | 62,859           |   |
| Total  current assets                            |   | 1,985,839     |      | 4,863,902        |   |
|                                             |   |          |      |             |   |
| Investments                                      |   |          |      |             |   |
|                                             |   |          |      |             |   |
| Property  and equipment:                         |   |          |      |             |   |
| Research and development equipment               |   | 218,292       |      | 209,524          |   |
| Office Equipment                                 |   | 113,086       |      | 103,678          |   |
| Manufacturing and engineering equipment          |   | 285,504       |      | 282,158          |   |
| Sales and marketing equipment                    |   | 54,269        |      | 104,393          |   |
| Leasehold improvements                           |   | 31,613        |      | 31,613           |   |
|                                             |   | 702,764       |      | 731,366          |   |
| Accumulated depreciation                         |   | (557,813      | )         | (593,905         | )      |
|                                             |   | 144,951       |      | 137,461          |   |
|                                             |   |          |      |             |   |
|                                             |   |          |      |             |   |
| Total  Assets                                    |   | $             | 2,130,790 |             | $      | 5,001,363 |   |
|                                             |   |          |      |             |   |
| **Liabilities and shareholders' equity**         |   |          |      |             |   |
| Current  liabilities:                            |   |          |      |             |   |
| Accounts payable                                 |   | $             | 278,887   |             | $      | 139,532 |   |
| Accrued payroll                                  |   | 45,666        |      | 52,921           |   |
| Deferred revenue                                 |   | 199,690       |      | 198,925          |   |
| Total  current liabilities                       |   | 524,243       |      | 391,378          |   |
|                                             |   |          |      |             |   |
| 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                       |   |          |      |             |   |
| October 31, 2001 - 6,989,599                     |   |          |      |             |   |
| Deficit accumulated during the development stage |   | (15,779,409   | )         | (17,142,119      | )      |
| Total  shareholders' equity                      |   | 1,606,547     |      | 4,609,985        |   |
|                                             |   |          |      |             |   |
| Total  liabilities and shareholders' equity      |   | $             | 2,130,790 |             | $      | 5,001,363 |   |

 

*The accompanying notes are an integral part of thesefinancial statements.*

 

 

**Medwave, Inc.**

**(A Development Stage Company)**

** **

**Statementsof Operations**

*(Unaudited)*

 
|                                                                        |   |                               |     |                             |   |       |   |       |       | **Period  from**      |   |
|-----------------------------------------------------------------------------|--------|------------------------------------|----------|----------------------------------|--------|------------|--------|------------|------------|-----------------------|--------|
|                                                                        |   |                               |     |                             |   |       |   |       |       | **June 27,  1984**    |   |
|                                                                        |   |                               |     |                             |   |       |   |       |       | **(Inception)**       |   |
|                                                                        |   | **Three  months ended October 31** |     | **Six months  ended October 31** |   | **to**     |   |
|                                                                        |   | **2001**                           |     | **2000**                         |   | **2001**   |   | **2000**   |       | **October  31, 2001** |   |
| Revenue:                                                                    |   |                               |     |                             |   |       |   |       |       |                  |   |
| Net Sales                                                                   |   | $                                  | 124,949  |                             | $      | 95,250     |   | $          | 297,840    |                  | $      | 179,730 |   | $ | 2,514,689 |   |
|                                                                        |   |                               |     |                             |   |       |   |       |       |                  |   |
| Operating expenses:                                                         |   |                               |     |                             |   |       |   |       |       |                  |   |
| Cost of sales and product development                                       |   | 125,887                            |     | 105,694                          |   | 283,782    |   | 232,152    |       | 2,693,896             |   |
| Research and development                                                    |   | 161,599                            |     | 303,088                          |   | 295,516    |   | 563,091    |       | 9,411,397             |   |
| Sales and marketing                                                         |   | 410,867                            |     | 323,558                          |   | 823,048    |   | 568,162    |       | 5,398,780             |   |
| General and administrative                                                  |   | 172,083                            |     | 146,089                          |   | 343,855    |   | 318,773    |       | 4,850,531             |   |
| Operating loss                                                              |   | (745,487                           | )        | (783,179                         | )      | (1,448,361 | )      | (1,502,448 | )          | (19,839,915           | )      |
|                                                                        |   |                               |     |                             |   |       |   |       |       |                  |   |
| Other income:                                                               |   |                               |     |                             |   |       |   |       |       |                  |   |
| Interest income                                                             |   | 47,840                             |     | 32,692                           |   | 85,651     |   | 82,894     |       | 1,824,555             |   |
| Other income                                                                |   | -                                  |     | -                                |   | -          |   | -          |       | 1,500,000             |   |
| Net Loss                                                                    |   | $                                  | (697,647 | )                                | $      | (750,487   | )      | $          | (1,362,710 | )                     | $      | (1,419,554 | ) | $ | (16,515,360 | ) |
|                                                                        |   |                               |     |                             |   |       |   |       |       |                  |   |
| Net loss per share - basic and diluted                                      |   | $                                  | (0.10    | )                                | $      | (0.14      | )      | $          | (0.20      | )                     | $      | (0.26 | ) | $ | (5.41 | ) |
| Weighted average number of common and common equivalent shares  outstanding |   | 6,942,286                          |     | 5,499,596                        |   | 6,653,157  |   | 5,499,596  |       | 3,051,241             |   |

