-----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, VxlbIABTCMFdO+YSY3WDpPyDoOyjS6UeH0dPSsz8g7IS42YTS/jTAT0/MUBxNm65 91qxPpjjoLgRCx2fU9dNcA== 0000950137-04-003578.txt : 20040505 0000950137-04-003578.hdr.sgml : 20040505 20040505125128 ACCESSION NUMBER: 0000950137-04-003578 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040505 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: 04780585 BUSINESS ADDRESS: STREET 1: 502 S ROSA RD CITY: MADISON STATE: WI ZIP: 53719-1256 BUSINESS PHONE: 608273 10-Q 1 c85145e10vq.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 March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD ________ to ________. COMMISSION FILE NUMBER: 000-31745 THIRD WAVE TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 39-1791034 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 502 S. ROSA ROAD, MADISON, WI 53719 (Address of principal executive offices) (Zip Code) (888) 898-2357 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ] The number of shares outstanding of the registrant's Common Stock, $.001 par value, as of March 31, 2004, was 40,159,810. THIRD WAVE TECHNOLOGIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004 TABLE OF CONTENTS
PAGE NO. PART I FINANCIAL INFORMATION............................................................... Item 1. Consolidated Financial Statements............................................. Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003.............................................................................. Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003........................................................... Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003.......................................................................... Notes to Consolidated Financial Statements........................................ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................. Item 3. Quantitative and Qualitative Disclosures About Market Risk.................... Item 4. Controls and Procedures....................................................... PART II OTHER INFORMATION................................................................. Item 1. Legal Proceedings............................................................. Item 2. Changes In Securities And Use Of Proceeds..................................... Item 3. Defaults Upon Senior Securities............................................... Item 4. Submission Of Matters To A Vote Of Security Holders........................... Item 5. Other Information............................................................. Item 6. Exhibits And Reports On Form 8-K.............................................. SIGNATURES................................................................................. EXHIBITS...................................................................................
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THIRD WAVE TECHNOLOGIES, INC. Consolidated Balance Sheets
MARCH 31, 2004 DECEMBER 31, 2003 UNAUDITED ASSETS Current assets: Cash and cash equivalents $ 49,089,098 $ 47,015,746 Short-term investments 10,800,000 10,800,000 Receivables, net of allowance for doubtful accounts of $140,000 at March 31, 2004 and December 31, 2003 6,184,754 2,061,054 Inventories 3,027,846 1,394,046 Prepaid expenses and other 288,189 485,680 ----------------- ---------------- Total current assets 69,389,887 61,756,526 Equipment and leasehold improvements: Machinery and equipment 18,564,812 18,544,956 Leasehold improvements 2,108,038 2,099,104 ----------------- ---------------- 20,672,850 20,644,060 Less accumulated depreciation 12,708,277 12,116,813 ----------------- ---------------- 7,964,573 8,527,247 Intangible assets, net of accumulated amortization 5,274,936 5,651,124 Indefinite lived intangible assets 1,007,411 1,007,411 Goodwill 489,873 489,873 Other long term assets 2,754,817 2,989,752 ----------------- ---------------- Total assets $ 86,881,497 $ 80,421,933 ================= ================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 8,980,431 $ 4,955,434 Accrued payroll and related liabilities 1,877,309 2,802,297 Other accrued liabilities 1,341,739 1,776,250 Deferred revenue 117,500 67,760 Long-term debt due within one year 9,500,000 9,500,000 ----------------- ---------------- Total current liabilities 21,816,979 19,101,741 Long-term debt 13,333 13,333 Other liabilities 2,301,801 2,019,024 Shareholders' equity: Participating preferred stock, Series A, $.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding 0 0 Common stock, $.001 par value, 100,000,000 shares authorized, 40,159,810 and 40,021,244 shares issued and outstanding, respectively 40,160 40,021 Additional paid-in capital 193,840,149 193,356,121 Unearned stock compensation (182,388) (309,996) Foreign currency translation adjustment 34,657 33,307 Accumulated deficit (130,983,194) (133,831,618) ----------------- ----------------- Total shareholders' equity 62,749,384 59,287,835 ----------------- ---------------- Total liabilities and shareholders' equity $ 86,881,497 $ 80,421,933 ================= ================
See accompanying notes to financial statements. 3 THIRD WAVE TECHNOLOGIES, INC. Consolidated Statements of Operations (Unaudited)
