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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 March 31, 2005 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 March 31, 2005, was 41,154,491.
THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION............................................................................................ 3
Item 1. Financial Statements.......................................................................................... 3
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004............................................... 3
Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004............................. 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004............................. 5
Notes to Consolidated Financial Statements........................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 12
Item 4. Controls and Procedures....................................................................................... 12
PART II OTHER INFORMATION............................................................................................... 14
Item 1. Legal Proceedings............................................................................................. 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................................... 14
Item 3. Defaults Upon Senior Securities............................................................................... 14
Item 4. Submission Of Matters To A Vote Of Security Holders........................................................... 14
Item 5. Other Information............................................................................................. 14
Item 6. Exhibits...................................................................................................... 14
SIGNATURES.............................................................................................................. 16
EXHIBITS................................................................................................................ 17
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
MARCH 31, DECEMBER 31,
2005 2004
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 53,460,740 $ 55,619,981
Short-term investments 11,070,000 11,070,000
Receivables, net of allowance for doubtful accounts of $185,000 and $300,000, respectively 4,501,515 5,784,679
Inventories 1,389,075 1,236,392
Prepaid expenses and other 679,558 260,316
------------- -------------
Total current assets 71,100,888 73,971,368
Equipment and leasehold improvements:
Machinery and equipment 15,907,379 15,832,489
Leasehold improvements 2,283,792 2,277,604
------------- -------------
18,191,171 18,110,093
Less accumulated depreciation 12,581,644 12,139,423
------------- -------------
5,609,527 5,970,670
Assets held for sale 269,000 269,000
Intangible assets, net of accumulated amortization 3,770,184 4,146,372
Indefinite lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Other long term assets 2,086,667 2,212,935
------------- -------------
Total assets $ 84,333,550 $ 88,067,629
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,479,046 $ 6,519,005
Accrued payroll and related liabilities 2,130,286 2,873,506
Other accrued liabilities 2,037,426 1,867,361
Deferred revenue 314,333 129,530
Capital lease obligation due within one year 101,378 66,867
Long-term debt due within one year 9,615,428 9,614,127
------------- -------------
Total current liabilities 21,677,897 21,070,396
Long-term debt 305,650 335,069
Deferred revenue - long term 227,171 254,434
Capital lease obligations - long term 196,315 151,885
Other liabilities 3,910,674 3,520,948
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, 41,154,491 and 41,102,764
shares issued and outstanding, respectively 41,154 41,103
Additional paid-in capital 198,343,828 198,990,162
Unearned stock compensation (205,671) (554,293)
Foreign currency translation adjustment 31,095 31,949
Accumulated deficit (140,194,563) (135,774,024)
------------- -------------
Total shareholders' equity 58,015,843 62,734,897
------------- -------------
Total liabilities and shareholders' equity $ 84,333,550 $ 88,067,629
============= =============
See accompanying notes to financial statements.
3
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
---------------------------
MARCH 31,
---------------------------
2005 2004
------------ ------------
Revenues:
Product sales $ 6,914,276 $ 15,214,638
License and royalty revenue 93,083 40,641
Grant revenue 118,884 20,330
------------ ------------
Total revenues 7,126,243 15,275,609
------------ ------------
Operating expenses:
Cost of goods sold
Product cost of goods sold 1,538,676 3,599,760
Intangible and long-term asset amortization 461,395 571,096
------------ ------------
Total cost of goods sold 2,000,071 4,170,856
Research and development 2,465,380 2,672,876
Selling and marketing 3,364,493 2,624,772
General and administrative 3,779,264 2,357,391
------------ ------------
Total operating expense 11,609,208 11,825,895
------------ ------------
Income (loss) from operations (4,482,965) 3,449,714
Other income (expense):
Interest income 347,000 127,190
Interest expense (89,387) (56,994)
Other (195,187) (671,486)
------------ ------------
Total other income (expense) 62,426 (601,290)
------------ ------------
Net income (loss) $ (4,420,539) $ 2,848,424
============ ============
Net income (loss) per share - basic $ (0.11) $ 0.07
============ ============
Net income (loss) per share - diluted $ (0.11) $ 0.07
============ ============
Weighted average shares outstanding
Basic 41,123,521 40,079,040
============ ============
Diluted 41,123,521 41,566,020
============ ============
See accompanying notes to financial statements.
4
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ (4,420,539) $ 2,848,424
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 544,320 788,401
Amortization of intangible assets 376,188 376,188
Noncash stock compensation (414,464) 232,561
Loss on disposal of equipment 8,696 18,474
Changes in operating assets and liabilities:
Receivables 1,282,310 (4,122,350)
Inventories (152,683) (1,633,800)
Prepaid expenses and other assets (378,181) 237,515
Accounts payable 960,041 4,024,998
Accrued expenses and other liabilities (183,429) (1,076,723)
Deferred revenue 157,540 49,740
------------ ------------
Net cash provided by (used in) operating activities (2,220,201) 1,743,428
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (10,170) (49,290)
------------ ------------
Net cash used in investing activities (10,170) (49,290)
FINANCING ACTIVITIES:
Payments on long-term debt (28,118) 0
Payments on capital lease obligations (17,555) 0
Proceeds from common stock, net 116,803 379,214
------------ ------------
Net cash provided by financing activities 71,130 379,214
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,159,241) 2,073,352
Cash and cash equivalents at beginning of period 55,619,981 47,015,746
------------ ------------
Cash and cash equivalents at end of period $ 53,460,740 $ 49,089,098
============ ============
See accompanying notes to financial statements.
