Back to GetFilings.com
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, 2003 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
of incorporation or organization) Identification No.)
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 [ ]
Indicate by check whether the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of September 30, 2003, was 39,806,259.
THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION................................................................
Item 1. Consolidated Financial Statements.............................................
Consolidated Balance Sheets as of September 30, 2003 and December 31,
2002..............................................................................
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002.......................................................
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003
and 2002..........................................................................
Notes to Consolidated Financial Statements........................................
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................
Item 4. Controls and Procedures.......................................................
PART II OTHER INFORMATION..................................................................
Item 1. Legal Proceedings.............................................................
Item 2. Changes In Securities And Use Of Proceeds.....................................
Item 3. Defaults Upon Senior Securities...............................................
Item 4. Submission Of Matters To A Vote Of Security Holders...........................
Item 5. Other Information.............................................................
Item 6. Exhibits And Reports On Form 8-K..............................................
SIGNATURES..................................................................................
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31, 2002
2003
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 45,139,204 $ 49,301,501
Short-term investments 10,800,000 11,013,000
Receivables, net of allowance for doubtful accounts of $830,000 and
$465,000 at September 30, 2003 and December 31, 2002, respectively 4,036,274 2,724,856
Inventories 1,449,561 1,660,344
Prepaid expenses and other 602,272 1,145,687
------------- -------------
Total current assets 62,027,311 65,845,388
Equipment and leasehold improvements:
Machinery and equipment 18,488,201 18,449,319
Leasehold improvements 2,099,104 2,091,457
------------- -------------
20,587,305 20,540,776
Less accumulated depreciation 11,499,727 9,617,330
------------- -------------
9,087,578 10,923,446
Assets held for sale 36,495 336,000
Intangible assets, net of accumulated amortization 6,027,312 7,155,876
Indefinite lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Other long term assets 3,094,498 3,465,244
------------- -------------
Total assets $ 81,770,478 $ 89,223,238
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,750,869 $ 7,088,962
Accrued payroll and related liabilities 2,378,362 2,260,563
Other accrued liabilities 2,242,226 2,517,315
Deferred revenue 225,664 945,664
Long-term debt due within one year 9,500,000 9,515,152
------------- -------------
Total current liabilities 20,097,121 22,327,656
Long-term debt 13,333 13,333
Other liabilities 1,942,036 1,595,181
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,
39,806,259 and 39,559,574 shares issued and outstanding,
respectively 39,806 39,560
Additional paid-in capital 192,147,999 191,581,136
Unearned stock compensation (254,783) (618,246)
Accumulated other comprehensive loss 20,136 0
Accumulated deficit (132,235,170) (125,715,382)
------------- -------------
Total shareholders' equity 59,717,988 65,287,068
------------- -------------
Total liabilities and shareholders' equity $ 81,770,478 $ 89,223,238
============= =============
See accompanying notes to financial statements.
3
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Product sales $ 8,991,782 $ 4,599,558 $ 25,692,837 $ 23,202,735
Development revenue 249,999 399,787 749,999 1,202,913
License and royalty revenue 112,225 0 165,825 0
Grant revenue 0 23,506 54,457 332,453
------------------------------- -------------------------------
Total revenues 9,354,006 5,022,851 26,663,118 24,738,101
------------------------------- -------------------------------
Operating expenses:
Cost of goods sold
Product cost of goods sold 2,883,615 3,937,393 8,595,656 17,251,450
Intangible asset amortization 376,188 482,640 1,128,564 1,447,920
---------------------------------- ------------------------------
Total cost of goods sold 3,259,803 4,420,033 9,724,220 18,699,370
Research and development 2,790,785 2,548,850 8,201,863 10,630,071
Selling and marketing 2,107,898 2,445,458 6,993,800 7,265,438
General and administrative 2,322,828 3,197,401 8,135,631 9,001,923
Restructuring 0 14,309,355 0 14,309,355
Impairment loss 0 4,809,902 0 4,809,902
---------------------------------- ------------------------------
Total operating expense 10,481,314 31,730,999 33,055,514 64,716,059
---------------------------------- ------------------------------
Loss from operations (1,127,308) (26,708,148) (6,392,396) (39,977,958)
Other income (expense):
Interest income 118,128 238,198 449,194 796,611
Interest expense (57,049) (132,332) (241,132) (804,613)
Other (368,989) (329,341) (335,454) (391,573)
---------------------------------- ------------------------------
Other income (expense) (307,910) (223,475) (127,392) (399,575)
---------------------------------- ------------------------------
Net loss $ (1,435,218) $ (26,931,623) $ (6,519,788) $ (40,377,533)
================================== ==============================
Net loss per share - basic and diluted $ (0.04) $ (0.68) $ (0.16) $ (1.02)
================================== ==============================
Weighted Average Shares outstanding 39,803,272 39,472,563 39,688,844 39,432,573
See accompanying notes to financial statements.
