<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 March 31, 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 March 31, 2000: 44,386,713 shares of Class A Common Stock and
1,882,335 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>
ASSETS March 31, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 115,247,277 $ 6,290,045
Marketable Securities 4,615,050 4,480,500
Inventories 491,799 431,686
Prepaid expenses and other receivables 123,909 491,857
------------- -------------
Total current assets 120,478,035 11,694,087
Property and equipment, net 2,919,587 2,680,874
Other assets 3,126,019 2,156,923
------------- -------------
126,523,641 16,531,883
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 5,428,649 6,823,643
------------- -------------
Total current liabilities 5,428,649 6,823,643
------------- -------------
Stockholders' Equity:
Common stock, $.01 par value. Authorized 75,000,000 shares as Class A;
issued and outstanding 44,386,713 in 2000 and 39,445,683 in 1999 443,867 394,457
Common stock, $.01 par value. Authorized 13,000,000 shares as Class B;
issued and outstanding 1,882,335 in 2000 and 2,050,507 in 1999 18,823 20,505
Capital in excess of par value 217,912,129 99,854,111
Deficit accumulated during the development stage (101,894,878) (93,267,173)
Other Comprehensive Income - unrealized gain on marketable securities 4,615,050 2,860,500
Less: Note receivable from stockholder, including accrued interest
of $105,985 in 1999 -0- (154,160)
------------- -------------
Total stockholders' equity 121,094,991 9,708,240
------------- -------------
Commitments and contingencies
$ 126,523,641 $ 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
(date of inception)
Three months ended through
March 31, March 31, March 31,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenue, net $ 22,601 $ 7,548 $ 284,676
Cost of sales 14,011 5,150 159,378
------------- ------------- -------------
Gross margin 8,590 2,398 125,298
------------- ------------- -------------
Operating expenses:
Selling, general and administrative 6,047,364 2,901,491 65,267,415
Write-off of goodwill -- -- 769,886
Aladdin license and in-process
research and development expense -- -- 3,889,000
Research and development 3,535,753 1,968,764 36,939,533
------------- ------------- -------------
9,583,117 4,870,255 106,865,834
------------- ------------- -------------
Other income (expense):
License fee -- 625,000 5,000,000
License warrant cost -- -- (1,100,000)
Interest income 404,365 24,981 2,325,943
Interest expense -- (830,465) (1,695,461)
Gain on sale of marketable securities 542,457 -- 542,457
Other income (expense) -- -- (227,280)
------------- ------------- -------------
946,822 (180,484) 4,845,659
------------- ------------- -------------
Net loss (8,627,705) (5,048,340) (101,894,877)
Accrued dividends on preferred stock
-- 5,400 4,350,597
------------- ------------- -------------
Net loss to common stockholders $ (8,627,705) $ (5,053,740) $(106,245,474)
============= ============= =============
Weighted average number of common
shares outstanding during the period
-- basic and diluted 43,001,183 34,429,092 16,422,890
Loss per common share -- basic and diluted $ (.20) $ (.15) $ (6.47)
============= ============= =============
</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)
Three months ended through
March 31, March 31, March 31,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,627,705) $ (5,048,340) $(101,894,879)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of goodwill -- -- 769,886
Depreciation and amortization 359,068 134,269 2,865,576
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 108,333 134,120 3,600,199
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 -- 14,315 121,219
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 in accrued interest on note receivable 105,986 (1,204) --
Increase in inventories (60,113) -- (491,799)
Decrease in prepaid expenses and
other receivables 367,948 (146,463) (123,910)
Increase in other assets (969,097) -- (3,140,933)
Increase (decrease) in deferred revenue 94,966 (625,000) 94,966
Increase (decrease) in accounts payable and
accrued expenses (1,489,962) (931,044) 5,571,193
------------- ------------- -------------
Net cash used in operating activities (10,110,576) (5,394,107) (82,097,729)
------------- ------------- -------------
(Continued)
</TABLE>
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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)
Three months ended through
March 31, March 31, March 31,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities:
Acquisition of property and equipment (597,781) (328,484) (5,555,637)
