Here is what they did.
General
Medwave, Inc., or the Company, was organized under Minnesota law in 1984. In May, 2003, our shareholders voted to re-incorporate the Company under the laws of the State of Delaware via a merger between the Minnesota corporation and the Delaware corporation. We are engaged exclusively in the development, manufacture and sale of non-invasive, blood pressure measurement and monitoring systems and of related technologies.
Blood pressure monitoring has seen little change since the late 1800’s when blood pressure cuffs were introduced. Medwave develops sensor-based, non-invasive blood pressure solutions that are easier to use and at least as accurate as the traditional cuff technology. Blood pressure and changes in blood pressure are critical indicators of the health and performance of the body’s cardiovascular system. Blood pressure varies with age and by gender, such that young adults tend to have lower blood pressures than older adults, and men tend to have higher blood pressures than women of the same age. All hospital patients require measurement of their blood pressure and many surgical or critically ill patients require frequent or continual monitoring of their blood pressure. Continual monitoring of blood pressure is important for patients in operating rooms, surgical recovery rooms, intensive care units, emergency departments and other critical care sites because of the acuteness of these patients’ conditions and rapidity with which their conditions can change. Trend information obtained from successive blood pressure measurements plays an important role in the diagnosis, prognosis, and treatment of diseases. Blood pressure is one vital sign that is measured in every clinical location of the healthcare spectrum, including a patient’s own home environment. Approximately 114 million people visit U.S. emergency departments each year with each visitor requiring a blood pressure reading at least once. It has recently been reported that approximately sixty-five million (65,000,000) people in the United States are considered hypertensive (with high blood pressure), which represents a 30% increase in the last decade.
Our proprietary technology, which uses Medwave’s sensor and algorithm technology, detects and analyzes pulse pressure waveforms from contraction of the heart. The transducer, which is placed on the patient’s wrist, measures arterial waveforms and calculates blood pressure from these measurements. We have applied for U.S. patents covering various aspects of Medwave’s blood pressure technology. As of March 31, 2006, twenty-six (26) U.S. patents relating to Medwave’s blood pressure technology have been granted, and eight (8) U.S. patent applications are pending. We have also been granted ten (10) foreign patents within the European Patent Office, India, and Japan, with an additional six (6) pending patent applications within the European Patent Office, China, Hong Kong, and Japan.
Products
Fusion TM — Fusion TM is our new vital signs monitoring platform replacing the Vasotrac monitor. We completed clinical trials and validations and have received FDA 510(k) clearance to begin marketing Fusion TM . Fusion TM was launched to the sales force in the first quarter of the current fiscal year and shipments began in November 2006. Fusion TM contains our core blood pressure technology, our sensors, and employs our algorithms to offer numerous technological advantages to the vital signs monitoring market. In addition to our core blood pressure technology, Fusion offers options to monitor oxygen saturation, temperature and a printer. This allows Fusion TM to compete in the vital signs market place.
Discontinuance of Primo TM — We developed the Primo TM hand-held blood monitor pressure and began sales after receiving FDA approval in February 2006. Many users of Primo encountered difficulty in the proper placement of the Primo’s sensor on the wrist which resulted in inconsistent performance. After 75% of previously shipped Primos were returned or scheduled for return to us, we decided to discontinue selling the Primo. In conjunction with this discontinuation, we have written-off our entire existing inventory of Primo hand-held monitors and the manufacturing equipment used for their production.
Vasotrac ® — We began marketing our Vasotrac ® monitoring system in February 1995 after receiving clearance from the FDA. The Vasotrac system helped develop our position as a developer of blood pressure monitoring technology that was particularly effective for use with difficult patients and in difficult to monitor environments. Due to obsolete parts and aging technologies, the Vasotrac ® will be discontinued and phased out of the product offerings over the fiscal year 2007 and replaced by Fusion TM .
OEM module — Our OEM solutions address the integrated non-invasive blood pressure module market. Our goal is to present joint integrated solutions to patient monitoring, defibrillator and other medical device companies and ultimately sign additional supplier agreements. Medwave’s sensor based OEM solutions provide us with significant competitive advantages over cuff based companies in the OEM arena. We have been placing additional emphasis on our OEM efforts. Analogic Corporation signed a Supplier and License Agreement in June 2005. This agreement allows Analogic to integrate Medwave’s sensor-based technology into their patient monitoring suite of products. Analogic has successfully integrated Medwave’s technology. They introduced the product at the 2006 American Society of Anesthesiology convention and expected to commercially launch their product sometime early in 2007.
