##### 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, 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  March 31, 2006 (unaudited) and September 30, 2005
    
    
    2Statements of Operations (unaudited)  Three and Six Months
Ended March 31, 2006 and 2005
    
    
    3Statements of Cash Flows (unaudited)  Six Months Ended
March 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
    
    
    17Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 6. Exhibits
    
    
    19Signatures
    
    
    20Exhibits
    
    
    21-22Certification of the Principal Executive Officer and Principal Financial Officer Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
  
  March 31
    
    
    September 302006
    
    
    2005(unaudited)
    
    
    (audited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,549,804
    
    
    $
    5,424,078Accounts receivable, net
    
    
    372,037
    
    
    
    315,081Inventories, net
    
    
    639,799
    
    
    
    443,788Prepaid expenses
    
    
    148,369
    
    
    
    81,659Total current assets
    
    
    8,710,009
    
    
    
    6,264,606Property and equipment:Research and development equipment
    
    
    36,814
    
    
    
    33,344Office equipment
    
    
    165,531
    
    
    
    155,910Manufacturing and engineering equipment
    
    
    789,437
    
    
    
    529,912Sales and marketing equipment
    
    
    71,540
    
    
    
    71,540Leasehold improvements
    
    
    71,109
    
    
    
    71,109Demonstration equipment
    
    
    25,418
    
    
    
    25,4181,159,849
    
    
    
    887,233Accumulated depreciation and amortization
    
    
    (486,193
    )
    
    
    (431,942
    )Total net property and equipment
    
    
    673,656
    
    
    
    455,291Total assets
    
    $
    9,383,665
    
    
    $
    6,719,897Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    1,046,963
    
    
    $
    593,006Accrued compensation
    
    
    92,390
    
    
    
    103,973Deferred revenue
    
    
    77,177
    
    
    
    77,826Total current liabilities
    
    
    1,216,530
    
    
    
    774,805Stockholders equity:Common stock, .01 par value:Authorized shares50,000,000
Issued and outstanding shares 
March 31, 2006 - 13,094,280
September 30, 2005 -11,475,416
    
    
    130,942
    
    
    
    114,754Additional paid in capital
    
    
    38,668,390
    
    
    
    34,360,596Accumulated deficit
    
    
    (30,632,197
    )
    
    
    (28,530,258
    )Total stockholders equity
    
    
    8,167,135
    
    
    
    5,945,092Total liabilities and stockholders equity
    
    $
    9,383,665
    
    
    $
    6,719,897
 The accompanying notes are an integral part of these financial statements.
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(Unaudited)
 Three months ended March 31
    
    
    Six months ended March 312006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Net sales
    
    $
    522,109
    
    
    $
    239,449
    
    
    $
    769,695
    
    
    $
    541,440Operating expenses:Cost of sales and production
    
    
    393,378
    
    
    
    134,634
    
    
    
    559,849
    
    
    
    420,317Research and development
    
    
    239,254
    
    
    
    318,859
    
    
    
    468,596
    
    
    
    466,251Sales and marketing
    
    
    520,791
    
    
    
    490,899
    
    
    
    997,393
    
    
    
    1,018,724General and administrative
    
    
    526,103
    
    
    
    351,984
    
    
    
    941,550
    
    
    
    575,140Total operating expenses:
    
    
    1,679,526
    
    
    
    1,296,376
    
    
    
    2,967,388
    
    
    
    2,480,432Operating loss
    
    
    (1,157,417
    )
    
    
    (1,056,927
    )
    
    
    (2,197,693
    )
    
    
    (1,938,992
    )Interest income
    
    
    54,186
    
    
    
    30,292
    
    
    
    95,754
    
    
    
    45,757Net loss
    
    $
    (1,103,231
    )
    
    $
    (1,026,635
    )
    
    $
    (2,101,939
    )
    
    $
    (1,893,235
    )Net loss per share  Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.10
    )
    
    $
    (0.18
    )
    
    $
    (0.18
    )Weighted average number of common and
common equivalent shares outstanding  basic and diluted
    
    
    12,158,617
    
    
    
    10,785,405
    
    
    
    11,813,263
    
    
    
    10,418,169
 The accompanying notes are an integral part of these financial statements.
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(Unaudited)
 Six months ended March 31,2006
    
    
    2005Operating activitiesNet loss
    
    $
    (2,101,939
    )
    
    $
    (1,893,235
    )Adjustments to reconcile net loss to net cash used in operating activities:Non-cash share-based compensation expense
    
    
    251,128
    
    
    
    Depreciation and amortization
    
    
    54,251
    
    
    
