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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, 2004 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, 2004, was 40,680,771.
THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION...................................................................................
Item 1. Financial Statements.................................................................................
Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003.................................
Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003......
Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003................
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, Use Of Proceeds, and Issuer Purchases of Equity Securities....................
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.....................................................................................................
EXHIBITS.......................................................................................................
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31,
2004 2003
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 56,067,688 $ 47,015,746
Short-term investments 11,070,000 10,800,000
Receivables, net of allowance for doubtful accounts of $140,000 at
September 30, 2004 and December 31, 2003 3,717,662 2,061,054
Inventories 1,269,924 1,394,046
Prepaid expenses and other 484,147 485,680
----------------- -----------------
Total current assets 72,609,421 61,756,526
Equipment and leasehold improvements:
Machinery and equipment 15,778,148 18,544,956
Leasehold improvements 2,210,036 2,099,104
----------------- -----------------
17,988,184 20,644,060
Less accumulated depreciation 11,706,953 12,116,813
----------------- -----------------
6,281,231 8,527,247
Assets held for sale 305,000 0
Intangible assets, net of accumulated amortization 4,522,560 5,651,124
Indefinite lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Other long term assets 2,376,494 2,989,752
----------------- -----------------
Total assets $ 87,591,990 $ 80,421,933
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,585,235 $ 4,955,434
Accrued payroll and related liabilities 2,037,303 2,802,297
Other accrued liabilities 1,438,679 1,776,250
Deferred revenue 262,955 67,760
Capital lease obligation 21,919 0
Long-term debt due within one year 9,613,211 9,500,000
----------------- -----------------
Total current liabilities 18,959,302 19,101,741
Long-term debt 359,724 13,333
Deferred revenue - long term 226,042 0
Capital lease obligations - long term 49,362 0
Other liabilities 3,282,960 2,019,024
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, 40,680,771 and
40,021,244 shares issued and outstanding, respectively 40,681 40,021
Additional paid-in capital 196,205,868 193,356,121
Unearned stock compensation (498,831) (309,996)
Foreign currency translation adjustment 31,533 33,307
Accumulated deficit (131,064,651) (133,831,618)
----------------- -----------------
Total shareholders' equity 64,714,600 59,287,835
----------------- -----------------
Total liabilities and shareholders' equity $ 87,591,990 $ 80,421,933
================= =================
See accompanying notes to financial statements.
3
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues:
Product sales $ 10,324,397 $ 8,991,782 $ 38,067,912 $ 25,692,837
Development revenue 0 249,999 0 749,999
License and royalty revenue 71,492 112,225 167,121 165,825
Grant revenue 83,138 0 151,870 54,457
-------------- -------------- -------------- --------------
Total revenues 10,479,027 9,354,006 38,386,903 26,663,118
-------------- -------------- -------------- --------------
Operating expenses:
Cost of goods sold
Product cost of goods sold 2,119,185 2,762,294 8,568,592 8,249,510
Intangible and long-term asset amortization 521,505 497,509 1,634,160 1,474,710
-------------- -------------- -------------- --------------
Total cost of goods sold 2,640,690 3,259,803 10,202,752 9,724,220
Research and development 2,720,962 2,790,785 8,723,599 8,201,863
Selling and marketing 2,370,231 2,098,515 7,691,222 6,959,948
General and administrative 2,863,852 2,332,211 8,433,456 8,169,483
Impairment charge 0 0 758,716 0
-------------- -------------- -------------- --------------
Total operating expense 10,595,735 10,481,314 35,809,745 33,055,514
-------------- -------------- -------------- --------------
Income (loss) from operations (116,708) (1,127,308) 2,577,158 (6,392,396)
Other income (expense):
Interest income 210,997 118,128 480,945 449,194
Interest expense (74,030) (57,049) (189,779) (241,132)
Other 4,015 (368,989) (101,357) (335,454)
-------------- -------------- -------------- --------------
Other income (expense) 140,982 (307,910) 189,809 (127,392)
-------------- -------------- -------------- --------------
Net income (loss) $ 24,274 $ (1,435,218) $ 2,766,967 $ (6,519,788)
============== ============== ============== ==============
Net income (loss) per share - basic $ 0.00 $ (0.04) $ 0.07 $ (0.16)
============== ============== ============== ==============
Net income (loss) per share - diluted $ 0.00 $ (0.04) $ 0.07 $ (0.16)
============== ============== ============== ==============
Weighted Average Shares outstanding
Basic 40,521,411 39,803,272 40,309,084 39,688,844
============== ============== ============== ==============
Diluted 42,509,345 39,803,272 42,070,075 39,688,844
============== ============== ============== ==============
See accompanying notes to financial statements.
