Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED December 31, 2001, OR
[ ] 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: 000-31745
THIRD WAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1791034
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
502 S. ROSA ROAD, MADISON, WI 53719
(Address of principal executive offices) (Zip Code)
(888) 898-2357
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 Par Value Per Share
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on February 28, 2002, was
83,576,253, based on the last sale price on that date as reported by The
Nasdaq Stock Market.
As of December 31, 2001, the registrant had 39,374,014 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K: Certain information required in Part III
of this Annual Report on Form 10-K is incorporated from the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on June 5, 2002.
THIRD WAVE TECHNOLOGIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
SIGNATURES
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. When used in this Form 10-K, the words
"believe," "anticipates," "intends," "plans," "estimates," and similar
expressions are forward-looking statements. Such forward-looking statements
contained in this Form 10-K are based on current expectations. Forward-looking
statements may address the following subjects: results of operations; customer
growth and retention; development of technologies; losses or earnings; operating
expenses, including, without limitation, marketing expense and technology and
development expense; and revenue growth. We caution investors that there can be
no assurance that actual results, outcomes or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, among others, our limited
operating history, unpredictability of future revenues and operating results,
competitive pressures and also the potential risks and uncertainties set forth
in the "Overview" section of Item 7 hereof and in the "Risk Factors" section of
Item 1 hereof, which factors are specifically incorporated herein by this
reference.
1
You should also carefully consider the factors set forth in other reports or
documents that we file from time to time with the Securities and Exchange
Commission. Except as required by law, we undertake no obligation to update any
forward-looking statements.
In this Form 10-K, we refer to information regarding our potential markets and
other industry data. We believe that all such information has been obtained from
reliable sources that are customarily relied upon by companies in our industry.
However, we have not independently verified any such information.
In this Form 10-K, the terms "we," "us," "our," "Company" and "Third Wave" each
refer to Third Wave Technologies, Inc.
In the United States, France and the United Kingdom our registered trademarks
are Cleavase(R) PowerScan(R) and Invader(R). Cleavase, CFLP and Invader are
registered in Germany. CFLP and Invader are also registered in Japan. Trademark
registration for InvaderCreator(TM) is pending in the United States, France,
Germany, the United Kingdom and Japan. Trademark registration is pending in the
United States for Third Wave.
PART I
ITEM 1. BUSINESS
Third Wave Technologies, Inc. is a leading developer, manufacturer and marketer
of genetic analysis products used in the discovery and validation of the genetic
basis of disease and the delivery of personalized medicine. Our patented genetic
analysis platform, the Invader product platform, offers several advantages over
conventional genetic analysis technologies that we believe are making the
Invader platform the technology of choice to address the rapidly growing demand
for such products. Genetic variations are the origin of most differences between
individuals, including differences in disease predisposition and drug therapy
response. The analysis of these millions of variations in up to hundreds of
millions of individuals will require billions of tests. The Invader platform is
highly accurate, sensitive, easy to use, cost-effective and does not require the
copying of the genetic sample using a complex copying technique known as
polymerase chain reaction, or PCR. Additionally, our products are compatible
with existing automation processes and detection platforms and are available in
convenient, ready-to-use formats. These advantages make the Invader platform the
ideal solution for genetic analysis across the health care continuum from
disease discovery to the point of patient care, including large-scale disease
association studies, drug response marker profiling and molecular diagnostics.
Third Wave is a Delaware corporation. The Company's principal executive offices
are located at 502 South Rosa Road, Madison, Wisconsin 53719, and the telephone
number is (888) 898-2357.
INDUSTRY BACKGROUND
Genetic information provides a basis for understanding biological and
medical functions in organisms. In June 2000, public and private efforts,
including the Human Genome Project, jointly announced the completion of the
sequencing of the billions of DNA bases of the human genome. Genomic research is
currently focused on the identification and analysis of genetic variations--
including establishing and validating the association of specific variations
with predisposition to disease or drug response within the genome from person to
person. These variations are differences, or polymorphisms, in DNA sequences.
The most common genetic variations are differences in a single DNA base, or
nucleotide, and are called single nucleotide polymorphisms, or SNPs.
2
IMPORTANCE OF GENETIC VARIABILITY
Approximately 99.9% of every individual's genome is identical with that of
every other individual. However, variation in the genome can modify how a gene
functions. These variations can lead to a spectrum of observable differences,
such as eye and hair color. Genetic variations are a major underlying component
of many diseases and disorders, including cancer, inflammation, hypertension and
cardiovascular disease, with many diseases being affected by multiple
variations. Genetic variations are also responsible for many of the differences
in how individuals respond to drug therapies. As a result, analysis of SNPs and
other genetic variations is playing an increasingly important role in the
discovery and development of new drugs, and in a variety of diagnostic,
prognostic, therapeutic and other medical and life science applications.
Industry sources estimate that there are millions of genetic variations in the
human genome, which has created a continuing increase in demand for products
that can quickly and accurately detect and analyze these variations.
GENOTYPING AND SNP ANALYSIS
Genotyping is the process of determining genetic variations, including
SNPs, that are present in an individual. Although some SNPs are known to be a
major cause of inherited diseases and individual differences in drug response,
the vast majority of inherited SNPs have not yet been analyzed. To identify
medically relevant genetic variations, potentially millions of variations are
being analyzed in large numbers of individuals using billions of analysis tests.
Once the medical relevance of particular variations or groups of variations is
determined, tests for that variation may then be performed on hundreds of
millions of individuals.
GENES AND GENE EXPRESSION ANALYSIS
Genes are segments of DNA within the genome that direct the production of
proteins. Cells use these proteins to carry out their functions. It is now
recognized that essentially all stages of disease are caused by changes in the
expression levels of genes. Scientists have, therefore, begun to study the
expression of genes in both disease and non-disease states. Gene expression
analysis determines gene activity by detecting and quantifying the level of
messenger RNA, or mRNA, produced from a gene. Although all genes are present in
all cells, each cell generally expresses only those genes it needs for the
specific functions it performs. By measuring the amounts of the mRNAs in
affected cells, medical professionals can understand how drugs and disease
progression affect cells and, consequently, a patient's health. Gene expression
analysis is being widely adopted as an integral step in drug discovery and
development, as well as in determining appropriate drug therapies and monitoring
their efficacy.
GENETIC ANALYSIS MARKET OPPORTUNITIES
The current worldwide market for genetic analysis products, which consists
of reagents, assays and other consumables used in performing genetic analysis
tests, is estimated to be at $1.0 billion and is expected to grow to $10 billion
by 2005.
The research market includes both genotyping, including SNP analysis, and
gene expression analysis applications. Industry sources estimate that the
current size of the research market is $325 million and is expected to grow to
$2.2 billion by 2010. The research market includes:
- confirmation of new sites of genetic variation in DNA;
- validation of the medical importance of specific genetic variations; and
3
- utilization of genetic variation and gene expression analysis in drug
discovery and development, determination of disease predisposition and
clinical test development.
The clinical market also includes both genotyping and gene expression
analysis applications. Industry sources estimate that the current size of the
clinical market is $800 million and is expected to grow to more than $8 billion
by 2005.
The clinical market includes:
- formulation of customized treatments based on genetic profile;
- monitoring of the efficacy of drug therapies;
- diagnosis of infectious and inherited diseases;
- early assessment of emerging disease;
- analysis of viral and bacterial drug resistance; and
- matching of recipients and donors in organ and tissue transplants.
CONVENTIONAL GENETIC ANALYSIS TOOLS AND LIMITATIONS
The initial technique for the analysis of genetic variations was
hybridization, which was first developed in the 1970s. Hybridization relies on
the principle that a unique piece of DNA will bind, or hybridize, most strongly
to its exact complement. In hybridization, short, synthetic segments of DNA,
also known as probes, are used to locate and bind to their counterparts within a
mixture of sample DNA or RNA. Hybridization is often performed using
instrumentation that incorporates a detection medium that provides a signal to
indicate whether the probe has hybridized to the sample DNA or RNA. However,
hybridization used alone has several limitations. In particular, the process in
which the probe binds to its counterpart requires ideal testing conditions to
avoid inaccurate results. Even minute changes in testing conditions, including
temperature and other reaction conditions, can dramatically affect the outcome
of the hybridization reaction and, therefore, the reliability of test results.
Beginning in the 1980s, various techniques were invented with the objective
of improving the reliability of hybridization. However, these methods do not
provide a signal that is sufficient to be generally detectable. Therefore, in
order to use these methods, it is necessary to first copy, or amplify, the
segment of DNA or RNA to be analyzed using a complex technique known as
polymerase chain reaction, or PCR. These techniques, whether involving
hybridization alone or in combination with additional steps, have significant
limitations, including:
- Inability to Directly Analyze Genomic Samples. Conventional methods are
not sensitive enough to directly analyze a particular genetic variation
contained within the 3 billion data points in the human genome. As a
result, these methods require that, for each genetic variation of
interest, the small portion of the genome that contains it must be
amplified using PCR. This amplification process adds time and material
and labor costs, makes automation and quantitative analysis difficult
and is susceptible to errors resulting from sample contamination.
- Highly Complex Product Development Process. Conventional methods
frequently require trial and error testing to validate tests or product
designs. Therefore, with conventional technologies, the process of
developing a test, or product, for analyzing a specific genetic
variation is highly complex and cannot be automated easily. This problem
is exacerbated by the dependence of conventional methods on PCR, which
requires
4
specific design and optimization of the PCR process for each new test
being developed. These problems severely limit the ability to use
conventional techniques to develop the large numbers of products that
will be required for comprehensive analysis of human genetic
variations.
- Low Degree of Accuracy. A high degree of accuracy is essential to detect
and quantify genetic variations, which may involve the analysis of
thousands of genetic variations per individual. Conventional methods can
result in one or more tests in 10 being inaccurate. These inaccuracies
are magnified in tests for multiple variations. For example, in a test
panel involving six genetic variations, the overall panel accuracy for a
technology having 95% accuracy per result would be only 74%.
- Difficulty of Use. Many of the conventional analysis methods involve
multiple technical steps requiring human intervention, which make the
analysis difficult to perform and impossible to fully automate. In
addition, while many pharmaceutical companies and research organizations
have already purchased expensive detection instrumentation, many
conventional methods cannot be used on multiple instrument platforms,
requiring customers to purchase additional equipment.
- High Cost Per Test Result. Due to the complexity of the product
development process, the difficulty of use and inability to directly
analyze genomic samples, conventional methods can cost in excess of
$1.00 per test result for research applications. These cost levels can
be prohibitive for pharmaceutical companies and research organizations
contemplating large-scale studies involving up to millions of genetic
variations in millions of patient samples.
- Limited Clinical Viability. Because of the low degree of accuracy and
difficulties associated with product development and use, conventional
methods have not been broadly applicable to clinical settings.
Capturing the expanding market opportunity for genetic analysis will
require technologies and products that address and overcome these significant
limitations to provide cost-effective, highly reliable genetic testing and
analysis.
THE THIRD WAVE SOLUTION
Our proprietary Invader platform offers a highly sensitive technology that
can detect and quantify genetic variations directly from unamplified genomic
DNA, RNA and infectious agents. The advantages of our proprietary technology
include:
- Direct Analysis of Genomic Samples. Our Invader platform is sufficiently
precise to analyze genomic samples directly, eliminating the requirement
for PCR amplification and making the Invader platform well suited to
automation and large-scale genetic analysis. Customers are routinely
performing more than 400,000 genotypes per day with the Invader
platform.
- Rapid, Automated Product Development Process. We have developed a
proprietary software program for the development of our products and
have automated the processes for both the manufacture and quality
control of these products. Using this software and automation, we can
develop and manufacture turnkey products significantly more quickly than
conventional analysis techniques permit. Once we have incorporated a
product into our catalog of developed products, even less production
time is required.
- Highly Accurate. The Invader platform has been found in published,
independent studies to be between 99.6% and 100% accurate in correctly
identifying genomic variations in routine use. Testing conducted
recently by a series of our clinical customers found our genotyping
products to be 99.9% accurate.
5
- Ease of Use and Platform Independence. The ability to automate assay
usage allows us to eliminate many of the steps that require human
intervention, reducing the possibility of errors and making the Invader
platform easier to use than conventional methods. We have introduced the
groundbreaking Invader "panel" format, which offers unmatched ease of
use as all the user must do is add genomic DNA, incubate the assay and
read the results. All the necessary components are pre-mixed and dried
in the bottom of each test well. The performance and ease of use of our
one-step, "just add patient sample" format are critical to accelerating
the delivery of DNA-based tests to doctors' offices and other primary
points of care. In addition, because the Invader products can be used on
nearly all major instrumentation systems in place today, our customers
do not need to purchase new instrumentation to adopt our technology.
This flexibility enables us to provide our products to customers who use
different instrument platforms with a configuration tailored to their
unique needs.
- Lower Cost Per Test Result. Due to our automated product development,
increased ease of use and ability to directly analyze genomic samples,
we have been able to reduce the cost per result significantly. These
cost reductions are making large-scale genomic studies more feasible as
a research and development tool for pharmaceutical companies and
research organizations. In addition, the cost advantages associated with
the use of the Invader platform is proving attractive to major health
care providers, who are interested not only in validating the clinical
utility of a genetic markers of interest to them, but who share our
commitment to accelerating the adoption of genetic analysis in clinical
settings.
- Increased Clinical Viability. The accuracy, ease of use and low cost per
test makes the Invader platform well suited for use in clinical settings
and has enabled us to build the broadest menu of clinical genetic
variation analysis products. Our automated product development process
is enabling us to efficiently develop new clinical products and to
market clinical applications products that were originally developed for
research use.
THIRD WAVE STRATEGY
Our strategy for capitalizing on the growing market opportunity in genetic
analysis products and commercializing our products and technologies is to:
- Establish Our Invader Platform as the Standard for Genetic Variation
Analysis Products. We are becoming the leading provider of genetic
analysis products and technologies by being the first to market with the
broadest menu of highly accurate, easy-to-use genetic analysis products
and by leveraging those products into commercial opportunities of
increasing value across the health care continuum from disease discovery
to the point of patient care. We are currently marketing nine clinical
products to address the markets for the genetic analysis of thrombosis
and cardiovascular disease risk. We manufactured and shipped more than
100,000 unique assays and we have successfully designed an additional
1.7 million unique assays for research use applications.
- Optimize Technology and Production Efficiencies. We work continually to
further enhance our technology platform and to enable manufacturing
efficiencies that reduce costs and allow us to commercialize our
products more rapidly. The Invader technology has been successfully used
in a microarray format. A microarray contains thousands of unique
genetic variation analysis targets at discrete sites on a solid surface
or support like microscopic latex beads or a small glass or plastic
chip, allowing researchers to test for each of those variations from the
same genetic sample at the same time. The Invader technology has also
been coupled the high-multiplexing capabilities of ACLARA BioScience's
eTag sequence-labeling technology, which enables customers to profile
many genes simultaneously in a single reaction directly from crude cell
lysates, without the need for sample prep or polymerase chain reaction
(PCR).
6
- Establish Additional Collaborative Relationships to Obtain Rights To
Commercialize Discoveries. We intend to establish additional
collaborative relationships with leading research organizations and
pharmaceutical companies that will provide us with rights to
commercialize the discoveries made using the Invader platform. These
relationships will be focused on the discovery of the associations of
specific genetic variations with major disease states, including cancer,
hypertension, inflammation and cardiovascular disease. Our strategy is
to offer our research collaborators early access and lower-cost use of
the Invader platform in exchange for the rights to commercialize the
discoveries they make using it. These rights typically enable us to
offer new genetic products for clinical research and clinical diagnostic
applications.
- Enter into Additional Commercial Alliances To Market Our Products and
Access New Technologies. We intend to enter into strategic commercial
alliances that will allow us to leverage our collaborators' marketing,
sales and new applications development strengths and gain access to
complementary and emerging technologies. Additionally, we plan to enter
into strategic alliances with a number of companies that can provide
proprietary and synergistic technologies to enhance our product
offerings. These alliances can open up new markets and marketing
channels and provide us with rights to use new and emerging detection
and other technologies, such as microfluidics and microarrays, with the
Invader platform. We also intend to leverage the strength of our broad
product menu with major health care providers with a strong tradition of
conducting clinical research. These partnerships will validate the
clinical utility of a variety of genetic markers and accelerate the
implementation of molecular diagnostics as an emerging, new standard of
care.
- Capitalize on Existing and Emerging Opportunities in Clinical Markets.
We intend to rapidly gain market share in the clinical market by
developing and commercializing products to address emerging needs in the
clinical market and expanding our customer base for existing and new
products through aggressive marketing and sales. We have introduced five
clinical products to address the market opportunity for the genetic
analysis of predisposition for blood clotting and four clinical products
to address the market opportunity for the genetic analysis of
cardiovascular disease risk. We plan to introduce additional clinical
products for many other applications, including the diagnosis of many
common and treatable diseases. We currently sell to the clinical market
with our internal sales force, which targets leading clinical reference
laboratories in the United States. Our future sales strategy for the
clinical market will include a combination of building our sales force,
strategic development, and distribution and/or co-marketing
arrangements.
INVADER PLATFORM
INVADER TECHNOLOGY
Our patented Invader platform can be differentiated from conventional
genetic analysis methods in at least two significant ways. First, our technology
uses a patented enzyme, known as a Cleavase enzyme, that only recognizes and
cuts the specific structure formed during the Invader process. The benefits of
using this structure-specific enzyme versus sequence-specific conventional
technologies are enhanced assay specificity, ease of development and use.
Second, our technology relies on linear amplification of the signal generated by
the Invader process rather than exponential amplification of the target sample
resulting from PCR. Linear amplification, which means that a single target
generates a given number of signals over a given period of time, allows for easy
quantification of target concentration and reduces the effects of sample
contamination that may result from exponential target amplification, in which a
single target generates two additional targets and each generated target
generates an additional two targets and so forth.
In its most common configuration, our Invader products detect and/or
quantify a target of interest through two steps. In the first step, two short
synthetic segments of DNA, or probes, hybridize, to the target of interest. One
probe is called the Invader probe and the other is called the Primary probe. The
7
Primary probe includes a short portion, known as a flap, which does not
hybridize to the target. The hybridization of the Invader and Primary probes at
a specific location on the target forms the structure recognized by the Cleavase
enzyme, which then cuts the unbound flap off of the Primary probe. When the
target of interest is not present, the structure is not formed and cutting does
not occur. The target of interest, when present, induces the cutting of several
thousand flaps per hour in a linear fashion.
In the second step, each flap generated in the first step hybridizes, or
binds, to a third probe, called a FRET Cassette, forming the structure
recognized by the Cleavase enzyme. The enzyme then cleaves off a portion of the
FRET Cassette causing, in the most common format, the reaction to emit a
detectable fluorescent signal. Consequently, each flap generated in the first
step induces the generation of several thousands of detectable signals per hour.
In this way, an Invader assay produces tens of millions of detectable signals
per target when the target is present, which can be read easily on most existing
detection systems. The result is that the Invader technology produces millions
of target-specific signals without copying the target sample itself.
Our Invader platform is much more precise than conventional technologies
and can produce accurate results over a broad range of temperatures and solution
conditions. In addition, unlike conventional approaches, the Invader platform
operates at a single reaction temperature, making it easier to use by reducing
the level of sophistication and training required for users of the system.
INVADER PRODUCTS
Our Invader products can be configured in a wide variety of formats and
combinations depending on the user's desired applications, detection systems and
other requirements. These formats may include a combination of Invader probes,
Primary probes, FRET Cassettes, Cleavase enzyme, buffers and other components.
All our products for a particular user are designed to use the same reaction
conditions, permitting easy automation of both assay design and test
performance. Since no aspect of the process requires individual optimization for
the user, any combination of reactions may run on a single assay plate, and all
plates are handled in an identical fashion.
