Wave Systems (WAVX) 10-Q 2015 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2015

OR

oTRANSITION 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)

Registrant’s telephone number, including area code:

(413) 243-1600

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in 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 April 27, 2015: 51,475,368 shares of Class A Common Stock and 8,885 shares of Class B Common Stock.

Wave Systems Corp. and Subsidiaries

Quarterly Report on Form 10-Q for the Three Months Ended March 31, 2015

Index

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at March 31, 2015 and December 31, 2014	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014	4
	Consolidated Statement of Stockholders' Deficit for the Three Months Ended March 31, 2015	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 6.	Exhibits	30

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PART I -FINANCIAL INFORMATION

Item 1.   Financial Statements

WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

	March 31, 2015			December 31, 2014
Assets
Current Assets:
Cash and cash equivalents	$	3,156,809		$	1,777,414
Accounts receivable, net of allowance for doubtful accounts of $-0- at March 31, 2015 and December 31, 2014	1,231,062			1,820,945
Prepaid expenses and other current assets	497,370			397,689
Total current assets	4,885,241			3,996,048
Property and equipment, net	386,109			411,755
Amortizable intangible assets, net	1,862,553			2,008,227
Goodwill	1,448,000			1,448,000
Other assets	165,989			169,330
Total Assets	8,747,892			8,033,360
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable and accrued expenses	4,088,031			3,918,493
Deferred revenue	5,533,972			5,125,932
Total current liabilities	9,622,003			9,044,425
Other long-term liabilities	41,066			50,779
Royalty liability	5,026,486			4,982,306
Long-term deferred revenue	2,430,458			871,677
Total liabilities	17,120,013			14,949,187
Stockholders’ Deficit:
Common stock, $.01 par value. Authorized 150,000,000 shares as Class A; 51,475,368 shares issued and outstanding at March 31, 2015 and 45,962,324 at December 31, 2014	514,754			459,623
Common stock, $.01 par value. Authorized 13,000,000 shares as Class B; 8,885 shares issued and outstanding at March 31, 2015 and December 31, 2014	89			89
Capital in excess of par value	426,138,126			422,745,539
Accumulated deficit	(435,025,090		)	(430,121,078		)
Total Stockholders’ Deficit	(8,372,121		)	(6,915,827		)
Total Liabilities and Stockholders’ Deficit	$	8,747,892		$	8,033,360

See accompanying notes to unaudited consolidated financial statements.

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WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

	Three months ended March 31,
	2015			2014
Net revenues:
Licensing and maintenance	$	2,452,535		$	5,332,539
Total net revenues	2,452,535			5,332,539
Operating expenses:
Licensing and maintenance — cost of net revenues	444,794			312,828
Selling, general and administrative	4,301,674			5,201,968
Research and development	2,499,046			3,064,673
Total operating expenses	7,245,514			8,579,469
Operating loss	(4,792,979		)	(3,246,930		)
Other income (expense), net:
Net currency transaction loss	(50,095		)	(1,711		)
Net interest expense	(60,938		)	(44,864		)
Total other income (expense), net	(111,033		)	(46,575		)
Net loss	$	(4,904,012	)	$	(3,293,505	)
Loss per common share — basic and diluted	$	(0.10	)	$	(0.09	)
Weighted average number of common shares outstanding during the period	49,943,967			38,486,897

See accompanying notes to unaudited consolidated financial statements.

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WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Deficit

(Unaudited)

	Class A Common Stock			Class B Common Stock			Capital in Excess of Par Value		Accumulated Deficit			Total
	Shares	Amount		Shares	Amount
Balance as of December 31, 2014	45,962,324	$	459,623	8,885	$	89	$	422,745,539	$	(430,121,078	)	$	(6,915,827	)
Net loss	—	—		—	—		—		(4,904,012		)	(4,904,012		)
Issuance of Class A common stock at $0.65 per share, less issuance costs of $245,009	5,513,044	55,131		—	—		3,283,339		—			3,338,470
Share-based compensation	—	—		—	—		109,248		—			109,248
Balance as of March 31, 2015	51,475,368	$	514,754	8,885	$	89	$	426,138,126	$	(435,025,090	)	$	(8,372,121	)

See accompanying notes to unaudited consolidated financial statements.