THREE MONTHS ENDED MARCH 31, -------------------------------- 2004 2003 ---- ---- Revenues: Product sales $ 15,214,638 $ 8,185,737 Development revenue 0 250,000 License and royalty revenue 40,641 25,572 Grant revenue 20,330 30,582 -------------------------------- Total revenues 15,275,609 8,491,891 -------------------------------- Operating expenses: Cost of goods sold Product cost of goods sold 3,500,751 2,602,266 Intangible and long term asset amortization 571,096 486,905 -------------------------------- Total cost of goods sold 4,071,847 3,089,171 Research and development 2,944,163 2,919,278 Selling and marketing 2,624,772 2,340,943 General and administrative 2,185,113 3,170,767 -------------------------------- Total operating expenses 11,825,895 11,520,159 -------------------------------- Income (loss) from operations 3,449,714 (3,028,268) Other income (expense): Interest income 127,190 170,795 Interest expense (56,994) (92,083) Other (671,486) 25,731 -------------------------------- Other income (expense) (601,290) 104,443 -------------------------------- Net income (loss) $ 2,848,424 $ (2,923,825) ================================ Net income (loss) per share - basic $ 0.07 $ (0.07) ================================ Net income (loss) per share - diluted $ 0.07 $ (0.07) ================================ Weighted Average Shares outstanding: Basic 40,079,040 39,564,054 Diluted 41,566,020 39,564,054
See accompanying notes to financial statements. 4 THIRD WAVE TECHNOLOGIES, INC. Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS ENDED MARCH 31, --------------------------------- 2004 2003 --------------- ----------------- OPERATING ACTIVITIES: Net income (loss) $ 2,848,424 $ (2,923,825) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 788,401 775,490 Amortization of intangible assets 376,188 376,188 Noncash stock compensation 232,561 235,273 (Gain) loss on disposal of equipment 18,474 769 Changes in operating assets and liabilities: Receivables (4,122,350) 1,168,216 Inventories (1,633,800) (169,731) Prepaid expenses and other assets 237,515 109,318 Accounts payable 4,024,998 747,347 Accrued expenses and other liabilities (1,076,723) (1,096,663) Deferred revenue 49,740 (175,000) --------------------------------- Net cash provided by (used in) operating activities 1,743,428 (952,618) INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements (49,290) (86,523) Proceeds on sale of equipment 0 11,850 Sales and maturities of short-term investments 0 48,000 --------------------------------- Net cash used in investing activities (49,290) (26,673) FINANCING ACTIVITIES: Payments on long-term debt 0 (6,392) Proceeds from common stock, net 379,214 22,560 --------------------------------- Net cash provided by financing activities 379,214 16,168 --------------------------------- Net increase (decrease) in cash and cash equivalents 2,073,352 (963,123) Cash and cash equivalents at beginning of period 47,015,746 49,301,501 --------------------------------- Cash and cash equivalents at end of period $ 49,089,098 $ 48,338,378 =================================
See accompanying notes to financial statements. 5 THIRD WAVE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 (unaudited) (1) Basis of Presentation The accompanying unaudited consolidated financial statements of Third Wave Technologies, Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results that may be expected for the year ending December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in our Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission. (2) Net Income (Loss) Per Share In accordance with accounting principles generally accepted in the United States, basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the respective periods. Diluted net income (loss) per share takes into account the weighted average shares from options that could potentially dilute basic earnings per share in the future. Shares associated with stock options are excluded for the three months ended March 31, 2003 because they are antidilutive for the period. The following table presents the calculation of basic and diluted net income (loss) per share:
THREE MONTHS ENDED MARCH 31, 2004 2003 ---------------- -------------- Numerator: Net income (loss) $ 2,848,424 $ (2,923,825) ================ ============== Denominator Weighted average shares outstanding - basic 40,079,040 39,564,054 Dilutive effect of stock options 1,486,980 N/A ---------------- -------------- Weighted average shares outstanding - diluted 41,566,020 39,564,054 ================ ==============
6 (3) Stock-Based Compensation Third Wave has stock-based employee compensation plans. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to continue using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations, in accounting for our stock option plans. Had compensation cost been determined based upon the fair value at the grant date for awards under the plans based on the provisions of SFAS No. 123, our SFAS No. 123 pro forma net income (loss) and net income (loss) per share would have been as follows:
THREE MONTHS ENDED MARCH 31, 2004 2003 ----------- ----------- Net income (loss), as reported $ 2,848,424 $(2,923,825) Add: Stock based compensation, as reported 232,561 235,273 Less: Stock-based compensation, using fair value method (1,284,913) (1,036,601) ----------- ----------- Pro forma net income (loss) $ 1,796,072 $(3,725,153) Net income (loss) per share - basic, as reported $ 0.07 $ (0.07) Net income (loss) per share - diluted, as reported $ 0.07 $ (0.07) Pro forma net income (loss) per share - basic $ 0.04 $ (0.09) Pro forma net income (loss) per share - diluted $ 0.04 $ (0.09)