Clinical Studies
We have conducted clinical studies for four purposes: (i) to aid the product development process, (ii) to obtain data for submission to the regulatory agencies, (iii) to help us prepare marketing and sales information to promote greater awareness of Medwave’s products, and (iv) to gain a peer-to-peer recommendation for our technology. We have used two standards of comparison, the automated cuff and the arterial line (A-line). We designed our clinical study strategy to focus on clinical segments and environments where conventional blood pressure measurement techniques did not work well, while providing the accuracy of an arterial line. We felt that due to the deep entrenchment of the blood pressure cuff, we had to exploit the areas where it had a difficult time performing. The three distinct areas where our focus was placed were:
1) Obese Patient Population
2) Pediatric Patient Population
3) Emergency Medicine
Invasive arterial catheters are believed to provide more data and more accurate blood pressure measurements than automated cuffs. The invasive catheter is therefore considered the “Gold Standard” in monitoring of a patient’s blood pressure. By inserting an invasive arterial catheter in the radial artery on one wrist and by placing Medwave’s technology sensor on the radial artery of the other wrist, data has been simultaneously recorded on a heart beat-by-beat basis. These clinical studies were conducted at teaching hospitals under Internal Review Board controls and protocols and have generally produced favorable results. We expect to continue conducting or supervising clinical studies of our technology on individuals with different characteristics and under various conditions until such time when our products receive general market acceptance.
Sales, Marketing, and Distribution
Over the past few years, our sales organization has been concentrating on the sales and implementation of Medwave’s technology within hospitals. More specifically, we have placed more emphasis on teaching hospitals and prestigious medical centers. Our strategy has been to gain endorsements from their elite facilities, while simultaneously conducting clinical validation studies. We now have numerous studies completed and published, prominent institutions using our technology and new products about to enter the market. Our sales force has made progress in regard to the acceptance of our technology as a standard across multiple departments within a facility.
We originally attempted to build a dealer network to sell our technology, in an effort to seek sales coverage without the commensurate increase in sales staff and cost that would occur if the same coverage were sought by building our own employee sales force. However, we did not find this to be an effective manner to enter and initially penetrate the market, as most medical device dealer organizations do not have the level of sales time required to sell innovative, breakthrough technology.
Recently, Medwave has gone through a sales, marketing and clinical reorganization. Many positions have been eliminated and many roles are being dual functioned. Over the past 12 months, Medwave experimented with various Sales Specialists working with dealers and distributors in efforts to help train and sell Primo TM . This proved to be an expensive and time consuming venture and subsequently, has been changed.
With the reduction and reorganization of the sales force, Medwave has created a model of direct sales through territory managers. This allows our seasoned sales representatives to market and sell Fusion on a direct basis. Due to the relative size of territories, new agreements with manufacturing representatives are being conducted and additional agreements are being signed to give Medwave more “feet on the street” without the overhead of salaries and related expenses. With this new sales model, we have more flexibility and control for selling and marketing Fusion TM . Furthermore, the manufacturing rep model allows us to partner with organizations that have a similar “call point” to that of Fusion TM and sell products of the same class increasing the call points of the sales process for Medwave products. This entire process will have oversight by the Territory Sale Manager for Medwave.
Our relationship with Universal Hospital Services (UHS) continues to develop. We signed an Agreement with them last year. This agreement has two components: one where UHS will become an exclusive rental distributor and the other which gives UHS the ability to sell Medwave’s products. UHS has approximately 120 sales professionals in 80 offices within the Unites States. UHS recently notified Medwave, that they have been selected as the exclusive supplier of bariatric equipment (related to obese patients) for a large group purchasing organization, due in part to offering Medwave’s products, which cover a wide range of sizes and settings.
We had a backlog of approximately $150,000 as of September 30, 2006, primarily of unfulfilled Fusion TM orders.
Invasive Arterial Catheter:
Invasive techniques employ the surgical placement of a catheter directly into an artery, an A-line. The fluid-filled catheter is connected to a pressure transducer and assorted tubing to produce beat-by-beat, continual blood pressure measurements. In addition, the catheter may be used to extract blood samples from which a number of diagnostic test results, such as blood gas information, may be obtained. Because our non-invasive technology does not allow for the extraction of blood samples, invasive techniques offer a competitive advantage in this area. The surgical insertion of the catheter, however, takes about fifteen to twenty minutes, assuming no complications. Moreover, while such insertions frequently are performed without incident, serious complications can occur, including thrombosis (blood clot), air emboli (air bubble), and infection. Measurement errors may occur due to air bubbles, catheter clotting or movement, or changes in elevation between the pressure transducer and the level of the heart. Immediately following catheter withdrawal, firm pressure must also be applied over the arterial site for an extended period of time to avoid serious blood loss. Primarily because of its invasive nature, the A-line is generally used by clinicians in critical cases and for only relatively short time periods. The cost associated with inserting and managing an arterial catheter can be significantly higher than non-invasive blood pressure monitoring.