 

*The accompanying notes are an integral partof these financial statements.*

 

 

**Medwave, Inc.**

**(A Development Stage Company)**

** **

**Statementsof Cash Flows**

*(Unaudited)*

 
|                                                                                   |   |                             |       |       |   | **Period  from**      |   |
|----------------------------------------------------------------------------------------|--------|----------------------------------|------------|------------|--------|-----------------------|--------|
|                                                                                   |   |                             |       |       |   | **June 27,  1984**    |   |
|                                                                                   |   |                             |       |       |   | **(Inception)**       |   |
|                                                                                   |   | **Six  months ended October 31** |       | **to**     |   |
|                                                                                   |   | **2001**                         |       | **2000**   |   | **October  31, 2001** |   |
| **Operating activities**                                                               |   |                             |       |       |   |                  |   |
| Net loss                                                                               |   | $                                | (1,362,710 | )          | $      | (1,419,554            | )      | $ | (16,515,360 | ) |
| Adjustments to reconcile net loss to net cash provided (used in  operating activities) |   |                             |       |       |   |                  |   |
| Depreciation                                                                           |   | 62,865                           |       | 34,050     |   | 853,039               |   |
| Amortization                                                                           |   | ---                              |       | 5,314      |   | 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                                                                    |   | 69,434                           |       | (17,527    | )      | (138,575              | )      |
| Inventories                                                                            |   | 49,132                           |       | (290,966   | )      | (418,500              | )      |
| Prepaid expenses                                                                       |   | 130,750                          |       | 44,909     |   | (62,859               | )      |
| Accounts payable and accrued expenses                                                  |   | (139,355                         | )          | 100,337    |   | 136,532               |   |
| Accrued payroll and related taxes                                                      |   | 7,255                            |       | (14,843    | )      | 52,921                |   |
| Deferred income                                                                        |   | (765                             | )          | 138,415    |   | 198,925               |   |
| Net cash used in operating activities                                                  |   | (1,183,394                       | )          | (1,419,865 | )      | (15,747,072           | )      |
|                                                                                   |   |                             |       |       |   |                  |   |
| **Investing activities**                                                               |   |                             |       |       |   |                  |   |
| Patent expenditures                                                                    |   | ---                              |       | ---        |   | (136,017              | )      |
| Purchase of investments                                                                |   | ---                              |       | ---        |   | (38,907,724           | )      |
| Sales and maturity of investments                                                      |   | ---                              |       | 1,388,271  |   | 38,908,724            |   |
| Purchase of property and equipment                                                     |   | (55,375                          | )          | (137,501   | )      | (1,014,892            | )      |
| Proceeds from sale of equipment                                                        |   | ---                              |       | ---        |   | 21,663                |   |
| Net cash provided (used) in investing activities                                       |   | (55,375                          | )          | 1,250,770  |   | (1,128,246            | )      |
|                                                                                   |   |                             |       |       |   |                  |   |
| **Financing activities**                                                               |   |                             |       |       |   |                  |   |
| Net proceeds from issuance ofConvertible 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                                       |   | 3,127,379                        |       | (169,095   | )      | 4,243,968             |   |
| Cash and cash equivalents at beginning of period                                       |   | 1,116,589                        |       | 1,155,924  |   | ---                   |   |
| Cash and cash equivalents at end of period                                             |   | $                                | 4,243,968  |       | $      | 986,829               |   | $ | 4,243,968 |   |

