UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ________ to ________.
COMMISSION FILE NUMBER: 000-31745
THIRD WAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1791034
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
502 S. ROSA ROAD, MADISON, WI 53719
(Address of principal executive offices) (Zip Code)
(888) 898-2357
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check whether the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of March 31, 2004, was 40,159,810.
THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
<Table>
<Caption>
PAGE NO.
PART I FINANCIAL INFORMATION...............................................................
Item 1. Consolidated Financial Statements.............................................
Consolidated Balance Sheets as of March 31, 2004 and December 31,
2003..............................................................................
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003...........................................................
Consolidated Statements of Cash Flows for the three months ended March 31, 2004
and 2003..........................................................................
Notes to Consolidated Financial Statements........................................
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................
Item 4. Controls and Procedures.......................................................
PART II OTHER INFORMATION.................................................................
Item 1. Legal Proceedings.............................................................
Item 2. Changes In Securities And Use Of Proceeds.....................................
Item 3. Defaults Upon Senior Securities...............................................
Item 4. Submission Of Matters To A Vote Of Security Holders...........................
Item 5. Other Information.............................................................
Item 6. Exhibits And Reports On Form 8-K..............................................
SIGNATURES.................................................................................
EXHIBITS...................................................................................
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
<Table>
<Caption>
MARCH 31, 2004 DECEMBER 31, 2003
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 49,089,098 $ 47,015,746
Short-term investments 10,800,000 10,800,000
Receivables, net of allowance for doubtful accounts of $140,000
at March 31, 2004 and December 31, 2003 6,184,754 2,061,054
Inventories 3,027,846 1,394,046
Prepaid expenses and other 288,189 485,680
----------------- ----------------
Total current assets 69,389,887 61,756,526
Equipment and leasehold improvements:
Machinery and equipment 18,564,812 18,544,956
Leasehold improvements 2,108,038 2,099,104
----------------- ----------------
20,672,850 20,644,060
Less accumulated depreciation 12,708,277 12,116,813
----------------- ----------------
7,964,573 8,527,247
Intangible assets, net of accumulated amortization 5,274,936 5,651,124
Indefinite lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Other long term assets 2,754,817 2,989,752
----------------- ----------------
Total assets $ 86,881,497 $ 80,421,933
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,980,431 $ 4,955,434
Accrued payroll and related liabilities 1,877,309 2,802,297
Other accrued liabilities 1,341,739 1,776,250
Deferred revenue 117,500 67,760
Long-term debt due within one year 9,500,000 9,500,000
----------------- ----------------
Total current liabilities 21,816,979 19,101,741
Long-term debt 13,333 13,333
Other liabilities 2,301,801 2,019,024
Shareholders' equity:
Participating preferred stock, Series A, $.001 par value,
10,000,000 shares authorized, 0 shares issued and outstanding 0 0
Common stock, $.001 par value, 100,000,000 shares authorized,
40,159,810 and 40,021,244 shares issued and outstanding,
respectively 40,160 40,021
Additional paid-in capital 193,840,149 193,356,121
Unearned stock compensation (182,388) (309,996)
Foreign currency translation adjustment 34,657 33,307
Accumulated deficit (130,983,194) (133,831,618)
----------------- -----------------
Total shareholders' equity 62,749,384 59,287,835
----------------- ----------------
Total liabilities and shareholders' equity $ 86,881,497 $ 80,421,933
================= ================
</Table>
See accompanying notes to financial statements.
