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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, 2005 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ________ to ________.
COMMISSION FILE NUMBER: 000-31745
THIRD WAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1791034
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
502 S. ROSA ROAD, MADISON, WI 53719
(Address of principal executive offices) (Zip Code)
(888) 898-2357
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check whether the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
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 4, 2005, was 41,236,377.
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THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PAGE NO.
PART I FINANCIAL INFORMATION.......................................................................................... 3
Item 1. Consolidated Financial Statements.......................................................................... 3
Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004....................................... 3
Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004............ 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004...................... 5
Notes to Consolidated Financial Statements....................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................. 13
Item 4. Controls and Procedures.................................................................................... 14
PART II OTHER INFORMATION............................................................................................. 14
Item 1. Legal Proceedings.......................................................................................... 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................................ 14
Item 3. Defaults Upon Senior Securities............................................................................ 16
Item 4. Submission Of Matters To A Vote Of Security Holders........................................................ 16
Item 5. Other Information.......................................................................................... 16
Item 6. Exhibits................................................................................................... 16
SIGNATURES............................................................................................................ 17
EXHIBITS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
September 30, 2005 December 31, 2004
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 42,431,168 $ 55,619,981
Short-term investments 11,835,000 11,070,000
Receivables, net of allowance for doubtful accounts
of $185,000 and $300,000 at September 30, 2005
and December 31, 2004, respectively 3,642,717 5,784,679
Inventories 2,234,084 1,236,392
Prepaid expenses and other 650,148 260,316
------------- -------------
Total current assets 60,793,117 73,971,368
Equipment and leasehold improvements:
Machinery and equipment 15,453,981 15,832,489
Leasehold improvements 2,347,093 2,277,604
------------- -------------
17,801,074 18,110,093
Less accumulated depreciation 12,792,956 12,139,423
------------- -------------
5,008,118 5,970,670
------------- -------------
Assets held for sale - 269,000
Intangible assets, net of accumulated amortization 3,017,808 4,146,372
Indefinite lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Other long term assets 1,857,730 2,212,935
------------- -------------
Total assets $ 72,174,057 $ 88,067,629
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,169,092 $ 6,519,005
Accrued payroll and related liabilities 1,936,319 2,873,506
Other accrued liabilities 3,286,377 1,867,361
Deferred revenue 213,269 129,530
Capital lease obligation 104,095 66,867
Long-term debt due within one year 9,873,800 9,614,127
------------- -------------
Total current liabilities 21,582,952 21,070,396
Long-term debt 749,356 335,069
Deferred revenue - long term 172,645 254,434
Capital lease obligations - long term 209,283 151,885
Other liabilities 4,581,460 3,520,948
Shareholders' equity:
Participating preferred stock, Series A, $.001 par value,
10,000,000 shares authorized, 0 shares issued and outstanding - -
Common stock, $.001 par value, 100,000,000 shares authorized,
41,370,234 shares issued, 41,152,234 shares outstanding at
September 30, 2005 and 41,102,764 shares issued and outstanding
at December 31, 2004 41,370 41,103
Additional paid-in capital 199,073,727 198,990,162
Unearned stock compensation (312,277) (554,293)
Treasury stock - 218,000 shares acquired at an average price
of $4.02 per share (877,159) -
Foreign currency translation adjustment 41,136 31,949
Accumulated deficit (153,088,436) (135,774,024)
------------- -------------
Total shareholders' equity 44,878,361 62,734,897
------------- -------------
