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Wave Q3 ’08 Revenue Grew 6% to $1.8 Million as Q3 ’08 Billings Rose 36% to $2.3 Million

Deferred Revenue Rises 78% Over Q2 2008 on Accelerating License Upgrade Sales

Lee, MA — November 10, 2008 — Wave Systems Corp. (NASDAQ: WAVX — www.wave.com) today reported results for the third quarter (Q3) and nine months ended September 30, 2008 and reviewed recent corporate progress and developments. Wave’s Q3 2008 net revenues rose 6% to $1,835,000, compared to Q3 2007 net revenues of $1,734,000, reflecting increased bundled software royalties, as well as growth in contribution from software license upgrades.

Reflecting continued increases in Wave’s software license activity, Q3 2008 billings, (a non-GAAP measure of demand, which reflects upgrade contracts signed during the period but which may be recognized over future periods), rose 36% to $2,297,000, versus Q3 2007 billings of $1,695,000.

As disclosed in its Q2 2008 news announcement, Wave’s software upgrade sales are being recorded as deferred revenue and recognized generally over a 365-day period. As a result of this treatment and the additional growth in Wave’s upgrade sales in Q3, deferred revenue increased 78% or $462,000 to $1,050,000 in Q3 2008, compared to deferred revenue at June 30, 2008 of $589,000, which was $233,000 higher than the Q1 2008 level. Gross profit for Q3 2008 rose, in both dollar amount and percentage terms, to $1,628,000 (88.7%), compared to $1,524,000 (87.9%) in Q3 2007.

As a result of higher levels of SG&A and R&D expense to support a growing base of sales activity, partners, customers and prospective customers, Wave reported a net loss of $5,605,000, or $0.10 per basic and diluted share, in Q3 2008, compared to a Q3 2007 net loss of $4,778,000 or $0.10 per basic and diluted share. Per-share figures are based on a weighted average number of basic shares outstanding in the third quarters of 2008 and 2007 of 57,896,000 and 49,737,000, respectively.

As of September 30, 2008, Wave had total assets of $2,985,000. Subsequent to the close of Q3 2008, Wave completed a $721,500 offering of Series J convertible preferred stock and began to implement a series of cost reduction measures aimed at reducing the Company’s ongoing operating expenses.

Steven Sprague, Wave’s President and CEO, commented, "As reflected in revenue, billings and deferred revenue in Q3, Wave continued to make progress in expanding its base of customer installations both on a bundled and upgrade basis, despite growing global economic challenges. Among the highlights in Q3 was Wave’s role in Dell’s largest-ever product launch: the Latitude E-Series notebooks in late September. This new PC line integrates Wave’s EMBASSY® client software within Dell’s new ControlPoint application, giving users a set of robust tools for managing a wide array of embedded security, from Trusted Platform Modules (TPMs) to fingerprint sensors. As we have previously reported, under our arrangement with Dell, Wave will now begin to receive higher per-unit royalties on shipments of those products. Wave anticipates beginning to record bundling revenues from the E-Series product line in Q4. Going forward, we believe that our inclusion on these platforms, combined with the higher per-unit bundling royalty, will benefit our financial performance in Q4 and subsequent quarters. Further, as we announced earlier today, our partner Seagate is now providing its higher-capacity FDE drives as an upgrade option on the E-Series. These drives are bundled with Wave software and should represent additional revenue opportunities for Wave.

"In Q3, we also continued to see evidence of the industry’s growing adoption of hardware-based security solutions. Toshiba became the second major drive manufacturer to develop a full disk encryption line. Wave began demonstrating development versions of its ETS and ERAS software for these new Toshiba drives. We have also showcased advanced security solutions that employ our software and Intel’s vPro™ technology. We believe Intel’s integration of TPM functionality into the chipset, forming an ‘iTPM’, could have an important impact on industry adoption of the TPM technology. After more than a year-and-a-half of development work by Wave, Intel began shipping the first desktop boards with vPro technology, bundled with our software.

"Further expanding our PC OEM base, Wave has completed an important agreement with Acer, the world’s third-largest PC vendor, who has selected Wave’s ETS software to bundle with its new Veriton™ 670 business PCs. Initial shipments by Acer are projected to begin before year-end. Given Acer’s global presence, and particularly its strength in Asia, we are excited about continuing to develop this relationship."

Summary of recent progress/developments:

Wave Logo

About Wave Systems Corp.

Wave is a pioneer in hardware-based PC security that provides software to help solve critical enterprise PC security challenges such as data protection, strong authentication, network access control and the management of these enterprise functions.  Wave is a founding member of the Trusted Computing Group (TCG), a consortium of more than 100 companies that forged open standards for hardware security.  Wave’s EMBASSY® line of client- and server-side software leverages and manages the security functions of the TCG’s industry standard hardware security chip, the Trusted Platform Module (TPM) as well as hard drives that comply with TCG’s “Opal” self-encrypting drive (SED) standard.  Self-encrypting drives are a growing segment of the data protection market, offering increased security and better performance than most existing software-based encryption solutions.  TPMs are standard equipment on many enterprise-class PCs shipping today and have shipped on an estimated 300 million PCs worldwide.  Using TPMs and/or SEDs and Wave software, enterprises can substantially and cost-effectively strengthen their current security solutions.  Visit http://www.wave.com for more information.

