<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, 2000
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, 2000: 45,909,925 shares of Class A Common Stock and
1,002,117 shares of Class B Common Stock.
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1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 105,231,677 $ 6,290,045
Marketable securities 4,096,301 4,480,500
Inventories 476,552 431,686
Prepaid expenses and other receivables 603,557 491,857
------------------ -------------
Total current assets 110,408,087 11,694,087
Property and equipment, net 3,639,194 2,680,874
Other assets 3,882,119 2,156,923
------------------ ------------------
117,929,400 16,531,883
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 4,886,908 6,823,643
------------------ ------------------
Total current liabilities 4,886,908 6,823,643
------------------ ------------------
Stockholders' equity:
Common stock, $.01 par value. Authorized 75,000,000 shares as Class A;
issued and outstanding 45,909,925 in 2000 and 39,445,683 in 1999 459,099 394,457
Common stock, $.01 par value. Authorized 13,000,000 shares as Class B;
issued and outstanding 1,002,117 in 2000 and 2,050,507 in 1999 10,021 20,505
Capital in excess of par value 219,193,173 99,854,111
Deficit accumulated during the development stage (110,716,102) (93,267,173)
Accumulated other Comprehensive Income - unrealized gain on marketable
securities 4,096,301 2,860,500
Less: Note receivable from stockholder, including accrued interest
of $105,985 in 1999 -- (154,160)
------------- -------------------
Total stockholders' equity 113,042,492 9,708,240
------------- -------------------
Commitments and contingencies
$ 117,929,400 $ 16,531,883
============== ==================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
2
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, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue $ 54,748 $ 11,678 $ 77,349 $ 19,226 $ 339,424
Cost of sales 36,192 5,597 50,203 10,747 195,570
------------- -------------- ------------- ------------ ---------------
Gross margin 18,556 6,081 27,146 8,479 $ 143,854
------------- -------------- ------------- ------------ ---------------
Operating expenses:
Selling, general, and administrative 5,972,218 4,119,917 12,019,582 7,021,407 71,239,633
Write-off of goodwill -- -- -- -- 769,886
Aladdin license and in-process
Research and development expenses -- -- -- -- 3,889,000
Research and development 4,532,952 2,344,866 8,068,705 4,313,630 41,472,485
------------- -------------- ------------- ------------ ---------------
10,505,170 6,464,783 20,088,287 11,335,037 117,371,004
------------- -------------- ------------- ------------ ---------------
Other income (expense):
License fee -- 625,000 -- 1,250,000 5,000,000
License warrant cost -- -- -- -- (1,100,000)
Interest income 1,665,391 285,559 2,069,755 310,540 3,991,333
Interest expense -- (1,002) -- (831,467) (1,695,461)
Gain on sale of marketable securities -- -- 542,457 -- 542,457
Other income (expense) -- -- -- -- (227,281)
------------ ------------- ------------- ------------- -------------
1,665,391 909,557 2,612,212 729,073 6,511,048
------------ ------------ ------------- ------------- -------------
Net loss (8,821,224) (5,549,145) (17,448,929) (10,597,485) (110,716,102)
Accrued dividends on preferred stock -- 5,400 -- 10,800 4,350,597
------------- -------------- ------------- ------------- -------------
Net loss to common stockholders $ (8,821,224) $ (5,554,545) $ (17,448,929) $ (10,608,285) $(115,066,699)
============ ============ ============= ============= =============
Weighted average number of
common shares outstanding
during the period 46,717,415 37,622,694 45,893,036 35,990,158 16,389,629
------------ ------------ ------------- ------------- ---------------
Loss per common share $ (0.19) $ (0.15) $ (0.38) $ (0.29) $ (7.02)
============ ============ ============= ============= ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
3
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,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (17,448,929) $ (10,597,485) $ (110,716,102)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of goodwill -- -- 769,887
Depreciation and amortization 723,730 299,806 3,230,238
Reserve for note from affiliate -- -- 1,672,933
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
Gain on sale of marketable securities (542,457) (542,457)
Common stock issued for services rendered 108,333 134,120 3,600,198
Warrants issued as compensation for services -- 1,075,240 2,751,595
Issuance of warrants to Aladdin -- -- 2,939,000