Total liabilities and shareholders' equity $ 72,174,057 $ 88,067,629
============= =============
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,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
Clinical product sales $ 4,031,766 $ 3,828,240 $ 11,407,180 $ 10,284,198
Research product sales 1,039,569 6,496,157 6,152,540 27,783,714
License and royalty revenue 89,763 71,492 272,609 167,121
Grant revenue 61,293 83,138 287,819 151,870
------------ ------------ ------------ ------------
Total revenues 5,222,391 10,479,027 18,120,148 38,386,903
------------ ------------ ------------ ------------
Operating expenses:
Cost of goods sold
Product cost of goods sold 1,108,385 1,813,702 3,960,294 8,565,560
Intangible and long-term asset amortization 468,035 521,505 1,427,625 1,634,160
------------ ------------ ------------ ------------
Total cost of goods sold 1,576,420 2,335,207 5,387,919 10,199,720
Research and development 2,063,762 3,026,445 6,569,300 8,726,631
Selling and marketing 3,662,014 2,370,231 10,208,077 7,691,222
General and administrative 5,600,641 2,863,852 13,647,600 8,433,456
Impairment charge - - 202,707 758,716
------------ ------------ ------------ ------------
Total operating expense 12,902,837 10,595,735 36,015,603 35,809,745
------------ ------------ ------------ ------------
Income (loss) from operations (7,680,446) (116,708) (17,895,455) 2,577,158
Other income (expense):
Interest income 459,704 210,997 1,200,042 480,945
Interest expense (128,516) (74,030) (313,278) (189,779)
Other (30,685) 4,015 (305,721) (101,357)
------------ ------------ ------------ ------------
Total other income (expense) 300,503 140,982 581,043 189,809
Net income (loss) $ (7,379,943) $ 24,274 $(17,314,412) $ 2,766,967
Net income (loss) per share - basic $ (0.18) $ 0.00 $ (0.42) $ 0.07
Net income (loss) per share - diluted $ (0.18) $ 0.00 $ (0.42) $ 0.07
Weighted average shares outstanding
Basic 41,073,652 40,521,411 41,094,740 40,309,084
Diluted 41,073,652 42,509,345 41,094,740 42,070,075
See accompanying notes to consolidated financial statements.
4
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2005 2004
OPERATING ACTIVITIES:
Net income (loss) $(17,314,412) $ 2,766,967
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,596,997 2,103,010
Amortization of intangible assets 1,128,564 1,128,564
Noncash stock compensation (354,827) 1,329,404
Impairment charge and loss on disposal of equipment 208,731 870,058
Changes in operating assets and liabilities:
Receivables 2,084,109 (1,658,382)
Inventories (997,692) 124,122
Prepaid expenses and other assets (266,647) 121,605
Accounts payable (349,913) 629,801
Accrued expenses and other liabilities 1,542,341 161,368
Deferred revenue 1,950 421,237
------------ ------------
Net cash provided by (used in) operating activities (12,720,799) 7,997,754
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (307,185) (532,601)
Proceeds on sale of equipment 197,287 65,020
Purchases of short-term investments (11,835,000) (11,070,000)
Sales and maturities of short-term investments 11,070,000 10,800,000
------------ ------------
Net cash used in investing activities (874,898) (737,581)
FINANCING ACTIVITIES:
Proceeds of long-term debt 800,000 470,000
Payments on long-term debt (126,040) (10,399)
Payment on capital lease obligations (70,591) -
Proceeds from common stock, net 680,674 1,332,168
Repurchase of stock (877,159) -
------------ ------------
Net cash provided by financing activities 406,884 1,791,769
Net increase (decrease) in cash and cash equivalents (13,188,813) 9,051,942
Cash and cash equivalents at beginning of period 55,619,981 47,015,746
Cash and cash equivalents at end of period $ 42,431,168 $ 56,067,688
During the nine months ended September 30, 2005, the Company entered into
capital lease obligations of $165,217.
See accompanying notes to consolidated financial statements.
5
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Third Wave
Technologies, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation
have been included. Interim results are not necessarily indicative of results
that may be expected for the year ending December 31, 2005.
The balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the audited financial statements and footnotes thereto included
in our Form 10-K for the fiscal year ended December 31, 2004 filed with the
Securities and Exchange Commission.
(2) Net Income (Loss) Per Share
In accordance with accounting principles generally accepted in the United
States, basic net income (loss) per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. Diluted net income (loss) per share takes into account the
weighted average shares from options that could potentially dilute basic net
income per share in the future. Shares associated with stock options are
excluded for the three and nine months ended September 30, 2005 because they are
anti-dilutive.