The Research Market
- Genotyping Products and Panels. We have developed and manufactured more
than 100,000 Invader DNA Assay products, each designed to analyze a
unique genotype. We have successfully designed more than 1.7 million
additional unique products. We have automated the SNP genotyping product
development and manufacturing process. As a result, we believe that we
will be able to produce hundreds of thousands of new products for
analyzing additional genotypes during the next several years. These
products will be available individually or in combination, including as
panels for disease-specific, chromosome-specific or genome-wide genotype
analysis. We have completed, for example, the development of a panel of
2,000 SNP assays for chromosome 22 and a panel of 10,000 coding SNP
assays for medium resolution genome analysis.
- Plant and Animal Agriculture Products. On December 14, 2001 we acquired
the remaining 50% of the outstanding shares of Third Wave AgBio, Inc.
(please see detailed reference in Note 2 to the Financial Statements and
Supplementary Data found on Page F-14). We have developed products based
on the Invader technology for plant and animal genetic research markets.
In addition, we will create products for applications in plant and
animal molecular diagnostics markets.
- Gene Expression Product and Panels. We have developed Invader RNA Assay
products for quantifying the expression of genes involved in immune
response and drug metabolism. We intend to develop additional products
to address the demand for the accurate quantification of existing and
newly discovered genes involved in immune response, drug development and
metabolism and response or non-response to drug therapy. These products
will be available individually or in combination, including as groups of
tests, or panels, for particular applications.
Clinical Market
- Genotyping Product Catalog and Panels. We have developed nine clinical
products, which are currently being marketed under FDA regulations as
analyte specific reagents, or ASRs, to address market opportunities for
the genetic analysis of deep-vein thrombosis and cardiovascular disease
8
risk factors. We are currently developing a number of additional ASR
products for clinical genotyping applications.
INVADER PRODUCT APPLICATIONS
We anticipate that pharmaceutical and biotechnology companies, academic
research centers, government initiatives, clinical reference laboratories and
health care providers will be able to utilize our products in many aspects of
disease discovery, drug development, clinical trials, and patient diagnosis and
treatment applications including those described below.
Genomic Product Applications
- Disease Association Studies. Pharmaceutical companies, academic research
institutions and government initiatives can use our products to discover
and validate the association of specific genetic variations with
predisposition to a particular disease or response to a drug therapy.
Once an association has been validated, the product that detects the
variation may be refined and introduced as a clinical diagnostic.
- Plant and Animal Genetic Research and Molecular Diagnostics. Leading
plant and animal genetic research organizations can use our products for
the purposes of understanding the genetic identity, parentage,
predisposition to or presence of disease, and possession of desirable or
undesirable traits in plant and animal organisms.
- Target Identification and Validation. Pharmaceutical companies and
others can use our products to determine associations between a
particular medical condition or disease and one or more genetic
variation profiles to identify genes that are related to the condition.
These candidate genes may then serve as potential targets for new drug
development. Once a potential target has been identified, pharmaceutical
companies will be able to use our products to confirm the action of
these targets.
- Lead Compound Identification, Validation and Optimization.
Pharmaceutical companies can use our products to identify potential drug
compounds. For example, they can identify compounds that not only act on
the proteins encoded by the target gene, but also on the proteins
encoded by the variants of the gene. In this manner, a pharmaceutical
company can identify potential drug compounds that act on multiple
versions of a target protein. Our products will be able to be used to
validate potential drug candidates by performing biological assays on
these compounds against variants of a given protein. Companies may also
optimize and improve potential drug candidates by seeking to establish
broader efficacy over larger populations through studies on known
variants of targets.
- Preclinical and Clinical Testing. Pharmaceutical companies will be able
to use our products to test model systems, such as mice, and to
correlate therapeutic and metabolic responses to known genetic variation
profiles in the target or in related enzymes to better predict drug
efficacy and safety. Additionally, pharmaceutical companies can use our
products to select patients for clinical trials based on the presence or
absence of genetic variation profiles known to be associated with drug
response.
- Market Extension/Drug Revival. Pharmaceutical companies will be able to
use our products in marketing programs to expand or extend markets of an
existing drug to new patient groups. This may lead to label extensions,
additional patent protection and longer commercial lives for existing
drugs based on patient genetic profiles. Similarly, pharmaceutical
companies will be able to use our products to bring back to market drugs
which were previously removed due to adverse drug response or lack of
therapeutic activity.
Clinical Product Applications
- Clinical Diagnosis. Clinical reference laboratories and health care
providers can use our products to diagnose a number of diseases.
9
- Therapy or Treatment Selection. Medical professionals will be able to
use our products to customize treatment regimens specifically to a
particular patient. This could significantly reduce erroneous or
ineffective prescriptions and increase the likelihood that patients
receive the proper dosage of appropriate drugs. Our products can also be
used by managed care systems and other healthcare providers to tailor
patient drug therapy programs for maximum efficacy and avoidance of
adverse drug reactions.
- Therapeutic Monitoring. Medical professionals may use our products to
monitor response to a particular therapeutic regimen, allowing earlier
modulation of treatment, if necessary. This type of therapeutic
monitoring could improve medical outcomes by reducing the time required
to identify the most appropriate types and levels of treatment.
MANUFACTURING
We currently manufacture our products at our three facilities, located in
the Madison, Wisconsin area. Manufacturing is automated from receipt of a
proposed target sequence to shipment of the corresponding product. Additionally,
we have developed and implemented a modular manufacturing process at all of our
manufacturing facilities, which allows easy expansion. Each manufacturing module
consists of the following coordinated stations and computer support:
- proprietary software program for automated product design;
- bar code product tracking system;
- automated probe synthesis and processing system;
- automated probe purification station;
- automated probe quantification and dilution and fill station; and
- on-line robotic product quality control system.
We have designed the manufacturing processes and area at each facility to
optimize material flow and personnel movement with all the manufacturing and
quality control operations. We have fully integrated our manufacturing modules
with our materials, requirements, and planning system to manage and control our
material and product orders and inventories.
Our clinical products are produced in environmentally controlled clean
rooms and are isolated from the rest of the facility consistent with national
and international registration standards. We have registered the facilities used
for manufacturing our clinical products with the United States Food and Drug
Administration, or FDA, as a Device Manufacturer and we believe we are in
compliance with FDA's quality system requirements, or QSRs.
MARKETING AND SALES
We currently market and sell our products through a combination of direct
sales personnel, which are focused primarily on the clinical market, and through
collaborative relationships. Our clinical sales force is currently comprised of
six individuals, and we plan to increase this sales force as market demand
requires. The clinical sales force targets high volume clinical and reference
laboratories that meet the criteria for highly-complex laboratories under the
Clinical Laboratory Improvement Amendments of 1988.
10
Our products for the research market are sold primarily through
collaborative relationships with pharmaceutical companies and research
institutions focused on life sciences in humans, plants, and animals. Our
business development group targets leading pharmaceutical companies and research
and academic institutions with the objective of entering into agreements for the
supply of genetic testing products. We also appear at industry trade shows and
advertise in trade publications in connection with our marketing efforts.
During 2001, the majority of our product sales have been to international
end customers, primarily in Japan and the United Kingdom. We intend to continue
to pursue domestic and international market opportunities through a combination
of distribution arrangements and collaborative relationships. We may also
establish a direct international sales organization in selected major markets.
For a description of our industry segment and our product revenues by
geographic area, see Note 13 of the Notes to the Consolidated Financial
Statements included under Item 8 of this Form 10-K.
COLLABORATIVE RELATIONSHIPS
Our business involves research collaborations with instrument companies,
pharmaceutical companies and academic institutions. Many of these entities have
proven and renowned capabilities in gene-based product discovery and
commercialization. We have entered into a number of collaboration agreements and
are presently in late stage discussions with a select number of other groups to
establish additional relationships. Although to date none of these relationships
have resulted in clinical products, we expect to commercialize clinical products
developed through these collaborative relationships. The following is a summary
of our principal collaborative relationships.
OTSUKA PHARMACEUTICAL COMPANY, LTD.
We entered into a marketing and distribution agreement with Otsuka
Pharmaceutical Company, Ltd. in October 2001. Under the agreement, we appointed
Otsuka as our exclusive distributor for Invader research products in Japan and
other countries in the Far East, Southeast Asia and the Middle East that
together comprise approximately 25 percent of the world market for genome
research tools.
Otsuka is a leading provider of pharmaceuticals, medical devices, genome
research products and other healthcare products. Otsuka Group and its overseas
affiliates have 23,000 employees and had gross sales of approximately $8 billion
in 2000. Otsuka is a prominent member of the Pharma SNP Consortium, created by
the Japanese pharmaceutical industry to fund pharmacogenomic research in close
collaboration with Japan's Millennium Project.
The partnership of Third Wave with Otsuka will further accelerate Third
Wave's market penetration in Japan, which is emerging as the largest and most
robust market for SNP analysis products through its world leadership in
SNP-disease association studies.
The agreement is incremental to Third Wave's existing collaboration with the
Japanese government's Millennium Project. Under that collaboration, Third Wave
is supplying more than 120,000 Invader SNP assay products to the largest
SNP-disease association study in the world.
Otsuka will market, distribute and provide technical support for both
existing catalog and new custom-order Invader products for genotyping and gene
expression analysis.
ACLARA BIOSCIENCES, INC.
In October 2001, we entered a development and commercialization agreement
with ACLARA BioSciences, Inc. focused on multiplexed gene expression research
products. These research products couple the high-multiplexing capabilities of
ACLARA's eTag sequence-labeling technology with the unique performance and
ease-of-use characteristics of Third Wave's Invader platform.
The combination of the ACLARA and Third Wave technologies will enable
customers to profile many genes simultaneously in a single reaction directly
from crude cell lysates, without the need for sample prep or polymerase chain
reaction (PCR). We believe that this integration of complementary technologies
will provide a level of throughput and multiplexing that is unprecedented among
DNA and RNA detection or quantitation products.
The first collaboration multiplex products will detect and quantify the
expression levels of many key, clinically relevant genes, including cytokine
genes, which regulate inflammatory and immune response, and cytochrome P450
genes, which regulate drug metabolism. The products will have immediate
applications in drug discovery and development research.
APPLIED BIOSYSTEMS GROUP, A DIVISION OF APPLERA CORPORATION.
In August 2000, we entered into a development and non-exclusive supply
agreement with the Applied Biosystems Group, a division of Applera Corporation.
Under this agreement, we developed a panel of assays for high resolution genetic
analysis including SNP detection. These assays were developed for use in a SNP
initiative sponsored by various agencies of the Japanese government known as the
"Japanese Millennium Project." Under the agreement, we developed and
manufactured certain components for the assays and Applied Biosystems provided
us with various raw materials. Applied Biosystems also developed an automated
detection instrument for use in performing genomic analysis with the assays. In
connection with the development program, Applied Biosystems also agreed to lend
us various items of equipment used in the manufacture and quality control of the
assays.
Under the agreement with Applied Biosystems, we supplied the Japanese
Millennium Project with assay components and invoiced Applied Biosystems in
accordance with a fee arrangement defined in the agreement. We recorded as
revenue our billings to Applied Biosystems in accordance with SAB 101 and other
guidance; accordingly, no revenue was recognized until the final product was
delivered to the Japanese government (i.e. billings related to shipments to
Applied Biosystems were deferred until the ultimate sale to the outside party
occurs). At the end of each quarter, we and Applied Biosystems each prepared an
analysis of revenues recorded and costs incurred. Our costs included fees for
equipment lent to us by Applied Biosystems under a separate equipment loan
agreement. As a result of the profit analysis by each company, one party would
owe the other an amount to achieve a 50%/50% split of the total profits under
the agreement.
In the second quarter of 2001, we elected to supply our products to the
Japanese Millennium Project through a Japanese distributor. Our final quarterly
reconciliation with Applied Biosystems accounted for shipments of products to
Japan through the second quarter of 2001. In July 2001, we purchased the loaned
manufacturing equipment from Applied Biosystems for approximately $4.8 million.
11
NOVARTIS AG
In June 2000, we entered into a collaborative development agreement with
Novartis Pharmaceuticals Corporation to develop a medium-density panel of 10,000
SNP assays spaced across the human genome. We will transfer 10,000 Invader
assays comprising 3,840,000 genotype determinations to Novartis solely for its
internal research and development applications worldwide.
Upon execution of the agreement, Novartis paid a sum creditable against
half of the amounts due upon transfer of the assays. Novartis also paid a
sum for each genotyping determination. In addition, Novartis granted us a
non-exclusive, fully paid-up worldwide license to improvements to the Invader
assays made in the course of its performance under this agreement, as well as a
right of first refusal to obtain an exclusive worldwide license to all patent
applications claiming discoveries and inventions, made by Novartis in the course
of using the assays, for diagnostic applications. This agreement is significant
to us principally because of the value of the technology rights and rights of
first refusal Novartis has granted us under the agreement.
Each party has a right to terminate the agreement upon specified notice in
the event that a breach of the agreement occurs without cure. If a termination
occurs and we are the breaching party, we must refund payment for assays that
have not been transferred.
The agreement expired in August 2001.
SMITHKLINE BEECHAM BIOLOGICALS
In June 2000, we entered into a New Assay Development and Option Agreement
with SmithKline Beecham Biologicals. Under the agreement, we will develop assays
for genotyping and gene expression analysis for use in SmithKline's internal
research and development of therapeutic vaccine applications.
We divided the SmithKline program into three phases. In the first two
phases, we will develop 7,000 assays for mRNA transcripts; in the third, we will
develop 3,000 assays for DNA sequences. SmithKline will pay a development fee
upon the initiation of each phase of the program. SmithKline will also pay for
assays provided under this agreement, an initial support fee for up to 40 hours
of our technical support during the initial phase, and additional payments for
our technical support if needed during subsequent phases of the program.
Upon completion of the program, SmithKline will evaluate the assays and
will have a 90-day option to enter into a subsequent Development and Marketing
Agreement with us to develop and distribute diagnostic assays based on our
Invader platform for use with SmithKline's therapeutic vaccines.
The agreement will expire upon the later of expiration of a 90-day
standstill period beginning upon final delivery of the assays to SmithKline or
the end of the 90-day option period, during which the parties will negotiate a
collaborative development agreement, beginning upon notice from SmithKline,
given before the end of the standstill period, that it desires to enter such an
agreement. SmithKline may terminate the agreement at any time and we may
terminate the agreement if SmithKline fails to cure a breach 30 days after we
have provided written notification of such breach.
BML
In December 2000, we entered into a development and commercialization
agreement with BML, Inc., one of the two largest clinical reference laboratories
in Japan. Under this agreement, we will develop assays in accordance with a
mutually agreed development program for use in clinical applications by BML and
BML will pay us for the development.
12
Under the agreement, BML paid us $3.0 million as reimbursement for past
development expenses. Additionally, the agreement includes minimum funding for
the development program by BML of $2.0 million for calendar year 2001 and $1.0
million for each of calendar years 2002 and 2003.
Under the agreement, we agree to supply BML with its requirements of the
developed assays for use in its clinical applications at preferential prices.
Additionally, we will have the right to commercialize the developed assays
worldwide; however, we agree not to commercialize these assays to third parties
for use in Japan for a period between six and 24 months depending on whether the
assay is covered by patents owned by BML. We have also agreed, upon BML's
request, to negotiate the terms and conditions under which BML would have the
right to distribute the developed assays in Japan. Also, BML granted us a
license under all patent rights they own which cover the exploitation of the
developed assays, for which we have agreed to pay them a royalty.
The term of the agreement is until December 31, 2007. The agreement may be
terminated by BML on six months written notice given on or after June 30, 2003.
Additionally, either party may terminate the agreement on 60 days notice in the
event the other party materially breaches the agreement.
PFIZER
In August 1999, we entered into a Research Agreement with Warner-Lambert,
now Pfizer. Under this agreement we agreed to develop and supply assays for SNP
analysis and mRNA assays for gene expression profiling for Warner-Lambert's
research and development efforts. A total of 181 assays will be developed with a
total of 184,000 determinations.
Upon execution of the agreement, Warner-Lambert paid us the sum of $474,000
representing payment for all of the assays. We will own all improvements to the
Invader assay technology made during the course of the program, and
Warner-Lambert will own all other inventions. In addition, Warner-Lambert has
granted us an exclusive, worldwide, royalty-free and irrevocable license under
the inventions developed in the course of the development program to use and
commercialize diagnostic applications. These technology and commercialization
rights represent the principal value to us of this agreement.
The development program may be terminated by Warner Lambert upon 15 days'
prior written notice to us.
STANFORD UNIVERSITY
In September 1999, we entered into a research collaboration agreement with
Stanford University that granted the Stanford Human Genome Center rights and
licenses to use our proprietary technologies for internal research purposes.
Stanford will use these technologies in research and development projects for
the large-scale production of research and clinical assays. The agreement also
provides that we will develop and supply up to 30 assays for the research
projects.
We will jointly own any intellectual property jointly developed with
Stanford under this program. Stanford irrevocably granted us a worldwide,
non-exclusive license to exploit any improvements to the SNP Invader assays. We
also obtained from Stanford an irrevocable, exclusive license to exploit any
discovery, invention, data or materials developed by Stanford from the SNP
Invader assays, for research and diagnostic applications. We will pay Stanford a
royalty on net sales of diagnostic products resulting from this collaboration
sold by us or our sublicensees. We will share revenues from commercial sales of
therapeutic products resulting from this collaboration. We primarily benefit
from the intellectual property rights associated with this agreement.
The term of the agreement is five years, which term may be extended by
mutual agreement. The agreement may be terminated by Stanford, upon 60 days'
prior written notice to us, but will terminate
13
automatically, 60 days after written notice of a material breach by a party has
been delivered to such breaching party.
GENOME RESEARCH LIMITED (SANGER CENTRE)
In September 1999, we entered into a collaboration agreement with the
Sanger Centre to utilize our products in the construction of the first SNP map
of a human chromosome and a corresponding SNP test panel. The collaboration
focuses on SNPs located on human chromosome 22, which were identified as part of
the Sanger Centre's chromosome 22 DNA sequence. Under this agreement, we
developed and supplied assays for approximately 2,000 unique SNPs positioned
along chromosome 22. Initially, the Sanger Centre is using this SNP test panel
to type unamplified genomic DNA from a select group of several hundred
individuals. For each of the 2,000 assays, we transferred 350 tests to the
Sanger Centre for its Chromosome 22 linkage study, for a total of 700,000
genotypes. As part of a second phase of the program, the Sanger Centre has an
option to purchase an additional 3,500,000-genotyping tests.
We have access to all data developed over the course of this linkage study
and the Sanger Centre has assigned to us all rights to any improvements
developed under the agreement. The Sanger Centre pays us for each genotyping
test that we supply. The payments that we have received under this agreement
have not been material to our historical results of operations. Rather, the
intellectual property rights that we received under this agreement represent its
primary value to us.
The agreement will terminate automatically, 30 days after written notice of
a material breach by a party has been delivered to such breaching party.
14
INTELLECTUAL PROPERTY
We have implemented an aggressive patent strategy designed to provide us
with freedom to operate and facilitate commercialization of our current and
future products. We currently own 23 issued patents and exclusively license two
issued patents in the United States, and own two issued patents in Australia and
two issued patents in Canada. We have received notices of allowance for four
additional United States patent applications and two Australian applications. We
have 71 additional United States patent applications pending. In addition, we
have licensed rights to patent applications pending in the United States, Japan
and other major industrialized nations, covering genetic variations associated
with drug metabolism. Reflecting our international business strategy, we have
foreign filings in major industrialized nations corresponding to each major
technology area represented in our United States patent and application claims.
The issued, allowed and pending patents distinguish us from competitors by
claiming proprietary methods and compositions for analysis of DNA and RNA,
either genomic or amplified, using structure-specific cleavage processes and
compositions. Issued and pending claims are included for assay design methods
and compositions, as well as for use of the technology in various read-out
formats such as fluorescence resonance energy transfer, mass spectrometry or in
conjunction with solid supports such as micro latex beads or chips. We also have
issued and pending claims covering oligonucleotide design production systems and
methods. These methods also allow multiplexing or analysis of more than one
sample in a single reaction, allowing the system to be easily amenable to a wide
range of automated and non-automated detection methods.
