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, 1997
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.)
480 Pleasant Street
Lee, Massachusetts 01238
(Address of principal executive offices)
(Zip code)
(413) 243-1600
(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, 1997: 18,591,089 shares of Class A Common Stock
and 4,562,641 shares of Class B Common Stock.
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 1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 341,354 $ 4,064,324
Prepaid expenses and other receivables 15,900 70,358
------------- -------------
Total current assets 357,254 4,134,682
Property, equipment, and leasehold improvements
less accumulated depreciation and amortization
of $880,659 in 1997 and $622,356 in 1996 978,831 934,798
Goodwill, net of accumulated amortization of
$39,686 in 1996 - 912,752
Other assets 97,500 254,987
------------- -------------
$ 1,433,585 $ 6,237,219
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 872,595 $ 937,163
Deferred revenue 1,025,000 -
------------- -------------
Total current liabilities 1,897,595 937,163
------------- -------------
Note Payable 499,327 465,500
------------- -------------
Preferred Stock:
Series A Cumulative Redeemable Preferred Stock,
$0.01 par value; 360 shares issued and
outstanding in 1997 and 1996; involuntary
liquidation value $464,433 464,433 432,334
Series B Cumulative Convertible Preferred Stock,
$0.01 par value; 350 shares issued and out-
standing in 1996 - 195,520
Series C Cumulative Convertible Preferred Stock,
$0.01 par value; 0 shares and 31,000 shares
issued and outstanding in 1997 and 1996;
involuntary liquidation value $638,600 - 2,647,742
Series D Cumulative Convertible Preferred Stock,
$0.01 par value; 43,500 shares and 80,000
shares issued and outstanding in 1997 and
1996; involuntary liquidation value $874,350 874,350 -
------------- -------------
Total Preferred Stock 1,338,783 3,275,596
------------- -------------
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, Authorized
2,000,000 shares:
360 shares issued and outstanding as Series
A Cumulative Redeemable Preferred Stock - -
31,000 shares issued and outstanding as
Series C Cumulative Convertible Preferred
Stock - -
80,000 shares issued and outstanding as
Series D Cumulative Convertiible Preferred
Stock - -
Common stock, $0.01 par value, Authorized
50,000,000 shares as Class A; 18,591,089
issued and outstanding at September
30, 1997;
11,582,086 at December 31, 1996 185,910 115,821
Common stock, $0.01 par value, Authorized
13,000,000 shares as Class B; 4,562,641
issued and outstanding at September
30, 1997;
6,208,141 at December 31, 1996 45,626 62,081
Capital in excess of par value 38,705,134 33,052,432
Deficit accumulated during the development stage (40,981,096) (31,426,669)
Less: Note receivable from stockholder, includ-
ing accrued interest of $84,519 in 1997 and
$71,530 in 1996 (257,694) (244,705)
------------- -------------
Total stockholders' equity (deficit) (2,302,120) 1,558,960
------------- -------------
$ 1,433,585 $ 6,237,219
<FN>
See accompanying notes to unaudited condensed consolidated financial statements.
</FN>
</TABLE>
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,
1997 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,097 $ - $ 6,645 $ 1,458 $ 8,103
---------- ---------- ---------- ---------- ----------------
Operating expenses:
Selling, general, and administrative 1,457,363 1,086,126 4,724,064 3,718,230 24,275,420
Research and development 2,163,538 832,409 4,078,717 2,553,700 16,580,402
Goodwill writeoff 769,886 - 769,886 - 769,886
---------- ---------- ---------- ---------- ----------------
4,390,787 1,918,535 9,572,667 6,271,930 41,625,708
---------- ---------- ---------- ---------- ----------------
Interest income 8,324 54,091 45,422 169,780 1,048,472
Interest expense (11,398) - (33,827) (447) (424,683)
Other income - - - - 12,720
---------- ---------- ---------- ---------- ----------------
(3,074) 54,091 11,595 169,333 636,509
---------- ---------- ---------- ---------- ----------------
Net loss (4,389,764) (1,864,444) (9,554,427) (6,101,139) (40,981,096)
Accrued dividends on preferred stock
(including accretion of assured
incremental yield on Series D preferred
stock of $1,122,743 for nine month
period ended September 30, 1997) 20,000 102,882 1,877,469 143,032 2,872,981
---------- ---------- ---------- ---------- ----------------
Net loss to common stockholders (4,409,764) (1,967,326) (11,431,896) (6,244,171) (43,854,077)
Weighted average number of common
shares outstanding during the period 21,539,324 14,613,419 19,560,212 14,402,309 9,378,210
Loss per common share $ (0.205) $ (0.135) $ (0.584) $ (0.434) $ (4.676)
========== ========== ========== ========== ================
<FN>
See accompanying notes to unaudited condensed consolidated financial statements.
