Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Basis of Consolidation | (a) Basis of Consolidation |
The consolidated financial statements include the financial statements of Wave, Wave Systems Holdings, Inc., a wholly owned subsidiary, Safend, Ltd. (and its wholly owned subsidiary, Safend, Inc., collectively referred to as "Safend"), a wholly owned subsidiary and Wavexpress, Inc. a majority-owned subsidiary that is dormant. All intercompany accounts and transactions have been eliminated in consolidation. |
Foreign Currency Translation | (b) Foreign Currency Translation |
The functional currency of Safend is the U.S dollar. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Foreign currency transaction gains or losses are credited or charged to the consolidated statements of operations as incurred as a component of other income (expense), net. |
Use of Estimates | (c) Use of Estimates |
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to, depreciation and amortization, revenue recognition, accounts receivable reserves, valuation of long-lived and intangible assets, contingencies and share-based compensation. Actual results could differ from those estimates. |
Cash and Cash Equivalents | (d) Cash and Cash Equivalents |
Wave considers all highly liquid instruments with an original or remaining maturity of three months or less to be cash equivalents. |
Accounts Receivable and Allowance For Doubtful Accounts | (e) Accounts Receivable and Allowance For Doubtful Accounts |
Included in accounts receivable at December 31, 2014 and 2013 are unbilled amounts totaling $164,834 and $125,497, respectively. |
The determination of the allowance for doubtful accounts is based on management's estimate of uncollectible accounts receivable. Management records specific reserves for receivable balances that are considered high risk of non-collectability due to known facts regarding the customer. |
Accounting for Transfers of Financial Assets | (f) Accounting for Transfers of Financial Assets |
Wave derecognizes financial assets, specifically accounts receivable, when control has been surrendered in compliance with ASC Topic 860, Transfers and Servicing. Transfers of accounts receivable that meet the requirements of ASC 860 for sale accounting treatment are removed from the balance sheet and gains or losses on the sale are recognized. If the conditions for sale accounting treatment are not met, or are no longer met, accounts receivable transferred are classified as collateralized receivables in the consolidated balance sheets and cash received from these transactions is classified as secured borrowings. All transfers of assets are accounted for as secured borrowings. Transaction costs associated with secured borrowings, if any, are treated as borrowing costs and recognized in interest expense. |
Concentrations | (g) Concentrations |
Sales to Wave's largest customer in 2014, 2013 and 2012, Dell, Inc., were approximately 32%, 46% and 55% of revenue, respectively. Accounts receivable at December 31, 2014, 2013 and 2012 included receivables from Dell, Inc. and its affiliates of $134,621, $1,025,377 and $1,187,398, respectively. At December 31, 2014 and 2013, $0 and $1,683,188, respectively, of Dell receivables are classified as pledged receivables on the consolidated balance sheet. |
Property and Equipment | (h) Property and Equipment |
Property and equipment, including purchased computer software, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets which range from between 3 years to 5 years. Amortization of leasehold improvements is computed using the shorter of the useful life or remaining lease term which range from between 3 years and 4 years. |
Capitalized internal-use software development costs | (i) Capitalized internal-use software development costs |
The Company follows the provisions of ASC Topic 350-40, Intangibles Goodwill and Other—Internal Use Software. ASC Topic 350-40 provides guidance for determining whether computer software is internal-use software and also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The capitalized costs as of December 31, 2014 and 2013 are related to Wave's cloud platform that is hosted by the Company and accessed by its clients on a subscription basis. The Company expenses all costs incurred during the preliminary project stage of development and capitalizes the costs incurred during the application development stage. Costs incurred relating to upgrades and enhancements to the software are capitalized if it is determined that these upgrades or enhancements add additional functionality to the software. Costs incurred to improve and support products after they become available are charged to expense as incurred. The Company records amortization of the software on a straight-line basis over five, which is the estimated useful life of the software. At each balance sheet date, management evaluates the unamortized capitalized software costs for potential impairment by comparing the balance to the net realizable value of the products. |
Income Taxes | (j) Income Taxes |
Wave accounts for income taxes under the asset and liability method. As such, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. At December 31, 2014 and 2013, a full valuation allowance has been recorded against the gross deferred tax asset since management believes that, after considering all the available objective evidence, both positive and negative, historical and prospective, with greater weight given to historical evidence, it is more likely than not that these assets will not be realized. Wave classifies any interest and penalties related to uncertain tax positions as components of the income tax provision. |
Share-based Payments | (k) Share-based Compensation |
