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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 JUNE 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD __________ TO __________
COMMISSION FILE NUMBER: 000-31745
THIRD WAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 39-1791034
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
502 S. ROSA ROAD, MADISON, WI 53719
(Address of principal executive offices) (Zip Code)
(888) 898-2357
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of August 7, 2007, was 42,834,588.
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THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2007
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION ........................................ 3
Item 1. Consolidated Financial Statements ........................ 3
Consolidated Balance Sheets (Unaudited) as of June 30, 2007 and
December 31, 2006 .......................................... 3
Consolidated Statements of Operations (Unaudited) for the Three
and Six Months Ended June 30, 2007 and 2006 ................ 4
Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 2007 and 2006 ........................ 5
Notes to Consolidated Financial Statements (Unaudited) ........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ..................................................... 18
Item 4. Controls and Procedures .................................. 18
PART II OTHER INFORMATION ........................................... 19
Item 1. Legal Proceedings ........................................ 19
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ................................................. 20
Item 3. Defaults Upon Senior Securities .......................... 20
Item 4. Submission Of Matters To A Vote Of Security Holders ...... 20
Item 5. Other Information ........................................ 20
Item 6. Exhibits ................................................. 20
SIGNATURES .......................................................... 21
EXHIBITS ............................................................
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
(Unaudited)
JUNE 30, 2007 DECEMBER 31, 2006
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,250,346 $ 42,428,841
Short-term investments 1,575,000 1,770,000
Accounts receivables, net of allowance for doubtful
accounts of $200,000 at June 30, 2007 and December
31, 2006, respectively 4,638,665 4,756,497
Inventories 4,681,710 3,513,909
Prepaid expenses and other 1,304,232 463,139
------------- -------------
Total current assets 58,449,953 52,932,386
Equipment and leasehold improvements:
Machinery and equipment 16,963,354 16,623,560
Leasehold improvements 2,907,293 2,362,676
------------- -------------
19,870,647 18,986,236
Less accumulated depreciation 15,337,695 14,763,932
------------- -------------
4,532,952 4,222,304
------------- -------------
Intangible assets, net of accumulated amortization 1,333,138 2,135,884
Goodwill 489,873 489,873
Capitalized license fees, net of accumulated amortization 2,047,096 2,624,580
Other assets 2,725,719 1,828,949
------------- -------------
Total assets $ 69,578,731 $ 64,233,976
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,889,305 $ 7,095,860
Accrued payroll and related liabilities 2,111,434 3,856,999
Other accrued liabilities 1,094,845 1,446,500
Deferred revenue -- 109,052
Capital lease obligations due within one year 89,576 124,220
Long-term debt due within one year 341,865 368,269
------------- -------------
Total current liabilities 12,527,025 13,000,900
Long-term debt 15,457,481 15,182,478
Deferred revenue - long-term -- 36,330
Capital lease obligations - long-term 65,891 99,446
Other liabilities 4,375,464 4,776,272
Minority interest in subsidiary 427,835 465,134
Shareholders' equity:
Participating preferred stock, Series A, $.001 par
value, 10,000,000 shares authorized, no shares
issued and outstanding -- --
Common stock, $.001 par value, 100,000,000 shares
authorized, 42,843,939 shares issued, 42,625,939
shares outstanding at June 30, 2007 and 42,135,713
shares issued and 41,917,713 shares outstanding at
December 31, 2006 42,844 42,136
Additional paid-in capital 217,972,476 209,355,204
Unearned stock compensation (657) (6,354)
Treasury stock at cost, 218,000 shares (877,159) (877,159)
Foreign currency translation adjustment (192,521) (102,186)
Accumulated deficit (180,219,948) (177,738,225)
------------- -------------
Total shareholders' equity 36,725,035 30,673,416
------------- -------------
Total liabilities and shareholders' equity $ 69,578,731 $ 64,233,976
============= =============
See accompanying notes to consolidated financial statements.
3
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2007 2006 2007 2006
----------- ----------- ------------ -----------
Revenues:
Clinical product sales $ 6,255,873 $ 5,058,561 $ 12,229,033 $ 9,768,348
Research product sales 1,063,811 1,632,261 1,632,763 4,627,949
License and royalty revenue 41,228 27,263 212,183 54,526
Grant revenue -- 40,994 -- 182,876
----------- ----------- ------------ -----------
Total revenues 7,360,912 6,759,079 14,073,979 14,633,699
----------- ----------- ------------ -----------
Operating expenses:
Cost of goods sold 1,940,499 1,897,880 3,957,435 4,060,921
Research and development 5,214,341 3,032,584 10,323,430 5,334,597
Selling and marketing 3,207,841 2,892,154 5,810,622 5,920,789
General and administrative 3,303,755 3,885,711 6,189,502 7,946,306
Litigation 1,242,814 180,928 1,649,294 1,182,862
----------- ----------- ------------ -----------
Total operating expenses 14,909,250 11,889,257 27,930,283 24,445,475
----------- ----------- ------------ -----------
Loss from operations (7,548,338) (5,130,178) (13,856,304) (9,811,776)
Other income (expense):
Interest income 550,204 373,728 1,081,479 746,910
Interest expense (295,155) (50,336) (596,395) (106,182)
Other (77,187) 39,081 10,670,760 19,896
----------- ----------- ------------ -----------
Total other income (expense) 177,862 362,473 11,155,844 660,624
Loss before minority
interest $(7,370,476) $(4,767,705) $ (2,700,460) $(9,151,152)
Minority interest in subsidiary 122,505 40,846 218,737 $ 40,846
----------- ----------- ------------ -----------
Net loss $(7,247,971) $(4,726,859) $ (2,481,723) $(9,110,306)
=========== =========== ============ ===========
Net loss per share - basic and diluted $ (0.17) $ (0.11) $ (0.06) $ (0.22)
Weighted average shares outstanding - basic
and diluted 42,399,095 41,460,010 42,178,113 41,384,388
See accompanying notes to consolidated financial statements.