</FN>
</TABLE>
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,
1997 1996 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,554,427) $ (6,101,139) $ (40,981,096)
Adjustments to reconcile net loss to net
used in operating activities:
Depreciation and amortization 401,479 194,161 1,102,153
Goodwill writeoff 769,886 - 769,886
Reserve for short-term loans to affiliate - 763,601 1,672,934
Accrued interest on marketable securities - (42,224) (106,962)
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 226,425 104,010 2,597,987
Accrued interest on note payable 33,827 43,327
Preferred stock issued for services rendered - - 265,600
Warrants issued for technology 250,000 250,000
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 (12,989) (12,987) (84,519)
Increase in inventories - (300,964)
Decrease (increase) in prepaid expenses and
other receivables 54,458 114,319 (15,900)
Decrease (increase) in other assets 157,487 (3,590) (112,416)
(Decrease) increase in accounts payable and
accrued expenses (64,568) (525,128) 1,010,107
Increase in deferred revenues 1,025,000 - 1,025,000
------------- ------------- ---------------
Net cash used in operating activities (6,713,422) (5,809,941) (29,909,036)
------------- ------------- ---------------
Cash flows from investing activities:
Acquisition of property, equipment, & leasehold
improvements (302,447) (151,076) (1,853,259)
Short-term loans to affiliate - (763,601) (1,672,934)
Organizational costs - - (14,966)
Redemption of marketable securities - 5,000,000 27,653,731
Purchase of marketable securities - (2,999,257) (27,546,769)
------------- ------------- ---------------
Net cash (used in) provided by investing activities (302,447) 1,086,066 (3,434,197)
------------- ------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,814,899 291,010 24,386,481
Net proceeds from issuance of Series B Preferred
Stock - 3,214,026 5,950,027
Net proceeds from issuance of Series D Preferred
Stock 1,478,000 1,478,000
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
Repayments of notes payable - - (255,000)
Advances from stockholder - - 227,598
Repayments of advances from stockholders - - (227,598)
Decrease in deffered offering costs - - -
------------- ------------- ---------------
Net cash provided by financing activities 3,292,899 3,505,036 33,684,587
------------- ------------- ---------------
Net (decrease) increase in cash and cash
equivalents (3,722,970) (1,218,839) 341,354
Cash and cash equivalents at beginning of
period 4,064,324 2,511,928 -
------------- ------------- ---------------
Cash and cash equivalents at end of period $ 341,354 $ 1,293,089 $ 341,354
<FN>
No cash was paid for interest during the nine months ended September 30, 1997 or
1996.
In May 1997, warrants valued at approximately $162,000 were issued as a
placement fee for the Series D Preferred Stock.
See accompanying notes to unaudited condensed consolidated financial statements.