The following table presents the calculation of basic and diluted net income
(loss) per share:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2005 2004 2005 2004
------------ ------------- ------------- ------------
Numerator:
Net income (loss) $ (7,379,943) $ 24,274 $(17,314,412) $ 2,766,967
Denominator
Weighted average shares outstanding - basic 41,073,652 40,521,411 41,094,740 40,309,084
Dilutive securities - stock options N/A 1,987,934 N/A 1,760,991
Weighted average shares outstanding - diluted 41,073,652 42,509,345 41,094,740 42,070,075
Basic net income (loss) per share $ (0.18) $ (0.00) $ (0.42) $ 0.07
Dilutive net income (loss) per share $ (0.18) $ (0.00) $ (0.42) $ 0.07
(3) Stock-Based Compensation
Third Wave has stock-based employee compensation plans. Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation",
encourages, but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. We have chosen to
continue using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations, in accounting for our stock option plans.
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:
6
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2005 2004 2005 2004
-------------- ----------- -------------- -------------
Net income (loss), as reported $ (7,379,943) $ 24,274 $ (17,314,412) $ 2,766,967
Add: Stock-based compensation, as reported 422,357 785,226 (354,827) 1,329,404
Less: Stock-based compensation, using fair value
method (1,217,295) (814,730) (3,557,025) (3,013,856)
Less: Stock-based compensation, related to the
employee stock purchase plan determined under SFAS
No. 123 -0- -0- (95,847) (151,017)
-------------- ---------- -------------- -------------
Pro forma net income (loss) $ (8,174,881) $ (5,230) $ (21,322,111) 931,498
============== ========== ============== =============
Net income (loss) per share, basic, as reported $ (0.18) $ (0.00) $ (0.42) $ 0.07
Net income (loss) per share, diluted, as reported $ (0.18) $ (0.00) $ (0.42) $ 0.07
Pro forma net income (loss) per share, basic $ (0.20) $ (0.00) $ (0.52) $ 0.02
Pro forma net income (loss) per share, diluted $ (0.20) $ (0.00) $ (0.52) $ 0.02
As described in Note 2 of Notes to Consolidated Financial Statements in our
Form 10-K for the year ended December 31, 2004, the Financial Accounting
Standards Board recently issued SFAS No. 123 (revised 2004), "Share-Based
Payment", which is a revision of SFAS No. 123. The Company expects to adopt SFAS
No. 123(R) on January 1, 2006.
(4) Inventories
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method for determining cost.
Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31,
2005 2004
-------------- ----------
Raw materials $ 1,630,456 $ 1,318,771
Finished goods and work in process 1,363,628 567,621
Reserve for excess and obsolete inventory (760,000) (650,000)
------------- ------------
Total inventories $ 2,234,084 $ 1,236,392
============= ============
(5) Stock Compensation
Included in operating expenses are the following stock compensation charges, net
of reversals related to terminated employees:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
------------ ----------- ------------ -------------
Cost of goods sold $ 40,143 $ 47,731 $ 27,163 $ 57,692
Research and development 1,969 419,025 (499,113) 769,970
Selling and marketing 33,150 188 45,557 68,674
General and administrative 347,095 318,282 71,566 433,068
------------ ----------- ------------ -------------
Total stock compensation $ 422,357 $ 785,226 $ (354,827) $ 1,329,404
------------ ----------- ------------ -------------
(6) Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
-------------- ----------- -------------- -------------
Net income (loss) $ (7,379,943) $ 24,274 $(17,314,412) $ 2,766,967
Other comprehensive income (loss):
Foreign currency translation adjustments 4,625 (1,945) 9,187 (1,774)
------------- ---------- ------------- -------------
Comprehensive income (loss) $ (7,375,318) $ 22,329 $ (17,305,225) $ 2,765,193
============= ========== ============= =============
7
(7) Derivative Instruments
We sell products in a number of countries throughout the world. In the quarters
ended September 30, 2005 and 2004, we sold certain products with the resulting
accounts receivable denominated in Japanese Yen. Simultaneous with such sales
and purchase order commitments, we purchased foreign currency forward contracts
to manage the risk associated with foreign currency collections in the normal
course of business. These derivative instruments have maturities of less than
one year and are intended to offset the effect of transaction gains and losses,
which arise when collections in a foreign currency are received after the asset
is generated. There were no contracts outstanding at September 30, 2005. The
changes in the fair value of the derivatives and the loss or gain on the hedged
asset relating to the risk being hedged are recorded in earnings.
