-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J7Yq9cvRSAadMWx+nZnfwh6DL54A4prI0U/a8jJj6bCCUv2faGK9Oro8SlJugVzs lwK5wq1CD8X2ZC41X2qW0Q== 0000950137-03-005972.txt : 20031114 0000950137-03-005972.hdr.sgml : 20031114 20031114152303 ACCESSION NUMBER: 0000950137-03-005972 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THIRD WAVE TECHNOLOGIES INC /WI CENTRAL INDEX KEY: 0001120438 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 391791034 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-31745 FILM NUMBER: 031003957 BUSINESS ADDRESS: STREET 1: 502 S ROSA RD CITY: MADISON STATE: WI ZIP: 53719-1256 BUSINESS PHONE: 608273 10-Q 1 c80372e10vq.txt QUARTERLY REPORT 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ________ to ________. COMMISSION FILE NUMBER: 000-31745 THIRD WAVE TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 39-1791034 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 502 S. ROSA ROAD, MADISON, WI 53719 (Address of principal executive offices) (Zip Code) (888) 898-2357 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ] The number of shares outstanding of the registrant's Common Stock, $.001 par value, as of September 30, 2003, was 39,806,259. THIRD WAVE TECHNOLOGIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003 TABLE OF CONTENTS
PAGE NO. PART I FINANCIAL INFORMATION................................................................ Item 1. Consolidated Financial Statements............................................. Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002.............................................................................. Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002....................................................... Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002.......................................................................... Notes to Consolidated Financial Statements........................................ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... Item 4. Controls and Procedures....................................................... PART II OTHER INFORMATION.................................................................. Item 1. Legal Proceedings............................................................. Item 2. Changes In Securities And Use Of Proceeds..................................... Item 3. Defaults Upon Senior Securities............................................... Item 4. Submission Of Matters To A Vote Of Security Holders........................... Item 5. Other Information............................................................. Item 6. Exhibits And Reports On Form 8-K.............................................. SIGNATURES..................................................................................
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THIRD WAVE TECHNOLOGIES, INC. Consolidated Balance Sheets
SEPTEMBER 30, DECEMBER 31, 2002 2003 UNAUDITED ASSETS Current assets: Cash and cash equivalents $ 45,139,204 $ 49,301,501 Short-term investments 10,800,000 11,013,000 Receivables, net of allowance for doubtful accounts of $830,000 and $465,000 at September 30, 2003 and December 31, 2002, respectively 4,036,274 2,724,856 Inventories 1,449,561 1,660,344 Prepaid expenses and other 602,272 1,145,687 ------------- ------------- Total current assets 62,027,311 65,845,388 Equipment and leasehold improvements: Machinery and equipment 18,488,201 18,449,319 Leasehold improvements 2,099,104 2,091,457 ------------- ------------- 20,587,305 20,540,776 Less accumulated depreciation 11,499,727 9,617,330 ------------- ------------- 9,087,578 10,923,446 Assets held for sale 36,495 336,000 Intangible assets, net of accumulated amortization 6,027,312 7,155,876 Indefinite lived intangible assets 1,007,411 1,007,411 Goodwill 489,873 489,873 Other long term assets 3,094,498 3,465,244 ------------- ------------- Total assets $ 81,770,478 $ 89,223,238 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,750,869 $ 7,088,962 Accrued payroll and related liabilities 2,378,362 2,260,563 Other accrued liabilities 2,242,226 2,517,315 Deferred revenue 225,664 945,664 Long-term debt due within one year 9,500,000 9,515,152 ------------- ------------- Total current liabilities 20,097,121 22,327,656 Long-term debt 13,333 13,333 Other liabilities 1,942,036 1,595,181 Shareholders' equity: Participating preferred stock, Series A, $.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding 0 0 Common stock, $.001 par value, 100,000,000 shares authorized, 39,806,259 and 39,559,574 shares issued and outstanding, respectively 39,806 39,560 Additional paid-in capital 192,147,999 191,581,136 Unearned stock compensation (254,783) (618,246) Accumulated other comprehensive loss 20,136 0 Accumulated deficit (132,235,170) (125,715,382) ------------- ------------- Total shareholders' equity 59,717,988 65,287,068 ------------- ------------- Total liabilities and shareholders' equity $ 81,770,478 $ 89,223,238 ============= =============
