<PAGE>
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, 1999
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, 1999: 34,142,662 shares of Class A Common Stock and
2,280,823 shares of Class B Common Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,989,416 $ 1,057,094
Prepaid expenses and other receivables 928,816 5,000
------------ ------------
Total current assets 20,918,232 1,062,094
Property and equipment, net 1,356,604 888,261
Other assets 139,215 107,457
------------ ------------
22,414,051 2,057,812
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses 2,880,347 3,029,158
Deferred license fee -- 1,250,000
Note payable 577,219 561,831
------------ ------------
Total current liabilities 3,457,566 4,840,989
------------ ------------
Series A Cumulative Redeemable Preferred Stock, $.01 par value
360 shares issued and outstanding in 1999 and 1998; involuntary
liquidation value of, $504,001 in 1999 and $493,201 in 1998 504,001 493,201
------------ ------------
Stockholders' Equity (deficiency):
Series G Convertible Preferred stock, $.01 par value. 150,000 shares
authorized and 20,000 outstanding in 1998 -- 347,812
Common stock, $.01 par value. Authorized 75,000,000 shares as Class A;
issued and outstanding 34,142,662 in 1999 and 28,402,149 in 1998 341,427 284,022
Common stock, $.01 par value. Authorized 13,000,000 shares as Class B;
issued and outstanding 2,280,823 in 1999 and 3,140,665 in 1998 22,808 31,407
Capital in excess of par value 83,297,001 53,430,130
Deficit accumulated during the development stage (65,057,001) (57,220,407)
Less: Note receivable from stockholder, including accrued interest
of $103,576 in 1999 and $101,167 in 1998 (151,751) (149,342)
------------ ------------
Total stockholders' equity (deficiency) 18,452,484 (3,276,378)
------------ ------------
Commitments and contingencies
$ 22,414,051 $ 2,057,812
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period from
February 12,
1988
(inception)
Three months ended Six months ended through
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999
<S> <C> <C> <C> <C> <C>
Net revenue $ 2,283 $ 3,902 $ 4,681 $ 12,515 $ 27,044
Operating expenses:
Selling, general, and administrative 3,446,823 2,563,079 5,847,869 3,983,954 43,158,541
Write-off of goodwill -- -- -- -- 769,886
Aladdin license and in-process
research and development expenses -- -- -- -- 3,889,000
Research and development 1,562,771 783,575 2,649,181 1,322,396 20,903,962
5,009,594 3,346,654 8,497,050 5,306,350 68,721,389
Other income (expense):
License fee 625,000 1,500,000 1,250,000 1,500,000 5,000,000
License warrant cost -- -- -- -- (1,100,000)
Interest income 220,630 20,683 237,242 25,898 1,406,583
Interest expense (1,002) (12,975) (831,467) (24,375) (1,681,959)
Other income -- -- -- -- 12,720
844,628 1,507,708 655,775 1,501,523 3,637,344
Net loss (4,162,683) (1,835,044) (7,836,594) (3,792,312) (65,057,001)
Accrued dividends on preferred stock
(including accretion of assured
incremental yield on preferred stock of
$0 in 1999, $750,000 in 1998) 5,400 675,405 10,800 813,197 4,348,158
Net loss to common stockholders $ (4,168,083) $ (2,510,449) $ (7,847,394) $ (4,605,509) $(69,405,159)
Weighted average number of common
shares outstanding during the period 35,341,873 28,078,432 33,709,337 27,718,566 12,534,350
Loss per common share $ (0.12) $ (0.09) $ (0.23) $ (0.17) $ (5.54)
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period from
February 12, 1988
(date of inception)
Six months ended through
June 30, June 30, June 30,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(7,836,594) $(3,792,312) $(65,057,001)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of goodwill -- -- 769,886
Depreciation and amortization 191,046 168,079 1,711,155
Reserve for note from affiliate -- -- 1,672,934
Accrued interest on marketable securities -- -- (106,962)
Noncash expenses:
Accretion of assured incremental yield on
convertible debt -- -- 119,000
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 134,120 259,477 3,459,666
Warrants issued as compensation for services 1,075,240 -- 2,622,064
Issuance of warrants to Aladdin -- -- 2,939,000
Accrued interest on note payable 15,388 24,376 121,219
Preferred stock issued for services rendered -- -- 265,600