 

*The accompanying notes are an integral partof these financial statements.*

 

 

**Medwave, Inc.**

**(A Development Stage Company)**

** **

**NotesTo Financial Statements**

 

October 31, 2001

 

 

1.       **Descriptionof Business**

 

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

 

2.       **Basis ofPresentation**

 

          Thefinancial information presented as of October 31, 2001 has been prepared fromthe books and records without audit. Financial information as of April 30, 2001 is based on audited financialstatements of the Company but does not include all disclosures required bygenerally accepted accounting principles. In the opinion of management, all adjustments, consisting only of normalrecurring adjustments, necessary for a fair presentation of the financialinformation for the periods indicated have been included.  For further information regarding theCompany’s accounting policies, refer to the financial statements and relatednotes included in the Company’s Annual Report on Form 10-K for the fiscal yearended April 30, 2001.

 

3.       **Shareholders’Equity**

 

**         **OnJune 13, 2001, the Company completed the sale of 1,212,865 shares of its CommonStock in the second 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. In October, 2001, the Company issued,at no added charge, 68,013 additional shares of common stock to satisfyrequirements of the first offering in March, 2001.

 

 

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

 

The following discussion should be read inconjunction with, and is qualified by, the Company’s financial statements setforth in Item 1 of this Form 10-Q.

 

**General**

 

The Company, which was formed in 1984, is adevelopment stage company that currently employs seventeen full-timeemployees.  Since our inception, we havebeen engaged exclusively in the development of devices for monitoring anddevices for measuring blood pressure. Utilizing our proprietary technology, we developed the Vasotrac®APM205A system which monitors blood pressure, providing new readingsapproximately every fifteen heartbeats. We believe that the continual blood pressure readings and non-invasivequalities of the Vasotrac system make it the most advanced approach to bloodpressure monitoring.  In February 1995,we received clearance from the US Food and Drug Administration (FDA) to marketthe Vasotrac system.  We have 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, we submitted a 510(k) notification to the FDA for reviewof the Vasotrax hand-held monitor.  InAugust 2000, we received FDA clearance, which has allowed us to begin marketingthe Vasotrax in the United States for use on adult patients by trained medicalpersonnel.  In addition, and as a resultof our supplier agreement with Nihon Kohden of Japan, we are developing amodule of our Vasotrac continual non-invasive blood pressure monitor. Themodule is designed to be integrated into the other company’s larger, morecomprehensive systems.

We have incurred an accumulated deficit of$17,142,119 from our inception through October 31, 2001.  We expect to incur additional losses fromdevelopment, testing, regulatory compliance, sales, and other expenses at leastuntil we emerge from the development stage.

 

We have focused on building a dealer networkso that we can seek nationwide and ultimately worldwide sales coverage withoutthe commensurate increase in sales staff and cost that would occur if the samecoverage were sought by building our own employee sales force.  In October 2000, we also began hiring a coreteam of sales professionals to work with the dealer network.  The success of our 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, our dealers have notdemonstrated that they will be successful. However, over the past several quarters we have expanded the number andbroadened the type of dealers with which we are working.

 

Our success is dependent upon the successful development and marketingof the Vasotrac system, the Vasotrac module, and the Vasotrax hand-held monitoras well as related technology.  However,there can be no assurance that our products or related technology will besuccessfully marketed or sold in sufficient quantities and at margins necessaryto achieve or maintain profitability.