3
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
--------------------------------
2004 2003
---- ----
Revenues:
Product sales $ 15,214,638 $ 8,185,737
Development revenue 0 250,000
License and royalty revenue 40,641 25,572
Grant revenue 20,330 30,582
--------------------------------
Total revenues 15,275,609 8,491,891
--------------------------------
Operating expenses:
Cost of goods sold
Product cost of goods sold 3,500,751 2,602,266
Intangible and long term asset amortization 571,096 486,905
--------------------------------
Total cost of goods sold 4,071,847 3,089,171
Research and development 2,944,163 2,919,278
Selling and marketing 2,624,772 2,340,943
General and administrative 2,185,113 3,170,767
--------------------------------
Total operating expenses 11,825,895 11,520,159
--------------------------------
Income (loss) from operations 3,449,714 (3,028,268)
Other income (expense):
Interest income 127,190 170,795
Interest expense (56,994) (92,083)
Other (671,486) 25,731
--------------------------------
Other income (expense) (601,290) 104,443
--------------------------------
Net income (loss) $ 2,848,424 $ (2,923,825)
================================
Net income (loss) per share - basic $ 0.07 $ (0.07)
================================
Net income (loss) per share - diluted $ 0.07 $ (0.07)
================================
Weighted Average Shares outstanding:
Basic 40,079,040 39,564,054
Diluted 41,566,020 39,564,054
</Table>
See accompanying notes to financial statements.
4
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2004 2003
--------------- -----------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,848,424 $ (2,923,825)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 788,401 775,490
Amortization of intangible assets 376,188 376,188
Noncash stock compensation 232,561 235,273
(Gain) loss on disposal of equipment 18,474 769
Changes in operating assets and liabilities:
Receivables (4,122,350) 1,168,216
Inventories (1,633,800) (169,731)
Prepaid expenses and other assets 237,515 109,318
Accounts payable 4,024,998 747,347
Accrued expenses and other liabilities (1,076,723) (1,096,663)
Deferred revenue 49,740 (175,000)
---------------------------------
Net cash provided by (used in) operating activities 1,743,428 (952,618)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (49,290) (86,523)
Proceeds on sale of equipment 0 11,850
Sales and maturities of short-term investments 0 48,000
---------------------------------
Net cash used in investing activities (49,290) (26,673)
FINANCING ACTIVITIES:
Payments on long-term debt 0 (6,392)
Proceeds from common stock, net 379,214 22,560
---------------------------------
Net cash provided by financing activities 379,214 16,168
---------------------------------
Net increase (decrease) in cash and cash equivalents 2,073,352 (963,123)
Cash and cash equivalents at beginning of period 47,015,746 49,301,501
---------------------------------
Cash and cash equivalents at end of period $ 49,089,098 $ 48,338,378
=================================
</Table>
See accompanying notes to financial statements.
5
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Third Wave
Technologies, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. Interim results are not necessarily indicative of results
that may be expected for the year ending December 31, 2004.
The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the audited financial statements and footnotes thereto included
in our Form 10-K for the fiscal year ended December 31, 2003 filed with the
Securities and Exchange Commission.
(2) Net Income (Loss) Per Share
In accordance with accounting principles generally accepted in the United
States, basic net income (loss) per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. Diluted net income (loss) per share takes into account the
weighted average shares from options that could potentially dilute basic
earnings per share in the future. Shares associated with stock options are
excluded for the three months ended March 31, 2003 because they are antidilutive
for the period.
The following table presents the calculation of basic and diluted net income
(loss) per share:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2004 2003
---------------- --------------
Numerator:
Net income (loss) $ 2,848,424 $ (2,923,825)
================ ==============
Denominator
Weighted average shares outstanding - basic 40,079,040 39,564,054
Dilutive effect of stock options 1,486,980 N/A
---------------- --------------
Weighted average shares outstanding - diluted 41,566,020 39,564,054
================ ==============
</Table>
6
(3) Stock-Based Compensation
Third Wave has stock-based employee compensation plans. Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. We have chosen
to continue using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, in accounting for our stock option plans.
Had compensation cost been determined based upon the fair value at the grant
date for awards under the plans based on the provisions of SFAS No. 123, our
SFAS No. 123 pro forma net income (loss) and net income (loss) per share would
have been as follows:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2004 2003
----------- -----------
Net income (loss), as reported $ 2,848,424 $(2,923,825)
Add: Stock based compensation,
as reported 232,561 235,273
Less: Stock-based compensation,
using fair value method (1,284,913) (1,036,601)
----------- -----------
Pro forma net income (loss) $ 1,796,072 $(3,725,153)
Net income (loss) per share - basic,
as reported $ 0.07 $ (0.07)
Net income (loss) per share - diluted,
as reported $ 0.07 $ (0.07)
Pro forma net income (loss) per
share - basic $ 0.04 $ (0.09)
Pro forma net income (loss) per
share - diluted $ 0.04 $ (0.09)
</Table>
(4) Inventories
Inventories, consisting mostly of raw materials, are carried at the lower of
cost or market using the first-in, first-out (FIFO) method for determining cost.