</FN>
</TABLE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Deficit Note
Class A Class B Capital Accumulated Receivable
Common Stock Common Stock in Excess During the from
--------------------- --------------------- 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, 1996 11,582,086 $ 115,821 6,208,141 $ 62,081 $33,052,432 $(31,426,669) $(244,705) $ 1,558,960
Exercise of options to pur-
chase stock 46,660 467 10,330 103 114,329 114,899
Conversion of Series B Pre-
ferred stock 117,240 1,172 - - 198,044 - - 199,216
Conversion of Series C Pre
ferred stock 2,850,439 28,504 - - 3,046,144 - - 3,074,648
Conversion of Series D Pre-
ferred stock 940,334 9,403 - - 724,247 - - 733,650
Shares issued for services 98,500 985 - - 387,664 - - 388,649
Shares and warrants issued
for cash 1,300,000 13,000 - - 1,937,000 - - 1,937,000
Accrual of interest on note
receivable - - - - - - (12,989) (12,989)
Accrual dividend on preferred
stock - - - - (754,726) - - (754,726)
Exchange of Class B stock for
Class A stock 1,655,830 16,558 (1,655,830) (16,558) - - - -
Net (loss) for nine months
ended September 30, 1997 - - - - - (9,554,427) - (9,554,427)
---------- ---------- ---------- ---------- ----------- ------------- ---------- ------------
Balance at September 30,
1997 18,591,089 $ 185,910 4,562,641 $ 45,626 $38,705,134 $(40,981,096) $(257,694) $(2,315,120)
========== ========== ========== ========== =========== ============= ========== ============
<FN>
See accompanying notes to unaudited condensed consolidated financial statements.
</FN>
</TABLE>
11
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Condensed Consolidated Financial Statements
September 30, 1997 and 1996
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, 1997, and the results of its operations and cash
flows for the nine months ended September 30, 1997. 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, 1996, included in
its Form 10-K filed in March 1997. The results of operations for the three and
nine months September 30, 1997 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. Going Concern:
The Company has incurred significant losses in current and prior periods.
Management intends to continue to devote resources toward the research,
development and marketing of its products in order to generate future revenues
from licensing and product sales. In addition, the Company is actively pursuing
additional short and long term financing sources, including debt and equity
financing. Although management believes that it can successfully research,
develop and market its products and obtain additional financing, there can be no
assurance that it will be able to do so.
3. Stock Options and Grants:
During the quarter and nine months ended September 30, 1997, the Company granted
one employee options to purchase a total of 3,665 shares and 68,915 shares,
respectively of Class A Common Stock at prices ranging from $1.09 to $2.91 per
share. These options were granted at the market price on the date next preceding
the date of grant.
4. Capital Stock:
In May of 1997, the Company raised $1,315,976, net of issuance costs of $284,024
$162,024 of which related to the value ascribed to warrants issued) through the
placement of 80,000 shares of Series D Preferred Stock pursuant to Regulation D
of the Act. The Series D Preferred Stock has a stated value of $20 per share,
which accrues dividends payable quarterly in cash at 6% per annum.
Any unpaid dividends become due on the date conversion takes place. The Series D
Preferred Stock ranks senior to the Company's common stock and junior to the
Series A, B and C Preferred Stock. Series D Preferred Stock is convertible by
the holder, in increments, into the Company's Class A common stock based on the
market price of the Company's Class A common stock at the time of conversion.
Conversion can occur at the earlier of 75 days after the original issue date or
the date the Securities and Exchange Commission declares a registration
statement, filed to register the Class A common stock received upon conversion,
effective.
The Series D Preferred Stock is convertible at the lesser of $1.35 per share or
80%, as adjusted, of the average of the fair value of the Class A common stock
for the five days prior to the conversion date. In the event of any conversion,
by a holder or holders, would exceed 20% of the total number of shares of Class
A common stock then outstanding, the holder has the option to convene a meeting
to obtain shareholder approval or require the Company to redeem the number of
shares of Series D Preferred Stock that are in excess of 20%. The Series C and
Series D Preferred Stock may be redeemed for cash under certain circumstances.
The Series C Preferred Stock has been totally converted into shares of Class A
common stock during the third quarter. Except for 43,500, the Series D Preferred
Stock has been converted into shares of Class A common stock during the quarter.
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 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 a system that meters the usage of
electronic content ( the "Wave System"). Electronic content refers to any data,
graphic software, video or audio sequence that can be digitally transmitted.
Concurrent with its research and development activities, the Company has devoted
increased resource to market research, market development and other related
activities.
The Company believes that the Wave System can fundamentally change how
electronic content is consumed by providing more efficient and flexible pricing,
greater protection against unauthorized usage and secure, low-cost, and accurate
data on the usage of the electronic content. The currently operational Wave
System enables the merchandising of electronic content at the point of purchase,
increasing the probability that consumers will sample and consume the electronic
content that they want. The Wave System accurately and securely records
information pertaining to the usage of the electronic content. This facilitates
the payment of royalties to content owners and the customized distribution of
content to customers.
