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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, 2005March 31, 2006 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, (as definedor a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in
Exchange Act Rule 12b-2 of the Exchange Act). YesAct. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [X] NoNon-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of November 4, 2005,May 5, 2006, was 41,236,377.41,481,882.
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THIRD WAVE TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005MARCH 31, 2006
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION..........................................................................................INFORMATION......................................... 3
Item 1. Consolidated Financial Statements..........................................................................Statements......................... 3
Consolidated Balance Sheets as of September 30, 2005March 31, 2006 (Unaudited) and
December 31, 2004.......................................2005........................................... 3
Consolidated Statements of Operations (Unaudited) for the threeThree
Months Ended March 31, 2006 and nine months ended September 30, 2005 and 2004............ 42005........................ 5
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2005Three
Months Ended March 31, 2006 and 2004...................... 52005.......... ............. 6
Notes to Consolidated Financial Statements....................................................................... 6Statements..................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9Operations............................ 10
Item 3. Quantitative and Qualitative Disclosures About Market
Risk................................................. 13Risk........................................................... 14
Item 4. Controls and Procedures.................................................................................... 14Procedures................................... 15
PART II OTHER INFORMATION............................................................................................. 14INFORMATION............................................ 15
Item 1. Legal Proceedings.......................................................................................... 14Proceedings......................................... 15
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds................................................ 14Proceeds....................................................... 16
Item 3. Defaults Upon Senior Securities............................................................................Securities........................... 16
Item 4. Submission Of Matters To A Vote Of Security Holders........................................................Holders....... 16
Item 5. Other Information..........................................................................................Information......................................... 16
Item 6. Exhibits...................................................................................................Exhibits.................................................. 16
SIGNATURES............................................................................................................SIGNATURES........................................................... 17
EXHIBITS
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THIRD WAVE TECHNOLOGIES, INC.
Consolidated Balance Sheets
September 30, 2005March 31, December 31,
2004
(Unaudited)2006 2005
------------- -------------
Unaudited
ASSETS
Current assets:
Cash and cash equivalents $ 42,431,16824,566,350 $ 55,619,98127,681,704
Short-term investments 11,835,000 11,070,000
Receivables,11,035,000 11,035,000
Accounts receivable, net of allowance for doubtful
accounts of $185,000 and $300,000$200,000 at September 30, 2005March 31, 2006 and December
31, 2004,2005, respectively 3,642,717 5,784,6793,469,560 3,764,519
Inventories 2,234,084 1,236,3923,349,118 2,248,183
Prepaid expenses and other 650,148 260,316927,275 235,794
------------- -------------
Total current assets 60,793,117 73,971,36843,347,303 44,965,200
Equipment and leasehold improvements:
Machinery and equipment 15,453,981 15,832,48915,699,826 15,563,119
Leasehold improvements 2,347,093 2,277,6042,346,946 2,346,938
------------- -------------
17,801,074 18,110,09318,046,772 17,910,057
Less accumulated depreciation 12,792,956 12,139,423and amortization 13,543,893 13,192,617
------------- -------------
5,008,118 5,970,6704,502,879 4,717,440
------------- -------------
Assets held for sale - 269,000Restricted cash -- 805,184
Intangible assets, net of accumulated amortization 3,017,808 4,146,372
Indefinite lived2,265,432 2,641,620
Indefinite-lived intangible assets 1,007,411 1,007,411
Goodwill 489,873 489,873
Capitalized license fees 3,552,183 2,797,046
Other long term assets 1,857,730 2,212,935952,716 980,954
------------- -------------
Total assets $ 72,174,05756,117,797 $ 88,067,62958,404,728
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,169,0927,364,132 $ 6,519,0056,850,207
