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 June 30, 1998
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 June 30, 1998: 26,221,826 shares of Class A Common Stock and
3,997,438 shares of Class B Common Stock.
<PAGE>
-2-
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDARIES
(a development stage corporation)
Consolidated Balance Sheets
(Unaudited)
ASSETS June 30, 1998 December 31, 1997
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents 6,008,189 758,721
Total current assets 6,008,189 758,721
Property, equipment, and leasehold
improvements less accumulated
depreciation and amortization of
$1,132,263 in 1998 and $964,184
in 1997 860,232 849,276
Other assets 89,178 70,216
----------------- -----------------
6,957,599 1,678,213
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses 1,444,097 1,427,762
Deferred license fee 2,547,005 -
Note payable 546,500 522,124
Total current liabilities 4,537,602 1,949,886
----------------- -----------------
Series A Cumulative Redeemable Preferred
Stock, $.01 par value, 360 shares issued
and outstanding in 1998 and 1997;
involuntary liquidation value, $482,401 482,401 471,601
----------------- -----------------
Stockholders' equity (deficit):
Series A Cumulative Redeemable Preferred
Stock, $.01 par value, 360 shares issued
and outstanding in 1998 and 1997;
involuntary liquidation value, $477,001 - -
Series G Convertible Preferred Stock, $20
par value, 150,000 shares issued and
outstanding in 1998 1,851,908 -
Common stock, $.01 par value. Authorized
50,000,000 shares as Class A; issued
and outstanding 26,221,826 in 1998 and
22,874,639 in 1997 262,219 228,747
Common stock, $.01 par value. Authorized
13,000,000 shares as Class B; issued
and outstanding 3,997,438 in 1998 and
4,421,953 in 1997 39,975 44,220
Capital in excess of par 49,112,293 44,520,246
Deficit accumulated during the development
stage (49,116,775) (45,324,463)
Less: note receivable from stockholder,
including accrued interest of $88,849 (212,024) (212,024)
Total stockholders' equity (deficit) 1,937,596 (743,274)
----------------- -----------------
$ 6,475,198 $ 1,678,213
================= =================
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDARIES
(a development stage corporation)
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended Period from
February 12,
1988
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 (inception)
through June
30, 1998
<S> <C> <C> <C> <C> <C>
Revenues 3,902 2,133 12,515 2,548 24,685
Operating expenses:
Selling, general, and administrative 2,563,079 1,677,959 3,983,954 3,266,701 31,420,460
Write-off of goodwill - - - - 769,886
Aladdin license and in-process research
and development expenses - - - - 3,889,000
Research and development 783,575 910,395 1,322,396 1,915,179 16,068,209
----------- ----------- ----------- ----------- ------------
3,346,654 2,588,354 5,306,350 5,181,880 52,147,555
----------- ----------- ----------- ----------- ------------
License fee 1,500,000 - 1,500,000 - 2,500,000
Interest income 20,683 11,216 25,898 37,098 1,084,230
Interest expense (12,975) (11,398) (24,375) (22,429) (590,855)
Other income - - - - 12,720
----------- ----------- ----------- ----------- ------------
1,507,708 (182) 1,501,523 14,669 3,006,095
----------- ----------- ----------- ----------- ------------
Net loss (1,835,044) (2,586,403) (3,792,312) (5,164,663) (49,116,775)
----------- ----------- ----------- ----------- ------------
Accrued dividends on preferred stock
(including accretion of assured incremental
yield on preferred stock of $750,000 in 1998,
$1,122,743 in 1997, and $2,423,000
cumulative) 675,405 722,591 813,197 1,857,468 4,291,692
Net loss to common stockholders (2,510,449) (3,308,994) 4,605,509 (7,022,131) (53,408,467)
============ ============= ============= ============= ============
Weighted average number of common
shares outstanding during the
period 28,078,432 19,202,817 27,718,566 18,549,189 10,629,639
Loss per common share $ (0.09) $ (0.17) $ (0.17) $ (0.38) $ (5.02)
============ ============= ============= ============= ============
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDARIES
(a development stage corporation)
Consolidated Statement of Cash Flows
(Unaudited)
Period from
Six months ended February 12, 1988
June 30, 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss (3,792,312) (5,054,663) (49,116,775)
Adjustments to reconcile net loss to net
cash used in operating activities:
Write-off of goodwill - - 769,886
Depreciation and amortization 168,079 267,153 1,269,915
Reserve for short-term loans to affiliates - - 1,672,934
Accrued interest on marketable securities - - (106,962)
Non-cash expenses:
Common stock issued in connection with
License and Cross-license Agreement - - 1,124,960
Accretion of assured incremental yield on convertible debt - - 119,000
Common stock and warrants issued for services rendered