See accompanying notes to financial statements. 3 THIRD WAVE TECHNOLOGIES, INC. Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Revenues: Product sales $ 8,991,782 $ 4,599,558 $ 25,692,837 $ 23,202,735 Development revenue 249,999 399,787 749,999 1,202,913 License and royalty revenue 112,225 0 165,825 0 Grant revenue 0 23,506 54,457 332,453 ------------------------------- ------------------------------- Total revenues 9,354,006 5,022,851 26,663,118 24,738,101 ------------------------------- ------------------------------- Operating expenses: Cost of goods sold Product cost of goods sold 2,883,615 3,937,393 8,595,656 17,251,450 Intangible asset amortization 376,188 482,640 1,128,564 1,447,920 ---------------------------------- ------------------------------ Total cost of goods sold 3,259,803 4,420,033 9,724,220 18,699,370 Research and development 2,790,785 2,548,850 8,201,863 10,630,071 Selling and marketing 2,107,898 2,445,458 6,993,800 7,265,438 General and administrative 2,322,828 3,197,401 8,135,631 9,001,923 Restructuring 0 14,309,355 0 14,309,355 Impairment loss 0 4,809,902 0 4,809,902 ---------------------------------- ------------------------------ Total operating expense 10,481,314 31,730,999 33,055,514 64,716,059 ---------------------------------- ------------------------------ Loss from operations (1,127,308) (26,708,148) (6,392,396) (39,977,958) Other income (expense): Interest income 118,128 238,198 449,194 796,611 Interest expense (57,049) (132,332) (241,132) (804,613) Other (368,989) (329,341) (335,454) (391,573) ---------------------------------- ------------------------------ Other income (expense) (307,910) (223,475) (127,392) (399,575) ---------------------------------- ------------------------------ Net loss $ (1,435,218) $ (26,931,623) $ (6,519,788) $ (40,377,533) ================================== ============================== Net loss per share - basic and diluted $ (0.04) $ (0.68) $ (0.16) $ (1.02) ================================== ============================== Weighted Average Shares outstanding 39,803,272 39,472,563 39,688,844 39,432,573
See accompanying notes to financial statements. 4 THIRD WAVE TECHNOLOGIES, INC. Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- 2003 2002 ------------ ------------ OPERATING ACTIVITIES: Net loss $ (6,519,788) $(40,377,533) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,313,202 6,735,029 Amortization of intangible assets 1,128,564 1,485,921 Noncash stock compensation 541,097 902,761 Noncash impairment charge 0 15,601,304 (Gain) loss on disposal of equipment 38,970 (87,040) Amortization of deferred gain 0 (23,870) Changes in operating assets and liabilities: Receivables (1,291,282) (621,948) Inventories 210,783 4,169,094 Prepaid expenses and other assets 668,016 1,334,713 Accounts payable (1,338,093) (2,218,146) Accrued expenses and other liabilities 189,565 3,369,020 Deferred revenue (720,000) (1,131,704) --------------------------------- Net cash used in operating activities (4,778,966) (10,862,399) INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (182,009) (2,281,437) Proceeds on sale of equipment 311,355 526,735 Purchases of licensed technology (100,000) 0 Purchase of short-term investments (10,800,000) (9,665,000) Sales and maturities of short-term investments 11,013,000 120,000 --------------------------------- Net cash provided by (used in) investing activities 242,346 (11,299,702) FINANCING ACTIVITIES: Proceeds from long-term debt 0 1,653,647 Payments on long-term debt (15,152) (2,891,278) Proceeds from common stock, net 389,475 210,501 Payments on capital lease obligations 0 (932,795) --------------------------------- Net cash provided by (used in) financing activities 374,323 (1,959,925) --------------------------------- Net decrease in cash and cash equivalents (4,162,297) (24,122,026) Cash and cash equivalents at beginning of period 49,301,501 73,131,123 --------------------------------- Cash and cash equivalents at end of period $ 45,139,204 $ 49,009,097 =================================