(8) Amortizable Intangible Assets
Amortizable intangible assets consist of the following:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
--------------------------------------------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------- ------------ ------------- ------------
Costs of settling patent litigation $ 10,533,248 $ 7,515,440 $ 10,533,248 $ 6,386,876
Reacquired marketing and distribution rights 2,211,111 2,211,111 2,211,111 2,211,111
Customer agreements 38,000 38,000 38,000 38,000
-------------- ------------- -------------- -------------
Total $ 12,782,359 $ 9,764,551 $ 12,782,359 $ 8,635,987
============== ============= ============== =============
(9) Restructuring and Impairment of Long Lived Assets
During the third quarter of 2002, we announced a restructuring plan designed to
simplify product development and manufacturing operations and reduce operating
expenses. The restructuring charges recorded were determined based upon plans
submitted by the Company's management and approved by the Board of Directors
using information available at the time. The restructuring charge included $2.5
million for the consolidation of facilities, $500,000 for prepayment penalties
mainly under capital lease arrangements, an impairment charge of $7.2 million
for abandoned leasehold improvements and equipment to be sold and $900,000 of
other costs related to the restructuring. The Company also recorded a $1.1
million charge within cost of goods sold related to inventory that was
considered obsolete based upon the restructuring plan.
The facilities charge contained estimates based on the Company's potential to
sublease a portion of its corporate office. The Company has offered the
corporate office space for sublease, but has been unable to sublease the space.
Accordingly, the Company decreased its estimate of the amount of sublease income
it expects to receive. The estimated lease and operating expenses were also
reduced, based on a portion of the office space being utilized.
The following table shows the changes in the restructuring accrual since
December 31, 2004. The remaining restructuring balance of $1.0 million is for
rent payments on a non-cancelable lease, net of estimated sublease income, which
will continue to be paid over the lease term through 2011. The current portion
of the accrual is included in other accrued liabilities on the balance sheets
and the remainder is included in other long-term liabilities.
Accrued restructuring balance at December 31, 2004 $ 1,116,848
Payments made (118,768)
------------
Accrued restructuring balance at September 30, 2005 $ 998,080
------------
(10) Shareholder's Equity
The Board of Directors has 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 September 30, 2005 for $877,159.
(11) Reclassifications
Certain reclassifications have been made to the 2004 financial statements to
conform to the 2005 presentation.
8
THIRD WAVE TECHNOLOGIES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations as of September 30, 2005 and for the three and nine months ended
September 30, 2005 and 2004 should be read in conjunction with our Form 10-K for
the fiscal year ended December 31, 2004 filed with the Securities and Exchange
Commission. In this Form 10-Q, the terms "we," "us," "our," "Company," and
"Third Wave" each refer to Third Wave Technologies, Inc. The following
discussion of our financial condition and results of our operations should be
read in conjunction with our Financial Statements, including the Notes thereto,
included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For
a more detailed discussion of such forward-looking statements and the potential
risks and uncertainties that may affect their accuracy, see the discussion below
under the caption "Forward-Looking Statements".
OVERVIEW
Third Wave Technologies, Inc. is a leading molecular diagnostics company. We
believe our proprietary Invader(R) chemistry, a novel, proprietary molecular
chemistry is easier to use, more accurate and cost-effective, and enables higher
testing throughput. These and other advantages conferred by our chemistry are
enabling us to provide clinicians and researchers with superior molecular
solutions.