and interest on borrowings 259,477 194,800 2,936,535
Issuance of warrants to Aladdin - - 2,939,000
Accrued interest on note payable 24,376 22,429 90,500
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 - - 565,250
Changes in assets and liabilities:
Increase in accrued interest on note receivable - (8,659) (88,850)
Decrease in prepaid expenses and other receivables - 54,758 -
Increase (decrease) in other assets (18,962) 111,679 (104,094)
Increase (decrease) in accounts payables and
accrued expenses 16,335 (61,842) 1,581,609
Increase in deferred revenue license fee 2,547,005 - 2,547,005
---------------- --------------- -----------------
Net cash used in operating activities (796,002) (4,474,345) (32,569,834)
---------------- --------------- -----------------
Cash flows from investing activities:
Acquisition of property and equipment
and leasehold improvements (179,035) (259,113) (1,900,621)
Short-term loans to affiliates - - (1,672,934)
Organizational costs - - (14,966)
Purchase of marketable securities-held to maturity - - (27,546,769)
Maturity of marketable securities-held to maturity - - 27,653,731
---------------- --------------- -----------------
Net cash used in investing activities (179,035) (259,113) (3,481,559)
---------------- --------------- -----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 3,447,005 98,195 27,856,476
Net proceeds from issuance of preferred stock and
warrants 2,777,500 1,478,000 12,283,027
Sale of warrants - - 4
Note receivable from stockholder - - (123,175)
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 note payable - - (255,000)
Advances from stockholder - - 227,598
Repayments of advances from stockholder - - (227,598)
---------------- --------------- -----------------
Net cash provided by financing activities 6,224,505 1,576,195 42,059,582
---------------- --------------- -----------------
Net increase (decrease) in cash and cash
equivalents 5,249,468 (3,157,263) 6,008,189
Cash and cash equivalents at beginning of
period 758,721 4,064,324 -
---------------- --------------- -----------------
Cash and cash equivalents at end of period $ 6,008,189 $ 907,061 $ 6,008,189
================ =============== =================
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDARIES
(a development stage corporation)
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Series G Class A Common Stock Class B Common Stock
Convertible -----------------------------------------------
Preferred Stock Shares Amount Shares Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 22,874,639 228,747 4,421,953 44,220
Exercise of options to purchase Class A stock 2,187,250 21,873
Exchange of Class B stock for Class A stock 424,515 4,245 (424,515) (4,245)
Shares issued as compensation for services rendered 57,084 571
Conversion of Series G preferred stock (759,739) 678,338 6,783
Accrued dividend on preferred stock
including accretion of assured incremental 802,397
yield
Issuance of Series G Convertible Preferred
stock and common stock warrants, net of 1,809,250
issuance costs of $222,500
Assured incremental yield on issuance of
Series G Convertible Preferred stock
Net loss
----------------------------------------------------------------------
Balance at June 30, 1998 $1,851,908 $26,221,826 262,219 3,997,438 $39,975
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDARIES
(a development stage corporation)
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
Capital Deficit accumulated Note receivable Total
excess during the from stockholder
of par value development stage
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 44,520,246 (45,324,463) (212,024) (743,274)
Exercise of options to purchase Class A stock 3,425,132 3,447,005
Exchange of Class B stock for Class A stock
Shares issued as compensation for services rendered 258,906 259,477
Conversion of Series G preferred stock 752,956 -
Accrued dividend on preferred stock
including accretion of assured incremental yield (813,197) (10,800)
Issuance of Series G Convertible Preferred
stock and common stock warrants, net of
issuance costs of $222,500 218,250 2,027,500
Assured incremental yield on issuance of
Series G Convertible Preferred stock 750,000 750,000
Net loss (3,792,312) (3,792,312)
--------------------------------------------------------------------------
Balance at June 30, 1998 $ 49,112,293 $ (49,116,775) $ (212,024) $1,937,596
</TABLE>
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Condensed Consolidated Financial Statements
June 30, 1998 and 1997
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 June 30, 1998, and the results of its operations and cash flows
for the six months ended June 30, 1998. 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, 1997, included in
its Form 10-K filed in March 1998. The results of operations for the six months
ended June 30, 1998 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.