4
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
--------------------------
2007 2006
----------- ------------
OPERATING ACTIVITIES:
Net loss $(2,481,723) $ (9,110,306)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest in net loss of subsidiary (218,737) (40,846)
Depreciation and amortization 861,950 817,834
Amortization of intangible assets 802,746 752,376
Amortization of licensed technology 577,484 629,009
Noncash stock compensation 1,408,039 1,785,650
Interest accretion related to convertible note
payable 446,454 --
Impairment charge and loss on disposal of
equipment 15,407 27,886
Changes in operating assets and liabilities:
Accounts receivables 28,331 (448,148)
Inventories (1,169,061) (1,039,889)
Prepaid expenses and other assets (1,664,823) (460,153)
Accounts payable 2,267,949 (1,509,668)
Accrued expenses and other liabilities (2,049,864) 975,203
Deferred revenue (145,382) (54,298)
----------- ------------
Net cash used in operating activities (1,321,230) (7,675,350)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (1,193,831) (374,308)
Proceeds on sale of equipment 1,439 --
Purchases of licensed technology (471,775) (516,546)
Purchases of short-term investments (575,000) --
Sales and maturities of short-term investments 770,000 --
Change in restricted cash balance -- 805,184
----------- ------------
Net cash used in investing activities (1,469,167) (85,670)
FINANCING ACTIVITIES:
Payments on long-term debt (197,855) (187,000)
Payments on capital lease obligations (68,198) (67,850)
Proceeds from issuance of common stock, net 1,794,532 435,998
Proceeds from minority equity investment in
subsidiary 5,259,058 5,093,973
Repurchase of common stock (53,492) --
----------- ------------
Net cash provided by financing activities 6,734,045 5,275,121
----------- ------------
Effect of exchange rate changes on cash (122,143) --
----------- ------------
Net increase (decrease) in cash and cash equivalents 3,821,505 (2,485,899)
----------- ------------
Cash and cash equivalents at beginning of period 42,428,841 27,681,704
----------- ------------
Cash and cash equivalents at end of period $46,250,346 $ 25,195,805
=========== ============
Noncash investing and financing activities:
- - During the six months ended June 30, 2007, the Company issued 79,441 shares
of common stock as partial payment of amounts earned by employees under the
2006 Incentive Plan.
- - During the six months ended June 30, 2006 the Company entered into capital
lease obligations of $58,659.
- - During the six months ended June 30, 2006 the Company entered into a
license agreement under which the Company will pay 1,000,000 Euros over two
years. The estimated present value of the license is $1,122,338.
See accompanying notes to consolidated financial statements.
5
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Third Wave
Technologies, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States (GAAP) for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by GAAP 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,
2007.
The balance sheet at December 31, 2006 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by GAAP 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, 2006 filed with the
Securities and Exchange Commission (SEC).
(2) Settlement
In September 2004, the Company filed a suit against Stratagene Corporation
alleging patent infringement of two patents concerning the Company's proprietary
Invader chemistry. The case was tried before a jury in August 2005, and the jury
found that Stratagene willfully infringed the Company's patents and that the
patents were valid and awarded $5.29 million in damages. The Court subsequently
tripled that judgment and awarded the Company interest and attorneys fees of
$4.2 million. Stratagene appealed the verdict to the Court of Appeals for the
Federal Circuit in Washington, D.C.
On January 29, 2007, the Company and Stratagene entered into an out-of-court
settlement regarding this litigation. Under the terms of the settlement
Stratagene paid the Company $10.75 million in cash to satisfy the outstanding
judgment and dropped its appeal in its entirety. The parties also agreed to
dismiss all litigation, including the suit filed by Stratagene against Third
Wave in the District of Delaware.
(3) Net Loss Per Share
In accordance with GAAP, basic net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. Diluted net 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
periods presented because they are anti-dilutive.
The following table presents the calculation of basic and diluted net loss per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Numerator:
Net loss $(7,247,971) $(4,726,859) $(2,481,723) $(9,110,306)
=========== =========== =========== ===========
Denominator
Weighted average shares outstanding - basic 42,399,095 41,460,010 42,178,113 41,384,388
Dilutive securities - stock options N/A N/A N/A N/A
----------- ----------- ----------- -----------
Weighted average shares outstanding - diluted 42,399,095 41,460,010 42,178,113 41,384,388
Basic net loss per share $ (0.17) $ (0.11) $ (0.06) $ (0.22)
Dilutive net loss per share $ (0.17) $ (0.11) $ (0.06) $ (0.22)
6
(4) Shareholders' Equity
The Company purchases shares of its common stock to cover employee related taxes
withheld on vested restricted shares. During the second quarter of 2007, the
Company repurchased and retired approximately 10,000 shares of its common stock
for an aggregate cost of approximately $53,000.
The Company has Incentive Stock Option Plans for its employees and Nonqualified
Stock Option Plans (collectively, the Plans) for employees and non-employees
under which an aggregate of 13,213,183 stock options and stock purchase rights
(including restricted stock units (RSUs)) may be granted. Options under the
Plans have a maximum life of ten years. Options vest at various intervals, as
determined by the compensation committee of the Board of Directors at the date
of grant. At June 30, 2007, approximately 2.0 million shares were available for
future grant under the Plans.
Stock Options
The following table summarizes the stock option activity under the Plans for the
six months ended June 30, 2007:
WEIGHTED WEIGHTED
AVERAGE AVERAGE AGGREGATE
NUMBER OF EXERCISE CONTRACTUAL INTRINSIC
SHARES PRICE LIFE VALUE
--------- -------- ----------- ----------
Outstanding at December 31, 2006 7,787,607 $4.12
Granted 19,829 5.34
Exercised (512,352) 2.97
Forfeited (44,749) 5.46
--------- -----
Outstanding at June 30, 2007 7,250,335 $4.22 6.0 $14,366,670
Options exercisable at June 30, 2007 5,660,758 $4.42 5.4 $10,628,418
The weighted average fair value of stock options granted in the six months ended
June 30, 2007 and 2006 was $3.29 and $1.87, respectively, using the
Black-Scholes option-pricing model.
