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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, 2006MARCH 31, 2007
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
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 November 6, 2006,May 7, 2007, was 41,978,466.42,277,120.
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THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006MARCH 31, 2007
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION......................................... 3
Item 1. Consolidated Financial Statements......................... 3
Consolidated Balance Sheets (Unaudited) as of September 30,
2006March 31, 2007
and December 31, 2005..................................2006.......................................... 3
Consolidated Statements of Operations (Unaudited) for the Three
and Nine Months Ended September 30, 2006March 31, 2007 and 2005.....2006........................... 4
Consolidated Statements of Cash Flows (Unaudited) for the NineThree
Months Ended September 30, 2006March 31, 2007 and 2005...............2006........................... 5
Notes to Consolidated Financial Statements (Unaudited)......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................Operations....................... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................Risk...................................................... 17
Item 4. Controls and Procedures................................... 17
PART II OTHER INFORMATION............................................ 17
Item 1. Legal Proceedings......................................... 17
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds...............................................Proceeds.................................................. 18
Item 3. Defaults Upon Senior Securities........................... 18
Item 4. Submission Of Matters To A Vote Of Security Holders....... 18
Item 5. Other Information......................................... 18
Item 6. Exhibits.................................................. 18
SIGNATURES........................................................... 19
EXHIBITS............................................................. 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
(UNAUDITED)(Unaudited)
SEPTEMBER 30, 2006MARCH 31, DECEMBER 31,
2005
------------------ -----------------2007 2006
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 31,226,26545,535,913 $ 27,681,70442,428,841
Short-term investments 1,575,000 1,770,000
11,035,000
Accounts receivable,receivables, net of allowance for doubtful accounts of $200,000 at
September 30, 2006March 31, 2007 and December 31, 2005,2006, respectively 4,148,889 3,764,5194,453,014 4,756,497
Inventories 3,419,297 2,248,1833,799,023 3,513,909
Prepaid expenses and other 714,750 235,7941,423,188 463,139
------------- -------------
Total current assets 41,279,201 44,965,20056,786,138 52,932,386
Equipment and leasehold improvements:
Machinery and equipment 16,062,324 15,563,11916,780,816 16,623,560
Leasehold improvements 2,362,831 2,346,9382,362,879 2,362,676
------------- -------------
18,425,155 17,910,05719,143,695 18,986,236
Less accumulated depreciation and amortization 14,337,214 13,192,61715,154,572 14,763,932
------------- -------------
4,087,941 4,717,4403,989,123 4,222,304
------------- -------------
Restricted cash -- 805,184
Intangible assets, net of accumulated amortization 1,513,056 2,641,620
Indefinite-lived intangible assets 1,007,411 1,007,4111,734,511 2,135,884
Goodwill 489,873 489,873
Capitalized license fees, 2,929,386 2,797,046net of accumulated amortization 2,320,588 2,624,580
Other assets 967,144 980,9542,304,660 1,828,949
------------- -------------
Total assets $ 52,274,01267,624,893 $ 58,404,72864,233,976
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,291,2117,119,356 $ 6,850,2077,095,860
Accrued payroll and related liabilities 3,474,830 2,158,8701,704,987 3,856,999
Other accrued liabilities 2,345,387 2,344,8351,157,402 1,446,500
Deferred revenue 114,051 121,497-- 109,052
Capital lease obligations due within one year 132,468 114,693110,991 124,220
Long-term debt due within one year 381,279 378,551355,086 368,269
------------- -------------
Total current liabilities 12,739,226 11,968,65310,447,822 13,000,900
Long-term debt 354,766 639,56415,321,134 15,182,478
Deferred revenue - long-term 63,593 145,382-- 36,330
Capital lease obligations - long-term 126,106 191,92478,149 99,446
Other liabilities 4,900,640 5,384,9044,385,499 4,776,272
Minority interest in subsidiary 597,728 --372,574 465,134
Shareholders' equity:
Participating preferred stock, Series A, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value, 100,000,000 shares authorized, 41,801,30542,404,431
shares issued, 41,583,30542,186,431 shares outstanding at September 30, 2006March 31, 2007 and
41,461,37742,135,713 shares issued 41,243,377and 41,917,713 shares outstanding at December
31, 2005 41,801 41,4612006 42,404 42,136
Additional paid-in capital 206,821,976 199,097,187210,912,495 209,355,204
Unearned stockstock-based compensation -- (114,892)(1,791) (6,354)
Treasury stock - 218,000 shares acquired at an average price of $4.02 per
share (877,159) (877,159)
Foreign currency translation adjustment (112,032) 47,442(84,257) (102,186)
Accumulated deficit (172,382,633) (158,119,738)(172,971,977) (177,738,225)
------------- -------------
Total shareholders' equity 33,491,953 40,074,30137,019,715 30,673,416
------------- -------------
Total liabilities and shareholders' equity $ 52,274,01267,624,893 $ 58,404,72864,233,976
============= =============
See accompanying notes to consolidated financial statements.
3
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,Three Months
Ended March 31,
-------------------------
---------------------------2007 2006 2005 2006 2005
----------- -----------
------------ ------------
Revenues:
Clinical product sales $ 5,368,4705,973,160 $ 4,031,766 $ 15,136,818 $ 11,407,1804,709,787
Research product sales 1,181,226 1,039,569 5,809,175 6,152,540568,952 2,995,688
License and royalty revenue 51,827 89,763 106,353 272,609170,955 27,263
Grant revenue -- 61,293 182,876 287,819141,882
----------- -----------
------------ ------------
Total revenues 6,601,523 5,222,391 21,235,222 18,120,1486,713,067 7,874,620
----------- ----------- ------------ ------------
Operating expenses:
Cost of goods sold
Product cost of goods sold 1,549,928 1,108,385 4,229,464 3,960,2941,311,571 1,469,650
Intangible and long-term asset amortization 687,178 468,035 2,068,563 1,427,625705,365 693,391
----------- -----------
------------ ------------
2,237,106 1,576,420 6,298,027 5,387,9192,016,936 2,163,041
Research and development 3,451,043 2,063,762 8,785,640 6,569,3005,109,089 2,302,013
Selling and marketing 2,713,646 3,662,014 8,634,435 10,208,0772,602,781 3,028,635
General and administrative 3,536,620 2,922,659 11,482,926 8,490,3182,885,747 4,060,595
Litigation 255,809 2,677,982 1,438,671 5,157,282
Impairment of equipment -- -- -- 202,707
Restructuring (180,000) -- (180,000) --406,481 1,001,934
----------- -----------
------------ ------------
Total operating expense 12,014,224 12,902,837 36,459,699 36,015,603expenses 13,021,034 12,556,218
----------- ----------- ------------ ------------
Loss from operations (5,412,701) (7,680,446) (15,224,477) (17,895,455)(6,307,967) (4,681,598)
Other income (expense):
Interest income 368,727 459,704 1,115,637 1,200,042531,275 373,182
Interest expense (55,251) (128,516) (161,433) (313,278)(301,239) (55,846)
Other (118,845) (30,685) (98,949) (305,721)10,747,947 (19,185)
----------- ----------- ------------ ------------
Total other income (expense) 194,631 300,503 855,255 581,043
----------- ----------- ------------ ------------
Net loss10,977,983 298,151
Income (loss) before minority interest $(5,218,070) $(7,379,943) $(14,369,222) $(17,314,412)
----------- ----------- ------------ ------------4,670,016 (4,383,447)
Minority interest $ 65,481 $ -- $ 106,327 $in subsidiary 96,232 --
----------- -----------
------------ ------------
Net loss $(5,152,589) $(7,379,943) $(14,262,895) $(17,314,412)income (loss) $ 4,766,248 $(4,383,447)
=========== ===========
============ ============
Net lossincome (loss) per share - basic and$ 0.11 $ (0.11)
Net income (loss) per share - diluted $ (0.12)0.11 $ (0.18) $ (0.34) $ (0.42)(0.11)
Weighted average shares outstanding Basic and- basic 42,025,463 41,310,561
Weighted average shares outstanding - diluted 41,515,143 41,073,652 41,427,973 41,094,74043,884,463 41,310,561
See accompanying notes to consolidated financial statements.
