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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD 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)
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 [ ]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of September 30, 2002, was 39,491,763.
THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page No.
--------
PART I FINANCIAL INFORMATION..................................................................... 1
Item 1. Financial Statements................................................................. 1
Balance Sheets as of September 30, 2002 and December 31, 2001............................. 1
Statements of Operations for the three and nine months ended September 30, 2002
and 2001.................................................................................. 2
Statements of Cash Flows for the nine months ended September 30, 2002 and 2001............ 3
Notes to Financial Statements............................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 13
Item 4. Controls and Procedures.............................................................. 13
PART II OTHER INFORMATION......................................................................... 14
Item 1. Legal Proceedings..................................................................... 14
Item 2. Changes In Securities And Use Of Proceeds............................................. 14
Item 3. Defaults Upon Senior Securities....................................................... 14
Item 4. Submission Of Matters To A Vote Of Security Holders................................... 14
Item 5. Other Information..................................................................... 14
Item 6. Exhibits And Reports On Form 8-K...................................................... 14
SIGNATURES......................................................................................... 15
CERTIFICATIONS.....................................................................................
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Balance Sheets
SEPTEMBER 30, 2002 DECEMBER 31, 2001
ASSETS (UNAUDITED) (AUDITED)
------------------ -----------------
Current assets:
Cash and cash equivalents $ 1,488,127 $ 1,807,372
Short-term investments 57,233,970 71,491,751
Receivables, net of allowance for doubtful accounts of $175,000 at
September 30, 2002 and December 31, 2001 2,451,070 1,829,122
Inventories 2,279,880 6,448,974
Prepaid expenses and other 1,659,782 2,308,003
------------- -------------
Total current assets 65,112,829 83,885,222
Equipment and leasehold improvements
Machinery and equipment 17,181,084 30,848,712
Leasehold improvements 2,015,440 7,597,235
Assets held for sale 2,097,659 0
------------- -------------
21,294,183 38,445,947
Less accumulated depreciation 9,068,189 10,864,634
------------- -------------
12,225,994 27,581,313
Intangible assets, net of accumulated amortization 7,638,513 9,257,434
Goodwill and indefinite lived intangible assets 1,497,284 6,174,186
Other assets 3,679,704 4,716,427
Total assets $ 90,154,324 $ 131,614,582
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 9,058,809 $ 11,276,955
Accrued expenses and other liabilities 4,413,931 1,976,799
Deferred revenue 1,154,247 1,535,951
Long-term debt due within one year 3,484,096 2,618,359
Capital lease obligations due within one year 1,710,043 1,643,372
------------- -------------
Total current liabilities 19,821,126 19,051,436
Deferred revenue 166,667 916,667
Long-term debt 1,863,252 3,966,620
Other 1,087,157 200,000
Capital lease obligations 1,727,604 2,727,070
Shareholders' equity:
Participating preferred stock, Series A, $.001 par value,
10,000,000 shares authorized, 0 shares issued and outstanding 0 0
Common stock, $.001 par value, 100,000,000 shares authorized,
respectively 39,491,763 and 39,374,014 shares issued and
outstanding, respectively 39,492 39,374
Additional paid-in capital 191,522,507 191,426,698
Deferred stock compensation (844,231) (1,861,566)
Accumulated deficit (125,229,250) (84,851,717)
------------- -------------
Total shareholders' equity 65,488,518 104,752,789
------------- -------------
Total liabilities and shareholders' equity $ 90,154,324 $ 131,614,582
============= =============
See accompanying notes to financial statements.
-1-
THIRD WAVE TECHNOLOGIES, INC.