See accompanying notes to financial statements. 5 THIRD WAVE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (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, 2003. The balance sheet at December 31, 2002 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, 2002 filed with the Securities and Exchange Commission. (2) Net Loss Per Share In accordance with accounting principles generally accepted in the United States, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the respective periods. Shares associated with stock options are not included because they are antidilutive for the periods presented. (3) Stock-Based Compensation Third Wave has stock-based employee compensation plans. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to continue using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for our stock option plans. Had compensation cost been determined based upon the fair value at the grant date for awards under the plans based on the provisions of SFAS No. 123, our SFAS No. 123 pro forma net loss and net loss per share would have been as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net loss, as reported $ (1,435,218) $(26,931,623) $ (6,519,788) $(40,377,533) Add: Stock based compensation, as reported 106,248 298,268 541,097 902,761 Less: Stock-based compensation, using fair value method (1,469,278) (1,109,982) (3,701,996) (3,230,150) --------------------------------------------------------------------------- Pro forma net loss $ (2,798,248) $(27,743,337) $ (9,680,687) $(42,704,922) Net loss per share, basic and diluted, as reported $ (0.04) $ (0.68) $ (0.16) $ (1.02) Pro forma net loss per share, basic and diluted $ (0.07) $ (0.70) $ (0.24) $ (1.08)
(4) Inventories Inventories, consisting mostly of raw materials, are carried at the lower of cost or market using the first-in, first-out (FIFO) method for determining cost. 6 Inventories consist of the following:
SEPTEMBER 30, DECEMBER 31, 2003 2002 -------------- ------------ Raw materials $ 1,638,633 $ 4,253,090 Finished goods and work in process 472,787 457,254 Reserve for excess and obsolete inventory (661,859) (3,050,000) ------------- ------------ Total inventories $ 1,449,561 $ 1,660,344 ============= ============
(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, 2003 2002 2003 2002 ---- ---- ---- ---- Cost of goods sold $ 10,762 $ 35,746 $ 80,783 $ 135,485 Research and development 8,864 23,062 33,006 79,592 Selling and marketing 2,094 5,612 7,950 26,822 General and administrative 84,528 233,848 419,358 660,862 ------------------------------------------------------ Total stock compensation $106,248 $ 298,268 $ 541,097 $ 902,761 ------------------------------------------------------
(6) Comprehensive Loss The components of comprehensive loss are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net loss $ (1,435,218) $ (26,931,623) $ (6,519,788) $ (40,377,533) Other comprehensive loss: Foreign currency translation adjustments 23,104 0 20,136 0 --------------------------------------------------------------- Comprehensive loss $ (1,412,114) $ (26,931,623) $ (6,499,652) $ (40,377,533) ---------------------------------------------------------------
(7) Derivative Instruments We sell products in a number of countries throughout the world. In the quarter ended September 30, 2003, we sold certain products with the resulting accounts receivable denominated in Japanese Yen. Simultaneous with such sales and purchase order commitments, we purchased foreign currency forward contracts to manage the risk associated with collections of receivables denominated in foreign currencies in the normal course of business. These derivative instruments have maturities of less than one year and are intended to offset the effect of transaction gains and losses, which arise when collections in a foreign currency are received after the asset is generated. Contracts outstanding at September 30, 2003 represented a combined U.S. dollar equivalent commitment of approximately $10.8 million. The changes in the fair value of the derivatives and the loss or gain on the hedged asset relating to the risk being hedged are recorded currently in earnings. (8) Goodwill and Intangible Assets Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. In connection with the adoption of SFAS No. 142, it was concluded that no impairment existed at the time of adoption, and accordingly, we did not recognize any transitional impairment loss for goodwill. For intangible assets with indefinite lives, the fair values of these assets were compared to their carrying values as of January 1, 2002, also resulting in no transitional impairment. We completed