4
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (6,519,788) $(40,377,533)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,313,202 6,735,029
Amortization of intangible assets 1,128,564 1,485,921
Noncash stock compensation 541,097 902,761
Noncash impairment charge 0 15,601,304
(Gain) loss on disposal of equipment 38,970 (87,040)
Amortization of deferred gain 0 (23,870)
Changes in operating assets and liabilities:
Receivables (1,291,282) (621,948)
Inventories 210,783 4,169,094
Prepaid expenses and other assets 668,016 1,334,713
Accounts payable (1,338,093) (2,218,146)
Accrued expenses and other liabilities 189,565 3,369,020
Deferred revenue (720,000) (1,131,704)
---------------------------------
Net cash used in operating activities (4,778,966) (10,862,399)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (182,009) (2,281,437)
Proceeds on sale of equipment 311,355 526,735
Purchases of licensed technology (100,000) 0
Purchase of short-term investments (10,800,000) (9,665,000)
Sales and maturities of short-term investments 11,013,000 120,000
---------------------------------
Net cash provided by (used in) investing activities 242,346 (11,299,702)
FINANCING ACTIVITIES:
Proceeds from long-term debt 0 1,653,647
Payments on long-term debt (15,152) (2,891,278)
Proceeds from common stock, net 389,475 210,501
Payments on capital lease obligations 0 (932,795)
---------------------------------
Net cash provided by (used in) financing activities 374,323 (1,959,925)
---------------------------------
Net decrease in cash and cash equivalents (4,162,297) (24,122,026)
Cash and cash equivalents at beginning of period 49,301,501 73,131,123
---------------------------------
Cash and cash equivalents at end of period $ 45,139,204 $ 49,009,097
=================================
See accompanying notes to financial statements.
5
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated 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, 2003.
The balance sheet at December 31, 2002 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 consolidated 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, 2002 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) Stock-Based Compensation
Third Wave has stock-based employee compensation plans. Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. We have chosen
to continue using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, in accounting for our stock option plans.
Had compensation cost been determined based upon the fair value at the grant
date for awards under the plans based on the provisions of SFAS No. 123, our
SFAS No. 123 pro forma net loss and net loss per share would have been as
follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported $ (1,435,218) $(26,931,623) $ (6,519,788) $(40,377,533)
Add: Stock based compensation,
as reported 106,248 298,268 541,097 902,761
Less: Stock-based compensation,
using fair value method (1,469,278) (1,109,982) (3,701,996) (3,230,150)
---------------------------------------------------------------------------
Pro forma net loss $ (2,798,248) $(27,743,337) $ (9,680,687) $(42,704,922)
Net loss per share, basic and
diluted, as reported $ (0.04) $ (0.68) $ (0.16) $ (1.02)
Pro forma net loss per share,
basic and diluted $ (0.07) $ (0.70) $ (0.24) $ (1.08)
(4) 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.