The calculations were made for the six months ended June 30, 2007 and 2006 using
the following assumptions:
2007 2006
---- ----
Expected term (years) 5 5
Risk-free interest rate 4.75% 4.95%
Expected volatility 68% 75%
Expected dividend yield 0% 0%
Forfeiture rate 25% 25%
The expected volatility is based on the historical volatility of the Company's
common stock. The Company uses historical option activity to estimate the
forfeiture rate, expected term of the options and the option exercise and
employee termination behavior. The Company considers all employees to have
similar exercise behavior and therefore has not identified separate homogeneous
groups for valuation. The expected term of the options represents the period of
time the options granted are expected to be outstanding. The risk-free interest
rate for periods within the contractual term of the options is based on the U.S.
Treasury constant maturity interest rate which has a term that is consistent
with the expected life of the stock options.
As of June 30, 2007, there was approximately $2.7 million of total unrecognized
compensation cost related to the stock options granted under the Plans. The
intrinsic value of the shares acquired upon exercise of stock options in the six
months ended June 30, 2007 and 2006 was $1.4 million and $0.2 million,
respectively.
Restricted Stock Units
The Company's stock plan also permits the granting of restricted stock units to
eligible employees and non-employee directors. Restricted stock units are
payable in shares of common stock upon vesting. The restricted stock units vest
at various intervals as determined by the compensation committee of the Board of
Directors at the date of grant. The following table presents a summary of the
Company's nonvested restricted stock units granted to employees as of June 30,
2007.
7
SIX MONTHS ENDED
JUNE 30, 2007
--------------------
WEIGHTED
AVERAGE
NUMBER OF FAIR
SHARES VALUE
--------- --------
Nonvested restricted stock units at December 31, 2006 109,079 $2.84
Granted 555,173 4.76
Vested (105,880) 3.24
Forfeited (5,726) 5.73
--------- -----
Nonvested restricted stock units at June 30, 2007 552,646 $4.71
========= =====
As of June 30, 2007, there was approximately $2.0 million of total unrecognized
compensation cost related to the nonvested restricted stock units granted under
the plan. The expense is expected to be recognized over the vesting period.
Compensation expense related to restricted stock units was approximately
$115,000 in the six months ended June 30, 2007. The aggregate intrinsic value of
the restricted stock units outstanding at June 30, 2007 was $3.2 million.
Employee Stock Purchase Plan
The Company also has an Employee Stock Purchase Plan (Purchase Plan) under which
an aggregate of 1,256,800 common shares may be issued. All employees are
eligible to participate in the Purchase Plan. Eligible employees may make
contributions through payroll deductions of up to 10% of their compensation. The
price of common stock purchased under the Purchase Plan is 85% of the lower of
the fair market value of the common stock at the beginning or end of the
offering period. There were 99,697 and 67,267 shares sold to employees in the
six months ended June 30, 2007 and 2006, respectively. At June 30, 2007,
approximately 207,000 shares were available for issuance under the Purchase
Plan.
Minority Interest
In April 2006, Third Wave Japan, Inc., a formerly wholly-owned subsidiary of the
Company (TWT Japan), entered into a Series A Preferred Stock and Warrant
Purchase Agreement with Mitsubishi Corporation and CSK Institute for
Sustainability, LTD. Under this purchase agreement, Mitsubishi and CSK invested
(Y)580 million (approximately $5.1 million) in TWT Japan in exchange for
Series A convertible preferred stock of TWT Japan and warrants to purchase TWT
Japan common stock. Pursuant to the transaction, Mitsubishi and CSK acquired
approximately 17% of TWT Japan prior to the exercise of the warrants or 20%
after exercise of the warrants.
On May 31, 2007, TWT Japan entered into a Series A Preferred Stock Purchase
Agreement with Mitsubishi, CSK, BML, Inc., Daiichi Pure Chemicals Co., Ltd.,
Toppan Printing Co., Ltd. and Shimadzu Corporation. Under this purchase
agreement, these investors purchased (Y) 640,080,000 (approximately $5.3
million) of TWT Japan Series A convertible preferred stock, representing
approximately 12.9% of TWT Japan's outstanding shares and approximately 12.4% of
its outstanding equity on a fully-diluted basis. As a result of the transaction
and the prior investments made by Mitsubishi and CSK in April 2006, outside
investors own approximately 27.5% of TWT Japan prior to the exercise of
outstanding warrants or 31% after exercise of the warrants. The proceeds from
these equity investments are required to be used in the operations of TWT Japan.
At the time of the original investment, minority interest of $704,000 was
recorded on the consolidated balance sheet to reflect the share of the net
assets of TWT Japan held by minority investors. After the second investment, an
additional $210,000 was recorded as minority interest on the consolidated
balance sheet to reflect the increased share of the net assets of TWT Japan held
by investors. For the six months ended June 30, 2007, minority interest was
reduced by approximately $247,000 for the minority investors' share of the net
losses and change in foreign currency translation adjustments of TWT Japan.
(5) Inventories
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method for determining cost.