 

In late December 1999, we entered into anexclusive distribution agreement with 3Ci of Atlanta, Georgia, a hospital -based distributor sales company with nationwide coverage for critical caredepartments, for selling our Vasotrac system to the hospital market in theUnited States.  We converted thisagreement to a non-exclusive distribution agreement in December 2000 so that wecould increase the number of our direct sales employees and expand ourdistribution network.  In addition, inthe fall of 2000, we entered into a non-exclusive agreement with 3Ci for thesale of the Vasotrax hand-held monitor to the hospital market in the UnitedStates.  In March 2001, AllegianceHealthcare – Respiratory Care acquired 3Ci. At this point, however, we areunable to determine what effect, if any, the Allegiance Healthcare acquisitionof 3Ci will have on distribution and sales of our products through this saleschannel, or the ongoing relationship of the parties.

 

Between February 2000 and October 2001 weentered into several international distribution agreements in Austria, Canada,China, Germany, Hong Kong, Italy, Japan, Norway, South Korea, Spain, Sweden,the United Kingdom, and Taiwan.  In theAsian markets, we are currently working with the distributors to obtain thenecessary government clearances to be able to sell our Vasotrac system andVasotrax hand-held monitor in those countries. In August 2000, we received the CE mark allowing us to sell the Vasotracsystem in European Union countries. In October 2001, we completed therequirements for, and were granted,  ISO9001 certification, allowing us to sell into European Union countries anddisplay the CE mark on all of our products. In January 2001, we received thenecessary clearances to be able to sell into the Canadian market.  Although we have a distribution agreement inplace in South Korea, we are currently exploring additional distributionalternatives due to low initial market penetration and local concerns in theSouth Korean healthcare market.  We werenotified in the spring of 2001, that we received South Korean governmentclearance to market the Vasotrac system in South Korea.

 

In June 2000, we signed an agreement 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.  We have worked withNihon Kohden to prepare the necessary requirements to obtain Ministry of Healthclearance, which is required prior to sales commencing in the Japanesemarket.  As part of our agreement withNihon Kohden, Nihon Kohden issued a purchase order to us valued at $250,000,which will be completely fulfilled at the time of Ministry of Healthclearance.  Nihon Kohden prepaid aportion of this order, which has been treated as deferred revenue on ourfinancial statements.

InSeptember 2000, we also signed an OEM module agreement with Nihon Kohden thatcalls for us to develop and produce a Vasotrac module that will be integratedinto the Nihon Kohden patient monitoring product family. As a part of thisagreement, Nihon Kohden placed an initial order for Vasotrac OEM modules, to bedelivered over the initial 18 months, and paid us a down payment of $125,000,which has been treated as deferred revenue on our financial statements. InNovember 2001, we shipped our first Vasotrac module prototype products to NihonKohden.

 

We are currently adding our own salesemployees to work with the dealers in order to provide better productsupport.  We currently anticipate adirect sales force of approximately 10 employees that will work with andsupport a distribution network focused on the pre-hospital, hospital, andpost-hospital environments.  We are alsocurrently looking for a distribution partner for the Vasotrax hand-held monitoroutside the hospital market.  Thesuccess of our product sales will depend upon the ability of dealers and/orsales representatives to sell the products to the hospitals, their affiliates,and other markets. Over the past several months, we have entered into severalregional distribution agreements with specialty distribution companies.

 

The initial response regarding our Vasotraxhand-held monitor from focus groups and limited showings has also beenfavorable.  However, we may need toestablish 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 thedevelopment stage is also dependent on our ability to hire additional employeesfor key operating positions, including sales and marketing positions.  Competition for such employees is intenseand there can be no assurance that we will be successful in hiring suchemployees on acceptable terms or when required, or in maintaining the servicesof our present employees.  Wepreliminarily estimate that these additional employees will increase employee-relatedexpenses in excess of $300,000 during the next twelve months.  However, such requirements are subject tochange and are highly dependent on the development process for the system,including the manufacturing scale-up process, market acceptance, and ourdistribution methods.