4
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------Three Months
Ended March 31,
-------------------------
2007 2006
2005
------------ ----------------------- -----------
OPERATING ACTIVITIES:
Net loss $(14,262,895) $(17,314,412)income (loss) $ 4,766,248 $(4,383,447)
Adjustments to reconcile net lossincome (loss) to net
cash used inprovided by (used in) operating activities:
Minority Interestinterest in net loss of subsidiary (106,327)(96,232) --
Depreciation and amortization 1,230,262 1,297,395436,701 407,082
Amortization of intangible assets 1,128,564 1,128,564401,373 376,188
Amortization of licensed technology 939,998 299,602303,992 317,203
Noncash stock compensation 2,720,817 (354,827)
Impairment charge and (gain) loss615,822 966,546
Interest accretion related to convertible note payable 223,228 --
Loss on disposal of equipment 28,564 208,73111,834 9,691
Changes in operating assets and liabilities:
Accounts Receivable (625,604) 2,084,109receivable 262,523 302,888
Inventories (1,171,114) (997,692)(285,351) (1,100,935)
Prepaid expenses and other assets (333,386) (266,647)(1,409,653) (621,138)
Accounts payable (1,118,105) (349,913)268,395 157,505
Accrued expenses and other liabilities 971,293 1,542,341(2,388,717) 70,205
Deferred revenue (89,235) 1,950
------------ ------------(145,382) (23,447)
----------- -----------
Net cash used inprovided by (used in) operating activities (10,687,168) (12,720,799)2,964,781 (3,521,659)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (570,668) (307,185)(214,462) (182,733)
Proceeds on sale of equipment 524 -- 197,287
Purchases of licensed technology (702,274) --
Maturity of short-term investments 11,035,000 11,070,000(244,900) (333,212)
Purchases of short-term investments (1,770,000) (11,835,000)(575,000) --
Sales and maturities of short-term investments 770,000 --
Change in restricted cash balance -- 805,184
--
------------ ----------------------- -----------
Net cash provided by (used in) investing activities 8,797,242 (874,898)(263,838) 289,239
FINANCING ACTIVITIES:
Proceeds from long-term debt -- 800,000
Payments on long-term debt (282,070) (126,040)(97,755) (91,984)
Payments on capital lease obligations (106,702) (70,591)(34,526) (31,123)
Proceeds from issuance of common stock, net 729,286 680,674
Proceeds from minority investment in subsidiary 5,093,973 --
Repurchase of common stock for treasury -- (877,159)
------------ ------------502,225 240,173
----------- -----------
Net cash provided by financing activities 5,434,487 406,884
------------ ------------369,944 117,066
----------- -----------
Effect of exchange rate changes on cash 36,185 --
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,544,561 (13,188,813)
------------ ------------3,107,072 (3,115,354)
----------- -----------
Cash and cash equivalents at beginning of period 42,428,841 27,681,704
55,619,981
------------ ----------------------- -----------
Cash and cash equivalents at end of period $ 31,226,265 $ 42,431,168
============ ============$45,535,913 $24,566,350
----------- -----------
Noncash investing and financing activities:
- - During the ninethree months ended September 30,March 31, 2007, the Company issued 79,441
shares of common stock as partial payment of amounts earned by employees
under the 2006 and 2005,Incentive Plan.
- - During the three months ended March 31, 2006 the Company entered into
capital lease obligations of $58,659 and $165,217, respectively.$19,479.
- - During the ninethree months ended September 30,March 31, 2006 the Company entered into a
license agreement under which the Company will pay 1,000,000 Euros over two
years. The estimated present value of the license is $1,122,338.
See accompanying notes to consolidated financial statements.
5
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006March 31, 2007
(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 (GAAP) 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 StatesGAAP 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,
2006.2007.
The balance sheet at December 31, 20052006 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
StatesGAAP 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, 20052006 filed with the
Securities and Exchange Commission.Commission (SEC).
(2) Settlement
In September 2004, the Company filed a suit against Stratagene alleging patent
infringement of two patents concerning the proprietary Invader chemistry. The
case was tried before a jury in August 2005, and the jury found that Stratagene
willfully infringed the Company's patents and that the patents were valid and
awarded $5.29 million in damages. The Court subsequently tripled that judgment
and awarded the Company interest and attorneys fees of $4.2 million. Stratagene
appealed the verdict to the Court of Appeals for the Federal Circuit in
Washington, D.C.
On January 29, 2007, the Company and Stratagene entered into an out-of-court
settlement regarding this litigation. Under the terms of the settlement
Stratagene paid the Company $10.75 million in cash to satisfy the outstanding
judgment and dropped its appeal in its entirety. The parties also agreed to
dismiss all litigation, including the suit filed by Stratagene against Third
Wave in the District of Delaware.
(3) Net LossIncome (Loss) Per Share
In accordance with accounting principles generally accepted in the United
States,GAAP, basic net lossincome (loss) per share has been computed
using the weighted-average number of shares of common stock outstanding during
the respective periods. Diluted net lossincome (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,March 31, 2006 and 2005 because they are
anti-dilutive.
The following table presents the calculation of basic and diluted net lossincome
(loss) per share:
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30MARCH 31,
-------------------------
---------------------------2007 2006 2005 2006 2005
----------- -----------
------------ ------------
Numerator:
Net loss $(5,152,589) $(7,379,943) $(14,262,895) $(17,314,412)income (loss) $ 4,766,248 $(4,383,447)
=========== ===========
============ ============
DenominatorDenominator:
Weighted average shares outstanding - basic 41,515,143 41,073,652 41,427,973 41,094,74042,025,463 41,310,561
Dilutive securities - stock options N/A N/A N/A1,859,000 N/A
----------- ----------- ------------ ------------
Weighted average shares outstanding - diluted 41,515,143 41,073,652 41,427,973 41,094,74043,884,463 41,310,561
Basic net lossincome (loss) per share $ (0.12)0.11 $ (0.18) $ (0.34) $ (0.42)(0.11)
Dilutive net lossincome (loss) per share $ (0.12)0.11 $ (0.18) $ (0.34) $ (0.42)(0.11)
(3)(4) Stock-Based Compensation
The Company has Incentive Stock Option Plans for its employees and Nonqualified
Stock Option Plans (collectively, the Plans) for employees and non-employees
under which an aggregate of 13,213,183 stock options and stock purchase rights
(including restricted stock units (RSUs)) may be granted. Options under the
Plans have a maximum life of ten years. Options vest at various intervals, as
determined by the compensation committee of the Board of Directors at the date
of grant. At September 30, 2006,March 31, 2007, approximately 2.42.5 million shares were available for
future grant under the plans.Plans.
6
Stock Options
The following table summarizes the stock option activity under the Plans for the
ninethree months ended September 30, 2006:
6
March 31, 2007:
WEIGHTED
AVERAGE AGGREGATE
NUMBER OF WEIGHTED AVERAGE CONTRACTUAL INTRINSIC
SHARES EXERCISE PRICE LIFE VALUE
------------------- ---------------- ----------- --------------------
Outstanding at December 31,2005 9,101,298 $4.3431,2006 7,787,607 $4.12
Granted 909,250 2.9919,829 5.34
Exercised (272,661) 2.05(189,278) 2.65
Forfeited (1,489,072) 4.96
----------(18,825) 6.78
--------- -----
Outstanding at September 30, 2006 8,248,815March 31, 2007 7,599,333 $4.15 6.3 8,019,0296.1 $10,859,359
Options exercisable at September 30, 2006 5,688,164 $4.49March 31, 2007 5,599,711 $4.37 5.6 5,191,384$ 7,736,770
The weighted-averageweighted average fair value of stock options granted in the ninethree months
ended September 30,March 31, 2007 and 2006 was $3.29 and 2005 was $1.90 and $3.05,$1.88, respectively, using the
Black-Scholes option-pricing model.
The calculations were made assuming a
dividend yield of 0%, a weighted-average expected option life of five yearsfor the three months ended March 31, 2007 and a weighted-average risk-free interest rate of 4.83%, and 4.28% in 2006
and 2005,
respectively. The volatility factor used inusing the Black-Scholes model for 2006 and
2005 was 74% and 81%, respectively. The expected life of stock options is
estimated based on historical experience.following assumptions:
2007 2006
---- ----
Expected term (years) 5 5
Risk-free interest rate 4.5% 4.7%
Expected volatility 69% 77%
Expected dividend yield 0% 0%
Forfeiture rate 25% 25%
The expected volatility is estimated
based on the historical financial datavolatility of the Company's
stock. The Company uses historical option activity to estimate the forfeiture
rate, expected term of the options and the option exercise and employee
termination behavior. The Company considers all employees to have similar
exercise behavior and therefore has not identified separate homogeneous groups
for valuation. The expected term of the Company.options represents the period of time
the options granted are expected to be outstanding. The risk-free interest rates wererate
for periods within the contractual term of the options is based on the U.S.
