##### 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 December 31, 2006; or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-28010
 MEDWAVE, INC.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    41-1493458
(IRS employer
identification number)
 
 
 þ o
  o o þ
 o þ




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheets  December 31, 2006 and September 30, 2006
    
    
    2Statements of Operations  Three Months Ended December 31,
2006 and 2005
    
    
    3Statements of Cash Flows  Three Months Ended December 31,
2006 and 2005
    
    
    4Notes to Unaudited Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 1A.
Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    18Signatures
    
    
    19CertificationCertificationCertificationCertification
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 
 December 31
    
    September 302006
    
    2006(unaudited)
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,832,899
    
    
    $
    4,698,115Accounts receivable, net
    
    
    104,405
    
    
    
    154,146Inventories, net
    
    
    929,897
    
    
    
    860,435Prepaid expenses and other current assets
    
    
    115,178
    
    
    
    113,112Total current assets
    
    
    3,982,379
    
    
    
    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
    
    
    (559,444
    )
    
    
    (528,837
    )Property and equipment, net
    
    
    441,073
    
    
    
    450,647Total assets
    
    $
    4,423,452
    
    
    $
    6,276,455Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    201,816
    
    
    $
    557,405Accrued expenses
    
    
    545,392
    
    
    
    843,573Accrued payroll and other related expenses
    
    
    59,343
    
    
    
    95,062Deferred revenue
    
    
    66,230
    
    
    
    75,713Total current liabilities
    
    
    872,781
    
    
    
    1,571,753Stockholders equity:Common stock, .01 par value:Authorized
shares50,000,000
Issued and
outstanding
sharesDecember 31,
 2006 13,104,280
September 30, 2006
13,094,280
    
    
    131,042
    
    
    
    130,942Additional paid in capital
    
    
    38,989,614
    
    
    
    38,907,977Accumulated deficit
    
    
    (35,569,985
    )
    
    
    (34,334,217
    )Total stockholders equity
    
    
    3,550,671
    
    
    
    4,704,702Total liabilities and stockholders equity
    
    $
    4,423,452
    
    
    $
    6,276,455
 The accompanying notes are an integral part of these unaudited financial statements.
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Medwave, Inc.
 Statements of Operations  (Unaudited)
 Three months ended December 31,2006
    
    2005Revenue:Net Sales
    
    $
    212,684
    
    
    $
    247,586Operating expenses:Cost of sales and
production
    
    
    297,346
    
    
    
    166,471Research and
development
    
    
    178,634
    
    
    
    229,342Sales and marketing
    
    
    510,281
    
    
    
    476,602General and
administrative
    
    
    505,244
    
    
    
    415,447Total Operating expenses:
    
    
    1,491,505
    
    
    
    1,287,862Operating loss
    
    
    (1,278,821
    )
    
    
    (1,040,276
    )Other income (expense):Interest income
    
    
    43,053
    
    
    
    41,568Net loss
    
    $
    (1,235,768
    )
    
    $
    (998,708
    )Net loss per share  Basic and
diluted
    
    $
    (0.09
    )
    
    $
    (0.09
    )Weighted average number of common
and
common equivalent
shares outstanding
 basic and diluted
    
    
    13,099,063
    
    
    
    11,475,416
 The accompanying notes are an integral part of these unaudited
financial statements.
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Medwave,
Inc.
 Statements
of Cash Flows  (Unaudited)
 Three months ended December 31,2006
    
    2005Operating activitiesNet loss
    
    $
    (1,235,768
    )
    
    $
    (998,708
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash share-based compensation expense
    
    
    74,337
    
    
    
    114,148Depreciation and amortization
    
    
    30,607
    
    
    
    18,988Changes in operating assets and liabilities:Accounts receivable
    
    
    49,741
    
    
    
    124,080Inventories
    
    
    (69,462
    )
    
    
    (94,886
    )Prepaid expenses
    
    
    (2,066
    )
    
    
    (27,917
    )Accounts payable
    
    
    (355,589
    )
    
    
    (29,938
    )Accrued liabilities
    
    
    (333,900
    )
    
    
    (68,021
    )Deferred revenue
    
    
    (9,483
    )
    
    
    (4,872
    )Net cash used in operating activities
    
    
    (1,851,583
    )
    
    
    (967,126
    )Investing ActivitiesPurchase of property and equipment
    
    
    (21,033
    )
    
    
    (253,886
    )Net cash used in investing activities
    
    
    (21,033
    )
    
    
    (253,886
    )Financing ActivitiesProceeds from issuance of common stock
    
    
    7,400
    
    
    
    Net cash provided by financing activities
    
    
    7,400
    
    
    
    Decrease in cash and cash equivalents
    
    
    (1,865,216
    )
    
    
    (1,221,012
    )Cash and cash equivalents at beginning of period
    
    
    4,698,115
    
    
    
    5,424,078Cash and cash equivalents at end of period
    
    $
    2,832,899
    
    
    $
    4,203,066
 The accompanying notes are an integral part of these unaudited financial statements.
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1.
    