Statements of Operations
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Product $ 4,796,432 $ 7,314,642 $ 23,202,735 $ 25,304,633
Development 202,913 750,000 1,202,913 2,360,000
Grant 23,506 122,996 332,453 389,247
------------ ------------ ------------ ------------
5,022,851 8,187,638 24,738,101 28,053,880
------------ ------------ ------------ ------------
Operating expenses:
Cost of goods sold
Product cost of goods sold 3,937,393 5,881,918 17,251,450 21,861,053
Intangible amortization 482,640 482,640 1,447,920 1,447,920
------------ ------------ ------------ ------------
Total cost of goods sold 4,420,033 6,364,558 18,699,370 23,308,973
Research and development 2,548,850 4,447,449 10,630,071 11,384,096
Selling and marketing 2,445,458 2,173,513 7,265,438 7,074,926
General and administrative 3,197,401 3,052,904 9,001,923 8,177,653
Restructuring and other charges 14,309,355 0 14,309,355 0
Impairment loss 4,809,902 0 4,809,902 0
------------ ------------ ------------ ------------
27,310,966 9,673,866 46,016,689 26,636,675
------------ ------------ ------------ ------------
Total operating expenses 31,730,999 16,038,424 64,716,059 49,945,648
------------ ------------ ------------ ------------
Loss from operations (26,708,148) (7,850,786) (39,977,958) (21,891,768)
Other income (expense):
Interest income 238,198 782,222 796,611 2,894,686
Interest expense (132,332) (415,564) (804,613) (966,227)
Other (329,341) 66,201 (391,573) 47,897
------------ ------------ ------------ ------------
(223,475) 432,859 (399,575) 1,976,356
------------ ------------ ------------ ------------
Net loss attributable to common shareholders ($26,931,623) ($ 7,417,927) ($40,377,533) ($19,915,412)
============ ============ ============ ============
Net loss per share - basic and diluted ($0.68) ($0.19) ($1.02) ($0.57)
Weighted average shares outstanding, basic
and diluted 39,472,563 38,335,352 39,432,573 35,046,057
See accompanying notes to financial statements.
-2-
THIRD WAVE TECHNOLOGIES, INC.
Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2001
------------- -------------
OPERATING ACTIVITIES:
Net loss ($ 40,377,533) ($ 19,915,412)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 6,735,029 5,216,357
Amortization of intangible assets 1,485,921 1,447,920
Noncash stock compensation 902,761 2,300,535
Noncash impairment charge 15,601,304 0
Gain / loss on sale of assets (87,040) 44,364
Deferred gain on sale of assets 0 (179,024)
Amortization of deferred gain (23,870) (11,981)
Changes in operating assets and liabilities:
Receivables (621,948) (3,503,087)
Inventories 4,169,094 (7,891,933)
Prepaid expenses and other assets 1,334,713 (2,599,768)
Accounts payable (2,218,146) 120,688
Accrued expenses and other liabilities 3,369,020 2,697,118
Deferred revenue (1,131,704) (91,784)
------------- -------------
Net cash provided by (used in) operating activities (10,862,399) (22,366,007)
------------- -------------
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (2,281,437) (18,947,261)
Proceeds from sale of equipment 526,735 5,070,000
Purchase of short-term investments (15,824,036) (101,956,795)
Sales of short-term investments 30,081,817 52,781,079
------------- -------------
Net cash provided by (used in) investing activities 12,503,079 (63,052,977)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 1,653,647 5,399,879
Payments on long-term debt (2,891,278) (7,099,199)
Proceeds from common stock, net 210,501 74,785,313
Payments on capital lease obligations (932,795) (321,477)
------------- -------------
Net cash provided by (used in) financing activities (1,959,925) 72,764,516
------------- -------------
Net change in cash and cash equivalents (319,245) (12,654,468)
Cash and cash equivalents at beginning of period 1,807,372 14,046,484
------------- -------------
Cash and cash equivalents at end of period $ 1,488,127 $ 1,392,016
============= =============
See accompanying notes to financial statements.
-3-
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)
(1) Basis of Presentation
The accompanying unaudited financial statements of Third Wave Technologies, Inc.
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Interim results
are not necessarily indicative of results that may be expected for the year
ending December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
The accompanying unaudited financial statements should be read in conjunction
with the audited financial statements and footnotes thereto included in our Form
10-K for the fiscal year ended December 31, 2001 filed with the Securities and
Exchange Commission.
(2) 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. Shares associated with stock options are not included
because they are antidilutive for the periods presented.
(3) Initial Public Offering
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 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. We expect
to use the proceeds from the offering for capital expenditures, and general
corporate purposes, including working capital and research and development
activities.
(4) Inventory
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.