Wave recognizes compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan. Share-based compensation expense recognized is based on the value of the portion of share-based payment awards that is ultimately expected to vest and has been reduced for estimated forfeitures. Wave determines the fair value of share-based payment awards on the date of the grant using the Black-Scholes option pricing method which is affected by Wave's stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the estimated term of the award and Wave's estimated stock price volatility. |
Research and Development and Software Development Costs | (l) Research and Development and Software Development Costs |
Research and development costs are expensed as incurred. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products. |
Loss Per Share | (m) Loss Per Share |
Basic net loss per common share has been calculated by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is also computed using the weighted average number of common shares and includes dilutive potential common shares outstanding. Dilutive potential common shares consist primarily of employee stock options and stock warrants. Diluted net loss per share is equal to basic net loss per share and is therefore not presented separately in the financial statements. The weighted average number of potential common shares that would have been included in diluted loss per share had their effect not been anti-dilutive for each of the years ended December 31, 2014, 2013 and 2012 were approximately 144,000 shares, 99,000 shares and 615,000 shares, respectively. Employee stock options and other stock warrants to purchase a weighted average of approximately 6,104,000, 5,504,000 and 3,669,000 shares were outstanding as of December 31, 2014, 2013 and 2012 respectively, but are not included in the computation of diluted loss per share because their exercise price was greater than the average share price of Wave's common shares. |
Valuation of Long Lived Assets | (n) Valuation of Long Lived Assets |
We review purchased intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Recoverability of asset groups is assessed based on the estimated undiscounted future cash flows expected to be generated by the asset group, including its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the impairment to be recognized is measured by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. |
Goodwill | (o) Goodwill |
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the fair value of a reporting unit is more likely than not below its carrying value. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss. We perform a quantitative test and determine the fair value of the reporting unit using the income approach. Under the income approach, we calculate the fair value of the reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business’s ability to execute on the projected cash flows. The reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss. |
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates and future economic and market conditions. We base our fair value estimates on assumptions we believe to be reasonable but they are unpredictable and inherently uncertain. Actual future results may differ from those estimates. |
We will continue to evaluate goodwill on an annual basis as of September 30 and whenever events or changes in circumstances, such as significant adverse changes in business climate or operating results or changes in management’s business strategy, indicate that there may be a potential indicator of impairment. |
Revenue Recognition | (p) Revenue Recognition |
Wave's business model targets revenues from various sources including software products and development contracts. Many of these sales arrangements include multiple-elements and/or require significant modification or customization of Wave's software. |
Wave recognizes revenue when 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) fees are fixed or determinable and 4) collectability is reasonably assured. If we determine that any one of the four criteria is not met, we will defer recognition of revenue until all the criteria are met. In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue. |
Licensing and Maintenance |
Wave receives revenue from licensing its software through distribution arrangements with its OEM partners, license upgrade agreements with end users of the products, software development and other services including maintenance. Wave applies software revenue recognition guidance to all transactions except those where no software is involved. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Persuasive evidence is generally a binding purchase order or license agreement. Delivery occurs when product is shipped for its OEM distribution arrangements, or delivered via a license key for our license upgrade agreements. |
Wave enters into perpetual software license agreements through direct sales to customers and indirect sales through its OEM partners, distributors and resellers. Wave has defined its two classes of end user customers: large customers, whose orders are in excess of 5,000 licenses and small customers, whose orders are less than 5,000 licenses. These license upgrade agreements generally include a maintenance component. For arrangements with multiple elements, including software licenses, maintenance and/or services, revenue is allocated and deferred in amounts equivalent to the vendor specific objective evidence ("VSOE") of fair value for the undelivered elements and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as license revenue. VSOE of fair value is based upon the price for which the undelivered element is sold separately. |
During the year ended December 31, 2014, Wave further stratified the VSOE of fair value of maintenance analysis to align it with current sales trends with respect to product mix and maintenance terms. The following represents the resulting updates to VSOE of fair value of maintenance as a result of such further stratification. |
|
·Wave products: |
|