The Company anticipates that its existing capital resources may be adequate to
satisfy its capital requirements into the fourth quarter of 1998. In order to
continue operations, however, the Company will need to raise additional funds
through public or private financing. The Company has no current commitment to
obtain additional funds and is unable to state the amount or source of such
additional funds. These uncertainties raise doubt about the Company's ability to
continue as a going concern.
3. Stock Options and Grants:
During the quarter ended June 30, 1998, the Company granted several consultants
options to purchase a total of 102,000 shares of Class A Common Stock at prices
ranging from $1.49 to $3.85 per share. These options were granted at the market
price on the date of contract or the average closing share price during the
period which services were provided to the Company.
4. Capital Stock:
In March of 1998, the Company raised $2,777,500, net of issuance costs of
$222,500, through the placement of 150,000 shares of Series G Convertible
Preferred Stock ("the Stock") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The Series G Convertible Preferred Stock has
a stated value of $20 per share, which accrues dividends payable quarterly in
cash at 6% per annum. In addition to the Stock, the Company issued warrants to
purchase 75,000 shares of Class A Common as part of the aforementioned
transaction. The Company anticipates that this funding will satisfy its capital
requirements through the third quarter in 1998. However, it is not assured that
such funding will be ample to continue its operations.
Any unpaid dividends become due on the date conversion takes place. The Series G
Convertible Preferred Stock ranks senior to the Company's common stock and
junior to the Series A Cumulative Redeemable Preferred Stock. Series G
Convertible 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.
The Stock is convertible at the lesser of (a) $1.12, the average per share
market value for the five trading days immediately preceding the original issue
date and (b) 80 percent of the average of the five (5) lowest trade prices
during the twenty-five calendar days immediately preceding the conversion date.
CERTAIN FORWARD-LOOKING INFORMATION:
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Exchange Act of 1933 and Section
21E of the Securities Exchange Act of 1934. These statements include, but are
not limited to, statements regarding contingencies, future prospects, liquidity
and capital expenditures herein under "Part I Financial Information - Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Actual results could differ materially from those projected in the
forward-looking statements as a result of the risk factors set forth below and
detailed in the Company's other filings with the Commission during the past 12
months.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Wave is in transition from a firm focused principally on research and
development of new technology, to a firm 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 integrated circuit technology, WaveMeter,
WaveNet and other necessary components of the Wave System. During 1996 the
Company also devoted substantial efforts and resources to designing and
developing the technology required to make the Wave System compatible with the
distribution of electronic content on the Web. Concurrent with its research and
development activities, the Company has devoted increased resources to market
development and other related activities. From inception through June 30, 1998,
the Company has realized only minimal operating revenues, and does not
anticipate significant revenues in the near future. There are numerous risks
that could adversely affect the Company's efforts to achieve profitability.
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 has commercialized this
technology through its Internet Commerce website, the Great Stuff Network. To
date, the Company has recognized a minimal amount of revenue from this
technology.
