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Lee, MA
November 9, 2012

Wave Systems Corp. (NASDAQ: WAVX) today reported financial results for its third quarter ended September 30, 2012 (Q3 ’12) and highlighted recent progress and new product launches.

Wave reported total net revenues of $7.0 million for Q3 ’12, including $1.5 million in licensing revenues from its Safend subsidiary, and services revenue of $40,000 from the final billing of a government contract. Wave’s Q3 ’11 total net revenues were $9.5 million, including $156,000 in revenues from Safend, which was acquired in late September 2011, and $274,000 in services revenue related to a government contract. The year-ago third quarter also benefitted from approximately $2 million in additional revenue related to two “large” enterprise-customer upgrade sales recorded ratably during 2011. Total net revenues in Q2 ’12 were $7.8 million.

Wave’s Q3 ’12 and year-to-date results reflect lower levels of OEM bundling revenue resulting from both lower PC shipment volumes as well as revisions to the Company’s royalty rates starting in November 2011 which, on a blended basis, have reduced per-unit revenues. In aggregate, Q3 ’12 was impacted by a $1.6 million decrease in OEM royalties versus the prior year period, and since the beginning of 2012 Wave’s OEM bundling revenue has declined by $3.2 million versus a year ago, providing another headwind in year-over-year comparisons.

Total billings declined to $6.1 million in Q3 ‘12, compared to $6.4 million in Q3 ’11 and $6.9 million in Q2 ’12. Total billings for Q3 ’12, Q3 ’11 and Q2 ’12 included $1.3 million, $143,000 and $1.4 million, respectively, from Safend.

Wave’s Q3 ’12 combined SG&A and R&D expenses declined to $12.6 compared to $13.7 million in Q2 ’12 but rose over Q3 ’11 expenses of $10.9 million. The year-over-year increase in SG&A and R&D expenses reflects expanded staffing in engineering, sales & marketing and administration, principally due to the addition of approximately 60 team members and related overhead resulting from the Safend acquisition. The increased staffing & expenses support a broader base of OEM relationships, growth in the prospective customer base and pipeline of order opportunities on a global basis and investments in the development of new products and product capabilities.

Wave recorded a Q3 ‘12 net loss of $6.1 million, or $0.06 per basic and diluted share, as compared to a Q2 ’12 net loss of $6.5 million, or $0.07 per basic and diluted share and its Q3 ‘11 net loss of $1.8 million, or $0.02 per basic and diluted share. Per share figures are based on a weighted average number of basic shares outstanding during Q3 ’12, Q3 ‘11 and Q2 ’12 of 98.0 million, 83.7 million and 92.5 million, respectively.

In order to highlight its operational performance on a cash-flow basis, Wave reports EBITDAS, a non-GAAP measure defined as earnings before interest income (expense), income taxes, depreciation and amortization and stock-based compensation expense. Wave recorded negative EBITDAS of $4.2 million in Q3 ’12, compared with negative EBITDAS of $0.3 million in Q3 ‘11 and negative EBITDAS of $4.6 million in Q2 ’12.

As of September 30, 2012, Wave’s total current assets were $6.5 million and total current liabilities, including the current portion of deferred revenue of $4.5 million, were $12.6 million. Cash and cash equivalents were $2.2 million at September 30, 2012, as compared to $1.6 million at June 30, 2012.

Wave continues to utilize a variety of approaches to fund its operations, including active working capital management methods, a receivables financing relationship to monetize its largest receivables and common stock sales. During Q3’12, Wave completed the sale of 2.6 million shares of Class A common stock at $0.6425 per share, yielding net proceeds of approximately $1.5 million. Purchasers also received warrants to purchase up to 1.3 million shares of Class A common stock at $0.58 which expire in August 2017. In October (Q4 ’12), Wave raised  approximately an additional  $3.1 million in net  proceeds through the sale of 3.3 million shares of Class A common stock at $1.0025 per share. Purchasers also received warrants to purchase up to 1.7 million shares of Class A common stock at $0.94 which expire in October 2017. Both of these private placements were pursuant to Wave’s effective shelf registration statement.

Also during Q3 ’12, Wave raised net proceeds of approximately $3.6 million through the issuance of approximately 4.0 million shares of its Class A common stock at an average price of $0.93 per share through its At The Market (ATM) structure. Since the end of Q3 ’12, shares sales through the ATM raised additional net proceeds of approximately $0.3 million at an average price of $0.99. Since the ATM’s inception in January 2012, Wave has raised total net proceeds of $9.1 million through the issuance of 7.9 million shares of Class A common stock at an average price of $1.18 per share. The share sales are completed at market prices, with a 3% commission and without any warrant issuance.