As a general matter, we believe that non-invasive rather than invasive treatments and methods are preferred by clinicians for numerous medical conditions and processes, including the measurement and monitoring of blood pressure. Non-invasive techniques significantly reduce patient risk and increase patient comfort. In addition, the time and expense required to setup, maintain, and remove non-invasive equipment generally is substantially less than with invasive systems. We believe that, in many cases, patients in emergency departments and associated environments, critical care, operating rooms, cardiology departments, and pediatric environments could benefit from non-invasive continual blood pressure monitoring after the point at which clinicians may now discontinue obtaining such readings due to concerns associated with prolonged or indefinite uses of invasive techniques.
Non-Invasive Blood Pressure Cuffs:
Many non-invasive blood pressure measurement techniques utilize a manually operated occlusive cuff around the upper arm. A relatively simple blood pressure instrument, called a sphygmomanometer, contains a cuff connected to a hand air pump and pressure gauge or mercury
column. The cuff is inflated to a pressure above that of systolic pressure until the brachial artery is completely occluded, and then the cuff is slowly deflated. During deflation, the clinician must listen to the pulse in the brachial artery. Upon hearing and properly interpreting the appropriate sounds, the clinician records the pressures shown on the gauge or mercury column. The cuff pressure occurring simultaneously with certain observed events within the circulatory or cuff systems are taken as the systolic and diastolic pressures. This process may take several minutes to complete, and in some patients will cause significant discomfort due to the squeezing of the cuff around the upper arm. Numerous clinical studies have been performed comparing the accuracy of this method with the invasive arterial catheter, and have shown a wide degree of variation with this method being caused by such things as environmental noise and movement, improper cuff size, and readings taken too close in time to one another. Recently, many states have required a reduction in the use of mercury, therefore forcing the healthcare industry to seek alternatives.
An automated, non-invasive blood pressure monitoring system is already commonly used throughout hospitals, clinics, nursing homes, out-patient and ambulatory surgery centers, and physician’s offices. In addition, every bedside monitor, whether configured, stand-alone, or networked, incorporates an automatic blood pressure cuff. It is estimated that there are approximately 500,000 bedside monitors installed in the world market, with approximately 75,000 new monitors sold per year. In addition, within the pre-hospital emergency medicine response market, many defibrillators are sold with an automatic blood pressure cuff built into them. It is estimated that approximately 60,000 new defibrillators are sold each year. The automated non-invasive blood pressure monitoring system currently dominating the stand-alone market is the Dinamap ® product, marketed by GE Medical Systems, a division of General Electric Company. The Dinamap ® provides blood pressure measurements via automatic inflation and deflation of an occlusive cuff at predetermined intervals. It is reasonably reliable and simple to use. However, the Dinamap ® product provides only intermittent measurements at one-to-ninety minute intervals, as selected by the clinician. Some patients suffer signification discomfort from the frequent cuff inflation. In addition, with cuff-based systems, arm circulation is cut off during each measurement, the arm holding the pressure cuff is unavailable for intravenous lines and other forms of monitoring, and arm bruising and sleep interruption frequently occur. Also, the manual and automatic cuff systems have not performed well in areas with a high degree of motion, such as in ambulances or cardiac stress labs. It is estimated that there are approximately 450,000 stand-alone/vital signs monitors installed in the market, with approximately 60,000 per year being sold for expansion or replacement reasons. This vital signs market will be addressed by our Fusion TM product and the different options it offers.
In contrast to the sphygmomanometer and other cuff-based systems, our products do not require an inflatable cuff but instead contain a unique pressure sensor that is placed on the wrist. In addition to the comfort factor and greater versatility of our products, we believe that our technology has a very important advantage over cuff-based systems: more rapid readings that allow for more precise monitoring.
For the hospital based patients who require continual blood pressure monitoring, invasive methods are currently the clinician’s technology of choice. Given the attractiveness of non-invasive monitoring, however, several companies have introduced or are introducing products into this market for non-invasive continual monitoring of arterial pressure based upon several technologies. These technologies include pulse-wave velocity, partially inflated finger cuffs, partially inflated arm cuffs, and tonometry. We believe that none of these alternatives has gained wide acceptance within the clinical community for continually monitoring arterial pressure. This belief is based on previous, unsuccessful efforts of other companies to introduce accurate, continuous, and non-invasive blood pressure monitors, the absence of such products at major medical and other product shows, the lack of published advertisements, papers or studies about such products in respected scientific, medical and other journals, and anecdotal discussions with physicians and other medical personnel by our management.
In addition, all of the devices which have been introduced historically were intended to be used predominantly in the operating room environment, as many of these technologies have had a difficult time performing with patients where motion or animation may be present. Medwave has focused its efforts on the hospital markets/departments over the past few years in an effort to introduce and gain clinical acceptance within the hospital setting. We have been involved in numerous clinical studies within settings where traditional blood pressure cuffs have had a difficult time performing. As a result, our sales and marketing focus has been towards environments such as bariatrics,
pediatrics, and emergency room settings, as well as the operating room. We believe that our technology performs well in these clinical environments, where a blood pressure cuff, manual or automatic, is often challenged. Several studies involving our technology confirmed our belief, as a great deal of focus for our clinical studies includes obese, pediatric and emergency department patients.