In order to achieve broad market acceptance of the Wave System, the Company
pursues strategic relationships with major personal computer manufacturers and
promotes the use of the Wave System to electronic content owners, particularly
among developers and distributors of entertainment and educational software. The
Company believes that the compatibility with the Web provides the foundation for
the broad acceptance of the Wave System. Specifically, the Company believes that
the WaveMeter can be the foundation for a "client-side subscriber management
system" that is independent of a delivery network. 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. However, to date, the
Company has not been successful in achieving any significant market acceptance
of the Wave System.
In May 1998, the Company entered into a technology licensing agreement with
Standard Microsystems Corporation ("SMSC"). The Company and SMSC agreed to work
together and support SMSC to create a Wave-Enabled I/O Chip containing the
WaveMeter. Pursuant to the agreement, the Company and SMSC will jointly develop
the technology facilitate the I/O chip as contemplated in the agreement. If the
I/O chip is successfully developed, the Company is liable to pay SMSC up to $2
million for product defects for chips in SMSC inventory and in their channels of
distribution.
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.
The Company also received the final payment of $3.25 million in June 1998
pursuant to the licensing and joint venture agreement ("the Agreement") with
Internet Technology Group, PLC, a United Kingdom company. This payment and the
$750,000 received in January of this year total $4 million received in 1998. Of
the $4 million, $1.5 million was recorded as a license fee in the second quarter
and the balance as deferred license income. As part of the Agreement and after
the final license fee is paid, the Company and Internet Technology Group, PLC
are to issue a significant warrant to each other for approximately one million
shares. The full terms of these warrants have not been completely finalized by
the parties.
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 may 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 financing in order to capitalize on business
opportunities and market conditions and insure the continued development of the
Company's technology, products and services. However, there can be no assurance
that adequate financing will be available. Any available financing may
substantially dilute the existing shareholders' equity.
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.
Results of Operations
Three Months Ended June 30, 1998 and 1997
Research and development expenses for the three months ended June 30, 1998 were
$783,575, as compared to $910,395 for the comparable period of 1997. The 13.9%
decrease in research and development expenses was primarily attributable to
fewer people associated with the design and development of the Company's
proprietary integrated circuit technology.
Selling, general and administrative expense for the three months ended June 30,
1998 were $2,563,079 as compared to $1,677,959 for the comparable period of
1997. The substantial 53% increase in selling, general and administrative
expenses was primarily attributable to an increase in personnel, trade shows,
equipment and other related costs associated with the development and marketing
of new applications and new markets for the Company's technology.
Interest income for the three months ended June 30, 1998 was $20,683, as
compared to $11,216 for the comparable period of 1997. The slight increase in
interest income is primarily attributable to an increase 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.
The Company recognized a $1.5 million license fee from the Internet Technology
Group, PLC for pursuant to a licensing technology agreement executed in 1997.
Due to the reasons set forth above, the Company's net loss for the three months
ended June 30,1998 was $1,835,044 as compared to $2,586,403 for the comparable
period of 1997. The net loss for the three months ended June 30, 1998 to common
stockholders was $2,510,449 as compared to $3,308,994 for the comparable period
of 1997.
Six Months Ended June 30, 1998 and 1997
Research and development expenses for the six months ended June 30, 1998 were
$1,322,396, as compared to $1,915,179 for the comparable period of 1997. The
decrease in research and development expenses was primarily attributable to
fewer people and costs associated with the design and development of the
Company's proprietary integrated circuit technology.
Selling, general and administrative expense for the six months ended June 30,
1998 were $3,983,954 as compared to $3,266,701 for the comparable period of
1997. The 22% increase in selling, general and administrative expenses was
primarily attributable to an increase in personnel, trade shows, equipment and
other related costs associated with the development and marketing of new
applications and new markets for the Company's technology.