The Wave System consists of many individually distributed processors (the
"WaveMeter"). These devices decrypt content on demand from end users. The
WaveMeter is a proprietary application-specific integrated circuit, mounted on a
printed circuit board, or used as an add-in device in a stand-alone PC. The
WaveMeter allows transactions to occur without the expense of a real-time
network connection for every transaction. The WaveMeter securely stores
electronic funds and batched information about the usage of electronic content
to be securely transmitted to a central transaction processing center
("WaveNet"). WaveNet manages encryption and decryption keys, processes credit
and usage charges, automatically obtains credit authorization, calculates
royalty distributions, and can provide user and usage data to electronic content
owners. The Wave System is compatible with existing content delivery systems
such as CD-ROM, the Internet and Direct Broadcast Satellite.
In 1996 the Company developed a production software version of the WaveMeter
that offers a subset of the feature of the hardware version of the WaveMeter and
has been implemented as part of the Company's Internet commerce server (the
"WaveMeter server"). The WaveMeter server supports a publishing service called
WINPublish and a purchasing function called WINPurchase. Through WINPublish, an
electronic content owner can sell encrypted content from its site on the Web to
purchasers using the WINPurchase function.
The Company's strategy is to achieve broad market acceptance of the Wave System
as a standard platform for commerce in electronic content. To achieve this goal
the Company pursues strategic relationships with manufacturers of personal
computers and companies involved in electronic content commerce. Wave also
promotes the use of the Wave System by electronic content owners, particularly
among developers and distributors of entertainment and educational software. The
compatibility with the Web provides the foundation for the broad acceptance of
the Wave System. The Company views the acceptance by developers, distributors
and consumers of entertainment and educational software as an important factor
in the development of a broad installed base of WaveMeters. The Company further
believes that once there is a broad installed base of WaveMeters, electronic
content owners from other market segments are likely to be attracted to the Wave
System.
During the third quarter, the Company furthered its goal of achieving broad
market acceptance of the Wave System by entering into strategic relationships.
The Company and Aladdin Knowledge Systems, Ltd. ("Aladdin") closed a licensing
agreement whereby in return for an equity position in Wave, Aladdin licensed its
proprietary persistent encryption technology. The Company believes that the
incorporation of this technology into the Wave System will facilitate the
commerce in electronic content on a pay-per-use basis. The Company acquired a
license for technology and in process research and development from Aladdin in
exchange for 500,000 shares of Wave Class A common stock and warrants for the
purchase of fifteen percent of the Company on a fully diluted basis. The Company
estimated the value of this transaction at $1.2 million. This amount was
expensed during the third quarter. This technology and license is essential to
facilitate the commerce in electronic content on a pay-per-use basis. The
Company also has set the groundwork for the acceptance of the Wave System in
Europe. In July, the Company entered into a joint venture with Internet
Technology Group, Plc. Pursuant to this agreement, Wave licensed certain
elements of the Wave System to a joint venture company, Global Wave, Ltd., to
promote the use of the Wave System in Europe. The joint venture will be entirely
funded by loans from ITG to Global Wave.
The Company received a payment in the amount of $1 million from ITG for certain
licensed elements of the Wave System. This payment is recorded as deferred
revenue. The Company could receive an additional payment of $4 million
contingent upon achieving two of the four milestones required in the agreement.
The Company reached one of the two milestones by executing an agreement with a
hardware manufacturer. The Company executed a hardware agreement with Acotec
GmbH, a German hardware manufacturer, that will include the WaveMeter on their
ISDN Card in 1998.
The Company intends to continue to pursue strategic relationships with hardware
manufacturers, including personal computer manufacturers, and companies involved
in the commerce of electronic content both in North America and overseas. The
development of WINPublish and WINPurchase services and the Great Stuff Network
site, provide innovative alternatives for the distribution of electronic content
on the Web.