Inventories consist of the following:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2004 2003
-------------- --------------
Raw materials $ 1,484,941 $1,609,866
Finished goods and work in process 2,342,657 534,180
Reserve for excess and obsolete inventory (799,752) (750,000)
-------------- --------------
Total inventories $ 3,027,846 $1,394,046
============== ==============
</Table>
(5) Stock Compensation
Included in operating expenses are the following stock compensation charges, net
of reversals related to terminated employees:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2004 2003
---------- ----------
Cost of goods sold $ 5,082 $ 55,652
Research and development 78,335 12,772
Selling and marketing 68,001 3,220
General and administrative 81,143 163,629
---------- ----------
Total stock compensation $ 232,561 $235,273
---------- ----------
</Table>
7
(6) Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2004 2003
-------------- --------------
Net income (loss) $ 2,848,424 $ (2,923,825)
Other comprehensive income (loss):
Foreign currency translation adjustments 1,350 (759)
-------------- --------------
Comprehensive income (loss) $ 2,849,774 $ (2,924,584)
-------------- --------------
</Table>
(7) Derivative Instruments
We sell products in a number of countries throughout the world. In the quarters
ending March 31, 2004 and 2003, we sold certain products with the resulting
accounts receivable denominated in Japanese Yen. Simultaneous with such sales
and purchase order commitments, we purchased foreign currency forward contracts
to manage the risk associated with foreign currency collections in the normal
course of business. These derivative instruments have maturities of less than
one year and are intended to offset the effect of transaction gains and losses,
which arise when collections in a foreign currency are received after the asset
is generated. Contracts outstanding at March 31, 2004 represented a combined
U.S. dollar equivalent commitment of approximately $20.9 million. The changes in
the fair value of the derivatives and the loss or gain on the hedged asset
relating to the risk being hedged are recorded currently in earnings.
(8) Amortizable Intangible Assets
Amortizable intangible assets consist of the following:
<Table>
<Caption>
MARCH 31, 2004 DECEMBER 31, 2003
------------------------------- -------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------- -------------- -------------
Costs of settling patent
Litigation $ 10,533,248 $ 5,258,312 $ 10,533,248 $ 4,882,124
Reacquired marketing and
Distribution rights 2,211,111 2,211,111 2,211,111 2,211,111
Customer agreements 38,000 38,000 38,000 38,000
============== ============= ============== =============
$ 12,782,359 $ 7,507,423 $ 12,782,359 $ 7,131,235
============== ============= ============== =============
</Table>
(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 third quarter 2002 restructuring
charge included $2.2 million for the consolidation of facilities, $500,000 for
prepayment penalties mainly under capital lease arrangements, an impairment
charge of $10.8 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.
During the fourth quarter of 2002, the Company completed an auction to sell
equipment held for sale resulting from the restructuring. The auction resulted
in significantly higher proceeds than the Company had anticipated in the third
quarter of 2002. Accordingly, a credit of $3.6 million was recorded as an offset
to the restructuring charge in the fourth quarter of 2002. The Company also
amended its corporate lease agreement during the fourth quarter of 2002, which
resulted in an increase to the facilities charge of $300,000. The facilities
charge contained estimates based upon the Company's potential to sublease a
portion of its corporate office beginning in 2004. The Company continues to
offer corporate office space for sublease, but has not yet sublet the space.
Accordingly, in the fourth quarter of 2003, the Company changed its estimate of
when it expects to sublease the space from 2004 to 2006.
8
The following table shows the changes in the restructuring accrual since
December 31, 2003. The remaining restructuring balance of $1.3 million is for
rent payments on a non-cancelable lease, net of estimated sublease income, which
will continue to be paid over the lease term through 2011. The current portion
of the accrual is included in other accrued liabilities on the balance sheet and
the remainder is included in other long-term liabilities.