CEO Commentary:
“During the third quarter, sales fell short of expectations due to challenges in completing enterprise deals, as well as a lower level of OEM bundling revenues. Our performance has prompted a ‘redoubling’ of efforts to bring sales in the pipeline to fruition in the current quarter as well as expanded efforts at developing new opportunities,” commented Wave CEO Steven Sprague. “In light of our sales results, we’ve also taken a closer look at ways to curtail expenses, realizing a $1.2 million reduction in operating expenses in Q3 versus Q2 and a $2.2 million reduction versus Q1 of this year.

“Nonetheless, we remain optimistic about the future and our prospects in this growing market. As anticipated, Wave released several new products and product enhancements during the third quarter, including Wave Cloud, a SaaS (software as a service) offering that provides central management for hardware-based endpoint encryption, and Wave Endpoint Monitor, a first-of-its-kind solution that detects malware threats in the ‘pre-boot’ mode. We believe these new capabilities extend our leadership position in the Trusted Computing space at a time when Trusted Computing capabilities are receiving global visibility through the launch of the Windows 8 operating system across PCs, tablets and mobile devices.

“We view Windows 8, which utilizes industry standard hardware to deliver a range of convenient and secure new features, as a validation of the benefits of Trusted Computing and Wave’s solutions. Wave is uniquely positioned to support Windows 8 deployments via server-based or cloud management solutions, as well as to deliver a range of Windows 8 capabilities to enterprise customers running Windows 7 and earlier versions. Though Trusted Computing is based on industry-standard hardware used to protect your identity, the powerful user benefits are ease of use, ease of connection, and ease of access to the critical data that you need to do your job; it just works. Further, by building these capabilities on top of Trusted Computing hardware now being deployed across PCs, tablets and mobile devices via Windows 8, governments, enterprises, and even individuals, are able to benefit and manage all of their devices using one solution.”

“As the mobile security space continues to expand—especially with the rising use of consumer smartphones in the enterprise, in mobile commerce and for sensitive applications—Wave has taken a leadership role in promoting the adoption of hardware-based industry standards for greater security. Last quarter, Wave announced its inclusion in the influential ARM TrustZone Ready Program, whose partners have pledged to help chipset vendors design and integrate Trusted Computing hardware features in the chipsets they are building today.

“We are making great progress with scrambls to address security issues posed by the rising use of Cloud storage services in the enterprise as well as the evolution of social media into a tool increasingly used by businesses for the dissemination of critical information.  We see strong interest within the corporate environment for solutions that enable the safe sharing of files and communications over the Internet and social media.”

Recent News and Developments

For more information please contact:

Wave Contact:
Gerard T. Feeney, CFO
Wave Systems Corp.
413-243-1600

Investor Relations:
David Collins, Eric Lentini
Catalyst Global LLC
212-924-9800 office / 917-734-0339 mobile
wavx@catalyst-ir.com

 

 

 

WAVE SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

 

Three months ended

 

Nine months ended

 

September 30, 2012

 

September 30, 2011

 

September 30, 2012

 

September 30, 2011

Net revenues:

 

 

 

 

 

 

 

    Licensing

$6,930,724   

 

$9,259,722   

 

$20,950,093  

 

$24,617,967  

    Services

39,539

 

274,416

 

763,781

 

486,533

Total net revenues

6,970,263

 

9,534,138

 

21,713,874

 

25,104,500

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

   Licensing – cost of net revenues

395,188

 

459,002

 

1,317,055

 

1,139,943

Services – cost of net revenues

7,521

 

28,122

 

144,111

 

102,169

   Selling, general, and administrative

7,847,873

 

7,021,658

 

26,246,347

 

19,304,601

   Research and development

4,793,453

 

3,869,833

 

14,861,557

 

10,717,346

   Total operating expenses

13,044,035

 

11,378,615

 

42,569,070

 

31,264,059

   Operating loss

(6,073,772)

 

(1,844,477)

 

(20,855,196)

 

(6,159,559)

Other income (expense):

 

 

 

 

 

 

 

   Net currency transaction gain (loss)

1,965

 

-

 

11,753

 

231,368

   Net interest expense

(36,685)

 

(1,074)

 

           (99,294)

 

           (3,128)

   Total other income (expense)

(34,720)

 

(1,074)

 

(87,541)

 

228,240

Net loss

$(6,108,492)

 

$(1,845,551)

 

$(20,942,737)

 

$(5,931,319)

 

 

 

 

 

 

 

 

Loss per common share –

   basic and diluted

$(0.06)       

 