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WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended
	March 31, 2015			March 31, 2014
Cash flows from operating activities:
Net loss	$	(4,904,012	)	$	(3,293,505	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	205,752			236,648
Compensation associated with issuance of stock options	109,248			414,283
Accretion of royalty liability	29,050			24,325
Changes in assets and liabilities:
Decrease in accounts receivable	589,883			316,900
(Increase) decrease in prepaid expenses and other current assets	(99,681		)	6,205
Decrease (increase) in other assets	3,341			(1,135		)
Increase (decrease) in accounts payable and accrued expenses	240,538			(594,149		)
Increase (decrease) in deferred revenue	1,966,821			(73,339		)
Decrease in royalty liability	(55,870		)	(99,911		)
Decrease in other long-term liabilities	(9,713		)	(11,780		)
Net cash used in operating activities	(1,924,643		)	(3,075,458		)
Cash flows from investing activities:
Acquisition of property and equipment	(34,432		)	(24,757		)
Net cash used in investing activities	(34,432		)	(24,757		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	3,338,470			5,323,717
Net cash provided by financing activities	3,338,470			5,323,717
Net increase in cash and cash equivalents	1,379,395			2,223,502
Cash and cash equivalents at beginning of period	1,777,414			2,120,102
Cash and cash equivalents at end of period	$	3,156,809		$	4,343,604
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	28,168		$	37,620

See accompanying notes to unaudited consolidated financial statements.

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WAVE SYSTEMS CORP. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

March 31, 2015 and 2014

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of Wave Systems Corp. (“Wave”) as of March 31, 2015 and December 31, 2014, its results of operations for the three-month periods ended March 31, 2015 and 2014, its changes in stockholder’s deficit for the three-month period ended March 31, 2015, and its cash flows for the three-month periods ended March 31, 2015 and 2014.  Such financial statements have been prepared in accordance with United States generally accepted accounting principles and the applicable regulations of the Securities and Exchange Commission.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted.  It is suggested that these consolidated financial statements be read in conjunction with Wave’s audited financial statements and notes thereto for the year ended December 31, 2014, included in its Form 10-K filed on March 9, 2015.  The results of operations for the three-month period ended March 31, 2015 are not necessarily indicative of the operating results for the full year or any future periods.

References to “Wave”, “we”, “us”, “our” or “the Company” refer to Wave Systems Corp. and its consolidated subsidiaries and include the financial statements of Wave Systems Corp. (“Wave” or “the Company”); Wave Systems Holdings, Inc., a wholly owned subsidiary; Wavexpress, Inc. (referred to individually, as the context so requires, as “Wavexpress”), a majority-owned subsidiary; Safend, Ltd. (referred to individually, as the context so requires, as “Safend”), a wholly-owned subsidiary; and Safend, Inc, a wholly owned US-based subsidiary of Safend, Ltd.  All intercompany transactions have been eliminated.

1.Critical Accounting Policies

Wave’s discussion and analysis of its financial condition and results of operations are based on the Company’s consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis management evaluates its estimates and judgments, including those related to revenue recognition, accounts receivable reserves, depreciation and amortization, valuation of long-lived, and intangible assets, goodwill, contingencies and share based compensation.  Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A detailed description of the accounting policies deemed critical to the understanding of the consolidated financial statements is included in the notes to Wave’s audited financial statements for the year ended December 31, 2014, included in its Form 10-K filed with the Securities and Exchange Commission on March 9, 2015.

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 of 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 to end users, OEM partners, 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 agreements.

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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.

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, 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. 

Valuation of 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.

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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.

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.

Share-based Compensation — We recognize compensation expense for all share-based compensation awards made to employees, directors and consultants, including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan. Share-based compensation expense recognized is based on the fair value of share-based payment awards adjusted for estimated forfeitures.  We estimate the fair value of share-based payment awards at grant date using a Black-Scholes option-pricing model.  Our estimate of the fair value of the share-based payment awards on the date of grant using the Black-Scholes option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables including, but not limited to, the estimated term of the award and our estimated stock price volatility.

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. 2014-9, 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 2018. 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.

2.Liquidity

The accompanying consolidated financial statements have been prepared assuming that Wave will continue as a going concern. Wave has incurred substantial operating losses since its inception, and as of March 31, 2015, has an accumulated deficit of approximately $435,025,000. We also expect Wave will incur an operating loss for the fiscal year 2015. As of March 31, 2015, Wave had negative working capital of approximately $4,737,000.

If Wave is not successful in executing its business plan, Wave will not generate enough revenue to fund its cash flow requirements for the twelve-months ended March 31, 2016. As of March 31, 2015, we had approximately $3,157,000 of cash on hand. Given Wave's forecasted cash requirements for the twelve-months ending March 31, 2016, and our cash balance as of March 31, 2015, Wave will be required to raise additional capital prior to March 31, 2016. Wave's ability to raise additional capital is primarily based on two sources:

• Sales of registered Class A Common Stock under a $15,000,000 shelf registration statement filed with the U.S. Securities and Exchange Commission ("SEC") on December 18, 2014 and declared effective by the SEC on January 7, 2015 ("2015 shelf registration statement"); and

• Sales of Class A Common Stock through private placements.