<Table>
<Caption>
Accrued restructuring balance at
December 31, 2003 $ 1,414,044
Payments made (77,936)
--------------
Accrued restructuring balance at
March 31, 2004 $ 1,336,108
--------------
</Table>
(10) Reclassifications
Certain reclassifications have been made to the 2003 financial statements to
conform to the 2004 presentation.
THIRD WAVE TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations as of March 31, 2004 and for the three months ended March 31, 2004
and 2003 should be read in conjunction with our Form 10-K for the fiscal year
ended December 31, 2003 filed with the Securities and Exchange Commission. In
this Form 10-Q, the terms "we," "us," "our," "Company," and "Third Wave" each
refer to Third Wave Technologies, Inc. The following discussion of our financial
condition and results of our operations should be read in conjunction with our
Financial Statements, including the Notes thereto, included elsewhere in this
Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. For a more detailed discussion of
such forward-looking statements and the potential risks and uncertainties that
may affect their accuracy, see the "Forward-Looking Statements" section of this
Form 10-Q.
OVERVIEW
Third Wave Technologies, Inc. is a leading molecular diagnostics
company. We believe our proprietary Invader(R) technology, a novel,
chemistry-based platform, is easier to use, more accurate and cost-effective,
and enables higher testing throughput than existing technology. These and other
advantages conferred by our technology platform are enabling us to provide
physicians and researchers with superior tools to diagnose and treat disease.
More than 110 clinical laboratory customers are using Third Wave's products. Our
customer base also includes the Japanese government's share of the International
Haplotype Map Project. Other customers include pharmaceutical and biotechnology
companies, academic research centers and major health care providers.
Third Wave markets a growing number of products including analyte-specific
reagents (ASRs). These ASRs allow certified clinical reference laboratories to
create assays to screen for cystic fibrosis and other inherited disorders, and
to test for the Factor V Leiden and a host of other mutations associated with
predisposition to cardiovascular and other diseases. The Company has developed
or plans to develop a menu of molecular diagnostic products for clinical
applications that include genetic testing, pharmacogenetics, chromosomal
analysis, infectious disease, and women's health. The Company also has a number
of other Invader(R) products including those for research, agricultural and
other applications.
Our financial results may vary significantly from quarter to quarter due to
fluctuations in the demand for our products, timing of new product introductions
and deliveries made during the quarter, the timing of research, development and
grant revenues, and increases in spending, including expenses related to our
product development.
9
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. We review the accounting policies we use in reporting our
financial results on a regular basis. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to accounts receivable, inventories,
equipment and leasehold improvements and intangible assets. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. These estimates and judgments are reviewed by management on an
ongoing basis, and by the Audit Committee at the end of each quarter prior to
the public release of our financial results. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
RESTRUCTURING AND OTHER CHARGES.
The restructuring and other charges resulting from the restructuring plan in
the third quarter of 2002 has been recorded in accordance with EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)", Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges," and Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
restructuring charge was comprised primarily of costs to consolidate facilities,
impairment charges for abandoned leasehold improvements and equipment to be sold
or abandoned, prepayment penalties related mainly to capital lease obligations
on equipment to be sold or abandoned, and other costs related to the
restructuring. The remaining accrued restructuring balance is for rent payments
on a non-cancelable lease, net of estimated sublease income. In calculating the
cost to consolidate the facilities, we estimated the future lease and operating
costs to be paid until the leases are terminated and the amount, if any, of
sublease receipts for each location. This required us to estimate the timing and
costs of each lease to be terminated, the amount of operating costs, and the
timing and rate at which we might be able to sublease the site. To form our
estimates for these costs, we performed an assessment of the affected facilities
and considered the current market conditions for each site. Our assumptions on
the lease termination payments, operating costs until terminated, and the
offsetting sublease receipts may turn out to be incorrect and our actual cost
may be materially different from our estimates.