(4) Inventories Inventories, consisting mostly of raw materials, are carried at the lower of cost or market using the first-in, first-out (FIFO) method for determining cost. Inventories consist of the following:
MARCH 31, DECEMBER 31, 2004 2003 -------------- -------------- Raw materials $ 1,484,941 $1,609,866 Finished goods and work in process 2,342,657 534,180 Reserve for excess and obsolete inventory (799,752) (750,000) -------------- -------------- Total inventories $ 3,027,846 $1,394,046 ============== ==============
(5) Stock Compensation Included in operating expenses are the following stock compensation charges, net of reversals related to terminated employees:
THREE MONTHS ENDED MARCH 31, 2004 2003 ---------- ---------- Cost of goods sold $ 5,082 $ 55,652 Research and development 78,335 12,772 Selling and marketing 68,001 3,220 General and administrative 81,143 163,629 ---------- ---------- Total stock compensation $ 232,561 $235,273 ---------- ----------
7 (6) Comprehensive Income (Loss) The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED MARCH 31, 2004 2003 -------------- -------------- Net income (loss) $ 2,848,424 $ (2,923,825) Other comprehensive income (loss): Foreign currency translation adjustments 1,350 (759) -------------- -------------- Comprehensive income (loss) $ 2,849,774 $ (2,924,584) -------------- --------------
(7) Derivative Instruments We sell products in a number of countries throughout the world. In the quarters ending March 31, 2004 and 2003, we sold certain products with the resulting accounts receivable denominated in Japanese Yen. Simultaneous with such sales and purchase order commitments, we purchased foreign currency forward contracts to manage the risk associated with foreign currency collections in the normal course of business. These derivative instruments have maturities of less than one year and are intended to offset the effect of transaction gains and losses, which arise when collections in a foreign currency are received after the asset is generated. Contracts outstanding at March 31, 2004 represented a combined U.S. dollar equivalent commitment of approximately $20.9 million. The changes in the fair value of the derivatives and the loss or gain on the hedged asset relating to the risk being hedged are recorded currently in earnings. (8) Amortizable Intangible Assets Amortizable intangible assets consist of the following:
MARCH 31, 2004 DECEMBER 31, 2003 ------------------------------- ------------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------------- ------------- -------------- ------------- Costs of settling patent Litigation $ 10,533,248 $ 5,258,312 $ 10,533,248 $ 4,882,124 Reacquired marketing and Distribution rights 2,211,111 2,211,111 2,211,111 2,211,111 Customer agreements 38,000 38,000 38,000 38,000 ============== ============= ============== ============= $ 12,782,359 $ 7,507,423 $ 12,782,359 $ 7,131,235 ============== ============= ============== =============
(9) Restructuring and Impairment of Long Lived Assets During the third quarter of 2002, we announced a restructuring plan designed to simplify product development and manufacturing operations and reduce operating expenses. The restructuring charges recorded were determined based upon plans submitted by the Company's management and approved by the Board of Directors using information available at the time. The third quarter 2002 restructuring charge included $2.2 million for the consolidation of facilities, $500,000 for prepayment penalties mainly under capital lease arrangements, an impairment charge of $10.8 million for abandoned leasehold improvements and equipment to be sold and $900,000 of other costs related to the restructuring. The Company also recorded a $1.1 million charge within cost of goods sold related to inventory that was considered obsolete based upon the restructuring plan. During the fourth quarter of 2002, the Company completed an auction to sell equipment held for sale resulting from the restructuring. The auction resulted in significantly higher proceeds than the Company had anticipated in the third quarter of 2002. Accordingly, a credit of $3.6 million was recorded as an offset to the restructuring charge in the fourth quarter of 2002. The Company also amended its corporate lease agreement during the fourth quarter of 2002, which resulted in an increase to the facilities charge of $300,000. The facilities charge contained estimates based upon the Company's potential to sublease a portion of its corporate office beginning in 2004. The Company continues to offer corporate office space for sublease, but has not yet sublet the space. Accordingly, in the fourth quarter of 2003, the Company changed its estimate of when it expects to sublease the space from 2004 to 2006. 8 The following table shows the changes in the restructuring accrual since December 31, 2003. The remaining restructuring balance of $1.3 million is for rent payments on a non-cancelable lease, net of estimated sublease income, which will continue to be paid over the lease term through 2011. The current portion of the accrual is included in other accrued liabilities on the balance sheet and the remainder is included in other long-term liabilities.