Generally, United States patents have a term of 17 years from the date of
issue for patents issued from applications filed with the United States Patent
Office prior to June 8, 1995, and 20 years from the application filing date or
earlier claimed priority date in the case of patents issued from applications
filed on or after June 8, 1995. For applications filed after May 29, 2000, the
term is 20 years from the date of filing. A minimum term of 17 years is assured,
provided that there are no applicant-caused delays during prosecution. Patents
in most other countries have a term of 20 years from the date of filing the
patent application. Our issued United States patents will expire between 2012
and 2016. Our success depends to a significant degree on our ability to develop
proprietary products and technologies. We intend to continue to file patent
applications as we develop new products, technologies and patentable
enhancements. Prosecution practices have been implemented to avoid any applicant
delays that could compromise the guaranteed 17-year minimum term. There can be
no guarantee that such procedures will prevent the loss of a potential patent
term. This is particularly true in the short-term as the patent rules
implementing the most recent patent term changes are largely new and untested.
Complex legal and factual determinations and evolving laws make patent
protection uncertain. As a result, we cannot be certain that patents will be
issued from any of our pending patent applications or from applications licensed
to us or that any issued patents will have sufficient breadth to offer
meaningful protection. In addition, our issued patents or patents licensed to us
may be successfully challenged, invalidated, circumvented or unenforceable so
that our patent rights would not create an effective competitive barrier.
Moreover, the laws of some foreign countries may not protect our proprietary
rights to the same extent as do United States patent laws.
15
In addition to patent protection, we rely on copyright and trade secret
protection of our intellectual property. We attempt to protect our trade secrets
by entering into confidentiality agreements with third parties, employees and
consultants. Our employees and consultants are required to sign agreements to
assign to us their interests in discoveries, inventions, patents and copyrights
arising from their work for us. They are also required to maintain the
confidentiality of our intellectual property, and refrain from unfair
competition with us during their employment and for a period of time after their
employment with us, which includes solicitation of our employees and customers.
We cannot be certain that these agreements will not be breached or invalidated.
In addition, we cannot assure you that third parties will not independently
discover or invent competing technologies or reverse engineer our trade secrets
or other technologies.
In October 2000, we settled a dispute with ID Biomedical Corporation in
which ID Biomedical had claimed that our products and processes infringed their
patents. In the ID Biomedical settlement, we paid $4.0 million in cash and
issued 545,454 shares of common stock and, in exchange, ID Biomedical dismissed
its lawsuit against us and agreed not to sue us, our affiliates, our customers
and certain others for infringement of patents held by ID Biomedical. In
December 2000, we entered into a licensing arrangement with Dade Behring in
order to resolve an intellectual property dispute between us and Dade Behring.
In the future, we may become involved in lawsuits in which third parties
file claims asserting that our technologies or products infringe on their
intellectual property. We cannot predict whether third parties will assert such
claims against us or against the licensors of technologies licensed to us, or
whether those claims will harm our business. We may be forced to defend against
such claims, whether they are with or without any merit or whether they are
resolved in favor of or against us or our licensors, and may face costly
litigation and diversion of management's attention and resources. As a result of
such disputes, we may have to develop costly non-infringing technologies, or
enter into licensing agreements. These agreements, if necessary, may be
unavailable on terms acceptable to us, or at all, which could seriously harm our
business and financial condition.
COMPETITION
The markets for our technologies and products are very competitive, and we
expect the intensity of competition to increase. Currently, we compete primarily
with other companies that are pursuing technologies and products that provide
alternatives to our technologies and products. Many of our competitors have
greater financial, operational, sales and marketing resources, and more
experience in research and development than we have. Moreover, competitors may
have greater name recognition than we do, and may offer discounts as a
competitive tactic. These competitors and other companies may have developed or
could in the future develop new technologies that compete with our products or
render our products obsolete.
In the research market, we compete with several companies offering
alternative technologies which differ from the Invader product platform. These
companies include, among others: Affymetrix, Inc., Amersham Pharmacia Biotech
Ltd., Genometrix, Hyseq, Inc., Illumina, Inc., Luminex Corporation, Molecular
Devices, Inc., Nanogen, Inc., Orchid Biosciences, Inc., Applera Corporation,
Protogene Laboratories, Inc., Pyrosequencing AB, Rapigene, Inc., Sequenom, Inc.
and Visible Genetics, Inc.
In the clinical market, we also potentially compete with several companies
offering alternative technologies which differ from the Invader product
platform. These companies include, among others: Abbott Corporation, Bayer
Corporation, Becton Dickinson and Company, BioRad Corporation, Chiron, Dade
Behring, Inc., Digene, Hoffman-La Roche Ltd., Gen-Probe, Luminex Corporation,
Orchid Biosciences, Inc. and Sequenom, Inc.
16
GOVERNMENT REGULATION
We do not anticipate that our products that will be labeled for research
use only, or RUO, or those products used in drug discovery or genomics will be
subject to significant government regulation. The manufacture, labeling,
distribution and marketing of our products labeled as analyte specific reagents,
or ASRs, or labeled for clinical use will be regulated as medical devices by the
FDA and in certain other countries. We believe our products currently marketed
pursuant to FDA regulations as ASRs, as well as those products we intend to
market in the future as ASRs, are exempt from the 510(k) premarket notification
and premarket approval requirements. However, certain of our products or their
applications may require that we obtain, or we may choose to obtain, regulatory
clearances or approvals. These products would include, for example, clinical
products that we choose to market as in vitro diagnostic products rather than as
ASRs. We expect that we will apply for FDA clearances or approvals for some of
our future products, and anticipate filing the first of such applications in
calendar year 2002.
The Food, Drug and Cosmetic Act requires that medical devices introduced to
the United States market, unless exempted by regulation, be the subject of
either a premarket notification clearance, known as a 510(k), or a premarket
approval, known as a PMA. Some of our clinical products may require a PMA,
others may require a 510(k). Other products, like ASRs, may be exempt from
regulatory clearance or approval.
With respect to devices reviewed through the 510(k) process, we may not
market a device until an order is issued by the FDA finding our product to be
substantially equivalent to a legally marketed device known as a predicate
device. A 510(k) submission may involve the presentation of a substantial volume
of data, including clinical data, and may require a substantial review. The FDA
may agree that the product is substantially equivalent to a predicate device and
allow the product to be marketed in the United States. The FDA, however, may
determine that the device is not substantially equivalent and require a PMA, or
require further information, such as additional test data, including data from
clinical studies, before it is able to make a determination regarding
substantial equivalence. By requesting additional information, the FDA can
further delay market introduction of our products.
If the FDA indicates that a PMA is required for any of our clinical
products, the application will require extensive clinical studies, manufacturing
information and likely review by a panel of experts outside the FDA. Clinical
studies to support either a 510(k) submission or a PMA application would need to
be conducted in accordance with FDA requirements. Failure to comply with FDA
requirements could result in the FDA's refusal to accept the data or the
imposition of regulatory sanctions. There can be no assurance that we will be
able to meet the FDA's requirements or receive any necessary approval or
clearance.
Once granted, a 510(k) clearance or PMA approval may place substantial
restrictions on how our device is marketed or to whom it may be sold. Even in
the case of devices like ASRs, many of which are exempt from 510(k) clearance or
PMA approval requirements, the FDA may impose restrictions on marketing. Our ASR
products may be sold only to clinical laboratories certified under Clinical
Laboratory Improvement Amendments of 1988, or CLIA, to perform high complexity
testing. In addition to requiring approval or clearance for new products, the
FDA may require approval or clearance prior to marketing products that are
modifications of existing products. We cannot assure you that any necessary
510(k) clearance or PMA approval will be granted on a timely basis, or at all.
Delays in receipt of or failure to receive any necessary 510(k) clearance or PMA
approval, or the imposition of stringent restrictions on the labeling and sales
of our products could have a material adverse effect on us. As a medical device
manufacturer, we are also required to register and list our products with the
FDA. In addition, we are required to comply with the FDA's quality systems
regulations, or QSRs which require that our devices be manufactured and records
be maintained in a prescribed manner with respect to manufacturing, testing and
control activities. Further, we are required to comply with FDA requirements for
labeling and promotion. For example, the FDA prohibits cleared or approved
devices from being promoted for uncleared or unapproved uses. In addition, the
medical device reporting regulation requires that we provide information to the
FDA whenever there is evidence to reasonably suggest that one of our devices may
have caused or contributed to a death or serious
17
injury, or that there has occurred a malfunction that would be likely to cause
or contribute to a death or serious injury if the malfunction were to recur.
Our manufacturing facilities are subject to periodic and unannounced
inspections by the FDA and state agencies for compliance with quality system
regulations. Additionally, the FDA will conduct a preapproval inspection for all
PMA devices and in some cases for 510(k) devices. Although we believe we are in
compliance with the FDA's quality system regulations for ASRs, we have never
been inspected by the FDA and cannot assure you that we will be able to maintain
compliance in the future. If the FDA believes that we are not in compliance with
applicable laws or regulations, it can issue a warning letter, detain or seize
our products, issue a recall notice, enjoin future violations and assess civil
and criminal penalties against us. In addition, approvals or clearances could be
withdrawn in appropriate circumstances. Failure to comply with regulatory
requirements or any adverse regulatory action could have a material adverse
effect on us.
Any customers using our products for clinical use in the United States may
be regulated under CLIA. CLIA is intended to ensure the quality and reliability
of clinical laboratories in the United States by mandating specific standards in
the areas of personnel qualifications, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests, namely, waived, moderately complex and highly complex, and
the standards applicable to a clinical laboratory depend on the level of the
tests it performs. We cannot assure you that the CLIA regulations and future
administrative interpretations of CLIA will not have a material adverse impact
on us by limiting the potential market for our products.
Medical device laws and regulations are also in effect in many of the
countries in which we may do business outside the United States. These range
from comprehensive device approval requirements for some or all of our medical
device products, to requests for product data or certifications. The number and
scope of these requirements are increasing. Medical device laws and regulations
are also in effect in some states in which we do business. There can be no
assurance that we will obtain regulatory approvals in such countries or that we
will not incur significant costs in obtaining or maintaining foreign regulatory
approvals. In addition, export of certain of our products which have not yet
been cleared or approved for domestic commercial distribution may be subject to
FDA export restrictions.
We are also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these regulations
could have a material adverse effect on our business.
EMPLOYEES
As of December 31, 2001, we employed 294 persons, of whom 36 hold doctorate
degrees and 196 hold other advanced degrees. Approximately 86 employees are
engaged in research and development, 25 in business development, sales and
marketing, 132 in operations and manufacturing and 51 in intellectual property,
finance and other administrative functions. Our success will depend in large
part on our ability to attract and retain qualified employees. We face
competition in this regard from other companies, research and academic
institutions, government entities and other organizations. We believe that we
maintain good relations with our employees.
SCIENTIFIC ADVISORY BOARD
We have established a scientific advisory board made up of leading scholars
in the fields of genetic analysis, enzymology, mass spectrometry, microfluidics,
microarrays, proteomics and molecular medicine. Members of our scientific
advisory board consult with us on matters relating to the development of our
products described elsewhere in this Form 10-K. Members of our scientific
advisory board are reimbursed for the reasonable expenses of such consultations
or attending meetings of the scientific advisory board. All
18
of the members hold shares of our common stock or have received options to
purchase shares of our common stock. The members of the scientific advisory
board are as follows:
Lloyd M. Smith, Ph.D., Kellett Professor of Chemistry at the University of
Wisconsin-Madison.
James E. Dahlberg, Ph.D., Frederick Sanger Professor of Biomolecular
Chemistry, University of Wisconsin-Madison.
John Todd, Ph.D., Professor of Medical Genetics, Cambridge Institute for
Medical Research, Cambridge University, Cambridge, UK.
Kenneth Welsh, Ph.D., Director of the Imperial College/Royal Brompton &
Harefield National Health Service Genomics Center and Chairman of the Quality
Control Scheme for Histocompatibility and Immunogenetics for the United Kingdom.
Olke Uhlenbeck, Ph.D., Professor of Chemistry & Biochemistry, University of
Colorado.
Edwin Ullman, Ph.D., former Vice President and Director of Research at
Behring Diagnostics.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAD AN ACCUMULATED DEFICIT OF $84.9 MILLION AT DECEMBER 31, 2001, AND EXPECT
TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES FOR THE FORESEEABLE FUTURE.
We have had substantial operating losses since our inception in 1993, and
we expect our operating losses to continue over the foreseeable future. We
experienced net losses of $9.7 million in 1999, $25.6 million in 2000, and $36.8
million in 2001. In order to further develop our products and technologies for
the detection of genetic variations, including development of new products for
the clinical market, we will need to incur significant expenses in connection
with our internal research and development and commercialization programs. As a
result, we expect to incur operating losses for the foreseeable future. In
addition, there is no assurance that we will ever become profitable or that we
will sustain profitability if we do become profitable. Should we experience
protracted or unforeseen operating losses, our capital requirements would
increase and our stock price would likely decline.
FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY NEGATIVELY
IMPACT OUR STOCK PRICE.
Our revenues and results of operations have fluctuated significantly in the
past and we expect significant fluctuations to continue in the future due to a
variety of factors, many of which are outside of our control. These factors
include:
- the volume and timing of orders for our products;
- changes in the mix of our products offered;
- the timing of payments we receive under collaborative agreements, as
well as our ability to recognize these payments as revenues;
- the number, timing and significance of new products and technologies
introduced by our competitors;
19
- our ability to develop, obtain regulatory clearance, market and
introduce new and enhanced products on a timely basis;
- changes in the cost, quality and availability of equipment, reagents
and components required to manufacture or use our products;
- availability of commercial and government funding to researchers who
use our products and services; and
- availability of third-party reimbursement to users of our clinical
products.
Research and development costs associated with our products and
technologies, as well as facilities costs, personnel costs, marketing programs
and overhead account for a substantial portion of our operating expenses. We
cannot adjust these expenses quickly in the short term. If our revenues decline
or do not grow as anticipated, we may not be able to reduce our operating
expenses accordingly. Failure to achieve anticipated levels of revenues could
significantly harm our operating results for one or more fiscal periods. Due to
the possibility of fluctuations in our revenues and expenses, we believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. In addition, our operating results in a
future fiscal quarter may not meet the expectations of stock market analysts and
investors. In that case, our stock price would likely decline and investors
would experience a decline in the value of their investment.
OUR TECHNOLOGIES AND INITIAL COMMERCIAL PRODUCTS MAY NOT BE COMMERCIALLY VIABLE
OR SUCCESSFUL, WHICH COULD ADVERSELY AFFECT OUR REVENUES.
We are currently developing and commercializing only a limited number of
products based on our technologies. We plan to develop additional products,
including products for clinical applications. We cannot assure you that we will
be able to complete development of our products that are currently under
development or that we will be able to develop additional new products. In
addition, although data available to date are favorable, we do not have
sufficient experience with broad use of our products in high volume clinical and
research settings to be able to assure you that our customers will be able to
use our products and technologies to successfully detect and quantify genetic
variations. In addition, some of the genetic variations for which we develop our
products may not be useful in assisting therapeutic or diagnostic product
development. In this event, our sales or products for these genetic variations
would diminish significantly or cease, and we would not be able to recoup our
investment in developing these products. Accordingly, if we fail to successfully
further develop our products and technologies, and if our technologies and
products are not useful in the development of commercially successful
therapeutic or diagnostic products, we may not achieve a competitive position in
the market. If we fail to do so, our revenues will be seriously harmed and it is
unlikely that we will ever achieve profitability. In this event, our stock price
would likely decline.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY LIKELY NEED TO EXPAND OR
ESTABLISH NEW MANUFACTURING FACILITIES AS WE COMMERCIALIZE OUR PRODUCTS.
We have limited experience manufacturing our products, and have limited
experience manufacturing our products in the volumes that will be necessary for
us to achieve significant commercial sales. We may need to establish new
manufacturing processes or facilities. Facilities expansion and development or
process improvements can be delayed by unforeseen circumstances, including
inability to obtain needed manufacturing equipment on a timely basis,
difficulties with facility construction and completion of improvements and
difficulties associated with moving from small-scale, pilot production to higher
volumes. If we fail to meet our facilities needs, we may not be able to provide
our customers with the quantity of products they require, which would damage
customer relations and result in reduced revenues. Additionally, some of our
products must be manufactured in accordance with FDA's quality system
20
regulations, known as QSRs. We have limited experience in manufacturing our
products in compliance with QSRs.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE, AND AS A RESULT, MAY BE UNABLE
TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS IN COMMERCIALIZING OUR POTENTIAL
PRODUCTS.
We currently have a small sales force, consisting of six individuals
focused on the clinical market, and will need to increase the size of our sales
force as we further commercialize our products. In particular, as we introduce
new clinical products, we will need to increase our clinical applications sales
force. We are not currently able to estimate the number of new sales personnel
we will require. However, this number could be significant and we may not be
able to recruit, hire and train a sufficient number of sales personnel in a
short time frame. We also intend to market our products through collaborations
and distribution agreements with biopharmaceutical and life science companies.
We cannot assure you that we will be able to establish a successful sales force
or to establish collaboration or distribution arrangements to market our
products. If we are unable to implement an effective marketing and sales
strategy, we will be unable to grow our revenues and execute our business plan.
This would harm our financial condition and our stock price would likely
decline.
WE WILL REQUIRE ADDITIONAL FUNDING FOR OUR FUTURE OPERATING PLANS. THESE FUNDS
MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.
We anticipate that our existing capital resources together with cash from
product sales will be sufficient to fund our operating and capital requirements
for at least the next 12 months. Thereafter, we will likely need to raise
significant additional capital. We expect our capital and operating expenses to
be significant for the foreseeable future. We have expended significant
resources in developing our manufacturing facilities and expect to continue to
expend significant resources to develop these facilities and improve production
processes, increase our research and development and commercialization
activities and acquire additional manufacturing facilities. The amount of
additional capital we will need to raise will depend on many factors, including:
- our progress with our research and development programs;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborations; and
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights.
In addition, we may require additional financing in less than 12 months if
we:
- decide to expand faster than planned;
- develop new or enhanced products ahead of schedule;
- need to respond to competitive pressures; or
- decide to acquire complementary products, businesses or technologies.
If we raise additional funds through the sale of equity, convertible debt
or other equity-linked securities, your percentage ownership in the company will
be reduced. In addition, these transactions may dilute the value of our
outstanding stock. We may issue securities that have rights, preferences and
privileges senior to our common stock. If we raise additional funds through
collaborations or licensing arrangements, we may relinquish rights to certain of
our technologies or products, or grant licenses to third parties on terms
21
that are unfavorable to us. If future financing is not available to us or is not
available on terms acceptable to us, we may not be able to fund our future needs
which would have a material adverse effect on our results of operations and
financial condition.
COMMERCIALIZATION OF OUR TECHNOLOGIES DEPENDS ON STRATEGIC PARTNERSHIPS AND
COLLABORATIONS WITH OTHER COMPANIES, AND IF OUR CURRENT OR FUTURE PARTNERSHIPS
AND COLLABORATIONS ARE NOT SUCCESSFUL, WE MAY EXPERIENCE DIFFICULTY
COMMERCIALIZING OUR TECHNOLOGIES AND PRODUCTS.