LONG-LIVED ASSETS--IMPAIRMENT
Equipment, leasehold improvements and amortizable identifiable intangible
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. For assets held and
used, if the sum of the expected undiscounted cash flows is less than the
carrying value of the related asset or group of assets, a loss is recognized for
the difference between the fair value and carrying value of the asset or group
of assets. For assets removed from service and held for sale, we estimate the
fair market value of such assets and record an adjustment if fair value less
costs to sell is lower than carrying value.
Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment tests under SFAS No. 142,
"Goodwill and Other Intangible Assets." The annual impairment tests are
completed in the quarter ended September 30.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2004
and 2003, we sold certain products with the resulting accounts receivable
denominated in Japanese Yen. Simultaneous with such sales and purchase order
commitments, we purchased foreign currency forward contracts to manage the risk
associated with collections of receivables denominated in foreign currencies in
the normal course of business. These derivative instruments have maturities of
less than one year and are intended to offset the effect of transaction gains
and losses. Contracts outstanding at March 31, 2004 represented a combined U.S.
dollar equivalent commitment of approximately $20.9 million. The changes in the
fair value of the derivatives and the loss or gain on the hedged asset relating
to the risk being hedged are recorded currently in earnings.
10
INVENTORIES--SLOW MOVING AND OBSOLESCENCE
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because of process improvements or technology advancements, the amount on hand
is more than can be used to meet future need, or estimates of shelf lives may
change. We currently consider all inventory that we expect will have no activity
within one year as well as any additional specifically identified inventory to
be subject to a provision for excess inventory. We also provide for the total
value of inventories that we determine to be obsolete based on criteria such as
changing manufacturing processes and technologies. At March 31, 2004, our
inventory reserves were $0.8 million, or 21% of our $3.8 million total gross
inventories. As of March 31, 2004, a large portion of our gross inventory was
held at a customer site pending inspection for approval.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
REVENUES. Revenues for the three months ended March 31, 2004 of $15.3 million
represented an increase of $6.8 million as compared to revenues of $8.5 million
for the corresponding period of 2003.
Product revenues increased to $15.2 million for the quarter ended March 31,
2004, from $8.2 million in the quarter ended March 31, 2003. The increase in
product sales during the three months ending March 31, 2004 was due to an
increase in sales of genomic research product to a major Japanese research
institute and an increase in molecular diagnostic sales compared to the
corresponding periods of 2003. We expect our molecular diagnostic revenues to
increase throughout 2004.
Development revenues for the three months ended March 31, 2004 was $0, compared
to $0.3 million for the three months ended March 31, 2003. The decrease was due
to the transition from development revenue to product revenue in our development
and commercialization agreement with BML, Inc.
Significant Customer. We generated $10.7 million, or 70% of our revenues from
sales to a major Japanese research institute for use by several end-users during
the quarter ended March 31, 2004. As of March 31, 2004, $4.0 million of our
accounts receivable were attributable to this customer. This customer will
continue to purchase Company products in 2004, however, the timing and total of
such purchases will be influenced by the funding process and amounts which are
unpredictable and unknown to Third Wave.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
settlement fees. For the three months ended March 31, 2004, cost of goods sold
increased to $4.1 million, compared to $3.1 million for the corresponding period
of 2003. The increase is primarily due to the increase in sales volume. We
expect gross margin to improve as molecular diagnostic revenues increase.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist
primarily of salaries and related personnel costs, material costs for assays and
product development, fees paid to consultants, depreciation and facilities costs
and other expenses related to the design, development, testing and enhancement
of our products and acquisition of technologies used or to be used in our
products. Research and development costs are expensed as they are incurred.
Research and development expenses for the three months ended March 31, 2004 and
2003 were $2.9 million. We will continue to invest in research and development,
and expenditures in this area may increase as we expand our product development
efforts.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, commissions, office support and related costs, and travel
and entertainment. Selling and marketing expenses for the three months ended
March 31, 2004 were $2.6 million, an increase of $0.3 million, as compared to
$2.3 million for the corresponding period of 2003. The increase in the three
months ended March 31, 2004 was due to an increase in personnel related expenses
compared to the same period in 2003. We anticipate selling and marketing
expenses to continue to be at or above 2003 levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses decreased to $2.2 million in
the three months ended March 31, 2004, from $3.2 million for the corresponding
period in 2003. The decrease in the three months ended March 31, 2004 was due to
a decrease in legal fees related to litigation and personnel related expenses
compared to the corresponding period of 2003.