    Basis of PresentationThe financial statements included in this report have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated
under the Securities Exchange Act of 1934. Accordingly, they do not include all of the
information and disclosures required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair presentation of the
financial information have been included for the interim periods presented. The preparation of
financial statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates. Operating results for interim periods
are not necessarily indicative of results that may be expected for the entire fiscal year.
Accordingly, these interim period condensed financial statements should be read in conjunction
with the financial statements contained in the Companys Annual Report on Form 10-K for the
year ended September 30, 2006.Our cash and cash equivalents were $2,832,900 and $4,698,100 at December 31, 2006 and September
30, 2006. Management is presently implementing strategies designed to increase revenues,
contain costs and improve the financial results of the Companys operations. The Company
believes that net proceeds from its private placement completed in February 2006 (see note 8 to
financial statements in the Companys Annual Report on Form 10-K for the year ended September
30, 2006 filed with the SEC on January 16, 2007), together with achieving its operating budget
for 2007, will be sufficient to fund its operations through at least October 1, 2007.
Management has taken steps to reduce cash expenditures; including closing its Danvers,
Massachusetts office and related employee layoffs.The Company continues to experience net losses and has an accumulated deficit of approximately
$36,000,000 through December 31, 2006. The report of our independent registered public
accounting firm contained an explanatory paragraph regarding substantial doubt about the
Companys ability to continue as a going concern at September 30, 2006.We will need to raise additional capital to fund our long-term operations if we do not begin to
realize an operating profit. There can be no assurance that we will be able to receive such
funds on acceptable terms.2.
    
    InventoriesInventories which consist of material, labor and overhead are valued at the lower of cost or
market on the first-in, first-out (FIFO) method and consist of the following:
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December 31,
    
    
    September 30,2006
    
    
    2006Raw materials
    
    $
    772,376
    
    
    $
    587,770Finished goods
    
    
    235,521
    
    
    
    332,665Obsolescence reserve
    
    
    (78,000
    )
    
    
    (60,000
    )Total
    
    $
    929,897
    
    
    $
    860,435
 3.
    
    Stockholders EquityA summary of changes in stockholders equity for the three months ended December 31, 2006 is as
follows:
 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
    
    
    
    
    
    
    
    
    
    
    74,337
    
    
    
    
    
    
    
    74,337Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,235,768
    )
    
    
    (1,235,768
    )Balance at December
31, 2006
    
    
    13,104,280
    
    
    $
    131,042
    
    
    $
    38,989,614
    
    
    $
    (35,569,985
    )
    
    $
    3,550,671
    Three months ended
    
    Three months endedDecember 31,
    
    December 31,2006
    2005Cost of sales and production
    
    $
    1,892
    
    
    $
    2,035Research and development
    
    
    10,486
    
    
    
    16,918Sales and marketing
    
    
    9,483
    
    
    
    26,385General and administrative
    
    
    52,476
    
    
    
    68,810Net share-based
compensation expense
    
    $
    74,337
    
    
    $
    114,148Effect on loss per share
Basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.01
    )
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Three months ended
    
    Three months endedDecember 31,
    
    December 31,2006
    
    2005Expected option term (1)
    
    6.25 yrs
    
    6.25 yrsExpected volatility factor (2)
    
    
    85.07
    %
    
    
    66.50
    %Risk-free interest rate (3)
    
    
    4.54
    %
    
    
    4.14
    %Expected annual dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 
 (1)
    
    The option life was determined using the simplified method for estimating expected option
life, which qualify as plain-vanilla options.(2)
    
    The stock volatility for each grant is determined based on the weighted average of historical
monthly price changes of the Companys stock over the expected option term.(3)
    
    The risk-free interest rate for periods equal to the expected term of the stock option is
based on the U.S. Treasury yield curve in effect at the time of the grant.    7




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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
    
    
    
    6.6
  Options Outstanding
    
    Vested OptionsWeighted
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Average of
    
    Average
    
    
    
    
    
    AverageRange of
    
    Shares
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Contract Life
    
    Price
    
    Exercisable
    
    Price$0.33 - 0.80
    
    
    300,000
    
    
    7.0 years
    
    $
    0.64
    
    
    
    200,000
    
    
    $
    0.741.14 - 1.60
    
    
    52,500
    
    
    5.4 years
    
    
    1.43
    
    
    
    52,500
    
    
    
    1.432.04 - 2.80
    
    
    132,000
    
    
    6.8 years
    
    
    2.12
    
    
    
    84,000
    
    
    
    2.073.00 - 4.75
    
    
    337,077
    
    
    7.4 years
    
    
    4.06
    
    
    
    179,750
    
    
    
    4.195.06 - 7.13
    
    
    21,000
    
    
    5.6 years
    
    
    6.88
    
    
    
    20,750
    
    
    
