Wave Reports 2012 Results and Highlights Focus on Enterprise Management of Windows 8 Tablets

Marketwired

LEE, MA--(Marketwire - Mar 18, 2013) - Wave Systems Corp. (NASDAQ: WAVX), a provider of security and management software for endpoint devices, today reported financial results for its fourth quarter (Q4 '12) and year ended December 31, 2012 and highlighted recent developments in its business.

Wave generated total net revenues of $7.1 million for Q4 '12, a modest increase over total net revenues of $7.0 million in Q3 '12, but a decline from Q4 '11 total net revenues of $11.0 million, which included $2.4 million in additional licensing and maintenance revenue related to three enterprise customers.

Wave's Q4 '12 and full year 2012 total net revenues reflect lower levels of OEM bundling revenue resulting from a combination of lower PC shipment volumes and a reduction in royalty rates established in November 2011. Q4 '12 OEM bundling revenues decreased by $0.3 million versus Q3 '12 and by $1.7 million versus Q4 '11. For the full year 2012, OEM bundling revenue declined a total of $4.8 million versus 2011.

Wave's Q4 '12 total net revenues included $1.4 million in licensing and maintenance revenues from its Safend subsidiary versus $1.5 million in Q3 '12 and $1.6 million in Q4 '11. Services revenue from a U.S. government consulting contract was $0.6 million for both Q4 '12 and Q4 '11 and $40,000 for Q3 '12.

Total billings for Q4 '12 rose to $9.3 million, an increase of 52% from $6.1 million in Q3 '12, but a decline of 20% from $11.5 million in Q4 '11, which included $1.7 million related to a single large customer contract. Q4 '12 total billings include $1.7 million in maintenance fees for a large enterprise customer that will be recorded ratably over the three-year maintenance term through December 31, 2015. Q4 '12 total billings included $1.7 million from Safend, as compared to $1.3 million in Q3 '12 and $1.8 million in Q4 '11.

As a result of headcount and cost reduction initiatives completed in Q4, Wave's combined SG&A and R&D expenses declined to $11.7 million in Q4 '12 from $12.4 million in Q3 '12 and $14.0 million in Q4 '11. Wave expects to realize a full quarter's benefit from these cost reductions starting in Q1 '13, however the savings will be offset in the period by annual audit and tradeshow expenses.

Though Wave continues to view its Safend subsidiary as an important strategic asset, during Q4 '12 Wave determined that sufficient indicators of potential impairment existed to require an impairment analysis for Safend. As a result of this review, Wave recorded non-cash impairment charges totaling $7.5 million to write down the value of goodwill and intangible assets attributed to Safend, of which $3.4 million is included in the licensing and maintenance cost of net revenues and $4.1 million is reflected in impairment of goodwill and intangible assets.

Wave recorded a Q4 '12 net loss of $13.0 million, or ($0.13) per basic and diluted share, as compared to a net loss of $6.1 million, or ($0.06) per basic and diluted share in Q3 '12 and a net loss of $4.9 million, or ($0.05) per basic and diluted share in Q4 '11. Per share figures are based on a weighted average number of basic shares outstanding during Q4 '12, Q3 '12 and Q4 '11 and of 104.0 million, 98.0 million and 88.5 million, respectively.

To illustrate its operational performance on a cash-flow basis, Wave reports EBITDAS, a non-GAAP measure defined as earnings before impairment expense, interest income (expense), income taxes, depreciation and amortization and stock-based compensation expense. Wave recorded negative EBITDAS of $4.1 million in Q4 '12, compared with negative EBITDAS of $4.2 million in Q3 '12 and negative EBITDAS of $2.8 million in Q4 '11.

As of December 31, 2012, Wave's total current assets were $9.4 million and total current liabilities, including the current portion of deferred revenue totaling $5.9 million, were $15.1 million. Cash and cash equivalents were $2.1 million at December 31, 2012, as compared to $2.2 million at September 30, 2012 and $3.4 million at December 31, 2011. Year-end 2012 cash does not include $1.7 million received in February 2013 under a three-year maintenance contract signed in Q4 '12.

Wave raised net proceeds of $313,506 in early Q4 '12 through the issuance of 325,590 shares of its Class A common stock at an average price of $0.99 per share through its At The Market (ATM) structure. Wave raised gross proceeds of $3.3 million in a registered direct offering in October 2012. Additionally, last week, Wave raised gross proceeds of $1 million from the sale of Class A common stock and warrants; the offering was priced at the March 11th closing price of $0.83 per share.