Our success depends primarily on gaining physician and hospital acceptance of our products. Gaining clinical acceptance of our technology usually requires our employees to participate in non-formal (not requiring Institutional Review Board approval) clinical trials or evaluations. These evaluations usually compare our technology’s performance to either a blood pressure cuff or to invasive arterial catheters. Having clinical studies and papers, which have been presented and/or published is essential and is usually the beginning of initial discussions with a prospective customer. In addition, it has become increasingly more important to gather and present economic data, which shows that our technology can reduce cost, improve patient through-put, and provide more efficiency for a hospital staff.
Employees
As of December 31, 2006 we employed 22 full-time employees and three part-time employees. We have recently initiated the staged closure of our former office in Danvers, Massachusetts. We anticipate closing this office by April 2007 by which point we will have transitioned all of our operating functions to our office in Arden Hills, Minnesota.
Regulatory Environment
We are subject to FDA and other government regulations, including regulations with respect to marketing approval, manufacturing practices, packaging, labeling and complaint reporting. Medical devices “substantially equivalent” to existing systems continuously marketed since May 1976 may be marketed pursuant to a Pre-Market Notification Submission with the FDA. The FDA finding of “substantial equivalence” for the Vasotrac system and the Vasotrax hand-held monitor does not in any way denote official approval of the device. Further, any representation that creates an impression of official approval of a device because it complies with the pre-market notification regulations is misleading and constitutes misbranding. Certain devices, including those which are not “substantially equivalent” to predicate devices, are subject to Pre-Market Approval Application, or PMA, requirements and more stringent FDA reviews. In contrast to the 510(k) process, the PMA process generally occurs over a more protracted time period and requires more extensive clinical data.
Like all medical device manufacturers, we must implement, maintain and follow the FDA’s Quality System Regulation, or QSR. We believe our primary manufacturing costs are driven by initial scale-up and ultimate production levels and will not be significantly impacted by such requirements. Should we intend to market our products for new or different uses, or should we significantly modify the system in a way that could significantly affect its safety or effectiveness, we would be required to file a new 510(k) submission with the FDA. Moreover, it is anticipated that any new product concepts developed by us will require various government clearances prior to being sold.
In our initial 510(k) submission to the FDA, we included not only clinical data, but also outlined our plans to continue testing and integrating the results into the Vasotrac system. We do not believe that FDA regulations require, and therefore at this point do not anticipate, submission to the FDA of our post-510(k) clinical studies. Although the FDA has stated that a manufacturer is best qualified to make an initial determination of whether a new 510(k) submission is necessary, the FDA can overrule a manufacturer’s decision not to submit a new 510(k) submission and take appropriate regulatory action. If we determine we do not need to submit any such new 510(k) submission, including with respect to our post-510(k) clinical studies, and the FDA consequently takes regulatory action, we could be materially and adversely affected.
Warranty and Service
Our products are generally available with limited 12-month parts and labor warranty commencing at the date of shipment. Some of our OEM agreements may have different terms to the warranty. When warranty repairs are necessary, we generally perform them at our Arden Hills, Minnesota facility. We also provide on-call technical support and service equipment on a time and materials basis. Recently, clinical support staff members have been added on a per diem basis in order to assist the staff of our growing customer base.
Trademarks
Medwave ® , Vasotrac ® , Vasotrax ® , Legato TM , and Fusion TM are trademarks of the Company.
ITEM 1A. RISK FACTORS.
This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth in the following risk factors, elsewhere in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. However, these risks are not the only ones we face. Additional risks that are not yet identified or that we think are immaterial may also materially harm our business. If any of the events or circumstances described in the following risk factors actually occurs, our business, operating results and financial condition could be materially adversely affected. In that case, the value of our common stock could decline substantially.
Our success is dependent on market acceptance of our products as a replacement for the traditional blood pressure cuff.
Our success depends on medical institutions, such as hospitals, outpatient centers, ambulance companies, nursing homes and physician offices, and, to a lesser extent, individual customers accepting our products. Our products, including the Fusion TM system, are designed to replace the traditional blood pressure monitoring cuff that medical professionals have used for more than 100 years. Virtually all medical professionals are trained using cuff technology. Our success depends on demonstrating that our products are easier to use and at least as accurate as the traditional cuff. If our products do not gain market acceptance, our future will be jeopardized.
We face substantial competition.
Several companies competing in the traditional cuff and catheter blood pressure monitoring markets have significantly greater resources as well as established technologies and product reputations in the blood pressure monitoring field. If we are unable to develop and market technologically superior blood pressure monitoring systems that provide benefits to patients and improved staff effectiveness at affordable prices, we will not be able to overcome our competitors’ greater resources and established technologies. In addition, these competitors have cooperative relationships with large medical equipment companies and buying groups that we must also overcome in order to successfully compete.