 

Weare using cash and cash equivalents primarily to increase our sales andmarketing efforts, to increase awareness of Medwave and our technology in themarket, to continue clinical testing of the Vasotrac system, Vasotrax hand-heldmonitor and related technologies, to continue to validate our 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,we expect to spend approximately $600,000 for research and development.  Specifically, we expect to use the funds todevelop alternative sensors (including sensors for use on pediatrics, anddisposable sensors), to sustain engineering support for manufacturing, tocontinue development of the Vasotrax hand-held monitor, and to develop theVasotrac OEM module.  During the next 12months, we do not expect to spend any material amount on equipment in connectionwith these initiatives.  Even assumingonly limited sales, we believe that our cash and cash equivalents should allowus to meet our cash requirements for approximately sixteen months from October31, 2001.  If the development processfor our products does not proceed as expected because significant productdesign changes are required to achieve market acceptance, unexpecteddifficulties are encountered in attaining cost-effective manufacturability, thesales and marketing costs are higher than expected, or the products are notaccepted by the market place, we may require additional capital at an earlierdate.  We may seek such capital throughbank borrowing, equipment financing, equity financing, and other methods.  Our financing needs are subject to changedepending on, among other things, market conditions and opportunities,equipment or other asset-based financing that may be available, and cash flowfrom operations.  Any material favorableor unfavorable deviation from our anticipated expense could significantlyaffect the timing and amount of additional financing that we may require.  However, additional financing may not beavailable when needed or, if available, may not be on terms that are favorableto us or our security holders.  Inaddition, any such financing could result in substantial dilution to ourexisting security holders.

 

**Resultsof Operations**

 

The results of operations compares the threemonths and six months ended October 31, 2001 and 2000, respectively.  The analysis of liquidity and capitalresources compares October 31, 2001 to April 30, 2001.

 

Operatingrevenue was $125,000 and $95,300 for the quarter ended October 31, 2001 and2000, respectively. Operating revenue was $297,800 and $179,700 for the sixmonths ended October 31, 2001 and 2000, respectively.  The operating revenue increase was attributed to the increase ofboth direct sales employees and specialty distribution companies.

 

Cost of sales and product development was$125,900 and $105,700 for the quarter ended October 31, 2001 and 2000,respectively.  Cost of sales and productdevelopment was $283,800 and $232,200 for the six months ended October 31, 2001and 2000, respectively.  The cost ofsales and product development increase for the quarter ended October 31, 2001,and the increase for six months ended October 31, 2001 was attributed to anincrease in unit sales during the first quarter and the cost of increasingproduction of the Vasotrac.

 

TheCompany incurred $161,600 and $303,100 for research and development expensesfor the quarter ended October 31, 2001 and 2000, respectively. The Companyincurred $295,500 and $563,100 for research and development expenses for thesix months ended October 31, 2001 and 2000, respectively.  The research and development expense decreaseand decrease for the six months was attributed to the Company completingnumerous development projects, including pediatric applications, the NIA V-LineInterface, and High Motion Tolerant Software. In addition, the company had lessdependence on outside contractors.

 

The Company incurred $410,900 and $323,600for sales and marketing expenses for the quarter ended October 31, 2001 and2000, respectively.   The Companyincurred $823,000 and $568,200 for sales and marketing expenses for the sixmonths ended October 31, 2001 and 2000, respectively.  The sales and marketing expense increase was attributable to theincrease in the number of sales representatives employed by the Company andincreased marketing activities.

 

The Company incurred $172,100 and $146,100for general and administrative expenses for the quarter ended October 31, 2001and 2000, respectively. The Company incurred $343,900 and $318,800 for the sixmonths ended October 31, 2001 and 2000, respectively. The increase in generaland administrative expenses was attributable to higher insurance costs.

 

Interest income was $47,800 and $32,700 forthe quarter ended October 31, 2001 and October 31, 2000, respectively.  Interest income was $85,700 and $82,900 forthe six months ended October 31, 2001 and 2000, respectively.  The increase reflects higher cash and cashequivalents balances.