Significant uncertainty currently exists with respect to the adequacy of current
funds to support the Company's activities. This uncertainty will continue until
a 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 order to reduce these uncertainties, the Company is currently evaluating
additional financing options and may therefore elect to raise capital, from time
to time, through equity or debt financings in order to capitalize on business
opportunities and 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.
On October 1, 1997 Nasdaq granted a temporary exception to certain of its
initial listing requirements and listed the Company on The Nasdaq SmallCap
Market. The Company was requested to provide the Hearing Panel with an executed
copy of a contract with a leading domestic personal computer manufacturer on or
before October 15, 1997, by which time Wave must make a public filing with the
Securities and Exchange Commission and Nasdaq. The filing had to include a
balance sheet demonstrating pro forma net tangible assets of $5.5 million or
more as well as compliance with all initial inclusion requirements for The
Nasdaq SmallCap Market, other than minimum bid price. On October 24, 1997, the
Company received a letter from Nasdaq stating Wave did not meet the terms of the
Panel's decision. The Panel determined to delist the Company's securities from
The Nasdaq SmallCap Market effective with the close of business on October 24,
1997. The Company currently trades on the Over-The-Counter Bulletin Board (OTC).
Results of Operations
Three Months Ended September 30, 1997 and 1996
Research and development expenses for the three months ended September 30, 1997
were $2,163,538, as compared to $832,409 for the comparable period of 1996. The
increase in research and development expenses was primarily attributable to the
costs associated with the design and development of the Company's proprietary
integrated circuit technology, including non-recurring engineering costs and
prototype purchases, cost of the Alanddin technology and the costs associated
with the design and development of WaveNet.
Selling, general and administrative expense for the three months ended September
30, 1997 were $1,457,363, as compared to $1,086,126 for the comparable period of
1996. The increase in selling, general and administrative expenses was primarily
attributable to an increase in personnel cost and other related costs associated
with the development, marketing, trade shows and new applications of the
Company's technology.
The Company wrote-off the goodwill in the amount of $769,886 during the third
quarter. The Company recognized the increased uncertainty as to the
recoverability of goodwill arising from the acquisition of Wave Interactive
Network (WIN).
Interest income for the three months ended September 30, 1997 was $8,324, as
compared to $54,091 for the comparable period of 1996. The decrease in interest
income is primarily attributable to a decrease in interest-bearing assets. The
increase in interest expense is related to the Company's $465,000 note payable
to Southeast Interactive Technology Fund I, LLC.
Due to the reasons set forth above, the Company's net loss for the three months
ended September 30, 1997 was $4,389,764 as compared to $1,864,444 for the
comparable period of 1996.
Nine Months Ended September 30, 1997 and 1996
Research and development expenses for the nine months ended September 30, 1997
were $4,078,717, as compared to $2,553,700 for the comparable period of 1996.
The increase in research and development expenses was primarily attributable to
the costs associated with the design and development of the Company's
proprietary integrated circuit technology, including non-recurring engineering
costs and prototype purchases, cost of the Alanddin technology and the costs
associated with the design and development of WaveNet.
Selling, general and administrative expense for the nine months ended September
30, 1997 were $4,724,064 as compared to $3,718,230 for the comparable period of
1996. The increase in selling, general and administrative expenses was primarily
attributable to an increase in personnel cost and other related costs associated
with the development, marketing, trade shows and new applications of the
Company's technology.
The Company wrote-off the goodwill in the amount of $769,886 during the third
quarter. The Company recognized the increased uncertainty as to the
recoverability of goodwill arising from the acquisition of Wave Interactive
Network (WIN).
Interest income for the nine months ended September 30, 1997 was $45,422, as
compared to $169,780 for the comparable period of 1996. The decrease in interest
income is primarily attributable to a decrease in interest-bearing assets. The
increase in interest expense is related to the Company's $465,000 note payable
to Southeast Interactive Technology Fund I, LLC.