We face substantial competition from other companies that manufacture and market noninvasive instruments for continuous blood pressure measurement and monitoring. These companies may already have, or could develop, superior products or employ more effective sales and distribution strategies to gain greater market share. Either of these possibilities would prevent us from expanding our customer base and could ultimately jeopardize our ability to continue operations. We may also be subject to price competition from other sensor manufacturers whose products are also compatible with our monitors.
We rely on a single technology platform.
Currently, we utilize our proprietary sensor technology and software algorithms in all of our products. Reliance on a single technology platform creates substantial risks for us. If our products are not accepted in the marketplace for any reason, we would be materially and adversely affected, our primary business focus would require re-evaluation, and our ability to continue operations would be jeopardized.
Our products may not perform adequately or be placed properly.
Our products may not provide accurate blood pressure readings as result of a patient’s bone physiology, body weight and physical condition. For example, if a patient’s peripheral blood flow to their arms has been compromised, our products may not function as specified. Other contraindications for our products may result from patients on cardiopulmonary bypass or having any condition in which obtaining a pulsating pressure signal from the radial artery is not possible. Moreover, improper placement of the pressure sensor or improper use of our products by medical personnel may cause our products’ blood pressure readings to be inaccurate. If our products fail to perform, medical institutions may not purchase our products, which would harm our results of operations.
We have recently learned that many users of our Primo hand-held monitors have encountered difficulty in the proper placement of the Primo’s sensor on the wrist which has resulted in inaccurate readings. As a result of these difficulties, approximately 75% of previously shipped Primo hand-held monitors have been or will shortly be returned to us. As a result, we will discontinue selling the Primo. These returns have, and the marketplace resistance created by our discontinuation of a recently launched product will likely continue to, harm our results of operations.
We may be unable to design and build products that do not have substantial operational problems after sale or require unforeseen amounts additional servicing. If our products have repeated operational difficulties after sale, medical institutions may not purchase our products and/or we may incur substantial repair and replacement expenses to avoid losing an existing customer. Any additional servicing requirements, individually or in the aggregate, may be time-consuming or prohibitively expensive. Further, the need for any such additional servicing may not be readily apparent to clinicians using the products and could result in inaccurate readings and the negative impacts on our results of operations discussed above. Even if our products are perceived to generate inaccurate readings or require substantial service after purchase, medical institutions may not purchase our products, which would harm our results of operations.
We must continue to evaluate the design of our products.
We will continue to test our existing products, will likely test our future products on an ongoing basis, and may be required to modify any existing or future products as a result of these tests. If the configuration of the technology must be modified, there can be no assurance that these modifications will be acceptable to customers or be technically feasible. Even if feasible, these modifications could result in significant delays and significant expenses. If these modifications require regulatory approval, additional significant delays could result. We could be materially and adversely affected by any of these developments.
Similarly, as our products are incorporated into OEM modules, both the initial OEM product and any subsequent changes to the OEM product will require regulatory approval. These approvals may result in additional delays, which could be exacerbated because any regulatory application for our OEM products must be submitted by our third party OEM partners. We could be materially and adversely affected by any of these developments.
We may not have adequate intellectual property protection.
We rely on patents, trade secret protection, confidentiality agreements, and un-patented proprietary know-how for the continuing development of new products. Any action that we bring against a third party for infringing any of these rights will be costly and may distract our management’s attention. Our patents and other intellectual property protection may not be able to prevent competition by others.
The patents that have been granted to us, and for which we have applied, do not confer on us the right to manufacture and market products that infringe patents held by others. If our products infringe any patent rights held by third parties, we may be required to stop making, using or selling our products or to obtain licenses from, or pay royalties to, others, any of which could entail significant expense and have a material adverse effect upon us. Further, in such event, there can be no assurance that we would be able to obtain or maintain any licenses on acceptable terms.
We, throughout the development process for our products, and many of our employees have previously been associated with various companies, institutions and individuals. Although we have no knowledge that any such companies, institutions or individuals have claimed, or have any basis for claiming, interests in our intellectual property rights, there can be no assurance that such claims will not be threatened. Even if claims brought against us are unsuccessful or without merit, we would have to defend ourselves. The defense of any actions may be time-consuming and costly and may distract our management’s attention. As a result, we may incur significant expenses and may be unable to effectively operate our business.
Our technology may become obsolete.
The medical device industry is subject to rapid technological innovation and, consequently, the life cycles of products tend to be relatively short. We are engaged in a field characterized by extensive research efforts. There can be no assurance that new developments or discoveries in the field will not render our products and/or technology obsolete. The greater resources of many of the companies currently engaged in research of blood pressure management may permit such companies to create, or respond more rapidly than us to, technological innovations or advances.