6
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- ------------
Raw materials $ 1,638,633 $ 4,253,090
Finished goods and work in process 472,787 457,254
Reserve for excess and obsolete inventory (661,859) (3,050,000)
------------- ------------
Total inventories $ 1,449,561 $ 1,660,344
============= ============
(5) Stock Compensation
Included in operating expenses are the following stock compensation charges, net
of reversals related to terminated employees:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Cost of goods sold $ 10,762 $ 35,746 $ 80,783 $ 135,485
Research and development 8,864 23,062 33,006 79,592
Selling and marketing 2,094 5,612 7,950 26,822
General and administrative 84,528 233,848 419,358 660,862
------------------------------------------------------
Total stock compensation $106,248 $ 298,268 $ 541,097 $ 902,761
------------------------------------------------------
(6) Comprehensive Loss
The components of comprehensive loss are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss $ (1,435,218) $ (26,931,623) $ (6,519,788) $ (40,377,533)
Other comprehensive loss:
Foreign currency translation adjustments 23,104 0 20,136 0
---------------------------------------------------------------
Comprehensive loss $ (1,412,114) $ (26,931,623) $ (6,499,652) $ (40,377,533)
---------------------------------------------------------------
(7) Derivative Instruments
We sell products in a number of countries throughout the world. In the quarter
ended September 30, 2003, 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, which arise when collections in a
foreign currency are received after the asset is generated. Contracts
outstanding at September 30, 2003 represented a combined U.S. dollar equivalent
commitment of approximately $10.8 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.
(8) Goodwill and Intangible Assets
Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, 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.
In connection with the adoption of SFAS No. 142, it was concluded that no
impairment existed at the time of adoption, and accordingly, we did not
recognize any transitional impairment loss for goodwill. For intangible assets
with indefinite lives, the fair values of these assets were compared to their
carrying values as of January 1, 2002, also resulting in no transitional
impairment.
We completed the annual impairment tests in the quarters ended September 30,
2002 and 2003. For goodwill, this analysis is based on the comparison of the
fair value of the Agbio reporting unit to the carrying value of the net assets
of the respective reporting units. The fair value of the reporting unit was
determined using a combination of discounted cash flows and other common
valuation methodologies. For intangible assets with indefinite lives, the fair
values of these assets were compared to their carrying values. Based on the
analyses performed in 2002, it was determined that goodwill, intangible assets
deemed to have indefinite lives and amortizable intangible assets were impaired
and
7
accordingly an impairment charge of $4,809,902 was recognized in the quarter
ended September 30, 2002 (Goodwill - $4,210,313, Indefinite-lived intangibles -
$466,589, amortizable intangible asset $133,000). Based on the analyses
completed in the quarter ended September 30, 2003, it was determined that there
was no impairment of goodwill and intangible assets with indefinite lives.
Identifiable intangible assets with indefinite lives consist of the
following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- -----------
Technology license $ 1,053,000 $ 1,053,000
Impairment charge (137,172) (137,172)
Trademark 421,000 421,000
Impairment charge (329,417) (329,417)
----------- -----------
$ 1,007,411 $ 1,007,411
=========== ===========
Amortizable intangible assets consist of the following:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------------------- -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------- -------------- -------------
Costs of settling patent
Litigation $ 10,533,248 $ 4,505,936 $ 10,533,248 $ 3,377,372
Reacquired marketing and
Distribution rights 2,211,111 2,211,111 2,211,111 2,211,111
Customer agreements 171,000 38,000 171,000 38,000
Impairment charge--Customer
Agreements (133,000) -- (133,000) --
-------------- ------------- -------------- -------------
$ 12,782,359 $ 6,755,047 $ 12,782,359 $ 5,626,483
============== ============= ============== =============
(9) Restructuring and Impairment of Long Lived Assets
During the third quarter of 2002, 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.
The restructuring charges recorded were determined based upon plans submitted by
the management and approved by the Board of Directors using information
available at the time. The restructuring charge of $14.3 million in the three
months ended September 30, 2002 included $2.2 million for the consolidation of
facilities, $0.5 million for prepayment penalties mainly under capital lease
arrangements, and an impairment charge of $11.4 million for abandoned leasehold
improvements and equipment to be sold or abandoned. The fixed assets and
leaseholds were written down to their estimated salvage value. We also recorded
a $1.1 million charge in 2002 within cost of goods sold related to inventory
that was considered obsolete based upon the restructuring plan.
