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, 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 September 30, 1998: 26,621,411 shares of Class A Common Stock and
3,997,438 shares of Class B Common Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statments
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS September 30, 1998
(Unaudited) December 31, 1997
Current assets:
Cash and cash equivalents $ 3,633,591 $ 758,721
------------- -------------
Total current assets 3,633,591 758,721
Property, equipment, and leasehold improvements
less accumulated depreciation and amortization
of $1,219,796 in 1998 and $964,184 in 1997 865,267 849,276
Other assets 103,160 70,216
$ 4,602,019 $ 1,678,213
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 2,011,488 $ 1,427,762
Deferred license fee 1,922,005 -
Note payable 559,714 522,124
------------- -------------
Total current liabilities 4,493,207 1,949,886
------------- -------------
Series A Cumulative Redeemable Preferred Stock,
$.01 par value, 360 shares issued and
outstanding in 1998 and 1997; involuntary
liquidation value, $487,801 487,801 471,601
------------- -------------
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 1,641,648 -
Common stock, $.01 par value. Authorized
25,000,000 shares as Class A; issued and
outstanding 26,621,411 in 1998 and 22,874,639 in
1997 266,269 228,747
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 49,731,878 44,520,246
Deficit accumulated during the development stage (51,846,735) (45,324,463)
Less: note receivable from stockholder, including
accrued interest of $88,849 (212,024) (212,024)
------------- -------------
Total stockholders' equity (deficit) (378,989) (743,274)
------------- -------------
$ 4,602,019 $ 1,678,213
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statement of Operations
(Unaudited)
<S> <C> <C> <C> <C> <C>
Period from
February 12, 1998
Three months ended Nine months ended (inception) through
September 30, September 30, September 30, September 30, September 30,
1998 1997 1998 1997 1998
---------- ---------- ---------- ---------- ----------
Revenues $ 3,066 $ 4,097 $ 15,581 $ 6,645 $ 27,751
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general, and
administrative 2,222,923 1,457,363 6,206,877 4,724,064 33,692,134
Write-off of goodwill - 769,886 - 769,886 769,886
Aladdin license and in-process
research and development - - - - 3,889,000
expenses
Research and development 1,176,618 2,163,538 2,499,014 4,078,717 17,244,827
---------- ---------- ---------- ---------- -----------
3,399,541 4,390,787 8,705,891 9,572,667 55,595,847
---------- ---------- ---------- ---------- -----------
License fee 625,000 - 2,125,000 - 3,125,000
Interest income 54,730 8,324 80,628 45,422 1,138,960
Interest expense (13,214) (11,398) (37,589) (33,827) (604,069)
Other income - - - - 12,720
---------- ---------- ---------- ---------- -----------
666,516 (3,074) 2,168,039 11,595 3,672,611
---------- ---------- ---------- ---------- -----------
Net loss (2,729,960) (4,389,764) (6,522,272) (9,554,427) (51,895,485)
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) 50,400 20,000 863,597 1,877,469 4,342,092
Net loss to common stockholders $(2,780,360) $(4,409,764) $(7,385,869) $(11,431,896) $(56,237,577)
=========== =========== =========== ============ ============
Weighted average number of
common shares outstanding 30,290,056 21,539,324 28,638,389 19,560,212 11,090,040
during the period
Loss per common share $ (0.09) $ (0.20) $ (0.26) $ (0.58) $ (5.07)
=========== =========== =========== ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Period from
February 12, 1998
Nine months ended (inception) through
September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,522,272) $ (9,554,427) $ (51,846,735)
Adjustments to reconcile net loss to net cash used
in operating activities:
Write-off goodwill - 769,886 769,886
Depreciation and amortization 255,612 401,479 1,442,980
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 issued for services rendered and
interest on borrowings 482,667 226,425 3,159,725
Issuance of warrants to Aladdin - - 2,939,000
Accrued interest on note payable 37,590 33,827 103,714
Preferred stock issued for services rendered - 250,000 265,600
Compensation associated with issuance of stock - - 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) (88,850)
Decrease in prepaid expenses and other receivables - 54,458 -
(Increase) decrease in other assets (32,945) 157,487 (118,077)
Increase (decrease) in accounts payable and accrued
expenses 583,726 (64,568) 2,149,000
Increase in Deferred License Fee 1,922,005 1,025,000 1,922,005
------------- ------------- -------------
Net Cash used in operating activities (3,273,617) (6,713,422) (34,961,917)
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment (271,603) (302,447) (2,078,721)
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 (271,603) (302,447) (3,659,659)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 3,642,590 1,814,899 28,052,061
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 - - 2,083,972
stockholders
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 6,420,090 3,292,899 42,255,167
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 2,874,870 (3,722,970) 3,633,591
Cash and cash equivalents at beginning of period 758,721 4,064,324 -
------------- ------------- -------------
Cash and cash equivalents at end of period $ 3,633,591 $ 341,354 $ 3,633,591
------------- ------------- -------------
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Stockholders' Equity (deficit)
Nine Months Ended September 30, 1998
(Unaudited)
Series G
Convertible Class A Common Stock Class B Common Stock
Preferred Shares Amount Shares Amount
Stock
<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 2,290,427 22,905
Exchange of Class B stock
for Class A stock 424,515 4,245 (424,515) (4,245)
Shares issued as
compensation for
services rendered 125,582 1,310
Conversion of Series G
Preferred Stock (1,014,999) 906,248 9,062
Accrued dividend on
preferred stock
including accretion of
assured incremental
yield 847,397
Issuance of Series G
Convertible Preferred
stock and common stock
warrants, net of
issuance costs of
$222,500 1,809,250
Assured incremental yield
on issuance of Series
G Convertible
Preferred stock
Net loss
------------ ------------ ------------ ------------ ------------
1,641,648 26,621,411 266,269 3,997,438 39,975
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Stockholders' Equity (deficit)
Nine Months Ended September 30, 1990
(Unaudited)
Deficit
accumulated
Capital in during the Note
excess development receivable
of par value stage from Total
stockholder
<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 3,619,685 3,642,590
Exchange of Class B stock
for Class A stock -
Shares issued as
compensation for
services rendered 481,357 482,667
Conversion of Series G
Preferred Stock 1,005,937 -
Accrued dividend on
preferred stock
including accretion of
assured incremental
yield (863,597) (16,200)
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 (6,522,272) (6,522,272)
------------ ------------ ------------ ------------
49,731,878 (51,846,735) (212,024) (378,989)
</TABLE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Condensed Consolidated Financial Statements
September 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 September 30, 1998, and the results of its operations and
cash flows for the three and nine months ended September 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 three and
nine months September 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 first quarter of 1999. 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. 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.