CEO Commentary:
Wave CEO, Steven Sprague, commented, "While 2012 was challenging from a revenue perspective, we made important strategic investments to advance our solutions for security, management and data protection in the mobile world of tablets and smartphone devices. In 2011, we saw the current trend towards mobile and implemented our own mobile strategy that leverages the unique Trusted Computing functionality only Wave can provide. We were certainly surprised by both the speed of mobile adoption and the impact it has had on demand for some of our core PC solutions, but we were not alone in that regard given the fundamental changes in the PC industry over the last year.

"We believe these developments have set the stage for significant opportunities for Wave in 2013 and beyond, and we have focused our sales and marketing efforts on our unique security and management capabilities for Windows 8 tablets, including Microsoft's Surface Pro and Dell's Latitude 10. The initial enterprise response to this solution has been positive, and this development has prompted opportunities to continue to promote this security infrastructure for managing existing devices running Windows 7. We are now beginning to ship prototype tablet software but do not anticipate any meaningful order activity until Q2 at the earliest.

"Windows 8 tablets managed by Wave can leverage robust hardware-based security and eliminate passwords for enterprise VPN or WiFi access on a global basis. When our software is combined with Microsoft Active Directory, there is no need for an additional layer of Mobile Device Management for Windows 7 or 8 devices. We expect to extend this capability to other mobile devices as well, offering enterprises a single cost-effective, hardware-based system to manage security and network access across three device form factors.

"Whether a PC, a tablet or a smartphone, Wave's Trusted Computing solutions offer a superior, cost-effective, industry standard approach to managing devices and thwarting today's cyber threats in a user-friendly way," Mr. Sprague added. "We believe our PC and tablet solutions can help enterprises and governments to utilize the strength, convenience, management and favorable cost of ownership of Trusted Computing solutions to solve the security and management challenges created by the device 'arms race' they are struggling to address."

Recent News and Developments

About Wave Systems
Wave Systems Corp. reduces the complexity, cost and uncertainty of data protection by starting inside the device. Unlike other vendors who try to secure information by adding layers of software for security, Wave leverages the security capabilities built directly into endpoint computing platforms themselves. Wave has been a leading expert in this growing trend, leading the way with first-to-market solutions and helping shape standards through its work as a board member for the Trusted Computing Group.

Safe Harbor for Forward-Looking Statements
This press release may contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), including all statements that are not statements of historical fact regarding the intent, belief or current expectations of the company, its directors or its officers with respect to, among other things: (i) the company's financing plans; (ii) trends affecting the company's financial condition or results of operations; (iii) the company's growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words "may," "would," "will," "expect," "estimate," "anticipate," "believe," "intend" and similar expressions and variations thereof are intended to identify forward-looking statements. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the company's ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. Wave assumes no duty to and does not undertake to update forward-looking statements.

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WAVE SYSTEMS CORP. AND SUBSIDIARIES  
Consolidated Statements of Operations  
(Unaudited)  
   
    Three Months Ended
December 31,
    Twelve months ended
December 31,
 
    2012     2011     2012     2011  
Net revenues:                                
  Licensing and maintenance     6,530,639       10,482,551       27,480,732       35,100,518  
  Services     600,000       551,964       1,363,781       1,038,497  
Total net revenues   $ 7,130,639     $ 11,034,515     $ 28,844,513     $ 36,139,015  
Operating expenses:                                
  Licensing and maintenance - cost of net revenues     4,331,166       692,583       6,333,221       1,848,482  
  Services - cost of net revenues     -       86,998       144,111       189,167  
  Adjustments to purchase accounting     -       1,033,206       -       1,033,206  
  Selling, general and administrative     7,459,890       8,583,669       33,021,237       27,871,223  
  Research and development     4,194,337       5,369,783       19,055,894       16,087,129  
  Impairment of goodwill and intangible assets    
4,054,732
     