the annual impairment tests in the quarters ended September 30, 2002 and 2003. For goodwill, this analysis is based on the comparison of the fair value of the Agbio reporting unit to the carrying value of the net assets of the respective reporting units. The fair value of the reporting unit was determined using a combination of discounted cash flows and other common valuation methodologies. For intangible assets with indefinite lives, the fair values of these assets were compared to their carrying values. Based on the analyses performed in 2002, it was determined that goodwill, intangible assets deemed to have indefinite lives and amortizable intangible assets were impaired and 7 accordingly an impairment charge of $4,809,902 was recognized in the quarter ended September 30, 2002 (Goodwill - $4,210,313, Indefinite-lived intangibles - $466,589, amortizable intangible asset $133,000). Based on the analyses completed in the quarter ended September 30, 2003, it was determined that there was no impairment of goodwill and intangible assets with indefinite lives. Identifiable intangible assets with indefinite lives consist of the following:
SEPTEMBER 30, DECEMBER 31, 2003 2002 ----------- ----------- Technology license $ 1,053,000 $ 1,053,000 Impairment charge (137,172) (137,172) Trademark 421,000 421,000 Impairment charge (329,417) (329,417) ----------- ----------- $ 1,007,411 $ 1,007,411 =========== ===========
Amortizable intangible assets consist of the following:
SEPTEMBER 30, 2003 DECEMBER 31, 2002 --------------------------------- ------------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------------- ------------- -------------- ------------- Costs of settling patent Litigation $ 10,533,248 $ 4,505,936 $ 10,533,248 $ 3,377,372 Reacquired marketing and Distribution rights 2,211,111 2,211,111 2,211,111 2,211,111 Customer agreements 171,000 38,000 171,000 38,000 Impairment charge--Customer Agreements (133,000) -- (133,000) -- -------------- ------------- -------------- ------------- $ 12,782,359 $ 6,755,047 $ 12,782,359 $ 5,626,483 ============== ============= ============== =============
(9) Restructuring and Impairment of Long Lived Assets During the third quarter of 2002, we announced a restructuring plan designed to simplify our product development and manufacturing operations, increase gross margin, reduce operating expenses and move the company more aggressively towards profitability. During the quarter ending September 30, 2002, we recorded a restructuring charge of $14.3 million associated primarily with our consolidation of facilities and the write down of certain fixed assets and leasehold improvements. The restructuring charges recorded were determined based upon plans submitted by the management and approved by the Board of Directors using information available at the time. The restructuring charge of $14.3 million in the three months ended September 30, 2002 included $2.2 million for the consolidation of facilities, $0.5 million for prepayment penalties mainly under capital lease arrangements, and an impairment charge of $11.4 million for abandoned leasehold improvements and equipment to be sold or abandoned. The fixed assets and leaseholds were written down to their estimated salvage value. We also recorded a $1.1 million charge in 2002 within cost of goods sold related to inventory that was considered obsolete based upon the restructuring plan. Assets held for sale on the balance sheet represent equipment that we continue to attempt to sell, written down to its estimated fair value. The facilities charge contains estimates based upon our potential to sublease a portion of the corporate office for a portion of the remaining lease term. Actual results may differ from these estimates, which could require adjustments to the restructuring accrual in future periods. The following table shows the components of the restructuring and other charges and changes in the restructuring accrual through September 30, 2003. The remaining facilities balance of $1.6 million included in the restructuring accrual is primarily related to rent payments on non-cancelable leases, net of estimated sublease income, which will continue to be paid over the respective lease terms through 2011. The other component of the restructuring accrual mainly represented amounts owed resulting from the termination of non-cancelable purchase orders for equipment. The current portion of the accrual is included in "Other accrued liabilities" on the balance sheet and the long-term portion is included in "Other liabilities."