Treasury constant maturity interest rate whosewhich has a term that is consistent
with the expected life of the stock options.
As of September 30,
2006,March 31, 2007, there was approximately $4.5$3.2 million of total unrecognized
compensation cost related to the stock options granted under the plans.Plans. The
intrinsic value of the shares exercisedacquired upon exercise of stock options in the
ninethree months ended September 30,March 31, 2007 and 2006 and 2005 was $0.4$0.5 million and $0.6$0.2 million,
respectively.
Restricted Stock Units
The Company's stock plan also permits the granting of restricted stock units to
eligible employees and non-employee directors. Restricted stock units are
payable in shares of Company stock upon vesting. The restricted stock units vest
at various intervals as determined by the compensation committee of the Board of
Directors at the date of grant. The following table presents a summary of the
Company's nonvested restricted stock units granted to employees as of September 30, 2006.March 31,
2007.
NINETHREE MONTHS ENDED
SEPTEMBER 30, 2006MARCH 31, 2007
----------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES FAIR VALUE
--------- ----------------
Nonvested shares of restricted stock units at December 31, 2005 -- $ --2006 109,079 $2.84
Granted 112,530 2.8483,789 0.29
Vested --(79,441) --
Forfeited (3,451)(1,300) 2.84
------- -----
Nonvested shares of restricted stock units at September 30, 2006 109,079 $2.84March 31, 2007 112,127 $2.95
======= =====
As of September 30, 2006,March 31, 2007, there was approximately $0.3 million of total unrecognized
compensation cost related to the nonvested restricted stock units granted under
the plan. The expense is expected to be recognized over the vesting period.
Compensation expense
7
related to restricted stock units was approximately $28,000$20,000 in the ninethree months
ended September 30, 2006. AsMarch 31, 2007. The aggregate intrinsic value of September 30, 2006, there were 109,079the restricted stock
units outstanding.outstanding at March 31, 2007 was $0.6 million.
Employee Stock Purchase Plan
The Company also has an Employee Stock Purchase Plan (Purchase Plan) under which
an aggregate of 1,256,800 common shares may be issued. All employees are
eligible to participate in the Purchase Plan. Eligible employees may make
contributions through payroll deductions of up to 10% of their compensation. The
price of common stock purchased under the Purchase Plan is 85% of the lower of
the fair market value of the common stock at the beginning or end of the
offering period. There were 67,267 and 57,428no shares sold to employees in the ninethree months
ended September 30,March 31, 2007 and 2006, and 2005, respectively. At September 30,
2006,March 31, 2007, approximately
364,000306,000 shares were available for issuance under the Purchase Plan.
Review of Stock Option Grants and Procedures
In October 2006, the Company's audit committee concluded a voluntary
investigation of the Company's historical stock option granting practices and
related accounting. This investigation, which was conducted with the assistance
of outside legal counsel, covered the timing, pricing and authorization of all
the Company's stock option grants made since the Company's initial public
offering in February 2001. Based on this review, the Company determined that it
used incorrect measurement dates with respect to the accounting for certain
previously granted stock options, primarily during the years 2002 through 2004.
The audit committee concluded that deficiencies in the grant process were the
result of administrative errors and misunderstanding of applicable accounting
rules, and were not attributable to fraud or intentional misconduct.
7
Based upon the Company's determination that certain of its historic stock option
grants had intrinsic value on the grant date, the Company had unrecorded
non-cash stock compensation expense. The Company has concluded that the
additional unrecorded non-cash stock compensation expense is not material to its
financial statements in any of the periods to which such charges would have
related, and therefore will not revise its historic financial statements.
The Company recorded an additional non-cash stock-based compensation charge
totaling $176,000 in the quarter ended September 30, 2006, representing the
effect of the adjustment resulting from the non-cash charges discussed above
that relate to 2006. Additionally, the Company expects to record a
reclassification between accumulated deficit and additional paid in capital,
within the equity section of the consolidated balance sheet to be included in
its Form 10-K for the fiscal year ending December 31, 2006, of approximately
$731,000. This reclassification represents the effect of the adjustment
resulting from the non-cash charges discussed above that related to fiscal 2005
and prior years. Neither the current period charge nor the reclassification
affect the Company's cash position. There were no significant income tax effects
relating to this adjustment for the Company.
Prior to January 1, 2006, we used the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for stock options granted
under our Plans. Generally, no compensation cost was required to be recognized
for options granted to employees because the options had an exercise price equal
to the market value per share of the underlying common stock on the date of
grant. Prior to 2006, the Purchase Plan was considered noncompensatory under APB
Opinion No. 25 and, therefore, no expense was recorded for the 15% discount.
Prior to January 1, 2006, options granted to non-employee consultants were
accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force
(EITF) Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," and therefore were measured based upon their fair value as calculated
using the Black-Scholes option pricing model. The fair value of options granted
to non-employees was periodically remeasured as the underlying options vested.
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment", which is a revision of SFAS No. 123. SFAS No. 123(R)
permits public companies to adopt its requirements using one of two methods: (1)
a "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No.
123(R) for all-share based payments granted after the effective date and (b)
based on the requirements of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date; or (2) a "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. The Company has
adopted the modified prospective approach.
As prescribed in the modified prospective approach, prior periods have not been
restated to reflect the effects of implementing FAS 123(R). For the three and
nine month periods ended September 30, 2005, the pro forma stock option expense,
net loss and net loss per share are as follows:
THREE MONTHS NINE MONTHS
------------ ------------
Net loss, as reported $(7,379,943) $(17,314,412)
Add: Stock-based compensation, as reported 422,357 (354,827)
Add: Stock-based compensation, using fair
value method (1,217,295) (3,557,025)
Add: Stock-based compensation, related to
the employee stock purchase plan
determined under SFAS No. 123 0 (95,847)
----------- ------------
Pro forma net loss $(8,147,881) $(21,322,111)
=========== ============
Net loss per share, basic and diluted, as reported $ (0.18) $ (0.42)
Pro forma net loss per share, basic and diluted $ (0.20) $ (0.52)
The stock-based compensation expense attributable to SFAS No. 123(R) for
the three months and nine months ended September 30, 2006 was $0.6 million and
$2.0 million, respectively.
8
(4)(5) Inventories
Inventories 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,MARCH 31, DECEMBER 31,
2007 2006
2005
----------------------- ------------
Raw materials $2,344,098 $1,486,166$2,434,091 $2,283,852
Finished goods 1,521,610 1,271,1011,269,049 1,367,177
Work in process 383,589 165,916821,693 517,880
Reserve for excess and obsolete inventory (830,000) (675,000)(725,810) (655,000)
---------- ----------
Total inventories $3,419,297 $2,248,183$3,799,023 $3,513,909
========== ==========
(5) Stock(6) Stock-based Compensation
Included in operating expenses are the following stockstock-based compensation
charges, net of reversalsforfeitures related to terminated employees:
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,MARCH 31,
-------------------
----------------------2007 2006 2005 2006 2005
-------- --------
---------- ---------
Cost of goods sold $ 43,63623,723 $ 40,143 $ 105,945 $ 27,16340,913
Research and development 155,982 1,969 476,892 (499,113)124,433 155,790
Selling and marketing 183,728 33,150 565,234 45,557122,713 198,946
General and administrative 551,821 347,095 1,572,746 71,566344,953 570,897
-------- --------
---------- ---------
Total stockstock-based compensation $935,167 $422,357 $2,720,817 $(354,827)
--------$615,822 $966,546
-------- ---------- -----------------
(6)(7) Comprehensive LossIncome (Loss)
The components of comprehensive lossincome (loss) are as follows:
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------MARCH 31,
------------------------
2007 2006
2005 2006 2005---------- ----------- ----------- ------------ ------------
Net loss $(5,152,589) $(7,379,943) $(14,262,895) $(17,314,412)income (loss) $4,766,248 $(4,383,447)
Other comprehensive income (loss):
Foreign currency translation adjustments (114,167) 4,625 (159,474) 9,18717,929 36
---------- -----------
----------- ------------ ------------
Comprehensive loss $(5,266,756) $(7,375,318) $(14,422,369) $(17,305,225)income (loss) $4,784,177 $(4,383,411)
========== =========== =========== ============ ============
9
(7)(8) Amortizable Intangible Assets
Amortizable intangible assets consist of the following:
SEPTEMBER 30, 2006MARCH 31, 2007 DECEMBER 31, 20052006
-------------------------- --------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------ ----------- ------------
Costs of settling patent litigation $10,533,248 $ 9,020,192$9,772,568 $10,533,248 $ 7,891,628
Reacquired marketing and distribution rights 2,211,111 2,211,111 2,211,111 2,211,111$9,396,380
Technology license 915,828 30,528 915,828 7,632
Trademark 91,583 3,052 91,583 763
Customer agreements 38,000 38,000 38,000 38,000
----------- ---------- ----------- ----------- ---------------------
Total $12,782,359 $11,269,303 $12,782,359 $10,140,739$11,578,659 $9,844,148 $11,578,659 $9,442,775
=========== ========== =========== =========== =====================
(8)8
(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 and revisions to
the building lease.