Short-term loans to affiliate -- -- (1,672,934)
Organizational costs -- -- (14,966)
Purchase of marketable securities 1,620,000 -- (27,546,769)
Maturity of marketable securities -- -- 27,653,731
------------- ------------- -------------
Net cash used in investing activities 1,022,219 (328,484) (7,136,575)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 117,997,414 22,709,421 188,661,740
Net proceeds from issuance of preferred stock
and warrants -- -- 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)
Redemption of Preferred Stock -- -- (506,440)
------------- ------------- -------------
Net cash provided by financing activities 118,045,589 24,709,421 204,481,581
------------- ------------- -------------
Net increase in cash and cash equivalents 108,957,232 18,986,830 115,247,277
Cash and cash equivalents at beginning of period 6,290,045 4,451,175 --
------------- ------------- -------------
Cash and cash equivalents at end of period $ 115,247,277 $ 23,438,005 $ 115,247,277
============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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5
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B Capital
common stock common stock in excess of
Shares Amount Shares Amount Par Value
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 39,445,683 $394,457 2,050,507 $20,505 $99,854,111
Net loss
Unrealized gain on marketable securities
Comprehensive income (loss)
Shares issued at $34.00 per share, net of expenses 3,600,800 36,008 114,941,408
Exercise of warrants to purchase Class A common stock 312,500 3,125 1,174,263
Exercise of options to purchase Class A common stock 851,679 8,517 1,834,093
Shares issued as compensation for services rendered 7,879 79 108,254
Repayment of note receivable
Investment Gain on marketable securities
Exchange of Class B stock for Class A stock 168,172 1,682 (168,172) (1,682)
---------- -------- --------- ------ -----------
44,386,713 $443,867 1,882,335 $18,823 $217,912,129
========== ======== ========= ======= ============
Balance at March 31, 2000
</TABLE>
<TABLE>
<CAPTION>
Deficit
accumulated Series G Accumulated Note
during the Convertible Other receivable
development Preferred Comprehensive from
Stage Stock Income Stockholder Total
----- ----- ------ ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $(93,267,173) 0 $2,860,500 $(154,160) $ 9,708,240
Net loss (8,627,705) (8,627,705)
Unrealized gain on marketable securities 1,754,550 1,754,550
Comprehensive income (loss) (6,873,155)
Shares issued at $34.00 per share, net of expenses 114,977,416
Exercise of warrants to purchase Class A common stock 1,177,388
Exercise of options to purchase Class A common stock 1,842,610
Shares issued as compensation for services rendered 108,333
Repayment of note receivable 54,160 154,160
Investment Gain on marketable securities 1,754,550 1,754,550
Exchange of Class B stock for Class A stock
------------- --------- ---------- ------------- ------------
$(101,894,878) - $ 0 - $4,615,050 - $ 0 - $121,094,991
============= ========= ========== ============= ============
Balance at March 31, 2000
</TABLE>
<PAGE>
6
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Consolidated Financial Statements
March 31, 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 March 31, 2000 and 1999, and the results of its
operations and cash flows for the three months ended March 31, 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 three months March 31, 2000 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. 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 6.0% or
approximately $7.3 million for their services.
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 valued at $11 per share in satisfaction of the
outstanding principal amount of $2,000,000.
<PAGE>
7
3. JOINT VENTURE:
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 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 owns,
in the aggregate, 7% of the outstanding capital stock of WaveXpress. In
addition, Wave is currently funding WaveXpress through a convertible note.
This note can be converted into equity at a predetermined conversion rate.
Through March 31, 2000, Wave has loaned WaveXpress approximately $5.3
million. Neither Sarnoff nor any of the other minority shareholders are
obligated to provide any funding to the venture. WaveXpress has been
included in the consolidated results of the Company.
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. On April 1, 1999 a
Holder of a Note surrendered the Note for conversion into 605,531 shares of
Company Class A Common Stock for the unpaid principal and interest.