-4-
Inventory consists of the following:
September 30, December 31,
2002 2001
----------- -----------
Raw material $ 4,925,809 $ 6,963,240
Finished goods and work in process 554,071 2,165,734
Reserve for excess and obsolete inventory (3,200,000) (2,680,000)
----------- -----------
Total inventory $ 2,279,880 $ 6,448,974
=========== ===========
(5) Stock Compensation
Included in operating expenses are the following stock compensation charges, net
of recoveries for forfeited options:
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
Cost of goods sold 35,746 113,690 135,485 443,275
Research and development 23,062 57,355 79,592 221,196
Selling and marketing 5,612 25,766 26,822 101,752
General and administrative 233,848 396,442 660,862 1,534,312
----------------------------------- ---------------------------------
Total stock compensation 298,268 593,253 902,761 2,300,535
=================================== =================================
(6) Derivative Instruments
In September 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
which we adopted 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 we did not
have any derivative financial instruments on January 1, 2001.
We sell products in a number of countries throughout the world. In the quarter
ending September 30, 2002, we sold certain products with the resulting accounts
receivable denominated in Japanese Yen. Simultaneous with such sales and
purchase order commitments, we purchased foreign currency forward contracts to
manage the risk associated with foreign currency collections 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,
which arise when collections in a foreign currency are received after the asset
is generated. Contracts outstanding at September 30, 2002 represented a combined
U.S. dollar equivalent commitment of approximately $0.6 million. 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. An
unrealized loss on the forward contracts and an offsetting unrealized gain on
the underlying hedged transactions were recorded as a liability and asset,
respectively, in the financial statements.
-5-
(7) Goodwill and Intangible Assets
Effective January 1, 2002, we adopted SFAS No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill
and intangible assets deemed to have indefinite lives are no longer amortized,
but are subject to annual impairment tests. Other intangible assets continue to
be amortized over their useful lives.
We completed the transitional testing of goodwill upon the January 1, 2002
adoption date of SFAS No. 142. The first step of the transitional test indicated
that no impairment existed as of the adoption date, as the fair value of the
reporting unit carrying the goodwill exceeded its carrying value.
We evaluated and reduced the expectations for future growth in revenue and cash
flow for the Agbio reporting unit which is related to the goodwill and
unamortized intangible assets. Additionally, the equity values of comparable
companies in our industry have declined. Due to these factors, which indicate
that goodwill and other assets of the reporting unit may be impaired, we, with
the assistance from an independent valuation expert, performed an evaluation of
goodwill and other intangible assets.
The fair value of the reporting unit was compared to the carrying value,
including goodwill, in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets". The fair value of the reporting unit was determined using a
combination of discounted cash flows method and other common valuation
methodologies. It was determined that the carrying value, including goodwill,
exceeded the fair value of the reporting unit, and consequently a charge of $4.8
million for the impairment of goodwill and other intangible assets was recorded
during the three months ended September 30, 2002.
Goodwill and intangible assets at September 30, 2002 and December 31, 2001,
consist of the following:
September 30, 2002 December 31, 2001
Amortized intangible assets
Cost of settling patent litigation $ 10,533,248 $ 10,533,248
Reacquired marketing and distribution rights 8,000,000 8,000,000
FY 2000 impairment (5,788,889) (5,788,889)
Customer agreements 171,000 171,000
FY 2002 Impairment (133,000) 0
------------ ------------
$ 12,782,359 $ 12,915,359
------------ ------------
Accumulated Amortization
Cost of settling patent litigation $ 3,001,185 $ 1,872,619
Reacquired marketing and distribution rights 2,104,661 1,785,306
Customer agreements 38,000 0
------------ ------------
$ 5,143,846 $ 3,657,925
------------ ------------
Unamortized intangible assets
Goodwill $ 4,700,186 $ 4,700,186
Technology license 1,053,000 1,053,000
Trademark 421,000 421,000
FY 2002 Impairment (4,676,902) 0
------------ ------------
$ 1,497,284 $ 6,174,186
------------ ------------
-6-
(8) Restructuring and Impairment of Long Lived Assets
We announced a restructuring plan designed to simplify our product development
and manufacturing operations, increase gross margin, reduce operating expenses
and move the company more aggressively towards profitability. During the quarter
ending September 30, 2002, we recorded a restructuring charge of $14.3 million
associated primarily with our consolidation of facilities and the write down of
certain fixed assets and leasehold improvements. Some of the fixed assets and
leasehold improvements that were written down will be held for sale in an
auction to occur on November 14, 2002.