·VSOE of fair value of maintenance is only applied to bundled license and maintenance arrangements with maintenance terms of one year and less than 5,000 licenses. |
|
Wave has VSOE of fair value of maintenance for its small class of customers based on independent one-year maintenance renewals for its EMBASSY Remote Administration Server (“ERAS”) for Self Encrypting Drives (“SED”) product and its Protector product. As a result, for the ERAS SED and Protector small customer class licenses with maintenance bundled, Wave allocates the arrangement consideration to the elements in multi-element arrangements using the residual method. Under the residual method, the VSOE of the undelivered elements is deferred and the remaining portion of the arrangement fee for perpetual licenses is recognized as revenue upon delivery of the software, assuming all other revenue recognition criteria are met. |
|
When VSOE of fair value for the undelivered elements does not exist, as is the case for Wave’s maintenance for all products other than ERAS SED and Protector, large customer class ERAS SED and Protector orders, and small customer class ERAS SED and Protector orders when maintenance terms are in excess of one year, the entire arrangement fee is recognized ratably over the performance period as licensing and maintenance revenue. |
|
Wave’s deferred revenue consists of the unamortized maintenance for sales to its small class of customers and bundled license and maintenance arrangements where VSOE does not exist. |
Licensing and maintenance—cost of net revenues includes customer support personnel costs, foreign tax withholdings, amortization expense of the developed technology intangible asset, costs associated with providing consulting services and related share-based compensation expense. |
Services |
Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price, long-term service or development contracts is recognized using the percentage of completion method or the completed contract method. The determination between use of the completed contract method and the percentage of completion method is based on our ability to reasonably estimate the costs to fulfill the contract. The Company measures the percentage of completion by reference to the proportion of contract hours incurred for work performed to date to the estimated total contract hours expected to be incurred. Losses on fixed price contracts are recognized during the period in which such losses are identified. |
Services—cost of net revenues includes non-recurring time and materials costs incurred in connection with fixed price contracts. |
Immaterial Correction of an Error | (q) Immaterial Correction of an Error |
During the third quarter of 2014, we identified an error in our accounting for share-based compensation recorded in fiscal years 2013, 2012 and 2011and through the six-months ended June 30, 2014. We assessed the materiality of the error on prior periods’ financial statements and concluded that the error was not material to any of our prior period annual or current and prior period interim financial statements. We elected to correct the error in the three-month period ended September 30, 2014 by decreasing operating expenses by $820,000 and decreasing capital in excess of par value on the consolidated balance sheet by the same amount. For the three and nine month periods ended September 30, 2014, loss per basic and diluted share decreased by $0.02 as a result of the correction. |
During the fourth quarter of 2014, we identified an error in our accounting for the royalty liability for grants received from the Israeli government through the Office of the Chief Scientist ("OCS") for fiscal years 2013 and 2012 and through the nine months ended September 30, 2014. We assessed the materiality of the error on prior periods' financial statements and concluded that the error was not material to any of our prior period annual or current and prior period interim financial statements. We elected to correct the error in the three-month period ended December 31, 2014 by increasing interest expense by $580,000 and increasing the royalty liability on the consolidated balance sheet by the same amount. For the three and twelve month periods ended December 31, 2014, loss per basic and diluted share decreased by $0.01as a result of the correction. |
Recent Adopted Accounting Pronouncements | (r) Recently Adopted Accounting Pronouncements |
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements - Going Concern, which amends the disclosures of uncertainties about an entity's ability to continue as a going concern. The amendments provide guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce the diversity in the timing and content of footnote disclosures. The Company is required to adopt the amendments in the first quarter of 2017. Early adoption is permitted. The Company is currently evaluating the impact of these amendments on its Consolidated Financial Statements. |
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), which amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company is required to adopt the amendments in the first quarter of 2017. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently evaluating the impact of these amendments and the transition alternatives on its Consolidated Financial Statements. |
In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Components of an Entity, which updates the definition of discontinued operations under GAAP. Going forward, only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. Previously, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group was eligible for discontinued operations presentation. Additionally, the condition that the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction has been removed. The effective date for the revised standard is for applicable transactions that occur within annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company adopted this standard in the third quarter of 2014. |