<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 September 30, 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 September 30, 1996: 8,967,794 shares of Class A Common
Stock and 6,100,571 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>
September 30, December 31,
ASSETS 1996 1995
--------------- ---------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,293,089 $ 2,511,928
Marketable securities, held-to-maturity 1,987,680 3,946,200
Inventories 377,355 76,391
Prepaid expenses and other receivables, including notes from
affiliates, less allowance of $1,684,952 in 1996 and $668,000 in 1995 20,452 134,771
--------------- ---------------
Total current assets 3,678,576 6,669,290
Property, equipment, and leasehold improvements, less accumulated depreciation
and amortization of $544,346 in 1996 and $350,185 in 1995 911,445 954,530
Other assets 133,812 130,222
--------------- ---------------
$ 4,723,833 $ 7,754,042
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 685,650 $ 1,210,778
--------------- ---------------
Total current liabilities 685,650 1,210,778
--------------- ---------------
Preferred Stock:
Series A Cumulative Redeemable Preferred Stock, $.01 par value; 360 shares
issued and outstanding in 1996 and 1995; involuntary liquidation value $444,600 421,883 390,534
Series B Cumulative Convertible Preferred Stock, $.01 par value; 260 shares
issued and outstanding in 1996; involuntary liquidation value $2,653,000 2,475,964 -
--------------- ---------------
Total Preferred Stock 2,897,847 390,534
--------------- ---------------
Stockholders' equity:
Preferred stock, $.01 par value, Authorized 2,000,000 shares:
360 shares issued and outstanding as Series A Cumulative Redeemable Preferred Stock - -
260 shares issued and outstanding as Series B Cumulative Convertible Preferred Stock - -
Common stock, $.01 par value, Authorized 25,000,000 shares as Class A;
8,967,794 issued and outstanding at September 30, 1996; 6,615,618 at December 31, 1995 89,679 66,156
Common stock, $.01 par value, authorized 13,000,000 shares as Class B;
6,100,571 issued and outstanding at September 30, 1996; 7,583,138 at December 31, 1995 61,005 75,831
Capital in excess of par value 30,074,022 28,980,987
Deficit accumulated during the development stage (28,843,993) (22,742,854)
Less: Note receivable from stockholder, including accrued interest of $67,202
in 1996 and $54,215 in 1995 (240,377) (227,390)
--------------- ---------------
1,140,336 6,152,730
--------------- ---------------
$ 4,723,833 $ 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 Nine Months February 12,
Ended Ended 1988 (Inception)
September 30, September 30, Through
-------------------------------- ------------------------------- September 30,
1996 1995 1996 1995 1996
--------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ 1,458 $ - $ 1,458
--------------- -------------- -------------- -------------- ---------------
Operating expenses:
Selling, general, and administrative 1,086,126 1,003,808 3,718,230 2,798,563 17,610,965
Research and development 832,409 856,006 2,553,700 2,156,877 11,844,364
--------------- -------------- -------------- -------------- ---------------
1,918,535 1,859,814 6,271,930 4,955,440 29,455,329
--------------- -------------- -------------- -------------- ---------------
Interest income 54,091 138,007 169,780 448,541 978,064
Interest expense - (298) (447) (298) (380,906)
Other income - 11,750 - 11,750 12,720
--------------- -------------- -------------- -------------- ---------------
54,091 149,459 169,333 459,993 609,878
--------------- -------------- -------------- -------------- ---------------
Net loss (1,864,444) (1,710,355) (6,101,139) (4,495,447) (28,843,993)
Accrued dividends on preferred stock 102,882 10,150 143,032 30,450 267,966
--------------- -------------- -------------- -------------- ---------------
Net loss to common stockholders $ (1,967,326) $ (1,720,505) $ (6,244,171) $ (4,525,897) $ (29,111,959)
=============== ============== ============== ============== ===============
Weighted average number of common shares
outstanding during the period 14,613,419 13,975,227 14,402,309 13,687,474 8,290,031
Loss per common share $ (0.13) $ (0.12) $ (0.43) $ (0.33) $ (3.51)
=============== ============== ============== ============== ===============
</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
Nine Months February 12,
Ended 1988 (Inception)
September 30, Through
---------------------------------- September 30,
1996 1995 1996
-------------- -------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,101,139) $ (4,495,447) $ (28,843,993)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 194,161 132,727 578,006
Reserve for short-term loans to affiliate 763,601 - 763,601
Accrued interest on marketable securities (42,224) (218,387) (197,803)
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 104,010 20,000 2,434,634
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 (12,987) (12,953) (67,202)
Increase in inventories (300,964) - (377,355)
(Increase) decrease in prepaid expenses and
other receivables 114,319 (54,797) (20,452)
(Increase) in other assets (3,590) (169,321) (143,756)
(Decrease) increase in accounts payable and
accrued expenses (525,128) 76,294 740,650
-------------- -------------- ------------------
Net cash used in operating activities (5,809,941) (4,721,884) (22,213,207)
-------------- -------------- ------------------
Cash flows from investing activities:
Acquisition of property, equipment & leasehold improvements (151,076) (507,470) (1,449,449)
Short-term loans to affiliate (763,601) - (763,601)
Organizational costs - - (14,966)
Redemption of marketable securities 5,000,000 13,044,254 25,810,690
Purchase of marketable securities (2,999,257) (12,703,602) (27,600,568)
-------------- -------------- ------------------
Net cash (used in) provided by investing activities 1,086,066 (166,818) (4,017,894)
-------------- -------------- ------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 291,010 1,600 22,440,085
Net proceeds from issuance of Series B Preferred Stock 3,214,026 - 3,214,026
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 3,505,036 1,600 27,524,190
-------------- -------------- ------------------
Net (decrease) increase in cash and cash equivalents (1,218,839) (4,887,102) 1,293,089
Cash and cash equivalents at beginning of period 2,511,928 5,159,440 -
-------------- -------------- ------------------
Cash and cash equivalents at end of period $ 1,293,089 $ 272,338 $ 1,293,089
============== ============== ==================
</TABLE>
No cash was paid for interest during the nine months ended September 30, 1996
or 1995.