Compensation associated with issuance of
stock options -- -- 634,463
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 (2,409) -- (103,577)
Increase in prepaid expenses and
other receivables (923,816) -- (928,816)
Increase in other assets (31,758) (18,962) (154,131)
Increase (decrease) in deferred revenue (1,250,000) 2,547,005 0
Increase (decrease) in accounts payable and
accrued expenses (148,811) 16,335 3,017,859
----------- ----------- ------------
Net cash used in operating activities (8,777,594) (796,002) (46,762,518)
----------- ----------- ------------
</TABLE>
(Continued)
4
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
Period from
February 12, 1988
(date of inception)
Six months ended through
June 30, June 30, June 30,
1999 1998 1999
<S> <C> <C> <C>
Cash flows from investing activities:
Acquisition of property and equipment (659,389) (179,035) (2,838,233)
Short-term loans to affiliate -- -- (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 (659,389) (179,035) (4,419,171)
----------- ----------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 26,369,305 3,447,005 54,892,999
Net proceeds from issuance of preferred stock
and warrants -- 2,777,500 12,283,027
Sale of warrants -- -- 4
Note receivable from stockholder -- -- (48,175)
Proceeds from notes payable and warrants to
stockholders 2,000,000 -- 4,083,972
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)
Increase in deferred offering costs -- -- --
----------- ----------- ------------
Net cash provided by financing activities 28,369,305 6,224,505 71,171,105
----------- ----------- ------------
Net increase in cash and cash equivalents 18,932,322 5,249,468 19,989,416
Cash and cash equivalents at beginning of period 1,057,094 758,721 --
----------- ----------- ------------
Cash and cash equivalents at end of period $19,989,416 $ 6,008,189 $ 19,989,416
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity (deficit)
Six Months Ended June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
SERIES G
CONVERTIBLE
PREFERRED CLASS A COMMON STOCK CLASS B COMMON STOCK
STOCK SHARES AMOUNT SHARES AMOUNT
--------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 347,812 28,402,149 $284,022 3,140,665 $ 31,407
--------- ---------- -------- ---------- --------
Shares issued at $11.00 per
share, net of expenses -- 2,122,205 21,222 -- --
Conversion of bridge-loan to
Class A common stock -- 181,818 1,819 -- --
Exercise of warrants to purchase
Class A common stock -- 1,848,767 18,487 -- --
Exercise of options to purchase
Class A common stock -- 336,944 3,369 -- --
Exchange of Class B stock for
Class A common stock -- 859,842 8,599 (859,842) (8,599)
Warrants to purchase Class A
common stock to be issued to
consultants for services -- -- -- -- --
Shares issued at prices ranging from
$5.00 per share to $15.00 per share
as compensation for services rendered -- 13,835 138 -- --
Accrual of interest on note
receivable -- -- -- -- --
Conversion of Series G preferred (347,812) 377,102 3,771 -- --
stock
Accrued dividend on preferred
stock 0 -- -- -- --
Net loss -- -- -- -- --
--------- ---------- -------- ---------- --------
Balance at June 30, 1999 $ 0 34,142,662 $341,427 2,280,823 $ 22,808
--------- ---------- -------- ---------- --------
--------- ---------- -------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
CAPITAL IN DURING THE NOTE RECEIVABLE
EXCESS DEVELOPMENT FROM
OF PAR VALUE STAGE STOCKHOLDER TOTAL
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 $ 53,430,130 $(57,220,407) $(149,342) $ (3,276,378)
------------ ------------ --------- ------------
Shares issued at $11.00 per
share, net of expenses 21,657,367 -- -- 21,678,589
Conversion of bridge-loan to
Class A common stock 1,998,181 -- -- 2,000,000
Exercise of warrants to purchase
Class A common stock 3,864,634 -- -- 3,883,121
Exercise of options to purchase
Class A common stock 804,226 -- -- 807,595
Exchange of Class B stock for
Class A common stock -- -- -- --
Warrants to purchase Class A
common stock to be issued to
consultants for services 1,075,240 -- -- 1,075,240
Shares issued at prices ranging from
$5.00 per share to $15.00 per share
as compensation for services rendered 133,982 -- -- 134,120
Accrual of interest on note
receivable -- -- (2,409) (2,409)
Conversion of Series G preferred 344,041 -- -- --