11
INTEREST INCOME. Interest income for the three months ended March 31, 2004 was
$0.1 million, compared to $0.2 million for the corresponding period of 2003.
This decrease was primarily due to lower interest rates compared to the three
months ended March 31, 2003.
INTEREST EXPENSE. Interest expense for the three months ended March 31, 2004 and
2003 was approximately $0.1 million.
OTHER INCOME (EXPENSE): Other expense for the three months ended March 31, 2004
was $0.7 million, compared to other income of $26,000 for the three months ended
March 31, 2003. The increase in the expense is due to the adjustment of foreign
currency contracts and the related hedged asset to fair value at the end of the
quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through private
placements of equity securities, research grants from federal and state
government agencies, payments from strategic collaborators, equipment loans,
capital leases, sale of products, a convertible note and an initial public
offering. As of March 31, 2004, we had cash and cash equivalents and short-term
investments of $59.9 million.
Net cash provided by operations for the three months ended March 31, 2004 was
$1.7 million, compared to net cash used in operations of $1.0 million in the
corresponding period in 2003. The decrease in cash used in operations was
primarily due to the increase in revenue.
Net cash used in investing activities for the three months ended March 31,
2004 and March 31, 2003 was less than $0.1 million. Investing activities
included capital expenditures of $49,000 in the three months ended March 31,
2004, compared to $87,000 in the corresponding period in 2003. Investing
activities in the three months ended March 31, 2003 also included proceeds from
the sale of equipment of $12,000 and $48,000 from the maturity of short-term
investments.
Net cash provided by financing activities was $0.4 million in the three
months ended March 31, 2004, compared to $16,000 in 2003. Cash provided by
financing activities in the three months ending March 31, 2004 consisted of
proceeds from the sale of common stock of $0.4 million compared to $23,000 in
the corresponding period of 2003. In the three months ended March 31, 2003,
$6,000 was used to repay debt.
The following summarizes our contractual obligations at March 31, 2004 and
the effect those obligations are expected to have on our liquidity and cash flow
in future periods (in thousands):
<Table>
<Caption>
TOTAL LESS THAN YEARS YEARS OVER
1 YEAR 2 - 3 4 - 5 5 YEARS
--------- -------- ------- --------
CONTRACTUAL OBLIGATION
Non-cancelable operating
lease obligations $ 14,848 $ 1,603 $ 3,722 $ 4,026 $ 5,497
Term loan 9,513 9,500 13 -- --
--------- -------- -------- ------- -------
Total obligation $ 24,361 $ 11,103 $ 3,735 $ 4,026 $ 5,497
--------- -------- -------- ------- -------
</Table>
As of December 31, 2003 and March 31, 2004, a valuation allowance equal to 100%
of our net deferred tax assets had been recognized since our future realization
is not assured. At December 31, 2003, we had federal and state net operating
loss carryforwards of approximately $114 million. The net operating loss
carryforwards will expire at various dates beginning in 2008, if not utilized.
Utilization of the net operating losses and credits to offset future taxable
income may be subject to an annual limitation due to the change of ownership
provisions of federal tax laws and similar state provisions as a result of the
initial public offering in February 2001.
We cannot assure you that our business or operations will not change in a manner
that would consume available resources more rapidly than anticipated. We also
cannot assure you that we will not require substantial additional funding before
we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
o our progress with our research and development programs;
o our level of success in selling our products and technologies;
o our ability to establish and maintain successful collaborative
relationships;
12
o the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
o the timing of purchases of additional capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is currently confined to changes in foreign exchange
and interest rates. The securities in our investment portfolio are not leveraged
and, due to their short-term nature, are subject to minimal interest rate risk.
We currently do not hedge interest rate exposure. Due to the short-term
maturities of our investments, we do not believe that an increase in market
rates would have any negative impact on the realized value of our investment
portfolio.