More than 120 clinical laboratory customers are using Third Wave's products.
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 test for hepatitis C virus, human papillomavirus, cystic
fibrosis and other inherited disorders, including the Factor V Leiden and a host
of other mutations associated with cardiovascular and other diseases. The
Company recently received FDA clearance of its UGT1A1 pharmacogenetic test,
which is designed to detect mutations associated with adverse reaction to the
chemotherapy Camptosar. The Company has developed and plans to continue to
develop a menu of molecular diagnostic products for clinical applications that
include genetics/pharmacogenetics, oncology/chromosomal analysis, and infectious
disease/women's health. The Company also has a number of other Invader(R)
products 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. As a result, annual financial results are more indicative
of the Company's performance than quarterly results and results of operations in
any quarterly period may not be indicative of results likely to be realized in
the subsequent quarterly periods.
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.
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.
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 includes 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
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
10
expected undiscounted cash flows is less than the carrying value of the related
asset or group of assets, a loss is recognized for the difference between the
fair value and carrying value of the asset or group of assets. For assets
removed from service and held for sale, we estimate the fair market value of
such assets and record an adjustment if fair value less costs to sell is lower
than carrying value. In the nine months ended September 30, 2005 and September
30, 2004, we recorded an impairment charge on certain equipment of $0.2 million
and $0.8 million, respectively.
Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment tests under SFAS No. 142,
"Goodwill and Other Intangible Assets." The annual impairment tests are
completed in the quarter ended September 30. In the quarter ended September 30,
2005, the annual impairment test was performed and based on the analysis, it was
determined that there was no impairment of goodwill or intangible assets with
indefinite lives.
DERIVATIVE INSTRUMENTS
We sell products in a number of countries throughout the world. During 2005 and
2004, we sold certain products with the resulting accounts receivable
denominated in Japanese Yen. Simultaneous with such sales and purchase order
commitments, we purchased foreign currency forward contracts to manage the risk
associated with collections of receivables denominated in foreign currencies in
the normal course of business. These derivative instruments have maturities of
less than one year and are intended to offset the effect of transaction gains
and losses. There were no contracts outstanding at September 30, 2005. The
changes in the fair value of the derivatives and the loss or gain on the hedged
asset relating to the risk being hedged are recorded in earnings.
INVENTORIES--SLOW MOVING AND OBSOLESCENCE
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because of process improvements or technology advancements, the amount on hand
is more than can be used to meet future need, or estimates of shelf lives may
change. We currently consider all inventory that we expect will have no activity
within one year as well as any additional specifically identified inventory to
be subject to a provision for excess inventory. We also provide for the total
value of inventories that we determine to be obsolete based on criteria such as
changing manufacturing processes and technologies. At September 30, 2005, our
inventory reserves were at $0.8 million, or 25% of our $3.0 million total gross
inventories.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2005 and 2004
REVENUES. Revenues for the three months ended September 30, 2005 of $5.2 million
represented a decrease of $5.3 million, compared to revenues of $10.5 million
for the corresponding period of 2004. Revenues for the nine months ended
September 30, 2005 of $18.1 million represented a decrease of $20.3 million,
compared to revenues of $38.4 million for the corresponding period of 2004.
Product revenues decreased to $5.1 million for the quarter ended September 30,
2005, from $10.3 million in the quarter ended September 30, 2004. Product
revenues decreased to $17.6 million for the nine months ended September 30,
2005, from $38.1 million in the nine months ended September 30, 2004. The
decrease in product sales during the three and nine months ending September 30,
2005 was primarily due to a decrease in sales of genomic research product to a
major Japanese research institute partially offset by an increase in clinical
molecular diagnostic sales compared to the corresponding periods of 2004. As we
continue to develop and expand our line of molecular diagnostic products, we
expect our molecular diagnostic revenues to increase.