FACILITIES OTHER TOTAL Accrued restructuring balance at December 31, 2002 $ 2,158,038 $ 805,580 $ 2,963,618 Payments made (532,164) (840,270) (1,372,434) Adjustments (35,000) 35,000 0 ----------- ----------- ----------- Accrued restructuring balance at September 30, 2003 $ 1,590,874 $ 310 $ 1,591,184 =========== =========== ===========
8 (10) Reclassifications Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation. THIRD WAVE TECHNOLOGIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2003 and for the three and nine months ended September 30, 2003 and 2002 should be read in conjunction with our Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission. In this Form 10-Q, the terms "we," "us," "our," "Company," and "Third Wave" each refer to Third Wave Technologies, Inc. The following discussion of our financial condition and results of our operations should be read in conjunction with our Financial Statements, including the Notes thereto, included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may affect their accuracy, see the "Forward-Looking Statements" section of this Form 10-Q. OVERVIEW Third Wave Technologies, Inc. is a leading genetic analysis products company. We believe our proprietary Invader technology platform is easier to use, more accurate and cost-effective, and enables higher testing throughput than conventional methods based on polymerase chain reaction, or PCR. These and other advantages conferred by our technology platform are enabling us to continue to successfully serve select research customers, while focusing the majority of our commercial effort on the rapidly growing, high-value clinical molecular diagnostic market. More than 100 clinical molecular diagnostic laboratory customers are using Third Wave's products in routine patient care. Our research customer base includes the most notable genome research projects in the world, including the Japanese government's SNP Initiative and that government's share of the International Haplotype Map Project. Other customers include pharmaceutical and biotechnology companies, academic research centers and major health care providers. Third Wave markets a growing number of products including analyte-specific reagents (ASRs) for routine clinical use. These ASRs allow certified clinical reference laboratories to create assays to screen for cystic fibrosis and other inherited disorders, and to test for the Factor V Leiden and a host of other mutations associated with predisposition to cardiovascular and other diseases. We also market a series of Invader RNA Assays for measuring expression levels of a number of genes. 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. 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. 9 RESTRUCTURING AND OTHER CHARGES. The restructuring and other charges resulting from the restructuring plan in the third quarter of 2002 has been recorded in accordance with EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges," and Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The restructuring charge is 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. 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. Estimates were also used in our calculation of the estimated realizable value on equipment that is being held for sale. These estimates were formed based on recent history of sales of similar equipment and market conditions. Our assumptions on the lease termination payments, operating costs until terminated, the offsetting sublease receipts and estimated realizable value of equipment held for sale may turn out to be incorrect and our actual cost may be materially different from our estimates. LONG-LIVED ASSETS--IMPAIRMENT Equipment, leasehold improvements and amortizable identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For assets held and used, if the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. For assets removed from service and held for sale, we estimate the fair market value of such assets and record an adjustment if fair value less costs to sell is lower than carrying value. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests under SFAS No. 142, "Goodwill and Other Intangible Assets." The annual impairment tests were completed in the quarters ended September 30, 2003 and 2002. DERIVATIVE INSTRUMENTS We sell products in a number of countries throughout the world. During 2003 and 2002, we sold certain products with the resulting accounts receivable denominated in Japanese Yen. Simultaneous with such sales and purchase order commitments, we purchased foreign currency forward contracts to manage the risk associated with collections of receivables denominated in foreign currencies in the normal course of business. These derivative instruments have maturities of less than one year and are intended to offset the effect of transaction gains and losses. Contracts outstanding at September 30, 2003 represented a combined U.S. dollar equivalent commitment of approximately $10.8 million. The changes in the fair value of the derivatives and the loss or gain on the hedged asset relating to the risk being hedged are recorded currently in earnings. 