Accrued payroll and related liabilities 1,936,319 2,873,5062,838,280 2,158,870
Other accrued liabilities 3,286,377 1,867,3612,196,831 2,344,835
Deferred revenue 213,269 129,530125,313 121,497
Capital lease obligation 104,095 66,867obligations due within one year 109,886 114,693
Long-term debt due within one year 9,873,800 9,614,127383,351 378,551
------------- -------------
Total current liabilities 21,582,952 21,070,39613,017,793 11,968,653
Long-term debt 749,356 335,069542,780 639,564
Deferred revenue - long term 172,645 254,434long-term 118,119 145,382
Capital lease obligations - long term 209,283 151,885long-term 185,087 191,924
Other liabilities 4,581,460 3,520,9485,356,409 5,384,904
3
Shareholders' equity:
Participating preferred stock, Series A, $.001 par
value, 10,000,000 shares authorized, 0no shares
issued and outstanding - --- --
Common stock, $.001 par value, 100,000,000 shares
authorized, 41,370,23441,622,827 shares issued, 41,152,23441,404,827
shares outstanding at September 30, 2005March 31, 2006 and 41,102,76441,461,377
shares issued, and41,243,377 shares
outstanding at December 31, 2004 41,370 41,1032005 41,623 41,461
Additional paid-in capital 199,073,727 198,990,162200,188,852 199,097,187
Unearned stock compensation (312,277) (554,293)-- (114,892)
Treasury stock - 218,000 shares acquired at an average
price of $4.02 per share (877,159) -(877,159)
Foreign currency translation adjustment 41,136 31,94947,478 47,442
Accumulated deficit (153,088,436) (135,774,024)(162,503,185) (158,119,738)
------------- -------------
Total shareholders' equity 44,878,361 62,734,89736,897,609 40,074,301
------------- -------------
Total liabilities and shareholders' equity $ 72,174,05756,117,797 $ 88,067,62958,404,728
============= =============
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 FlowsOperations
(Unaudited)
NineThree Months Ended
September 30,March 31,
-------------------------
2006 2005
2004----------- -----------
OPERATING ACTIVITIES:Revenues:
Clinical product sales $ 4,709,787 $ 3,101,709
Research product sales 2,995,688 3,812,567
License and royalty revenue 27,263 93,083
Grant revenue 141,882 118,884
----------- -----------
Total revenues 7,874,620 7,126,243
----------- -----------
Operating expenses:
Cost of goods sold
Product cost of goods sold 1,469,650 1,538,676
Intangible and long-term asset amortization 693,391 461,395
----------- -----------
2,163,041 2,000,071
Research and development 2,302,013 2,465,380
Selling and marketing 3,028,635 3,364,493
General and administrative 4,060,595 3,013,746
Litigation 1,001,934 765,518
----------- -----------
Total operating expenses 12,556,218 11,609,208
----------- -----------
Loss from operations (4,681,598) (4,482,965)
Other income (expense):
Interest income 373,182 347,000
Interest expense (55,846) (89,387)
Other (19,185) (195,187)
----------- -----------
Total other income (expense) 298,151 62,426
----------- -----------
Net income (loss) $(17,314,412)loss $(4,383,447) $(4,420,539)
=========== ===========
Net loss per share - basic and diluted $ 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(0.11) $ 42,431,168 $ 56,067,688(0.11)
Weighted average shares outstanding
Basic 41,310,561 41,123,521
Diluted 41,310,561 41,123,521
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.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
----------------------------
2006 2005
----------- -----------
OPERATING ACTIVITIES:
Net loss $(4,383,447) $(4,420,539)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 407,082 459,113
Amortization of intangible assets 376,188 376,188
Amortization of licensed technology 317,203 85,207
Noncash stock compensation 966,546 (414,464)
Loss on disposal of equipment 9,691 8,696
Changes in operating assets and liabilities:
Accounts receivable 302,888 1,282,310
Inventories (1,100,935) (152,683)
Prepaid expenses and other assets (621,138) (378,181)
Accounts payable 157,505 960,041
Accrued expenses and other liabilities 70,205 (183,429)
Deferred revenue (23,447) 157,540
----------- -----------
Net cash used in operating activities (3,521,659) (2,220,201)
INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (182,733) (10,170)
Purchases of licensed technology (333,212) --
Change in restriced cash balance 805,184 --
----------- -----------
Net cash provided by (used in) investing activities 289,239 (10,170)
FINANCING ACTIVITIES:
Payments on long-term debt (91,984) (28,118)
Payments on capital lease obligations (31,123) (17,555)
Proceeds from issuance of common stock, net 240,173 116,803
----------- -----------
Net cash provided by financing activities 117,066 71,130
----------- -----------
Net decrease in cash and cash equivalents (3,115,354) (2,159,241)
----------- -----------
Cash and cash equivalents at beginning of period 27,681,704 55,619,981
----------- -----------
Cash and cash equivalents at end of period $24,566,350 $53,460,740
=========== ===========
Noncash investing and financing activities:
During the three months ended March 31, 2006 and 2005, the Company entered into
capital lease obligations of $19,479 and $96,496, respectively.