Significant Customer. We generated $3.6 million, or 20% of our revenues, from
sales to a major Japanese research institute for use by several end-users during
the nine months ended September 30, 2005, compared to $25.0 million, or 65% of
our revenues during the nine months ended September 30, 2004. We believe this
customer will continue to purchase Company products. However, the timing and
amount of such purchases will be influenced by the Japanese government funding
process and other factors beyond the Company's control, as a result of which the
timing and amount of such purchases are unpredictable and unknown to Third Wave.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
settlement fees. For the three months ended September 30, 2005, cost of goods
sold decreased to $1.6 million, compared to $2.3 million for the corresponding
period of 2004. For the nine months ended
11
September 30, 2005, cost of goods sold decreased to $5.4 million, compared to
$10.2 million for the corresponding period of 2004. The decrease in the nine
month period was primarily due to the decrease 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 September 30, 2005
were $2.1 million, compared to $3.0 million for the three months ended September
30, 2004. Research and development expenses for the nine months ended September
30, 2005 were $6.6 million, compared to $8.7 million for the nine months ended
September 30, 2004. The decrease in research and development expenses was
primarily due to a decrease in personnel related expenses. We will continue to
invest in research and development, and expenditures in this area may increase
as we expand our product development efforts.
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, 2005 were $3.7 million, an increase of $1.3 million, compared to
$2.4 million for the corresponding period of 2004. Selling and marketing
expenses for the nine months ended September 30, 2005 were $10.2 million, an
increase of $2.5 million, compared to $7.7 million for the corresponding period
of 2004. The increase in selling and marketing expenses was due to an increase
in personnel related expenses compared to the same period in 2004. We anticipate
selling and marketing expenses to continue to be at or above 2004 levels for the
remainder of 2005 and beyond.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses increased to $5.6 million in
the three months ended September 30, 2005, from $2.9 million for the
corresponding period in 2004. General and administrative expenses increased to
$13.6 million in the nine months ended September 30, 2005, from $8.4 million for
the corresponding period in 2004. The increase in general and administrative
expenses was primarily due to an increase in legal expenses as a result of the
patent infringement lawsuit against Stratagene. The Company anticipates a
continued high level of legal expenses as a result of the additional lawsuits
with Innogenetics, Chiron Corporation, Bayer Corporation, Digene Corporation and
Stratagene discussed in further detail below in Part II - Item 1 "Legal
Proceedings." In addition, as the Company moves towards consideration of FDA
cleared or approved products, there will be increased expenses attributed to
these activities.
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, compared to
$0.8 million for the nine months ended September 30, 2004 for equipment written
down to fair value.
INTEREST INCOME. Interest income for the three months ended September 30, 2005
was $0.5 million, compared to $0.2 million for the corresponding period of 2004.
Interest income for the nine months ended September 30, 2005 was $1.2 million
compared to $0.5 million in the nine months ended September 30, 2004. The
increase in interest income was due to higher interest rates compared to 2004.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2005
and 2004 was approximately $0.1 million. Interest expense for the nine months
ended September 30, 2005 was $0.3 million compared to $0.2 million in the
corresponding period of 2004.
OTHER INCOME (EXPENSE): Other expense for the three months ended September 30,
2005 was approximately $31,000 compared to other income of approximately $4,000
for the same period in 2004. Other expense for the nine months ended September
30, 2005 was $0.3 million, compared to other expense of $0.1 million for the
nine months ended September 30, 2004.
OTHER ITEMS: On September 14, 2004, Third Wave filed suit against Stratagene
Corporation in the United States District Court for the Western District of
Wisconsin. The complaint alleged patent infringement by Stratagene's sale of its
QPCR; QRTPCR Full Velocity products of two Third Wave patents concerning the
Company's proprietary Invader technology. The case was tried before a jury in
August 2005 and the jury found that Stratagene willfully infringed Third Wave's
patents, and that Third Wave's patents were valid. The jury awarded Third Wave
$5.29 million in damages. Post-trial motions are currently pending before the
Court, including Stratagene's motion for a new trial and to resolve the damages
award and Third Wave's motion for trebled damages, attorneys fees and costs.