Inventories consist of the following:
JUNE 30, DECEMBER 31,
2007 2006
---------- ------------
Raw materials $2,291,149 $2,283,852
Finished goods 1,948,721 1,367,177
Work in process 911,840 517,880
Reserve for excess and obsolete inventory (470,000) (655,000)
---------- ----------
Total inventories $4,681,710 $3,513,909
========== ==========
8
(6) Stock-based Compensation
Included in operating expenses are the following stock-based compensation
charges, net of forfeitures related to terminated employees:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
2007 2006 2007 2006
-------- -------- ---------- ----------
Cost of goods sold $ 28,634 $ 21,396 $ 52,357 $ 62,309
Research and development 213,742 165,120 338,175 320,910
Selling and marketing 159,713 182,560 282,426 381,506
General and administrative 390,128 450,028 735,081 1,020,925
-------- -------- ---------- ----------
Total stock compensation $792,217 $819,104 $1,408,039 $1,785,650
======== ======== ========== ==========
(7) Comprehensive Loss
The components of comprehensive loss are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net loss $(7,247,971) $(4,726,859) $(2,481,723) $(9,110,306)
Other comprehensive loss:
Foreign currency translation adjustments (108,264) (45,343) (90,335) (45,307)
----------- ----------- ----------- -----------
Comprehensive loss $(7,356,235) $(4,772,202) $(2,572,058) $(9,155,613)
=========== =========== =========== ===========
(8) Amortizable Intangible Assets
Amortizable intangible assets consist of the following:
JUNE 30, 2007 DECEMBER 31, 2006
-------------------------- --------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
----------- ------------ ----------- ------------
Costs of settling patent litigation $10,533,248 $10,148,756 $10,533,248 $9,396,380
Technology license 915,828 53,424 915,828 7,632
Trademark 91,583 5,341 91,583 763
Customer agreements 38,000 38,000 38,000 38,000
----------- ----------- ----------- ----------
Total $11,578,659 $10,245,521 $11,578,659 $9,442,775
=========== =========== =========== ==========
(9) Restructuring and Impairment of Long Lived Assets
During the third quarter of 2002, we announced a restructuring plan designed to
simplify product development and manufacturing operations and reduce operating
expenses. The restructuring charges recorded were determined based upon plans
submitted by the Company's management and approved by the Board of Directors
using information available at the time. The restructuring charge included $2.5
million for the consolidation of facilities, $500,000 for prepayment penalties
mainly under capital lease arrangements, an impairment charge of $7.2 million
for abandoned leasehold improvements and equipment to be sold and $900,000 of
other costs related to the restructuring. The Company also recorded a $1.1
million charge within cost of goods sold related to inventory that was
considered obsolete based upon the restructuring plan.
The facilities charge contained estimates based on the Company's potential to
sublease a portion of its corporate office. The Company has offered the
corporate office space for sublease, but has been unable to sublease the space.
Accordingly, the Company decreased its estimate of the amount of sublease income
it expects to receive. The estimated lease and operating expenses were also
reduced, based on a portion of the office space being utilized and revisions to
the building lease.
The following table shows the changes in the restructuring accrual since
December 31, 2006. The remaining restructuring balance of $0.6 million is for
rent payments on a non-cancelable lease, net of estimated sublease income, which
will continue to be paid
9
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.
Accrued restructuring balance at December 31, 2006 $631,260
Payments made (62,299)
--------
Accrued restructuring balance at June 30, 2007 $568,961
========
(10) Other Long-term Liabilities
Other long-term liabilities consist of the following items:
JUNE 30, DECEMBER 31,
2007 2006
---------- ------------
License payments $ 849,343 $1,048,260
Long-term Incentive Plan 1,850,545 1,885,989
Restructuring 443,447 505,681
Rent 1,032,129 1,103,313
Other 200,000 233,029
---------- ----------
$4,375,464 $4,776,272
========== ==========
(11) Income Taxes
On July 13, 2006, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes, and
prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN No. 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006.
The Company adopted the provisions of FIN No. 48 on January 1, 2007. The total
amount of unrecognized tax benefits as of the date of adoption was not
significant. As such, there are no unrecognized tax benefits included in the
balance sheet that would, if recognized, affect the effective tax rate.
The Company's practice is to recognize interest and/or penalties related to
income tax matters in income tax expense. The Company had no accruals for
interest and penalties on the Company's Balance Sheets at December 31, 2006 and
at June 30, 2007, and has not recognized any interest or penalties in the
Statement of Operations for the first six months of 2007.
The Company is subject to taxation in the U.S. and various state jurisdictions.
All of the Company's tax years are subject to examination by the U.S. and state
tax authorities due to the carryforward of unutilized net operating losses and
research and development credits.
The adoption of FIN No. 48 did not impact the Company's financial condition,
results of operations or cash flows. At June 30, 2007, the Company had deferred
tax assets of $63.2 million. The deferred tax assets are primarily composed of
federal and state tax net operating loss carryforwards and federal and state
research and development credit carryforwards. Due to uncertainties surrounding
the Company's ability to generate future taxable income to realize these assets,
a full valuation allowance has been established to offset the Company's net
deferred tax asset. Additionally, the future utilization of the Company's net
operating loss and research and development credit carryforwards to offset
future taxable income may be subject to a substantial annual limitation as a
result of ownership changes that may have occurred previously or that could
occur in the future. Any carryforwards that will expire prior to utilization as
a result of such limitations will be removed from deferred tax assets with a
corresponding reduction of the valuation allowance. Due to the existence of the
valuation allowance, future changes in our unrecognized tax benefits will not
impact the Company's effective tax rate.
(12) Reclassifications
10
Certain reclassifications have been made to the 2006 financial statements to
conform to the 2007 presentation.
11
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 June 30, 2007 and for the three and six months ended June 30,
2007 and 2006 should be read in conjunction with our Form 10-K for the fiscal
year ended December 31, 2006 filed with the SEC. In this Form 10-Q, the terms
"we," "us," "our," "Company," and "Third Wave" each refer to Third Wave
Technologies, Inc. and its subsidiaries. The following discussion of our
financial condition and results of our operations should be read in conjunction
with our Financial Statements, including the Notes thereto, included elsewhere
in this Form 10-Q.
OVERVIEW
Third Wave Technologies, Inc. is a leading molecular diagnostics company. We
believe our proprietary Invader chemistry, a novel, molecular chemistry, is
easier to use and more accurate than competing technologies. These and other
advantages conferred by our chemistry are enabling us to provide clinicians and
researchers with superior molecular solutions.
More than 190 clinical laboratory customers are using Third Wave's molecular
diagnostic reagents. Other customers include pharmaceutical and biotechnology
companies, academic research centers and major health care providers.
In August 2005, we received clearance from the U.S. Food and Drug Administration
(the FDA) for our Invader UGT1A1 Molecular Assay. The Invader UGT1A1 Molecular
Assay is cleared for use to identify patients who may be at increased risk of
adverse reaction to the chemotherapy drug Camptosar(R) (irinotecan) by detecting
and identifying specific mutations in the UGT1A1 gene that have been associated
with that risk. Camptosar, marketed in the U.S. by Pfizer, Inc., is used to
treat colorectal cancer and was relabeled in 2005 to include dosing
recommendations based on a patient's genetic profile. In December 2006, we
submitted a cystic fibrosis product to the FDA.
