<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-24752
Wave Systems Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3477246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
540 Madison Avenue
New York, New York 10022
(Address of principal executive offices)
(Zip code)
(212) 755-3282
(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
The number of shares outstanding of each of the issuer's classes of common
stock as of March 31, 1996: 7,363,285 shares of Class A Common Stock and
6,942,670 shares of Class B Common Stock.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 406,920 $ 2,511,928
Marketable securities, held-to-maturity 3,996,600 3,946,200
Inventories 277,057 76,391
Prepaid expenses and other receivables, including notes from
affiliates, less allowance of $763,865 in 1996 and $668,000 in 1995 77,407 134,771
------------ ------------
Total current assets 4,757,984 6,669,290
Property, equipment, and leasehold improvements, less accumulated depreciation
and amortization of $413,218 in 1996 and $350,185 in 1995 954,049 954,530
Other assets 132,979 130,222
------------ ------------
$ 5,845,012 $ 7,754,042
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 861,006 $ 1,210,778
------------ ------------
Total current liabilities 861,006 1,210,778
------------ ------------
Series A Cumulative Redeemable Preferred Stock, $.01 par value; 360 shares
issued and outstanding in 1996 and 1995; involuntary liquidation value $433,800 400,982 390,534
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, Authorized 2,000,000 shares; 360 shares issued
and outstanding as Series A Cumulative Redeemable Preferred Stock -- --
Common stock, $.01 par value, Authorized 25,000,000 shares as Class A;
7,363,285 issued and outstanding at March 31, 1996; 6,615,618 at
December 31, 1995 73,633 66,156
Common stock, $.01 par value, authorized 13,000,000 shares as Class B;
6,942,670 issued and outstanding at March 31, 1996; 7,583,138 at
December 31, 1995 69,427 75,831
Capital in excess of par value 29,243,353 28,980,987
Deficit accumulated during the development stage (24,571,670) (22,742,854)
Less: Note receivable from stockholder, including accrued interest of $58,544
in 1996 and $54,215 in 1995 (231,719) (227,390)
------------ ------------
4,583,024 6,152,730
------------ ------------
$ 5,845,012 $ 7,754,042
============ ============
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
-2-
<PAGE> 3
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period From
Three Months February 12,
Ended 1988 (Inception)
March 31, Through
------------------------------------ March 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 1,148 $ -- $ 1,148
------------ ------------ ------------
Operating expenses:
Selling, general, and administrative 985,450 777,186 14,878,185
Research and development 910,297 646,812 10,200,961
------------ ------------ ------------
1,895,747 1,423,998 25,079,146
------------ ------------ ------------
Interest income 65,783 164,656 874,067
Interest expense -- -- (380,459)
Other income -- -- 12,720
------------ ------------ ------------
65,783 164,656 506,328
------------ ------------ ------------
Net loss (1,828,816) (1,259,342) (24,571,670)
Accrued dividends on preferred stock 10,448 10,150 135,382
------------ ------------ ------------
Net loss to common stockholders $ (1,839,264) $ (1,269,492) $(24,707,052)
============ ============ ============
Weighted average number of common shares
outstanding during the period 14,213,673 13,485,476 7,906,899
Loss per common share $ (0.13) $ (0.09) $ (3.12)
============ ============ ============
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
-3-
<PAGE> 4
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period From
Three Months February 12,
Ended 1988 (Inception)
March 31, Through
------------------------------- March 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,828,816) $ (1,259,342) $(24,571,670)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 64,276 30,243 448,121
Accrued interest on marketable securities (50,400) (38,110) (205,979)
Noncash expenses:
Common stock issued in connection with
License and Cross-License Agreement -- -- 1,124,960
Common stock issued for services rendered
and additional interest on borrowings 63,072 -- 2,393,696
Preferred stock issued for services rendered -- -- 265,600
Compensation associated with issuance of
stock options -- -- 399,740
Amortization of deferred compensation -- -- 398,660
Amortization of discount on notes payable -- -- 166,253
Common stock issued by principal stockholder for
services rendered -- -- 565,250
Changes in assets and liabilities:
Increase in accrued interest on note receivable (4,329) (4,295) (58,544)
Increase in inventories (200,666) -- (277,057)
(Increase) decrease in prepaid expenses and
other receivables 57,364 45,578 (77,407)
Increase in other assets (4,000) (7,123) (144,166)
(Decrease) increase in accounts payable and
accrued expenses (349,772) 80,488 916,006
------------ ------------ ------------
Net cash used in operating activities (2,253,271) (1,152,561) (18,656,537)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property, equipment & leasehold improvements (62,552) (221,969) (1,360,925)
Organizational costs -- -- (14,966)
Redemption of marketable securities -- 8,107,038 (24,601,311)
Purchase of marketable securities -- (2,956,292) 20,810,690
------------ ------------ ------------
Net cash (used in) provided by investing activities (62,552) 4,928,777 (5,166,512)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 210,815 -- 22,359,890
Sale of warrants -- -- 4
Note receivable from stockholder -- -- (173,175)
Proceeds from notes payable and warrants to stockholders -- -- 2,083,972
Repayments of notes payable to stockholders -- -- (1,069,972)
Proceeds from notes payable and warrants -- -- 1,284,250
Repayment of notes payable -- -- (255,000)
Advances from stockholder -- -- 227,598
Repayments of advances from stockholders -- -- (227,598)
Decrease in deferred offering costs -- -- --
------------ ------------ ------------
Net cash provided by financing activities 210,815 -- 24,229,969
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (2,105,008) 3,776,216 406,920
Cash and cash equivalents at the beginning of period 2,511,928 5,159,440 --
------------ ------------ ------------
Cash and cash equivalents at the end of period $ 406,920 $ 8,935,656 $ 406,920
============ ============ ============
No cash was paid for interest during the three months ended March 31, 1996 or 1995.