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
Nine Months Ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Deficit Note
Capital Accumulated Receivable
Class A Class B in Excess During the from
Common Stock Common Stock of Development Stock-
Shares Amount Shares Amount Par Value Stage holder Total
------------ ---------- ----------- -------- ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1995 6,615,618 $ 66,156 7,583,138 $75,831 $28,980,987 $(22,742,854) $(227,390) $6,152,730
Exercise of options
to purchase
Class A stock 143,471 1,435 - - 289,575 - - 291,010
Shares issued for
services 42,077 421 - - 103,589 - - 104,010
Conversion of Class B
preferred stock 684,061 6,841 - - 842,903 849,744
Accrual of interest
on note receivable - - - - - - (12,987) (12,987)
Accrued dividend on
preferred stock - - - - (143,032) - - (143,032)
Exchange of Class B
stock for Class A
stock 1,482,567 14,826 (1,482,567) (14,826) - - - -
Net (loss) for nine
months ended
September 30, 1996 - - - - - (6,101,139) - (6,101,139)
------------ ---------- ----------- -------- ------------ ------------- ---------- -----------
Balance at September 30,
1996 8,967,794 $ 89,679 6,100,571 $61,005 $30,074,022 $(28,843,993) $(240,377) $1,140,336
============ ========== =========== ======== ============ ============= ========== ===========
</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
September 30, 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 September 30, 1996, and the results of its operations and
cash flows for the three and nine months ended September 30, 1996 and 1995, and
for the period from February 12, 1988 (inception) through September 30, 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 consolidated
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 and nine months ended September 30, 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,
options, and convertible preferred stock) in this computation would be
antidilutive.
2. Stock Options and Grants:
During the quarter ended September 30, 1996, the Company granted various
employees options to purchase a total of 74,000 shares of Class A Common Stock
at $1.97 per share. These options were granted at the market price on the date
next preceding the date of grant.
3. Related Party Transaction:
In May of 1996 the Company re-directed its operations to capitalize on the
consumer marketplace and the rapid growth of the Internet. To this end the
Company entered into negotiations and reached an agreement in principle with
Wave Interactive Network ("WIN") whereby the Company will acquire all of the
outstanding common stock of WIN not currently owned by the Company in exchange
for 375,000 shares of the Company's Class B common stock. Additionally, based
on the attainment of certain milestones, the shareholders of WIN are entitled
to receive up to an additional 325,000 shares of the Company's Class B common
stock.
As part of this agreement, the Company will acquire the net assets of WIN
including approximately $450,000 in WIN convertible preferred stock. It is the
Company's intent to exchange WIN's convertible preferred stock for a similar
class of Wave stock.
-6-
<PAGE> 7
The Company has financed the activities of WIN since May of 1996 by extending
short-term loans to WIN. These notes have been fully reserved.
4. Capital Stock:
In May of 1996 the Company raised $3,214,026, net of expenses, through the
private placement of 350 shares of Series B Preferred Stock ("Series B Stock").
The Series B Stock has a stated value of $10,000 per share, which accrues
dividends for liquidation and conversion purposes at 6% per annum, and ranks
senior to the Company's common stock and junior to the Series A Preferred
Stock. Series B Stock is convertible by the holder, in increments, into the
Company's Class A common stock at the lower of $3.31 per share of common stock,
or 85% of the market price of the Company's common stock on the date of
conversion. The Series B Stock is subject to automatic conversion two years
from the issue date. In the event of any conversion, whether automatic or
voluntary, by a holder or holders, the Company is required to redeem the number
of Series B Stock that, when converted into Class A common stock, would exceed
20% of the total number of shares of Class A common stock then outstanding.
During the third quarter of 1996, 90 shares of the Company's Series B Stock
were converted into 684,061 shares of the Company's Class A common stock.
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") as well as
WaveNet and other necessary components of the WaveMeter and 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.