4
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2004 2003
-------------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,766,967 $ (6,519,788)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,103,010 2,313,202
Amortization of intangible assets 1,128,564 1,128,564
Noncash stock compensation 1,329,404 541,097
Impairment charge and loss on disposal of equipment 870,058 38,970
Changes in operating assets and liabilities:
Receivables (1,658,382) (1,291,282)
Inventories 124,122 210,783
Prepaid expenses and other assets 121,605 668,016
Accounts payable 629,801 (1,338,093)
Accrued expenses and other liabilities 161,368 189,565
Deferred revenue 421,237 (720,000)
-------------- --------------
Net cash provided by (used in) operating activities 7,997,754 (4,778,966)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (532,601) (182,009)
Proceeds on sale of equipment 65,020 311,355
Purchases of licensed technology 0 (100,000)
Purchases of short-term investments (11,070,000) (10,800,000)
Sales and maturities of short-term investments 10,800,000 11,013,000
-------------- --------------
Net cash provided by (used in) investing activities (737,581) 242,346
FINANCING ACTIVITIES:
Proceeds of long-term debt 470,000 0
Payments on long-term debt (10,399) (15,152)
Proceeds from common stock, net 1,332,168 389,475
-------------- --------------
Net cash provided by financing activities 1,791,769 374,323
-------------- --------------
Net increase (decrease) in cash and cash equivalents 9,051,942 (4,162,297)
Cash and cash equivalents at beginning of period 47,015,746 49,301,501
-------------- --------------
Cash and cash equivalents at end of period $ 56,067,688 $ 45,139,204
============== ==============
See accompanying notes to financial statements.
5
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(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, 2004.
The balance sheet at December 31, 2003 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, 2003 filed with the
Securities and Exchange Commission.
(2) Net Income (Loss) Per Share
In accordance with accounting principles generally accepted in the United
States, basic net income (loss) per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. Diluted net income (loss) per share takes into account the
weighted average shares from options that could potentially dilute basic net
income per share in the future. Shares associated with stock options are
excluded for the three and nine months ended September 30, 2003 because they are
antidilutive for the periods.
The following table presents the calculation of basic and diluted net income
(loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Numerator:
Net income (loss) $ 24,274 $ (1,435,218) $ 2,766,967 $ (6,519,788)
Denominator
Weighted average shares outstanding - basic 40,521,411 39,803,272 40,309,084 39,688,844
Dilutive securities - stock options 1,987,934 N/A 1,760,991 N/A
-------------- -------------- -------------- --------------
Weighted average shares outstanding - diluted 42,509,345 39,803,272 42,070,075 39,688,844
============== ============== ============== ==============
Basic net income (loss) per share $ 0.00 $ (0.04) $ 0.07 $ (0.16)
Dilutive net income (loss) per share $ 0.00 $ (0.04) $ 0.07 $ (0.16)
6
(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 income (loss) and net income (loss) per share
would have been as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income (loss), as reported $ 24,274 $ (1,435,218) $ 2,766,967 $ (6,519,788)
Add: Stock based compensation, as reported 785,226 106,248 1,329,404 541,097
Less: Stock-based compensation, using fair value method (1,410,484) (1,469,278) (3,851,688) (3,701,996)
------------- ------------- ------------- -------------
Pro forma net income (loss) $ (600,984) $ (2,798,248) $ 244,683 $ (9,680,687)
============= ============= ============= =============
Net income (loss) per share, basic, as reported $ 0.00 $ (0.04) $ 0.07 $ (0.16)
Net income (loss) per share, diluted, as reported $ 0.00 $ (0.04) $ 0.07 $ (0.16)
Pro forma net income (loss) per share, basic $ (0.01) $ (0.07) $ 0.01 $ (0.24)
Pro forma net income (loss) per share, diluted $ (0.01) $ (0.07) $ 0.01 $ (0.24)
(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.