Due to the reasons set forth above, the Company's net loss for the nine months
ended September 30, 1997 was $9,554,427 as compared to $6,101,139 for the
comparable period of 1996.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from operations
since its inception, and, as of September 30, 1997, had a deficit accumulated
during the development stage of $40,981,096 and a stockholders' deficit of
$2,302,120. The Company has financed its operations through September 30, 1997
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 ,
150,000 shares of Series C Convertible Preferred Stock and 80,000 shares of
Series D Convertible Preferred Stock for an aggregate amount of $8,100,000
(before deduction of expenses incurred in connection therewith). 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 September 30, 1997, the Company had approximately $340,000 in cash and cash
equivalents. The Company held no marketable securities at September 30, 1997. At
December 31, 1996, the Company had approximately $4,064,000 in cash and cash
equivalents and held no marketable securities. The decrease in cash and cash
equivalents is attributable to the net cash used in operations. At September 30,
1997, the Company had a deficit in working capital of approximately $1,540,341.
The Company expects to incur substantial additional expenses resulting in
significant losses at least through the period ending December 31, 1997 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. On October 19, 1997 the Company's Series A
Cumulative Redeemable Preferred Stock became mandatorily redeemable for a total
amount of $468,000. However, this amount has not been paid.
On September 16, 1997, the Company issued 800,000 shares of the Company's Class
A Common Stock, par value $.01 ("Class A Common Stock"), and warrants to
purchase 140,000 shares of Class A Common Stock, which may be exercised at an
exercise price equal to $1.00, for an aggregate purchase price of $800,000
pursuant to Regulation D promulgated under the Securities Act of 1933, as
amended (the "Act"), to six accredited investors.
On October 9, 1997 the Company issued 112,500 shares of newly created Series F
Convertible Preferred Stock, par value $.01 ("Series F Convertible Preferred
Stock"), at a price of $20 per share, for an aggregate purchase price of
$2,250,000. The shares were sold to one (1) accredited investor pursuant to
Regulation D promulgated under the Act. The Series F Convertible Preferred Stock
is convertible into the Class A Common Stock at an effective conversion price of
the lower of (a) $1.05 and (b) 80% of the average of the five (5) lowest trading
prices of the Class A Common Stock during (x) a day on which the Class A Common
Stock is traded on The Nasdaq National Market or The Nasdaq SmallCap Market or
principal national securities exchange or market on which the Class A Common
Stock has been listed, or (y) if the Class A Common Stock is not listed on The
Nasdaq National Market or The Nasdaq SmallCap Market or any stock exchange or
market, a day on which the Class A Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (z) if the
Class A Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Class A Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices) ("Trading Days"), as reported by
Bloomberg Information Services, Inc. during the ten (10) Trading Days
immediately preceding the Conversion Date, as defined in the Certificate of
Designation of the Series F Convertible Preferred Stock.
Significant uncertainty currently exists with respect to the adequacy of current
funds to support the Company's activities. This uncertainty will continue until
a 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 order to reduce these uncertainties, the Company is currently evaluating
financing options and may therefore elect to raise additional capital, from time
to time, through equity or debt financings in order to capitalize on business
opportunities and 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 27, 1997 a complaint alleging breach of contract, among other related
claims, was filed against the Company by Carl A. Artopoeus and Artopoeus Capital
Management (collectively, "Artopeous") with the Sacramento Superior Court in
Sacramento, California in connection with the engagement of Artopeous by the
Company to arrange financing. The action has been removed to the Federal Court,
Eastern District of California. A hearing has been set for January 1998.
Item 2. Changes in Securities
On September 16, 1997, the Company issued 800,000 shares of the Company's Class
A Common Stock, par value $.01 ("Class A Common Stock"), and warrants to
purchase 140,000 shares of Class A Common Stock, which may be exercised at an
exercise price equal to $1.00, for an aggregate purchase price of $800,000
pursuant to Regulation D promulgated under the Securities Act of 1933, as
amended (the "Act"), to six accredited investors.