To reduce foreign exchange risk, we selectively use financial instruments. Our
earnings are affected by fluctuations in the value of the U.S. dollar against
foreign currencies as a result of the sales of our products in foreign markets.
Forward foreign exchange contracts are used to hedge against the effects of such
fluctuations. Our policy prohibits the trading of financial instruments for
profit. A discussion of our accounting policies for derivative financial
instruments is included in the notes to the financial statements.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, conducted an evaluation as of the end of the period covered
by this report, of the effectiveness of the Company's disclosure controls and
procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934. Based on that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. As
required by Rule 13a-15(d) under the Securities Exchange Act of 1934 the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, also conducted an evaluation of the company's internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this report.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. When used in this Form 10-Q the words
"believe," "anticipates," "intends," "plans," "estimates," and similar
expressions are forward-looking statements. Such forward-looking statements
contained in this Form 10-Q are based on current expectations. Forward-looking
statements may address the following subjects: results of operations; customer
growth and retention; development of technologies; losses or earnings; operating
expenses, including, without limitation, marketing expense and technology and
development expense; and revenue growth. We caution investors that there can be
no assurance that actual results, outcomes or business conditions will not
differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, among others, our limited
operating history, unpredictability of future revenues and operating results,
competitive pressures and also the potential risks and uncertainties set forth
in the "Overview" section hereof and in the "Overview" and "Risk Factors"
sections of our annual report on Form 10-K for the fiscal year ended December
31, 2003 filed with the Securities and Exchange Commission, which factors are
specifically incorporated herein by this reference. You should also carefully
consider the factors set forth in other reports or documents that we file from
time to time with the Securities and Exchange Commission. Except as required by
law, we undertake no obligation to update any forward-looking statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - There are no material legal proceedings pending.
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the usual course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(1) None
13
(2) None
(3) None
(4) Use of Proceeds. Pursuant to our Registration Statement on Form S-1, as
amended, filed with the Securities and Exchange Commission and declared
effective February 9, 2001, (Registration No. 333-42694), we commenced
our initial public offering of 7,500,000 registered shares of common
stock, $0.001 par value, on February 9, 2001, at a price of $11.00 per
share (the "Offering"). The Offering was completed on February 14, 2001,
and all of the 7,500,000 shares were sold, generating gross proceeds of
approximately $82,500,000. The managing underwriters for the Offering
were Lehman Brothers Inc., CIBC World Markets, Dain Rauscher
Incorporated, Robert W. Baird & Co. Incorporated, and Fidelity Capital
Markets.
In connection with the Offering, we incurred approximately $5.8 million
in underwriting discounts and commissions, and approximately $1.9
million in other related expenses. The net offering proceeds to us,
after deducting the foregoing expenses, were approximately $74.8
million.
From the time of receipt through March 31, 2004, we have invested the
net proceeds from the Offering in investment-grade, interest-bearing
securities. We used $4.0 million of the proceeds to satisfy a
cancellation fee for the termination of a distribution agreement with
Endogen Corporation. We used approximately $14.0 million for general
corporate purposes, including working capital and research and
development activities.
We expect to use the remainder of the net proceeds for general corporate
purposes, including working capital and expanding research and
development and sales and marketing efforts to accelerate the
commercialization of new products and the development of new
partnerships.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses or products to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, we may evaluate potential acquisitions of these businesses,
products, or technologies. We have no current agreements or commitments
regarding any such transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None.
ITEM 5. OTHER INFORMATION - None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certifications
(b) Reports on Form 8-K filed during the three months ended March 31, 2004:
The Company filed a Form 8-K dated February 4, 2004 and February 24,
2004 reporting the Company's press releases dated February 4 and
February 24 announcing the Company's year ending December 31, 2003
financial results.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THIRD WAVE TECHNOLOGIES, INC.
Date: May 5, 2004 /s/ Lance Fors
-----------------------------
Lance Fors, CEO
Date: May 5, 2004 /s/ David Nuti
-----------------------------
David Nuti, CFO
15