The following table shows the changes in the restructuring accrual since
December 31, 2005. The restructuring accrual was reduced in the quarter ended
September 30, 2006 due to an amendment to the building lease that resulted in
lower lease payments over the original remaining life of the lease.2006. The remaining restructuring balance of $0.7$0.6 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, 2005 $ 957,5632006 $631,260
Payments made (117,767)
Adjustment (180,000)
=========(31,390)
--------
Accrued restructuring balance at September 30, 2006 $ 659,796
=========March 31, 2007 $599,870
========
(9)(10) Other Long-term Liabilities
Other long-term liabilities consist of the long-term portion of the following
items:
SEPTEMBER 30, 2006MARCH 31, DECEMBER 31,
2005
------------------ -----------------2007 2006
---------- ------------
License payments $1,291,896 $1,430,942$ 949,446 $1,048,260
Long-term Incentive Plan 1,667,289 1,312,8411,693,767 1,885,989
Restructuring 536,488 775,174474,564 505,681
Rent 1,138,909 1,159,0941,067,722 1,103,313
Other 266,058 706,853200,000 233,029
---------- ----------
$4,900,640 $5,384,904$4,385,499 $4,776,272
========== ==========
(10) Shareholders' Equity
The Board of Directors had authorized a program for the repurchase by the
Company of up to 5% of its outstanding common stock. Third Wave has repurchased
218,000 shares of common stock as of December 31, 2005 for $877,159. The program
expired on December 31, 2005.
10
(11) New Accounting PronouncementsIncome Taxes
On December 16, 2004,July 13, 2006, the Financial Accounting Standards Board (FASB)("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS
No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
The Company adopted SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods: (1) a
"modified prospective" method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of SFAS No. 123(R) for
all-share based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123(R) that remain unvested on the effective date; or
(2) a "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption. The Company adopted the modified
prospective approach.
In September 2006, the FASB issued FINFinancial Interpretation ("FIN") No. 48, "AccountingAccounting for Uncertainty in Income
Taxes" which - An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise'sentity's financial
statements in accordance with SFAS No. 109, "AccountingAccounting for Income Taxes." This interpretationTaxes, and
prescribes a recognition threshold and measurement attributeattributes for the financial
statement recognition and
measurementdisclosure of a tax positionpositions taken or expected to be taken inon a tax
return. This interpretation alsoUnder FIN No. 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006.
The adoptionCompany adopted the provisions of InterpretationFIN No. 48 on January 1, 2007. The total
amount of unrecognized tax benefits as of the date of adoption was not
significant. As such, there are no unrecognized tax benefits included in the
balance sheet that would, if recognized, affect the effective tax rate.
9
The Company's practice is not expected to have any
significant effectrecognize interest and/or penalties related to
income tax matters in income tax expense. The Company had no accruals for
interest and penalties on the Company's consolidated financial positionBalance Sheets at December 31, 2006 and
at March 31, 2007, and has not recognized any interest or resultspenalties in the
Statement of operations.
In September 2006, the Securities and Exchange Commission ("SEC) issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB 108 provides guidance on the consideration of effects of the
prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. The SEC staff believes registrants must
quantify errors using both a balance sheet and income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 is effectiveOperations for the first annual period ending after November
15, 2006 with early application encouraged.quarter of 2007.
The Company adopted SAB 108is subject to taxation in the quarter ended September 30, 2006.U.S. and various state jurisdictions.
All of the Company's tax years are subject to examination by the U.S. and state
tax authorities due to the carryforward of unutilized net operating losses and
research and development credits.
The adoption of this guidance hasFIN No. 48 did not had a
material impact on the Company's consolidated financial statements.
In May 2005,condition,
results of operations or cash flows. At March 31, 2007, the FASB issued SFAS No. 154, "Accounting ChangesCompany had deferred
tax assets of $63.2 million. The deferred tax assets are primarily composed of
federal and Error
Corrections - a replacement of Accounting Principles Board Opinion ("APB") No.
20state tax net operating loss carryforwards and SFAS No. 3," which changes the requirements for the accounting for,federal and reporting of, a change in accounting principle. SFAS No. 154 is effective for
accounting changesstate
research and correction of errors made in fiscal years beginning after
December 15, 2005; however, the statement does not change the transition
provisions of any existing accounting pronouncements. The adoption of this
guidance has not had a material impact ondevelopment credit carryforwards. Due to uncertainties surrounding
the Company's consolidated financial
statements.ability to generate future taxable income to realize these assets,
a full valuation allowance has been established to offset the Company's net
deferred tax asset. Additionally, the future utilization of the Company's net
operating loss and research and development credit carryforwards to offset
future taxable income may be subject to a substantial annual limitation as a
result of ownership changes that may have occurred previously or that could
occur in the future. Any carryforwards that will expire prior to utilization as
a result of such limitations will be removed from deferred tax assets with a
corresponding reduction of the valuation allowance. Due to the existence of the
valuation allowance, future changes in our unrecognized tax benefits will not
impact the Company's effective tax rate.
(12) Reclassifications
Certain reclassifications have been made to the 20052006 financial statements to
conform to the 20062007 presentation.
1110
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, 2006March 31, 2007 and for the three and nine months ended September 30,March 31, 2007
and 2006 and 2005 should be read in conjunction with our Form 10-K for the fiscal year
ended December 31, 20052006 filed with the Securities and Exchange
Commission.SEC. 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.
OVERVIEW
Third Wave Technologies, Inc. develops and marketsis a leading molecular diagnostic reagents
for a variety of DNA and RNA analysis applications to meet the needs of our
customers. The Company offers a number of products based on its Invader(R)
chemistry for clinical testing. Third Wave offers in vitro diagnostic kits and
analyte specific, general purpose, and research use only reagents for nucleic
acid analysis.diagnostics company. We
believe our proprietary Invader(R)Invader chemistry, a novel, molecular chemistry, is
easier to use cost-effective, and enables higher
testing throughput.more accurate than competing technologies. These and other
advantages conferred by our chemistry enableare enabling us to provide clinicians and
researchers with superior molecular solutions.
Approximately 160More than 180 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.
Our
customer base is dominated by a small number of large clinical testing labs. We
regularly experience pricing and other competitive pressures in these accounts.
If for any reason,In August 2005, we are unable to maintain or renew our contracts,
particularly our contracts with key customers, or if, for any reason, we are
unable to maintain current pricing levels and/or volumes with our customers, or
are unable to manufacture the required product, our revenues and business may
suffer materially.
Third Wave has received clearance from the U.S. Food and Drug Administration
(FDA)(the FDA) for its Invader(R)our Invader UGT1A1 Molecular Assay. The Invader(R)Invader UGT1A1 Molecular
Assay is usedcleared for use to identify patients who may be at increased risk of
adverse reaction to the chemotherapy drug Camptosar(R) (irinotecan) by detecting
and identifying specific mutations in the UGT1A1 gene that have been associated
with that risk. Camptosar(R),Camptosar, marketed in the United StatesU.S. by Pfizer, Inc., is used to
treat colorectal cancer and has beenwas relabeled in 2005 to include dosing
recommendations based on a patient's genetic profile. In December 2006, we
submitted a cystic fibrosis product to the FDA. We also market a growing number
of products, including analyte specific reagents (ASRs). These ASRs allow
certified clinical reference laboratories to create assays that test for
infectious disease (e.g.,to perform hepatitis
C virus),virus genotyping, inherited disorders testing (e.g., Factor V Leiden), and a
host of other markersmutations associated with genetic predispositions and other
diseases. The FDA is currently reviewing draft guidance for the
regulation of ASRs. If the FDA issues guidance or takes other actions that limit
ASRs generally or limits Third Wave's ASRs specifically, such guidance or
actions could materially affect our business. The Company hasWe have developed or plansplan to develop a menu of molecular diagnostic
products for clinical applications that include genetic testing,
pharmacogenetics, and women's health. The CompanyWe also hashave a number of other Invader(R)Invader
products including those for research, agricultural and other applications.