During the three months ended March 31, 2006 the Company entered into a license
agreement under which the Company will pay 1,000,000 Euros over two years. The
estimated present value of the license is $1,122,338.
See accompanying notes to consolidated financial statements.
6
THIRD WAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005March 31, 2006
(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, 2005.2006.
The balance sheet at December 31, 20042005 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, 20042005 filed with the
Securities and Exchange Commission.
(2) Net Income (Loss)Loss Per Share
In accordance with accounting principles generally accepted in the United
States, basic net income (loss)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)loss per share takes into account the weighted average shares from
options that could potentially dilute basic net income per share in the future.
Shares associated with stock options are excluded for the three and nine months ended
September 30,March 31, 2006 and 2005 because they are anti-dilutive.
The following table presents the calculation of basic and diluted net income
(loss)loss per
share:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,MARCH 31,
----------------------------
2006 2005
2004 2005 2004
------------ ------------- ------------- ----------------------- -----------
Numerator:
Net income (loss) $ (7,379,943) $ 24,274 $(17,314,412) $ 2,766,967loss $(4,383,447) $(4,420,539)
============ ============
Denominator
Weighted average shares outstanding - basic 41,073,652 40,521,411 41,094,740 40,309,08441,310,561 41,123,521
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 42,070,07541,310,561 41,123,521
Basic net income (loss)loss per share $ (0.18)(0.11) $ (0.00) $ (0.42) $ 0.07(0.11)
Dilutive net income (loss)loss per share $ (0.18)(0.11) $ (0.00) $ (0.42) $ 0.07(0.11)
(3) Stock-Based Compensation
Third WaveThe Company has stock-based employee compensationIncentive 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 may be granted. Options
under the Plans have a maximum life of ten years. Options vest at various
intervals, as determined by the Board of Directors at the date of grant. At
March 31, 2006, approximately 2.2 million shares were available for future grant
under the plans.
StatementThe Company also has an Employee Stock Purchase Plan (Purchase Plan) under which
an aggregate of Financial
Accounting Standards (SFAS) No. 123, "Accounting1,256,800 common shares may be issued. Employees are eligible to
participate in the Purchase Plan if they work at least 20 hours per week and
more than five months in any calendar year. 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 no shares sold to employees in the three months
ended March 31, 2006, and 2005. At March 31, 2006, approximately 431,000 shares
were available for Stock-Based Compensation"issuance under the plan.
The following table summarizes the activity under the Plan for the three months
ended March 31, 2006:
NUMBER OF WEIGHTED EXERCISE
SHARES EXERCISE PRICE
--------- -----------------
Outstanding at December 31,2005 9,101,298 $ 4.34
Granted 417,000 2.94
Exercised (161,450) 1.49
Forfeited (700,546) 5.09
--------- ------
Outstanding at March 31, 2006 8,656,302 $ 4.27
Options Exercisable at March 31, 2006 5,392,448 $ 4.73
The weighted-average fair value of stock options granted in the three months
ended March 31, 2006 and 2005 was $1.89 and $4.93, respectively, using the
Black-Scholes option-pricing model. The calculations were made assuming a
dividend yield of 0%, encourages, but does not require companiesa weighted-average expected option life of five years and
a weighted-average risk-free interest rate of 4.7%, and 4.5% in 2006 and 2005,
respectively. The volatility factor used in the Black-Scholes model for 2006 and
2005 was 77% and 83%, respectively.
Prior to record compensation cost for
stock-based employee compensation plans at fair value. We have chosen to
continue usingJanuary 1, 2006, we used the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, in accounting for stock options granted
under our stock option plans.
HadPlans. Generally, no compensation cost been determined based uponwas required to be recognized
for options granted to employees because the fairoptions had an exercise price equal
to the market value atper share of the grant
date for awards under the plans basedunderlying common stock on the provisionsdate of
grant. Prior to 2006, the Purchase Plan was considered noncompensatory under APB
Opinion No. 25 and, therefore, no expense was recorded for the 15% discount.
Options granted to non-employee consultants were accounted for in accordance
with SFAS No. 123 our
SFASand Emerging Issues Task Force (EITF) Issue No. 123 pro forma net income (loss)96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services," and net income (loss) per share would
have beentherefore
were measured based upon their fair value 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,calculated using the Black-Scholes
option pricing model. The 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 Notesoptions granted to Consolidated Financial Statements in our
Form 10-K fornon-employees was
periodically remeasured as the year ended December 31, 2004, the Financial Accounting
Standards Board recently issuedunderlying options vested.