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
-4-
<PAGE> 5
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B Capital
Common Stock Common Stock in Excess
--------------------------------------- ----------------------------------- of
Shares Amount Shares Amount Par Value
--------- ------------ --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1995 6,615,618 $ 66,156 7,583,138 $ 75,831 $ 28,980,987
Exercise of options
to purchase
Class A stock 83,199 833 - - 209,982
Shares issued for
services 24,000 240 - - 62,832
Accrual of interest
on note receivable - - - - -
Accrued dividend on
preferred stock - - - - (10,448)
Exchange of Class A
stock for Class B
stock 640,468 6,404 (640,468) (6,404) -
Net (loss) for three
months ended
March 31, 1996 - - - - -
--------- ------------ --------- ----------- --------------
Balance at March 31,
1996 7,363,285 $ 73,633 6,942,670 $ 69,427 $ 29,243,353
========= ============ ========= =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Deficit Note
Accumulated Receivable
During the from
Development Stock-
Stage holder Total
--------------- ------------- --------------
<S> <C> <C> <C>
Balance at
December 31,
1995 $ (22,742,854) $ (227,390) $ 6,152,730
Exercise of options
to purchase
Class A stock -- -- 210,815
Shares issued for
services -- -- 63,072
Accrual of interest
on note receivable -- (4,329) (4,329)
Accrued dividend on
preferred stock -- -- (10,448)
Exchange of Class A
stock for Class B
stock -- -- --
Net (loss) for three
months ended
March 31, 1996 (1,828,816) -- (1,828,816)
--------------- ------------- --------------
Balance at March 31, --
1996 $ (24,571,670) $ (231,719) $ 4,583,024
=============== ============= ==============
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
-5-
<PAGE> 6
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Condensed Consolidated Financial Statements
March 31, 1996 and 1995
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of March 31, 1996, and the results of its operations and cash flows
for the three months ended March 31, 1996 and 1995, and for the period from
February 12, 1988 (inception) through March 31, 1996. Such financial statements
have been condensed in accordance with the applicable regulations of the
Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 1995, included in
its Form 10-K filed in April 1996. The results of operations for the three
months ended March 31, 1996 are not necessarily indicative of the operating
results for the full year.
1. (Loss) per Share:
(Loss) per share is computed based on the weighted average number of common
shares outstanding. The inclusion of common stock equivalents (warrants and
options) in this computation would be antidilutive.
2. Stock Options and Grants:
In March, 1996 the Company issued 24,000 shares of Class A Common Stock to
satisfy a previously recorded liability for compensation for services.
During the quarter ended March 31, 1996, the Company granted various employees
options to purchase a total of 392,850 shares of Class A Common Stock at prices
ranging between $2.97 per share and $3.81 per share. These options were granted
at the market price on the date next preceding the date of grant.
- 6 -
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Wave Systems Corp. ("Wave" or the "Company") is in transition from a company
focused principally on research and development of new technology to a company
focused on the commercialization of its technology through licensing fees,
royalties and product sales. Since its inception in February of 1988, the
Company has devoted substantially all of its efforts and resources to research,
feasibility studies, design, development, and market testing of the Wave System.
During this period, the Company designed and successfully developed its
proprietary application specific integrated circuit ("ASIC"), WaveMeter, WaveNet
and other necessary components of the Wave System. Concurrent with its research
and development activities, the Company has devoted increased resources to
market research, market development and other related activities.
In the three month period ended March 31, 1996 the Company reported its first
operating revenues. The Company does not however anticipate significant revenues
in the near future. There are significant risks which could adversely affect the
Company's efforts to achieve profitability.
Results of Operations
Three Months Ended March 31, 1996 and 1995
In the three month period ended March 31, 1996 the Company reported its first
operating revenues.