The FDA is considering new guidelines for the use of ASRs. The enactment of new
guidelines or potential adverse market perceptions of using ASRs when FDA
cleared tests are available may present risks to our ability to continue to
successfully market and sell our ASR products.
Currently, one of our key strategic initiatives is the commercialization of our
Human Papillomavirus (HPV) offering. To bring this product to marketIn August 2006, we will
need to receivebegan clinical trials
for two HPV premarket approval known as a PMA, fromsubmissions to the FDA. Seeking a PMAWe expect to spend
between $12 million and $15 million on these submissions over three years. If
for our HPV offering (andany reason these trials are not successful or are substantially delayed or
for any other product offerings) will be costly and
there can be no assurance that we will receive FDA approval or that other
difficulties will not delay or prevent the successful commercialization of our
HPV offering. Ifreason we are unable to successfully commercialize our HPV
offering, our business and prospects maywould likely be materially adversely
affected.impacted. Additionally, we anticipate significant competition in the HPV market
as additional large competitors have announced plans to enter the market in the
near future. This competition may have a significant impact on the success of
our commercialization of our HPV offering.
In January 2007, Digene Corporation initiated legal proceedings against us over
our HPV products. See Part II, Item 1 -- Legal Proceedings. Should the outcome
of this action be unfavorable, the Company's business, financial condition,
results of operations and cash flows could be materially adversely affected.
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 submissions for FDA clearances or approvals and intellectual
property litigation.
1211
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.GAAP. 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
disclosuredisclosures 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.
REVENUE RECOGNITION
Revenue from product sales is recognized upon delivery which is generally when
the title passes to the customer, provided that the Company has completed all
performance obligations and the customer has accepted the products. Customers
have no contractual rights of return or refunds associated with product sales.
Consideration received in multiple element arrangements is allocated to the
separate units based upon their relative fair values. The multiple element
arrangements involve contracts with customers in which the Company is selling
reagent products and leasing equipment to the customer for use during the term
of the contract. Based upon the guidance in paragraph 9 of EITF No. 00-21
"Revenue Arrangements with Multiple Deliverables", both the reagents and
equipment have value to the customer on a standalone basis, there is objective
and reliable evidence of fair value for both the reagents and equipment and
there are no rights of return. The Company has sold both the reagents and
equipment separately, and therefore is able to determine a fair value for each.
The respective fair values are used to allocate the proceeds received to each of
the elements for purposes of recognizing revenue.
Grant and development revenues consist primarily of research grants from agencies of the federal
government and revenue from companies with which the
Company has established strategic alliances, the revenue from which is recognized as research is performed.
Payments received which are related to future performance are deferred and
recorded as revenue when earned. Grant payments designated to purchase specific
assets to be used in the performance of a contract are recognized as revenue
over the shorter of the useful life of the asset acquired or the contract.
License and royalty revenue include amounts earned from third parties for
licenses of the Company's intellectual property and are recognized when earned
under the terms of the related agreements. License revenues are generally
recognized upon receipt unless the Company has continuing performance
obligations, in which case the license revenue is recognized ratably over the
period of expected performance.
RESTRUCTURING AND OTHER CHARGES
The restructuring and other charges resulting from the restructuring plan in the
third quarter of 2002 have 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 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.
1312
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 the fair value less costs to sell is
lower than the 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 test wasis completed
in the quarter ended September 30, 2006 and resulted in no impairment.30.
STOCK-BASED COMPENSATION EXPENSE
PriorWe have adopted SFAS No. 123(R) to 2006, we accountedaccount for share-based payments to
employees using APB
Opinion No. 25's intrinsic value method and, as such, generally recognized no
compensation cost for employee stock options when granted. On January 1, 2006 we
adopted SFAS No. 123(R) asemployees. As a result, of which we recognize expense for all share-based payments to
employees, including grants of employee stock options and RSUs, based on their
fair values. We have adopted the modified prospective transition
method as permitted by SFAS No. 123(R).
In October 2006, our audit committee concluded a voluntary investigation of the
Company's historical stock option granting practices and related accounting.
This investigation, which was conducted with the assistance of outside legal
counsel, covered the timing, pricing and authorization of all our stock option
grants made since our initial public offering in February 2001. Based on this
review, the Company determined that it used incorrect measurement dates with
respect to the accounting for certain previously granted stock options,
primarily during the years 2002 through 2004. The audit committee concluded that
deficiencies in the grant process were the result of administrative errors and
misunderstanding of applicable accounting rules, and were not attributable to
fraud or intentional misconduct.
We recorded an additional non-cash stock-based compensation charge totaling
$176,000 in the quarter ended September 30, 2006, representing the effect of the
adjustment resulting from the non-cash charges discussed above that relate to
2006. Additionally, we expect to record a reclassification between accumulated
deficit and additional paid in capital, within the equity section of the
consolidated balance sheet to be included in our Form 10-K for the fiscal year
ending December 31, 2006, of approximately $731,000. This reclassification
represents the effect of the adjustment resulting from the non-cash charges
discussed above that related to fiscal 2005 and prior years. Neither the current
period charge nor the reclassification affect our cash position. There were no
significant income tax effects relating to this adjustment for the Company.
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 or within the period defined by the expiration date of the
product, 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 inventoriesinventory (including inventory that we
determine to be obsolete based on criteria such as changing manufacturing
processes and technologies.technologies). At September 30, 2006,March 31, 2007, our inventory reserves were
$830,000,approximately $726,000, or 20%16% of our $4.2$4.5 million total gross inventories.
NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004,July 13, 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS
No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.
14
The Company adopted SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods: (1) a
"modified prospective" method in which compensation cost is recognized beginning
with the effective date (a) based on the requirements of SFAS No. 123(R) for
all-share based payments granted after the effective date and (b) based on the
requirements of SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123(R) that remain unvested on the effective date; or
(2) a "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures either (a) all prior periods presented or (b)
prior interim periods of the year of adoption. The Company adopted the modified
prospective approach.
In September 2006, the FASB issued FINFinancial Interpretation (FIN) No. 48, "AccountingAccounting for Uncertainty in Income
Taxes" which - An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise'sentity's financial
statements in accordance with SFAS No. 109, "AccountingAccounting for Income Taxes." This interpretationTaxes, and
prescribes a recognition threshold and measurement attributeattributes for the financial
statement recognition and
measurementdisclosure of a tax positionpositions taken or expected to be taken inon a tax
return. This interpretation alsoUnder FIN No. 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006.
The adoptionCompany adopted the provisions of InterpretationFIN No. 48 on January 1, 2007. The total
amount of unrecognized tax benefits as of the date of adoption was not
significant. As such, there are no unrecognized tax benefits included in the
balance sheet that would, if recognized, affect the effective tax rate.
The Company's practice is not expected to have any
significant effectrecognize interest and/or penalties related to
income tax matters in income tax expense. The Company had no accruals for
interest and penalties on the Company's consolidated financial positionBalance Sheets at December 31, 2006 and
at March 31, 2007, and has not recognized any interest or resultspenalties in the
Statement of operations.
In September 2006, the Securities and Exchange Commission ("SEC) issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB 108 provides guidance on the consideration of effects of the
prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. The SEC staff believes registrants must
quantify errors using both a balance sheet and income statement approach and
evaluate whether either approach results in quantifying a misstatement that,
when all relevant quantitative and qualitative factors are considered, is
material. SAB 108 is effectiveOperations for the first annual period ending after November
15, 2006 with early application encouraged.quarter of 2007.
The Company adopted SAB 108is subject to taxation in the quarter ended September 30, 2006.U.S. and various state jurisdictions.
All of the Company's tax years are subject to examination by the U.S. and state
tax authorities due to the carryforward of unutilized net operating losses and
research and development credits.
The adoption of this guidance hasFIN No. 48 did not had a
material impact on the Company's consolidated financial statements.