In order to augment our internal sales and marketing efforts and to reach
additional product and geographic markets, we have entered into strategic
partnerships and collaborations for marketing of our products. We intend to
enter into additional arrangements in the future. These agreements provide us,
in some instances, with access to products and technologies that are
complementary to ours and funding for development of our products. We may also
be dependent on collaborators for regulatory approvals and clearances, and
manufacturing in particular geographic and product markets. If our strategic
partnerships and collaborations are not successful, we may not be able to
develop or successfully commercialize the products that are the subject of the
collaborations on a timely basis, if at all. In addition, if we do not enter
into additional partnership agreements, or if these agreements are not
successful, our ability to develop and commercialize new products will be
negatively affected which will harm our future operating results.
We have no control over the resources that any partner or collaborator may
devote to our products. Any of our present or future partners or collaborators
may not perform their obligations as expected. These partners or collaborators
may breach or terminate their agreements with us or otherwise fail to meet their
obligations or perform their collaborative activities successfully and in a
timely manner. Further, any of our partners or collaborators may elect not to
develop products arising out of our partnerships or collaborations or devote
sufficient resources to the development, manufacture or commercialization of
these products. If any of these events occur, we may not be able to develop our
products and technologies and our ability to generate revenues will decrease.
OUR STRATEGY FOR DEVELOPING AND COMMERCIALIZING PRODUCTS DEPENDS IN PART ON OUR
ABILITY TO FORM RESEARCH COLLABORATIONS AND LICENSING ARRANGEMENTS. IF WE ARE
NOT ABLE TO ENTER INTO THESE COLLABORATIONS AND ARRANGEMENTS ON ACCEPTABLE TERMS
OUR RESULTS WILL SUFFER.
Our strategy involves the formation of research collaborations with
academic institutions and pharmaceutical companies involved in developing
genetic variation analysis for use in disease association studies and
personalized treatment approaches to medicine. Under these arrangements, we
intend to offer our products and technologies at a reduced cost in exchange for
rights to commercialize discoveries made using our technologies. As a result, we
may be dependent on our research collaborators as a source of new products and
technologies. If these research collaborations are not successful, and do not
provide us with new products and technologies, our results of operations would
suffer and our future prospects and revenue growth would be impaired.
In addition, we have historically maintained relationships with consultants
and scientific advisors at academic and other institutions who have conducted
research on our behalf critical to the development of our products and
technologies. The majority of these individuals have commitments to other
entities and have limited time available for us. Some of these entities may also
compete with us. We will need to establish additional relationships with
consultants and scientific advisors related to our business. We will have
little, if any, control over the activities of any new consultants and
scientific advisors and can expect only limited amounts of their time to be
dedicated to our activities. Our ability to identify and develop new products
and technologies may depend in part on continued collaborations with researchers
at academic and other institutions. We cannot be certain that any of our
existing relationships with scientific advisors will be successful. Further, we
may not be able to negotiate acceptable collaborations in the future with
additional consultants or scientific advisors at academic and other
institutions.
22
THE EARLY TERMINATION OF ANY OF OUR LICENSES OR OUR RESEARCH OR STRATEGIC
COLLABORATIONS COULD SERIOUSLY HARM OUR BUSINESS AND FINANCIAL CONDITION.
Certain of our strategic and research collaboration agreements may be
terminated with little or no notice. In particular, the supply of products to
the Japanese Millennium Project may be terminated upon specified notice at any
time. This agreement will likely account for a significant portion of our
revenues for 2002. Accordingly, early termination of this agreement would
seriously harm our revenues, and in turn our business and financial condition.
In addition, we intend to seek additional strategic and research collaborations
and licenses with third parties, who may negotiate provisions with us that allow
them to terminate their agreements with us prior to the expiration of the
negotiated term. It is likely that, as a result of the prevalence of such
provisions in collaboration agreements involving biotechnology companies, we
will enter into agreements that give either or both parties the right to
terminate prior to expiration of the stated term of the agreement.
If any third party strategic or research collaborator or licensee were to
unexpectedly terminate its agreement with us or otherwise fail to perform its
obligations under our collaboration agreement or to complete them in a timely
manner, we could lose significant revenues. This situation would be particularly
serious if it related to the Japanese Millennium Project. In particular, early
termination of any of our strategic collaborations or partnerships could harm
our financial condition and operating results because we rely on these
agreements for product sales, development funding and access to new product
applications. In addition, unexpected termination of collaborations could also
result in our loss of important intellectual property or other rights which we
had intended to obtain under these agreements. If any of these events were to
occur, our business and our financial condition could be seriously harmed.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND MARKETPLACE. COMPETITIVE
DEVELOPMENTS, INCLUDING NEW TECHNOLOGIES THAT RENDER OURS LESS COMPETITIVE OR
OBSOLETE, COULD SERIOUSLY HARM OUR BUSINESS.
The biotechnology and life sciences industries generally and the genetic
analysis market specifically are highly competitive, and we expect the intensity
of competition to increase. We compete with organizations in the United States
and abroad that develop and manufacture products and provide services for the
analysis of genetic information for research and/or clinical applications. These
organizations include:
- biotechnology, pharmaceutical, chemical and other companies;
- academic and scientific institutions;
- governmental agencies; and
- public and private research organizations.
Many of our competitors have greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
Moreover, our competitors may offer broader product lines and have greater name
recognition than we do, and may offer discounts as a competitive tactic. In
addition, several development stage companies are currently making or developing
technologies, products or services that compete with or are being designed to
compete with our technologies and products. Our competitors may develop or
market technologies, products or services that are more effective or
commercially attractive than our current or future products, or that may render
our technologies or products less competitive or obsolete. Competitors may make
rapid technological developments which may result in our technologies and
products becoming obsolete before we recover the expenses incurred to develop
them or before they generate significant revenue or market acceptance.
Accordingly, if competitors introduce superior technologies or products and we
cannot make enhancements to our technologies and products necessary for them to
remain competitive, our competitive position, and in turn our business, revenues
and financial condition, will be seriously harmed. This, in turn, would likely
cause our stock price to decline.
23
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY METHODS AND TECHNOLOGIES, WE MAY NOT
BE ABLE TO COMMERCIALIZE PRODUCTS.
Our commercial success will depend, in large part, on our ability to obtain
patent protection on many aspects of our business, including the products,
methods and services we develop. Patents issued to us may not provide us with
substantial protection or be commercially beneficial to us. The issuance of a
patent is not conclusive as to its validity or its enforceability.
In addition, our patent applications or those we have licensed, may not
result in issued patents. If our patent applications do not result in issued
patents, our competitors may obtain rights to commercialize our discoveries
which would harm our competitive position.
We also may apply for patent protection on novel genetic variations in
known genes and their uses, as well as novel uses for previously identified
genetic variations discovered by third parties. In the latter cases, we may need
a license from the holder of the patent with respect to such genetic variations
in order to make, use or sell any related products. We may not be able to
acquire such licenses on terms acceptable to us, if at all.
Certain parties are attempting to rapidly identify and characterize genes
and genetic variations through the use of sequencing and other technologies. To
the extent any patents are issued to other parties on such partial or
full-length genes or genetic variations or uses for such genes or genetic
variations, the risk increases that the sale of products developed by us or our
collaborators may give rise to claims of patent infringement against us. Others
may have filed and, in the future, are likely to file patent applications
covering many genetic variations and their uses. Any such patent application may
have priority over our patent applications and could further require us to
obtain rights to previously issued patents covering genetic variations. We
cannot assure you that any license that we may require under any such patent
will be made available to us on commercially acceptable terms, if at all.
We may be sued for infringing on the intellectual property rights of
others. We could also become involved in interference proceedings in the United
States Patent and Trademark Office to determine the relative priority of our
patents or patent applications and those of the other parties involved in the
interference proceeding. Intellectual property proceedings are costly, and could
affect our results of operations. These proceedings can also divert the
attention of managerial and technical personnel. If we do not prevail in any
intellectual property proceeding, in addition to any damages we might have to
pay, we could be required to stop the infringing activity, or obtain a license
to or design around the intellectual property in question. In interference
proceedings, our patent rights could be invalidated and the scope of our patents
could be limited. If we are unable to obtain licenses to intellectual property
rights that we need to conduct our business, or are unable to design around any
third party patent, we may be unable to sell some of our products, which will
result in reduced revenue.
We have in the past and may in the future become a party to litigation
involving patents and intellectual property rights. In October 2000, we settled
a dispute with ID Biomedical Corporation in which ID Biomedical had claimed that
our products and processes infringed their patents. In the ID Biomedical
settlement, we paid $4.0 million in cash and issued 545,454 shares of common
stock and, in exchange, ID Biomedical dismissed its lawsuit against us and
agreed not to sue us, our affiliates, our customers and certain others for
infringement of patents held by ID Biomedical. In December 2000, we entered into
a licensing arrangement with Dade Behring in order to resolve an intellectual
property dispute between us and Dade Behring.
We may in the future receive claims of infringement of intellectual
property rights from other parties. If we do not prevail in any future legal
proceedings, we may be required to pay significant monetary damages. In
addition, we could also be enjoined from use of certain processes or prevented
from selling certain configurations of our products that were found to be within
the scope of the patent claims. In the event we did not prevail in any future
proceeding, we would either have to obtain licenses from the other party, avoid
certain product configurations or modify some of our products and processes to
design around
24
the patents. Licenses could be costly or unavailable on commercially reasonable
terms. Designing around patents or focusing efforts on different configurations
could be time consuming, and we would have to remove some of our products from
the market while we were completing redesigns. Accordingly, if we are unable to
settle future intellectual property disputes through licensing or similar
arrangements, or if any such future disputes are determined adversely to us, our
ability to market and sell our products could be seriously harmed. This would in
turn harm our business, financial condition and results of operations.
In addition, in order to protect or enforce our patent rights or to protect
our ability to operate our business, we may need to initiate other patent
litigation against third parties. These lawsuits could be expensive, take
significant time, and could divert management's attention from other business
concerns. These lawsuits could result in the invalidation or limitation in the
scope of our patents or forfeiture of the rights associated with our patents. We
cannot assure you that we would prevail in any such proceedings or that a court
will not find damages or award other remedies in favor of our opposing party in
any of these suits. During the course of any future proceedings, there may be
public announcements of the results of hearings, motions and other interim
proceedings or developments in the litigation. Securities analysts or investors
may perceive these announcements to be negative, which could cause the market
price of our stock to decline.
OTHER RIGHTS AND MEASURES THAT WE RELY UPON TO PROTECT OUR INTELLECTUAL PROPERTY
MAY NOT BE ADEQUATE TO PROTECT OUR PRODUCTS AND COULD REDUCE OUR ABILITY TO
COMPETE IN THE MARKET.
In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
While we require employees, collaborators, consultants and other third parties
to enter into confidentiality and/or non-disclosure agreements where
appropriate, any of the following could still occur:
- the agreements may be breached;
- we may have inadequate remedies for any breach;
- proprietary information could be disclosed to our competitors; or
- others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets
or disclose such technologies.
If for any of the above reasons our intellectual property is disclosed,
invalidated or misappropriated, it would harm our ability to protect our rights
and our competitive position.
IF WE FAIL TO RETAIN OUR KEY PERSONNEL AND HIRE, TRAIN AND RETAIN QUALIFIED
EMPLOYEES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN
REDUCED REVENUES.
Our future success will depend on the continued services and on the
performance of our senior management, in particular the services of Lance Fors,
Ph.D., our Chief Executive Officer and Chairman of the Board.
If a competitor hired Dr. Fors away from us, or if for any reason he could
not continue to work for us, we would have difficulty hiring officers with
equivalent skills in general and financial management. We do not currently carry
"key person" life insurance, so the loss of the services of Dr. Fors could
seriously impair our ability to operate in our industry.
25
In addition, our researchers, scientists and technicians have significant
experience in research and development related to the analysis of genetic
variations. If we were to lose these employees to our competitors, we could
spend a significant amount of time and resources to replace them, which could
impair our research and development efforts. Further, in order to scale up our
manufacturing capability and to further our research and development efforts, we
will need to hire, train and retain additional manufacturing, research,
scientific and technical personnel. The low level of unemployment in the
Madison, Wisconsin area may make it difficult for us to hire and retain
qualified manufacturing and other personnel. If we are unable to hire, train and
retain the personnel we need, we may experience delays in the research,
development and commercialization of our technologies and products. This would
result in reduced revenues and would harm our results of operations.
WE PLAN TO CONTINUE TO INTRODUCE PRODUCTS FOR THE CLINICAL MARKET, AND WE MAY
NEED TO OBTAIN FDA CLEARANCES AND APPROVALS AND COMPLY WITH FDA QUALITY SYSTEM
REGULATIONS AND OTHER REGULATIONS RELATING TO THE MANUFACTURING, MARKETING AND
SALE OF CLINICAL PRODUCTS.
We anticipate that the manufacturing, labeling, distribution and marketing
of a number of our clinical diagnostic products will be subject to extensive
regulation in the United States and in certain other countries.
In the United States, the Food and Drug Administration, or the FDA,
regulates, as medical devices, most diagnostic tests and in vitro reagents that
are marketed as finished test kits. Some clinical laboratories, however,
purchase clinical products which are marketed under FDA regulations as analyte
specific reagents, or ASRs, and develop and prepare their own finished
diagnostic tests called "home brews." FDA also considers ASRs to be medical
devices. The FDA restricts the sale of these products to clinical laboratories
certified under the Clinical Laboratory Improvement Amendments of 1988, known as
CLIA, to perform high complexity testing. We intend to market some diagnostic
products as finished test kits and others as individual reagents. Consequently,
these clinical products will be regulated as medical devices.
Unless otherwise exempt, medical devices require FDA approval or clearance
prior to marketing in the United States. Although we believe our currently
marketed products, as well as those ASRs we intend to market in the future, are
exempt from 510(k) premarket notification and premarket approval requirements,
the process of obtaining approvals and clearances necessary to market our
proposed clinical products can be time-consuming, expensive and uncertain. To
date, we have not applied for FDA or any other regulatory approvals or
clearances with respect to any of our clinical diagnostic products. However,
clinical products that we may seek to introduce in the future may require FDA
approvals or clearances prior to commercial sale in the United States. We may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new clinical products. In addition, we cannot
assure you that regulatory approval or clearance of any clinical products for
which we seek such approvals will be granted by the FDA or foreign regulatory
authorities on a timely basis, if at all.
If approval or clearance is obtained we will be subject to continuing FDA
obligations. When manufacturing medical devices, including ASRs, we will be
required to adhere to Quality System regulations, which will require us to
manufacture our products and maintain records in a prescribed manner. We have
never been subject to an FDA Quality System inspection, and we cannot assure you
that we can pass an FDA audit or maintain compliance in the future. Further, the
FDA may place substantial restrictions on the indications for which our products
may be marketed or to whom they may be marketed. Additionally, there can be no
assurance that FDA will not require us to conduct clinical studies as a
condition of approval or clearance. Failure to comply with applicable FDA
requirements can result in, among other things:
- administrative or judicially imposed sanctions;
- injunctions, civil penalties, recall or seizure of our products;
26
- total or partial suspension of production;
- failure of the government to grant premarket clearance or premarket
approval for our products;
- withdrawal of marketing clearances or approvals; and
- criminal prosecution.
Any of our customers using our products for clinical use in the United
States may be regulated under CLIA. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualification, administration, participation
in proficiency testing, patient test management, quality control, quality
assurance and inspections. The regulations promulgated under CLIA establish
three levels of clinical tests and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. CLIA requirements may
prevent some clinical laboratories from using our products. Therefore, CLIA
regulations and future administrative interpretations of CLIA could harm our
business by limiting the potential market for our products.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We have experienced a period of rapid and substantial growth that has
placed and, if such growth continues, will continue to place a strain on our
administrative and operational infrastructure. If we are unable to manage this
growth effectively, our business, results of operations or financial condition
may be materially adversely affected. We increased the number of our employees
from 49 at December 31, 1996, to 294 at December 31, 2001. We have at times
experienced difficulties in filling orders on schedule as well as production
delays and have encountered problems with our reporting and management systems
as the number of our employees has grown and our levels of business activity
have increased. To date, none of these problems has materially harmed our
business. We cannot assure you, however, that our business would not be harmed
if these problems continued. Our ability to manage our operations and growth
effectively requires us to continue to improve our operational, financial and
management controls, reporting systems and procedures and hiring programs. We
may not be able to successfully implement improvements to our management
information and control systems in an efficient or timely manner and may
discover deficiencies in existing systems and controls. If we are unable to
improve our controls and systems to meet the needs of an expanding enterprise,
we could experience production delays and problems with our reporting systems,
and these problems could harm our business.
OUR FAILURE TO COMPLY WITH ANY APPLICABLE ENVIRONMENTAL, HEALTH, SAFETY AND
RELATED GOVERNMENT REGULATIONS MAY AFFECT OUR ABILITY TO DEVELOP, PRODUCE OR
MARKET OUR POTENTIAL PRODUCTS AND MAY ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Our research, development and manufacturing activities involve the use,
transportation, storage and disposal of hazardous materials and are subject to
related environmental and health and safety statutes and regulations. As we
expand our operations, our increased use of hazardous substances will lead to
additional and more stringent requirements. This may cause us to incur
substantial costs to maintain compliance with applicable statutes and
regulations. In particular, we are obligated to file a report to the United
States Environmental Protection Agency, or EPA, regarding specified types of
microorganisms we use in our operations. We have filed the required reports.
However, one of the microorganisms we use is not currently on the EPA list of
approved microorganisms. The EPA could, upon review of our use of this
microorganism, require us to discontinue its use. If this were to occur, we
would have to substitute a different microorganism from the EPA's approved list.
We could experience delays or disruptions in production while we converted to
the new microorganism. In addition, any failure to comply with laws and
regulations and any costs associated with unexpected and unintended releases of
hazardous substances by us into the environment, or at disposal sites used by
us, could expose us to substantial liability in the form of fines, penalties,
remediation costs or other damages and could require us to shut down our
operations. Any of these events would seriously harm our business and operating
results.
27
WE MAY BE HELD LIABLE FOR ANY INACCURACIES ASSOCIATED WITH GENETIC ANALYSIS
TESTS PERFORMED USING OUR PRODUCTS, WHICH MAY REQUIRE US TO DEFEND OURSELVES IN
COSTLY LITIGATION.
We may be subject to claims resulting from incorrect results of analysis of
genetic variations or other screening tests performed using our products.
Litigation of these claims can be costly. We could expend significant funds
during any litigation proceeding brought against us. Further, if a court were to
require us to pay damages to a plaintiff, the amount of such damages could
significantly harm our financial condition.
IF OUR VENDORS FAIL TO SUPPLY US WITH COMPONENTS FOR WHICH AVAILABILITY IS
LIMITED, WE MAY EXPERIENCE DELAYS IN OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION.
Certain key components of our manufacturing equipment and products are
currently available only from a single source or a limited number of sources. We
currently rely on outside vendors to manufacture certain components of our
products and certain reagents we provide in our products. Some or all of these
key components may not continue to be available in commercial quantities at
acceptable costs. It could be time consuming and expensive for us to seek
alternative sources of supply. Consequently, if any events cause delays or
interruptions in the supply of our components, we may not be able to supply our
customers with our products on a timely basis which would adversely affect our
results of operations.
FUTURE ISSUANCE OF OUR PREFERRED STOCK MAY DILUTE THE RIGHTS OF OUR COMMON
STOCKHOLDERS.
Our Board of Directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the price, privileges and other terms of
these shares without any further approval of our stockholders. The rights of the
holders of common stock may be adversely affected by the rights of our holders
of our preferred stock that may be issued in the future.
WE HAVE VARIOUS MECHANISMS IN PLACE THAT YOU AS A STOCKHOLDER MAY NOT CONSIDER
FAVORABLE AND WHICH MAY DISCOURAGE UNSOLICITED TAKEOVER ATTEMPTS.