On October 9, 1997 the Company issued 112,500 shares of newly created Series F
Convertible Preferred Stock, par value $.01 ("Series F Convertible Preferred
Stock"), at a price of $20 per share, for an aggregate purchase price of
$2,250,000. The shares were sold to one (1) accredited investor pursuant to
Regulation D promulgated under the Act. The Series F Convertible Preferred Stock
is convertible into the Class A Common Stock at an effective conversion price of
the lower of (a) $1.05 and (b) 80% of the average of the five (5) lowest trading
prices of the Class A Common Stock during (x) a day on which the Class A Common
Stock is traded on The Nasdaq National Market or The Nasdaq SmallCap Market or
principal national securities exchange or market on which the Class A Common
Stock has been listed, or (y) if the Class A Common Stock is not listed on The
Nasdaq National Market or The Nasdaq SmallCap Market or any stock exchange or
market, a day on which the Class A Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (z) if the
Class A Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Class A Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices) ("Trading Days"), as reported by
Bloomberg Information Services, Inc. during the ten (10) Trading Days
immediately preceding the Conversion Date, as defined in the Certificate of
Designation of the Series F Convertible Preferred Stock.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on July 17, 1997, the
Company's stockholders elected the following six person to one-year terms. No
director received less than 98% of the total votes cast (17,277,291): Peter J.
Sprague ("For" -- 17,024,964, "Withheld" -- 252,327); John E. Bagalay, Jr., Ph.D
("For" -- 17,064,664, "Withheld" -- 192,627); Philippe Bertin ("For" --
17,065,214, "Withheld" -- 212,077); George Gilder ("For" -- 17,069,964,
"Withheld" -- 207,327); John E. McConnaughy, Jr. ("For" -- 17,087,064,
"Withheld" -- 190,227); and Gene W. Ray, Ph.D ("For" -- 17,062,463, "Withheld"
- -- 214,828).
The stockholders approved an amendment to the Restated Certificate of
Incorporation of the Company to increase the number of shares of Class A Common
Stock that the Company shall have authority to issue from 25 million to 50
million shares. Total votes "For" were 16,353,327; total votes "Against" were
789,454; total abstentions were 134,510; and total broker non-votes were zero.
The stockholders approved an amendment to the Company's 1994 Stock Option Plan
to increase the number of shares of Class A Common Stock reserved for issuance
thereunder by 1,000,000 shares. Total votes "For" were 6,454,613; total votes
"Against" were 915,042; total abstentions were 122,425; and total broker
non-votes were 9,785,211.
The stockholders also approved the Company's 1996 Performance Stock Option Plan
to reserve 800,000 shares of Class A Common Stock to be issued to employees,
consultants or others. Total votes "For" were 6,622,628; total votes "Against"
were 749,417; total abstentions were 120,035; and total broker non-votes were
9,785,211.
The stockholders approved a proposal to permit the issuance to the holder of the
outstanding shares of Series C Convertible Preferred Stock and the Series D
Convertible Preferred Stock that number of shares of Class A Common Stock that
equals or exceeds 20% of that number of shares of outstanding common stock of
the Company as at December 27, 1996 or May 30, 1997. Total votes "For" were
6,316,347; total votes "Against" were 1,027,397; total abstentions were 148,336;
and total broker non-votes were 9,785,211.
Lastly, the stockholders ratified the appointment of KPMG Peat Marwick LLP as
the Company's independent auditors for the current fiscal year. Total votes
"For" were 16,935,235; total votes "Against" were 240,900; total abstentions
were 101,156; and total broker non-votes were zero.
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.
Dated: November 19, 1997
WAVE SYSTEMS CORP.
(Registrant)
By: /s/ Peter J. Sprague
--------------------------------------------
Name: Peter J. Sprague
Title: Chairman, Chief Executive Officer
(Principal Financial Officer and Duly
Authorized Officer of the Registrant)
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF WAVE SYSTEMS CORP. FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 341,354
<SECURITIES> 0
<RECEIVABLES> 15,900
<ALLOWANCES> 0
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<CURRENT-ASSETS> 357,254
<PP&E> 978,831
<DEPRECIATION> 880,659
<TOTAL-ASSETS> 1,433,585
<CURRENT-LIABILITIES> 1,897,595
<BONDS> 499,327
468,000
1,338,783
<COMMON> 231,536
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,433,585
<SALES> 0
<TOTAL-REVENUES> 6,645
<CGS> 0
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<OTHER-EXPENSES> 9,572,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33,827)
<INCOME-PRETAX> (11,431,896)
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