stock
Accrued dividend on preferred
stock (10,800) -- -- (10,800)
Net loss -- (7,836,594) -- (7,836,594)
------------ ------------ --------- ------------
Balance at June 30, 1999 $ 83,297,001 $(65,057,001) $(151,751) $ 18,452,484
------------ ------------ --------- ------------
------------ ------------ --------- ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Consolidated Financial Statements
June 30, 1999 and 1998
In the opinion of management, the accompanying unaudited 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, 1999 and 1998, and the results of its operations
and cash flows for the six months ended June 30, 1999 and 1998. Such
financial statements have been prepared 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 consolidated
financial statements be read in conjunction with the Company's audited
financial statements and notes thereto for the year ended December 31, 1998,
included in its Form 10-K filed in March 1999. The results of operations for
the six months June 30, 1999 are not necessarily indicative of the operating
results for the full year.
2. 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.
3. CAPITAL STOCK:
On March 23, 1999 the Company sold 2,090,954 shares of its Class A Common
Stock, at a price of $11.00 per share, for an aggregate purchase price of
$23,000,494. The shares were sold to a group of accredited investors pursuant
to Regulation D promulgated under the Securities Act of 1933, as amended.
Pacific Growth Equities, Inc. acted as sole placement agent for the private
placement, receiving a commission of approximately $1.2 million.
On January 26, 1999 the Company issued warrants to purchase 275,000 shares
of its Class A Common Stock at an exercise price of $4.00 per share,
exercisable until January 26, 2004, (the "Warrants") to one (1) accredited
investor. If, over any sixty (60) consecutive day period, the average of the
averaged daily high and low prices of the Class A Common Stock, as reported
by Bloomberg Information Services, Inc., exceeds seven dollars ($7.00), the
Company may force the conversion of the Warrants. The Warrants were issued as
consideration for a $2,000,000 promissory note, bearing no interest, due
January 26, 2002. As a result of the private placement on March 23, 1999, the
Company was required to convert the $2 million promissory note into Common
Stock. The Company issued 181,818 shares of Class A Common Stock in
satisfaction of the outstanding principal amount of $2,000,000.
On May 19, 1999 the Company issued 1,216,136 shares of the Company's Class
A common stock to Aladdin Knowledge Systems, Ltd. upon the exercise by
Aladdin of its warrant at an exercise price of $1.70 per share. The company
issued two warrants to Aladdin in connection with a technology license
agreement on July 18, 1997. Warrant number one was exercised on May 19, 1999.
The second warrant provides the holder with the right to acquire 7% of the
Company's Class A common stock on a fully diluted basis for the average
closing price for the 15 trading days prior to exercise. During June of 1998,
Aladdin exercised a portion of the second warrant and still has the right to
acquire shares approximating 3.45% of the Company's Class A common stock.
1. PREPAID EXPENSES AND OTHER RECEIVABLES:
7
<PAGE>
On April 19, 1999 the Company and Sarnoff Corporation announced the
planned formation of inTelecast, a joint venture whose mission is
to provide secure data broadcast architecture, infrastructure and
content services for Digital Television broadcasting to the
personal computer. The Fantastic Corporation, a provider of
broadband multimedia solutions has agreed to enter into a
relationship with inTelecast which allows inTelecast to offer
broadcasters proven broadband multimedia solutions for seamless
packaging, management, broadcasting and viewing of TV-quality
digital content. As part of this relationship, inTelecast and The
Fantastic Corporation, signed a software License agreement. At the
end of June, the Company paid on behalf of the joint venture
$500,000 to Fantastic for the license of technology to the joint
venture by Fantastic. The company has recorded the initial payment
in the company's Balance sheet under Prepaid expenses and other
receivables.