 

**Liquidityand Capital Resources**

 

The Company’s cash, and cash equivalents were$4,244,000 and $1,116,600 at October 31, 2001 and April 30, 2001, respectively.

 

With the cash and cash equivalents, and shortand long-term investments, the Company believes that sufficient liquidity isavailable to satisfy its working capital needs for approximately sixteen monthsfrom October 31, 2001.  The Company hasno significant capital expenditure commitments.

Cash flows used in operations decreased to$1,183,400 for the six month period ended October 31, 2001 from $1,419,900 forthe six month period ended October 31, 2000, a decrease of $236,500.  In both periods, we used cash flowsprimarily to fund operating losses, which were partially offset by the non-cashexpense for depreciation.  Sources ofcash in 2001 resulted from the decrease in accounts receivable, inventories,and prepaid expenses. In 2000, other primary uses of cash were for the decreasein accounts payable. An increase in inventory was another primary use of cashin operations for the six month period ended October 31, 2000.

 

Net investing activities used $55,400 of cashin the six month period ended October 31, 2001, for property and equipmentadditions.  For the six month periodended October 31, 2000, the conversion of marketable securities into cashprovided $919,900 which was used for operations.

 

Financing activities provided $4,366,100 ofcash for the six month period ended October 31, 2001, and nothing for thecorresponding period in 2000. The source of financing was the June, 2001 secondand final round of our private placement of common stock and warrants

 

 

**ITEM3.                  Quantitative andQualitative Disclosures About Market Risk**

    Not applicable.

 

 

**PARTII.                OTHER INFORMATION**

 

 

**ITEM1.                  Legal Proceedings**

    Not applicable.

 

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

 

In October,2001, the Company issued, at no added charge, 68,031 additional shares of itsCommon Stock to certain investors who purchased shares in the March 20, 2001round of the Company’s private placement. These additional shares were issuedto resolve issues concerning certain price anti-dilution provisions present forthe March 20, 2001 round. The issuance of such shares reduced the average pershare purchase price for the Common Stock purchased by such investors in theMarch 20 round from $6.375 to $4.25. The Company relied on Rule 506 under theSecurities Act of 1933 for the issuance of the shares.

 

**ITEM 3.                  DefaultsUpon Senior Securities**

    Not applicable.

 

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

    Not applicable.

 

**ITEM 5.                  OtherInformation**

 

Statements made in this report that arestated as expectations, plans, anticipations, prospects or future estimates orwhich otherwise look forward in time are considered “forward-lookingstatements” and involve a variety of risks and uncertainties, known andunknown, which are likely to affect the actual results.  The following factors, among others, as wellas factors discussed in the Company’s other filings with the SEC, have affectedand, in the future, could affect the Company’s actual results:  resistance to the acceptance of new medicalproducts, the market acceptance of the Vasotrac system, the Vasotrax hand-heldunit or other products of the Company, hospital budgeting cycles, thepossibility of adverse or negative commentary from clinical researchers orother users of the Company’s products, the Company’s success in creatingeffective distribution channels for its products, the Company’s ability toscale up its manufacturing process, and delays in product development orenhancement or regulatory approval. Consequently, no forward-looking statement can be guaranteed and actualresults may vary materially.

 

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

 

                (A)          EXHIBITS:

                                NONE

 

                (B)           REPORTSON FORM 8K:

                                          No reports on Form 8-K were filed by the Company during the quarterended October 31, 2001

 

 

 

 

**SIGNATURES**

 

 

In accordance with the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 
| Date:  | December 17, 2001 |   |   | Medwave, Inc.                 |
|--------|-------------------|--------|--------|-------------------------------|
|   |              |   |   |                          |
|   |              |   |   |                          |
|   |              |   | By:    | /s/ Timothy  J. O’Malley |  
 

 

 

 

Timothy J.  O’Malley

 

 

 

 

President  and Chief Executive Officer

  |