Safe Harbor for Forward Looking Statements

Under the Private Securities Litigation Reform Act of 1995. This press release may contain forward-looking information within the meaning of 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.

All brands are the property of their respective owners.

For more information please contact:

Wave Contact:
Gerard T. Feeney, CFO
Wave Systems Corp.
413-243-1600
info@wave.com
Wave Investor Relations Contact
David Collins, Ratula Roy
Catalyst Global LLC
212-924-9800
wavx@catalyst-ir.com

 

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

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2008

 

September 30, 2007

 

September 30,
2008

 

September 30, 2007

Net revenues:

 

 

 

 

 

 

 

   Licensing

$1,821,225  

 

$1,716,878  

 

$5,442,830 

 

$4,353,815  

   Services

13,482

 

17,371

 

76,249

 

77,826

Total net revenues

1,834,707

 

1,734,249

 

5,519,079

 

4,431,641

Cost of sales:

 

 

 

 

 

 

 

   Licensing

198,354

 

199,104

 

567,222

 

558,669

Services

8,614

 

11,184

 

56,797

 

21,393

Total cost of sales

206,968

 

210,288

 

624,019

 

580,062

Gross profit

1,627,739

 

1,523,961

 

4,895,060

 

3,851,579

Operating expenses:

 

 

 

 

 

 

 

  Selling, general, and administrative

4,048,641

 

3,707,498

 

12,574,992

 

11,093,101

  Research and development

3,177,408

 

2,724,857

 

9,590,608

 

7,687,312

  Total operating expenses

7,226,049

 

6,432,355

 

22,165,600

 

18,780,413

  Operating loss

(5,598,310)

 

(4,908,394)

 

(17,270,540)

 

(14,928,834)

Other income (expense):

 

 

 

 

 

 

 

  Interest income

1,395

 

130,694

 

23,682

 

264,840

  Interest expense

(7,817)

 

                 –

 

(7,817)

 

                 –

  Total other income (expense)

(6,422)

 

130,694

 

15,865

 

264,840

Net loss

$(5,604,732)

 

$(4,777,700)

 

$(17,254,675)

 

$(14,663,994)

Loss per common share — basic and diluted

$(0.10)

 

$(0.10)

 

$(0.32)

 

$(0.32)

Weighted average number of common shares outstanding during the period

57,896,307

 

49,736,556

 

54,261,426

 

45,636,775

 

 

 

 

 

 

 

 

 

 


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

 

 

 

September 30,

 

December 31,

 

2008

 

2007

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$ 696,847

 

$ 3,714,030

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

 

 

 

      at September 30, 2008 and December 31, 2007

933,389

 

1,165,385

Prepaid expenses

255,366

 

339,342

     Total current assets

1,885,602

 

5,218,757

Property and equipment, net

961,346

 

682,512

Other assets

138,064

 

         136,587

Total Assets

2,985,012

 

6,037,856

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued expenses

6,604,002

 

3,253,320

Current portion of capital lease payable

65,039

 

                 —

Deferred revenue

1,050,560

 

289,025

     Total current liabilities

7,719,601

 

3,542,345

Long-term portion of capital lease payable

260,101

 

       —         

Total liabilities

7,979,702

 

3,542,345

 

 

 

 

Stockholders’ Equity (Deficit):

 

 

 

8% Series I Preferred stock, $.01 par value. Authorized 2,000 shares;
 220 shares issued and outstanding at liquidation preference in 2008 and -0- in 2007

2

 

                 —

Common stock, $.01 par value. Authorized 150,000,000 shares as Class A;
 58,527,767 shares issued and outstanding in 2008 and 49,744,327 in 2007

585,278

 

497,443

Common stock, $.01 par value. Authorized 13,000,000 shares as Class B; 38,232 shares issued and outstanding in 2008 and 2007

382

 

382

Capital in excess of par value

335,157,973

 

325,481,336

Accumulated deficit

(340,738,325)

 

(323,483,650)

Total Stockholders’ Equity (Deficit)

(4,994,690)

 

2,495,511

Total Liabilities and Stockholders’ Equity

  $2,985,012

 

$ 6,037,856

 

 

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

 

Three months ended

 

Nine months ended

 

 

 

September 30, 2008

 

September 30, 2007

 

September 30,
2008

 

September 30, 2007

Total net revenues

$1,834,707

 

$1,734,249

 

$5,519,079

 

$4,431,641

Increase (decrease) in deferred revenue

461,921

 

(39,448)

 

761,535

 

73,793

 

 

 

 

 

 

 

 

Total billings (Non-GAAP)

$2,296,628

 

$1,694,801

 

$6,280,614

 

$4,505,434

 

Non-GAAP Financial Measures:

As supplemental information, we provide a non-GAAP performance measure that we refer to as total billings. This measure 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 demand for 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.