The restructuring charge included $2.2 million of expense related to the
consolidation of facilities, $0.5 million for the prepayment penalties on debt
and capital leases related to assets to be sold, and a net charge of $11.4
million for the write down of fixed assets and leasehold improvements. The fixed
assets and leaseholds that we intend to sell were written down to their
estimated salvage value and classified as "Assets held for sale" on the balance
sheet. Some of the restructuring expenses required us to make significant
estimates that affect the amounts reported, actual results may differ from these
estimates, which would require adjustments in future periods.
The following displays the activity and balances of the restructuring accrual
for the three months ended September 30, 2002. The remaining facilities balance
of $2.1 million in the restructuring accrual is primarily related to the
expense of non-cancelable leases, net of estimated sublease income, which will
be paid over the respective lease terms through the year 2011. The current
portion of the accrual is in the "Accrued expense and other liabilities"
balance on the balance sheet, and the long-term portion is included in the
"Other" balance in the long term liabilities.
FIXED ASSET PREPAYMENT
FACILITIES DISPOSALS PENALTIES OTHER TOTAL
Charge in September 2002 $2,165,652 $ 11,398,885 $494,930 $ 249,888 $ 14,309,355
Amount paid (88,873) -- (58,549) (34,621) (182,043)
Non cash charges -- (10,788,885) -- (135,267) (10,924,152)
-----------------------------------------------------------------------------
$2,076,779 $ 610,000 $436,381 $ 80,000 $ 3,203,160
=============================================================================
(9) Reclassifications
Certain reclassifications have been made to the 2001 financial statements to
conform to the 2002 presentation.
-7-
THIRD WAVE TECHNOLOGIES, INC.
ITEM 2. 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 September 30, 2002 and for the three and nine months ended
September 30, 2002 and 2001 should be read in conjunction with our Form 10-K for
the fiscal year ended December 31, 2001 filed with the Securities and Exchange
Commission. In this Form 10-Q, the terms "we," "us," "our," "Company," and
"Third Wave" each refer to Third Wave Technologies, Inc. The following
discussion of our financial condition and results of our operations should be
read in conjunction with our Financial Statements, including the Notes thereto,
included elsewhere in this Form 10-Q. This Form 10-Q 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. For
a more detailed discussion of such forward-looking statements and the potential
risks and uncertainties that may affect their accuracy, see the "Forward-Looking
Statements" section of this Form 10-Q.
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.
Our 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.
We have 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. We are
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 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 products for research use. We
also have introduced a series of Invader RNA Assay products for measuring the
expression levels of genes with proven clinical relevance. We will launch
additional products or technology access programs for genotyping and gene
expression analysis. These products will be available in flexible formats and
include assays for quantitating a number of 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. Our
proprietary products and technologies position us 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
product development and manufacturing capabilities.
-8-
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 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.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2002 and
2001, we sold certain products with the resulting accounts receivable
denominated in Japanese Yen. Simultaneous with such sales and purchase order
commitments, 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 contracts outstanding at September 30, 2002 amounting to
$0.6 million. 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 $2.0 million of our revenues from sales to a major
Japanese research institute for use by several end-users during the quarter
ended September 30, 2002. As of September 30, 2002, $0.7 million of our accounts
receivable were attributable to this customer. There is no guarantee that this
significant customer will continue to purchase our products at current levels.
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. During the three months
ending September 30,2002, we recorded a charge of $1.1 million to cost of goods
sold to increase the inventory reserve related to excess inventory and
-9-
also disposed of approximately $0.6 million of inventory that had been reserved
for previously. At September 30, 2002, our inventory reserves were $3.2 million,
or 58% of our $5.5 million total gross inventories.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2002 and 2001
REVENUES. Revenues for the three months ended September 30, 2002 of $5.0 million
represents a decrease of $3.2 million as compared to revenues of $8.2 million
for the corresponding period of 2001. Revenues for the nine months ended
September 30, 2002 of $24.7 million represents a decrease of $3.4 million as
compared to revenues of $28.1 million for the corresponding period of 2001.
Product revenues decreased to $4.8 million for the quarter ended September 30,
2002, from $7.3 million in the quarter ended September 30, 2001. Product
revenues decreased to $23.2 million for the nine months ended September 30,
2002, from $25.3 million in the nine months ended September 30, 2001. Product
sales during the three and nine month periods ending September 30, 2002 were
lower than prior year due to the conclusion of the initial phase of the Japanese
Millenium Project.