Accrued restructuring balance at December 31, 2003 $ 1,414,044 Payments made (77,936) -------------- Accrued restructuring balance at March 31, 2004 $ 1,336,108 --------------
(10) Reclassifications Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation. THIRD WAVE TECHNOLOGIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 should be read in conjunction with our Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission. In this Form 10-Q, the terms "we," "us," "our," "Company," and "Third Wave" each refer to Third Wave Technologies, Inc. The following discussion of our financial condition and results of our operations should be read in conjunction with our Financial Statements, including the Notes thereto, included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may affect their accuracy, see the "Forward-Looking Statements" section of this Form 10-Q. OVERVIEW Third Wave Technologies, Inc. is a leading molecular diagnostics company. We believe our proprietary Invader(R) technology, a novel, chemistry-based platform, is easier to use, more accurate and cost-effective, and enables higher testing throughput than existing technology. These and other advantages conferred by our technology platform are enabling us to provide physicians and researchers with superior tools to diagnose and treat disease. More than 110 clinical laboratory customers are using Third Wave's products. Our customer base also includes the Japanese government's share of the International Haplotype Map Project. Other customers include pharmaceutical and biotechnology companies, academic research centers and major health care providers. Third Wave markets a growing number of products including analyte-specific reagents (ASRs). These ASRs allow certified clinical reference laboratories to create assays to screen for cystic fibrosis and other inherited disorders, and to test for the Factor V Leiden and a host of other mutations associated with predisposition to cardiovascular and other diseases. The Company has developed or plans to develop a menu of molecular diagnostic products for clinical applications that include genetic testing, pharmacogenetics, chromosomal analysis, infectious disease, and women's health. The Company also has a number of other Invader(R) products including those for research, agricultural and other applications. Our financial results may vary significantly from quarter to quarter due to fluctuations in the demand for our products, timing of new product introductions and deliveries made during the quarter, the timing of research, development and grant revenues, and increases in spending, including expenses related to our product development. 9 CRITICAL ACCOUNTING POLICIES Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We review the accounting policies we use in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, equipment and leasehold improvements and intangible assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis, and by the Audit Committee at the end of each quarter prior to the public release of our financial results. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. RESTRUCTURING AND OTHER CHARGES. The restructuring and other charges resulting from the restructuring plan in the third quarter of 2002 has been recorded in accordance with EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges," and Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The restructuring charge was comprised primarily of costs to consolidate facilities, impairment charges for abandoned leasehold improvements and equipment to be sold or abandoned, prepayment penalties related mainly to capital lease obligations on equipment to be sold or abandoned, and other costs related to the restructuring. The remaining accrued restructuring balance is for rent payments on a non-cancelable lease, net of estimated sublease income. In calculating the cost to consolidate the facilities, we estimated the future lease and operating costs to be paid until the leases are terminated and the amount, if any, of sublease receipts for each location. This required us to estimate the timing and costs of each lease to be terminated, the amount of operating costs, and the timing and rate at which we might be able to sublease the site. To form our estimates for these costs, we performed an assessment of the affected facilities and considered the current market conditions for each site. Our assumptions on the lease termination payments, operating costs until terminated, and the offsetting sublease receipts may turn out to be incorrect and our actual cost may be materially different from our estimates. LONG-LIVED ASSETS--IMPAIRMENT Equipment, leasehold improvements and amortizable identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For assets held and used, if the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. For assets removed from service and held for sale, we estimate the fair market value of such assets and record an adjustment if fair value less costs to sell is lower than carrying value. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment tests under SFAS No. 142, "Goodwill and Other Intangible Assets." The annual impairment tests are completed in the quarter ended September 30. DERIVATIVE INSTRUMENTS We sell products in a number of countries throughout the world. During 2004 and 2003, we sold certain products with the resulting accounts receivable denominated in Japanese Yen. Simultaneous with such sales and purchase order commitments, we purchased foreign currency forward contracts to manage the risk associated with collections of receivables denominated in foreign currencies in the normal course of business. These derivative instruments have maturities of less than one year and are intended to offset the effect of transaction gains and losses. Contracts outstanding at March 31, 2004 represented a combined U.S. dollar equivalent commitment of approximately $20.9 million. The changes in the fair value of the derivatives and the loss or gain on the hedged asset relating to the risk being hedged are recorded currently in earnings. 10 INVENTORIES--SLOW MOVING AND OBSOLESCENCE Significant management judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because of process improvements or technology advancements, the amount on hand is more than can be used to meet future need, or estimates of shelf lives may change. We currently consider all inventory that we expect will have no activity within one year as well as any additional specifically identified inventory to be subject to a provision for excess inventory. We also provide for the total value of inventories that we determine to be obsolete based on criteria such as changing manufacturing processes and technologies. At March 31, 2004, our inventory reserves were $0.8 million, or 21% of our $3.8 million total gross inventories. As of March 31, 2004, a large portion of our gross inventory was held at a customer site pending inspection for approval. RESULTS OF OPERATIONS Three Months Ended March 31, 2004 and 2003 REVENUES. Revenues for the three months ended March 31, 2004 of $15.3 million represented an increase of $6.8 million as compared to revenues of $8.5 million for the corresponding period of 2003. Product revenues increased to $15.2 million for the quarter ended March 31, 2004, from $8.2 million in the quarter ended March 31, 2003. The increase in product sales during the three months ending March 31, 2004 was due to an increase in sales of genomic research product to a major Japanese research institute and an increase in molecular diagnostic sales compared to the corresponding periods of 2003. We expect our molecular diagnostic revenues to increase throughout 2004. Development revenues for the three months ended March 31, 2004 was $0, compared to $0.3 million for the three months ended March 31, 2003. The decrease was due to the transition from development revenue to product revenue in our development and commercialization agreement with BML, Inc. Significant Customer. We generated $10.7 million, or 70% of our revenues from sales to a major Japanese research institute for use by several end-users during the quarter ended March 31, 2004. As of March 31, 2004, $4.0 million of our accounts receivable were attributable to this customer. This customer will continue to purchase Company products in 2004, however, the timing and total of such purchases will be influenced by the funding process and amounts which are unpredictable and unknown to Third Wave. COST OF GOODS SOLD. Cost of goods sold consists of materials used in the manufacture of product, depreciation on manufacturing capital equipment, salaries and related expenses for management and personnel associated with our manufacturing and quality control departments and amortization of licenses and settlement fees. For the three months ended March 31, 2004, cost of goods sold increased to $4.1 million, compared to $3.1 million for the corresponding period of 2003. The increase is primarily due to the increase in sales volume. We expect gross margin to improve as molecular diagnostic revenues increase. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses consist primarily of salaries and related personnel costs, material costs for assays and product development, fees paid to consultants, depreciation and facilities costs and other expenses related to the design, development, testing and enhancement of our products and acquisition of technologies used or to be used in our products. Research and development costs are expensed as they are incurred. Research and development expenses for the three months ended March 31, 2004 and 2003 were $2.9 million. We will continue to invest in research and development, and expenditures in this area may increase as we expand our product development efforts. SELLING AND MARKETING EXPENSES. Selling and marketing expenses consist primarily of salaries and related personnel costs for our sales and marketing management and field sales force, commissions, office support and related costs, and travel and entertainment. Selling and marketing expenses for the three months ended March 31, 2004 were $2.6 million, an increase of $0.3 million, as compared to $2.3 million for the corresponding period of 2003. The increase in the three months ended March 31, 2004 was due to an increase in personnel related expenses compared to the same period in 2003. We anticipate selling and marketing expenses to continue to be at or above 2003 levels. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, legal and professional fees, office support and depreciation. General and administrative expenses decreased to $2.2 million in the three months ended March 31, 2004, from $3.2 million for the corresponding period in 2003. The decrease in the three months ended March 31, 2004 was due to a decrease in legal fees related to litigation and personnel related expenses compared to the corresponding period of 2003. 11 INTEREST INCOME. Interest income for the three months ended March 31, 2004 was $0.1 million, compared to $0.2 million for the corresponding period of 2003. This decrease was primarily due to lower interest rates compared to the three months ended March 31, 2003. INTEREST EXPENSE. Interest expense for the three months ended March 31, 2004 and 2003 was approximately $0.1 million. OTHER INCOME (EXPENSE): Other expense for the three months ended March 31, 2004 was $0.7 million, compared to other income of $26,000 for the three months ended March 31, 2003. The increase in the expense is due to the adjustment of foreign currency contracts and the related hedged asset to fair value at the end of the quarter. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily through private placements of equity securities, research grants from federal and state government agencies, payments from strategic collaborators, equipment loans, capital leases, sale of products, a convertible note and an initial public offering. As of March 31, 2004, we had cash and cash equivalents and short-term investments of $59.9 million. Net cash provided by operations for the three months ended March 31, 2004 was $1.7 million, compared to net cash used in operations of $1.0 million in the corresponding period in 2003. The decrease in cash used in operations was primarily due to the increase in revenue. Net cash used in investing activities for the three months ended March 31, 2004 and March 31, 2003 was less than $0.1 million. Investing activities included capital expenditures of $49,000 in the three months ended March 31, 2004, compared to $87,000 in the corresponding period in 2003. Investing activities in the three months ended March 31, 2003 also included proceeds from the sale of equipment of $12,000 and $48,000 from the maturity of short-term investments. Net cash provided by financing activities was $0.4 million in the three months ended March 31, 2004, compared to $16,000 in 2003. Cash provided by financing activities in the three months ending March 31, 2004 consisted of proceeds from the sale of common stock of $0.4 million compared to $23,000 in the corresponding period of 2003. In the three months ended March 31, 2003, $6,000 was used to repay debt. The following summarizes our contractual obligations at March 31, 2004 and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
TOTAL LESS THAN YEARS YEARS OVER 1 YEAR 2 - 3 4 - 5 5 YEARS --------- -------- ------- -------- CONTRACTUAL OBLIGATION Non-cancelable operating lease obligations $ 14,848 $ 1,603 $ 3,722 $ 4,026 $ 5,497 Term loan 9,513 9,500 13 -- -- --------- -------- -------- ------- ------- Total obligation $ 24,361 $ 11,103 $ 3,735 $ 4,026 $ 5,497 --------- -------- -------- ------- -------
As of December 31, 2003 and March 31, 2004, a valuation allowance equal to 100% of our net deferred tax assets had been recognized since our future realization is not assured. At December 31, 2003, we had federal and state net operating loss carryforwards of approximately $114 million. The net operating loss carryforwards will expire at various dates beginning in 2008, if not utilized. Utilization of the net operating losses and credits to offset future taxable income may be subject to an annual limitation due to the change of ownership provisions of federal tax laws and similar state provisions as a result of the initial public offering in February 2001. We cannot assure you that our business or operations will not change in a manner that would consume available resources more rapidly than anticipated. We also cannot assure you that we will not require substantial additional funding before we can achieve profitable operations. Our capital requirements depend on numerous factors, including the following: o our progress with our research and development programs; o our level of success in selling our products and technologies; o our ability to establish and maintain successful collaborative relationships; 12 o the costs we incur in enforcing and defending our patent claims and other intellectual property rights; and o the timing of purchases of additional capital. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is currently confined to changes in foreign exchange and interest rates. The securities in our investment portfolio are not leveraged and, due to their short-term nature, are subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Due to the short-term maturities of our investments, we do not believe that an increase in market rates would have any negative impact on the realized value of our investment portfolio. To reduce foreign exchange risk, we selectively use financial instruments. Our earnings are affected by fluctuations in the value of the U.S. dollar against foreign currencies as a result of the sales of our products in foreign markets. Forward foreign exchange contracts are used to hedge against the effects of such fluctuations. Our