On June 9, 1999 the company and PC Free Inc., a worldwide
customer-based computer system provider signed an agreement to
embed the company's EMBASSY E-commerce system in PC Free's computer
systems. Part of the agreement required the company to advance PC
Free Inc. $240,000 which is an advance of projected future revenue
sharing. The $240,000 advance is recorded in the company's Balance
sheet under Prepaid expenses and other receivables. As
consideration for the advance, the company shall receive from PC
Free Inc. a warrant to purchase the stock of PC Free. The company
is currently evaluating the value of the warrant of PC Free shares
received and when determined, will allocate the $240,000 payment
between the warrant and the prepaid revenue sharing.
4. NON-CASH FINANCING ACTIVITIES:
On March 23, 1999, the Company converted a $2,000,000 promissory note by
issuing 181,818 shares of its Class A Common Stock.
5. SUBSEQUENT EVENTS:
On July 28, 1999, the company announced it had acquired all of the
outstanding common and preferred shares of N*ABLE Technologies, a
security solutions company in exchange for 2,781,263 shares of the
company's Class A Common Stock. The transaction is intended to be
accounted for under the pooling of interest method of accounting. The
following is summary financial information for N*Able as of, and for the
year ended, June 30, 1999:
<TABLE>
<S> <C>
Assets $1,370,200
Liabilities $ 592,875
Equity $ 777,325
Revenue $ 3,798
Net Loss $5,197,514
</TABLE>
The Company is currently accumulating the required historical and pro
forma financial information required to be disclosed in connection with
this transaction. Such information will be provided in an amended Form
8-K to be filed by the Company.
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 our other filings with the
Commission during the past 12 months.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our Business........Wave is creating a new, pay-per use electronic commerce
model for the delivery of digital information and services.
We are involved in the research, development, and market
testing of the Wave System, designed to meter the consumer's
usage of electronic content and services. Electronic content
and services refers to any data, graphic, software, video or
audio sequence that can be digitally transmitted or stored.
Under this model, electronic content and service providers
use the Wave System to allow consumers to purchase use of
their e-content on a pay-for-use basis, much like a phone
card or a pay-per-view cable system. We believe that the
Wave System can fundamentally change today's centralized
e-commerce model by creating a distributed trust and
security system, under which consumers will be able to make
individual purchases of images, text, music or video, or
make use of software, all from the consumer's desktop, by
payment of a small fee for each purchase or use. This means
that e-content can be consumed with more efficient and
flexible pricing, broader distribution opportunities,
greater protection against unauthorized usage and more
secure, low-cost, and accurate collection of consumer usage
data.
Our Market..........Our long-term strategy is to achieve broad market acceptance
of the Wave System as a standard platform for electronic
commerce. The growth of e-commerce is creating consumer
demand for a powerful merchandising interface at the point
of purchase, whether in the office or at home. E-content
providers seek a system that will allow consumers to pay
royalties easily and quickly for usage while allowing both
customized and broad, inexpensive distribution. Consumers in
turn seek enhanced control of their individual privacy and
secure storage of sensitive information. We believe that
there are three major weaknesses in the current e-content
transaction market: inflexible pricing, weak security and
lack of demographic feedback. The Inflexible pricing problem
occurs when customers subscribe to an electronic content
delivery system (an on-line news service, for example), and
are required to pay an up-front fee for access to ALL of the
content offered by the system, even though a subscriber may
only use a small portion of the content. Weak security is a
deterrent to consumer usage of e-commerce, as many
electronic content delivery systems do not have sufficiently
sophisticated cryptography and security systems in place to
afford confidence to content providers with respect to
unauthorized usage and piracy of their e-content. Lastly,
existing e-content delivery systems provide very limited
feedback data about customers' usage. We believe that by
addressing these problems, we will be able to achieve
widespread adoption of the Wave System as a standard for
e-commerce.