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
Raw materials $ 1,609,097 $ 1,609,866
Finished goods and work in process 410,827 534,180
Reserve for excess and obsolete inventory (750,000) (750,000)
------------- -------------
Total inventories $ 1,269,924 $ 1,394,046
============= =============
(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,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Cost of goods sold $ 47,731 $ 10,762 $ 57,692 $ 80,783
Research and development 419,025 8,864 769,970 33,006
Selling and marketing 188 2,094 68,674 7,950
General and administrative 318,282 84,528 433,068 419,358
----------- ----------- ----------- -----------
Total stock compensation $ 785,226 $ 106,248 $ 1,329,404 $ 541,097
----------- ----------- ----------- -----------
7
(6) Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----------- -------------- ------------- -----------
Net Income (Loss) $ 24,274 $ (1,435,218) $ 2,766,967 $(6,519,788)
Other comprehensive income (loss):
Foreign currency translation adjustments (1,945) 23,104 (1,774) 20,136
----------- -------------- ------------- -----------
Comprehensive income (loss) $ 22,329 $ (1,412,114) $ 2,765,193 $(6,499,652)
=========== ============== ============= ===========
(7) Derivative Instruments
We sell products in a number of countries throughout the world. In the quarters
ending September 30, 2004 and 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 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. There were no contracts outstanding at September 30, 2004. 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) Amortizable Intangible Assets
Amortizable intangible assets consist of the following:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------------ -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------- -------------- -------------
Costs of settling patent litigation $ 10,533,248 $ 6,010,688 $ 10,533,248 $ 4,882,124
Reacquired marketing and distribution rights 2,211,111 2,211,111 2,211,111 2,211,111
Customer agreements 38,000 38,000 38,000 38,000
-------------- ------------- -------------- -------------
Total $ 12,782,359 $ 8,259,799 $ 12,782,359 $ 7,131,235
============== ============= ============== =============
(9) Restructuring and Impairment of Long Lived Assets
During the third quarter of 2002, we announced a restructuring plan designed to
simplify product development and manufacturing operations and reduce operating
expenses. The restructuring charges recorded were determined based upon plans
submitted by the Company's management and approved by the Board of Directors
using information available at the time. The restructuring charge included $2.5
million for the consolidation of facilities, $500,000 for prepayment penalties
mainly under capital lease arrangements, an impairment charge of $7.2 million
for abandoned leasehold improvements and equipment to be sold and $900,000 of
other costs related to the restructuring. The Company also recorded a $1.1
million charge within cost of goods sold related to inventory that was
considered obsolete based upon the restructuring plan.
The facilities charge contained estimates based on the Company's potential to
sublease a portion of its corporate office. The Company has offered the
corporate office space for sublease, but has been unable to sublease the space.
Accordingly, the Company decreased its estimate of the amount of sublease income
it expects to receive. The estimated lease and operating expenses were also
reduced, based on a portion of the office space being utilized.
The following table shows the changes in the restructuring accrual since
December 31, 2003. The remaining restructuring balance of $1.3 million is for
rent payments on a non-cancelable lease, net of estimated sublease income, which
will continue to be paid over the lease term through 2011. The current portion
of the accrual is included in other accrued liabilities on the balance sheet and
the remainder is included in other long-term liabilities.
8
Accrued restructuring balance at December 31, 2003 $ 1,414,044
Payments made (155,830)
-------------
Accrued restructuring balance at September 30, 2004 $ 1,258,214
-------------
(10) Reclassifications
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 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, 2004 and for the three and nine months ended
September 30, 2004 and 2003 should be read in conjunction with our Form 10-K for
the fiscal year ended December 31, 2003 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 molecular diagnostics company. We
believe our proprietary Invader(R) technology, a novel, chemistry-based
platform, is easier to use, more accurate and cost-effective, and enables higher
testing throughput than existing technology. These and other advantages
conferred by our technology platform are enabling us to provide physicians and
researchers with superior tools to diagnose and treat disease.
More than 110 clinical laboratory customers are using Third Wave's products. Our
customer base also includes the Japanese 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). 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. The Company has developed
or plans to develop a menu of molecular diagnostic products for clinical
applications that include genetic testing, pharmacogenetics, chromosomal
analysis, infectious disease, and women's health. The Company also has a number
of other Invader(R) products including those for research, agricultural and
other applications.