$(0.02)       

 

 $(0.22)     

 

 $(0.07)        

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding during the period

97,987,172

 

83,680,753

 

93,585,723

 

82,929,284

 

 

 

 

 

 

 

 

 

 

 

WAVE SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Supplemental Schedules
(Unaudited)

 

Three months ended

 

Nine months ended

 

September 30, 2012

 

September 30, 2011

 

September 30, 2012

 

September 30, 2011

 

 

 

 

 

 

 

 

Total net revenues

$6,970,263

 

$9,534,138

 

$21,713,874

 

$25,104,500

Increase (decrease) in deferred revenue

(884,795)

 

(3,182,659)

 

 (1,900,663)

 

(3,823,218)

 

 

 

 

 

 

 

 

Total billings (Non-GAAP)

$6,085,468

 

$6,351,479

 

$19,813,211

 

$21,281,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss as reported

$(6,108,492)

 

$(1,845,551)

 

$(20,942,737)

 

$(5,931,319)

Net interest expense

36,685

 

1,074

 

99,294

 

3,128

Depreciation and amortization

539,001

 

177,933

 

1,611,521

 

438,794

Stock-based compensation expense

1,343,510

 

1,355,100

 

3,987,588

 

3,938,605

 

 

 

 

 

 

 

 

EBITDAS (Non-GAAP)

$(4,189,296)

 

$(311,444)

 

$(15,244,334)

 

$(1,550,792)

 

Non-GAAP Financial Measures:

As supplemental information, we provide the non-GAAP performance measures that we refer to as total billings and EBITDAS. Total billings is provided in addition to, but not as a substitute for, GAAP total net revenues.  Total billings means the sum of total net revenues determined in accordance with GAAP, plus the increase or minus the decrease in deferred revenue.  We consider total billings an important measure of our financial performance, as we believe it best represents the continued increase in our software license upgrades.  Total billings is not a measure of financial performance under GAAP and, as calculated by us, may not be consistent with computations of total billings by other companies.   EBITDAS is defined as net income (loss) before interest income (expense), income taxes, depreciation and amortization and stock-based compensation.  EBITDAS should not be construed as a substitute for net income (loss) or net cash provided by (used in) operating activities (all as determined in accordance with GAAP) for the purpose of analyzing our operating performance, financial position and cash flows, as EBITDAS is not defined by GAAP.  However, we regard EBITDAS as a complement to net income (loss) and other GAAP financial performance measures, including an indirect measure of operating cash flow.

 

WAVE SYSTEMS CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

 

 

 

September 30,

 

December 31,

 

2012

 

2011

Assets

 

 

 

Current assets:

 

 

 

  Cash and cash equivalents

$2,163,046

 

$3,385,035

  Accounts receivable, net of allowance for doubtful accounts of $-0-

 

 

 

       September 30, 2012 and December 31, 2011

2,640,528

 

7,198,645

  Collateralized receivables

795,416

 

-

  Prepaid expenses

886,919

 

823,761

      Total current assets

6,485,909

 

11,407,441

  Property and equipment, net

983,920

 

1,236,844

  Amortizable intangible assets, net

9,711,906

 

10,925,306

  Goodwill

6,216,059

 

6,216,059

  Other assets

325,393

 

336,607

Total Assets

23,723,187

 

30,122,257

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

Current liabilities:

 

 

 

  Secured borrowings

672,107

 

-

  Accounts payable and accrued expenses

7,366,079

 

6,701,026

  Current portion of capital lease payable

63,197

 

72,074

  Deferred revenue

4,484,362

 

6,619,257

      Total current liabilities

12,585,745

 

13,392,357

  Long-term portion of capital lease payable

-

 

44,659

  Other long-term liabilities

93,969

 

66,283

  Royalty liability

4,116,656

 

4,043,163

  Long-term deferred revenue

1,194,152

 

1,035,220

Total liabilities

17,990,522

 

18,581,682

 

 

 

 

Stockholders’ Equity:

 

 

 

Common stock, $.01 par value.  Authorized 150,000,000 shares as Class A; 

 100,999,248 shares issued and outstanding in 2012 and 89,574,385 in 2011

1,009,992

 

895,744

Common stock, $.01 par value.  Authorized 13,000,000 shares as Class B; 35,556 shares issued and outstanding in 2012 and 2011

355

 

355

Capital in excess of par value

388,618,723

 

373,598,144

Accumulated deficit

(383,896,405)

 

(362,953,668)

Total Stockholders' Equity

5,732,665

 

11,540,575

Total Liabilities and Stockholders’ Equity

$23,723,187

 

$30,122,257