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 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 1. 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, Embassy,
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 September 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
("Embassy"). These devices decrypt content on demand from end users. Embassy 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. Embassy allows
transactions to occur without the expense of a real-time network connection for
every transaction. Embassy 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 Embassy that
offers a subset of the feature of the hardware version of Embassy and has been
implemented as part of the Company's Internet commerce server ("Embassy
server"). The Embassy 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
Embassy 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 Embassy.
The Company further believes that once there is a broad installed base of
Embassy, 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 Embassy.
Pursuant to the agreement, the Company and SMSC will jointly develop the
technology to 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 and $625,000 were recorded as a license fee income
in the second quarter and the balance as deferred license fee 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 September 30, 1998 and 1997
Research and development expenses for the three months ended September 30,
1998 were $1,176,618, as compared to $2,163,538 for the comparable period of
1997. The 46% decrease in research and development expenses was primarily
attributable to a reduction in the costs associated with non-recurring
engineering costs and prototype purchases in 1997 offset by an increase in
headcount during the first nine months of 1998.
Selling, general and administrative expense for the three months ended
September 30, 1998 were $2,222,923 as compared to $1,457,363 for the comparable
period of 1997. The substantial 52.5% 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.
During the third quarter of 1997, the company took a one-time write-off of
goodwill in the amount of $769,886. The company recognized the increased
uncertainty as to the recoverability of goodwill arising from the acquisition of
Wave Interactive Network (WIN).
Net interest income for the three months ended September 30, 1998 was
$41,516, as compared to net interest expense of $3,074 for the comparable period
of 1997. The increase in interest income is primarily attributable to an
increase in interest-bearing assets.
The Company recognized a $625,000 license fee from the Internet Technology
Group, PLC 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 September 30, 1998 was $2,729,960 as compared to $4,389,764 for the
comparable period of 1997. The net loss for the three months ended September 30,
1998 to common stockholders was $2,780,360 as compared to $4,409,764 for the
comparable period of 1997.
Nine Months Ended September 30, 1998 and 1997
Research and development expenses for the nine months ended September 30,
1998 were $2,499,014 as compared to $4,078,717 for the comparable period of
1997. The decrease in research and development expenses was primarily
attributable to a reduction in the costs associated with non-recurring
engineering costs and prototype purchases in 1997 offset by an increase in
headcount during the first nine months of 1998.
Selling, general and administrative expense for the nine months ended
September 30, 1998 were $6,206,877 as compared to $4,724,064 for the comparable
period of 1997. The 31% 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.
Net interest income for the nine months ended September 30, 1998 was
$43,039, as compared to $11,595 for the comparable period of 1997. The increase
in interest income is primarily attributable to an increase in interest-bearing
assets.
During the third quarter of 1997, the company took a one-time write-off of
goodwill in the amount of $769,886. The company recognized the increased
uncertainty as to the recoverability of goodwill arising from the acquisition of
Wave Interactive Network (WIN).
The Company recognized a $2,125,000 license fee for the nine months ended
September 30, 1998 from the Internet Technology Group, PLC pursuant to a
licensing technology agreement executed in 1997.
Due to the reasons set forth above, the Company's net loss for the nine
months ended September 30, 1998 was $6,522,272 as compared to $9,554,427 for the
comparable period of 1997. The net loss for the nine months ended September 30,
1998 to common stockholders was $7,385,869 as compared to $11,431,896 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 September 30, 1998, had a deficit
accumulated during the development stage of $51,846,735 and stockholders'
deficit of $378,989. The Company has financed its operations through September
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 amount of $13,350,000 (before deduction of expenses incurred in
connection therewith).
At September 30, 1998, the Company had $3,633,591 million in cash and cash
equivalents. The Company held no marketable securities at September 30, 1998. At
December 31, 1997, the Company had $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
$1,500,000 less cash used for operating expenses for the first nine months of
1998 of approximately $9 million. At September 30, 1998, the Company had a
deficit in working capital of approximately $860,000. The Company expects to
incur substantial additional expenses resulting in significant losses at least
through the period ending December 31, 1999 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 November
13, 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 first quarter of 1999. 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.
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: November 23, 1998
WAVE SYSTEMS CORP.
(Registrant)
By: /s/ Peter J. Sprague
-------------------------------
Name: Peter J. Sprague
Title: Chairman, Chief Executive Officer
(Duly Authorized Officer of the
Registrant)
By: /s/ Gerard T. Feeney
-------------------------------
Name: Gerard T. Feeney
Title: Chief Financial Officer
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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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