On January 1, 2006, The Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment", which is a revision of SFAS No. 123. The Company expects to adopt SFAS No. 123(R)
permits public companies to adopt its requirements using one of two methods: (1)
a "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on January 1, 2006.the requirements of SFAS No.
123(R) for all-share based payments granted after the effective date and (b)
based on the requirements of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date; or (2) a "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. The Company has
adopted the modified prospective approach.
7
As prescribed in the modified prospective approach, prior periods have not been
restated to reflect the effects of implementing FAS 123(R). For the three month
period ended March 31, 2005, the pro forma stock option expense, net loss and
net loss per share are as follows:
Net loss, as reported $(4,420,539)
Add: Stock-based compensation, as reported (414,464)
Add: Stock-based compensation, using fair value method (1,064,014)
-----------
Pro forma net loss $(5,899,017)
Net loss per share, basic and diluted, as reported $ (0.11)
Pro forma net loss per share, basic and diluted $ (0.14)
(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,MARCH 31, DECEMBER 31,
2006 2005
2004
-------------- ---------- ------------
Raw materials $ 1,630,456 $ 1,318,771$1,992,979 $1,486,166
Finished goods and work in process 1,363,628 567,6212,206,139 1,437,017
Reserve for excess and obsolete inventory (760,000) (650,000)
------------- ------------(850,000) (675,000)
---------- ----------
Total inventories $ 2,234,084 $ 1,236,392
============= ============$3,349,118 $2,248,183
========== ==========
(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,MARCH 31,
--------------------
2006 2005
2004 2005 2004
------------ ----------- ------------ --------------------- ---------
Cost of goods sold $ 40,14340,913 $ 47,731 $ 27,163 $ 57,692(5,749)
Research and development 1,969 419,025 (499,113) 769,970155,790 (259,850)
Selling and marketing 33,150 188 45,557 68,674198,946 29,708
General and administrative 347,095 318,282 71,566 433,068
------------ ----------- ------------ -------------570,897 (178,573)
-------- ---------
Total stock compensation $ 422,357 $ 785,226 $ (354,827) $ 1,329,404
------------ ----------- ------------ -------------$966,546 $(414,464)
-------- ---------
(6) Comprehensive Income (Loss)Loss
The components of comprehensive income (loss)loss are as follows:
THREE MONTHS ENDED
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,MARCH 31,
-------------------------
2006 2005
2004 2005 2004
-------------- ----------- -------------- ------------------------
Net income (loss) $ (7,379,943) $ 24,274 $(17,314,412) $ 2,766,967loss $(4,383,447) $(4,420,539)
Other comprehensive income (loss):
Foreign currency translation adjustments 4,625 (1,945) 9,187 (1,774)
------------- ---------- ------------- -------------36 (854)
----------- -----------
Comprehensive income (loss) $ (7,375,318) $ 22,329 $ (17,305,225) $ 2,765,193
============= ========== ============= =============loss $(4,383,411) $(4,421,393)
=========== ===========
78
(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, 2005MARCH 31, 2006 DECEMBER 31, 2004
--------------------------------------------------------------------------------2005
-------------------------- --------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------------------ ------------ ------------------------ ------------
Costs of settling patent litigation $10,533,248 $ 10,533,2488,267,816 $10,533,248 $ 7,515,440 $ 10,533,248 $ 6,386,8767,891,628
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
============== ============= ============== =============$12,782,359 $10,516,927 $12,782,359 $10,140,739
=========== =========== =========== ===========
(9)(8) 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, 2004.2005. The remaining restructuring balance of $1.0$0.9 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 $ 1,116,8482005 $957,563
Payments made (118,768)
------------(41,485)
--------
Accrued restructuring balance at September 30, 2005 $ 998,080
------------March 31, 2006 $916,078
--------
(10) Shareholder's(9) Shareholders' Equity
The Board of Directors hashad 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,December 31, 2005 for $877,159. (11)The program
expired on December 31, 2005.
(10) Reclassifications
Certain reclassifications have been made to the 20042005 financial statements to
conform to the 20052006 presentation.
89
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, 2005March 31, 2006 and for the three and nine months ended September 30,March 31, 2006
and 2005 and 2004 should be read in conjunction with our Form 10-K for the fiscal year
ended December 31, 20042005 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. isdevelops and markets molecular diagnostic reagents
for a leading molecular diagnostics company.variety of DNA and RNA analysis applications to meet the needs of our
customers. The Company offers a number of products based on its Invader (R)
chemistry for clinical testing. Third Wave offers in vitro diagnostic kits and
analyte specific, general purpose, and research use only reagents for nucleic
acid analysis. 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 120145 clinical laboratory customers are using Third Wave's products.molecular
diagnostic reagents. Other customers include pharmaceutical and biotechnology
companies, academic research centers and major health care providers.