Certain provisions of our certificate of incorporation and bylaws, as well
as Section 203 of the Delaware General Corporation Law, may discourage, delay or
prevent changes in our board of directors, executive officers or other senior
management. These provisions may also be used by incumbent management to delay a
change of control or acquisition of our company. These provisions include:
- authorizing our Board of Directors to issue preferred stock and to
determine the price, privileges and other terms of these shares without
any further approval of our stockholders, which could increase the
number of outstanding shares or thwart an unsolicited takeover attempt;
- establishing a classified Board of Directors with staggered, three-year
terms, which may lengthen the time required to gain control of our Board
of Directors;
- prohibiting cumulative voting in the election of directors, which would
allow a majority of stockholders to control the election of all
directors;
- requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- limiting who may call special meetings of stockholders;
- prohibiting stockholder action by written consent, which requires all
actions to be taken at a meeting of stockholders; and
28
- establishing advance notice requirements for nominations of candidates
for election to the Board of Directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings.
A change of control could be beneficial to stockholders in a situation in
which the acquisition price being paid by the party seeking to acquire us
represented a substantial premium over the prevailing market price of our common
stock. If our board of directors were not in favor of such a transaction, the
provisions of our certificate of incorporation and bylaws described above could
be used by our board of directors to delay or reduce the likelihood of
completion of the acquisition.
OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS WILL HAVE
SUBSTANTIAL CONTROL OVER OUR AFFAIRS.
As of February 28, 2002, our directors, executive officers and principal
stockholders beneficially own, in the aggregate, approximately 30.6% of our
common stock. These stockholders, acting together, will have the ability to
exert substantial influence over all matters requiring approval by our
stockholders. These matters include the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our assets. In
addition, they may dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination of which you might otherwise approve.
RISKS RELATED TO THE BIOTECHNOLOGY INDUSTRY
PUBLIC OPINION REGARDING ETHICAL ISSUES SURROUNDING THE USE OF GENETIC
INFORMATION MAY ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS.
Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic testing.
In addition, such authorities could prohibit testing for genetic predisposition
to certain conditions, particularly for those that have no known cure.
Furthermore, adverse publicity or public opinion relating to genetic research
and testing, even in the absence of any governmental regulation, could harm our
business. Any of these scenarios could reduce the potential markets for our
products, which could materially and adversely affect our revenues.
GOVERNMENT REGULATION OF GENETIC RESEARCH OR TESTING MAY ADVERSELY AFFECT THE
DEMAND FOR OUR PRODUCTS AND IMPAIR OUR BUSINESS AND OPERATIONS.
Federal, state and local governments may adopt regulations relating to the
conduct of genetic research and genetic testing. These regulations could limit
or restrict genetic research activities as well as genetic testing for research
or clinical purposes. In addition, if state and local regulations are adopted,
these regulations may be inconsistent with, or in conflict with, regulations
adopted by other state or local governments. Regulations relating to genetic
research activities could adversely affect our ability to conduct our research
and development activities. Regulations restricting genetic testing could
adversely affect our ability to market and sell our products. Accordingly, any
regulations of this nature could harm our business.
HEALTH CARE COST CONTAINMENT INITIATIVES COULD LIMIT THE ADOPTION OF GENETIC
TESTING AS A CLINICAL TOOL, WHICH WOULD HARM OUR REVENUES AND PROSPECTS.
In recent years, health care payors as well as federal and state
governments have focused on containing or reducing health care costs. We cannot
predict the effect that any of these initiatives may have on our business, and
it is possible that they will adversely affect our business. In particular,
gene-based therapeutics, if successfully developed and commercialized, are
likely to be costly compared to currently available drug therapies. Health care
cost containment initiatives focused either on gene-based therapeutics
29
or on genetic testing could cause the growth in the clinical market for genetic
testing to be curtailed or slowed. In addition, health care cost containment
initiatives could also cause pharmaceutical companies to reduce research and
development spending. In either case, our business and our operating results
would be harmed. In addition, genetic testing in clinical settings is often
billed to third-party payors, including private insurers and governmental
organizations. If our current and future clinical products are not considered
cost-effective by these payors, reimbursement may not be available to users of
our products. In this event, potential customers would be much less likely to
use our products, and our business and operating results would be seriously
harmed.
ITEM 2. PROPERTIES
Our facilities consist of space for research and development,
manufacturing, product support operations, marketing and corporate headquarters
and administration. All of our facilities are located in the greater Madison,
Wisconsin area. Our facilities are all leased and consist of the following
buildings:
SQUARE
TYPE OF FACILITY FOOTAGE LEASE EXPIRATION
- ---------------- ------- ----------------
Headquarters, research and development,
manufacturing, selling, marketing, and administration 95,000 September 2011, with option to extend
for three 5 year periods.
Oligonucleotide and SNP manufacturing 36,000 May 2003, with option to extend to
May 2006
Oligonucleotide and SNP manufacturing 33,000 October 2003, with option to extend to
October 2008
We have custom-designed and equipped our oligonucleotide synthesis and SNP
manufacturing facilities and we believe that these facilities comprise the
world's largest oligonucleotide synthesis and SNP assay manufacturing centers.
Under the terms of the existing leases, we pay rent of approximately
$241,000 per month. We believe that our current facilities will be adequate to
meet our near-term space requirements. We also believe that suitable additional
space will be available to us, when needed, on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the usual course of business. We are not
currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 annual meeting of the shareholders of the Company was held on
October 24, 2001. The Company solicited proxies for the annual meeting pursuant
to Section 14 of the Securities Exchange Act of 1934, as amended, and Regulation
14A thereunder. The following directors were elected by the shareholders at the
annual meeting for a term expiring at the annual meeting in 2004: Lance Fors by
a vote of 26,778,340 shares for, 0 shares against, 1,021,587 shares withhold
authority and 0 broker non-vote shares; David A. Thompson by a vote of
27,782,327 shares for, 0 shares against, 17,600 shares withhold authority and 0
30
broker non-vote shares; and Kenneth R. McGuire by a vote of 27,780,647 shares
for, 0 shares against, 19,280 shares withhold authority and 0 broker non-vote
shares.
The shareholders approved the appointment of Ernst & Young LLP as the
independent auditors of the Company by a vote of 27,697,689 shares for, 89,830
shares against, 12,408 shares withhold authority and 0 broker non-vote shares.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ National Market under the symbol
"TWTI" and has been publicly traded since February 2001. The following table
sets forth for each quarter in 2001 the high and low sales prices per share,
based on closing prices, for our common stock as reported on the NASDAQ Stock
Market.
Fiscal Year Ended High Low
December 31, 2001 ---- ---
-----------------
First Quarter..................... $ 11.00 $ 5.38
Second Quarter.................... $ 11.00 $ 5.10
Third Quarter..................... $ 10.19 $ 5.01
Fourth Quarter.................... $ 8.85 $ 6.26
As of December 31, 2001, approximately 265 shareholders of record held our
common stock.
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, to support the development
of our business and do not anticipate paying any cash dividends in the
foreseeable future. Covenants in our capital lease facilities prohibit the
payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data set forth below for the years ended
December 31, 1999, 2000 and 2001, and the balance sheet data at December 31,
2000 and 2001 are derived from our financial statements, which have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
Form 10-K. The statement of operations data for the years ended December 31,
1997 and 1998 and the balance sheet data at December 31, 1997, 1998 and 1999 are
derived from our audited financial statements that are not included in this Form
10-K. When you read these selected financial data, it is important that you also
read our financial statements and related notes included elsewhere in this Form
10-K, as well as Item 7 of this Form 10-K related to "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Historical
results are not necessarily indicative of future results. See note 2 to our
financial statements included elsewhere in this Form 10-K for an explanation of
the method used to determine the number of shares used in computing pro forma
net loss per share.
31
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues $ 1,119 $ 4,382 $ 2,574 $ 11,417 $ 34,092
Operating expenses:
Cost of goods sold 670 1,223 2,290 11,518 32,930
Research and development 2,425 3,669 4,315 7,337 15,995
Selling and marketing 1,301 1,712 2,408 4,983 9,200
General and administrative 1,839 3,357 3,725 7,408 14,521
Impairment loss - - - 5,789 -
Merger costs - - 116 833 -
----------------------------------------------------------------------------
Total operating expenses 6,235 9,961 12,854 37,868 72,646
----------------------------------------------------------------------------
Loss from operations (5,116) (5,579) (10,280) (26,451) (38,554)
Other income (expense), net 217 147 566 877 1,762
----------------------------------------------------------------------------
Net loss (4,899) (5,432) (9,714) (25,574) (36,792)
Deemed dividend upon issuance of
Convertible preferred stock - - - (17,023) -
----------------------------------------------------------------------------
Net loss attributable to common shareholders $ (4,899) $ (5,432) $ (9,714) $ (42,597) $(36,792)
============================================================================
Basic and diluted net loss per share $ (0.40) $ (0.43) $ (0.68) $ (2.83) $ (1.03)
Shares used in computing basic and diluted
net loss per share 12,191 12,772 14,183 15,078 35,714
Pro forma basic and diluted net loss per share $ (0.98) $ (0.98)
Shares used in computing pro forma basic
and diluted net loss per share 26,120 37,483
DECEMBER 31,
---------------------------------------------------------
---------------------------------------------------------
1997 1998 1999 2000 2001
---------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $4,075 $ 5,614 $12,919 $47,179 $73,299
Working capital 2,584 4,099 13,774 29,122 64,834
Total assets 5,901 8,283 20,289 83,193 131,615
Long-term obligations, net of current portion 147 96 420 12,095 6,694
Accumulated deficit (7,429) (12,860) (22,575) (48,149) (84,852)
Total stockholders' equity 3,311 5,776 17,199 47,039 104,753
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 2001, and for the years ended December 31, 2001
and 2000 should be read in conjunction with "Selected Financial Data" and our
financial statements, including the notes thereto, included elsewhere in this
Form 10-K.
OVERVIEW
Third Wave Technologies develops, manufactures and markets genetic analysis
products used in the discovery and validation of the genetic basis of disease
and the delivery of personalized medicine.
The company's patented Invader product platform is highly accurate, sensitive,
easy to use and cost-effective, enabling the acceleration of genome and
pharmaceutical research and clinical patient analysis.
The Company has established strategic collaborations in the U.S. and abroad with
government initiatives, pharmaceutical and biotechnology companies, academic
research centers, clinical reference labs and major healthcare providers. The
Company is focused on high-volume opportunities with customers and collaborators
in large-scale disease association studies, drug response marker profiling and
molecular diagnostics.
A large suite of Third Wave's turnkey Invader platform products are or will be
available, in a variety of formats to meet the needs of our customers including
analyte specific reagents for routine clinical use and a large number of
products for research use. The Company has also introduced its first series of
Invader RNA Assay products for measuring the expression levels of genes with
proven clinical relevance. We will launch additional products for genotyping and
gene expression analysis. These products will be available in flexible formats
and include various densities of chromosome-specific panels, expanded
genome-wide screening and medically associated panels including disease-specific
panels, microsatellite replacement panels and assays for quantitating a number
of infectious diseases and mRNA transcripts, including drug metabolizing
enzymes, cytokines, chemokines, growth factors and housekeeping and reporter
genes.
Invader products are compatible with existing automation processes and detection
platforms and are available in convenient, ready-to-use formats. These
advantages make Invader products ideally suited for both small-scale and
large-scale genetic analysis in research and clinical applications, including
drug discovery and development and patient diagnosis and treatment. Third Wave's
proprietary products and technologies position the Company to exploit the
growing market opportunity for genetic analysis products.
Our financial results may vary significantly from quarter to quarter due to
fluctuations in the demand for our products, timing of new product introductions
and deliveries made during the quarter, the timing of research, development and
grant revenues, and increases in spending, including expenses related to our
ongoing scale up of product development and manufacturing capabilities.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting
33
principles generally accepted in the United States. We review the accounting
policies we use in reporting our financial results on a regular basis. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to accounts
receivable, inventories, equipment and leasehold improvements and intangible
assets. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Results
may differ from these estimates due to actual outcomes being different from
those on which we based our assumptions. These estimates and judgments are
reviewed by management on an ongoing basis, and by the Audit Committee at the
end of each quarter prior to the public release of our financial results. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
LONG-LIVED ASSETS - IMPAIRMENT
Equipment, leasehold improvements and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. For assets held and used, the sum of the
expected undiscounted cash flows is less than the carrying value of the related
asset or group of assets, a loss is recognized for the difference between the
fair value and carrying value of the asset or group of assets. For assets
removed from service and held for sale or abandoned we estimate the fair market
value of such assets and record an adjustment if fair market value is lower than
carrying value. Such analyses necessarily involve significant judgment. During
2001, we recorded a charge of approximately $2,970,000 classified in general and
administrative expenses to write down certain equipment to its net realizable
value.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2001, we
sold certain products with the resulting accounts receivable denominated in
Japanese Yen. Simultaneous with such sales, we purchased foreign currency
forward contracts to manage the risk associated with collections of receivables
denominated in foreign currencies in the normal course of business. These
derivative instruments have maturities of less than one year and are intended to
offset the effect of transaction gains and losses. There were no contracts
outstanding at December 31, 2001. The changes in the fair value of the
derivatives and the loss or gain on the hedged asset relating to the risk being
hedged are recorded currently in earnings.
SIGNIFICANT CUSTOMER
We generated approximately 76% of our revenues from sales to one end-user
customer in the Japanese government. As of December 31, 2001, none of our
accounts receivable were attributable to this customer. If our primary customer
would experience significant adverse conditions, they may not be able to
complete the purchase of additional products from us under the terms of our
existing firm sale commitments.
INVENTORIES - SLOW MOVING AND OBSOLESCENCE
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because of process improvements or technology advancements, the amount on hand
is more than can be used to meet future need, or estimates of shelf lives may
change. We currently consider all inventory that we expect will have no activity
within one year as well as any additional specifically identified inventory to
be subject to a provision for excess inventory. We also provide for the total
value of inventories that we determine to be obsolete based on criteria such as
changing manufacturing processes and technologies. At December 31, 2001, our
inventory reserves were $2.7 million, or 29% of our $9.1 million total gross
inventories.
34
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES. Revenues for the year ended December 31, 2001, of $34.1 million
represents an increase of $22.7 million as compared to revenues of $11.4 million
for the year ended December 31, 2000.
Product revenues increased to $30.4 million for the year ended December 31,
2001, from $10.9 million in the year ended December 31, 2000. The increase in
product sales was the result of increasing sales of the Invader products, which
are consumable tests and reagents used for DNA and RNA analysis in research and
clinical applications. Product sales during 2001 were above our original
expectations because our largest customer accelerated its purchases of our
proprietary Cleavase enzyme. The customer will use the enzyme in conjunction
with previously delivered Invader SNP probes sets, as well as those planned to
be delivered over the remainder of the project.
Development revenues increased to $3.1 million for the year ended December 31,
2001, from $0.1 million for the year ended December 31, 2000. The increase is
primarily due to development work being done on a development and
commercialization agreement with BML, Inc (BML). Under the agreement, we are
developing assays in accordance with a mutually agreed development program for
use in clinical applications by BML. This development is expected to be
completed by the end of 2003.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
litigation settlement fees. For the year ended December 31, 2001, cost of goods
sold increased to $32.9 million compared to $11.5 million for the year ended
December 31, 2000. The increase was due to the increased material expenses as a
result of higher product sales and costs incurred as we put in place additional
manufacturing capacity to meet accelerating demand for our Invader products. The
increase in cost of goods sold is also attributable to an increase in a non-cash
charge for amortization of litigation settlement costs and reacquired marketing
and distribution rights. Also, due to process improvements and technology
advancements, we incurred a non-cash charge of $2.4 million to increase the
reserve for obsolete and excess inventory on our raw materials.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of salaries and related personnel costs, material costs for assays and
product development, fees paid to consultants, depreciation and facilities costs
and other expenses related to the design, development, testing and enhancement
of our products and acquisition of technologies used or to be used in our
products. Research and development costs are expensed as they are incurred.
Research and development expenses for the year ended December 31, 2001, were
$16.0 million, compared to $7.3 million for the year ended December 31, 2000.
The increase in research and development expenses of $8.7 was primarily
attributable to increased expenses associated with additional research and
development personnel, increased purchases of laboratory supplies, increased
equipment depreciation, deferred compensation amortization and increased
facilities expenses in connection with the expansion of our internal and
collaborative research efforts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, office support and related costs, and travel costs.
Selling and marketing expenses for the year ended December 31, 2001, were $9.2
million, an increase of $4.2 million, as compared to $5.0 million for the year
ended December 31, 2000. We attribute this increase to the hiring of additional
personnel and increased costs associated with establishing and expanding our
clinical and research businesses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses increased to $14.5 million in
the year ended December 31, 2001, from $7.4 million for the year ended December
31, 2000. In 2001, a fixed asset impairment charge of $3.0 million was recorded
in general and administrative expense related to a write-
35
down of equipment to its net realizable value. The increase is also due to the
hiring of additional personnel to support our growing business activities.
IMPAIRMENT LOSS. In the year ended December 31, 2000, an impairment charge of
$5.8 million was recognized. The impairment charge pertained to intangible
assets recorded in connection with terminating a distribution agreement.
MERGER COSTS. In January 2000, we entered into an agreement to merge with
another company. In May 2000, we and the other company mutually agreed to
terminate the merger agreement. During the year ended December 31, 2000, we
incurred expenses related to the proposed merger of $0.8 million.
INTEREST INCOME. Interest income for the year ended December 31, 2001, was $3.3
million, compared to $1.5 million for the year ended December 31, 2000. This
increase was primarily due to interest received on larger cash, cash equivalent
and short-term investment balances, which we held as a result of our initial
public offering in February 2001, offset by amounts used to fund operating
activities and a decrease in interest rates realized on our investments.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2001, was
approximately $1.3 million compared to $0.7 million in the year ended December
31, 2000. The increase in interest expense was mainly due to additional debt
related to capital equipment financings completed in September 2000, May 2001,
and September 2001.
EQUITY IN LOSSES FROM JOINT VENTURES. On December 14, 2001, we acquired the
remaining 50% of Third Wave Agbio (Agbio). Accordingly, we recorded 50% of
Agbio's net losses from January 1, 2001 through December 14, 2001, which
amounted to $0.2 million, as a credit to equity in losses from joint ventures.
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUES. Revenues for the year ended December 31, 2000, of $11.4 million
represents an increase of $8.8 million as compared to revenues of $2.6 million
for the year ended December 31, 1999.
Product revenues increased to $10.9 million for the year ended December 31,
2000, from $0.5 million in the year ended December 31, 1999. The increase in
product sales was due to the introduction of clinical products and contracts to
provide products to customers in the research market.
Development revenues declined to $0.1 million for the year ended December 31,
2000, from $1.1 million for the year ended December 31, 1999 due to the
termination of development agreements with Endogen and IRC.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
settlement fees. For the year ending December 31, 2000, cost of goods sold
increased to $11.5 million compared to $2.3 million for the year ended December
31, 1999. The increase was primarily due to the increased material expenses as a
result of higher product sales and costs incurred as we put in place additional
manufacturing capacity to meet accelerating demand for our Invader products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of salaries and related personnel costs, material costs for assays and
product development, fees paid to consultants, depreciation and facilities costs
and other expenses related to the design, development, testing and enhancement
of our products and acquisition of technologies used or to be used in our
products. Research and development costs are expensed as they are incurred.
Research and development expenses for the year ended December 31, 2000, were
$7.3 million, compared to $4.3 million for the year ended December 31, 1999.
36
The increase in research and development expenses of $3.0 million was primarily
attributable to increased expenses associated with additional research and
development personnel, increased purchases of laboratory supplies, increased
equipment depreciation, deferred compensation amortization and increased
facilities expenses in connection with the expansion of our internal and
collaborative research efforts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, office support and related costs, and travel costs.
Selling and marketing expenses for the year ended December 31, 2000, were $5.0
million, an increase of $2.6 million, as compared to $2.4 million for the year
ended December 31, 1999. We attribute this increase to the hiring of additional
personnel and increased costs associated with establishing and expanding our
clinical business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses increased to $7.4 million in
the year ended December 31, 2000, from $3.7 million for the year ended December
31, 1999. The increase is due to the hiring of additional personnel to support
our growing business activities.