Our Product.........The Wave System consists of an EMBedded Application Security
SYstem ("EMBASSY") in consumer devices that provides a core
hardware and software foundation for consumers to purchase
e-content and use software on a pay-per use basis. The
EMBASSY system is a programmable, low cost "system within a
system" that can perform independent transactions such as
meter pay-per-use of e-content, store sensitive information
such as identities, credit information and account balances,
and run secure applications for pay-per-use access to
software. The EMBASSY system is an open model based on
secure smart card hardware technology that can be integrated
into PCs, peripherals, set top boxes or used as an
independent component. The WaveMeter application running in
the EMBASSY system allows e-commerce transactions to occur
without the expense of a real-time network connection for
every transaction. We have started production of a software
version of the WaveMeter application that offers many of the
features of the hardware version, and we have implemented it
as part of our Internet commerce server. The WaveMeter
server enables e-content owners to securely sell usage of
their intellectual property from a Web site. This secure
e-content delivery service, offered through the Wave Meter
server, does not require either the consumer or the
publisher to install any additional hardware or software.
The EMBASSY securely stores electronic funds and transaction
information about the usage of electronic content to be
transmitted securely to a central transaction processing
center ("WaveNet") periodically. The WaveNet application
9
<PAGE>
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 e-content owners. The Wave System is designed
to be compatible with existing content delivery system such
as CD-ROM, the Internet, and broadband services. Using these
distribution systems, e-content providers can distribute
their products in an encrypted or otherwise secured
("Wave-enabled") form, so it can be offered for sale through
the EMBASSY system, which in turn allows consumers to
purchase and access the e-content on an as-desired basis.
Our Partners........We are pursuing strategic relationships with software
developers and hardware manufacturers developing e-content
delivery. We have attracted other companies to port their
applications and services to the Wave System and its EMBASSY
platform, which we believe will in turn increase the value
of the system to other potential deployment partners. During
1998, we established relationships with RSA Data Security,
NEC Technologies, Pollex Technology, Hewlett-Packard's
VerSecure division, Sun Microsystems, SMSC, ITE, IGST,
Hauppauge Computer Systems and WavePhore. In 1999, we hope
to expand the number of commitments from hardware
manufacturers, including personal computer manufacturers,
peripheral companies and other companies involved in
e-commerce. Most recently, we entered into a strategic
partnership with Sigma Designs, a leading producer of
DVD/MPEG-2 decoder chips, OEM modules and add-in cards.
Sigma intends to incorporate our EMBASSY technology into its
products to be used in a variety of popular consumer
electronics, such as PCs and set-top boxes. We have also
partnered with Sarnoff Corporation to form inTelecast, a new
company that will offer network services enabling broadcast
delivery of digital content such as games, music, corporate
data and Internet pages, to the consumer at speeds up to 300
times faster than a dial-up connection, utilizing unused
bandwidth from the Digital Television spectrum. We also seek
to expand the role of the Wave System and its EMBASSY
platform as a general security device used in networks to
enable telecommunications vendors and Internet service
providers to provide virtual private networks and other new
services.
Recent Financings...We are currently evaluating additional financing options. We
may choose to raise capital from time to time, through
equity or debt financings, in order to capitalize on
business opportunities and market conditions. This would
help to insure the continued development of our technology,
products and services. In January 1999, we issued a $2
million convertible promissory note, which was subsequently
converted into Class A common stock in March 1999. We also
completed a $23 million private placement with
institutional, strategic and accredited investors in March
1999, which we expect will be sufficient to fund operations
through the end of 1999. We cannot, however, assure you that
we can raise additional financing in the future. While we do
not have any material commitments for capital expenditures
at this time, in order to bring the Wave System to market,
we do anticipate spending additional amounts on contracting
for software development, licensing key technologies, and
purchasing inventory items such as computer chips and
boards. Such spending will vary based on our performance.