Third Wave has received clearance from the U.S. Food and Drug Administration for
its Invader (R) UGT1A1 Molecular Assay. The Invader (R) UGT1A1 Molecular Assay
is used to identify patients who may be at increased risk of adverse reaction to
the chemotherapy Camptosar(R) (irinotecan) by detecting and identifying specific
mutations in the UGT1A1 gene that have been associated with that risk.
Camptosar, marketed in the United States by Pfizer, Inc., is used to treat
colorectal cancer and has been relabeled to include dosing recommendations based
on a patient's genetic profile. The Company also markets a growing number of
products, including analyte-specificanalyte specific reagents (ASRs). These ASRs allow certified
clinical reference laboratories to create assays tothat test for infectious
disease (e.g., hepatitis C virus, human papillomavirus, cystic
fibrosis and othervirus), inherited disorders including the(e.g., Factor V LeidenLeiden),
and a host of other mutationsmarkers associated with cardiovasculargenetic predispositions 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 andor plans to continue to develop a menu of molecular
diagnostic products for clinical applications that include genetics/genetic testing,
pharmacogenetics, oncology/chromosomal analysis, and infectious
disease/women's health. The Company also has a number of other
Invader(R)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 resultsdevelopment submissions for FDA clearances or approvals and results of operations in
any quarterly period may not be indicative of results likely to be realized in
the subsequent quarterly periods.
9
intellectual
property litigation.
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.
10
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.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 performedSTOCK-BASED COMPENSATION EXPENSE
Prior to 2006, we accounted for share-based payments to employees using APB
Opinion No. 25's intrinsic value method and, as such, generally recognized no
compensation cost for employee stock options when granted. On January 1, 2006 we
adopted SFAS No. 123(R) as a result of which we recognize expense for all
share-based payments to employees, including grants of employee stock options,
based on their fair values. We have adopted 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.modified prospective transition
method as permitted by SFAS No. 123(R).
11
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,March 31, 2006, our
inventory reserves were at $0.8 million,$850,000, or 25%20% of our $3.0$4.2 million total gross
inventories.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30,March 31, 2006 and 2005 and 2004
REVENUES. Revenues for the three months ended September 30, 2005March 31, 2006 of $5.2$7.9 million
represented a decreasean increase of $5.3$0.8 million, compared to revenues of $10.5$7.1 million
the corresponding period of 2005. Following is a discussion of changes in
revenues:
Total clinical molecular diagnostic product revenue increased to $4.7 million in
the quarter ended March 31, 2006 from $3.1 million in the quarter ended
March 31, 2005. U.S. clinical molecular diagnostic revenue increased to $4.4
million in the three months ended March 31, 2006 from $2.9 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.
Productin 2005.
Research product revenues decreased to $5.1 million for the quarter ended September 30,
2005, from $10.3$3.0 million in the quarter ended September 30, 2004. Product
revenues decreased to $17.6 million for the ninethree months ended
September 30,
2005,March 31, 2006 from $38.1$3.8 million in the ninethree months ended September 30, 2004.March 31, 2005. The
decrease in research product sales during the three and nine months ending September 30,
2005 was primarily due to2006 resulted from a decrease in
sales of genomic research product sales to a
major Japanese research institute for use by
several end users compared to prior year. The decrease in research revenue from
the Japan research institute was partially offset by an increase in clinical
molecular diagnostic sales compared to the corresponding periods of 2004. As we
continue to develop and expandrevenue from
our line of molecular diagnostic products, we
expect our molecular diagnostic revenues to increase.Agbio business.
Significant Customer. We generated $3.6$2.0 million, or 20%25% of our revenues, from
sales to a major Japanese research institute for use by several end-users during
the ninethree months ended September 30, 2005,March 31, 2006, compared to $25.0$3.1 million, or 65%44% of our
revenues during the ninethree 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.March 31, 2005.