Accrued interest on note payable -- 15,388 121,219
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:
Decrease (increase) in accrued interest on note
receivable -- (2,409) --
Increase in inventories (44,866) (29,750) (476,552)
Increase in prepaid expenses and
other receivables (111,700) (927,614) (1,068,485)
Increase in other assets (1,725,196) (31,758) (3,897,033)
Increase (decrease) in deferred revenue 61,926 (1,250,000) 61,926
Increase (decrease) in accounts payable and
accrued expenses (1,998,661) (4,581) 5,062,494
---------------- ------------ -----------
Net cash used in operating activities (20,977,820) (11,319,043) (93,323,915)
--------------- ------------ ------------
</TABLE>
(Continued)
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4
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,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Acquisition of property and equipment (1,682,049) (719,972) (6,174,978)
Short-term loans to affiliate -- -- (1,672,934)
Organizational costs -- -- (14,966)
Proceeds from maturities/sales
of marketable securities 2,162,457 -- 649,419
--------- ----------- ----------------
Net cash provided by (used in)
investing activities 480,408 (719,972) (7,213,459)
--------- ----------- ----------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 119,284,884 26,389,987 189,949,210
Net proceeds from issuance of preferred stock
and warrants -- -- 12,283,031
Note receivable from stockholder 154,160 -- --
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)
Redemption of Preferred Stock -- -- (506,440)
------------ ----------- ----------------
Net cash provided by financing activities 119,439,044 28,389,987 205,769,051
------------ ----------- ----------------
Net increase in cash and cash equivalents 98,941,632 16,350,972 105,231,677
Cash and cash equivalents at beginning of period 6,290,045 4,451,175 --
-------------- ------------- ----------------
Cash and cash equivalents at end of period $ 105,231,677 $ 20,802,147 $ 105,231,677
============== ============= ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
5
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
CLASS A CLASS B CAPITAL DURING THE
Comprehensive COMMON STOCK COMMON STOCK IN EXCESS OF DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT PAR VALUE STAGE
------ ------ ------ ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 39,445,683 $394,457 2,050,507 $20,505 $99,854,111 $(93,267,173)
Net loss (17,448,929)
Unrealized gain on marketable securities
Comprehensive income (loss)
Shares issued at $34.00 per share, net of 3,600,800 36,008 114,941,408
expenses
Exercise of warrants to purchase Class A common 312,500 3,125 1,174,263
stock
Exercise of options to purchase Class A common 1,494,673 14,947 3,115,137
stock
Shares issued as compensation for services 7,879 79 108,254
rendered
Repayment of note receivable
Exchange of Class B stock for Class A stock 1,048,390 10,484 (1,048,390) (10,484)
-----------------------------------------------------------------------------
Balance at June 30, 2000 45,909,925 $459,099 1,002,117 $10,021 $219,193,173 $(110,716,102)
========== ======== ========= ======= ============ =============
</TABLE>
<TABLE>
<CAPTION>
SERIES G ACCUMULATED NOTE
CONVERTIBLE OTHER RECEIVABLE
PREFERRED COMPREHENSIVE FROM
STOCK INCOME STOCKHOLDER TOTAL
----- ------ ------------ -----
<S> <C> <C> <C> <C>
Balance at December 31, 1999 0 $2,860,500 $(154,160) $9,708,240
Net loss (17,448,929)
Unrealized gain on marketable securities 1,235,801 1,235,801
Comprehensive income (loss) (16,213,128)
Shares issued at $34.00 per share, net of 114,977,416
expenses
Exercise of warrants to purchase Class A common 1,177,388
stock
Exercise of options to purchase Class A common 3,130,083
stock
Shares issued as compensation for services 108,333
rendered
Repayment of note receivable 154,160 154,160
Exchange of Class B stock for Class A stock
--------------------------------------------------------
Balance at June 30, 2000 - $ 0 - $4,096,301 - $ 0 - $113,042,492
=========== ========== ============ ============
</TABLE>
<PAGE>
6
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Consolidated Financial Statements
June 30, 2000 and 1999
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, 2000 and 1999, and the results of its operations
and cash flows for the six months ended June 30, 2000 and 1999. 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, 1999,
included in its Form 10-K filed in March 2000. The results of operations for
the six months ended June 30, 2000 are not necessarily indicative of the
operating results for the full year.