Development revenues decreased to $0.2 million for the three months ended
September 30, 2002, from $0.8 million for the three months ended September 30,
2001. Development revenues decreased to $1.2 million for the nine months ended
September 30, 2002, from $2.4 million for the nine months ended September 30,
2001. The decrease is primarily due to a scheduled decrease in funding amounts
per our development and commercialization agreement with BML, Inc (BML). Under
the agreement, we will develop 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 the 2003 calendar year.
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. During the quarter ended September 30, 2002, $1.1 million was
charged to cost of goods sold to increase the inventory reserve for excess
inventory. For the three months ended September 30, 2002, cost of goods sold
decreased to $4.4 million compared to $6.4 million for the corresponding period
of 2001. For the nine months ended September 30, 2002, cost of goods sold
decreased to $18.7 million compared to $23.3 million for the corresponding
period in 2001. The decrease was due to lower volume and lower variable costs
achieved by improved operational efficiencies.
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 three months ended September 30, 2002
were $2.5 million, compared to $4.4 million for the corresponding period of
2001. Research and development expenses for the nine months ended September 30,
2002 were $10.6 million, compared to $11.4 million for the nine months ended
September 30, 2001. The decrease in research and development expenses was
primarily attributable to decreased material costs for assay and product
development.
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, commissions, office support and related costs, and travel
and entertainment. Selling and marketing expenses for the three months ended
September 30, 2002 were $2.4 million, an increase of $0.2 million, as compared
to $2.2 million for the corresponding period of 2001. Selling and marketing
expenses for the nine months ended September 30, 2002 were $7.3 million, an
increase of $0.2 million, as compared to $7.1 million for the corresponding
period of 2001. We attribute the change to a combination of a reduction in the
supply of complimentary
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product, and the hiring of additional personnel and increased costs associated
with establishing and commercializing our clinical and genomic business units.
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 $3.2 million in
the three months ended September 30, 2002, from $3.1 million for the
corresponding period in 2001. For the nine months ended September 30, 2002,
general and administrative expenses increased to $9.0 million from $8.2 million
for the corresponding period in 2001. The increase is due to the hiring of
additional personnel to support our growing business activities, increased
facilities expenses, and increased costs associated with operating a public
company.
RESTRUCTURING AND OTHER CHARGES. We announced a restructuring plan designed to
simplify our product development and manufacturing operations, increase gross
margin, reduce operating expenses and move the company more aggressively towards
profitability. During the quarter ending September 30, 2002, we recorded a
restructuring charge of $14.3 million associated primarily with our
consolidation of facilities and the write down of certain fixed assets and
leasehold improvements. Some of the fixed assets and leasehold improvements that
were written down will be held for sale in an auction to occur on November 14,
2002.
The restructuring charge included $2.2 million of expense related to the
consolidation of facilities, $0.5 million for the prepayment penalties on debt
and capital leases related to assets to be sold, and a net charge of $11.4
million for the write down of fixed assets and leasehold improvements. The fixed
assets and leaseholds that we intend to sell were written down to their
estimated salvage value.
IMPAIRMENT LOSS. During the three months ended September 30, 2002, we evaluated
and consequently, reduced the expectations for future growth in revenue and cash
flow for the Agbio reporting unit which is related to the goodwill and
unamortized intangible assets. Additionally, the equity values of comparable
companies in our industry have declined. Due to these factors, which indicate
that goodwill and other assets of the reporting unit may be impaired, we, with
the assistance from an independent valuation expert, performed an evaluation of
goodwill and other intangible assets.
The fair value of the reporting unit was compared to the carrying value,
including goodwill. The fair value of the reporting unit was determined using a
combination of discounted cash flows method and other common valuation
methodologies. It was determined that the carrying value, including goodwill,
exceeded the fair value of the reporting unit, and consequently a charge of $4.8
million for the impairment of goodwill and other intangible assets was recorded
during the three months ended September 30, 2002.
INTEREST INCOME. Interest income for the three months ended September 30, 2002,
was $0.2 million, compared to $0.8 million for the corresponding period of 2001.