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.
9
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.
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 was 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. The remaining accrued restructuring balance is for rent payments
on a non-cancelable lease, net of estimated sublease income. 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. Our assumptions on
the lease termination payments, operating costs until terminated, and the
offsetting sublease receipts 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. In the quarter ended June 30, 2004
we recorded an impairment charge of $0.8 million on certain equipment.
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 are
completed in the quarter ended September 30. In addition, an impairment test was
performed in the quarter ended June 30, 2004 due to a change in our forecast.
Based on the analysis, it was determined that there was no impairment of
goodwill or intangible assets with indefinite lives.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During
2004 and 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. There were no contracts outstanding at September 30, 2004. 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.
10
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, 2004, our
inventory reserves were $0.8 million, or 37% of our $2.0 million total gross
inventories.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2004 and 2003
REVENUES. Revenues for the three months ended September 30, 2004 of $10.5
million represented an increase of $1.1 million, compared to revenues of $9.4
million for the corresponding period of 2003. Revenues for the nine months ended
September 30, 2004 of $38.4 million represented an increase of $11.7 million,
compared to revenues of $26.7 million for the corresponding period of 2003.
Product revenues increased to $10.3 million for the quarter ended September 30,
2004, from $9.0 million in the quarter ended September 30, 2003. Product
revenues increased to $38.1 million for the nine months ended September 30,
2004, from $25.7 million in the nine months ended September 30, 2003. The
increase in product sales during the three and nine months ending September 30,
2004 was due to an increase in sales of genomic research product to a major
Japanese research institute and an increase in molecular diagnostic sales
compared to the corresponding periods of 2003. We expect our molecular
diagnostic revenues to increase throughout 2004.
We had no development revenues for the three months ended September 30, 2004,
compared to development revenues of $0.2 million for the three months ended
September 30, 2003. We had no development revenues for the nine months ended
September 30, 2004, compared to development revenues of $0.7 million for the
nine months ended September 30, 2003. The decrease was due to the transition
from development revenue to product revenue in our development and
commercialization agreement with BML, Inc.
Significant Customer. We generated $24.9 million, or 65% of our revenues, from
sales to a major Japanese research institute for use by several end-users during
the nine months ended September 30, 2004. We believe this customer will continue
to purchase Company products, however, the timing and total of such purchases
will be influenced by the Japanese government funding process and amounts which
are unpredictable and unknown to Third Wave.
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, 2004, cost of goods
sold decreased to $2.6 million, compared to $3.3 million for the corresponding
period of 2003. For the nine months ended September 30, 2004, cost of goods sold
increased to $10.2 million, compared to $9.7 million for the corresponding
period of 2003. The increase in the nine month period was primarily due to the
increase in sales volume. Cost of goods sold as a percentage of revenue
decreased due to the increased sales of higher margin product. We expect gross
margin to improve as molecular diagnostic revenues increase.
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, 2004
were $2.7 million, compared to $2.8 million for the three months ended September
30, 2003. Research and development expenses for the nine months ended September
30, 2004 were $8.7 million, compared to $8.2 million for the nine months ended
September 30, 2003. The increase in research and development expenses was
primarily due to an increase in personnel related expenses. We will continue to
invest in research and development, and expenditures in this area may increase
as we expand our product development efforts.
11
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, 2004 were $2.4 million, an increase of $0.3 million, compared to
$2.1 million for the corresponding period of 2003. Selling and marketing
expenses for the nine months ended September 30, 2004 were $7.7 million, an
increase of $0.7 million, compared to $7.0 million for the corresponding period
of 2003. The increase in the nine months ended September 30, 2004 was due to an
increase in personnel related expenses compared to the same period in 2003. We
anticipate selling and marketing expenses to continue to be at or above 2003
levels.
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 $2.9 million in
the three months ended September 30, 2004, from $2.3 million for the
corresponding period in 2003. General and administrative expenses increased to
$8.4 million in the nine months ended September 30, 2004, from $8.2 million for
the corresponding period in 2003. The increase in the three months ended
September 30, 2004 was due to an increase in personnel related expenses compared
to the corresponding period of 2003. The Company anticipates increased legal
expenses as a result of its pending patent infringement lawsuit against
Stratagene. As the Company moves towards consideration of FDA cleared or
approved products, there will be increased expenses attributed to these
activities.