Assets held for sale on the balance sheet represent equipment that we
continue to attempt to sell, written down to its estimated fair value. The
facilities charge contains estimates based upon our potential to sublease a
portion of the corporate office for a portion of the remaining lease term.
Actual results may differ from these estimates, which could require adjustments
to the restructuring accrual in future periods.
The following table shows the components of the restructuring and other
charges and changes in the restructuring accrual through September 30, 2003. The
remaining facilities balance of $1.6 million included in the restructuring
accrual is primarily related to rent payments on non-cancelable leases, net of
estimated sublease income, which will continue to be paid over the respective
lease terms through 2011. The other component of the restructuring accrual
mainly represented amounts owed resulting from the termination of non-cancelable
purchase orders for equipment. The current portion of the accrual is included in
"Other accrued liabilities" on the balance sheet and the long-term portion is
included in "Other liabilities."
FACILITIES OTHER TOTAL
Accrued restructuring balance at
December 31, 2002 $ 2,158,038 $ 805,580 $ 2,963,618
Payments made (532,164) (840,270) (1,372,434)
Adjustments (35,000) 35,000 0
----------- ----------- -----------
Accrued restructuring balance at
September 30, 2003 $ 1,590,874 $ 310 $ 1,591,184
=========== =========== ===========
8
(10) Reclassifications
Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 presentation.
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, 2003 and for the three and nine months ended
September 30, 2003 and 2002 should be read in conjunction with our Form 10-K for
the fiscal year ended December 31, 2002 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, Inc. is a leading genetic analysis products company. We
believe our proprietary Invader technology platform is easier to use, more
accurate and cost-effective, and enables higher testing throughput than
conventional methods based on polymerase chain reaction, or PCR. These and other
advantages conferred by our technology platform are enabling us to continue to
successfully serve select research customers, while focusing the majority of our
commercial effort on the rapidly growing, high-value clinical molecular
diagnostic market.
More than 100 clinical molecular diagnostic laboratory customers are using Third
Wave's products in routine patient care. Our research customer base includes the
most notable genome research projects in the world, including the Japanese
government's SNP Initiative and that government's share of the International
Haplotype Map Project. Other customers include pharmaceutical and biotechnology
companies, academic research centers and major health care providers.
Third Wave markets a growing number of products including analyte-specific
reagents (ASRs) for routine clinical use. These ASRs allow certified clinical
reference laboratories to create assays to screen for cystic fibrosis and other
inherited disorders, and to test for the Factor V Leiden and a host of other
mutations associated with predisposition to cardiovascular and other diseases.
We also market a series of Invader RNA Assays for measuring expression levels of
a number of genes.
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.
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.
9
RESTRUCTURING AND OTHER CHARGES.
The restructuring and other charges resulting from the restructuring plan in
the third quarter of 2002 has been recorded in accordance with EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)", Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges," and Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
restructuring charge is comprised primarily of costs to consolidate facilities,
impairment charges for abandoned leasehold improvements and equipment to be sold
or abandoned, prepayment penalties related mainly to capital lease obligations
on equipment to be sold or abandoned, and other costs related to the
restructuring. In calculating the cost to consolidate the facilities, we
estimated the future lease and operating costs to be paid until the leases are
terminated and the amount, if any, of sublease receipts for each location. This
required us to estimate the timing and costs of each lease to be terminated, the
amount of operating costs, and the timing and rate at which we might be able to
sublease the site. To form our estimates for these costs, we performed an
assessment of the affected facilities and considered the current market
conditions for each site. Estimates were also used in our calculation of the
estimated realizable value on equipment that is being held for sale. These
estimates were formed based on recent history of sales of similar equipment and
market conditions. Our assumptions on the lease termination payments, operating
costs until terminated, the offsetting sublease receipts and estimated
realizable value of equipment held for sale may turn out to be incorrect and our
actual cost may be materially different from our estimates.
LONG-LIVED ASSETS--IMPAIRMENT
Equipment, leasehold improvements and amortizable identifiable 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, 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. For assets removed from service and held for sale, we estimate the
fair market value of such assets and record an adjustment if fair value less
costs to sell is lower than carrying value.
Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment tests under SFAS No. 142,
"Goodwill and Other Intangible Assets." The annual impairment tests were
completed in the quarters ended September 30, 2003 and 2002.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2003
and 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 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. Contracts outstanding at September 30, 2003 represented a combined
U.S. dollar equivalent commitment of approximately $10.8 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.
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 September 30, 2003, our
inventory reserves were $0.7 million, or 31% of our $2.1 million total gross
inventories.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2003 and 2002
10
REVENUES. Revenues for the three months ended September 30, 2003 of $9.4 million
represented an increase of $4.4 million as compared to revenues of $5.0 million
for the corresponding period of 2002. Revenues for the nine months ended
September 30, 2003 of $26.7 million represented an increase of $2.0 million as
compared to revenues of $24.7 million for the corresponding period of 2002.
Product revenues increased to $9.0 million for the quarter ended September 30,
2003, from $4.6 million in the quarter ended September 30, 2002. Product
revenues increased to $25.7 million for the nine months ended September 30,
2003, from $23.2 million in the nine months ended September 30, 2002. The
increase in product sales during the three and nine months ending September 30,
2003 was due to an increase in sales of research product to a major Japanese
research institute and an increase in clinical product sales compared to the
corresponding periods of 2002.
Development revenues decreased to $0.2 million for the three months ended
September 30, 2003, from $0.4 million for the three months ended September 30,
2002. Development revenues decreased to $0.7 million for the nine months ended
September 30, 2003, from $1.2 million for the nine months ended September 30,
2002. The decrease was primarily due to a decrease in funding amounts in 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 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
settlement fees. For the three months ended September 30, 2003, cost of goods
sold decreased to $3.3 million, compared to $4.4 million for the corresponding
period of 2002. For the nine months ended September 30, 2003, cost of goods sold
decreased to $9.7 million compared to $18.7 million for the corresponding period
in 2002. 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.
The decrease was also due to lower fixed costs as a result of the restructuring
that occurred in the third quarter of 2002.
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, 2003
were $2.8 million, compared to $2.5 million for the corresponding period of
2002. Research and development expenses for the nine months ended September 30,
2003 were $8.2 million, compared to $10.6 million for the nine months ended
September 30, 2002. The decrease in year to date research and development
expenses was primarily attributable to decreased material costs for assay and
product development and a decrease in fees paid for consulting, development, and
other services.
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, 2003 were $2.1 million, a decrease of $0.3 million, as compared to
$2.4 million for the corresponding period of 2002. Selling and marketing
expenses for the nine months ended September 30, 2003 were $7.0 million, a
decrease of $0.3 million, as compared to $7.3 million for the corresponding
period of 2002. The decrease in the three and nine month ended September 30,
2003 is due to a decrease in commissions paid to distributors, partially offset
by an increase in salary and personnel related expenses.
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 decreased to $2.3 million in
the three months ended September 30, 2003, from $3.2 million for the
corresponding period in 2002. General and administrative expenses decreased to
$8.1 million in the nine months ended September 30, 2003, from $9.0 million for
the nine months ended September 30, 2002. The decrease in the three and nine
month periods ended September 30, 2003 was due to a decrease in personnel
related expenses and consulting fees compared to the corresponding period in
2002.
RESTRUCTURING AND OTHER CHARGES. In 2002, 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 three months ended 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.
11
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 were written down to their estimated salvage value.
IMPAIRMENT LOSS. During the three months ended September 30, 2003 and 2002, we
completed the annual impairment tests required by SFAS No. 142 for goodwill and
intangible assets with indefinite lives, using the assistance of an independent
valuation expert.
For the goodwill analysis, the fair value of the Agbio reporting unit was
compared to the carrying value of the net assets of the reporting unit. The fair
value of the reporting unit was determined using a combination of discounted
cash flows method and other common valuation methodologies. For indefinite lived
intangible assets, the fair values of these assets were compared to their
carrying values. Based on the analyses performed in 2002, it was determined that
goodwill and indefinite lived intangibles were impaired and 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. Based on the analyses
performed in the quarter ended September 30, 2003, it was determined that there
was no impairment, and therefore, no charge was recorded.