Research and development expenses for the three months ended March 31, 1996 were
$910,297, as compared to $646,812 for the comparable period of 1995. The
increase in research and development expenses was primarily attributable to an
increase in personnel and other related costs associated with the design and
development of the Company's ASIC, including, but not limited to, non-recurring
engineering costs and prototype purchases; transaction processing system
(WaveNet); real time news services; and related enabling technologies. Current
research and development activities are focused on additional ASIC development
for future products and adaptation of the Company's products to additional
software operating environments and computer platforms.
Selling, general and administrative expenses for the three months ended March
31, 1996 were $985,450, as compared to $777,186 for the comparable period of
1995. The increase in selling, general and administrative expenses was primarily
attributable to an increase in personnel and other related costs associated with
the development and marketing of new applications of the Company's technology.
Interest income for the three months ended March 31, 1996 was $65,783, as
compared to $164,656 for the comparable period of 1995. The decrease in interest
income is primarily attributable to a decrease in interest-bearing assets.
Due to the reasons set forth above, the Company's net loss for the three months
ended March 31, 1996 was $1,828,816 as compared to $1,259,342 for the comparable
period of 1995.
- 7 -
<PAGE> 8
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from operations
since its inception and, as of March 31, 1996, had a deficit accumulated during
the development stage of $24,571,670. The Company has financed its operations
through March 31, 1996 principally through the private placement of Class B
Common Stock for an aggregate amount of $6,201,931 (before deduction of expenses
incurred in connection therewith), the issuance of $2,873,250 in aggregate
principal amount of its 10% Convertible Notes and 15% Notes (of which $2,098,250
was converted into Class B Common Stock) and the sale of 3,728,200 shares of its
Class A Common Stock in an initial public offering raising approximately
$15,711,000 after all expenses. In addition, the Company has attempted to
contain costs and reduce cash flow requirements by using consultants and
compensating key employees, consultants, suppliers and other vendors with Common
Stock and options to purchase Common Stock.
At March 31, 1996, the Company had approximately $407,000 in cash and cash
equivalents and approximately $3,997,000 in marketable securities. At December
31, 1995, the Company had approximately $2,512,000 in cash and cash equivalents
and approximately $3,946,000 in marketable securities. The decrease in cash and
cash equivalents reflects cash expenditures of approximately $2,316,000 to
finance operations and acquire property and equipment. At March 31, 1996, the
Company had working capital of approximately $3,897,000. The Company expects to
incur substantial additional expenses resulting in significant losses at least
through the period ending December 31, 1996 due to minimal revenues associated
with initial market entry, continued research and development costs as well as
increased sales and marketing expenses associated with market testing and
roll-out.
Significant uncertainty currently exists with respect to the adequacy of current
funds to support the Company's activities until positive cash flow from
operations can be achieved. Additionally, the Company is uncertain as to the
availability of financing from other sources to fund any cash deficiencies.
These uncertainties raise doubt about the Company's ability to continue as a
going concern. In early 1996, the Company adopted a plan that management
believed would allow the Company to continue its operations into 1997. The
Company will continue to monitor its performance against the plan on a monthly
basis and, if necessary, reduce its operations accordingly. The Company believes
that the plan constitutes a viable plan for the continuation of the Company's
business into 1997.
As part of this plan, the Company is currently evaluating financing options and
may therefore elect to raise additional capital, from time to time, through
equity or debt financing in order to capitalize on business opportunities,
market conditions and insure the continued development of the Company's
technology, products and services.
The Company presently has no material commitments for capital expenditures.
However, in order to bring the Wave System to market, the Company anticipates
spending additional amounts on inventory items such as computer chips and
boards, additional hardware, and related materials. Such spending will vary
based on the Company's performance against its previously noted plan.
- 8 -
<PAGE> 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed:
None
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
- 9 -
<PAGE> 10
SIGNATURE
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.
WAVE SYSTEMS CORP.
(Registrant)
Date: May 10, 1996 By: /s/ Peter Sprague
-----------------------
Name: Peter Sprague
Title: Chairman, Chief Executive
Officer
(Principal Financial Officer and Duly
Authorized Officer of the Registrant)
- 10 -
<PAGE> 11
EXHIBIT INDEX
-------------
Exhibit 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 406,920
<SECURITIES> 3,996,600
<RECEIVABLES> 778,270
<ALLOWANCES> 763,865
<INVENTORY> 277,057
<CURRENT-ASSETS> 4,757,984
<PP&E> 1,367,267
<DEPRECIATION> 413,218
<TOTAL-ASSETS> 5,845,012
<CURRENT-LIABILITIES> 861,006
<BONDS> 0
143,060
400,982
<COMMON> 0
<OTHER-SE> 4,439,964
<TOTAL-LIABILITY-AND-EQUITY> 5,845,012
<SALES> 0
<TOTAL-REVENUES> 1,148
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,895,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,828,816)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,828,816)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
</TABLE>