We also market a growing number of products, including analyte specific reagents
(ASRs). These ASRs allow certified clinical reference laboratories to create
assays to perform hepatitis C virus genotyping, inherited disorders testing
(e.g., Factor V Leiden), and testing for a host of other mutations associated
with genetic predispositions and other diseases. We have developed or plan to
develop a menu of molecular diagnostic products for clinical applications that
include genetic testing, pharmacogenetics, and women's health. We also have a
number of other Invader products including those for research, agricultural and
other applications.
The FDA is considering new guidelines for the use of ASRs. The enactment of new
guidelines or potential adverse market perceptions of using ASRs when FDA
cleared tests are available may present risks to our ability to continue to
successfully market and sell our ASR products.
Currently, one of our key strategic initiatives is the commercialization of our
Human Papillomavirus (HPV) offering. In August 2006, we began clinical trials
for two HPV premarket approval submissions to the FDA. We expect to spend
between $12 million and $15 million on these submissions over three years. If
for any reason these trials are not successful or are substantially delayed or
for any other reason we are unable to successfully commercialize our HPV
offering, our business and prospects would likely be materially adversely
impacted. Additionally, we anticipate significant competition in the HPV market
as additional large competitors have announced plans to enter the market in the
near future. This competition may have a significant impact on the success of
our commercialization of our HPV offering.
In January 2007, Digene Corporation initiated legal proceedings against us over
our HPV products. See Part II, Item 1 -- Legal Proceedings. Should the outcome
of this action be unfavorable, the Company's business, financial condition,
results of operations and cash flows could be materially adversely affected.
Our financial results may vary significantly from quarter to quarter due to
fluctuations in the demand for our products, timing of new product introductions
and deliveries made during the quarter, the timing of research, development and
grant revenues and increases in spending, including expenses related to our
product development submissions for FDA clearances or approvals and intellectual
property litigation.
CRITICAL ACCOUNTING POLICIES
12
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 GAAP. We review the accounting policies we use in
reporting our financial results on a regular basis. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to accounts receivable,
inventories, equipment and leasehold improvements and intangible assets. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. These estimates and judgments are reviewed by management on an
ongoing basis, and by the Audit Committee at the end of each quarter prior to
the public release of our financial results. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
REVENUE RECOGNITION
Revenue from product sales is recognized upon delivery which is generally when
the title passes to the customer, provided that the Company has completed all
performance obligations and the customer has accepted the products. Customers
have no contractual rights of return or refunds associated with product sales.
Consideration received in multiple element arrangements is allocated to the
separate units based upon their relative fair values. The multiple element
arrangements involve contracts with customers in which the Company is selling
reagent products and leasing equipment to the customer for use during the term
of the contract. Based upon the guidance in paragraph 9 of EITF No. 00-21
"Revenue Arrangements with Multiple Deliverables", both the reagents and
equipment have value to the customer on a standalone basis, there is objective
and reliable evidence of fair value for both the reagents and equipment and
there are no rights of return. The Company has sold both the reagents and
equipment separately, and therefore is able to determine a fair value for each.
The respective fair values are used to allocate the proceeds received to each of
the elements for purposes of recognizing revenue.
Grant revenues consist primarily of research grants from agencies of the federal
government the revenue from which is recognized as research is performed.
Payments received which are related to future performance are deferred and
recorded as revenue when earned. Grant payments designated to purchase specific
assets to be used in the performance of a contract are recognized as revenue
over the shorter of the useful life of the asset acquired or the contract.
License and royalty revenue include amounts earned from third parties for
licenses of the Company's intellectual property and are recognized when earned
under the terms of the related agreements. License revenues are generally
recognized upon receipt unless the Company has continuing performance
obligations, in which case the license revenue is recognized ratably over the
period of expected performance.
RESTRUCTURING AND OTHER CHARGES
The restructuring and other charges resulting from the restructuring plan in the
third quarter of 2002 have been recorded in accordance with EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)",
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges," and
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The restructuring charge was
comprised primarily of costs to consolidate facilities, impairment charges for
abandoned leasehold improvements and equipment to be sold or abandoned,
prepayment penalties related mainly to capital lease obligations on equipment to
be sold or abandoned, and other costs related to the restructuring. The
remaining accrued restructuring balance is for rent payments on a non-cancelable
lease, net of estimated sublease income. In calculating the cost to consolidate
the facilities, we estimated the future lease and operating costs to be paid
until the leases are terminated and the amount, if any, of sublease receipts for
each location. This required us to estimate the timing and costs of each lease
to be terminated, the amount of operating costs, and the timing and rate at
which we might be able to sublease the site. To form our estimates for these
costs, we performed an assessment of the affected facilities and considered the
current market conditions for each site. Our assumptions on the lease payments,
operating costs until terminated, and the offsetting sublease receipts may turn
out to be incorrect and our actual cost may be materially different from our
estimates.
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
13
difference between the fair value and carrying value of the asset or group of
assets. For assets removed from service and held for sale, we estimate the fair
market value of such assets and record an adjustment if the fair value less
costs to sell is lower than the carrying value.
Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment tests under SFAS No. 142,
"Goodwill and Other Intangible Assets." The annual impairment test is completed
in the quarter ended September 30.
STOCK-BASED COMPENSATION EXPENSE
We have adopted SFAS No. 123(R) to account for share-based payments to
employees. As a result, we recognize expense for all share-based payments to
employees, including grants of employee stock options and RSUs, based on their
fair values.
INVENTORIES--SLOW MOVING AND OBSOLESCENCE
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because of process improvements or technology advancements, the amount on hand
is more than can be used to meet future need, or estimates of shelf lives may
change. We currently consider all inventory that we expect will have no activity
within one year or within the period defined by the expiration date of the
product, as well as any additional specifically identified inventory to be
subject to a provision for excess inventory (including inventory that we
determine to be obsolete based on criteria such as changing manufacturing
processes and technologies). At June 30, 2007, our inventory reserves were
approximately $470,000, or 9% of our $5.2 million total gross inventories.