INTEREST INCOME. Interest income for the three months ended September 30, 2003
was $0.1 million, compared to $0.2 million for the corresponding period of 2002.
Interest income for the nine months ended September 30, 2003 was $0.4 million
compared to $0.8 million for the nine months ended September 30, 2002. This
decrease was primarily due to lower interest rates and lower cash balances
compared to the three and nine months ended September 30, 2002.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2003
and 2002 was approximately $0.1 million. Interest expense for the nine months
ended September 30, 2003 was $0.2 million compared to $0.8 million in the
corresponding period in 2002. The decrease in interest expense was primarily due
to lower interest rates on debt.
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, 2003, we had cash and cash equivalents and
short-term investments of $55.9 million.
Net cash used in operations for the nine months ended September 30, 2003 was
$4.8 million, compared with $10.9 million in the corresponding period in 2002.
The decrease in cash used in operations was primarily due to lower operating
losses.
Net cash provided by investing activities for the nine months ended
September 30, 2003 was $0.2 million, compared to a net cash used of $11.3
million in the corresponding period in 2002. Investing activities included
capital expenditures of $0.2 million in the nine months ended September 30,
2003, compared to $2.3 million in the corresponding period in 2002. Capital
expenditures during 2002 were higher due to investments in production and lab
equipment. Investing activities also included a net cash usage of $9.5 million
for the combination of purchases and maturities of short-term investments in the
nine months ended September 30, 2002 compared to net proceeds of $0.2 million in
the nine months ended September 30, 2003.
Net cash provided by financing activities was $0.4 million in the nine
months ended September 30, 2003, compared to net cash used in financing
activities of $2.0 million in 2002. Cash used in financing activities in the
nine months ended September 30, 2003 consisted of $15,000 to repay debt,
compared to $2.9 million in the corresponding period in 2002. Additionally, in
the nine months ended September 30, 2002, $0.9 million was used for capital
lease obligation payments and we received proceeds of $1.7 million from
additional financing. During 2002, we entered into a term loan agreement due on
July 31, 2003 to pay off the then existing debt and capital lease obligations.
We renewed the term loan in August 2003 for an additional year. The term loan is
collateralized with a 12-month certificate of deposit.
The following summarizes our contractual obligations at September 30, 2003
and the effect those obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):
12
TOTAL LESS THAN YEARS YEARS OVER
1 YEAR 1 - 3 4 - 5 5 YEARS
-------------------- -----------------
CONTRACTUAL OBLIGATION
Non-cancelable operating
lease obligations $ 17,698 $ 1,782 $ 4,223 $ 4,574 $ 7,119
Term loan 9,513 9,500 13 -- --
-------- -------- ------- ------- -------
Total obligation $ 27,211 $ 11,282 $ 4,236 $ 4,574 $ 7,119
-------- -------- ------- ------- -------
As of December 31, 2002 and September 30, 2003, 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, 2002, we had federal and state net
operating loss carryforwards of approximately $103 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 in February 2001.
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:
o our progress with our research and development programs;
o our level of success in selling our products and technologies;
o our ability to establish and maintain successful collaborative
relationships;
o the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
o the timing of purchases of additional capital.
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.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, conducted an evaluation as of the end of the period covered
by this report, of the effectiveness of the Company's disclosure controls and
procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934. Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. As
required by Rule 13a-15(d) under the Securities Exchange Act of 1934 the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the Company's internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
13
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, 2002 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(1) None
(2) None
(3) None
(4) 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.
14
From the time of receipt through September 2003, 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 $15.0 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:
ITEM 5. OTHER INFORMATION - None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certifications
(b) Reports on Form 8-K filed during the three months ended September 30,
2003: The Company filed a Form 8-K dated July 23, 2003 reporting under
Items 7 and 9 of Form 8-K the Company's press release dated July 23,
2003 announcing the Company's second quarter results.
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, 2003 By: /s/ Lance Fors
--------------------------
Lance Fors, CEO
Date: November 14, 2003 By: /s/ David Nuti
--------------------------
David Nuti, CFO
15