Growth..............We are focusing on our operational and marketing
infrastructure, in order to evolve our internal production
and fulfillment systems. We plan also to increase the
resources available to WaveNet to adapt to changing market
requirements, and expand it to handle more end users, to
implement more sophisticated pricing methodologies and to
add greater financial system flexibility.
R&D.................We are a development stage company and have realized minimal
operating revenues since our inception. At June 30, 1999, we
had an accumulated deficit of approximately $65.1 million.
We have made a substantial investment in research and
development, and we expect that we will be required to
continue to make substantial investments in our products and
technology. For the years ended December 31, 1998, 1997, and
1996, we spent approximately $3.5 million, $2.1 million and
$3.3 million, respectively, on research and development
activities (which amounts include the value of stock
issued). In addition, we licensed technology and in-process
research and development from Aladdin Knowledge Systems for
cash and warrants valued at $3.9 million in
10
<PAGE>
July 1997. From our inception in February 1988 through June
1999, we have spent approximately $20.9 million on research
and development activities.
Nasdaq Listing......We filed an application with the Nasdaq Stock Market
on January 29, 1999, seeking to list our common stock on the
Nasdaq National Market. As of May 27, 1999 we were re-listed
on the Nasdaq National Market.
We are incorporated in Delaware, and were known previously as Indata
Corp. We changed our name to Wave Systems Corp. in January 1993. Our principal
executive offices are located at 480 Pleasant Street, Lee, Massachusetts 01238,
and our telephone number is (413) 243-1600.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
For the three months ended June 30, 1999 and June 30, 1998, we had only
minimal operating revenues.
Research and development expenses for the three months ended June 30, 1999
were $1,562,771, as compared to $783,575 for the comparable period of 1998,
an increase of 99%. This increase is primarily attributable to an increase in
headcount and consulting-related expenses during the three months ended June
30, 1999.
Selling, general and administrative expenses for the three months ended
June 30, 1999 were $3,446,823, as compared to $2,563,079 for the comparable
period of 1998, an increase of 34%. This increase is primarily attributable
to an increase in personnel, consultants and professional fees, trade shows,
equipment and other related costs associated with the development and
marketing of new applications and new markets for our technology.
Interest income for the three months ended June 30, 1999 was $220,630, as
compared to $20,683 for the comparable period of 1998. The increase in
interest income is primarily attributable to an increase in interest-bearing
assets, which were a direct result of the private placement of Class A Common
Stock for an aggregate purchase price of $23,000,494.
We recognized $625,000 as compared to $1,500,000, respectively for the
three months ended June 30, 1999 and June 30, 1998 of license fees from the
Internet Technology Group, PLC, pursuant to a licensing technology agreement
executed in 1997. The $625,000 recognized this quarter was the final portion
of license fee of the Deferred license fee to be recognized.
Due to the reasons set forth above, our net loss for the three months ended
June 30, 1999 was $4,162,683, as compared to $1,835,044 for the comparable
period of 1998. We did not receive any cash license fee payments in the three
months ended June 30, 1999 and the net loss for the three months ended June
30, 1999 to common stockholders was $4,168,083 as compared to $2,510,449 for
the comparable period of 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Research and development expenses for the six months ended June 30, 1999
were $2,649,181, as compared to $1,322,396 for the comparable period of 1998.
This 100% increase in research and development expenses was primarily
attributable to an increase in headcount and consultant costs associated with
the design and development of the Company's proprietary integrated circuit
technology.