5. N*ABLE TECHNOLOGIES ACQUISITION:
On July 27, 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 2,280,800 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 period presented.
6. 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.
7. MARKETABLE SECURITIES:
The Company holds 83,910 common shares of Concentric Network
Corporation. As of March 31, 2000 the stock had a market value of
$4,615,050 based on that day's closing price of $55.00 per share. 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.
8. OTHER ASSETS:
Other assets consist primarily of security deposits associated with
facilities the Company leases, including a $773,000 deposit for
WaveXpress facilities.
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8
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. We are
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>
9
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 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. 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>
10
R&D .................... We are a development stage company and have realized
minimal operating revenues since our inception. At
March 31, 2000, we had an accumulated deficit of
approximately $101.9 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, 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 March 2000, we have spent approximately
$41 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.
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 MARCH 31, 2000 AND 1999
For the three months ended March 31, 2000 and March 31, 1999, we had
revenues of $22,601 from a combination of hardware services and internet
services sales.
Research and development expenses for the three months ended March 31,
2000 were $3,535,753, as compared to 1,968,764 for the comparable period of
1999, an increase of 80%. This increase is primarily attributable to the
increase in headcount and consulting-related expenses during the first
three months of 2000.
Selling, general and administrative expense for the three months ended
March 31, 2000 were $6,047,364, as compared to $2,901,491 for the
comparable period of 1999, an increase of 108%. This increase is 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 our technology.
Interest income for the three months ended March 31, 2000 was $404,365
as compared to $24,981 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 three months ended March 31, 1999 was
$830,465, while minimal 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. Other income associated with the Company's ownership
of ITG shares was recorded in the amount of $542,457. During January of
2000, Concentric Network Corporation completed their acquisition of ITG. 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 at a
cost of $1.6 million, for a gain of $542,457. As of March 31, 2000 the
83,910 shares of Concentric common stock had a market value of $4,615,050
based on that day's closing price of $55.00 per share.
<PAGE>
11
Due to the reasons set forth above, our net loss for the three months
ended March 31, 2000 was $8,627,705, as compared to $5,048,340 for the
comparable period of 1999. The net loss for the three months ended March
31, 2000 to common stockholders was $8,627,705 as compared to $5,053,740
for the comparable period of 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses and negative cash flow from operations
since our inception, and, as of March 31, 2000, had a $101,894,878 deficit
accumulated during the development stage, and stockholders' equity of
$121,094,991. We have financed our operations through March 31, 2000
principally through:
o the issuance of Class A and B Common Stock for a net amount of
$188,661,740;
o 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);
o 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;
o the private placement of 800,000 shares of Class A Common Stock
raising $800,000 before expenses; and
o the private placements of convertible preferred stock for an aggregate
amount of $13,350,000 before expenses.
At March 31, 2000, we had $115,247,277 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 $4,615,050 and $4,480,500 at
March 31, 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 $80.1million 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 March 31, 2000, we had working capital of $115,049,386. 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
Not applicable.
PART II - OTHER INFORMATION
<PAGE>
12
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27 Financial Data Schedule
Reports on Form 8-K: None.
<PAGE>
13
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: May 15, 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
<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 THREE
MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000919013
<NAME> WAVE SYSTEMS CORP.
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 115,247,277
<SECURITIES> 4,615,050
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 491,799
<CURRENT-ASSETS> 120,478,035
<PP&E> 5,785,163
<DEPRECIATION> (2,865,576)
<TOTAL-ASSETS> 126,523,641
<CURRENT-LIABILITIES> 5,328,649
<BONDS> 0
0
0
<COMMON> 462,690
<OTHER-SE> 121,194,991
<TOTAL-LIABILITY-AND-EQUITY> 126,523,641
<SALES> 22,601
<TOTAL-REVENUES> 0
<CGS> 14,011
<TOTAL-COSTS> 9,583,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,627,705)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,627,705)
<EPS-BASIC> (.20)
<EPS-DILUTED> 0
</TABLE>