NEW ACCOUNTING PRONOUNCEMENTS
On July 13, 2006, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes, and
prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN No. 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006.
The Company adopted the provisions of FIN No. 48 on January 1, 2007. The total
amount of unrecognized tax benefits as of the date of adoption was not
significant. As such, there are no unrecognized tax benefits included in the
balance sheet that would, if recognized, affect the effective tax rate.
The Company's practice is to recognize interest and/or penalties related to
income tax matters in income tax expense. The Company had no accruals for
interest and penalties on the Company's Balance Sheets at December 31, 2006 and
at June 30, 2007, and has not recognized any interest or penalties in the
Statement of Operations for the first six months of 2007.
The Company is subject to taxation in the U.S. and various state jurisdictions.
All of the Company's tax years are subject to examination by the U.S. and state
tax authorities due to the carryforward of unutilized net operating losses and
research and development credits.
The adoption of FIN No. 48 did not impact the Company's financial condition,
results of operations or cash flows. At June 30, 2007, the Company had deferred
tax assets of $63.2 million. The deferred tax assets are primarily composed of
federal and state tax net operating loss carryforwards and federal and state
research and development credit carryforwards. Due to uncertainties surrounding
the Company's ability to generate future taxable income to realize these assets,
a full valuation allowance has been established to offset the Company's net
deferred tax asset. Additionally, the future utilization of the Company's net
operating loss and research and development credit carryforwards to offset
future taxable income may be subject to a substantial annual limitation as a
result of ownership changes that may have occurred previously or that could
occur in the future. Any carryforwards that will expire prior to utilization as
a result of such limitations will be removed from deferred tax assets with a
corresponding reduction of the valuation allowance. Due to the existence of the
valuation allowance, future changes in our unrecognized tax benefits will not
impact the Company's effective tax rate.
14
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2007 and 2006
NET INCOME (LOSS). Net loss for the three months ended June 30, 2007 was $7.2
million compared to a net loss of $4.7 million for the corresponding period of
2006. Net loss for the six months ended June 30, 2007 was $2.5 million, compared
to a net loss of $9.1 million for the same period in 2006.
REVENUES. Revenues for the three months ended June 30, 2007 of $7.4 million
represented an increase of $0.6 million, compared to revenues of $6.8 million
for the corresponding period of 2006. Revenues for the six months ended June 30,
2007 of $14.1 million represented a decrease of $0.5 million, compared to
revenues of $14.6 million for the corresponding period of 2006. Following is a
discussion of changes in revenues:
Clinical molecular diagnostic product revenue increased to $6.3 million in the
quarter ended June 30, 2007 from $5.1 million in the quarter ended June 30,
2006. Clinical revenue for the six months ended June 30, 2007 increased to $12.2
million, compared to $9.8 million in 2006.
Research product revenue decreased to $1.1 million in the three months ended
June 30, 2007 from $1.6 million in the three months ended June 30, 2006.
Research product revenue for the six months ended June 30, 2007 decreased to
$1.6 million from $4.6 million in 2006. During the first half of 2006, we
received $2.7 million in Japanese research revenue, the last period in which
substantial revenue of this type was generated.
In the six months ended June 30, 2007, we generated $4.9 million, or 35% of our
revenue, from sales to a small number of large clinical testing laboratories
compared to $4.3 million, or 29% of our revenue, in the same period of 2006.
COST OF GOODS SOLD. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
other intangible assets. For the three months ended June 30, 2007, cost of goods
sold remained flat at $1.9 million, compared to the corresponding period of
2006. Cost of goods sold for the six months ended June 30, 2007 decreased to
$4.0 million from $4.1 million in 2006. The decrease in the six month period was
primarily due to the decrease in Research sales volume.
RESEARCH AND DEVELOPMENT EXPENSES. Our research activities are focused on moving
our technology into broader markets. Our development activities are focused on
new products to expand our molecular diagnostics menu. Research and development
expenses consist primarily of salaries and related personnel costs, material
costs for assays and product development, fees paid to consultants, depreciation
and facilities costs and other expenses related to the design, development,
testing, (including clinical trials to validate the performance of our products)
and enhancement of our products, and acquisition of technologies used in our
products. Research and development costs are expensed as they are incurred.
Research and development expenses for the three months ended June 30, 2007 were
$5.2 million, compared to $3.0 million for the three months ended June 30, 2006.
In the six months ended June 30, 2007, research and development expenses
increased to $10.3 million from $5.3 million in 2006. The increase in research
and development expenses was primarily due to an increase in personnel and
product development expense (including clinical trial costs incurred by us in
pursuit of FDA premarket approval for our HPV offerings). We will continue to
invest in research and development, and expenditures in this area will increase
as we expand our product development efforts. In addition, as the Company moves
towards consideration of FDA cleared or approved products, there will be
increased expenses attributed to these activities.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, commissions, office support and related costs, and travel
and entertainment. Selling and marketing expenses for the three months ended
June 30, 2007 were $3.2 million, an increase of $0.3 million, compared to $2.9
million for the corresponding period of 2006. The increase in selling and
marketing expenses was due to an increase in market research and consulting
expenses, compared to the same period in 2006. Selling and marketing expense for
the six months ended June 30, 2007 decreased slightly to $5.8 million compared
to $5.9 million for the corresponding period of 2006.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance and other
administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses decreased to $3.3 million in
the three months ended June 30, 2007, from $3.9 million for the corresponding
period in 2006. In the six months ended June 30, 2007, general and
administrative expenses decreased to $6.2 million compared to $7.9 million in
2006. The decrease in general and administrative expense was due to a decrease
in personnel related
15
expense, sales tax, and stock based compensation expense compared to the same
period in 2006. We anticipate that the total 2007 general and administrative
expense will approximate the 2006 level.
LITIGATION EXPENSE. Litigation expense consists of legal fees and other costs
associated with patent infringement and other lawsuits. Litigation expense
increased to $1.2 million in the three months ended June 30, 2007 from $0.2
million in the corresponding period in 2006. Litigation expense increased to
$1.6 million in the six months ended June 30, 2007 from $1.2 million in 2006.