Selling, general and administrative expenses for the six months ended June
30, 1999 were $5,847,869 as compared to $3,983,954 for the comparable period
of 1998. The 47% increase in selling, general and administrative expenses was
primarily attributable to an increase in personnel, consultants and
professional fees,
11
<PAGE>
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, 1999 was $237,242, as
compared to $25,898 for the comparable period of 1998. The increase in
interest income is primarily attributable to an increase in interest-bearing
assets, which were a direct result of the private placement of Class A Common
Stock for an aggregate purchase price of $23,000,494.
Interest expense for the six months ended June 30, 1999 was $831,467, as
compared to interest expense of $24,375 for the comparable period of 1998.
This increase in interest expense is primarily attributable to a non-cash
expense of approximately $666,000 for the value of warrants to acquire
275,000 shares of Common Stock issued as part of the bridge loan financing,
and a non-cash interest charge of approximately $151,000 on a note to
Southeast Interactive Technologies Fund I. On October 18, 1998, we amended
the Southeast Interactive Technologies note so that it was convertible at any
time from April 1, 1999 to April 18, 1999, reducing the conversion price to
$0.95 per share. Additional warrants for 75,000 shares were issued as part of
this amendment, and the fair value of these warrants was $106,000.
Additionally, the fair value of the reduced conversion price was $274,000. We
amortized such amounts as additional interest expense from the date that the
note was amended and the warrant issued through the earliest conversion date
of April 1, 1999. During the first quarter of 1999, approximately $151,000 of
the value of the reduced conversion rate was recorded as interest expense.
Due to the reasons set forth above, the Company's net loss for the six
months ended June 30, 1999 was $7,836,594 as compared to $3,792,312 for the
comparable period of 1998. The net loss for the six months ended June 30,
1998 to common stockholders was $7,847,394 as compared to $4,605,509 for the
comparable period of 1998.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flow from operations since
our inception, and, as of June 30, 1999, had a $65,057,001 deficit
accumulated during the development stage, and stockholders' equity of
$18,452,484. We have financed our operations through June 30, 1999
principally through:
- - the private placement of Class A and B Common Stock for an aggregate amount
of $31,201,931 before expenses;
- - the issuance of $2,873,250 in aggregate principal amount of our 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 our Class A Common Stock in an initial public
offering raising approximately $15,711,000 after expenses;
- - the private placement of 800,000 shares of Class A Common Stock raising
$800,000 before expenses; and
- - the private placements of convertible preferred stock for an aggregate amount
of $13,350,000 before expenses.
At June 30, 1999, we had $19,989,416 in cash and cash equivalents. At
December 31, 1998, we had $1,057,094 in cash and cash equivalents. We did not
hold any marketable securities at June 30, 1999 or December 31, 1998. The
increase in cash and cash equivalents is primarily attributable to cash
proceeds from private placements during the first quarter of 1999. In January
1999, we issued a $2 million convertible promissory note, which was
subsequently converted into Class A common stock in March 1999. We also
completed a $23 million private placement with institutional, strategic and
accredited investors in March 1999. On March 6, 1998, we sold 150,000 shares
of newly created Series G Convertible Preferred Stock to one accredited
investor at a price of $20 per share, for an aggregate purchase price of
$3,000,000, which was converted into 2,771,596 shares of Class A Common
Stock. We also issued warrants to purchase a total of 225,000 shares of Class
A Common Stock at an exercise price of $1.38 per share, exercisable until
October 9, 2002. On
12
<PAGE>
October 19, 1997, the Company's Series A Cumulative Redeemable Preferred
Stock became redeemable for a total amount of $468,000, for which demand for
redemption has been made.
As of December 31, 1998, we had available net operating loss carryforwards
for Federal income tax purposes of approximately $47.6 million. Because of
the "change in ownership" provisions of the Tax Reform Act of 1986, our 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 Wave occurs
within any three-year period. We have made no determination concerning
whether there has been such a cumulative change in ownership. However, we
believe that it is likely that such a change in ownership occurred prior to
or following the completion of our initial public offering in September 1994.