    22,840Loss on disposal of equipment
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (56,956
    )
    
    
    7,751Inventories
    
    
    (196,011
    )
    
    
    (40,183
    )Prepaid expenses
    
    
    (66,710
    )
    
    
    (109,749
    )Accounts payable
    
    
    453,957
    
    
    
    207,996Accrued compensation
    
    
    (11,583
    )
    
    
    (31,269
    )Deferred revenue
    
    
    (649
    )
    
    
    10,368Net cash used in operating activities
    
    
    (1,674,512
    )
    
    
    (1,825,481
    )Investing ActivitiesPurchase of property and equipment
    
    
    (272,616
    )
    
    
    (54,283
    )Net cash used in investing activities
    
    
    (272,616
    )
    
    
    (54,283
    )Financing ActivitiesProceeds from issuance of common stock
    
    
    4,072,854
    
    
    
    4,910,648Cash provided by financing activities
    
    
    4,072,854
    
    
    
    4,910,648Increase in cash and cash equivalents
    
    
    2,125,726
    
    
    
    3,030,884Cash and cash equivalents at beginning of period
    
    
    5,424,078
    
    
    
    4,793,326Cash and cash equivalents at end of period
    
    $
    7,549,804
    
    
    $
    7,824,210
 The accompanying notes are an integral part of these 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
reporting 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, 2005.2.
    
    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:
 March 31,
    
    
    September 30,2006
    
    
    2005Raw materials
    
    $
    512,152
    
    
    $
    343,467Finished goods
    
    
    152,647
    
    
    
    125,321Obsolescence reserve
    
    
    (25,000
    )
    
    
    (25,000
    )Total
    
    $
    639,799
    
    
    $
    443,788
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##### Table of Contents



3.
    
    Stockholders EquityA summary of changes in stockholders equity for the six months ended March 31, 2006 is as
follows:
 Common Stock.01 Par Value
    
    Additional
    
    AccumulatedShares
    
    Amount
    
    Paid in Capital
    
    Deficit
    
    TotalBalance at September 30,
2005
    
    
    11,475,416
    
    
    $
    114,754
    
    
    $
    34,360,596
    
    
    $
    (28,530,258
    )
    
    $
    5,945,092Private Placement  February
2006, Net of Issuance Costs
    
    
    1,617,614
    
    
    $
    16,176
    
    
    $
    4,054,578
    
    
    
    

    
    
    
    4,070,754Exercise of Stock Options
    
    
    1,250
    
    
    
    12
    
    
    
    2,088
    
    
    
    
    
    
    
    2,100Share Based Compensation
    
    
    

    
    
    
    

    
    
    
    251,128
    
    
    
    

    
    
    
    251,128Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,101,939
    )
    
    
    (2,101,939
    )Balance at March 31, 2006
    
    
    13,094,280
    
    
    $
    130,942
    
    
    $
    38,668,390
    
    
    $
    (30,632,197
    )
    
    $
    8,167,135
 Share-based payment
 Share-Based Payment Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation
  Three months ended
    
    
    Six months endedMarch 31, 2006
    
    
    March 31, 2006Cost of sales and production
    
    $
    2,035
    
    
    $
    5,583Research and development
    
    
    16,918
    
    
    
    34,538Sales and marketing
    
    
    26,385
    
    
    
    57,195General and administrative
    
    
    68,809
    
    
    
    153,812Net share-based compensation expense
    
    $
    114,147
    
    
    $
    251,128
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Three and Six Months EndedMarch 31,2006Expected option term (1)
    
    5.88 yearsExpected volatility factor (2)
    
    
    66.50
    %Risk-free interest rate (3)
    
    
    4.38
    %Expected annual dividend yield
    
    
    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 common stock over the most recent ten years, which is
the contractual term of the option awards.(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.  Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2005
    
    
    2005Net loss as reported
    
    $
    (1,026,635
    )
    
    $
    (1,893,235
    )Add: Employee compensation expense for options recorded in net loss
    
    
    
    
    
    
    Less: Total employee compensation expense for options determined
under the fair value method
    
    
    (127,012
    )
    
    
    (246,795
    )Pro forma net loss
    
    $
    (1,153,647
    )
    
    $
    (2,140,030
    )Basic and diluted loss per shareAs reported
    
    $
    (0.10
    )
    
    $
    (0.18
    )Pro forma
    
    $
    (0.11
    )
    
    $
    (0.21
    )
 Stock Incentive Plans
  7




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##### Table of Contents



Options OutstandingWeightedAverageWeighted
    
    
    RemainingNumber of
    
    
    Average
    
    
    ContractualShares
    
    
    Exercise Price
    
    
    TermBalance at September 30, 2005
    
    
    1,552,750
    
    
    