policy prohibits the trading of financial instruments for profit. A discussion of our accounting policies for derivative financial instruments is included in the notes to the financial statements. ITEM 4. CONTROLS AND PROCEDURES As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d) under the Securities Exchange Act of 1934 the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. When used in this Form 10-Q the words "believe," "anticipates," "intends," "plans," "estimates," and similar expressions are forward-looking statements. Such forward-looking statements contained in this Form 10-Q are based on current expectations. Forward-looking statements may address the following subjects: results of operations; customer growth and retention; development of technologies; losses or earnings; operating expenses, including, without limitation, marketing expense and technology and development expense; and revenue growth. We caution investors that there can be no assurance that actual results, outcomes or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, among others, our limited operating history, unpredictability of future revenues and operating results, competitive pressures and also the potential risks and uncertainties set forth in the "Overview" section hereof and in the "Overview" and "Risk Factors" sections of our annual report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission, which factors are specifically incorporated herein by this reference. You should also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update any forward-looking statements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - There are no material legal proceedings pending. From time to time, we may be involved in litigation relating to claims arising out of our operations in the usual course of business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (1) None 13 (2) None (3) None (4) Use of Proceeds. Pursuant to our Registration Statement on Form S-1, as amended, filed with the Securities and Exchange Commission and declared effective February 9, 2001, (Registration No. 333-42694), we commenced our initial public offering of 7,500,000 registered shares of common stock, $0.001 par value, on February 9, 2001, at a price of $11.00 per share (the "Offering"). The Offering was completed on February 14, 2001, and all of the 7,500,000 shares were sold, generating gross proceeds of approximately $82,500,000. The managing underwriters for the Offering were Lehman Brothers Inc., CIBC World Markets, Dain Rauscher Incorporated, Robert W. Baird & Co. Incorporated, and Fidelity Capital Markets. In connection with the Offering, we incurred approximately $5.8 million in underwriting discounts and commissions, and approximately $1.9 million in other related expenses. The net offering proceeds to us, after deducting the foregoing expenses, were approximately $74.8 million. From the time of receipt through March 31, 2004, we have invested the net proceeds from the Offering in investment-grade, interest-bearing securities. We used $4.0 million of the proceeds to satisfy a cancellation fee for the termination of a distribution agreement with Endogen Corporation. We used approximately $14.0 million for general corporate purposes, including working capital and research and development activities. We expect to use the remainder of the net proceeds for general corporate purposes, including working capital and expanding research and development and sales and marketing efforts to accelerate the commercialization of new products and the development of new partnerships. A portion of the net proceeds may also be used to acquire or invest in complementary businesses or products to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of these businesses, products, or technologies. We have no current agreements or commitments regarding any such transaction. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None. ITEM 5. OTHER INFORMATION - None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32 Section 1350 Certifications (b) Reports on Form 8-K filed during the three months ended March 31, 2004: The Company filed a Form 8-K dated February 4, 2004 and February 24, 2004 reporting the Company's press releases dated February 4 and February 24 announcing the Company's year ending December 31, 2003 financial results. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THIRD WAVE TECHNOLOGIES, INC. Date: May 5, 2004 /s/ Lance Fors ----------------------------- Lance Fors, CEO Date: May 5, 2004 /s/ David Nuti ----------------------------- David Nuti, CFO 15 EX-31.1 2 c85145exv31w1.txt CERTIFICATION OF CEO 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: May 5, 2004 /s/ Lance Fors ---------------------- Lance Fors, CEO 16 EX-31.2 3 c85145exv31w2.txt CERTIFICATION OF CFO 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: May 5, 2004 /s/ David Nuti --------------------------- David Nuti, CFO 17 EX-32 4 c85145exv32.txt 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 Third Wave Technologies, Inc. (the "Company) Form 10-Q for the period ended March 31, 2004 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 May 5, 2004 /s/ David Nuti ----------------------------- David Nuti Chief Financial Officer May 5, 2004 18 -----END PRIVACY-ENHANCED MESSAGE-----