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, 2003, our inventory reserves were $0.7 million, or 31% of our $2.1 million total gross inventories. RESULTS OF OPERATIONS Three and Nine Months Ended September 30, 2003 and 2002 10 REVENUES. Revenues for the three months ended September 30, 2003 of $9.4 million represented an increase of $4.4 million as compared to revenues of $5.0 million for the corresponding period of 2002. Revenues for the nine months ended September 30, 2003 of $26.7 million represented an increase of $2.0 million as compared to revenues of $24.7 million for the corresponding period of 2002. Product revenues increased to $9.0 million for the quarter ended September 30, 2003, from $4.6 million in the quarter ended September 30, 2002. Product revenues increased to $25.7 million for the nine months ended September 30, 2003, from $23.2 million in the nine months ended September 30, 2002. The increase in product sales during the three and nine months ending September 30, 2003 was due to an increase in sales of research product to a major Japanese research institute and an increase in clinical product sales compared to the corresponding periods of 2002. Development revenues decreased to $0.2 million for the three months ended September 30, 2003, from $0.4 million for the three months ended September 30, 2002. Development revenues decreased to $0.7 million for the nine months ended September 30, 2003, from $1.2 million for the nine months ended September 30, 2002. The decrease was primarily due to a decrease in funding amounts in our development and commercialization agreement with BML, Inc (BML). Under the agreement, we will develop assays in accordance with a mutually agreed development program for use in clinical applications by BML. This development is expected to be completed by the end of 2003. 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, 2003, cost of goods sold decreased to $3.3 million, compared to $4.4 million for the corresponding period of 2002. For the nine months ended September 30, 2003, cost of goods sold decreased to $9.7 million compared to $18.7 million for the corresponding period in 2002. During the quarter ended September 30, 2002, $1.1 million was charged to cost of goods sold to increase the inventory reserve for excess inventory. The decrease was also due to lower fixed costs as a result of the restructuring that occurred in the third quarter of 2002. 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, 2003 were $2.8 million, compared to $2.5 million for the corresponding period of 2002. Research and development expenses for the nine months ended September 30, 2003 were $8.2 million, compared to $10.6 million for the nine months ended September 30, 2002. The decrease in year to date research and development expenses was primarily attributable to decreased material costs for assay and product development and a decrease in fees paid for consulting, development, and other services. 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, 2003 were $2.1 million, a decrease of $0.3 million, as compared to $2.4 million for the corresponding period of 2002. Selling and marketing expenses for the nine months ended September 30, 2003 were $7.0 million, a decrease of $0.3 million, as compared to $7.3 million for the corresponding period of 2002. The decrease in the three and nine month ended September 30, 2003 is due to a decrease in commissions paid to distributors, partially offset by an increase in salary and personnel related expenses. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, legal and professional fees, office support and depreciation. General and administrative expenses decreased to $2.3 million in the three months ended September 30, 2003, from $3.2 million for the corresponding period in 2002. General and administrative expenses decreased to $8.1 million in the nine months ended September 30, 2003, from $9.0 million for the nine months ended September 30, 2002. The decrease in the three and nine month periods ended September 30, 2003 was due to a decrease in personnel related expenses and consulting fees compared to the corresponding period in 2002. RESTRUCTURING AND OTHER CHARGES. In 2002, we announced a restructuring plan designed to simplify our product development and manufacturing operations, increase gross margin, reduce operating expenses and move the company more aggressively towards profitability. During the three months ended September 30, 2002, we recorded a restructuring charge of $14.3 million associated primarily with our consolidation of facilities and the write down of certain fixed assets and leasehold improvements. 11 The restructuring charge included $2.2 million of expense related to the consolidation of facilities, $0.5 million for the prepayment penalties on debt and capital leases related to assets to be sold, and a net charge of $11.4 million for the write down of fixed assets and leasehold improvements. The fixed assets and leaseholds were written down to their estimated salvage value. IMPAIRMENT LOSS. During the three months ended September 30, 2003 and 2002, we completed the annual impairment tests required by SFAS No. 142 for goodwill and intangible assets with indefinite lives, using the assistance of an independent valuation expert. For the goodwill analysis, the fair value of the Agbio reporting unit was compared to the carrying value of the net assets of the reporting unit. The fair value of the reporting unit was determined using a combination of discounted cash flows method and other common valuation methodologies. For indefinite lived intangible assets, the fair values of these assets were compared to their carrying values. Based on the analyses performed in 2002, it was determined that goodwill and indefinite lived intangibles were impaired and a charge of $4.8 million for the impairment of goodwill and other intangible assets was recorded during the three months ended September 30, 2002. Based on the analyses performed in the quarter ended September 30, 2003, it was determined that there was no impairment, and therefore, no charge was recorded. INTEREST INCOME. Interest income for the three months ended September 30, 2003 was $0.1 million, compared to $0.2 million for the corresponding period of 2002. Interest income for the nine months ended September 30, 2003 was $0.4 million compared to $0.8 million for the nine months ended September 30, 2002. This decrease was primarily due to lower interest rates and lower cash balances compared to the three and nine months ended September 30, 2002. INTEREST EXPENSE. Interest expense for the three months ended September 30, 2003 and 2002 was approximately $0.1 million. Interest expense for the nine months ended September 30, 2003 was $0.2 million compared to $0.8 million in the corresponding period in 2002. The decrease in interest expense was primarily due to lower interest rates on debt. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily through private placements of equity securities, research grants from federal and state government agencies, payments from strategic collaborators, equipment loans, capital leases, sale of products, a convertible note and an initial public offering. As of September 30, 2003, we had cash and cash equivalents and short-term investments of $55.9 million. Net cash used in operations for the nine months ended September 30, 2003 was $4.8 million, compared with $10.9 million in the corresponding period in 2002. The decrease in cash used in operations was primarily due to lower operating losses. Net cash provided by investing activities for the nine months ended September 30, 2003 was $0.2 million, compared to a net cash used of $11.3 million in the corresponding period in 2002. Investing activities included capital expenditures of $0.2 million in the nine months ended September 30, 2003, compared to $2.3 million in the corresponding period in 2002. Capital expenditures during 2002 were higher due to investments in production and lab equipment. Investing activities also included a net cash usage of $9.5 million for the combination of purchases and maturities of short-term investments in the nine months ended September 30, 2002 compared to net proceeds of $0.2 million in the nine months ended September 30, 2003. Net cash provided by financing activities was $0.4 million in the nine months ended September 30, 2003, compared to net cash used in financing activities of $2.0 million in 2002. Cash used in financing activities in the nine months ended September 30, 2003 consisted of $15,000 to repay debt, compared to $2.9 million in the corresponding period in 2002. Additionally, in the nine months ended September 30, 2002, $0.9 million was used for capital lease obligation payments and we received proceeds of $1.7 million from additional financing. During 2002, we entered into a term loan agreement due on July 31, 2003 to pay off the then existing debt and capital lease obligations. We renewed the term loan in August 2003 for an additional year. The term loan is collateralized with a 12-month certificate of deposit. The following summarizes our contractual obligations at September 30, 2003 and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands): 12
TOTAL LESS THAN YEARS YEARS OVER 1 YEAR 1 - 3 4 - 5 5 YEARS -------------------- ----------------- CONTRACTUAL OBLIGATION Non-cancelable operating lease obligations $ 17,698 $ 1,782 $ 4,223 $ 4,574 $ 7,119 Term loan 9,513 9,500 13 -- -- -------- -------- ------- ------- ------- Total obligation $ 27,211 $ 11,282 $ 4,236 $ 4,574 $ 7,119 -------- -------- ------- ------- -------
As of December 31, 2002 and September 30, 2003, a valuation allowance equal to 100% of our net deferred tax assets had been recognized since our future realization is not assured. At December 31, 2002, we had federal and state net operating loss carryforwards of approximately $103 million. The net operating loss carryforwards will expire at various dates beginning in 2008, if not utilized. Utilization of the net operating losses and credits to offset future taxable income may be subject to an annual limitation due to the change of ownership provisions of federal tax laws and similar state provisions as a result of the initial public offering in February 2001. We cannot assure you that our business or operations will not change in a manner that would consume available resources more rapidly than anticipated. We also cannot assure you that we will not require substantial additional funding before we can achieve profitable operations. Our capital requirements depend on numerous factors, including the following: o our progress with our research and development programs; o our level of success in selling our products and technologies; o our ability to establish and maintain successful collaborative relationships; o the costs we incur in enforcing and defending our patent claims and other intellectual property rights; and o the timing of purchases of additional capital. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is currently confined to changes in foreign exchange and interest rates. The securities in our investment portfolio are not leveraged and, due to their short-term nature, are subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Due to the short-term maturities of our investments, we do not believe that an increase in market rates would have any negative impact on the realized value of our investment portfolio. To reduce foreign exchange risk, we selectively use financial instruments. Our earnings are affected by fluctuations in the value of the U.S. dollar against foreign currencies as a result of the sales of our products in foreign markets. Forward foreign exchange contracts are used to hedge against the effects of such fluctuations. Our policy prohibits the trading of financial instruments for profit. A discussion of our accounting policies for derivative financial instruments is included in the notes to the financial statements. ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d) under the Securities Exchange Act of 1934 the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company's internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. 