5
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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, 2005.
The balance sheet at December 31, 2004 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, 2004 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 months ended March 31, 2005 because they are
anti-dilutive.
The following table presents the calculation of basic and diluted net income
(loss) per share:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2005 2004
------------ ------------
Numerator:
Net income (loss) $ (4,420,539) $ 2,848,424
============ ============
Denominator:
Weighted average shares outstanding - basic 41,123,521 40,079,040
Dilutive securities - stock options N/A 1,486,980
------------ ------------
Weighted average shares outstanding - diluted 41,123,521 41,566,020
Basic net income (loss) per share $ (0.11) $ 0.07
Dilutive net income (loss) per share $ (0.11) $ 0.07
(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.
6
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
MARCH 31,
-----------------------------
2005 2004
------------- -------------
Net income (loss), as reported $ (4,420,539) $ 2,848,424
Add: Stock based compensation, as reported (414,464) 232,561
Less: Stock-based compensation, using fair value method (1,064,014) (1,053,943)
------------- -------------
Pro forma net income (loss) $ (5,899,017) $ 2,027,042
Net income (loss) per share, basic, as reported $ (0.11) $ 0.07
Net income (loss) per share, diluted, as reported $ (0.11) $ 0.07
Pro forma net income (loss) per share, basic $ (0.14) $ 0.05
Pro forma net income (loss) per share, diluted $ (0.14) $ 0.05
As described in Note 2 of Notes to Consolidated Financial Statements in
our Form 10-K for the year ended December 31, 2004, the Financial Accounting
Standards Board recently issued SFAS No. 123 (revised 2004), "Share-Based
Payment", which is a revision of SFAS No. 123. The Company expects to adopt
SFAS No. 123(R) on January 1, 2006.
(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:
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
Raw materials $ 1,471,024 $ 1,318,771
Finished goods and work in process 698,051 567,621
Reserve for excess and obsolete inventory (780,000) (650,000)
----------- -----------
Total inventories $ 1,389,075 $ 1,236,392
=========== ===========
(5) Stock Compensation
Included in operating expenses are the following stock compensation charges, net
of reversals related to terminated employees:
THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
--------- ---------
Cost of goods sold $ (5,749) $ 5,082
Research and development (259,850) 78,335
Selling and marketing 29,708 68,001
General and administrative (178,573) 81,143
--------- ---------
Total stock compensation $(414,464) $ 232,561
--------- ---------
(6) Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
----------- -----------
Net income (loss) $(4,420,539) $ 2,848,424
Other comprehensive income (loss):
Foreign currency translation adjustments (854) 1,350
----------- -----------
Comprehensive income (loss) $(4,421,393) $ 2,849,774
=========== ===========
(7) Derivative Instruments
We sell products in a number of countries throughout the world. In the quarters
ending March 31, 2005 and 2004, we sold certain products with the resulting
accounts receivable denominated in Japanese Yen. Simultaneous with such sales
and purchase order
7
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 March 31, 2005. 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 in earnings.
(8) Amortizable Intangible Assets
Amortizable intangible assets consist of the following:
MARCH 31, 2005 DECEMBER 31, 2004
------------------------- -------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------- ----------- ------------
Costs of settling patent litigation $10,533,248 $ 6,763,064 $10,533,248 $ 6,386,876
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 $ 9,012,175 $12,782,359 $ 8,635,987
=========== ============ =========== ============
(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, 2004. The remaining restructuring balance of $1.1 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 sheets
and the remainder is included in other long-term liabilities.
Accrued restructuring balance at December 31, 2004 $ 1,116,848
Payments made (38,638)
-----------
Accrued restructuring balance at March 31, 2005 $ 1,078,210
-----------
(10) Reclassifications
Certain reclassifications have been made to the 2004 financial statements to
conform to the 2005 presentation.
8
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 March 31, 2005 and for the three months ended March 31, 2005
and 2004 should be read in conjunction with our Form 10-K for the fiscal year
ended December 31, 2004 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) chemistry, a novel, proprietary molecular
chemistry, is easier to use, more accurate and cost-effective, and enables
higher testing throughput. These and other advantages conferred by our chemistry
are enabling us to provide clinicians and researchers with superior molecular
solutions.
More than 110 clinical laboratory customers are using Third Wave's
molecular diagnostic reagents. 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 perform hepatitis C virus genotyping, 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, oncology/chromosomal analysis, and infectious
disease/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.
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
9
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.