In May 2005,condition,
results of operations or cash flows. At March 31, 2007, the FASB issued SFAS No. 154, "Accounting ChangesCompany had deferred
tax assets of $63.2 million. The deferred tax assets are primarily composed of
federal and Error
Corrections - a replacement of Accounting Principles Board Opinion ("APB") No.
20state tax net operating loss carryforwards and SFAS No. 3," which changes the requirements for the accounting for,federal and reporting of, a change in accounting principle. SFAS No. 154 is effective for
accounting changesstate
research and correction of errors made in fiscal years beginning after
December 15, 2005; however, the statement does not change the transition
provisions of any existing accounting pronouncements. The adoption of this
guidance has not had a material impact ondevelopment credit carryforwards. Due to uncertainties surrounding
the Company's consolidated financial
statements.
15ability to generate future taxable income to realize these assets,
a full valuation allowance has been established to offset the Company's net
deferred tax asset. Additionally, the future utilization of the Company's net
operating loss and research and development credit carryforwards to offset
future taxable income may be subject to a substantial annual limitation as a
result of ownership changes that may have occurred previously or that could
occur in the future. Any carryforwards
13
that will expire prior to utilization as a result of such limitations will be
removed from deferred tax assets with a corresponding reduction of the valuation
allowance. Due to the existence of the valuation allowance, future changes in
our unrecognized tax benefits will not impact the Company's effective tax rate.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30,March 31, 2007 and 2006
and 2005
NET LOSS.INCOME (LOSS). Net lossincome for the three months ended September 30, 2006March 31, 2007 improved
to $5.2$4.8 million from $7.4a net loss of $4.4 million for the corresponding period of
2005. Net loss
for2006. The increase in net income was due to the nine months ended September 30, 2006 improved to $14.3impact of the $10.7 million of
other income from $17.3 million for the corresponding periodsettlement of 2005.patent litigation with Stratagene
Corporation partially offset by an increase in operating loss.
REVENUES. Revenues for the three months ended September 30, 2006March 31, 2007 of $6.6$6.7 million
represented an increasea decrease of $1.4$1.2 million, compared to revenues of $5.2$7.9 million for
the corresponding period of 2005. Revenues for the nine months ended
September 30, 2006 of $21.2 million represented an increase of $3.1 million,
compared to revenues of $18.1 million for the corresponding period of 2005.2006. Following is a discussion of changes in
revenues:
Clinical molecular diagnostic product revenue increased to $5.4$6.0 million in the
quarter ended September 30, 2006March 31, 2007 from $4.0$4.7 million in the quarter ended September 30, 2005. Clinical molecular diagnostic product revenue increased to
$15.1 million in the nine months ended September 30, 2006 from $11.4 million in
the nine months ended September 30, 2005.March 31,
2006.
Research product revenues increaseddecreased to $1.2$0.6 million in the three months ended
September 30, 2006March 31, 2007 from $1.0$3.0 million in the three months ended September 30,
2005. Research product revenues decreased to $5.8 million in the nineMarch 31, 2006. The
three months ended September 30,March 31, 2006 from $6.1 millionwas the last quarter in which we received
substantial Japanese research revenue.
Significant Customers. In the ninethree months ended September
30, 2005. The decrease in research product sales during 2006 resulted from a
decrease in genomic research product sales to a Japanese research institute for
use by several end users. The decrease in research revenue from the Japanese
research institute was partially offset by an increase in revenue from our Agbio
business.
Significant Customers. WeMarch 31, 2007, we generated
$2.8$2.5 million, or 13%38% of our revenues,revenue, from sales to a major Japanese research institute for use by several end-users during
the nine months ended September 30, 2006,small number of large
clinical testing laboratories compared to $3.6$2.1 million, or 20%26% of our revenues duringrevenue,
in the nine months ended September 30, 2005. In addition, we
generated $2.2 million or 10%same period of our revenues, from sales to a large clinical
lab during the nine months ended September 30, 2006.
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.other intangible assets. For the three months ended September 30, 2006,March 31, 2007, cost of
goods sold increaseddecreased to $2.2$2.0 million, compared to $1.6$2.2 million for the
corresponding period of 2005. For the nine months ended September 30, 2006, cost of goods sold
increased to $6.3 million, compared to $5.4 million for the corresponding period
of 2005.2006. The increasedecrease in the three and nine month periodsperiod was
primarily due to the increasedecrease in sales volume, amortization of new licenses and the write-off of
defective inventory due to a supplier relocation in the third quarter.volume.
RESEARCH AND DEVELOPMENT EXPENSES. Our research activities are focused on moving
our technology into broader markets. Our development activities are focused on
new products to expand our molecular diagnostics menu. 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, (including clinical trials to validate the performance of our products)
and enhancement of our products, and acquisition of technologies 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, 2006March 31, 2007 were
$3.5$5.1 million, compared to $2.1$2.3 million for the three months ended September 30, 2005. Research
and development expenses for the nine months ended September 30, 2006 were $8.8
million, compared to $6.6 million for the nine months ended September 30, 2005.March 31,
2006. The increase in research and development expenses was primarily due to an
increase in personnel and product development expense (including clinical trial
costs incurred by us in pursuit of FDA premarket approval for our HPV
offering), and an increase
in stock based compensation expense of $0.2 million and $1.0 million in the
three and nine month periods, respectively, compared to the same periods in
2005.offerings). We will continue to invest in research and development, and
expenditures in this area will increase as we expand our product development
efforts. In addition, as the Company moves towards consideration of FDA cleared
or approved products, there will be increased expenses attributed to these
activities.
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, 2006March 31, 2007 were $2.7$2.6 million, a decrease of $1.0$0.4 million, compared to $3.7$3.0
million for the corresponding period of 2005. Selling and marketing
expenses for the nine months ended September 30, 2006 were $8.6 million, a
decrease of $1.6 million, compared to $10.2 million for the corresponding period
of 2005.2006. The decrease in selling and
marketing expenses was due to a decrease in personnel related and equipment expense, offset by an
16
increase in stock based compensation expense of $0.2 million and $0.5 million in
the three and nine month periods, respectively,expenses, compared
to the same periods in 2005.2006.
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 increaseddecreased to $3.5$2.9 million in
the three months ended September 30, 2006,March 31, 2007, from $2.9$4.1 million for the corresponding
period in 2005. General and administrative expenses increased to
$11.5 million in the nine months ended September 30, 2006, from $8.5 million for
the corresponding period in 2005.2006. The increasedecrease in general and administrative expense was due to an increasea
decrease in personnel related expense, legal fees related to our patents and
the
equity investment in our Japan subsidiary, a sales tax charge and an increase in
stock based compensation expense of $0.2 million and $1.5 million in the three
and nine month periods, respectively compared to the same periodsperiod in 2005.2006. We
anticipate that general and administrative expense for the year will be at the
same level as prior year.
LITIGATION EXPENSE. Litigation expense consists of legal fees and other costs
associated with patent infringement and other lawsuits. Litigation expense
decreased to $0.3$0.4 million in the three months ended September 30, 2006March 31, 2007 from $2.7$1.0
million in the
14
corresponding period in 2005. Litigation expense decreased to
$1.4 million in the nine months ended September 30, 2006 from $5.2 million in
the corresponding period in 2005.2006. The decreases were the result of the decreased
litigation activity due to the resolution of the lawsuits with Innogenetics,
Chiron Corporation, Bayer Corporation, and Digene Corporation. We anticipate
litigation expense to remain below the 2005 levels for the remainder of the
year.
IMPAIRMENT. In the nine months ended September 30, 2005 an impairment charge of
$0.2 million was recorded for the loss on equipment that was sold.
RESTRUCTURING. In the three and nine months ended September 30, 2006 a credit of
$0.2 million was recorded to adjust the restructuring accrualincrease throughout 2007 due to an
amendment to the building lease.lawsuit with Digene
Corporation (see Part II, Item 1: Legal Proceedings).
INTEREST INCOME. Interest income for the three months ended September 30,March 31, 2007 and
2006 and 2005 was $0.4$0.5 million and $0.5 million, respectively. Interest income for
the nine months ended September 30, 2006 and 2005 was $1.1 million and $1.2$0.4 million, respectively.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2006
and 2005March 31, 2007 was approximately $0.1 million. Interest expense for the nine months
ended September 30, 2006 and 2005 was $0.2 million and
$0.3 million respectively.compared to $56,000 in the corresponding period in 2006. The
increase in interest expense was due to the interest accretion on the
convertible note payable entered into in December 2006.