Interest income for the nine months ended September 30, 2002 was $0.8 million
compared to $2.9 million for the nine months ended September 30, 2001. This
decrease was primarily due to lower interest rates compared to the three and
nine month periods ending September 30, 2001.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2002
was approximately $0.1 million compared to $0.4 million in the corresponding
period in 2001. Interest expense for the nine months ended September 30, 2002
was $0.8 million compared to $1.0 million in the corresponding period in 2001.
The decrease in interest expense was due to lower interest rates on new debt and
decreasing debt balances.
OTHER ITEMS. As previously announced, part of our operational consolidation plan
included a reduction in the company work force. A plan for work force reductions
was implemented in the June 2002 through August 2002 timeframe. Through
September 30, 2002, the workforce was reduced by approximately 38% with a
majority of the workforce reductions occurring in the oligo synthesis production
and operations support functions and the remainder spread throughout the
organization. We currently have 164 employees.
Aclara License and Supply Agreements. In October 2002, the Company and Aclara
BioSciences, Inc. ("Aclara") announced that they have entered into license and
supply agreements under which Aclara will have nonexclusive rights to
incorporate the Company's proprietary Invader(TM) technology and Cleavase(R)
enzyme with Aclara's eTag(TM) technology platform for multiplexed gene
expression applications for the research market. In addition to the nonexclusive
license grant, we have entered into a supply agreement with Aclara under which
we will supply Aclara with the Company's proprietary Cleavase(R) enzyme.
Finally, the parties have entered into an agreement which will provide Aclara
access to our Invader Creator(TM) software product for the design of Invader(R)
assays consistent with the terms of the license agreement.
In exchange for the license, Aclara has made up front payments and will make
royalty payments to the Company based on sales of the Aclara product. In
addition, Aclara will purchase Cleavase(R) enzyme from the Company. The license,
supply and Invader Creator(TM) software access agreements supercede the
research, development and collaboration agreement between the parties which was
announced and executed in October 2001.
-11-
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. As of September 30, 2002, we had cash and cash equivalents and
short-term investments of $58.7 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 nine months ended September 30, 2002 was
approximately $10.9 million, compared with approximately $22.4 million for the
comparable period in 2001. Non-cash charges in the nine months ended September
30, 2002 included stock compensation expense of $0.9 million, depreciation and
amortization expense of $8.2 million, and an impairment charge of $15.6 million.
The change in operating assets and liabilities for the nine months ended
September 30, 2002 included an increase in accounts receivable of $0.6 million,
a decrease in inventory of $4.2 million, a decrease in prepaid expenses and
other assets of $1.3 million, a decrease in accounts payable of $2.2 million, an
increase in accrued liabilities of $3.4 million and a decrease in deferred
revenue of $1.1 million. Investing activities included $2.3 million for
purchases of capital equipment, $0.5 million in proceeds from the sale of
equipment, and $14.3 million for the net sale of short-term investments.
Financing activities for the nine months ended September 30, 2002 included the
use of $2.9 million to repay debt, $0.9 million for capital lease obligations,
offset by proceeds from a new financing arrangement of $1.7 million, and net
proceeds from the issuance of common stock from the exercise of stock options
and employee stock purchase plan of $0.2 million.
During the quarter ending September 30, 2002, we entered into a term loan
agreement to pay off the existing debt and capital lease obligations. The term
loan of $9.5 million is collateralized with a 12 month certificate of deposit.
As of September 30, 2002, about $1.7 million of the loan was utilized to pay a
portion of the existing debt and prepayment penalties. The remainder term loan
was used and the existing debt and capital lease obligations were paid on
October 1, 2002.
As of December 31, 2001, a valuation allowance equal to 100% of our net deferred
tax assets had 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 the 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.
-12-
ITEM 3. 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.
FORWARD-LOOKING STATEMENTS
This Form 10-Q 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-Q the words
"believe," "anticipates," "intends," "plans," "estimates," and similar
expressions are forward-looking statements. Such forward-looking statements
contained in this Form 10-Q 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 hereof and in the "Overview" and "Risk Factors"
sections of our annual report on Form 10-K for the fiscal year ended December
31, 2001 filed with the Securities and Exchange Commission, which factors are
specifically incorporated herein by this reference. 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including its chief executive officer and chief
financial officer, have conducted an evaluation of effectiveness of disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities and Exchange
Act of 1934. Based on that evaluation, the chief executive officer and chief
financial officer concluded that the disclosure controls and procedures are
effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion. There
have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the chief
executive officer and chief financial officer completed their evaluation.