The increase was the result of the increased litigation activity due to the
lawsuit with Digene Corporation. We anticipate litigation expense to be
approximately $5 million in 2007 due to the lawsuit with Digene (see Part II,
Item 1: Legal Proceedings).
INTEREST INCOME. Interest income for the three months ended June 30, 2007 and
2006 was $0.6 million and $0.4 million, respectively. Interest income for the
six months ended June 30, 2007 and 2006 was $1.1 million and $0.7 million,
respectively.
INTEREST EXPENSE. Interest expense for the three months ended June 30, 2007 was
$0.3 million compared to $50,000 in the corresponding period in 2006. Interest
expense for the six months ended June 30, 2007 was $0.6 million compared to
$106,000 in the corresponding period in 2006. The increase in interest expense
was due to the interest accretion on the convertible note payable entered into
in December 2006.
OTHER INCOME (EXPENSE). Other expense for the three months ended June 30, 2007
was $0.1 million compared to other income of $39,000 for the same period in
2006. Other income for the six months ended June 30, 2007 was $10.7 million
compared to $20,000 for the same period in 2006. Other income for the six month
period included $10.75 million from the settlement of patent litigation with
Stratagene Corporation.
MINORITY INTEREST. Minority interest for the three months ended June 30, 2007
was $0.1 million compared to $41,000 in 2006. Minority interest for the six
months ended June 30, 2007 was $0.2 million compared to $41,000 in 2006 .
Minority interest represents Third Wave Japan's minority investors' share of the
equity and earnings of the subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through private
placements of equity securities, research grants from federal and state
government agencies, payments from strategic collaborators, equipment loans,
capital leases, product sales, convertible notes and an initial public offering.
As of June 30, 2007, we had cash and cash equivalents and short-term investments
of $47.8 million.
In April 2006 we raised $5.1 million from the sale of a minority equity
investment in our Japan subsidiary. In May 2007 we raised an additional $5.3
million from the sale of additional minority equity investments in our Japan
subsidiary The proceeds from these equity investments are required to be used in
the operations of our Japan subsidiary.
In December 2006 we sold $20,000,000 (at maturity) of Convertible Senior
Subordinated Zero-Coupon Promissory Notes (the "Notes") to an investor for total
proceeds of $14,881,878 (the "Purchase Price"). The Notes will mature on
December 19, 2011. The Notes do not bear cash interest but accrue original issue
discount on the Purchase Price at the rate of 6.00% per year compounded
semiannually (the Purchase Price plus such accrued original issue discount, the
"Accreted Value"). So long as the Notes remain outstanding, we may not incur
indebtedness other than certain Permitted Indebtedness, as such term is defined
in the Notes.
The Notes are convertible at the holder's option into shares of Third Wave
common stock at a rate of 124.01565 shares per $1,000 of principal at maturity
($744 of Purchase Price) or a total of 2,480,313 shares. Pursuant to the
securities purchase agreement under which we sold the Notes, in January 2007 we
filed a registration statement with the Securities and Exchange Commission
covering the resale of the shares of common stock issuable upon conversion of
the Notes.
After December 19, 2008, if Third Wave common stock closes above $9.00 (150% of
the initial conversion price) for 20 consecutive trading days, we may force the
conversion of the Notes so long as there is an effective registration statement
covering the Common Stock in place. At any time after December 19, 2009, we may
redeem the Notes for an amount equal to their Accreted Value. If either an event
of default occurs under the Notes (which would include failure to make any
payments due under the Notes and certain defaults under other indebtedness) or a
change of control occurs with respect to Third Wave, the holders of the Notes
may put the Notes to Third Wave for a purchase price equal to 110% of their
Accreted Value.
16
As of June 30, 2007, the Company has three notes payable to a bank in the
original amounts of $200,000, $270,000 and $800,000. These notes have respective
final maturity dates of July 1, 2007, October 1, 2009 and July 1, 2008, bear
annual interest at 4.25%, 4.93% and 5.2%, respectively, and require monthly
principal and interest payments. The borrowings under the notes payable are
secured by short-term investments consisting of certificates of deposit in the
aggregate amount of $575,000. The Company has an available and unused $1,000,000
letter of credit with the same bank that expires on September 1, 2007.
Net cash used by operations for the six months ended June 30, 2007 was $1.3
million, compared to $7.7 million in the corresponding period in 2006. The
change was primarily due to the proceeds received from the settlement of patent
litigation with Stratagene Corporation, offset by increased expenses related to
our HPV clinical trial.
Net cash used in investing activities for the six months ended June 30, 2007 was
$1.5 million, compared to $0.1 million in the corresponding period in 2006.
Investing activities included capital expenditures of $1.2 million in the six
months ended June 30, 2007 compared to $0.4 million in 2006. Investing
activities in the six months ended June 30, 2007 and 2006 included the payment
on license fee arrangements of $0.5 million. In addition, investing activities
in the six months ended June 30, 2007 included $0.2 million from the maturity of
short term investments. Investing activities in the six months ended June 30,
2006 also included a change in the restricted cash balance of $0.8 million.
Net cash provided by financing activities was $6.7 million in the six months
ended June 30, 2007 compared to $5.3 million in 2006. Cash provided by financing
activities in the six months ending June 30, 2007 consisted of proceeds from the
sale of common stock under the Company's employee stock purchase plan and stock
option plans of $1.8 million compared to $0.4 million in the corresponding
period of 2006. Financing activities in the six months ended June 30, 2007 and
2006 also included proceeds from a minority equity investment in our Japan
subsidiary of $5.3 million and $5.1 million, respectively. In the six months
ended June 30, 2007, $53,000 was used to repurchase our common stock to cover
employee related taxes withheld on vested restricted stock unit shares. In the
six months ended June 30, 2007 and 2006, $0.2 million was used to repay debt and
$68,000 was used for capital lease obligations.
We believe that current cash reserves together with our ability to generate cash
through operations, financing activities and other sources will be sufficient to
support short-term and long-term liquidity requirements for current operations
(including annual capital expenditures). However, we cannot assure you that our
business or operations will not change in a manner that would consume available
resources more rapidly than anticipated.