We have a new management team.
Our former President and Chief Executive Officer, Timothy J. O’Malley, resigned on September 21, 2006. After Mr. O’Malley’s resignation, our Board of Directors appointed one of the then current directors, Frank Katarow, as interim Chief Executive Officer. Subsequently, we hired Rocco Morelli to serve as our Senior Vice President of Sales & Marketing and Ramon Burton to serve as our Chief Financial Officer. Our success depends to a significant degree on the performance of our management team and other key employees. There is no guarantee that Messrs. Katarow, Burton or Morelli, or our other members of our management team will remain employed with us in the future.
We recently decided to relocate our corporate office which may adversely impact our business.
On October 23, 2006, we initiated a staged closure of our corporate office in Danvers, Massachusetts. As part of this plan, we have laid off the employees in this office. We anticipate closing this office in April 2007, when its lease expires, and transitioning the operational functions from the Danvers office to our facility in Arden Hills, Minnesota. The relocation of our corporate headquarters and the related layoffs may disrupt our operations and will likely add to employee instability and uncertainty. As a result, our business, financial condition and results of operations may be adversely affected until this transition is complete.
We may not be able to manage growth.
If successful, we will experience a period of growth that could place a significant strain on our managerial, financial and operational resources. Our infrastructure, procedures and controls may not be adequate to support our operations and to achieve the rapid execution necessary to successfully market our products. Our future operating results will also depend on our ability to scale up manufacturing efficiently, or expand our direct sales force and our internal sales, marketing and support staff. If we are unable to manage future expansion effectively, our business, results of operations and financial condition will suffer, our management will be less effective, and our revenues and product development efforts may decrease.
We have limited manufacturing experience and capability.
We currently have little manufacturing experience or capability. Today, most of our product manufacturing remains a highly manual process. We have developed, arranged for, and invested in some production tooling, but have not arranged for any significant third-party manufacturing capacity or agreements. There can be no assurance that we will be able to scale-up manufacturing of our products at quantities required to meet cost targets and profitability goals. If our manufacturing costs are higher than anticipated, we may not be able to produce and sell our products. In addition, there can be no assurance that any of our subcontractors will produce sufficient products at required quality and cost levels. We will be materially adversely affected if we are unable to scale-up manufacturing successfully or enter into manufacturing arrangements on acceptable terms.
We have only one manufacturing facility, the loss of which would harm our revenues and damage our customer relations.
We currently fabricate all of our products in our manufacturing facility located in Arden Hills, Minnesota, which is our sole source for production. A natural disaster or other event that resulted in the destruction or loss of part or all of our manufacturing facility or a work stoppage or other employee issues that interrupted or stopped production would significantly harm our business and operations and could cause our existing customers to cancel orders or not buy from us in the future. Although we believe other manufacturing facilities could manufacture our products in compliance with the FDA’s requirements, we may not be able to find an alternate facility that could meet our production requirements on short notice. Even if we found an alternate facility, our production costs likely would increase, which would harm our operating results.
Our sources of supply are concentrated in a single geographic area.
We currently purchase virtually all components and subassemblies for our products from vendors concentrated near our manufacturing operations in Arden Hills, Minnesota. This geographic supplier concentration heightens our exposure to adverse developments in Minnesota and the upper Midwest. Any rapid increase in our supplier costs or sudden unavailability of components or subassemblies because of adverse developments in this region could dramatically harm our overall operating results.
We must maintain and develop strategic relationships with third parties to increase market penetration of our product lines.
In fiscal year 2006, approximately 40% of our products were distributed through unaffiliated regional dealers or sales agents, including all of our international sales. Many aspects of our relationships with these third parties, and the success with which third parties promote distribution of our products, are beyond our control. These third parties typically do not distribute our products on an exclusive basis, and accordingly, there can be no assurance that they will continue to market our products as vigorously as they presently do or at all. The loss of qualified dealers or sales agents to market our products, particularly if these agents work with our competitors, could have a material adverse effect on our business, financial condition and results of operations.
Our international sales expose us to risks.
In fiscal year 2006, international sales accounted for approximately 10% of our revenue. The international sale of medical devices exposes us to risks from unexpected changes in regulatory requirements, tariffs and other barriers and restrictions, and reduced protection for intellectual property rights. In addition, all our international transactions are conducted in U.S. dollars so fluctuations in exchange rates may increase the price of our products in local currencies to the point that they become prohibitively expensive. Sales in international markets have become an increasingly large component of our business and the inability to continue selling internationally could have a material adverse effect on our business, financial condition and results of operations.
We may not continue to receive necessary FDA clearances or approvals.