IMPAIRMENT LOSS. In the year ended December 31, 2000, an impairment charge of
$5.8 million was recognized. The impairment charge pertains to intangible assets
recorded in connection with terminating a distribution agreement.
MERGER COSTS. In January 2000, we entered into an agreement to merge with
another company. In May 2000, we and the other company mutually agreed to
terminate the merger agreement. During the year ended December 31, 2000, we
incurred expenses related to the proposed merger of $0.8 million compared to
$0.1 million for the year ended December 31, 1999.
INTEREST INCOME. Interest income for the year ended December 31, 2000, was $1.5
million, compared to approximately $0.6 million for the year ended December 31,
1999. This increase was primarily due to interest received on larger cash, cash
equivalent and short-term investment balances, which we held as a result of our
Series F financing in July 2000, offset by amounts used to fund operating
activities.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2000, was
approximately $0.7 million compared to less than $0.1 million in the year ended
December 31, 1999. The increase in interest expense was due to additional debt
related to the capital equipment financing completed in September 2000, and the
convertible note payable from December 2000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through private
placements of equity securities, research grants from federal and state
government agencies, payments from strategic collaborators, equipment loans,
capital leases, sale of products, a convertible note and an initial public
offering in February 2001. As of December 31, 2001, we had cash and cash
equivalents and short-term investments of $73.3 million.
In February 2001, we completed our initial public offering of 7,500,000 shares
of common stock at a price of $11.00 per share (excluding underwriters'
discounts and commissions), generating net proceeds of approximately $74.8
million.
Net cash used in operations for the year ended December 31, 2001, was
approximately $30.3 million, compared with approximately $0.6 million for the
comparable period in 2000. Non-cash charges in the year ended December 31, 2001,
included stock compensation expense of $2.8 million, depreciation and
amortization expense of $10.2 million, an equipment impairment charge of $3.0
million and deferred gain on the sale of fixed assets of $0.2 million. The
change in operating assets and liabilities for the year ended December 31, 2001,
included an increase in accounts receivable of $0.9 million, an increase in
inventory of
37
$5.7 million, an increase in prepaid expenses and other assets of $1.6 million,
a decrease in accounts payable of $0.2 million, a decrease in accrued
liabilities of less than $0.1 million and a decrease in deferred revenue of $1.2
million. Investing activities included $21.0 million for purchases of capital
equipment, proceeds of $5.1 million from the sale of equipment during the year
ended December 31, 2001, and $38.4 million used for the net purchases of
short-term investments. Financing activities for the year included the use of
$8.4 million to repay debt and capital lease obligations, proceeds of $5.4
million from capital equipment financing and net proceeds from the issuance of
common stock of $75.4 million, which was primarily from our initial public
offering.
As of December 31, 2001, a valuation allowance equal to 100% of our net deferred
tax assets has been recognized since our future realization is not assured. At
December 31, 2001, we had federal and state net operating loss carryforwards of
approximately $77.9 million. The net operating loss carryforwards will expire at
various dates beginning in 2008, if not utilized. Utilization of the net
operating losses and credits to offset future taxable income may be subject to
an annual limitation due to the change of ownership provisions of federal tax
laws and similar state provisions as a result of our initial public offering.
We cannot assure you that our business or operations will not change in a manner
that would consume available resources more rapidly than anticipated. We also
cannot assure you that we will not require substantial additional funding before
we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
- our progress with our research and development programs;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
- the timing of purchases of additional capital.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is currently confined to changes in foreign exchange
and interest rates. The securities in our investment portfolio are not leveraged
and due to their short-term nature, are subject to minimal interest rate risk.
We currently do not hedge interest rate exposure. Due to the short-term
maturities of our investments, we do not believe that an increase in market
rates would have any negative impact on the realized value of our investment
portfolio.
To reduce foreign exchange risk, we selectively use financial instruments. Our
earnings are affected by fluctuations in the value of the U.S. dollar against
foreign currencies as a result of the sales of our products in foreign markets.
Forward foreign exchange contracts are used to hedge against the effects of such
fluctuations. Our policy prohibits the trading of financial instruments for
profit. A discussion of our accounting policies for derivative financial
instruments is included in the notes to the financial statements included
elsewhere in this Form 10-K.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Third Wave Technologies, Inc.
Index to Consolidated Financial Statements
CONTENTS
Report of Ernst & Young LLP, Independent Auditors............................F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2000 and 2001.................F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001..........................................F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 2000 and 2001..........................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001..........................................F-6
Notes to Consolidated Financial Statements...................................F-8
39
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors
Third Wave Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Third Wave
Technologies, Inc. (the Company) as of December 31, 2000 and 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 2000 and 2001, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
Ernst & Young LLP
Milwaukee, Wisconsin
January 18, 2002
F-1
Third Wave Technologies, Inc.
Consolidated Balance Sheets
DECEMBER 31
2000 2001
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,046,484 $ 1,807,372
Short-term investments 33,132,144 71,491,751
Receivables:
Trade, net of allowance for doubtful accounts of $59,000 and
$175,000 at December 31, 2000 and 2001, respectively 1,371,553 1,829,122
Accounts receivable from related party 22,290 -
Inventories 760,851 6,448,974
Prepaid expenses and other 1,731,004 2,308,003
-----------------------------
Total current assets 51,064,326 83,885,222
Equipment and leasehold improvements:
Machinery and equipment 19,194,828 30,848,712
Leasehold improvements 2,481,222 7,597,235
-----------------------------
21,676,050 38,445,947
Less accumulated depreciation 4,430,927 10,864,634
-----------------------------
17,245,123 27,581,313
Intangible assets, net 11,071,371 15,431,620
Other assets 3,812,190 4,716,427
-----------------------------
Total assets $ 83,193,010 $131,614,582
=============================
F-2
DECEMBER 31
2000 2001
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,439,002 $ 11,276,955
Accrued expenses and other liabilities 1,995,258 1,976,799
Deferred revenue 1,711,450 1,535,951
Long-term debt due within one year 6,796,234 2,618,359
Capital lease obligations due within one year - 1,643,372
--------------------------------
Total current liabilities 21,941,944 19,051,436
Deferred revenue 1,916,667 916,667
Long-term debt 2,095,211 3,966,620
Capital lease obligations - 2,727,070
Convertible note payable 10,000,000 -
Other 200,000 200,000
Shareholders' equity:
Participating preferred stock, Series A, $.001 par value,
100,000 shares authorized, 0 shares issued and outstanding - -
Convertible preferred stock, $.001 par value, 14,780,400
shares authorized:
Series A, 1,131,600 issued and outstanding in 2000 1,132 -
Series B, 600,000 issued and outstanding in 2000 600 -
Series C, 560,400 issued and outstanding in 2000 560 -
Series D, 1,185,600 issued and outstanding in 2000 1,186 -
Series E, 5,190,000 issued and outstanding in 2000 5,190 -
Series F, 5,444,400 issued and outstanding in 2000 5,444 -
Common stock, $.001 par value, 100,000,000 shares authorized,
15,633,800 and 39,374,014 shares issued and outstanding,
respectively 15,634 39,374
Common stock to be issued, 116,855 shares in 2000 856,800 -
Additional paid-in capital 98,871,975 191,426,698
Unearned stock compensation (4,570,364) (1,861,566)
Accumulated deficit (48,148,969) (84,851,717)
--------------------------------
Total shareholders' equity 47,039,188 104,752,789
--------------------------------
Total liabilities and shareholders' equity $ 83,193,010 $ 131,614,582
================================
See accompanying notes.
F-3
Third Wave Technologies, Inc.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31
1999 2000 2001
------------------------------------------------
Revenues:
Product sales $ 520,880 $ 10,891,439 $ 30,405,055
Development revenues 1,081,956 102,355 3,110,004
Grant revenues 971,537 423,624 576,690
------------------------------------------------
2,574,373 11,417,418 34,091,749
Operating expenses:
Cost of goods sold (including amortization of
capitalized legal settlement costs and
reacquired marketing and distribution rights
of $1,672,988 and $1,930,560 in 2000 and 2001,
respectively.) 2,289,655 11,518,439 32,930,411
Research and development 4,314,774 7,336,694 15,994,512
Selling and marketing 2,408,254 4,983,323 9,199,622
General and administrative 3,725,368 7,407,934 14,520,855
Impairment loss - 5,788,889 -
Merger costs 116,501 833,254 -
------------------------------------------------
Total operating expenses 12,854,552 37,868,533 72,645,400
------------------------------------------------
Loss from operations (10,280,179) (26,451,115) (38,553,651)
Other income (expense):
Interest income 585,412 1,500,142 3,349,617
Interest expense (45,366) (673,818) (1,346,876)
Equity in losses from joint ventures - - (241,282)
Other 25,752 50,645 (16)
------------------------------------------------
565,798 876,969 1,761,443
------------------------------------------------
Net loss (9,714,381) (25,574,146) (36,792,208)
Deemed dividend upon issuance of convertible
preferred stock - (17,022,824) -
------------------------------------------------
Net loss attributable to common stockholders $ (9,714,381) $(42,596,970) $(36,792,208)
================================================
Net loss per share - basic and diluted $ (0.68) $ (2.83) $ (1.03)
Pro forma, net loss per share (unaudited) - basic
and diluted $ (0.98) $ (0.98)
See accompanying notes.
F-4
Third Wave Technologies, Inc.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 2000 and 2001
Preferred Stock Common Stock
-----------------------------------------------------
Additional Additional Common
Par Paid-In Par Paid-In Stock to be
Value Capital Value Capital Issued
------------------------------------------------------------------------
Balance at December 31, 1998 $ 3,478 $ 5,353,395 $ 13,610 $ 13,265,637 $ -
Common stock issued - 1,105,200 shares - - 1,106 3,312,310 -
Preferred stock issued - 5,190,000 shares 5,190 17,332,702 - - -
Unearned stock compensation - - - 1,021,108 -
Amortization of unearned stock compensation - - - - -
Net loss - - - - -
------------------------------------------------------------------------
Balance at December 31, 1999 8,668 22,686,097 14,716 17,599,055 -
Common stock issued - 918,000 shares - - 918 5,525,263 -
Preferred stock issued -5,444,400 shares 5,444 45,450,703 - - -
Unearned stock compensation - - - 7,610,857 -
Amortization of unearned stock compensation - - - - -
Common stock to be issued - - - - 856,800
Net loss - - - - -
------------------------------------------------------------------------
Balance at December 31, 2000 14,112 68,136,800 15,634 30,735,175 856,800
Common stock issued in initial public
offering - 7,500,000 shares - - 7,500 74,831,549 -
Common stock issued for conversion of
note payable - 909,091 shares - - 909 9,999,091 -
Common stock issued related to a
litigation settlement - 116,854 shares - - 117 856,683 (856,800)
Common stock issued for acquisition - 925,000 - - 925 6,192,440 -
Common stock issued for stock options
and stock purchase plan - 177,269 shares - - 177 571,482 -
Conversion of preferred stock to common
stock - 14,112,000 shares (14,112) (68,136,800) 14,112 68,136,800 -
Unearned stock compensation - - - 103,478 -
Amortization of unearned stock compensation - - - - -
Net loss - - - - -
------------------------------------------------------------------------
Balance at December 31, 2001 $ - $ - $ 39,374 $ 191,426,698 $ -
========================================================================
Unearned
Stock Accumulated
Compensation Deficit Total
----------------------------------------------
Balance at December 31, 1998 $ - $ (12,860,442) $ 5,775,678
Common stock issued - 1,105,200 shares - - 3,313,416
Preferred stock issued - 5,190,000 shares - - 17,337,892
Unearned stock compensation (1,021,108) - -
Amortization of unearned stock compensation 485,924 - 485,924
Net loss - (9,714,381) (9,714,381)
----------------------------------------------
Balance at December 31, 1999 (535,184) (22,574,823) 17,198,529
Common stock issued - 918,000 shares - - 5,526,181
Preferred stock issued -5,444,400 shares - - 45,456,147
Unearned stock compensation (7,610,857) - -
Amortization of unearned stock compensation 3,575,677 - 3,575,677
Common stock to be issued - - 856,800
Net loss - (25,574,146) (25,574,146)
----------------------------------------------
Balance at December 31, 2000 (4,570,364) (48,148,969) 47,039,188
Common stock issued in initial public
offering - 7,500,000 shares - - 74,839,049
Common stock issued for conversion of
note payable - 909,091 shares - - 10,000,000
Common stock issued related to a
litigation settlement - 116,854 shares - - -
Common stock issued for acquisition - 925,000 - 89,460 6,282,825
Common stock issued for stock options
and stock purchase plan - 177,269 shares - - 571,659
Conversion of preferred stock to common
stock - 14,112,000 shares - - -
Unearned stock compensation (103,478) - -
Amortization of unearned stock compensation 2,812,276 - 2,812,276
Net loss - (36,792,208) (36,792,208)
----------------------------------------------
Balance at December 31, 2001 $(1,861,566) $ (84,851,717) $ 104,752,789
==============================================
See accompanying notes.
F-5
Third Wave Technologies, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1999 2000 2001
---------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (9,714,381) $ (25,574,146) $ (36,792,208)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 732,130 4,435,589 10,224,103
Noncash stock compensation 485,924 3,575,677 2,812,276
Noncash charge for impairment - 5,788,889 2,970,257
(Gain) loss on disposal of equipment (13,362) - 75,656
Deferred gain on sale of assets - - (179,024)
Amortization of deferred gain - - (25,724)
Equity in losses from joint ventures - - 241,282
Change in operating assets and liabilities:
Receivables (600,536) (428,617) (853,614)
Inventories (67,933) (561,231) (5,688,123)
Prepaid expenses and other assets (50,963) (2,568,037) (1,639,567)
Accounts payable 85,655 8,390,550 (162,076)
Accrued expenses and other liabilities 476,485 3,200,324 (18,459)
Deferred revenue (264,759) 3,143,095 (1,227,999)
---------------------------------------------------
Net cash used in operating activities (8,931,740) (597,907) (30,263,220)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements (2,788,782) (15,925,325) (21,011,245)
Proceeds on sale of equipment 85,423 - 5,070,000
Purchases of licensed technology - (9,383,248) (245,038)
Cash received in acquisition 165,314
Purchases of short-term investments (7,069,181) (61,831,044) (106,690,686)
Sales of short-term investments 8,979,181 31,488,900 68,331,079
---------------------------------------------------
Net cash used in investing activities (793,359) (55,650,717) (54,380,576)
FINANCING ACTIVITIES
Proceeds from long-term debt 626,454 2,742,443 5,399,879
Payments on long-term debt (178,634) (412,878) (7,706,345)
Proceeds from convertible note payable - 10,000,000 -
Proceeds from notes receivable - 1,997,736 -
Proceeds from issuance of common stock, net 1,225,680 382,981 75,410,708
Proceeds from issuance of preferred stock, net 17,337,892 45,456,147 -
Payments on capital lease obligations (71,943) - (699,558)
---------------------------------------------------
Net cash provided by financing activities 18,939,449 60,166,429 72,404,684
---------------------------------------------------
Increase (decrease) in cash and cash equivalents 9,214,350 3,917,805 (12,239,112)
Cash and cash equivalents at beginning of period 914,329 10,128,679 14,046,484
---------------------------------------------------
Cash and cash equivalents at end of period $ 10,128,679 $ 14,046,484 $ 1,807,372
===================================================
Supplemental disclosures of cash flow information -
Cash paid for interest $ 45,366 $ 260,533 $ 1,760,161
===================================================
See accompanying notes.
F-6
Third Wave Technologies, Inc.
Consolidated Statements of Cash Flows (continued)
Noncash investing and financing activities: During the year ended December 31,
2001, the Company:
- - converted $10,000,000 of notes payable into 909,091 shares of common stock
- - issued 925,000 shares of common stock in acquisition
- - entered into capital lease obligations of $5,070,000
During the year ended December 31, 2000, the Company:
- - issued 545,454 shares of common stock valued at $11.00 per share as a cost for
defending certain patents
- - issued notes payable of $6,000,000 for purchased intangible assets
During the year ended December 31, 1999, the Company:
- - issued 592,800 shares of common stock in exchange for notes receivable of
$1,997,736 (see Note 6)
- - converted $90,000 of notes payable into 60,000 shares of common stock
See accompanying notes.
F-7
Third Wave Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
1. NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Third
Wave Technologies, Inc. (the Company) and its wholly-owned subsidiary, Third
Wave Agbio, Inc. (Agbio) which became wholly-owned in 2001. All significant
intercompany balances and transactions are eliminated in consolidation.
NATURE OF OPERATIONS
The Company is a leading provider of products for analyzing genetic variations.
The Company's patented genetic analysis platform, the Invader platform, offers
several advantages over conventional genetic analysis technologies. The
Company's technologies produce highly accurate results, are easy to use and
eliminate the requirement for copying the genetic sample using polymerase chain
reaction, or PCR, saving the user time and money while eliminating the risk of
sample contamination. Additionally, the Company's technologies are automatable,
compatible with existing detection platforms and available in convenient assay
formats. These advantages make the Company's technologies ideally suited for
large-scale genetic analysis in both clinical and research applications
including drug discovery and development and patient diagnosis and treatment.
The Company currently markets products domestically and internationally to
clinical and research markets using an internal sales force as well as
collaborative relationships with pharmaceutical companies and research
institutions. Revenues to one end-user customer during 2000 and 2001 were 67%
and 76% of total revenues, respectively. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers highly liquid money market investments and short-term
investments with maturities of 90 days or less from the date of purchase to be
cash equivalents.
Short-term investments consist of certificates of deposit and commercial paper.
The cost of these securities, which are considered "available-for-sale" for
financial reporting purposes, approximates fair value at December 31, 2000 and
2001.
INVENTORIES
Inventories, consisting mostly of raw materials, are carried at the lower of
cost or market using the first-in, first-out (FIFO) method for determining cost.
Inventories consisted of the following:
DECEMBER 31
2000 2001
----------------------------
Raw material $ 839,075 $ 6,963,240
Finished goods and work in process 181,776 2,165,734
Reserve for excess and obsolete inventory (260,000) (2,680,000)
----------------------------
Total inventories $ 760,851 $ 6,448,974
============================
ADVERTISING COSTS
Advertising costs are expensed at the time the advertising takes place.
Advertising costs were $1,511, $158,033 and $675,624 in 1999, 2000 and 2001,
respectively.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost less accumulated
depreciation. Depreciation of purchased equipment is computed by the
straight-line method over the estimated useful lives of the assets which are
generally three to ten years. Depreciation of leasehold improvements is computed
by the straight-line method over the shorter of the estimated useful lives of
the assets or the lease term.
F-9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS
Patent-related development costs are expensed in the period incurred and are
included in general and administrative expenses in the statements of operations.
These costs were $287,014, $311,992 and $546,776 for the years ended December
31, 1999, 2000 and 2001, respectively.
INTANGIBLE ASSETS
Intangible assets consist of the following:
Original
Amortization
Period DECEMBER 31
(Years) 2000 2001
-----------------------------------------------
Acquisition of remaining outstanding shares
of Agbio (see Note 3) * $ - $ 6,345,186
Costs of settling patent litigation (see
Note 12) 7 10,533,248 10,533,248
Reacquired marketing and distribution rights (see
Note 9) 3 8,000,000 2,211,111
2000 impairment write-off (5,788,889) -
------------------------------
12,744,359 19,089,545
Less:
Accumulated amortization (1,672,988) (3,657,925)
------------------------------
$ 11,071,371 $ 15,431,620
==============================
*Valuation to be performed during 2002 for the purpose of allocating the
purchase price in accordance with FAS 142 and assigning useful lives.