    3.84
    
    
    
    6.2Granted
    
    
    17,500
    
    
    
    2.80Exercised
    
    
    
    
    
    
    Canceled
    
    
    (10,000
    )
    
    
    3.64Balance at December 31, 2005
    
    
    1,560,250
    
    
    
    3.80
    
    
    
    6.3Granted
    
    
    23,077
    
    
    
    3.06Exercised
    
    
    (1,250
    )
    
    
    1.68Canceled
    
    
    
    
    
    
    Balance at March 31, 2006
    
    
    1,582,077
    
    
    
    3.82
    
    
    
    6.2
  Options Outstanding
    
    
    Vested OptionsWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    Average of
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    Shares
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Contract Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$0.74 - 0.80
    
    
    222,000
    
    
    6 years
    
    $
    0.74
    
    
    
    166,500
    
    
    $
    0.741.14 - 1.60
    
    
    178,000
    
    
    6 years
    
    
    1.48
    
    
    
    150,000
    
    
    
    1.492.04 - 2.80
    
    
    170,500
    
    
    8 years
    
    
    2.13
    
    
    
    75,750
    
    
    
    2.073.00 - 4.75
    
    
    669,077
    
    
    8 years
    
    
    4.16
    
    
    
    279,750
    
    
    
    4.305.06 - 7.13
    
    
    275,500
    
    
    7 years
    
    
    6.63
    
    
    
    260,250
    
    
    
    6.698.94 - 10.00
    
    
    67,000
    
    
    2 years
    
    
    9.50
    
    
    
    67,000
    
    
    
    9.501,582,077
    
    
    6.2 years
    
    
    3.82
    
    
    
    999,250
    
    
    
    4.09
  8




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##### Table of Contents



Non-Vested OptionsWeightedNumber of
    
    
    AverageShares
    
    
    Fair ValueNon-vested at September 30, 2005
    
    
    634,500
    
    
    
    2.18Granted
    
    
    17,500
    
    
    
    1.81Vested (with no instrinsic value)
    
    
    (26,375
    )
    
    
    6.26Forfeited
    
    
    (10,000
    )
    
    
    1.00Non-vested at December 31, 2005
    
    
    615,625
    
    
    
    1.98Granted
    
    
    23,077
    
    
    
    1.90Vested (with instrinsic value of $22,263)
    
    
    (55,875
    )
    
    
    1.69Forfeited
    
    
    
    
    
    
    Non-vested at March 31, 2006
    
    
    582,827
    
    
    
    1.93
  Shareholder Rights Agreement
  3. Net Loss Per Share
  4. Stock Purchase Agreement
  9




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 ®
  Overview
    10




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
    
    Readings obtained in approximately 12 seconds  increasing staff efficiencies
    
    Requires no calibration for the life of the product  offering dramatic cost improvement
    
    Provides remarkable improvement in patient comfort
    
    Contains no mercury  enhanced safety
    
    Easily portable and fits in the palm of your hand  enhancing staff convenience
    
    Capability to function on historically difficult patients, such as the overweight and the elderly
    
    Non-invasive blood pressure monitoring, with a LED display that provides a clear readout of blood pressure values
    
    Advanced programming that incorporates artifact rejection technology, eliminating background noise and motion
 11




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A. Published Studies
 PrincipalDate
    
    Title
    
    Journal/Meeting
    
    Edition/Pages
    

Investigator/InstitutionJanuary/March 2005
    
    Near-Continuous,
Noninvasive Blood
Pressure Monitoring
in the
Out-of-Hospital
Setting
    
    Pre-hospital
Emergency Care
Journal
    
    Volume 9/Number 1
    
    Dr. Stephen Thomas,
Mass. General
Hospital/Harvard
Medical School;
Boston MedFlight,
Boston MAMarch 2005
    
    Validation of a
Noninvasive Blood
Pressure Monitoring
Device in
Normotensive and
Hypertensive
Pediatric Intensive
Care Patients
    
    Journal of Clinical
Monitoring and
Computing
    
    Volume 18, Issue 4
    
    Dr. Mark J. Heulitt,
University of Arkansas
for Medical Sciences,
Little Rock, ARMay 2005
    
    Comparison of the
Vasotrac with
Invasive Arterial
Blood Pressure
Monitoring in
Children Following
Pediatric Cardiac
Surgery
    