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,March 31, 2006, cost of goods sold
decreasedincreased to $1.6$2.2 million, compared to $2.3$2.0 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 2004.2005. The decreaseincrease in the ninethree month period was primarily due to the
decreaseincrease 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, 2005March 31, 2006 were
$2.1$2.3 million, compared to $3.0$2.5 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.March 31,
2005. The decrease in research and development expenses was primarily due to a
decrease in personnel related expenses.development expense and material costs for assay development, offset
by an increase in stock based compensation expense of $0.4 million. We will
continue to invest in research and development, and expenditures in this area
may increase as we expand our product development efforts. In addition, as the
Company moves towards consideration of FDA cleared or approved products, there
will be increased expenses attributed to these activities.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily
of salaries and related personnel costs for our sales and marketing management
and field sales force, commissions, office support and related costs, and travel
and entertainment. Selling and marketing expenses for the three months ended
September 30, 2005March 31, 2006 were $3.7$3.0 million, an increasea decrease of $1.3$0.4 million, compared to $2.4$3.4
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 2004.2005. The increasedecrease in selling and
marketing expenses was due to a decrease in personnel related and equipment
expense, offset by an increase in personnel related expensesstock based compensation expense of $0.2
million 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.2005.
12
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$4.1 million in
the three months ended September 30, 2005,March 31, 2006, from $2.9$3.0 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 2004.2005. The increase in general and administrative expensesexpense was primarily due to an
increase in personnel related expenses, legal expenses asfees, and a result$0.7 million increase
in stock based compensation expense.
LITIGATION EXPENSE. Litigation expense consists of thelegal fees and other costs
associated with patent infringement lawsuit against Stratagene.and other lawsuits. Litigation expense
increased to $1.0 million in the three months ended March 31, 2006 from $0.8
million in the corresponding period in 2005. The Company anticipates a
continued high level of legal expenses asincrease was a result of the
additional lawsuits with Innogenetics, Chiron Corporation, Bayer Corporation,
Digene Corporation and Stratagene. With the exception of Stratagene, discussedthese
lawsuits were resolved in further detailthe quarter ending March 31, 2006, and we anticipate
litigation expense to be 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 recordedlevels for the loss on equipment that was sold, compared to
$0.8 million forremainder of the nine months ended September 30, 2004 for equipment written
down to fair value.year.
INTEREST INCOME. Interest income for the three months ended September 30, 2005March 31, 2006 was
$0.5$0.4 million, compared to $0.2$0.3 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, 2004.2005. The
increase in interest income was due to higher interest rates compared to 2004.2005.
INTEREST EXPENSE. Interest expense for the three months ended September 30,March 31, 2006 and
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,
2005March 31, 2006
was approximately $31,000$19,000 compared to other income of approximately $4,000$0.2 million for the same period in 2004. Other2005.
The decrease in other expense forwas primarily due to the nineadjustments related to
foreign currency transactions in the three 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.March 31, 2005.
OTHER ITEMS:ITEMS- SUBSEQUENT EVENT: On September 14, 2004,March 31, 2006, 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 Technologies Japan,
K.K., a Japanese corporation ("Third Wave patents concerning the
Company's proprietary Invader technology. The case was tried before a jury in
August 2005Japan") and the jury found that Stratagene willfully infringed Third Wave's
patents, and that Third Wave's patents were valid. The jury awardedwholly-owned subsidiary of
Third Wave $5.29Technologies, Inc. (the "Company"), entered into a Series A Preferred
Stock and Warrant Purchase Agreement (the "Purchase Agreement") with Mitsubishi
Corporation ("Mitsubishi") and CSK Institute for Sustainability, LTD., a wholly
owned subsidiary of CSK Holdings ("CSK" and, together with Mitsubishi, the
"Investors"). Under the Purchase Agreement, Mitsubishi agreed to invest (Y)480
million in damages. Post-trial motions are currently pending before the
Court, including Stratagene's motion for a new trial(approximately $4.2 million) and CSK agreed 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 reviewinvest (Y)100 million
(approximately $800,000) in lieu of
paying Third Wave any awarded damagesJapan in exchange for convertible, Series
A preferred stock of Third Wave Japan and warrants to purchase an additional
(Y)100 million (approximately $800,000) worth of Third Wave Japan common stock.
Upon completion of the transactions contemplated under the Purchase Agreement,
the Investors will own approximately 17% of Third Wave Japan prior to the
exercise of the warrant or costs.20% after exercise of the warrant. The appellate review is expected
to take between 1-3 years.
12
transaction
was completed on April 21, 2006.
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,March 31, 2006, we had cash and cash equivalents and short-term
investments of $54.3$35.6 million.