1. LOSS PER SHARE:
Loss per share of $0.19 for the three months ended and $0.38 for the six
months ended June 30, 2000 is computed based on the weighted average number
of common shares outstanding of 46,717,415 and 45,893,036, respectively. The
inclusion of common stock equivalents (warrants, options and convertible
preferred stock) in this computation would be antidilutive; therefore basic
and dilutive are the same.
2. CAPITAL STOCK:
On March 7, 2000 the Company sold 3,600,800 shares of its Class A Common
Stock, at a price of $34.00 per share, for an aggregate purchase price of
$122,427,200. 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 $7.3 million, for
their services.
In January, 2000, the Company issued 275,000 shares of its class A Common
Stock to one (1) accredited investor, for an aggregate purchase price of
$1,100,000. These shares were issued upon the exercise of a warrant granted
on January 26, 1999. The warrant to purchase 275,000 shares of the Company's
Class A Common Stock at an exercise price of $4.00 per share, was exercisable
until January 26, 2004. The Warrants were issued as consideration for a
$2,000,000 promissory note, bearing no interest, due January 26, 2002.
During the six months ended June 30, 2000, the Company issued a total of
1,494,673 shares upon the exercise of incentive stock options by various
employees. The aggregate proceeds to the Company for the issuance of these
options was $3,116,634 at an average exercise price of approximately $2.09
per share.
3. WAVEXPRESS:
In April 1999, the Company joined with Sarnoff Corporation to announce the
formation of a new joint venture, WaveXpress. WaveXpress aims to provide
secure data broadcast architecture, infrastructure and content services to
broadcasters and content providers. WaveXpress is developing technology and
services that will allow content providers to send electronic content to
properly equipped PCs by utilizing unused bandwidth in the Digital Television
(DTV) spectrum. Consumers will be able to purchase this electronic content
directly through a secure network connection, thus enabling a significant new
revenue stream for broadcasters. On October 15, 1999, Wave and Sarnoff signed
a Joint Venture Agreement which formally established WaveXpress. Under this
<PAGE>
7
agreement Sarnoff and affiliates received a 40% equity stake in WaveXpress.
Wave and its affiliates that purchased for a nominal amount, founders stock
in April 1999 own the remaining 60% of the outstanding capital stock. The
affiliates of Wave include Peter Sprague and Steven Sprague, the Chairman and
Chief Executive Officer of Wave, respectively, certain members of the Board
of Directors of Wave and certain employees of Wave. This affiliate group
owned, in the aggregate, 7% of the outstanding capital stock of WaveXpress.
In addition, Wave is currently funding WaveXpress through a series of
convertible notes and warrants. Through June 30, 2000, Wave has loaned
WaveXpress approximately $8.9 million. The notes and warrants can be
converted into equity at a predetermined conversion rate. When converted, on
a fully diluted basis which would include all stock, warrants and the
WaveXpress Employee Stock Option Pool, Wave and its affiliates would own
approximately 72% of WaveXpress's outstanding capital stock. Neither Sarnoff
nor any of the other minority shareholders are obligated to provide any
funding to the venture. Accordingly, Wave has included the entire net loss
of WaveXpress in its consolidated results of operations. For the quarter and
year to date period ended June 30, 2000, WaveXpress has incurred a net loss
of approximately $2.3 million and $3.8 million respectively. WaveXpress has
incurred expenditures for R&D of approximately $1.2 million and $1.7 million
for the quarter and year to date period ended June 30, 2000.
4. CASH AND CASH EQUIVALENTS:
Cash is on deposit in a government money market account presently earning
an annualized rate of return of approximately 6%. The cash is liquid and
immediately available for the Company's operating requirements.
5. MARKETABLE SECURITIES:
In consideration for the 1,000,000 shares the Company held in ITG when
Concentric acquired ITG, the Company received $2,162,457 in cash and 83,910
shares in Concentric. The cost basis of the ITG shares to the Company was
$1,620,000, resulting in a gain of $542,457 during the first quarter of 2000.
On May 10, 2000, Nextlink Communications, Inc. acquired Concentric. As a
result of the acquisition, the Company now holds 107,975 common shares of
Nextlink, Inc. due to the conversion of the 83,910 Concentric shares at a
conversion price of $1.2868. As of June 30, 2000 the Nextlink common stock
had a market value of $4,096,301 based on that day's closing price of
$37.94 per share.