PREPAID LICENSE FEES
Other assets for the years ended December 31, 2000 and 2001, include $2,812,190
and $2,642,610 of prepaid license fees (which is net of $37,810 and $452,427,
respectively of accumulated amortization) paid to third parties for the use of
patented technology. The assets are being amortized to expense over the shorter
of the term of the license or the estimated useful lives of the assets
(generally three to ten years).
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
Equipment, leasehold improvements and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected undiscounted
cash flows is less than the carrying value of the related asset or group of
assets, a loss is recognized for the difference between the fair value and
carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment. During 2001, the Company recorded a charge of
approximately $2,970,000 classified in general and administrative expenses to
write down certain equipment to its net realizable value.
F-10
As described in Note 9, a $5,788,889 impairment loss was recognized in 2000
pertaining to intangible assets recorded in connection with terminating the
Endogen agreement. The fair value of the intangible assets was determined using
a discounted cash flow calculation.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
which was adopted by the Company on January 1, 2001. This Statement requires
that all derivatives be recorded in the balance sheet at fair value and that
changes in fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. There was no cumulative effect of adoption because
the Company did not have any derivative financial instruments on January 1,
2001.
The Company sells its products in a number of countries throughout the world.
During 2001, the Company sold certain products with the resulting accounts
receivable denominated in Japanese Yen. Simultaneous with such sales, the
Company purchased foreign currency forward contracts to manage the risk
associated with collections of receivables denominated in foreign currencies in
the normal course of business. These derivative instruments have maturities of
less than one year and are intended to offset the effect of transaction gains
and losses. There were no contracts outstanding at December 31, 2001. The
changes in the fair value of the Company's derivatives and the loss or gain on
the hedged asset relating to the risk being hedged are recorded currently in
earnings.
REVENUE RECOGNITION
Revenue from product sales is recognized upon delivery which is generally when
the title passes to the customer, provided that the Company has completed all
performance obligations and the customer has accepted the products. Customers
have no contractual rights of return or refunds associated with product sales.
Grant and development revenues consist primarily of research grants from
agencies of the Federal government and revenue from companies with which the
Company has established strategic alliances, the revenue from which is
recognized as research is performed. Payments received which are related to
future performance are deferred and recorded as revenue when earned. Grant
payments designated to purchase specific assets to be used in the performance of
a contract are recognized as revenue over the shorter of the useful life of the
asset acquired or the contract.
RESEARCH AND DEVELOPMENT
All costs for research and development activities are expensed in the period
incurred.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the current tax payable for the period plus or minus the change during the
period in deferred tax assets and liabilities. No current or deferred income
taxes have been provided through December 31, 2001, because of the net operating
losses incurred by the Company since its inception.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation for awards to employees using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to
F-11
Employees," and has adopted the disclosure only alternative of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123).
Included in operating expenses are the following stock compensation charges:
YEAR ENDED DECEMBER 31
1999 2000 2001
----------------------------------------
Cost of goods sold $ 163,605 $ 890,995 $ 540,076
Research and development 34,205 228,990 270,920
Selling and marketing 14,336 469,453 123,529
General and administrative 273,778 1,986,239 1,877,751
----------------------------------------
$ 485,924 $3,575,677 $2,812,276
========================================
Stock compensation expense for options granted to nonemployees has been
determined in accordance with FAS 123 and EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," and represents the fair value of
the consideration received or the fair value of the equity instruments issued,
whichever may be more reliably measured. For options that vest over future
periods, the fair value of options granted to nonemployees is periodically
remeasured as the underlying options vest.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting principles generally accepted in the United States require that fair
values be disclosed for most of the Company's financial instruments. The
carrying amounts of the Company's financial instruments, which include cash and
cash equivalents, short-term investments, accounts receivable, capital lease
obligations, current liabilities, long-term debt and notes payable are
considered to be representative of their respective fair values.
USE OF ESTIMATES
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET LOSS PER SHARE
In accordance with accounting principles generally accepted in the United
States, basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. The effect of stock options, convertible preferred stock and
convertible note payable is antidilutive for all periods presented.
Unaudited pro forma basic and diluted net loss per common share, as presented,
gives effect to common stock equivalent shares arising assuming that the
preferred stock and convertible note payable were converted to common stock upon
issuance using the if-converted method. This pro forma disclosure has been
included because the preferred stock and convertible note payable automatically
converted upon the closing of the initial public offering.
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per share.
F-12
YEAR ENDED DECEMBER 31
1999 2000 2001
------------------------------------------------
Net loss attributable to common stockholders $ (9,714,381) $(42,596,970) $(36,792,208)
================================================
Weighted-average shares of common stock
outstanding - basic and diluted 14,182,800 15,078,100 35,714,000
================================================
Basic and diluted net loss per share $ (0.68) $ (2.83) $ (1.03)
================================================
Pro forma (unaudited):
Net loss $(25,574,146) $(36,792,208)
Interest on convertible note payable 74,000 164,000
------------------------------
Net loss used in computing pro forma basic and
diluted net loss per share $(25,500,146) $(36,628,208)
==============================
Shares used above 15,078,100 35,714,000
Pro forma adjustment to reflect weighted effect
of conversion of convertible preferred stock
and convertible note payable 11,041,900 1,769,000
------------------------------
Shares used in computing pro forma basic and
diluted net loss per share 26,120,000 37,483,000
==============================
Pro forma basic and diluted net loss per share $ (0.98) $ (0.98)
==============================
Weighted-average shares from options that could
potentially dilute basic earnings per share in the
future that are not included in the computation
of diluted loss per share as their impact is
antidilutive (treasury stock method) 752,400 1,034,000 974,000
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 2000 financial
statements to conform to the 2001 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
Statement. This impairment test uses a fair value approach rather than
F-13
the undiscounted cash flows approach previously required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives and reviewed for impairment.
The Company will apply SFAS No. 142 beginning January 1, 2002 and does not
expect any significant impact on the Company's results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144),
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations for a Disposal of a Segment of a Business." FAS 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt FAS 144 as of January 1,
2002 and is currently evaluating the impact of FAS 144 to its financial
statements.
3. ACQUISITION
On October 16, 1998, the Company and a venture capital fund managed by a
director of the Company closed a transaction at which time the Company received
1,000 shares of common stock, representing 50 percent of the total voting stock
of Agbio in exchange for the Company's contribution to Agbio of an exclusive
worldwide license in the field of agriculture to all of the Company's
technology, which had a $2,000,000 fair value when contributed. The Company's
investment in Agbio was recorded initially at zero because the contributed
technology was in the development phase and thus had no book value. Agbio also
recorded the Company's nonmonetary contribution at zero; however, the other
investor's $2,000,000 million contribution was in cash, which created a
difference between the Company's investment balance ($0) and its share of
Agbio's beginning equity ($1,000,000). This difference was being amortized by
the Company over the estimated life of the contributed technology (5 years) as a
reduction to its share of Agbio's net losses. The investment balance remained at
zero throughout 1999 and 2000.
On December 14, 2001, the Company purchased the remaining 50% of Agbio from the
other investor for an aggregate of 925,000 shares of the Company's common stock
valued at $6.53 per share. In addition, 25,391 options to purchase the Company's
common stock were issued to replace existing Agbio options.
The acquisition of the remaining shares was accounted for as a purchase.
Accordingly, the results of operations of Agbio have been included in the
consolidated financial statements since December 14, 2001, the effective date of
the acquisition. Additionally, 50% of Agbio's losses from January 1, 2001
through December 14, 2001 have been included as a credit to equity in losses
from joint ventures. A credit was also recorded directly to retained earnings
for 50% of the net worth of Agbio through December 31, 2000.
The purchase price of $6.2 million will be allocated to the acquired assets and
assumed liabilities on the basis of their estimated fair values as of the date
of the acquisition, as determined by an independent appraisal during the first
half of 2002. The portion of the purchase price to be allocated to intangible
assets will be amortized based upon the useful lives determined in the
appraisal. Any excess purchase price over the fair value of the net assets and
identifiable intangibles acquired will be allocated to goodwill. On January 1,
2002, the Company will adopt SFAS No. 142, which changes the accounting for
goodwill from an amortization method to an impairment-only approach.
F-14
3. ACQUISITION (CONTINUED)
Based on unaudited data, the following table presents selected financial
information for the Company on a pro forma basis, assuming Agbio had been 100%
owned and consolidated since January 1, 2000:
Years ended December 31
-----------------------
2000 2001
-------------------------------
Net revenues $ 11,531,181 $ 34,473,491
Net loss applicable to common shareholders (44,426,818) (37,933,490)
Net loss per share $ (2.95) $ (1.04)
The pro forma net loss includes an estimation of amortization of identifiable
intangibles and goodwill that would have been recorded had the transaction taken
place at the beginning of the period being reported using a useful life of 7
years.
4. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt are as follows:
DECEMBER 31
2000 2001
------------------------------
Equipment loans $ 2,816,922 $ 6,532,386
Convertible note 10,000,000 -
Note payable to Endogen 6,000,000 -
Other 74,523 52,593
------------------------------
18,891,445 6,584,979
Less current portion 6,796,234 2,618,359
------------------------------
$12,095,211 $ 3,966,620
==============================
The Company has entered into several equipment loans with financial institutions
for the purchase of equipment, with borrowings secured by the equipment
purchased. The loans are repayable in 36 to 42 monthly installments, which
commence upon the delivery of equipment. These equipment loans have interest
rates that vary from 11.3% to 13.5%.
In December 2000, the Company entered into a convertible note which provided the
Company with a $10 million loan bearing interest at 15% per annum. The note
automatically converted into 909,091 shares of common stock at $11 per share
upon the initial public offering on February 9, 2001.
On January 21, 2000, the Company terminated a product development and marketing
agreement with Endogen Corporation (see Note 9), agreeing to pay $2,000,000 in
cash and $6,000,000 in a note bearing interest at 6% per annum due within three
months of an effective initial public offering or in three equal annual
installments beginning January 2001. The note was paid in full during 2001.
Maturities of long-term debt for each of the years succeeding December 31, 2001,
are as follows:
2002 $2,618,359
2003 2,812,401
2004 1,154,219
----------
$6,584,979
==========
F-15
5. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In February 2001, the Company completed an initial public offering of 7,500,000
shares of common stock at a price of $11.00 per share (excluding underwriters'
discounts and commissions), generating gross proceeds of approximately $82.5
million and net proceeds of $74.8 million, after deducting an aggregate of $7.7
million in underwriting discounts, commissions, and other offering related
expenses. All shares of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series D
Convertible Preferred Stock, Series E Convertible Preferred Stock, and Series F
Convertible Preferred Stock outstanding as of the closing date of the offering
were automatically converted into shares of common stock. No dividends were paid
on any of the Series A, B, C, D, E, or F Convertible Preferred Stock.
Subsequent to the commencement of the Company's initial public offering process,
the Company reevaluated the deemed fair market value of its common stock as of
July 2000 and determined it to be $11.90 per share. The Series F convertible
preferred stock was issued at about the same time for $8.78 per share. The
$17,022,824 aggregate excess of the fair value of the "if-converted" stock over
the preferred common stock conversion price was allocated to paid-in capital and
created a discount on the preferred stock. That discount was immediately
amortized to paid in capital (due to a lack of retained earnings) and was
considered a deemed dividend for loss-per-share purposes. For all other classes
of preferred stock, the conversion price was greater than or equal to the fair
value of the "if-converted" common stock.
STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (Purchase Plan) under which an
aggregate of 856,800 common shares may be issued. The Purchase Plan also
provides for annual increases in the number of shares available for issuance,
beginning in 2001, equal to the lesser of 1% of the outstanding shares of common
stock on the first day of the fiscal year, 428,400 shares or an amount
determined by the Board of Directors. During the year ended December 31, 2001,
28,069 shares were issued. Employees are eligible to participate in the Purchase
Plan if they work at least 20 hours per week and more than five months in any
calendar year. Eligible employees may make contributions through payroll
deductions of up to 10% of their compensation. The price of common stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning or end of the offering period.
STOCK OPTION PLANS
The Company has Incentive Stock Option Plans for its employees and Nonqualified
Stock Option Plans (the Plans) under which an aggregate of 6,802,800 options may
be granted. Annual increases in the number of shares available for issuance are
allowed beginning in 2001, limited to the lesser of 4.5% of the outstanding
shares of common stock on the first day of the fiscal year, 2,571,600 shares or
an amount determined by the Board of Directors. During 2001, 1,338,552
additional shares were authorized for grant. Options under the Plans have a
maximum life of ten years. Options vest at various intervals, as determined by
the Board of Directors at the date of grant.
The rollforward of shares available for grant through December 31, 2001, is as
follows:
Shares available for grant at December 31, 2000 2,744,100
Options granted (1,486,890)
Options forfeited 100,260
Increase in options available for grant 1,338,552
Options assumed in Agbio acquisition (25,391)
----------
Shares available for grant at December 31, 2001 2,670,631
==========
F-16
The Company's option activity is as follows:
Weighted-average
Number of Shares Exercise Price
----------------------------------
Outstanding at December 31, 1998 1,617,600 $1.46
Granted 452,400 3.77
Exercised (156,000) 1.66
Forfeited (62,400) 2.32
----------------------------------
Outstanding at December 31, 1999 1,851,600 1.97
Granted 1,998,000 8.30
Exercised (489,600) 0.79
Forfeited (59,700) 2.92
----------------------------------
Outstanding at December 31, 2000 3,300,300 5.96
Granted 1,486,890 8.48
Options assumed in Agbio acquisition 25,391 1.10
Exercised (149,200) 2.48
Forfeited (100,260) 7.92
----------------------------------
Outstanding at December 31, 2001 4,563,121 $6.85
----------------------------------
Exercisable at December 31, 2001 1,785,091 $4.64
==================================
Number of
Shares
Outstanding at Remaining Number of Shares
December 31, Contractual Exercisable at
2001 Life December 31, 2001
----------------------------------------------
Options granted between $0.27 and $1.11 452,291 4.2 452,291
Options granted between $2.20 and $3.31 272,300 5.8 272,300
Options granted between $3.32 and $4.45 587,700 7.6 406,500
Options granted between $5.53 and $6.63 714,150 9.8 -
Options granted between $6.64 and $7.74 43,500 9.6 -
Options granted between $7.75 and $8.85 1,854,050 8.7 637,800
Options granted between $8.86 and $9.95 31,350 7.9 16,200
Options granted between $9.96 and $11.06 607,780 9.4 -
-------------- -----------------
4,563,121 1,785,091
============== =================
From August 1, 1999 through December 31, 1999, and from January 1, 2000 to
December 31, 2000, options to purchase 238,800 and 165,600 shares of common
stock, respectively, were granted to employees with an exercise price of $3.37
per share. From January 1, 2000 to December 31, 2000 and from January 1, 2001 to
February 9, 2001, options to purchase 1,818,000 and 56,400 shares of common
stock were granted to employees with an exercise price of $8.78 per share. As a
result of these option grants having exercise prices below what was considered
the fair value of the underlying stock, the Company recorded deferred
compensation of $1,021,108, $7,610,857 and $103,478 in 1999, 2000 and 2001,
respectively. The Company amortized to expense $485,924 in 1999, $3,575,677 in
2000 and $2,812,276 in 2001 using an accelerated vesting method whereby each of
the years' vesting components is amortized over its own vesting period.
F-17
Pro forma information regarding net loss and net loss per share is required by
FAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the minimum value method of that Statement for
option grants made prior to the Company's initial public offering and the
Black-Scholes method for grants made subsequent to such offering. The
calculations were made assuming a dividend yield of 0%, a weighted-average
expected option life of five years and a weighted-average risk-free interest
rate of 5.00%, 5.50% and 5.50% for the years ended December 31, 1999, 2000 and
2001, respectively. The volatility factor used in the Black-Scholes method for
the period subsequent to the initial public offering in 2001 was .90. The
weighted-average fair value of options granted in 1999, 2000 and 2001 was $0.66,
$2.34 and $5.73, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
are amortized to expense over the options vesting period. The Company's pro
forma information is as follows (i.e., if FAS 123 method had been followed):
YEAR ENDED DECEMBER 31
1999 2000 2001
--------------------------------------------
FAS 123 pro forma net loss attributable to
common shareholders $(9,877,694) $(43,146,317) $(39,204,421)
FAS 123 pro forma loss per share - basic
and diluted $ (0.70) $ (2.86) $ (1.10)
6. INCOME TAXES
The types of temporary differences between tax bases of assets and liabilities
and their financial reporting amounts that give rise to the deferred tax asset
(liability) and their approximate tax effects are as follows:
DECEMBER 31
2000 2001
------------------------------
Deferred tax assets:
Patent expense $ 523,000 $ 732,000
Deferred revenue 1,451,000 981,000
Inventory obsolescence 104,000 1,072,000
Depreciation expense - 924,000
Other 294,000 486,000
Net operating loss carryforwards 19,407,000 31,146,000
------------------------------
21,779,000 35,341,000
Deferred tax liabilities:
Intangible assets (4,429,000) (3,635,000)
Depreciation expense (100,000) -
------------------------------
Net deferred tax asset 17,250,000 31,706,000
Valuation allowance (17,250,000) (31,706,000)
------------------------------
$ - $ -
==============================
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $77.9 million for U.S. federal and state tax purposes, which
expire beginning in 2008. In the event of a change in ownership greater than 50%
in a three-year period, utilization of the net operating losses may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986 and similar state provisions.
F-18
7. LEASE OBLIGATIONS
The Company leases its corporate facilities under an operating lease effective
through September 2011. The Company has the option to extend the lease for three
additional five-year periods. The lease agreement requires the Company to
provide the landlord an irrevocable standby letter of credit. The standby letter
of credit has a balance of $96,000 at December 31, 2001, and is reduced by
$8,000 per month. The lessor completed construction of a 65,000 square foot
addition to the corporate facilities in September 2001. The Company's monthly
rent payment will be approximately $176,000 per month until September 2006 and
$105,000 per month from October 2006 through September 2011. The Company also
pays the landlord approximately $30,000 per month for pass-through expenses.
During fiscal 2000, the Company prepaid $1 million of rent payments, which was
included in long-term other assets. The prepaid rent will be utilized over the
remaining life of the lease. Rent expense is being recorded by the Company on a
straight-line basis over the amended lease term. Long-term other assets include
$1,086,000 of prepaid rent at December 31, 2001.
The Company has two other leased operating facilities. The first operating
facility has a three-year lease term commencing May 2000 with the option to
extend the lease for an additional three-year period. The second operating
facility has a three-year term with the option to extend the lease for an
additional five-year period. All facility leases are classified as operating for
accounting purposes.
Rent expense was approximately $517,000, $779,000 and $1,713,000 for the years
ended December 31, 1999, 2000 and 2001, respectively.
The Company entered into two capital leases during 2001 for the sale and
leaseback of certain equipment totaling approximately $5 million. The first
lease requires monthly payments of $135,976 through June of 2004. The second
lease requires monthly payments of $40,292 through March of 2003, decreasing to
$25,102 through September 2004.
Future minimum lease payments, by year and in the aggregate are as follows:
Capital Operating
Leases Leases
----------------------------
2002 $2,115,211 $ 2,926,591
2003 1,978,501 2,655,502
2004 1,041,771 2,441,579
2005 - 2,539,242
2006 - 2,455,009
Thereafter - 8,131,749
----------------------------
Total minimum lease obligations 5,135,483 $21,149,672
=============
Less amounts representing interest 765,041
---------------
Present value of minimum lease payments 4,370,442
Less current portion of long-term lease
obligations $2,727,070
===============
1,643,372
---------------
Equipment includes $5,070,000 of assets under capitalized leases, with
accumulated depreciation of $380,537 as of December 31, 2001.