Net cash used in operations for the ninethree months ended September 30, 2005March 31, 2006 was $12.7$3.5
million, compared to net cash provided by operations of $8.0$2.2 million in the corresponding period in 2004.2005. The
decrease in cash provided by operationschange was primarily due to an increase in operating losses.inventories.
Net cash used inprovided by investing activities for the ninethree months ended September 30,
2005March 31,
2006 was $0.9$0.3 million, compared $0.7 millionto net cash used of $10,000 in the corresponding
period in 2004.2005. Investing activities included capital expenditures of $0.3$0.2
million in the ninethree months ended September 30, 2005March 31, 2006 versus $0.5 million$10,000 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 2004.2005. Investing activities in the ninethree months ended September 30, 2005 alsoMarch 31, 2006
included netthe payment on license fee arrangements of $0.3 million and a change in
the restricted cash usagebalance of $0.8 million to purchase
short-term investments, compared to $0.3 million in 2004.million.
Net cash provided by financing activities was $0.4$0.1 million in the ninethree months
ended September 30, 2005, compared to $1.8 million in the nine months ended
September 30, 2004.March 31, 2006 and 2005. Cash provided by financing activities in the
ninethree months ending September 30, 2005March 31, 2006 consisted of proceeds from the sale of common
stock under the Company's employee stock purchase plan and stock option plans of
$0.7$0.2 million compared to $1.3$0.1 million in the corresponding period of 2004.2005. In
the ninethree 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, $0.9March 31, 2006, $0.1 million was used to repurchase 218,000 shares of company stock; $126,000 was usedrepay debt,
compared to repay debt;$28,000 in the same period in 2005. Additionally, in the three
months ended March 31, 2006 and $71,0002005, $31,000 and $18,000 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.obligations, respectively.
13
The Company has three additional notes payable to a bank 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.$1,000,000. 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 believesWe believe that its current cash reserves together with itsour 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;
- the needs we may have 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 purchases of additional capital expenditures.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 forthdiscussed
under the heading "Overview" in the "Overview"Management's Discussion and Analysis of
Financial Condition and Results of Operations section of this Form 10-Q and in
the "Overview""Risk Factors" and "Risk
Factors"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, 20042005 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 securitiesOur exposure to market risk was discussed in our investment portfolio are not leveragedthe
Quantitative 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
maturitiesQualitative Disclosures About Market Risk section of our investments, we do not believe that an increase in market
rates wouldannual
report on Form 10-K for the fiscal
14
year ended December 31, 2005 filed with the Securities and Exchange Commission.
There have any negative impact onbeen no material changes to such exposures during the realized valuefirst quarter
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.2006.
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'sour 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'sour 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
requiredThere have been no
significant changes during the period covered 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 ofthis report in 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 controlcontrols 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.
OnIn September 14, 2004, Third Wavewe filed a suit against Stratagene Corporation in the United
States District Court for the Western District of Wisconsin. The complaint
alleged patent infringement of two of our patents concerning our proprietary
Invader technology by Stratagene's sale of its QPCR;QPCR and QRTPCR Full Velocity
products of two Third Wave patents concerning the
Company's proprietary Invader technology.products. The case was tried before a jury in August 2005, and the jury found
that Stratagene willfully infringed Third
Wave'sour patents and that Third Wave'sour patents were valid.
The jury awarded Third Waveus $5.29 million in damages. Post-trial motions are currently
pending beforeThe Court subsequently entered a
permanent injunction barring Stratagene from making, selling or offering to sell
its Full Velocity QPCR and QRT-PCR products and any other products that practice
our patented Invader methods. In December 2005, the Court including Stratagene's motion for a new trial and
to resolvetripled the damages
award to $15.9 million and Third Wave's motion for trebledruled that Stratagene must pay attorney fees of $4.2
million. In January 2006, the Court awarded additional interest on the damages
attorneysaward in the amount of $485,716, increasing the total damages amount to $16.4
million. Also in January 2006, Stratagene posted a $21 million civil bond to
stay payment of the judgment while it conducts its appeal. Stratagene has
appealed the verdict, the award of enhanced damages, and the award of attorneys'
fees and costs.
Oncosts to the Court of Appeals for the Federal Circuit in Washington,
D.C.
In May 6, 2005, Stratagene Corporation filed suit against Third Waveus 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.patents relating to our Invader Plus
chemistry. The complaint was served on Third Waveus in early September. Discovery is expected to begin in the near
future. NoSeptember 2005. A trial date has beenof
November 5, 2007 was set by the Court.