6. OTHER ASSETS:
Other assets consist primarily of security deposits associated with
facilities the Company leases. In January 2000 WaveXpress signed a ten year
lease for facilities in New York. As part of the agreement Wave placed a
deposit for $773,000 with a bank to secure the letter of credit in the amount
of approximately $773,000.
7. GLOBAL WAVE:
In June, 2000, Wave increased its ownership percentage of Global Wave
Limited, (a joint venture) from 25% to 40% through its holding company
Earthquest Limited. As part of the new joint venture agreement, Wave's partner
in the venture, Redwave, Plc, has agreed to contribute $7.5 million and 500,000
shares of Wave Systems common stock held by Redwave, in exchange for 600,000
shares of Global Wave series A common stock. Earthquest received 400,000 shares
of Global Wave series B common stock in exchange for a technology license
granted by Wave, on behalf of Earthquest to Global Wave. No value has been
assigned to these shares. Neither Earthquest nor Wave has provided, nor are they
obligated to provide any funding to Global Wave. Global Wave has not been
included in the consolidated results of the Company. Wave has not assigned any
value to its Global Wave interest.
8. SUBSEQUENT EVENTS
On July 19, 2000, the Company entered into a letter of intent with Indigo
Networks, LLC to purchase all of the assets of Indigo and its e-commerce
shopping network, iShopHere.com, for $7,235,000 payable in Wave common
<PAGE>
8
stock. The number of shares to be issued will be based on the average price for
the ten trading days immediately prior to the date of the closing (approximately
400,000 to 500,000 shares). iShopHere.com is a destination shopping network that
provides consumers access to quality brands and retailers as well as special
savings. It operates under a revenue sharing model whereby iShopHere.com
receives a percentage of each purchase transaction that takes place through its
network of over 450 participating merchants.
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9
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our Business........Wave Systems Corp. offers powerful, next-generation
solutions for electronic commerce, making the process
easier, versatile, and more secure for consumers as well as
business-to-business applications. The Company is involved
in the research, development, and market testing of the Wave
System, which performs the buying transactions in a range of
consumer electronic devices, including computers, personal
digital assistants, and interactive televisions, for the use
of electronic content and services in a secure, trusted
environment. Electronic content and services refers to any
data, graphic, software, video or audio sequence that can be
digitally transmitted or stored, as well as access to
services such as broadcast or telecommunications services.
Examples include archived newspaper and magazine articles,
on-line books, music selections, clip-art, photographs and
video games. Under our model, electronic content and service
providers use the Wave System to allow consumers to purchase
one-time, multiple or permanent use of their content or
service, using a wide range of payment models including
rental, pay-for-use, or outright purchase, 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 de-centralized distribution
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 computer or
other interactive device. This means that content and
services can be consumed with more efficient and flexible
pricing, broader distribution opportunities, greater
protection against unauthorized usage and with better
privacy protection of the consumer's sensitive information.
Our Market..........Our long-term strategy is to achieve broad market acceptance
of the Wave System as a standard platform for the secure
delivery of electronic content and services and to build a
network of services for this platform. 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. The business world is creating new
customer and supplier value chains which require new
approaches to the protection of information and content
which flows over public, shared networks. 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. Our creation of the
trusted client model allows important new approaches to
addressing issues regarding the authentication of
identities, the protection of content and services, and the
distribution of electronic commerce transactions. These
three capabilities are key to building a network of
end-users and conducting e-commerce transactions.
Our Product.........The Wave System consists of an EMBedded Application Security
SYstem in consumer devices that provides a core hardware and
software foundation for consumers to purchase electronic
content and access services on a flexible purchase basis.
The EMBASSY platform is a
<PAGE>
10
programmable, low cost "system within a system" that can
perform independent transactions such as meter pay-per-use
of electronic 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 platform is an open model based on security hardware
originally designed for use with "smart cards" that can be
integrated into personal computers and peripherals,
interactive televisions or used as independent components.
The WaveMeter application running in the EMBASSY platform
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. The WaveMeter server enables
electronic content owners to securely sell usage of their
intellectual property from a Web site. This secure
electronic content delivery service, offered through the
WaveMeter 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 WaveNet central
transaction processing center periodically. The WaveNet
application manages electronic codes for scrambling and
unscrambling electronic content, processes credit and usage
charges, automatically obtains credit authorization,
calculates royalty distributions, and provide user and usage
data to electronic content owners. The Wave System is
designed to be compatible with existing content delivery
systems, such as CD-ROMs and the Internet. Using these
Wave-enabled distribution systems, electronic content
providers can distribute their products in a secure format
and offer them for sale through the EMBASSY platform, which
in turn allows consumers to purchase and access the
electronic content when desired.