-13-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - With the exception of the matters identified below,
there are no material legal proceedings pending. From time to time, we
may be involved in litigation relating to claims arising out of our
operations in the usual course of business.
On September 6, 2002 the Company filed a patent infringement action
against Eragen Biosciences, Inc. in the United States District Court
for the Western District of Wisconsin. The complaint alleges that the
defendant is infringing certain claims of the Company's U.S. Patent No.
6,348,314 entitled "Invasive cleavage of nucleic acids" and U.S. Patent
No. 6,090,543 entitled "Cleavage of nucleic acids" based on Eragen's
development and sale of products known as "Gene-Code" or similar
technologies or products. The defendants answered the complaint on
October 8, 2002 and asserted a counterclaim seeking declaratory
judgment that Eragen has not infringed any valid claims of the Company
patents at issue. The trail of this case is currently scheduled for
September 8, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) None
(b) None
(c) None
(d) Use of Proceeds. Pursuant to our Registration Statement on Form S-1,
as amended, filed with the Securities and Exchange Commission and
declared effective February 9, 2001, (Registration No. 333-42694), we
commenced our initial public offering of 7,500,000 registered shares
of common stock, $0.001 par value, on February 9, 2001, at a price of
$11.00 per share (the "Offering"). The Offering was completed on
February 14, 2001, and all of the 7,500,000 shares were sold,
generating gross proceeds of approximately $82,500,000. The managing
underwriters for the Offering were Lehman Brothers Inc., CIBC World
Markets, Dain Rauscher Incorporated, Robert W. Baird & Co.
Incorporated, and Fidelity Capital Markets.
In connection with the Offering, we incurred approximately $5.8
million in underwriting discounts and commissions, and approximately
$1.9 million in other related expenses. The net offering proceeds to
us, after deducting the foregoing expenses, were approximately $74.8
million.
From the time of receipt through September 2002, we have invested the
net proceeds from the Offering in investment-grade, interest-bearing
securities. We used $4.0 million of the proceeds to satisfy a
cancellation fee for the termination of a distribution agreement with
Endogen Corporation. We used approximately $12.1 million for general
corporate purposes, including working capital and research and
development activities.
We expect to use the remainder of the net proceeds for general
corporate purposes, including working capital and expanding research
and development and sales and marketing efforts to accelerate the
commercialization of new products and the development of new
partnerships.
A portion of the net proceeds may also be used to acquire or invest
in complementary businesses or products to obtain the right to use
complementary technologies. From time to time, in the ordinary course
of business, we may evaluate potential acquisitions of these
businesses, products, or technologies. We have no current agreements
or commitments regarding any such transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
ITEM 5. OTHER INFORMATION - None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K - None.
(b) Reports on Form 8-K filed during the three months ended September
30, 2002
The Company filed a Form 8-K dated September 18, 2002 reporting under Item
5 the issuance of a press release relating to a one-time charge in the
third quarter.
(c) Exhibit 99.1 - Certification Pursuant to Section 1350, as enacted by
Section 906 of the Sarbanes-Oxley Act of 2002
(d) Exhibit 99.2 - Certification Pursuant to Section 1350, as enacted by
Section 906 of the Sarbanes-Oxley Act of 2002
-14-
SIGNATURES
Pursuant to the requirements 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.
THIRD WAVE TECHNOLOGIES, INC.
Date: November 14, 2002 By: /s/ Lance Fors
---------------------------------
Lance Fors, CEO
Date: November 14, 2002 By: /s/ John Puisis
---------------------------------
John Puisis, CFO
-15-
CERTIFICATION
I, Lance Fors, CEO of Third Wave Technologies, Inc. (the "registrant"), certify
that:
1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of the
registrant;
2. Based on my knowledge, the Report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the Report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in the Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
Report (the "Evaluation Date"); and
(c) presented in the Report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in the
Report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Lance Fors
---------------------------
Lance Fors, CEO
CERTIFICATION
I, John Puisis, CFO of Third Wave Technologies, Inc. (the "registrant"), certify
that:
1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of
the registrant;
2. Based on my knowledge, the Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by the Report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in the Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
the Report (the "Evaluation Date"); and
c) presented in the Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in the
Report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ John Puisis
-----------------
John Puisis, CFO