OnIn September 29, 2005, Innogenetics filed a suit against the Companyus in the United States
District Court for the Western District of Wisconsin. The complaint allegesalleged that
the Company'sour HCVg ASRs infringe a patent owned by Innogenetics relating to the detection
of the hepatitis C virus. No trial
date has been set.In February 2006, we reached an agreement with
Innogenetics that resolved the litigation. In connection with the agreement,
Third Wave acquired a non-exclusive license to Innogenetics' patent for the
United States. The agreement includes certain opt-out rights for Third Wave, as
well as an option to extend both the term and global reach of the license.
In October 2005, we filed a declaratory judgment suit in the CompanyUnited 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.
Also in October 2005, we filed a declaratory judgment suit in the United States
District Court for the Western District of Wisconsin against Chiron Corporation
and Bayer Corporation asking the Court forseeking a ruling that the
Company'sour HCVg ASRs do not infringe any
valid claims of Chiron's hepatitis C related patents. In February 2006, we
reached an agreement with Chiron and Bayer to dismiss the suit without
prejudice. No trial date has been set.
Also in October 2005,license were granted or taken under the Company filed a declaratory judgment suit inagreement and no payment
of any monies was made to any of 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.companies.
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
15
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 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, 2005 filed with the
Securities and Exchange Commission.
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,March 31, 2006, 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$35.2 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 INFORMATIONINFORMATION.
On AugustFebruary 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.2006, the Company's board of directors established the Company's
Long Term Incentive Plan No. 3. Under the terms ofplan, awards were made to select
employees, including the amendment,Company's executive officers, covering the note's maturity date was
extended from August 14, 20052006-2008
period to August 14, 2006provide a continued emphasis on specified financial performance goals
which the board considers to be important contributors to long-term stockholder
value. These cash awards will be payable only if the Company achieves specified
goals over the performance period for the following three measurements: the
Company's total shareholder return ranking as compared to its peer group, the
Company's stock price growth and the annual interest
rate was increased to 5.17%.growth in the Company's clinical molecular
diagnostics revenue. A copy of this Amendmentthe plan was filed as Exhibit 10.29 to Loan Agreement isthe
Company's annual report on Form 10-K for the fiscal year ended December 31, 2005
filed with this report as Exhibits 10.1the Securities and Exchange Commission and is hereby incorporated herein by
reference.
On October 25, 2005 Sam Eletr resigned fromreference herein. The foregoing description of the Boardplan does not purport to be
complete and is qualified in its entirety by reference to the full text of Directors.the
plan.
ITEM 6. EXHIBITS
10.1 Term Loan Agreement datedThe exhibits required to be filed as a part of August 14, 2003 betweenthis Report are listed in 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 CertificationsExhibit Index
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, 2005May 4, 2006 /s/ John Puisis
-----------------------------------
John Puisis, CEOKevin Conroy
----------------------------------------
Kevin Conroy, Chief Executive Officer
Date: November 7, 2005May 4, 2006 /s/ James Herrmann
-----------------------------------
James Herrmann,
PrincipalManeesh Arora
----------------------------------------
Maneesh Arora, Chief Financial Officer
17
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
3.1 Amended and Restated Bylaws of the Registrant Exhibit 3.1 to Registrant's Current Report on
Form 8-K filed April 17, 2006
10.1 Severance Agreement between James J. Herrmann Exhibit 10.26 to Registrant's Annual Report
and Third Wave Technologies, Inc. dated on Form 10-K for the fiscal year ended
January 31, 2006 December 31, 2005
10.2 Third Wave Technologies, Inc. LTIP 3 dated Exhibit 10.29 to Registrant's Annual Report
February 14, 2006 on Form 10-K for the fiscal year ended
December 31, 2005
10.3 Series A Preferred Stock and Warrant Purchase
Agreement between Registrant, Mitsubishi
Corporation and CSK Institute for
Sustainability, LTD., dated April 21, 2006
10.4 Investor Rights Agreement between Registrant,
Third Wave Technologies Japan, KK, Mitsubishi
Corporation and CSK Institute for
Sustainability, LTD., dated April 21, 2006
31.1 CEO's Certification Pursuant to Section 302 of
the Sarbanes Oxley Act of 2002
31.2 CFO's Certification pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.
32 CEO and CFO Certification pursuant to 18 U.S.C.
Section 1350, of Chapter 63 of Title 18 of the
United States Code
18