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.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During
2005 and 2004, 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 March 31, 2005. 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 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 March 31, 2005, our
inventory reserves were $0.8 million, or 36% of our $2.2 million total gross
inventories.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2005 and 2004
REVENUES. Revenues for the three months ended March 31, 2005 of $7.1 million
represented a decrease of $8.2 million, compared to revenues of $15.3 million
for the corresponding period of 2004.
Product revenues decreased to $6.9 million for the quarter ended March 31, 2005,
from $15.2 million in the quarter ended March 31, 2004. The decrease in product
sales during the three months ending March 31, 2005 was due to a decline in
orders from a major Japanese research institute. We expect our molecular
diagnostic revenues to increase throughout 2005, as we continue to launch new
products.
10
Significant Customer. We generated $3.1 million, or 44% of our revenues, from
sales to a major Japanese research institute for use by several end-users during
the three months ended March 31, 2005. 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, which is
unpredictable.
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 March 31, 2005, cost of goods sold
decreased to $2.0 million, compared to $4.2 million for the corresponding period
of 2004. The decrease in the three month period was primarily due to the
decrease in sales volume. Cost of goods sold as a percentage of revenue remained
relatively flat for the three months ended March 31, 2005, compared to 2004. 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 March 31, 2005,
were $2.5 million, compared to $2.7 million for the three months ended March 31,
2004. The research and development expenses remained relatively constant for the
comparative periods. We will continue to invest in research and development, and
expenditures in this area may increase as we expand our product development
efforts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, commissions, office support and related costs, and travel
and entertainment. Selling and marketing expenses for the three months ended
March 31, 2005, were $3.4 million, an increase of $0.8 million, compared to $2.6
million for the corresponding period of 2004. The increase in the three months
ended March 31, 2005 was due to an increase in personnel related expenses
compared to the same period in 2004. With the expansion of our clinical sales
force, we anticipate selling and marketing expenses to continue to be at or
above expense levels in 2004.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses increased to $3.8 million in
the three months ended March 31, 2005, from $2.4 million for the corresponding
period in 2004. The increase in the three months ended March 31, 2005, was due
to an increase in personnel related expenses, legal expenses related to
litigation, and consulting fees compared to the corresponding period of 2004.
The Company anticipates increased legal expenses as a result of its patent
infringement lawsuit against Stratagene. As the Company moves towards
consideration of FDA cleared or approved products, there will be increased
expenses attributed to those activities.
INTEREST INCOME. Interest income for the three months ended March 31, 2005 was
$0.3 million, compared to $0.1 million for the corresponding period of 2004.
The increase in the three months ended March 31, 2005 was due to higher
interest rates compared to 2004.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 2005 and
2004 was approximately $0.1 million.
OTHER INCOME (EXPENSE): Other expense for the three months ended March 31, 2005
was $0.2 million, compared to other expense of $0.7 million for the three months
ended March 31, 2004. The decrease in other expense was primarily due to the
adjustment of foreign currency contracts and the related hedged asset to fair
value at March 31, 2004.
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 March 31, 2005, we had cash and cash equivalents and short-term
investments of $64.5 million.
Net cash utilized by operations for the three months ended March 31, 2005 was
$2.2 million, compared to net cash provided by operations of $1.7 million in the
corresponding period in 2004. The decrease in cash from operations was due to an
increase in operating losses.
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Net cash used in investing activities for the three months ended March 31,
2005 was $10,170, compared to net cash used by investing of $49,290, in the same
period in 2004. The cash utilized during both comparative periods resulted from
the purchase of equipment.
Net cash provided by financing activities was $0.1 million in the three
months ended March 31, 2005, compared to $0.4 million in the three months ended
March 31, 2004. Cash provided by financing activities for the period ended March
31, 2005 consisted of proceeds from the sale of common stock of $0.1 million
compared to $0.4 million in the corresponding period of 2004.
There have been no significant changes in our contractual obligations since
December 31, 2004.
As of December 31, 2004 and March 31, 2005, 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, 2004, we had federal and state net operating
loss carryforwards of approximately $113 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 annual 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.
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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, 2004 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.
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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 the two Third Wave
asserted patents concerning the Company's proprietary Invader technology.
Discovery is currently underway and trial is scheduled for August 22,
2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) None
(b) 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 March 31, 2005, 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.
(c) None
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.
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Exhibits.
10.1 Employment Agreement between Maneesh Arora and Third Wave Technologies,
Inc. dated May 10, 2005
10.2 Employment Agreement between Lander R. Brown and Third Wave Technologies,
Inc. dated May 10, 2005.
10.3 Employment Agreement between Vecheslav A. Elagin and Third Wave
Technologies, Inc. dated May 10, 2005.
10.4 Employment Agreement between Jacob Orville and Third Wave Technologies,
Inc. dated May 10, 2005
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 Principal Financial Officer
32 Section 1350 Certifications
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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: May 10, 2005 /s/ John Puisis
-------------------------------------------
John Puisis, CEO
Date: May 10, 2005 /s/ James Herrmann
-------------------------------------------
James Herrmann, Principal Financial Officer
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