Interest income for the six months ended June 30, 1998 was $25,898, as compared
to $37,098 for the comparable period of 1997. The decrease in interest income is
primarily attributable to a decrease in interest-bearing assets. The slight
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 six months
ended June 30, 1998 was $3,792,312 as compared to $5,164,663 for the comparable
period of 1997. The net loss for the six months ended June 30, 1998 to common
stockholders was $4,605,509 as compared to $7,022,131 for the comparable period
of 1997.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from operations
since its inception, and, as of June 30, 1998, had a deficit accumulated during
the development stage of $49,116,775 and stockholders' equity of $1,937,596. The
Company has financed its operations through June 30, 1998 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, the
private placement of 800,000 shares of Class A Common Stock raising $800,000
(before deduction of expenses incurred in connection therewith), and the private
placements of convertible preferred stock for an aggregate of amount of
$13,350,000 (before deduction of expenses incurred in connection therewith).
At June 30, 1998, the Company had approximately $6 million in cash and cash
equivalents. The Company held no marketable securities at June 30, 1998. At
December 31, 1997, the Company had approximately $758,721 in cash and cash
equivalents. The Company held no marketable securities at December 31, 1997. The
increase in cash and cash equivalents is primarily attributable to cash proceeds
of approximately $2.8 million from the issuance of Series G convertible
preferred stock, the last two licensing payments of $750,000 and $3.25 million
from ITG, the exercising of Aladdin Knowledge Systems warrant for 1 million
shares for $2.55 million and other parties exercising warrants and options
yielding proceeds of approximately $900,000 less cash used for operating
expenses for the first six months of 1998 of approximately $5 million. At June
30, 1998, the Company had working capital deficiency of approximately $1.5
million. The Company expects to incur substantial additional expenses resulting
in significant losses at least through the period ending December 31, 1998 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 redeemable for a total amount of
$468,000. As of August 7, 1998, no demand for redemption has been made.
The Company anticipates that its existing capital resources will be adequate to
satisfy its capital requirements into the fourth quarter of 1998. In order to
continue operations, however, the Company will need to raise additional funds
through public or private financings. The Company has no current commitment to
obtain additional funds and is unable to state the amount or source of such
additional funds.
On March 6, 1998 the Company issued 150,000 shares of newly created Series G
Convertible preferred Stock, par value $.01 ("Series G Convertible Preferred
Stock") at a price of $20 per share, for an aggregate purchase price of
$3,000,000. The shares were sold to one (1) accredited investor pursuant to
Regulation D promulgated under the Act. The Series G Convertible Preferred Stock
is convertible into Class A Common Stock, par value $.01 ("Class A Common
Stock") at an effective conversion price of the lower of (a) $1.12 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 quoted by the OTC Bulletin Board, or (z) if the Class A Common
Stock is not 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 twenty-five Trading Days immediately
preceding the Conversion Date, as defined in the Certificate of Designation of
the Series G 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 financing in order to capitalize on business
opportunities and market conditions and insure the continued development of the
Company's technology, products and services. However, there can be no assurance
that adequate financing will be available. Any available financing may
substantially dilute the existing shareholders' equity.
As of December 31, 1997, the Company had available net operating loss
carryforwards for Federal income tax purposes of approximately $36.9 million.
Because of the "change in ownership" provisions of the Tax Reform Act of 1986,
the Company's net operating loss carryforwards may be subject to an annual
limitation on the utilization of these carryforwards against taxable income in
future periods if a cumulative change in ownership of more than 50 percent of
the Company occurs within any three-year period. The Company has made no
determination concerning whether there has been such a cumulative change in
ownership. However, the Company believes that it is likely that such a change in
ownership occurred prior to or following the completion of its initial public
offering.
Year 2000 Issues
The Company is in the process of evaluating its computer software and databases
to determine whether or not modifications will be required to prevent problems
related to the year 2000. At this time, it is not expected that modifying or
replacing the Company's software and databases will have a material financial
effect on the Company's financial position or results of operations in any given
year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
<PAGE>
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: August 14, 1998
WAVE SYSTEMS CORP.
(Registrant)
By: /s/ Peter S. Prague
------------------------------
Name: Peter J. Sprague
Title: Chairman, Chief Executive Officer
Duly Authorized Officer of the Registrant)
By: /s/ Gerald Feeney
------------------------------
Name: Gerald Feeney
Title: Chief Financial Officer
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENT OF WAVE SYSTEMS CORP. FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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