At June 30, 1999, we had working capital of $17,460,666. We expect we may
incur substantial additional expenses resulting in significant losses at
least through the period ending December 31, 1999, due to minimal revenues
and increased sales and marketing expenses associated with initial market
entry, and continued research and development costs. We anticipate that our
existing capital resources will be adequate, however, to satisfy our capital
requirements through year-end 1999. In order to continue operations, we will
need to raise additional funds through public or private financings. We have
no current commitment to obtain additional funds, nor can we state the amount
or source of such additional funds.
YEAR 2000 ISSUES
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of our computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
We have made an assessment with regard to whether our own internal
information systems are Year 2000 compliant. Since January 1998, in addition
to updating employee computers and workstations, we have upgraded various
accounting, telecommunications, customer care systems and transaction systems
at an aggregate cost of approximately $620,000, with systems that are
warranted by the vendors to be Year 2000 compliant. To the extent we purchase
additional systems, we require that such systems are warranted by the vendors
to be Year 2000 compliant. We continue to seek assurances from our existing
vendors whose systems are not warranted to be Year 2000 compliant that such
systems will be Year 2000 compliant. We employ a manager of management
information systems, whose responsibilities include oversight of Year 2000
compliance. We do not separately track the internal costs incurred for Year
2000 projects, which are principally the related payroll costs for our
information systems personnel. Although we do not believe that any additional
Year 2000 compliance-related costs will be significant, we cannot assure you
that that costs incurred to address unanticipated issues would not have a
material adverse effect on our business, operating results and financial
conditions. Any failure of third-party equipment or software comprising any
part of our systems to operate properly with regard to Year 2000 and
thereafter could require us to incur unanticipated expenses to address
associated problems, which could have a material adverse effect on our
business, operating results and financial condition.
We believe, based on an internal assessment, that the current versions of
our software products are Year 2000 compliant. We have no plan to ascertain
whether the internal systems and products of our potential future customers
are Year 2000 compliant. We may in the future be subject to claims based on
Year 2000 problems in others' products or issues arising from the integration
of multiple products within an overall system. Although we have not been
involved in any litigation or proceeding to date involving our products or
services related to Year 2000 issues, we cannot assure you that we will not
in the future be required to defend our products or services or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000-related disputes, and any of our liabilities for Year
2000-related damages, including consequential damages, could have a material
adverse effect on our business, operating results and financial condition.
We do not have any specific contingency plans if any Year 2000 problems
develop with respect to our embedded systems or systems acquired from
vendors. Contingency plans will be developed if we identify
13
<PAGE>
instances of noncompliance, and such noncompliance is expected to have a
material adverse impact on our operations. The cost of developing and
implementing such plans may itself be material.
Year 2000 issues may affect the purchasing patterns of customers and
potential customers in a variety of ways. Many companies are expending
significant resources to replace or remedy their current hardware and
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products such as those offered by us. We
do not believe that there is any practical way to ascertain the extent of,
and have no plan to address problems associated with such a reduction in
purchasing resources of our customers. Any such reduction could, however,
result in a material adverse effect on our business, operating results and
financial condition. The Year 2000 problem is pervasive and complex, as
virtually every computer operation will be affected in some way.
Consequently, you should understand that Year 2000 compliance may not be
achieved without significant additional costs to us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27 Financial Data Schedule
Reports on Form 8-K: None.
14
<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 16, 1999
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
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF WAVE SYSTEMS CORP. FOR
THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000919013
<NAME> WAVE SYSTEMS CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 19,989,416
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,918,232
<PP&E> 2,844,258
<DEPRECIATION> (1,487,654)
<TOTAL-ASSETS> 22,414,051
<CURRENT-LIABILITIES> 3,457,566
<BONDS> 0
504,001
0
<COMMON> 364,235
<OTHER-SE> 18,088,249
<TOTAL-LIABILITY-AND-EQUITY> 22,414,051
<SALES> 4,681
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 8,497,050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 831,467
<INCOME-PRETAX> (7,836,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,836,594)
<EPS-BASIC> (.23)
<EPS-DILUTED> 0
</TABLE>