    6.898.94 - 9.13
    
    
    32,000
    
    
    1.0 years
    
    
    9.50
    
    
    
    32,000
    
    
    
    9.50874,577
    
    
    6.6 years
    
    
    2.97
    
    
    
    569,000
    
    
    
    3.19
  8




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Non-Vested OptionsWeightedNumber of
    
    AverageShares
    
    Fair ValueNon-vested at September 30, 2006
    
    
    338,952
    
    
    $
    2.11Granted
    
    
    100,000
    
    
    
    0.34Vested (with intrinsic value of $188)
    
    
    (5,250
    )
    
    
    1.23Forfeited
    
    
    (128,125
    )
    
    
    2.26Non-vested at December 31, 2006
    
    
    305,577
    
    
    
    1.48
    3. Accrued expenses
  December 31
    
    September 302006
    
    2006Accrued severance
    
    $
    16,543
    
    
    $
    426,628Professional fees
    
    
    105,291
    
    
    
    87,047Customer refunds
    
    
    263,630
    
    
    
    173,150Contract settlement
    
    
    125,000
    
    
    
    125,000Other
    
    
    34,928
    
    
    
    31,748$
    545,392
    
    
    $
    843,573
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4. Net Loss Per Share
  
 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
   10




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TM TM
 General
   Recent Developments
 Fusion TM TM TM TM TM TM
 Discontinuance of Primo TM TM
 11




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Vasotrac ® ® ® TM
 OEM module
 Results of Operations
  ®
 Cost of
Sales and ProductionDecember 31,
    
    December 31,2006
    
    2005Cost of Sales and Production
    
    $
    297,300
    
    
    $
    166,500Percent change from previous year: Incr/(Decr)
    
    
    78.6
    %
    
    
    (41.7
    %)
  Research
and DevelopmentDecember 31,
    
    December 31,2006
    
    2005Research and Development
    
    $
    178,600
    
    
    $
    229,300Percent change from previous year: Incr/(Decr)
    
    
    (22.1
    %)
    
    
    55.6
    %
  12




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Sales and
MarketingDecember 31,
    
    December 31,2006
    
    2005Sales and Marketing
    
    $
    510,300
    
    
    $
    476,600Percent change from previous year: Incr/(Decr)
    
    
    7.1
    %
    
    
    (9.7
    %)
  General
and AdministrativeDecember 31,
    
    December 31,2006
    
    2005General and Administrative
    
    $
    505,200
    
    
    $
    415,500Percent change from previous year: Incr/(Decr)
    
    
    21.6
    %
    
    
    86.2
    %
   Liquidity and Capital Resources
  13




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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.
    
    $
    400,300
    
    
    $
    112,700
    
    
    $
    229,500
    
    
    $
    58,100
 14




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Critical Accounting Policies and Estimates
  Revenue Recognition.
 Inventory Valuation.
 Warranty Reserves
 Income Taxes
 15




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Stock-Based Compensation
   Impairment of Long-Lived Assets
  Accounts Receivable
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  16




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ITEM 4. Controls and Procedures
  
 PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM
1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity 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
 (A)
    
    Not applicable.(B)
    
    During the period covered by this report, there were no material changes to the
Companys procedures by which security holders may recommend nominees to the Companys
Board of Directors.
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ITEM 6. Exhibits
 (A)
    
    EXHIBITS: ExhibitNumber
    
    Description3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amendment to Articles of Incorporation (2)3.3
    
    Amended and Restated Bylaws (1)3.4
    
    Amendments to Bylaws (2)4.1
    
    Shareholders Rights Plan dated September 29, 2003 (3)10.1
    
    Form of Securities Purchase Agreement dated February 10, 2005 in
and among Medwave, Inc. and the Investors named therein
(4)31.1
    
    Certification of the principal executive officer, pursuant to Rule
13a  14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (6)31.2
    
    Certification of the principal
financial officer, pursuant to Rule 13a  14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(6)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(6)32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
(6)
 
 (1)
    
    Incorporated by reference to Medwave, Inc.s Registration Statement on Form SB-2, Registration No.
33-96878C.(2)
    
    Incorporated by reference to Medwave, Inc.s Registration Statement on Form S-3, Registration No.
333-103477.(3)
    
    Incorporated by reference to Medwave, Inc.s Form 8-A12G filed on October 3, 2003.(4)
    
    Incorporated by reference to Medwave, Inc.s Current Report on Form 8-K filed on February 11,
2005.(5)
    
    Incorporated by reference to Medwave, Inc.s Quarterly Report on Form 10-Q filed on May 13, 2005.(6)
    
    Filed herewith.
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SIGNATURES
  Date:      February 14, 2007
    Medwave, Inc.By:
    /s/ Frank A. KatarowFrank A. KatarowChief Executive Officer (interim)
(Principal Executive Officer)By:
    /s/ Ramon L BurtonRamon L. BurtonChief Financial Officer
(Principal Financial Officer) 19