Our products and activities are subject to extensive, ongoing regulation by the Food and Drug Administration and other governmental authorities. Unforeseen difficulties in these processes could significantly impact our results of operations. Moreover, delays in receipt of, or failure to obtain or maintain, regulatory clearances and approvals, or any failure to comply with regulatory requirements, could delay or prevent our ability to market our product line, which could impact our ability to generate revenue and harm our results of operations.
We may not receive approvals by foreign regulators that are necessary for international sales.
Sales of medical devices outside the United States are subject to foreign regulatory requirements that vary from country to country. If we, or our international distributors, fail to obtain or maintain required pre-market approvals or fail to comply with foreign regulations, foreign regulatory authorities may require us to file revised governmental notifications, cease commercial sales of our products in the applicable countries or otherwise cure the problem. Such enforcement action by regulatory authorities may be costly, and any such failures could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to product liability claims and our products may require modification if patients have complications that are potentially attributable to our products.
While we have not detected significant patient complications caused by any of our products, complications may occur as the technology is used on a greater number of patients with different characteristics and under various conditions. The presence of any significant complications would necessitate a potentially expensive evaluation to determine the cause of these complications. If any complications are ultimately attributable to the design or usage of our products, we could be forced to modify their design. There can be no assurance any modifications will be acceptable to customers or be technically feasible.
We have obtained product liability insurance, including excess umbrella coverage, in the aggregate amount of $7,000,000. However, there can be no assurance that we will be able to maintain this insurance in amounts and with coverage that will adequately cover associated risks or that this insurance will be available in the future at premiums that can be economically justified. Lack of this insurance, or failure of the insurance we maintain to compensate patients for complications caused by our products, could expose us to substantial damages, which could have a material adverse effect on our business, financial condition and results of operations.
We have a history of losses and may experience continued losses.
We have experienced losses every year since our inception. These losses have resulted because expenditures in the course of researching, developing and enhancing our technology and products and establishing our sales and marketing organization have exceeded our revenues. We expect that our operating expenses will increase in the foreseeable future. It is possible that we will never achieve or sustain the revenue levels required for profitability.
We may need additional capital, which may be unavailable.
The commercialization of our product line and the development and commercialization of any additional products may require greater expenditures than expected in our current business plan. Our capital requirements will depend on numerous factors, including:
• our rate of sales growth—fast growth may actually increase our need for additional capital to hire additional staff, purchase additional component inventories, finance the increase in accounts receivable and supply additional support services;
• our progress in marketing-related clinical evaluations and product development programs, all of which will require additional capital to begin and continue;
• our receipt of, and the time required to obtain, regulatory clearances and approvals—the longer regulatory approval takes, the more working capital we will need to support our regulatory and development efforts in advance of sales;
• the level of resources that we devote to the development, manufacture and marketing of our products—any decision we make to improve, expand or simply change our process, products or technology will require increased funds; and
• market acceptance and demand for our products—although growth may increase our capital needs, the lack of growth and continued losses would also increase our need for capital.
We may be unable to predict accurately the timing and amount of our capital requirements. We may be required to raise additional funds through public or private financing, bank loans, collaborative relationships or other arrangements earlier than expected. It is possible that banks, venture capitalists and other investors may perceive our capital structure, our history of losses or the need to achieve widespread acceptance of our technology as too great a risk to bear. As a result, additional funding may not be available on attractive terms, or at all, and may result in significant dilution of existing stockholders’ interests, all of which could cause our share price to decline. If we cannot obtain additional capital when needed, we may be forced to agree to unattractive financing terms, to change our method of operation or to curtail our operations.
A continued low stock price, the failure to maintain a minimum of $2.5 million of stockholders’ equity or our inability to comply with other applicable requirements could result in our being de-listed from the NASDAQ Capital Market and subject us to regulations that could reduce our ability to raise funds.
As of January 5, 2007, the closing price of our common stock was below $1.00 per share for 30 consecutive trading days in violation of the continued listing criteria for trading on the NASDAQ Capital Market. If our stock price does not increase during the applicable cure period, we fail to maintain stockholders’ equity of at least $2.5 million (and do not meet alternative tests of either having $35 million in market capitalization or $500,000 in annual net income), or we fail to satisfy other NASDAQ continued listing criteria, NASDAQ may de-list our common stock from the NASDAQ Capital Market. In such an event, our shares could only be traded on over-the-counter bulletin board systems. This method of trading could significantly impair our ability to raise new capital.
In the event that our common stock was de-listed from the NASDAQ Capital Market, we may become subject to special rules, called penny stock rules that impose additional sales practice requirements on broker-dealers who sell our common stock. The rules require, among other things, the delivery, prior to the transaction, of a disclosure schedule required by the Securities and Exchange Commission relating to the market for penny stocks. The broker-dealer also must disclose the commissions payable both to the broker-dealer and the registered representative and current quotations for the securities, and monthly statements must be sent disclosing recent price information.