We also cannot assure you that we will not require substantial additional
funding before we can achieve profitable operations. Our capital requirements
depend on numerous factors, including the following:
- our progress with our research and development programs;
- the need to pursue FDA clearances or approvals of our products;
- our level of success in selling our products and technologies;
- our ability to establish and maintain successful collaborative
relationships;
- the costs we incur in securing intellectual property rights, whether
through patents, licenses or otherwise;
- the costs we incur in enforcing and defending our patent claims and
other intellectual property rights;
- the need to respond to competitive pressures;
- the possible acquisition of complementary products, businesses or
technologies; and
- the timing of capital expenditures.
17
CONTRACTUAL OBLIGATIONS
In July 2007, we amended our facility lease. As a result of the amendment, our
operating lease obligations have changed as follows (in thousands):
2012 AND
TOTAL 2007 2008-2009 2010-2011 THEREAFTER
------- ------ --------- --------- ----------
Pre-amendment operating lease obligation $ 9,545 $1,161 $2,803 $2,890 $2,691
(Decrease)/increase in obligation $(1,423) $ 5 $ (735) $ (693) $ 0
------- ------ ------ ------ ------
Post-amendment operating lease obligation $ 8,122 $1,166 $2,068 $2,197 $2,691
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. When used in this Form 10-Q the words
"believe," "anticipates," "intends," "plans," "estimates," and similar
expressions are forward-looking statements. Such forward-looking statements
contained in this Form 10-Q are based on current expectations. Forward-looking
statements may address the following subjects: results of operations; customer
growth and retention; development of technologies; losses or earnings; operating
expenses, including, without limitation, marketing expense, litigation expense,
and technology and development expense; and revenue growth. We caution investors
that there can be no assurance that actual results, outcomes or business
conditions will not differ materially from those projected or suggested in such
forward-looking statements as a result of various factors, including, among
others, our limited operating history, unpredictability of future revenues and
operating results, competitive pressures and also the potential risks and
uncertainties discussed in the Risk Factors section of this Form 10-Q and under
the heading "Overview" in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section of this Form 10-Q and in the "Risk
Factors" and Management's Discussion and Analysis of Financial Condition and
Results of Operations sections of our annual report on Form 10-K for the fiscal
year ended December 31, 2006 filed with the SEC, which factors are specifically
incorporated herein by this reference. You should also carefully consider the
factors set forth in other reports or documents that we file from time to time
with the SEC. Except as required by law, we undertake no obligation to update
any forward-looking statements. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions, or circumstances on which
any such statements are based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is currently confined to changes in foreign exchange
and interest rates. Our exposure to market risk was discussed in the
Quantitative and Qualitative Disclosures About Market Risk section of our annual
report on Form 10-K for the fiscal year ended December 31, 2006 filed with the
SEC. There have been no material changes to such exposures during the second
quarter of 2007.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, conducted an evaluation as of the end of the period covered by this
report, of the effectiveness of the Company's disclosure controls and procedures
as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report. There have been no
significant changes during the period covered by this report in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, internal controls over financial
reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims arising
out of our operations in the usual course of business.
In October 2005, we filed a declaratory judgment suit in the United States
District Court for the Western District of Wisconsin against Digene Corporation
seeking a ruling that our HPV ASRs do not infringe any valid claims of Digene's
human papillomavirus related patents. In January 2006, we reached an agreement
with Digene to dismiss the suit without prejudice. We also agreed that neither
party would file a suit against the other relating to the Digene human
papillomavirus patents for one year. After this period expired, on January 11,
2007, Digene Corporation filed suit against us in the United States Court for
the Western District of Wisconsin. The complaint alleges patent infringement of
unidentified claims of a single patent related to HPV type 52 by the Company's
HPV ASR product. We filed our response to Digene's complaint on February 28,
2007, which, in addition to denying the alleged infringement, also asserted that
certain Digene sales practices violate certain anti-trust laws. After conducting
a hearing on June 22, 2007, the court recently released its claim construction
order on July 23, 2007 adopting all of Third Wave's proposed construction.
Summary judgment motions are due on September 28, 2007 and trial scheduled to
begin on February 19, 2008.
While no assurance can be given regarding the outcome of the above matter, based
on information currently available, the Company believes that the resolution of
this matter will not have a material adverse effect on the financial position or
results of future operations of the Company. However, because of the nature and
inherent uncertainties of litigation, should the outcome of the action
19
be unfavorable, the Company's business, financial condition, results of
operations and cash flows could be materially adversely affected.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors from those disclosed in
our Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. - None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - None.
ITEM 5. OTHER INFORMATION. - None.
ITEM 6. EXHIBITS.
The exhibits required to be filed as a part of this Report are listed in the
Exhibit Index.
20
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: August 7, 2007 /s/ Kevin T. Conroy
----------------------------------------
Kevin T. Conroy,
Chief Executive Officer
Date: August 7, 2007 /s/ Maneesh K. Arora
----------------------------------------
Maneesh K. Arora,
Chief Financial Officer
21
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
10.1 Series A Preferred Stock Purchase Agreement between Third Wave
Japan, Inc. and Mitsubishi Corporation, CSK Institute for
Sustainability, Ltd., BML, Inc., Daiichi Pure Chemicals Co.,
Ltd., Toppan Printing Co., Ltd. and Shimadzu Corporation dated
May 18, 2007
10.2 Investor Rights Agreement between Third Wave Technologies, Inc.,
Third Wave Japan, Inc., Mitsubishi Corporation, CSK Institute
for Sustainability, Ltd., BML, Inc., Daiichi Pure Chemicals Co.,
Ltd., Toppan Printing Co., Ltd. and Shimadzu Corporation dated
May 31, 2007
10.3 Lease Agreement between Third Wave Technologies, Inc and
University Research Park, Inc. dated July 13, 2007
31.1 CEO's Certification Pursuant to Section 302 of the Sarbanes
Oxley Act of 2002
31.2 CFO's Certification pursuant to Section 302 of the Sarbanes
Oxley Act of 2002
32 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, of
Chapter 63 of Title 18 of the United States Code
22