Stratagene may post a bond with the court pending appellate review in lieu of
paying Third Wave any awarded damages or costs. The appellate review is expected
to take between 1-3 years.
12
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 note and an initial public
offering. As of September 30, 2005, we had cash and cash equivalents and
short-term investments of $54.3 million.
Net cash used in operations for the nine months ended September 30, 2005 was
$12.7 million, compared to net cash provided by operations of $8.0 million in
the corresponding period in 2004. The decrease in cash provided by operations
was primarily due to an increase in operating losses.
Net cash used in investing activities for the nine months ended September 30,
2005 was $0.9 million, compared $0.7 million in the corresponding period in
2004. Investing activities included capital expenditures of $0.3 million in the
nine months ended September 30, 2005 versus $0.5 million for the same period in
2004. Investing activities included proceeds from the sale of equipment of $0.2
million in the nine months ended September 30, 2005, compared to $0.1 million in
the corresponding period in 2004. Investing activities in the nine months ended
September 30, 2005 also included net cash usage of $0.8 million to purchase
short-term investments, compared to $0.3 million in 2004.
Net cash provided by financing activities was $0.4 million in the nine months
ended September 30, 2005, compared to $1.8 million in the nine months ended
September 30, 2004. Cash provided by financing activities in the nine months
ending September 30, 2005 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 $1.3 million in the corresponding period of 2004. In the
nine months ended September 30, 2005, there was $0.8 million of proceeds from
long-term debt compared to $0.5 million in the nine months ended September 30,
2004. Additionally, in the nine months ended September 30, 2005, $0.9 million
was used to repurchase 218,000 shares of company stock; $126,000 was used to
repay debt; and $71,000 was used for capital lease obligations.
The Company has a $9,500,000 note payable with a bank due on August 14, 2006,
bearing annual interest at 5.17%. Interest on this note is payable monthly and
principal is payable at maturity. The Company has three additional notes payable
in the original amounts of $200,000, $270,000, and $800,000. These additional
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 $10,535,000. The Company has an available and
unused $1,300,000 letter of credit with the same bank that expires on September
1, 2006.
The Company believes that its current cash reserves together with its ability to
establish borrowing arrangements will be sufficient to support the 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;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights; and
- the timing of purchases of additional capital expenditures.
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 of this Form 10-Q and in the "Overview" and "Risk
Factors" sections of our annual report on Form 10-K for the fiscal year ended
December 31, 2004 filed with the Securities and Exchange Commission, which
factors are specifically incorporated herein by this reference. You should also
carefully consider the factors set forth in other reports or documents that we
file from time to time with the Securities and Exchange Commission. Except as
required by law, we undertake no obligation to update any forward-looking
statements. We expressly disclaim any obligation or undertaking to release
publicly any updates or 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. 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.
13
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims arising
out of our operations in the usual course of business.
On September 14, 2004, Third Wave filed suit against Stratagene Corporation
in the United States District Court for the Western District of Wisconsin.
The complaint alleged patent infringement by Stratagene's sale of its QPCR;
QRTPCR Full Velocity products of two Third Wave patents concerning the
Company's proprietary Invader technology. The case was tried before a jury
in August 2005 and the jury found that Stratagene willfully infringed Third
Wave's patents, and that Third Wave's patents were valid. The jury awarded
Third Wave $5.29 million in damages. Post-trial motions are currently
pending before the Court, including Stratagene's motion for a new trial and
to resolve the damages award and Third Wave's motion for trebled damages,
attorneys fees and costs.
On May 6, 2005, Stratagene Corporation filed suit against Third Wave in the
United States District Court for the District of Delaware. The complaint
alleges patent infringement by Third Wave relating to its Invader Plus
chemistry of claims of two Stratagene patents. The complaint was served on
Third Wave in early September. Discovery is expected to begin in the near
future. No trial date has been set by the Court.