Our Partners........We are pursuing strategic relationships to build new ways of
distributing electronic content and services with electronic
content providers, network companies, and hardware
manufacturers. 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 partners. During 1998
and 1999, we established relationships with RSA Data
Security, NEC Technologies, Pollex Technology,
Hewlett-Packard's VerSecure division, Sun Microsystems,
SMSC, ITE, IGST, Sarnoff Corp., Hauppauge Computer Systems,
Compaq Computer, National Semiconductor, KiSS Nordic,
Cyber-COMM, INTERVU, AMD, Hitachi, Lego Media and WavePhore.
In 2000, we hope to expand the number of commitments from
hardware manufacturers, including personal computer
manufacturers, peripheral companies and other companies
involved in e-commerce.
Recent Financings...On March 7, 2000 the Company completed a $122 million
private placement with institutional, strategic and
accredited investors, which we feel will be sufficient to
fund operations through the end of 2001. We may choose to
raise additional capital from time to time, through equity
or debt financings, in order to capitalize on business
opportunities and market conditions. This would help to
ensure 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. 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.
<PAGE>
11
R&D.................We are a development stage company and have realized minimal
operating revenues since our inception. At June 30, 2000, we
had an accumulated deficit of approximately $110.7 million.
We have made a substantial investment in research and
development, of $4.5 million and $8.1 million for the
quarter and year to date period ended June 30, 2000, 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, 1999, 1998, and 1997, we spent
approximately $10.7 million, $6.2 million and $4.7 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 July 1997. From our inception in February
1988 through June 2000, we have spent approximately $45
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.
Recent Acquisition..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 was accounted for under the pooling-of interest
method of accounting and accordingly, all financial data
presented herein for 1999 has been restated as if N*Able was
acquired on the first day of the earliest 1999 period
presented.
Subsequent Events...On July 19, 2000, the Company entered into a letter of
intent with Indigo Networks, LLC to purchase all of the
assets of Indigo and its e-commerce shopping network,
iShopHere.com, for $7,235,000 payable in Wave common stock.
The number of shares to be issued will be based on the
average price for the ten trading days immediately prior to
the date of the closing (approximately 400,000 to 500,000
shares). iShopHere.com is a destination shopping network
that provides consumers access to quality brands and
retailers as well as special savings. It operates under a
revenue sharing model whereby iShopHere.com receives a
percentage of each purchase transaction that takes place
through its network of over 450 participating merchants.
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, 2000 AND 1999
For the three months ended June 30, 2000 and June 30, 1999, we had only
minimal operating revenues.
Selling, general and administrative expenses for the three months ended
June 30, 2000 were $5,972,218, as compared to $4,119,917 for the comparable
period of 1999, an increase of 45%. This increase is primarily attributable
to an increase in personnel, consultants and professional fees, trade shows,
equipment and other related costs associated with the marketing of new
applications and development of new markets for our technology.
Research and development expenses for the three months ended June 30, 2000
were $4,532,952, as compared to $2,344,866 for the comparable period of 1999,
an increase of 93%. This increase is primarily attributable to an increase in
headcount and consulting-related expenses, as well as the impact of the
WaveXpress development work during the three months ended June 30, 2000.
WaveXpress' research and development expenses were $1,168,726 for the quarter
ended June 30, 2000.
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12
Interest income for the three months ended June 30, 2000 was $1,665,391, as
compared to $285,559 for the comparable period of 1999. 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 approximately $122.0 million.
Due to the reasons set forth above, our net loss to common stockholders for
the three months ended June 30, 2000 was $8,821,224, as compared to
$5,554,545 for the comparable period of 1999.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the six months ended June 30, 2000 and June 30, 1999, we had revenues
of $77,349 and $19,226, respectively, from a combination of hardware services
and internet services sales.
Selling, general and administrative expense for the six months ended June
30, 2000 were $12,019,582, as compared to $7,021,407 for the comparable
period of 1999, an increase of 71%. This increase is primarily attributable
to an increase in personnel, trade shows, equipment and other related costs
associated with the marketing of new applications and the development of new
markets for our technology.