During the third quarter the company reorganized its efforts to concentrate on
the consumer marketplace. The sales and marketing functions of the Company were
moved to San Jose, California, allowing the Company to be closer to the
peripheral and computer manufacturers who are major potential customers. The
Network News satellite operation in Reston, Virginia was consolidated into the
WaveNet facility in Massachusetts and has been reworked to be compatible with
the Company's Internet strategy. These changes have allowed the Company to
focus all of its resources on a market that holds the greatest potential for
Wave and fulfills the goal of distributing metering devices as a standard
electronic commerce device in personal computers.
The launch of the WINPublish(TM) and WINPurchase(TM) products has provided the
Company with its first revenue-generating platform. These Internet solutions
enter a market that has many participants, however, the market reaction has been
positive, and the Company expects that some pending endorsements and
distribution agreements will raise the market awareness for this product. In
addition, the Company is in negotiations with several hardware manufacturers,
and expects to announce in the fourth quarter an agreement whereby the first
WaveMeters would be shipped before the end of 1997.
The Company is now poised to deliver a new distribution channel to the
marketplace for consumer multimedia products and services, with the ability to
distribute a library of content to millions of homes and receive a recurring
revenue stream from each of those homes. The reorganization in 1996 has set
the stage for the Company to accomplish these goals.
-7-
<PAGE> 8
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Research and development expenses for the three months ended September 30, 1996
were $832,409 as compared to $856,006 for the comparable period of 1995.
Research and development expenses remained fundamentally unchanged. Current
research and development activities are focused on continued development of the
Company's "WINPublish / WINPurchase" suite of Internet-based
commerce/publishing solutions, the integration of the Company's technology with
emerging cable modem technologies and other broadband technologies, as well as
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
September 30, 1996 were $1,086,126, as compared to $1,003,808 for the
comparable period of 1995. The minor increase in selling, general and
administrative expenses was primarily attributable to increased costs related
to the launch of the Company's suite of Internet-based commerce/publishing
solutions off-set by overall cost containment activities.
Interest income for the three months ended September 30, 1996 was $54,091, as
compared to $138,007 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 September 30, 1996 was $1,864,444 as compared to $1,710,355 for the
comparable period of 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Research and development expenses for the nine months ended September 30, 1996
were $2,553,700, as compared to $2,156,877 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 continued
design and development of the Company's ASIC, including, but not limited to,
non-recurring engineering costs and prototype purchases; transaction processing
system (WaveNet); and related enabling technologies. Current research and
development activities are focused on the continued development of the
Company's suite of Internet-based commerce/publishing, integration of the
Company's technology with emerging cable modem technologies and other broadband
technologies, as well as 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 nine months ended
September 30, 1996 were $3,718,230, as compared to $2,798,563 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 as well as the pending acquisition of WIN and the
associated financing of WIN's activities.
Interest income for the nine months ended September 30, 1996 was $169,780, as
compared to $448,541 for the comparable period of 1995. The decrease in
interest income is primarily attributable to a decrease in interest-bearing
assets.
-8-
<PAGE> 9
Due to the reasons set forth above, the Company's net loss for the nine months
ended September 30, 1996 was $6,101,139 as compared to $4,495,447 for the
comparable period of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced net losses and negative cash flow from operations
since its inception and, as of September 30, 1996, had a deficit accumulated
during the development stage of $28,843,993. The Company has financed its
operations through September 30, 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), 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, and the private placement of 350
shares of Series B Preferred Stock for an aggregate amount of $3,500,000
(before deduction of expenses incurred in connection therewith). In addition,
the Company contained costs and reduced 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 September 30, 1996, the Company had approximately $1,293,000 in cash and
cash equivalents and approximately $1,988,000 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 $6,677,000 to finance operations and acquire property and
equipment. At September 30, 1996, the Company had working capital of
approximately $2,993,000. 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, despite the successful placement of
the Company's Series B Preferred Stock in May of the second quarter, 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 order to reduce these uncertainties, the Company continues to evaluate
additional financing options and may therefore elect to raise 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. Additionally, the Company
monitors its performance on a monthly basis and, if necessary, will reduce its
operating expenditures accordingly. The Company believes that these activities
provide a viable plan for the continuation of the Company's business into 1997.
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 requirements.
-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: November 14, 1996 By: /s/ Peter Sprague
-------------------------------
Name: Peter Sprague
Title: Chairman, Chief Executive
Officer
(Principal Financial Officer and Duly
Authorized Officer of the Registrant)
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,293,089
<SECURITIES> 1,987,680
<RECEIVABLES> 1,684,952
<ALLOWANCES> 1,684,952
<INVENTORY> 377,355
<CURRENT-ASSETS> 3,678,576
<PP&E> 1,455,791
<DEPRECIATION> 544,346
<TOTAL-ASSETS> 4,723,833
<CURRENT-LIABILITIES> 685,650
<BONDS> 0
2,897,847
0
<COMMON> 150,684
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,723,833
<SALES> 0
<TOTAL-REVENUES> 1,458
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,271,930
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,101,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,101,139)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> 0
</TABLE>