OTHER INCOME (EXPENSE). Other expenseincome for the three months ended September 30,
2006March 31, 2007
was approximately $0.1$10.7 million compared to $31,000expense of $19,000 for the same period in 2005.2006.
Other expense forincome included $10.75 million from the nine months ended September 30, 2006 was
approximately $0.1 million compared to $0.3 million for the same period in 2005.
The change in other expense was primarily due to the adjustments related to
foreign currency transactions in the periods.settlement of patent litigation
with Stratagene Corporation.
MINORITY INTEREST. Minority interest for the three and nine months ended September 30, 2006March 31, 2007
was $65,000 and $106,000, respectively.$96,000. Minority interest represents Third Wave Japan's minority investors'
share of the equity and earnings of the subsidiary.
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, product sales, a convertible notenotes and an initial public offering.
As of September 30, 2006,March 31, 2007, we had cash and cash equivalents and short-term
investments of $33$47.1 million.
Net cash used in operations for the nine months ended September 30,In April 2006 was
$10.7we raised $5.1 million compared to $12.7 million in the corresponding period in 2005.
The change was primarily due to lower operating losses.
Net cash provided by investing activities for the nine months ended September
30, 2006 was $8.8 million, compared to net cash used of $0.9 million in the
corresponding period in 2005. Investing activities included capital expenditures
of $0.6 million in the nine months ended September 30, 2006 versus $0.3 million
for the same period in 2005. Investing activities in the nine months ended
September 30, 2006 included the payment on license fee arrangements of $0.7
million and a change in the restricted cash balance of $0.8 million. Investing
activities in the nine months ended September 30, 2005 also included proceeds from the sale of equipment of $0.2 million. In addition, net cash provided by
investing activities included $9.3 million from the maturity of short term
investments in the nine months ended September 30, 2006, compared to cash usage
of $0.8 million to purchase short-term investments in 2005.
17
Net cash provided by financing activities was $5.4 million in the nine months
ended September 30, 2006 compared to $0.4 million in 2005. Cash provided by
financing activities in the nine months ending September 30, 2006 consisted of
proceeds from the sale of common stock under the Company's employee stock
purchase plan and stock option plans of $0.7 million compared to $0.7 million in
the corresponding period of 2005. In the nine months ended September 30, 2006,
$0.3 million was used to repay debt, compared to $0.1 million in the same period
in 2005. Additionally, in the nine months ended September 30, 2006 and 2005,
$107,000 and $71,000 was used for capital lease obligations, respectively.
Financing activities in the nine months ended September 30, 2005 also included
proceeds from long-term debt of $0.8 million and the repurchase of common stock
for treasury of $0.9 million. Financing activities in the nine months ended
September 30, 2006 also included proceeds from a minority equity
investment in our Japan subsidiary of $5.1 million.subsidiary. The proceeds from the equity investment are
required to be used in the operations of our Japan subsidiary.
In December 2006 we sold $20,000,000 (at maturity) of Convertible Senior
Subordinated Zero-Coupon Promissory Notes (the "Notes") to an investor for total
proceeds of $14,881,878 (the "Purchase Price"). The Notes will mature on
December 19, 2011. The Notes do not bear cash interest but accrue original issue
discount on the Purchase Price at the rate of 6.00% per year compounded
semiannually (the Purchase Price plus such accrued original issue discount, the
"Accreted Value"). So long as the Notes remain outstanding, we may not incur
indebtedness other than certain Permitted Indebtedness, as such term is defined
in the Notes.
The Notes are convertible at the holder's option into shares of Third Wave
common stock at a rate of 124.01565 shares per $1,000 of principal at maturity
($744 of Purchase Price) or a total of 2,480,313 shares. Pursuant to the
securities purchase agreement under which we sold the Notes, in January 2007 we
filed a registration statement with the Securities and Exchange Commission for
resale of the shares of common stock issuable upon conversion of the Notes.
After December 19, 2008, if Third Wave common stock closes above $9.00 (150% of
the initial conversion price) for 20 consecutive trading days, we may force the
conversion of the Notes so long as there is an effective registration statement
covering the Common Stock in place. At any time after December 19, 2009, we may
redeem the Notes for an amount equal to their Accreted Value. If either an event
of default occurs under the Notes (which would include failure to make any
payments due under the Notes and certain defaults under other indebtedness) or a
change of control occurs with respect to Third Wave, the holders of the Notes
may put the Notes to Third Wave for a purchase price equal to 110% of their
Accreted Value.
The Company has three notes payable to a bank in the original amounts of
$200,000, $270,000 and $800,000. These notes have respective final maturity
dates of July 1, 2007, October 1, 2009 and July 1, 2008, bear annual interest at
4.25%, 4.93%, and 5.2%, respectively, and require monthly principal and interest
payments. The borrowings under the notes payable are secured by short-term
investments consisting of certificates of deposit in the aggregate amount of
$775,000.$575,000. The Company has an available and unused $1,000,000 letter of credit
with the same bank that expires on September 1, 2007.
Net cash provided by operations for the three months ended March 31, 2007 was
$3.0 million, compared to net cash used of $3.5 million in the corresponding
period in 2006. The change was primarily due to the proceeds received from the
settlement of patent litigation with Stratagene Corporation.
Net cash used in investing activities for the three months ended March 31, 2007
was $0.3 million, compared to net cash provided of
15
$0.3 million in the corresponding period in 2006. Investing activities included
capital expenditures of $0.2 million in the three months ended March 31, 2007
and 2006. Investing activities in the three months ended March 31, 2007 included
the payment on license fee arrangements of $0.2 million compared to $0.3 million
in 2006. In addition, net cash provided by investing activities included $0.2
million from the maturity of short term investments in the three months ended
March 31, 2007. Investing activities in the three months ended March 31, 2006
also included a change in the restricted cash balance of $0.8 million.
Net cash provided by financing activities was $0.4 million in the three months
ended March 31, 2007 compared to $0.1 million in 2006. Cash provided by
financing activities in the three months ending March 31, 2007 consisted of
proceeds from the sale of common stock under the Company's employee stock
purchase plan and stock option plans of $0.5 million compared to $0.2 million in
the corresponding period of 2006. In the three months ended March 31, 2007 and
2006, $0.1 million was used to repay debt. Additionally, in the three months
ended March 31, 2007 and 2006, $35,000 and $31,000 was used for capital lease
obligations, respectively.
We believe that current cash reserves together with our ability to generate cash
through operations, financing activities and other sources will be sufficient to
support short-term and long-term liquidity requirements for current operations
(including annual capital expenditures). However, 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;
- the needs we may haveneed to pursue FDA clearances or approvals of our products;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in securing intellectual property rights, whether
through patents, licenses or otherwise;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights;
- the need to respond to competitive pressures;
- the possible acquisition of complementary products, businesses or
technologies; and
- the timing of capital expenditures
CONTRACTUAL OBLIGATIONS
During the quarter ended September 30, 2006 we amended our facility lease. As a
result of the amendment, our operating lease obligations have changed as follows
(in thousands):
FOURTH 2011 AND
TOTAL QUARTER 2006 2007-2008 2009-2010 THEREAFTER
---------- ------------ ---------- ---------- ----------
Pre-amendment operating lease obligation $ 10,481 $ 470 $ 3,986 $ 4,311 $ 1,714
(Decrease)/increase in obligation $ 542 $ (152) $ (291) $ (1,396) $ 2,381
Post-amendment operating lease obligation $ 11,023 $ 318 $ 3,695 $ 2,915 $ 4,095
18
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, litigation 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 discussed under the heading "Overview" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
of this Form 10-Q and in the "Risk Factors" and Management's Discussion and
Analysis of Financial Condition and Results of Operations sections of our annual
report on Form 10-K for the fiscal year ended December 31, 20052006 filed with the
Securities and Exchange Commission,SEC, 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.SEC. Except as required by
law, we undertake no obligation to update any forward-looking statements. We
expressly disclaim any obligation or undertaking to release publicly any updates
or
16
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions, or circumstances on which any such statements are based.
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. Our exposure to market risk was discussed in the
Quantitative and Qualitative Disclosures About Market Risk section of our annual
report on Form 10-K for the fiscal year ended December 31, 20052006 filed with the
Securities and Exchange Commission.SEC. There have been no material changes to such exposures during the thirdfirst
quarter of 2006.2007.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company's management, including our 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, our 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. There have been no
significant changes during the period covered by this report in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, internal controls over financial
reporting.