-
     
4,054,732
     
-
 
Total operating expenses     20,040,125       15,766,239       62,609,195       47,029,207  
Operating loss     (12,909,486 )     (4,731,724 )     (33,764,682 )     (10,890,192 )
Other income (expense):                                
  Net currency transaction gain (loss)     403       (55,273 )     12,156       175,004  
  Net interest expense     (98,695 )     (1,461 )     (197,989 )     (4,589 )
Total other income (expense)     (98,292 )     (56,734 )     (185,833 )     170,415  
Loss before income taxes     (13,007,778 )     (4,788,458 )     (33,950,515 )     (10,719,777 )
Income tax expense     (12,033 )     (74,959 )     (12,033 )     (74,959 )
Net loss     (13,019,811 )     (4,863,417 )     (33,962,548 )     (10,794,736 )
Loss per common share - basic and diluted   $ (0.13 )   $ (0.05 )   $ (0.35 )   $ (0.13 )
Weighted average number of common shares outstanding during the period     104,003,922       88,544,911       96,204,505       84,344,729  
                                 
                                 
                                 
WAVE SYSTEMS CORP. AND SUBSIDIARIES  
Consolidated Supplemental Schedule  
(Unaudited)  
   
    Three Months Ended
December 31,
    Twelve months ended
December 31,
 
    2012     2011     2012     2011  
Total net revenues   $ 7,130,639     $ 11,034,515     $ 28,844,513     $ 36,139,015  
Increase (decrease) in deferred revenue     2,127,204       491,688       84,904       (3,331,530 )
                                 
Total billings (Non-GAAP)   $ 9,257,843     $ 11,526,203     $ 28,929,417     $ 32,807,485  
                                 
                                 
Net loss as reported   $ (13,019,811 )   $ (4,863,417 )   $ (33,962,548 )   $ (10,794,736 )
Net interest expense     98,695       1,461       197,989       4,589  
Income tax expense     12,033       74,959       12,033       74,959  
Depreciation and amortization     525,309       566,274       2,136,830       1,005,068  
Stock-based compensation expense     843,243       1,441,356       4,830,831       5,379,961  
Impairment of goodwill and intangible assets     7,477,832       -       7,477,832       -  
                                 
EBITDAS (Non-GAAP)   $ (4,062,699 )   $ (2,779,367 )   $ (19,307,033 )   $ (4,330,159 )
                                 
                                 

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 impairment expense, 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)  
       
    December 31,     December 31,  
    2012     2011  
Assets                
Current assets:                
  Cash and cash equivalents   $ 2,112,769     $ 3,385,035  
  Accounts receivable, net of allowance for doubtful accounts of $-0- at December 31, 2012 and 2011, respectively     5,034,422       7,198,645  
  Pledged receivables     1,801,683       -  
  Prepaid expenses     421,769       823,761  
    Total current assets     9,370,643       11,407,441  
  Property and equipment, net     871,568       1,236,844  
  Amortizable intangible assets, net     4,028,333       10,925,306  
  Goodwill     4,038,000       6,216,059  
  Other assets     324,614       336,607  
Total Assets     18,633,158       30,122,257  
                 
Liabilities and Stockholders' Equity (Deficit)                
Current liabilities:                
  Secured borrowings     1,537,710       -  
  Accounts payable and accrued expenses     7,570,723       6,701,026  
  Current portion of capital lease payable     44,658       72,074  
  Deferred revenue     5,949,087       6,619,257  
    Total current liabilities     15,102,178       13,392,357  
Long-term portion of capital lease payable     -       44,659  
Other long-term liabilities     97,996       66,283  
Royalty liability     4,486,129       4,043,163  
Long-term deferred revenue     1,812,312       1,035,220  
      Total liabilities     21,498,615       18,581,682  
                 
Stockholders' Equity (Deficit):                
Common stock, $.01 par value. Authorized 150,000,000 shares as Class A; 105,007,873 shares issued and outstanding in 2012 and 89,574,385 in 2011     1,050,079       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     393,000,325       373,598,144  
Accumulated deficit     (396,916,216 )     (362,953,668 )
      Total Stockholders' Equity (Deficit)     (2,865,457 )     11,540,575  
Total Liabilities and Stockholders' Equity (Deficit)   $ 18,633,158     $ 30,122,257  
                 
                 
                 
Conference call: Today, March 18, 2013 at 4:30 p.m. ET
Webcast / Replay URL: www.wave.com/news/webcasts
Dial-in numbers: 415-226-5356 or 212-231-2912
Contact:

Wave Systems Corp.

Gerard T. Feeney
CFO
413-243-1600

Investor Relations
David Collins, Eric Lentini
212-924-9800
wavx@catalyst-ir.com

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