    Anesthesia &
Analgesia
    
    Vol. 100 No. 5
    
    Dr. Peter C. Laussen,
Childrens Hospital
Boston,
Boston, MAOctober 2005
    
    Comparison of
Radial Artery Blood
Pressure
Determination
between the
Vasotrac Device and
Invasive Arterial
Blood Pressure
Monitoring in
Adolescents
Undergoing
Scoliosis Surgery
    
    Anesthesia &
Analgesia
    
    Vol. 101 No. 4
    
    Dr. Peter C. Laussen,
Childrens Hospital
Boston,
Boston, MA
 12




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##### Table of Contents



PrincipalDate
    
    Title
    
    Journal/Meeting
    
    Edition/Pages
    

Investigator/InstitutionMarch 2006
    
    Vasotrac Arterial
Blood Pressure and
Direct Arterial
Pressure Monitoring
During Liver
Transplantation
    
    Anesthesia &
Analgesia
    
    Vol. 102 No. 690-3
    
    James Y. Findlay, 
FRCA, Mayo Clinic 
College of Medicine, 
Rochester, MN
 B. Abstracts and Poster Presentations
 PrincipalDate
    
    Title
    
    Journal/Meeting
    
    Edition/Pages
    

Investigator/InstitutionOctober 2004/December
2004
    
    Intraoperative
Blood Pressure
Measurement on the
Wrist is More
Accurate than on
the Upper Arm in
Morbidly Obese
Patients
    
    American Society of
Anesthesiologists,
Post 
Graduate
Assembly of

Anesthesiologists
    
    Abstract and/or
Poster Presentation
    
    Dr. Helmut Hager,
Washington University,
St. Louis, MO
 C. Published Textbooks
 Title
    
    Editor
    
    Publisher
    
    DateMorbid
Obesity: Peri-operative Management
    
    Dr. Adrian Alvarez
    
    Cambridge University Press
    
    
    2004
 D. Ongoing Projects
 Project/Study
    
    Facility
    
    Completion
    
    Primary InvestigatorAccuracy of the
Vasotrac System
compared to the
invasive arterial
catheter
    
    University of Arizona
    
    TBA
    
    Dr. Stephen BarkerRadial artery
noninvasive blood
pressure
measurement in ED
Triage
    
    Massachusetts
General Hospital
    
    TBA
    
    Dr. Stephen Thomas
  General
  13




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ä ä
 Results of Operations
   Cost of Sales and Production
 Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005Cost of Sales and Production
    
    $
    393,400
    
    
    $
    134,600
    
    
    $
    559,800
    
    
    $
    420,300Percent change from
previous year: Incr/-Decr
    
    
    192.3
    %
    
    
    
    
    
    
    33.2
    %
    
    
    
  14




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Research and Development
 Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005Research and Development
    
    $
    239,300
    
    
    $
    318,900
    
    
    $
    468,600
    
    
    $
    466,300Percent change from
previous year: Incr/-Decr
    
    
    -25.0
    %
    
    
    
    
    
    
    0.5
    %
    
    
    
  Sales and Marketing
 Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2006
    
    
    
    
    
    2005
    
    2006
    
    
    
    
    
    2005Sales and Marketing
    
    $
    520,800
    
    
    
    
    
    
    $
    490,900
    
    
    $
    997,400
    
    
    
    
    
    
    $
    1,018,700Percent change from
previous year: Incr/-Decr
    
    
    6.1
    %
    
    
    
    
    
    
    
    
    
    
    -2.1
    %
    
    
    
    
    
    
    
  General and Administrative
 Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2006
    
    2005
    
    2006
    
    2005General and Administrative
    
    $
    526,100
    
    
    $
    352,000
    
    
    $
    941,500
    
    
    $
    575,100Percent change from
previous year: Incr/-Decr
    
    
    49.5
    %
    
    
    
    
    
    
    63.7
    %
    
    
    
   15




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Liquidity and Capital Resources
       Off-Balance Sheet Arrangements
  Contractual Obligations
  Critical Accounting Policies and Estimates
  16




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Revenue Recognition
  Share-Based Compensation
 Share-Based Payment Accounting for Stock Issued to
Employees ccounting for Stock-Based Compensation
  Impairment of Long-Lived Assets
  Accounts Receivable
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  17




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ITEM 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  18




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ITEM 6. 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 21, 2006 by and among Medwave, Inc. and the
Investors named therein (4)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 (5)32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (5)
 
 (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 27, 2006.(5)
    
    Filed herewith. 19




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##### Table of Contents



SIGNATURES
  Date: May 4, 2006
    
    Medwave, Inc.By:
    
    /s/ Timothy J. OMalleyTimothy J. OMalleyPresident and Chief Executive Officer(Principal Executive Officer and Principal Financial Officer)
 20