As a result of our review of Stock Option Grants and Procedures (see
Footnote 3 to the financial statements), subsequent to the period covered by
this report we modified our procedures for granting stock options to ensure
correct measurement dates are used in the future.
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.
In September 2004, we filed a suit against Stratagene Corporation in the
United States District Court for the Western District of Wisconsin. The
complaint alleged patent infringement of two of our patents concerning our
proprietary Invader(R)Invader technology by Stratagene's sale of its QPCR and QRTPCR Full
Velocity products. The case was tried before a jury in August 2005, and the jury
found that Stratagene willfully infringed our patents and that our patents were
valid. The jury awarded us $5.29 million in damages. The Court subsequently
entered a permanent injunction barring Stratagene from making, selling or
offering to sell its Full VelocityFullVelocity QPCR and QRT-PCR products and any other
products that practice our patented Invader(R)Invader methods. In December 2005, the Court
tripled the damages award to $15.9 million and ruled that Stratagene must pay
attorney fees of $4.2 million. In January 2006, the Court awarded additional
interest on the damages award in the amount of $485,716, increasing the total
damages amount to $16.4 million. Stratagene appealed the verdict to the Court of
Appeals for the Federal Circuit in Washington, D.C. Also in January 2006,
Stratagene posted a $21 million civil bond to stay payment of the judgment
while it conductsduring its appeal. Stratagene has
appealed the verdict, the award of enhanced damages, and the award of attorneys'
fees and costs to theThe Court of Appeals forheard argument in the Federal Circuit in Washington,
D.C. Appellate briefing was completedappeal on July 10, 2006. Oral arguments before
the
19
Appellate court are set for December
7, 2006. On January 29, 2007, we entered into an out-of-court settlement with
Stratagene regarding this litigation. Under the terms of the settlement
Stratagene agreed to pay us $10.75 million in cash to satisfy the outstanding
judgment and dropped its appeal in its entirety. Stratagene made this payment to
us in the first quarter of 2007. As discussed below, the parties also agreed to
dismiss all litigation, including the suit filed by Stratagene against Third
Wave in the District of Delaware.
In May 2005, Stratagene Corporation filed suit against us in the United
States District Court for the District of Delaware. The complaint allegesalleged patent
infringement of claims of two Stratagene patents relating to our Invader Plus(R)Plus
chemistry. The complaint was served on us in September 2005. Recently, at the
request of both parties,2005 and the Court rescheduled theset a
trial date toof April 7, 2008. As part of the out-of-court settlement we entered
into with Stratagene, discussed above, Stratagene dismissed this suit without
prejudice on February 13, 2007. Under the terms of the settlement Stratagene and
Third Wave agreed to resolve any infringement claims that may arise between the
parties in the future as well as any disputes relating to their settlement
agreement through binding arbitration. The parties also agreed to grant each
other covenants-not-to sue under specified conditions in exchange for the
payment of royalties and other fees.
In September 2005, Innogenetics filed suit against us in the United States
District Court for the Western District of Wisconsin. The complaint alleged that
our HCVg ASRs infringe a patent owned by Innogenetics relating to the detection
of the hepatitis C virus. In February 2006, we reached an agreement with
Innogenetics that resolved the litigation. In connection with the agreement,
Third Wave acquired a non-exclusive license to Innogenetics' patent for the
United States. The agreement includes certain opt-out rights for Third Wave, as
well as an option to extend both the term and global reach of the license.
In October 2005, we filed a declaratory judgment suit in the United States
District Court for the Western District of Wisconsin against Chiron Corporation
and Bayer Corporation seeking a ruling that our HCVg ASRs do not infringe any
valid claims of Chiron's
17
hepatitis C related patents. In February 2006, we reached an agreement with
Chiron and Bayer to dismiss the suit without prejudice. No licenses were granted
or taken under the agreement and no payment of any monies was made to any of the
companies.
Also in October 2005, we filed a declaratory judgment suit in the United
States District Court for the Western District of Wisconsin against Digene
Corporation seeking a ruling that our HPV ASRs do not infringe any valid claims
of Digene's human papillomavirus related patents. In January 2006, we reached an
agreement with Digene to dismiss the suit without prejudice. We also agreed that
neither party would file a suit against the other relating to the Digene HPVhuman
papillomavirus patents for one year. After this period expired, on January 11,
2007, Digene Corporation filed suit against us in the United States Court for
the Western District of Wisconsin. The Company intendscomplaint alleges patent infringement of
unidentified claims of a single patent related to vigorously pursue itsHPV type 52 by the Company's
HPV ASR product. We filed our response to Digene's complaint on February 28,
2007, which, in addition to denying the alleged infringement, claims against third
partiesalso asserted that
certain Digene sales practices violate certain anti-trust laws. The litigation
is currently in the discovery phase with a claim construction hearing scheduled
for June 22, 2007 and trial scheduled to vigorously defend itself against infringement claims brought
against it by third parties. Therebegin on February 19, 2008.
While no assurance can be no assurance, however,given regarding the outcome of the above matters,
based on information currently available, the Company believes that the
Companyresolution of these matters will prevail in these proceedingsnot have a material adverse effect on the
financial position or results of future operations of the Company. However,
because of the nature and inherent uncertainties of litigation, should the
outcome of any of thesethe actions be unfavorable, the Company's business, financial
condition, results of operations and cash flows could be materially adversely
affected.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in
our Form 10-K for the fiscal year ended December 31, 20052006 filed with the Securities and Exchange Commission.SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. - None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --HOLDERS. - None.
ITEM 5. OTHER INFORMATION.
- None.On April 24, 2007, the Company's board of directors adopted a revised
Code of Business Conduct that applies to all employees, officers,
directors and agents. Sections of the Code of Business Conduct that were
revised include the sections that cover conflicts of interest,
compliance with law and reporting of violations. A copy of the revised
Code of Business Conduct is available on our website at www.twt.com.
ITEM 6. EXHIBITSEXHIBITS.
The exhibits required to be filed as a part of this Report are listed in the
Exhibit Index.
2018
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THIRD WAVE TECHNOLOGIES, INC.
Date: November 8, 2006May 7, 2007 /s/ Kevin T. Conroy
---------------------------------------------------------------------------------
Kevin T. Conroy, Chief Executive Officer
Date: November 8, 2006May 7, 2007 /s/ Maneesh K. Arora
---------------------------------------------------------------------------------
Maneesh K. Arora, Chief Financial
Officer
2119
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE TO
- ----------- ----------- ----------------------------------- -------------------------------------------------- -------------------------------------
10.1 Amendment TwoEmployment Agreement between Cindy Ahn and Third Exhibit 10.24 to Leasethe Registrant's
Wave Technologies, Inc. dated September 1,March 12, 2007 Quarterly Report on Form 10-K for the
fiscal year ended December 31, 2006
by10.2 Employment Agreement between John Bellano and between
University Research Park, Inc. andExhibit 10.25 to the Registrant's
Third Wave Technologies, Inc. dated March 12, 2007 Quarterly Report on Form 10-K for the
fiscal year ended December 31, 2006
10.3 Employment Agreement between Jorge Garces and Exhibit 10.26 to the Registrant's
Third Wave Technologies, Inc. dated March 12, 2007 Quarterly Report on Form 10-K for the
fiscal year ended December 31, 2006
10.4 Employment Agreement between Greg Hamilton and Exhibit 10.27 to the Registrant's
Third Wave Technologies, Inc. dated March 12, 2007 Quarterly Report on Form 10-K for the
fiscal year ended December 31, 2006
10.5 Third Wave Technologies, Inc. 2007 Incentive Plan Exhibit 10.29 to the Registrant's
Quarterly Report on Form 10-K for the
fiscal year ended December 31, 2006
10.6 Third Wave Technologies, Inc. Long Term Incentive Exhibit 10.30 to the Registrant's
Plan No. 4 Quarterly Report on Form 10-K for the
fiscal year ended December 31, 2006
31.1 CEO's Certification Pursuant to Section 302 of the
Sarbanes Oxley Act of 2002
31.2 CFO's Certification pursuant to Section 302 of the
Sarbanes Oxley Act of 2002.2002
32 CEO and CFO Certification pursuant to 18 U.S.C.
Section 1350, of Chapter 63 of Title 18 of the
United States Code
2220