13 FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Form 10-Q the words "believe," "anticipates," "intends," "plans," "estimates," and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-Q are based on current expectations. Forward-looking statements may address the following subjects: results of operations; customer growth and retention; development of technologies; losses or earnings; operating expenses, including, without limitation, marketing expense and technology and development expense; and revenue growth. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, our limited operating history, unpredictability of future revenues and operating results, competitive pressures and also the potential risks and uncertainties set forth in the "Overview" section hereof and in the "Overview" and "Risk Factors" sections of our annual report on Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission, which factors are specifically incorporated herein by this reference. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update any forward-looking statements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material legal proceedings pending. From time to time, we may be involved in litigation relating to claims arising out of our operations in the usual course of business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (1) None (2) None (3) None (4) Use of Proceeds. Pursuant to our Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission and declared effective February 9, 2001, (Registration No. 333-42694), we commenced our initial public offering of 7,500,000 registered shares of common stock, $0.001 par value, on February 9, 2001, at a price of $11.00 per share (the "Offering"). The Offering was completed on February 14, 2001, and all of the 7,500,000 shares were sold, generating gross proceeds of approximately $82,500,000. The managing underwriters for the Offering were Lehman Brothers Inc., CIBC World Markets, Dain Rauscher Incorporated, Robert W. Baird & Co. Incorporated, and Fidelity Capital Markets. In connection with the Offering, we incurred approximately $5.8 million in underwriting discounts and commissions, and approximately $1.9 million in other related expenses. The net offering proceeds to us, after deducting the foregoing expenses, were approximately $74.8 million. 14 From the time of receipt through September 2003, 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 $15.0 million for general corporate purposes, including working capital and research and development activities. We expect to use the remainder of the net proceeds for general corporate purposes, including working capital and expanding research and development and sales and marketing efforts to accelerate the commercialization of new products and the development of new partnerships. A portion of the net proceeds may also be used to acquire or invest in complementary businesses or products to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of these businesses, products, or technologies. We have no current agreements or commitments regarding any such transaction. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: ITEM 5. OTHER INFORMATION - None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32 Section 1350 Certifications (b) Reports on Form 8-K filed during the three months ended September 30, 2003: The Company filed a Form 8-K dated July 23, 2003 reporting under Items 7 and 9 of Form 8-K the Company's press release dated July 23, 2003 announcing the Company's second quarter results. 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 14, 2003 By: /s/ Lance Fors -------------------------- Lance Fors, CEO Date: November 14, 2003 By: /s/ David Nuti -------------------------- David Nuti, CFO 15 EX-31.1 3 c80372exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION I, Lance Fors, CEO of Third Wave Technologies, Inc. (the "registrant"), certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of the registrant; 2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the Report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report, based on such evaluation; and (c) disclosed in the Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and, 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ Lance Fors ------------------------- Lance Fors, CEO EX-31.2 4 c80372exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION I, David Nuti, CFO of Third Wave Technologies, Inc. (the "registrant"), certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of the registrant; 2. Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the Report; 3. Based on my knowledge, the financial statements, and other financial information included in the Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in the Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the Report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by the Report, based on such evaluation; and (c) disclosed in the Report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and, 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2003 /s/ David Nuti ----------------------- David Nuti, CFO EX-32 5 c80372exv32.txt SECTION 1350 CERTIFICATIONS EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350, AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Form 10-Q, Third Wave Technologies, Inc. (the "Company") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Lance Fors, Chief Executive Officer of the Company, and David Nuti, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C Section 1350, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Lance Fors ----------------------- Lance Fors Chief Executive Officer November 14, 2003 /s/ David Nuti ----------------------- David Nuti Chief Financial Officer November 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----