In the event that our common stock becomes characterized as a penny stock, our market liquidity could be severely affected. The regulations relating to penny stocks could limit the ability of broker-dealers to sell our common stock and thus the ability of our stockholders to sell their common stock favorably in the secondary market. All of these increased regulations and decreased liquidity could combine to depress the market price for our common stock and impair our ability to raise needed capital.
Our common stock is subject to price volatility.
The market price of our common stock has been and is likely to continue to be highly volatile. Our stock price could be subject to wide fluctuations in response to various factors, including:
• the sales of our common stock by affiliates or other shareholders with large holdings;
• the rate of adoption by physicians of our technology in targeted markets;
• the timing and extent of technological advancements or the failure to meet projected technological milestones;
• results of clinical studies;
• the timing of patent and regulatory approvals;
• changes in, or failure to meet, financial estimates of securities analysts;
• quarterly variations in operating results; and
• general market conditions.
Our future operating results may fall below the expectations of securities industry analysts or investors. Any such shortfall could result in a significant decline in the market price of our common stock. In addition, the stock market has experienced significant price and volume fluctuations that have affected the market prices of the stock of many medical device companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may directly and adversely influence the market price of our common stock.
Common stock which is available for immediate resale may depress our market price.
We have filed registration statements with the Securities and Exchange Commission covering the potential resale by some of our shareholders of up to 8,597,810 shares of common stock. Additionally, as of December 31, 2006, we had 1,962,105 shares of our common stock reserved for issuance with respect to options and warrants. The existence of a substantial number of shares of common stock subject to immediate resale, or the possibility of exercise of our outstanding options and warrants, could depress the market price for our common stock and impair our ability to raise needed capital.
Our common stock is thinly traded, so a shareholder may be unable to sell at or near ask price or at all if you need to liquidate your shares.
Our common stock has historically been sporadically or “thinly-traded” on the NASDAQ Capital Market. For example, during one particular day in the three months ended December 31, 2006, only 200 shares of our common stock were traded. As a result, the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company, which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of these persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our common stock until we became more financially viable. As a consequence, there may be periods of several days or more when trading activity in our shares is low and a shareholder may be unable to sell his shares of common stock at an acceptable price, or at all. We cannot give shareholders any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that even current trading levels will be sustained.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research reports and opinions that securities or industry analysts publish about our business. We do not currently have and may never obtain research coverage by analysts. Investors have numerous investment opportunities and may limit their investments to publicly traded companies that receive thorough research coverage. If no analysts commence coverage of us or if one or more analysts cease to cover us or fail to publish reports in a regular manner, we could lose visibility in the financial markets, which could cause a significant and prolonged decline in our stock price due to lack of investor awareness. In the event that we do obtain analyst coverage, and if one or more of the analysts downgrade our stock or comment negatively about our prospects or the prospects of other companies operating in our industry, our stock price could decline significantly.
We do not intend to pay dividends in the foreseeable future.
We have never declared or paid a cash dividend on our common stock. We currently intend to retain any earnings for use in the operation and expansion of our business and therefore do not anticipate paying any cash dividends in the foreseeable future.
Our internal control over financial reporting may need enhancement.
If we fail to maintain adequate internal control over financial reporting, if we are unable to timely complete our assessment of the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm cannot attest to our assessment of our internal control over financial reporting, we may be subject to regulatory sanctions and a loss of public confidence and the trading price of our stock could be negatively impacted.
Effective internal reporting controls are necessary for us to provide reliable financial reports and effectively detect and prevent fraud. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required beginning with our fiscal year ending September 30, 2008, to include in our annual report our assessment of the effectiveness of our internal control over financial reporting. Furthermore, our registered independent public accounting firm will be required to report on our assessment of the effectiveness of our internal control over financial reporting and separately report on the effectiveness of our internal control over financial reporting beginning with our fiscal year ending September 30, 2009. We have not yet completed our assessment of the effectiveness of our internal control over financial reporting. If we fail to timely complete this assessment, or if our independent registered public accounting firm cannot attest to our assessment, we may be subject to regulatory sanctions and a loss of public confidence. Also, the lack of effective internal control over financial reporting may adversely impact our ability to prepare timely and accurate financial statements.
Provisions in our shareholder rights agreement and state law may make it harder for others to obtain control of Medwave even though some stockholders might consider such a development to be favorable.
We have implemented a so-called poison pill by adopting our shareholders rights agreement. This poison pill significantly increases the costs that would be incurred by an unwanted third-party acquirer if such party owns or announces its intent to commence a tender offer for more than 15% of our outstanding common stock. The existence of this poison pill could delay, deter or prevent a takeover of Medwave. Applicable Delaware General Corporation Law also imposes various procedural and other requirements that could delay or make a merger, tender offer or proxy contest involving us more difficult.
All of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, which could preclude our stockholders from recognizing a premium over the prevailing market price of our stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
September 26 2009 08:06 AM ET - till market .
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