F-19
8. LICENSE AGREEMENTS
The Company entered into an exclusive license agreement (research license) in
March 1994 to make, use and sell products utilizing the licensed patents in the
research market. Under the research license, the Company is required to pay a
royalty at a rate not to exceed a certain percentage of the selling price on
licensed component sales. There have been no sales of licensed components
through December 31, 2001. The research license will continue until the licensed
patents expire or until the agreement is terminated by either party, whichever
is earlier, as defined in the agreement. The Company also entered into an equity
agreement with the licensor in March 1994 whereby it issued 115,200 shares of
common stock in exchange for the research license and diagnostic market option,
which is an exclusive license agreement to make, use and sell products utilizing
the licensed patents in the diagnostic market. In October 1998, the Company
issued 103,200 shares to the licensor to exercise the diagnostic market option.
The shares issued in 1994 and 1998 were valued at amounts considered to
approximate the fair value of common stock at the time of each issuance. Under
this agreement, the Company granted the licensor a put option to sell a
specified number of shares back to the Company anytime after March 1, 1998. The
total number of shares that can be put to the Company cannot exceed the number
of shares necessary to achieve a purchase price of $200,000. At December 31,
2001, the price per share to be paid if the put option is exercised is $3.37.
Accordingly, the Company has classified $200,000 of additional paid-in capital
outside of shareholders' equity in the accompanying balance sheets.
In October 2001, the Company entered into a development, license and supply
agreement with RIKEN, Inc. (RIKEN). The Company licensed certain patent rights
relating to polymorphism genes that encode drug metabolizing enzymes from RIKEN
for a nonrefundable fee which is being amortized over its estimated useful life
(7.5 years). The Company also pays royalties based upon net sales of licensed
products in exclusive and non-exclusive territories.
9. COLLABORATIVE AGREEMENTS
In August 1997, the Company entered into a product development and marketing
agreement with Endogen Corporation (Endogen), a leading manufacturer and
distributor of reagents supplied to the research market. The Company will
develop gene expression monitoring tests for human cytokines and chemokines
utilizing the Company's Invader(TM) product platform. Cytokines and chemokines
are proteins secreted by cells in the immune system to transfer information
between cells and have broad implications in disease detection, monitoring and
intervention. Endogen received from the Company an exclusive license to develop
and market unregulated nonhuman cytokine and chemokine tests to the life science
research and pharmacogenomics markets. The Company retained all rights to
regulated product applications which are developed as a result of the agreement.
Initial products were shipped to Endogen in 1999. In addition to the retained
rights to regulated product applications, the Company obtained a commitment to
receive funding of 50 percent of expenditures incurred in the development of the
gene expression monitoring tests, to a maximum of $1,050,000, paid over a
36-month period which commenced December 1, 1997, based upon a predetermined
schedule of employment and workload sharing. The Company recorded revenue of
$350,000 in 1999 and deferred revenue recognition of $19,022 until 2000 on cash
received under this contract. The Company terminated the product development and
marketing agreement on January 21, 2000, agreeing to pay $8,000,000 to Endogen,
consisting of $2,000,000 in cash and $6,000,000 payable under a three-year note
bearing interest at 6% (see Note 2). The $8,000,000 was initially capitalized as
an intangible asset (i.e., reacquired marketing and distribution rights) in
connection with a pending merger with another company. However, the pending
merger transaction was terminated in May 2000, which triggered an impairment
evaluation of the intangible asset. The impairment evaluation resulted in the
recognition of a $5,788,889 impairment loss.
Additionally, the Company's warrant to purchase 125,000 shares of common stock
of Endogen, which was received upon execution of the agreement in 1997 but had a
carrying value of $0, was canceled.
In August 1999, the Company entered into a Research Agreement with
Warner-Lambert, which is now part of Pfizer. Under this agreement the Company
agreed to develop and supply assays for SNP analysis
F-20
and mRNA assays for gene expression profiling for Warner-Lambert's research and
development efforts. A total of 181 assays will be developed, with a total of
184,000 determinations. The Company will own all improvements to the Invader
assay technology made during the course of the program. In addition,
Warner-Lambert has granted the Company an exclusive, worldwide, royalty-free and
irrevocable license under the inventions developed in the course of the
development program to use and commercialize diagnostic applications. Upon
execution of the agreement, Warner-Lambert paid the Company $474,100 for all the
assays. The Company recorded revenue from Warner-Lambert of $23,100, $318,350
and $33,650 in 1999, 2000 and 2001, respectively.
In June 2000, the Company entered into a collaborative development agreement
with Novartis Pharmaceuticals Corporation (Novartis) to develop a high-density
panel of 10,000 SNP assays spaced across the human genome. The Company is
required to transfer 10,000 Invader assays comprising 3,840,000 genotype
determinations to Novartis solely for its internal research and development
applications. Novartis has granted the Company a non-exclusive, fully paid-up
worldwide license to improvements to the Invader assays made in the course of
its performance under this agreement, as well as the right of first refusal to
obtain an exclusive worldwide license to all patent applications claiming
discoveries and inventions, made by Novartis in the course of using the assays,
for diagnostic applications. The total amount received from the agreement was
$950,000, half of which was received in July 2000 upon transfer of assays with
the remainder was received upon shipment of each additional genotyping
determination. The Company recorded revenue from Novartis of $19,346 in 2000 and
$930,654 in 2001.
In August 2000, the Company entered into a collaboration agreement with Applied
Biosystems Group, a division of Applera Corporation (Applied Biosystems), for
the development and manufacture of certain genotyping assays for the Japanese
"Millennium" Project to examine 150,000 unique single nucleotide polymorphisms
(SNPs) in 1,000 individuals and thereafter to examine those same 150,000 SNPs in
an additional 4,000 individuals. The Company provided products to Applied
Biosystems and received payment in accordance with quantities and prices stated
in the supply agreement with Applied Biosystems. Applied Biosystems sold such
products together with certain of their own products to the Japanese government.
The Company recorded revenue from Applied Biosystems once products were
delivered to the end user in Japan. At the end of each quarter, each Company
prepared an analysis of revenues recorded and costs incurred to date. The
Company's costs included fees for equipment borrowed from Applied Biosystems.
The Company and Applied Biosystems established an equal profit sharing
arrangement that required a reconciliation of revenues and costs between Applied
Biosystems and the Company within 30 days of each three-month period, as defined
in the agreement. The Company currently sells products through a Japanese
distributor for use in the Japanese Millennium Project.
In December 2000, the Company entered into a development and commercialization
agreement with BML, Inc. (BML). Under this agreement, the Company will develop
assays in accordance with a mutually agreed development program for use in
clinical applications by BML; such development is expected to be complete by the
end of 2003. The agreement may be terminated by BML on six months written notice
given on or after June 30, 2003. In 2000 and 2001, BML paid the Company $3
million and $2 million, respectively, which is being recognized as revenue on a
straight-line basis over the expected term of development services being
performed by the Company. Additional funding commitments of $1 million per year
are to be received in 2002 and 2003. The Company recorded revenue from BML of
$83,333 and $3,000,000 in 2000 and 2001, respectively. The Company deferred
revenue recognition of $1,916,667 at December 31, 2001.
In October 2001, the Company entered into a collaborative development agreement
with Aclara BioSciences, Inc. (Aclara) for the development and commercialization
of multiplexed gene expression research products using Aclara's eTag Technology
and the Company's Invader platform. The agreement expires ten years after the
first commercial launch of an approved product under the agreement, unless
extended by mutual written agreement of Aclara and the Company. The Company and
Aclara established an equal cost sharing arrangement that requires a
reconciliation of costs between Aclara and the Company within 30 days of each
three-month period, as defined in the agreement. There were no material costs
incurred by the Company during the year ended December 31, 2001.
F-21
In December 2001, the Company entered into an agreement with Daiichi Pure
Chemicals Company to develop genotyping assays that detect and/or quantify
certain genetic mutations for the purpose of evaluating patients for such
mutations. No revenue was recognized during 2001 related to this agreement.
10. 401(k) PLAN
The Company has a 401(k) savings plan (the Plan) which covers substantially all
employees. Through September 30, 2000, the Plan did not allow for Company
contributions. Effective October 1, 2000, the Plan provides for Company
contributions of 50% on up to 6% of employee contributions. Company
contributions to the plan were approximately $64,000 and $316,000 in 2000 and
2001, respectively.
11. TERMINATION OF MERGER
In January 2000, the Company entered into an agreement to merge with Applied
Biosystems. In May 2000, the Company and Applied Biosystems agreed to
terminate the merger agreement. Merger related costs charged to expense were
$116,501 and $833,254 in 1999 and 2000, respectively.
12. LITIGATION SETTLEMENT
In October 2000, the Company entered into a settlement and release agreement
with ID Biomedical Corporation (ID) related to a patent infringement lawsuit
filed by ID in September 2000. In return for a cash payment to ID of $4,000,000
and 545,454 shares of common stock issued to ID valued at the initial public
offering price of $11 per share, the patent infringement lawsuit was dismissed
and ID agreed not to sue the Company, its affiliates, distributors, customers
and any others for patent infringement or otherwise with respect to the
manufacture, use or sale of the Company's Invader products. Legal costs
associated with the settlement of this case were $533,248. Total litigation
settlement costs of $10,533,248 were capitalized as an intangible asset and are
being amortized to cost of goods sold over seven years, the period during which
the benefits are expected to be realized.
13. SEGMENT DISCLOSURE
The Company operates in one industry segment. Product revenues to international
end-users accounted for 82% and 87% of total revenues in 2000 and 2001 (product
revenues were not significant in 1999). All customers were billed in U.S.
dollars during 2000. At December 31, 2001, $91,907 of receivables are
denominated in Yen. Product revenues by geographic area for the years ended
December 31, 2000 and 2001, were as follows:
2000 2001
--------------------------------
United States $ 1,936,738 $ 3,868,909
Japan 7,848,699 26,386,919
Other 1,106,002 149,227
--------------------------------
$10,891,439 $30,405,055
================================
F-22
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following sets forth selected quarterly financial and stock price
information for the years ended December 31, 2000 and 2001 (in thousands). The
operating results are not necessarily indicative of results for any future
period.
QUARTER ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2001:
Net revenues $ 11,173 $ 8,694 $ 8,188 $ 6,038
Gross margins 1,086 1,836 1,823 (3,584)
Net loss applicable to common
shareholders (5,865) (6,632) (7,418) (16,877)*
Basic and diluted net loss per
share $ (0.20) $ (0.17) $ (0.19) $ (0.44)
Common stock per share:
High 11.00 11.00 10.19 8.85
Low 5.38 5.10 5.01 6.26
2000:
Net revenues $ 614 $ 760 $ 3,562 $ 6,481
Gross margins (988) (1,191) 658 1,420
Net loss applicable to common
shareholders (4,344) (11,512) (21,040) (5,701)
Basic and diluted net loss per
share $ (0.29) $ (0.77) $ (1.40) $ (0.37)
Common stock price per share is not presented from January 1, 2000 to February
8, 2001 because the common stock was not yet publicly traded.
* Net loss applicable to common shareholders during the quarter ended December
31, 2001 included an increase in the reserve for excess and obsolete
inventory of $2,180,000 (classified in cost of sales) and an equipment
impairment charge of $2,970,000 (classified in general and administrative
expenses).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information required by this Item from
the Company's definitive proxy statement for its 2001 annual meeting of
shareholders scheduled to be held on June 5, 2002 ("Proxy Statement"), which
will be filed with the Securities and Exchange Commission not later than 120
days after the end of our fiscal year.
F-23
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information required by this Item from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information required by this Item from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information required by this Item from
the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT.
1. Financial Statements. The financial statement required to be filed
as a part of this Report are listed on page 39.
2. Financial Statement Schedules. The financial statement schedules
required to be filed as a part of this Report are listed on page 39.
3. Exhibits. The exhibits required to be filed as a part of this
Report are listed in the Exhibit Index.
(b) REPORTS ON FORM 8-K. A Current Report on Form 8-K, dated November 28, 2001,
was filed with the Securities and Exchange Commission reporting under Items
5 and 7 in connection with the announcement that the board of directors of
the company approved the adoption of a Preferred Stock Rights Agreement.
F-24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 1, 2002.
THIRD WAVE TECHNOLOGIES, INC.
(Registrant)
By: Lance Fors
-------------------------------------
President and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and executive officers of Third Wave Technologies,
Inc., hereby severally constitute and appoint each of John C. Comerford and Alex
M. Kasper our true and lawful attorney and agent, with full power to them and
each of them to sign for us, and in our names in the capacities indicated below,
any and all amendments to the Annual Report on Form 10-K of Third Wave
Technologies, Inc. filed with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys to any and all amendments to said Annual Report on Form 10-K.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on dates indicated.
Signature Title Date
- --------- ----- ----
Lance Fors President, Chief Executive April 1, 2002
- ------------------------- Officer and Director
Lance Fors
John Puisis Chief Financial Officer April 1, 2002
- ------------------------- (Principal Financial Officer)
John Puisis
Alex M. Kasper Vice President, Finance March 29, 2002
- ------------------------- (Principal Accounting Officer)
Alex M. Kasper
G. Steven Burrill Director April 1, 2002
- -------------------------
G. Steven Burrill
Director
- -------------------------
Tom Daniel
Kenneth R. McGuire Director March 28, 2002
- -------------------------
Kenneth R. McGuire
John Neis Director March 31, 2002
- -------------------------
John Neis
Director
- -------------------------
Lloyd M. Smith
David A. Thompson Director March 29, 2002
- -------------------------
David A. Thompson
Preston Tsao Director March 28, 2002
- -------------------------
Preston Tsao
EXHIBIT INDEX
Certain of the following exhibits, as indicated parenthetically, were previously
filed as exhibits to registration statements filed by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), or to reports or
registration statements filed by the company under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and are hereby incorporated by
reference to such statements or reports. The Company's Exchange Act file number
is 000-31745.
Exhibits marked with an asterisk (*) indicate portions of the exhibit have
received confidential treatment. Exhibits marked with a double asterisk (**) are
filed herewith. Exhibits marked with a triple asterisk (***) indicate a
management contract or compensatory plan or arrangement.
Exhibit
No. Description Incorporated By Reference To
- ------- ----------- ----------------------------
3.1 Amended and Restated Certificate of Incorporation of Exhibit 3.1(b) to the Registrant's
the Registrant, dated as of August 16, 2000 Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
3.2 Amended and Restated Bylaws of the Registrant, dated Exhibit 3.2(b) to the Registrant's
as of February 9, 2001 Registration Statement on Form 8-A, File No.
000-31745, filed on November 30, 2001
4.1 Investors' Rights Agreement, dated as of July 24, 2000 Exhibit 4.2 to the Registrant's Registration
Statement on Form S-1, Registration No.
333-42694, filed on July 31, 2000, as amended
4.2 Rights Agreement between the Registrant and EquiServe Exhibit 4.9 to the Registrant's Registration
Trust Company N.A., dated as of October 24, 2001 Statement on Form 8-A, File No. 000-31745,
filed on November 30, 2001
10.1*** Incentive Stock Option Plan Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.2*** 1997 Incentive Stock Option Plan Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.3*** 1997 Nonqualified Stock Option Plan Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.4*** 1998 Incentive Stock Option Plan Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.5*** 1999 Incentive Stock Option Plan Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.6*** 1999 Nonqualified Stock Option Plan Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.7*** 2000 Stock Plan Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.8*** 2000 Employee Stock Purchase Plan Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.9*** Form of Director and Executive Officer Indemnification Exhibit 10.9 to the Registrant's
Agreement Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.10 Master Loan and Security Agreement, dated as of June Exhibit 10.10 to the Registrant's
22, 1999, between the Registrant and Transamerica Registration Statement on Form S-1,
Business Credit Corporation and amendment, dated as of Registration No. 333-42694, filed on July
September 1999, thereto 31, 2000, as amended
10.11* Research Collaboration Agreement, dated as of Exhibit 10.11 to the Registrant's
September 30, 1999, between the Registrant and The Registration Statement on Form S-1,
Board of Trustees of Leland Stanford Junior University Registration No. 333-42694, filed on July
31, 2000, as amended
10.12* Collaborative Development Agreement, dated as of June Exhibit 10.12 to the Registrant's
21, 2000, between the Registrant and Novartis Registration Statement on Form S-1,
Pharmaceuticals Corporation and affiliates Registration No. 333-42694, filed on July
31, 2000, as amended
10.13* New Assay Development and Option Agreement, dated as Exhibit 10.13 to the Registrant's
of June 20, 2000, between the Registrant and SmithKline Registration Statement on Form S-1,
Beechman Biologicals SA Registration No. 333-42694, filed on July
31, 2000, as amended
10.14* Memorandum of Understanding, dated as of September 17, Exhibit 10.14 to the Registrant's
1999, by the Registrant and approved and accepted by Registration Statement on Form S-1,
Genome Research Limited at September 21, 1999 Registration No. 333-42694, filed on July
31, 2000, as amended
10.15* Research Agreement, dated as of August 20, 1999, Exhibit 10.16 to the Registrant's
between the Registrant and Pfizer Inc. (as successor in Registration Statement on Form S-1,
interest to Warner Lambert Company) Registration No. 333-42694, filed on July
31, 2000, as amended, amendment dated
September 1, 2001 filed herewith
10.16** Lease Agreement, dated as of April 1, 1997, between Exhibit 10.18 to the Registrant's
the Registrant and University Research Park Facilities Registration Statement on Form S-1,
Corp. and amendment, dated as of September 1, 2001 Registration No. 333-42694, filed on July
31, 2000, as amended
10.17 Lease, dated as of April 10, 2000, between the Exhibit 10.19 to the Registrant's
Registrant and Prairie Warehousing LLP Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.18 Development and Supply Agreement, dated as of August Exhibit 10.20 to the Registrant's
1, 2000, between the Registrant and the Applied Registration Statement on Form S-1,
Biosystems Unit of Applera Corporation Registration No. 333-42694, filed on July
31, 2000, as amended
10.19 Equipment Loan Agreement, dated as of August 1, 2000, Exhibit 10.21 to the Registrant's
between the Registrant and the Applied Biosystems Unit Registration Statement on Form S-1,
of Applera Corporation Registration No. 333-42694, filed on July
31, 2000, as amended
10.20 Promissory Note, dated as of January 21, 2000, issued Exhibit 10.23 to the Registrant's
by the Registrant to Endogen Corporation Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.21 Convertible Note Purchase Agreement, dated as of Exhibit 10.24 to the Registrant's
December 15, 2000, between the Registrant and The Registration Statement on Form S-1,
Endeavors Group LLC, and the related convertible Registration No. 333-42694, filed on July
subordinated promissory note 31, 2000, as amended
10.22 Lease, dated as of October 30, 2000, between the Exhibit 10.25 to the Registrant's
Registrant and LCB, LLC Registration Statement on Form S-1,
Registration No. 333-42694, filed on July
31, 2000, as amended
10.23 Development and Commercialization Agreement, dated as Exhibit 10.26 to the Registrant's
of December 29, 2000, between the Registrant and BML, Registration Statement on Form S-1,
Inc. Registration No. 333-42694, filed on July
31, 2000, as amended
21** List of Subsidiaries
23** Consent of Ernst & Young LLP
24** Powers of Attorney (contained in the signature page
hereto)
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2001, 2000, and 1999
(Dollars in Thousands)
ADDITIONS
BALANCE AT CHARGED
BEGINNING (CREDITED) TO BALANCE AT
DESCRIPTION OF YEAR EXPENSE DEDUCTIONS END OF YEAR
- --------------------------------------------------------------------------------
Allowance for doubtful
accounts receivable:
1999 $ 1 $ 55 $ 0 $ 56
====== ====== ====== ======
2000 $ 56 $ 3 $ 0 $ 59
====== ====== ====== ======
2001 $ 59 $ 116 $ 0 $ 175
====== ====== ====== ======
Allowance for excess and
obsolete inventory:
1999 $ 0 $ 155 $ 0 $ 155
====== ====== ====== ======
2000 $ 155 $ 105 $ 0 $ 260
====== ====== ====== ======
2001 $ 260 $2,420 $ 0 $2,680
====== ====== ====== ======