Research and development expenses for the six months ended June 30, 2000
were $8,068,705, as compared to $4,313,630 for the comparable period of 1999,
an increase of 87%. This increase is attributable to an increase in
headcount, consulting-related expenses and WaveXpress development work during
the first six months of 2000. WaveXpress' research and deveolpment expenses
were $1,708,658 for the year to date period ended June 30, 2000.
Interest income for the six months ended June 30, 2000 was $2,069,755 as
compared to $310,540 for the same period in 1999. The interest income in 2000
is due to the $122 million private placement, which occurred in March 2000.
Interest expense for the six months ended June 30, 1999 was $831,467, while
no interest expense was incurred for the comparable period of 2000. The
interest expense in 1999 was primarily attributable to non-cash expenses
associated with the issuance of warrants as part of the 1999 bridge
financing. In consideration for its 1,000,000 shares in ITG, the Company
received approximately $2.2 million in cash and 83,910 shares of Concentric.
The cost basis of the ITG shares to the Company was approximately $1.6
million, for a gain of $542,457. During January of 2000, Concentric Network
Corporation completed their acquisition of ITG. On May 10, 2000 Concentric
was acquired by Nextlink Communications, Incorporated. As a result, the
Company's holdings became 107,975 shares of Nextlink common stock which had a
market value of $4,096,301 based on the June 30, 2000 closing price of $37.94
per share.
Due to the reasons set forth above, our net loss to common stockholders for
the six months ended June 30, 2000 was $17,448,929, as compared to
$10,608,285 for the comparable period of 1999.
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13
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flow from operations since
our inception, and, as of June 30, 2000, had a $110,716,102 deficit
accumulated during the development stage, and stockholders' equity of
$113,042,492. We have financed our operations through June 30, 2000
principally through:
- the issuance of Class A and B Common Stock for a net amount of
$189,949,210, including $3,115,137 from the exercise of employee incentive
stock options during the year-to-date period ended June 30, 2000.
- 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, 2000, we had $105,231,677 in cash and cash equivalents. At
December 31, 1999, we had $6,290,045 in cash and cash equivalents. We held
marketable securities with a value of $4,096,301 and $4,480,500 at June 30,
2000 and December 31, 1999, respectively. The increase in cash and cash
equivalents is primarily attributable to cash proceeds from a private
placement during the first quarter of 2000. In March 2000, we issued
3,600,800 shares of our Class A Common stock for $114,977,416, net of
expenses. The Company also received $2,162,457 of cash associated with its
ownership of 1,000,000 ITG shares. Warrants were exercised during the period
for proceeds of $1,177,388.
As of December 31, 1999, the Company had net operating loss carryforwards
for tax return purposes of approximately $80.1 million which expire beginning
in 2003 through 2020.
Pursuant to the Internal Revenue Code, Section 382 of 1986, annual
utilization of the Company's net operating loss carryforwards may be limited
if a cumulative change in ownership of more than 50% occurs within a three
year period. The Company has not determined whether there has been such a
cumulative change in ownership or the impact on the utilization of the loss
carryforwards if such change has occurred.
At June 30, 2000, we had working capital of $105,521,179. We expect we may
incur substantial additional expenses resulting in significant losses at
least through the period ending December 31, 2000, due to minimal revenues
and increased sales and marketing expenses associated with market entry, and
continued research and development costs. We anticipate that our existing
capital resources will be adequate to satisfy our capital requirements
through the end of 2001. Beyond 2001, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure to market risk associated with interest rate-sensitive
instruments is not material to the Company. Our investment portfolio consists
primarily of money market funds that meet high credit quality standards and
the amount of credit exposure to any one issue is limited. In addition, we
hold a minority equity investment in a publicly traded company, the value of
which is subject to market price volatility.
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14
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27 Financial Data Schedule
Reports on Form 8-K: None.
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15
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, 2000
WAVE SYSTEMS CORP.
(Registrant)
By: /s/ Peter J. Sprague
-----------------------------------------
Name: Peter J. Sprague
Title: Chairman of the Board
Duly Authorized Officer of the Registrant)
By: /s/ Gerard T. Feeney
----------------------------------------
Name: Gerard T. Feeney
Title: Chief Financial Officer
