WAVE SYSTEMS CORP - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

o 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 incorporation or organization)		(I.R.S. Employer 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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act.

Yes o No ý

The number of shares outstanding of each of the issuer’s classes of common stock as of November 5, 2003: 63,374,124 shares of Class A Common Stock and 205,725 shares of Class B Common Stock.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

WAVE SYSTEMS CORP. AND SUBSIDIARIES

(a development stage corporation)

Unaudited Consolidated Balance Sheets

	As of
	September 30, 2003			December 31, 2002
Assets
Current assets:
Cash and cash equivalents	$	6,010,996		$	10,221,124
Cash Collected on Behalf of Charities	—			235,553
Notes Receivable from Officers	—			278,342
Inventories	—			1,112,818
Prepaid expenses and other receivables	400,838			574,316
Total current assets	6,411,834			12,422,153
Marketable Equity Securities	5,311,997			2,881,016
Property and equipment, net	2,219,869			2,542,765
Other assets	326,111			363,438
Total Assets	14,269,811			18,209,372
Liabilities, Preferred Stock and Stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	2,838,283			3,404,377
Accrued Dividends	16,766			—
Due to Charities	—			263,156
Deferred Revenue	86,333			—
Total current liabilities	2,941,382			3,667,533

Series H Redeemable Convertible Preferred Stock, $0.01 par value. 40 shares issued and outstanding in 2003, liquidation/redemption value $400,000	400,000			—

Common stock, $.01 par value. Authorized 120,000,000 shares as Class A; 62,487,056 shares issued and outstanding in 2003 and 51,771,918 in 2002	624,870			517,720
Common stock, $.01 par value. Authorized 13,000,000 shares as Class B; 205,725 shares issued and outstanding in 2003 and 324,225 in 2002	2,057			3,242
Capital in excess of par value	256,189,599			247,112,405
Deficit accumulated during the development stage	(248,376,603		)	(233,091,528		)
Other Comprehensive Income – unrealized gain on marketable securities	2,488,506			—
Total stockholders’ equity	10,928,429			14,541,839
Total Liabilities, Preferred Stock and Stockholders’ Equity	14,269,811			$	18,209,372

See accompanying notes to unaudited consolidated financial statements.

WAVE SYSTEMS CORP. AND SUBSIDIARIES

(a development stage corporation)

Consolidated Statements of Operations

(Unaudited)

	Three Months ended				Nine Months ended				Period from February 12, 1988 (inception) through
	September 30, 2003		September 30, 2002		September 30, 2003		September 30, 2002		September 30, 2003
Net Revenues:
Product	$	95	$	21,925	$	1,433	$	121,922	$	487,547
Services	40,563		40,948		65,344		259,413		806,641
Licensing and Other	39,470		6,972		63,482		11,917		569,381
Total Net Revenues	80,128		69,845		130,259		393,252		1,863,569
Cost of sales:
Product	60		11,403		2,863		64,769		283,918
Services	10,781		12,552		15,748		103,221		375,454
Licensing and Other	20,033		1,345		21,437		4,809		157,074
Total Cost of Sales	30,874		25,300		40,048		172,799		816,446
Gross margin	49,254		44,545		90,211		220,453		1,047,123
Operating expenses:
Selling, general, and administrative	2,831,799		5,147,298		9,535,085		15,274,063		137,195,044
Research and development	1,610,066		2,768,094		5,839,123		9,040,981		89,801,812
Reserve for Inventory	1,114,442		—		1,114,442		—		1,114,442
Write-off of Intangibles and other impaired assets	—		665,641		—		1,571,031		3,332,948
Restructuring Costs and other special charges	—		—		—		726,280		726,280
Amortization of goodwill	—		—		—		—		2,294,176
Write-off of goodwill	—		—		—		—		3,054,456
In process research and development expense	—		—		—		—		2,176,000
Acquisition Costs	—		—		—		—		1,494,000
Aladdin license expense