IMPAIRMENT CHARGE. In the nine months ended September 30, 2004 an impairment
charge of $0.8 million was recorded for equipment written down to fair value.
INTEREST INCOME. Interest income for the three months ended September 30, 2004
was $0.2 million, compared to $0.1 million for the corresponding period of 2003.
Interest income for the nine months ended September 30, 2004 was $0.5 million
compared to $0.4 million in the nine months ended September 30, 2003.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2004
and 2003 was approximately $0.1 million. Interest expense for the nine months
ended September 30, 2004 and 2003 was $0.2 million.
OTHER INCOME (EXPENSE): Other income for the three months ended September 30,
2004 was $4,000, compared to other expense of $0.4 million for the three months
ended September 30, 2003. Other expense for the nine months ended September 30,
2004 was $0.1 million, compared to other expense of $0.3 million for the nine
months ended September 30, 2003. The increase in other income was due to the
adjustment of foreign currency contracts.
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, 2004, we had cash and cash equivalents and
short-term investments of $67.1 million.
Net cash provided by operations for the nine months ended September 30, 2004 was
$8.0 million, compared to net cash used in operations of $4.8 million in the
corresponding period in 2003. The increase in cash provided by operations was
primarily due to the increase in revenue.
Net cash used in investing activities for the nine months ended September
30, 2004 was $0.7 million, compared to net cash provided by investing of $0.2
million in the corresponding period in 2003. Investing activities included
capital expenditures of $0.5 million in the nine months ended September 30,
2004, compared to $0.2 million in the corresponding period in 2003. Investing
activities included proceeds from the sale of equipment of $0.1 million in the
nine months ended September 30, 2004, compared to $0.3 million in the
corresponding period in 2003. Investing activities in the nine months ended
September 30, 2004 also included a net cash usage of $0.3 million to purchase
short-term investments, compared to net cash proceeds of $0.2 million from the
maturity of short-term investments in 2003.
Net cash provided by financing activities was $1.8 million in the nine
months ended September 30, 2004, compared to $0.4 million in the nine months
ended September 30, 2003. Cash provided by financing activities in the nine
months ending September 30, 2004 consisted of proceeds from the sale of common
stock of $1.3 million compared to $0.4 million in the corresponding period of
2003. In the nine months ended September 30, 2004, there was $0.5 million of
proceeds from long-term debt. In the nine months ended
12
September 30, 2004, $10,000 was used to repay debt, compared to $15,000 in the
corresponding period in 2003.
There have been no significant changes in our contractual obligations since
December 31, 2003.
As of December 31, 2003 and September 30, 2004, 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, 2003, we had federal and state net
operating loss carryforwards of approximately $114 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:
- our progress with our research and development programs;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
- the timing of purchases of additional capital.
ITEM 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.
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
13
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, 2003 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 - 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 15, 2004, Third Wave filed suit against Stratagene
Corporation in the United States District Court for the Western District
of Wisconsin. The complaint alleges patent infringement by Stratagene
Corporation of at least several claims in each of two Third Wave patents
concerning the Company's proprietary Invader technology. A scheduling
conference in the litigation has been scheduled for November 17, 2004. A
trial is expected to take place between July and September of 2005,
assuming the parties do not settle the litigation prior to trial.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(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 30, 2004, 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 $14.0
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.
(e) None
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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.
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, 2004: The Company filed a Form 8-K dated July 27, 2004 reporting
the Company's press releases dated July 27, 2004 announcing the
Company's quarter ending June 30, 2004 financial statements and
stock repurchase plan. The Company filed a Form 8-K dated September
3, 2004 reporting the Company's press release dated September 3,
2004 announcing the election of a Director. Finally, on October 27,
2004, the Company filed a Form 8-K announcing the resignation and
replacement of its Chief Financial/Accounting Officer.
15
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: October 29, 2004 /s/ John Puisis
--------------------------
John Puisis, CEO
Date: October 29, 2004 /s/ David Nuti
--------------------------
David Nuti, CFO
16