On September 29, 2005, Innogenetics filed a suit against the Company in the
United States District Court for the Western District of Wisconsin. The
complaint alleges that the Company's HCVg ASRs infringe a patent owned by
Innogenetics relating to the detection of the hepatitis C virus. No trial
date has been set.
In October 2005, the Company filed a declaratory judgment suit in the United
States District Court for the Western District of Wisconsin against Chiron
Corporation and Bayer Corporation asking the Court for a ruling that the
Company's HCVg ASRs do not infringe any valid claims of Chiron's hepatitis C
related patents. No trial date has been set.
Also in October 2005, the Company filed a declaratory judgment suit in the
United States District Court for the Western District of Wisconsin against
Digene Corporation asking the court for a ruling that the Company's HPV ASRs
do not infringe any valid claims of Digene's human papillomavirus related
patents. No trial date has been set.
The Company intends to vigorously pursue its infringement claims against
third parties and to vigorously defend itself against infringement claims
brought against it by third parties. There can be no assurance, however,
that the Company will prevail in these proceedings and should the outcome of
any of these actions be unfavorable, the Company's business, financial
condition, results of operations and cash flows could be materially
adversely affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) None
14
(b) Use of Proceeds. Pursuant to our Registration Statement on Form S-1, as
amended, filed with the Securities and Exchange Commission and declared
effective February 9, 2001, (Registration No. 333-42694), we commenced
our initial public offering of 7,500,000 registered shares of common
stock, $0.001 par value, on February 9, 2001, at a price of $11.00 per
share (the "Offering"). The Offering was completed on February 14, 2001,
and all of the 7,500,000 shares were sold, generating gross proceeds of
approximately $82,500,000. The managing underwriters for the Offering
were Lehman Brothers Inc., CIBC World Markets, Dain Rauscher
Incorporated, Robert W. Baird & Co. Incorporated, and Fidelity Capital
Markets.
In connection with the Offering, we incurred approximately $5.8 million
in underwriting discounts and commissions, and approximately $1.9
million in other related expenses. The net offering proceeds to us,
after deducting the foregoing expenses, were approximately $74.8
million.
From the time of receipt through September 30, 2005, we have invested
the net proceeds from the Offering in investment-grade, interest-bearing
securities. We used $4.0 million of the proceeds to satisfy a
cancellation fee for the termination of a distribution agreement with
Endogen Corporation. We used approximately $16.5 million for general
corporate purposes, including working capital and research and
development activities.
We expect to use the remainder of the net proceeds for general corporate
purposes, including working capital and expanding research and
development and sales and marketing efforts to accelerate the
commercialization of new products and the development of new
partnerships.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses or products to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, we may evaluate potential acquisitions of these businesses,
products, or technologies. We have no current agreements or commitments
regarding any such transaction.
(c) None
15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
ITEM 5. OTHER INFORMATION
On August 14, 2005, we entered into an Amendment to Loan Agreement and Note
with U.S. Bank N.A. with respect to our $9,500,000 note payable to U.S.
Bank. Under the terms of the amendment, the note's maturity date was
extended from August 14, 2005 to August 14, 2006 and the annual interest
rate was increased to 5.17%. A copy of this Amendment to Loan Agreement is
filed with this report as Exhibits 10.1 and is incorporated herein by
reference.
On October 25, 2005 Sam Eletr resigned from the Board of Directors.
ITEM 6. EXHIBITS
10.1 Term Loan Agreement dated as of August 14, 2003 between the Company and
U.S. Bank N.A.
10.2 $9,500,000 Term Note payable to U.S. Bank N.A dated August 14, 2003
10.3 Amendment to Loan Agreement and Note dated as of August 14, 2005
between the Company and U.S. Bank N.A.
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
16
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 7, 2005 /s/ John Puisis
-----------------------------------
John Puisis, CEO
Date: November 7, 2005 /s/ James Herrmann
-----------------------------------
James Herrmann,
Principal Financial Officer
17