On January 26, 2015, Wave sold 5,513,044 shares of Class A Common Stock at $0.65 per share for gross proceeds of $3,583,479. This financing was completed under the 2015 shelf registration statement. Wave also issued warrants to the

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subscribers to purchase 2,205,216 shares of Class A Common Stock at an exercise price of $0.70 per share. These warrants expire on July 26, 2020. Security Research Associates, Inc. ("SRA") entered into a placement agency agreement with Wave in which they agreed to act as placement agent in connection with the offering. Wave agreed to pay SRA a fee equal to 6% of the gross proceeds of this offering. Wave realized approximately $3,338,000 in net proceeds after deducting the placement agent fees of approximately $215,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000. In connection with the financing, Wave also issued warrants to SRA to purchase up to 330,783 shares of Wave Class A Common Stock for $0.70 per share. These warrants expire on July 26, 2018.

For registered offerings, Wave is required to calculate the amount of capital the Company is allowed to raise in accordance with the General Instruction I.B.6. on Form S-3 (“the one-third rule”). The one-third rule restricts the amount of capital that can be raised in a 12-month period provided that the registrant’s aggregate market value of the common equity held by non-affiliates is less than $75 million. As a result of the application of the one-third rule, the funds available on the 2015 shelf registration statement are reduced. Until Wave attains an aggregate market value of $75 million or more for shares held by non-affiliates, its available funds under the 2015 shelf registration statement will remain restricted to the one-third rule computation. To determine the amount available under the one-third rule for future financings, the aggregate market value of the common equity is calculated using the price at which the common equity was last sold, or the average of the bid and asked prices of the common equity as of a date within 60 days prior to the date of filing. As of April 27, 2015, approximately $9,872,000 in gross proceeds remains under the 2015 shelf registration statement. Based on the price of Wave's common equity over the last 60 days and the one-third rule computation, all of the remaining gross proceeds are available for future financings as of April 27, 2015.

Wave will be required to sell shares of common stock, preferred stock, obtain debt financing or engage in a combination of these financing alternatives, to raise additional capital to continue to fund its operations for the twelve months ending March 31, 2016. If Wave is not successful in executing its business plan, it will be required to sell additional shares of common stock, preferred stock, obtain debt financing or engage in a combination of these financing alternatives or it could be forced to reduce expenses which may significantly impede its ability to meet its sales, marketing and development objectives, cease operations or merge with another company. No assurance can be provided that any of these initiatives will be successful. Due to its current cash position, cash needs over the next year and beyond, and the uncertainty as to whether it will achieve its sales forecast for its products and services, substantial doubt exists with respect to Wave's ability to continue as a going concern.

3.Goodwill and Amortizable Intangible Assets

There have been no changes to the carrying amount of goodwill during the three month period ended March 31, 2015. 

Wave tests goodwill for impairment annually on September 30 and during interim periods whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Wave uses a fair value approach in testing goodwill for impairment in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other. The goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, 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.

The Company estimates the fair value of its reporting units using the income approach. Under the income approach, the Company calculates the fair value of a 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’ ability to execute on the projected cash flows.  The inputs used for the income approach are significant unobservable inputs, or Level 3 inputs, as described in ASC Topic 820, Fair Value Measurement.

When indicators of impairment are present, such as those noted above, the Company tests long-lived assets (other than goodwill) for recoverability by comparing the carrying value of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset group, including its ultimate disposition.

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The following schedule presents intangible assets subject to amortization as of March 31, 2015 and December 31, 2014:

March 31, 2015

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Loss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,298,671	)	$	(5,038,100	)	$	89,229	3.5
Customer Relationships	3,972,000		(937,327		)	(1,786,673		)	1,248,000		6.5
Internal-use software	726,000		(219,010		)	—			506,990		3.5
Acquired Patents	1,100,000		(1,081,666		)	—			18,334		0.1
	$	12,224,000	$	(3,536,674	)	$	(6,824,773	)	$	1,862,553

December 31, 2014

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			Accumulated  Impairment  Loss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,292,297	)	$	(5,038,100	)	$	95,603	3.8
Customer Relationships	3,972,000		(889,327		)	(1,786,673		)	1,296,000		6.8
Internal-use software	726,000		(182,710		)	—			543,290		3.8
Acquired Patents	1,100,000		(1,026,666		)	—			73,334		0.4
	$	12,224,000	$	(3,391,000	)	$	(6,824,773	)	$	2,008,227

Amortization expense associated with intangible assets was $145,674 for the three months ended March 31, 2015 and 2014. The estimated amortization expense for intangible assets for the next five years and thereafter is as follows (in thousands):

Period	Estimated Amortization Expense
Remainder of 2015	$	290,354
2016	362,694
2017	362,694
2018	318,811
2019	192,000
Thereafter	336,000
Total	$	1,862,553

4.Accounts Payable and Accrued Expenses

The following schedule presents the details of accounts payable and accrued expenses as of March 31, 2015 and December 31, 2014:

	2015		2014
Accounts payable	$	1,162,925	$	1,080,167
Accrued payroll and related costs	2,407,900		2,211,565
Accrued consulting and professional fees	287,229		157,500
Royalty liability	104,000		175,000
State & local taxes payable	1,202		8,508
Other accrued expenses	124,775		285,753
Total accounts payable and accrued expenses	$	4,088,031	$	3,918,493

5.Issuance of Common Stock

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On January 26, 2015, Wave entered into agreements with certain investors for a private placement of 5,513,044 shares of its Class A Common Stock at a price of $0.65 per share yielding gross proceeds of $3,583,479. This financing was completed under the 2015 shelf registration statement together with the related registration statement on Form S-3 filed pursuant to Rule 462(b). Wave also issued warrants to the subscribers to purchase 2,205,216 shares of Class A Common Stock at an exercise price of $0.70 per share. These warrants expire on July 26, 2020. SRA entered into a placement agency agreement with Wave in which they agreed to act as placement agent in connection with the offering. Wave agreed to pay SRA a fee equal to 6% of the gross proceeds of this offering. Wave realized approximately $3,338,000 in net proceeds after deducting the placement agent fees of approximately $215,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000. In connection with the financing, Wave also issued warrants to SRA to purchase up to 330,783 shares of Wave Class A Common Stock for $0.70 per share. These warrants expire on July 26, 2018. The warrants associated with this financing have been accounted for as equity. A prospectus supplement related to the offering was filed with the SEC on January 27, 2015. 

During the three-month period ended March 31, 2014, Wave received net proceeds of $5,323,717 after deducting offering costs of approximately $169,000, in connection with the issuance of 5,365,784 shares of Class A Common Stock in its At The Market offerings through MLV & Co. LLC ("MLV").  The shares were sold at prices ranging from $0.90 -$1.13 per share. 

6.Share-based Compensation

Wave recognized $109,248 and $414,283 of share-based compensation during the three-months ended March 31, 2015 and 2014, respectively.  During the three-month period ended March 31, 2015, Wave granted 108,000 stock options at a weighted-average estimated fair value ranging from $0.37 and $0.47.  During the three-month period ended March 31, 2014, Wave granted 1,174,400 stock options at a weighted-average estimated fair value ranging from $0.54 to $0.65.

The following table summarizes the effect of share based compensation in Wave’s statement of operations, for the three-month periods ended March 31, 2015 and 2014:

	Three months ended  March 31,
	2015		2014
Cost of Sales	$	3,313	$	3,920
Selling, General & Administrative	104,450		315,495
Research & Development	1,485		94,868
Total	$	109,248	$	414,283

7.     Income Taxes

Wave has federal and state net operating loss carryforwards of approximately $316,802,000, which expire beginning in 2015 through 2035 and include approximately $8,074,000 of net operating loss carryforwards of Safend, Inc., a wholly owned US-based subsidiary of Safend, Ltd.  Pursuant to Section 382 of the Internal Revenue Code, the annual utilization of Wave’s net operating and capital loss carryforwards may be substantially limited if a cumulative change in ownership of more than 50% occurs within any three-year period.  Wave has not determined whether there have been such cumulative changes in ownership or the impact on the utilization of the loss carryforwards if such changes have occurred.  However, in considering Section 382 of the Internal Revenue Code, Wave believes that it is likely that such a change in ownership has occurred thus raising the likelihood that such net operating and capital loss carryforwards are subject to annual limitations.  In addition, the Company maintains approximately $16,000,000 of operating loss carryforwards associated with Safend, Ltd., which may be carried forward indefinitely.

8.Loss per Share

Basic net loss per common share has been calculated based upon 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 excludes dilutive instruments as their effect would be anti-dilutive.  Dilutive instruments 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

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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 three-month periods ended March 31, 2015 and 2014 were approximately 76,000 shares and 39,000 shares, respectively.  Employee stock options and other stock warrants to purchase a weighted average of approximately 7,639,000 and 6,299,000 shares were outstanding for the three-month periods ended March 31, 2015 and 2014, respectively, but have not been included in the computation of diluted loss per share because their effect would have been anti-dilutive.

9.Segment Reporting

Segments are defined by authoritative guidance as components of a company in which separate financial information is available and is evaluated by the chief operating decision maker (CODM), or a decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our chief executive officer. The Company presents a single segment for purposes of financial reporting and prepared its consolidated financial statements upon that basis.

The following table details Wave’s revenue by geographic area for the three-month periods ended March 31, 2015 and 2014.  Geographic area is based on the location of where the products were shipped or services rendered.

	United States of America			Europe			Asia			Total
2015
Wave products and services	$	1,155,647		$	1,025,944		$	270,944		$	2,452,535
% of Total	47		%	42		%	11		%	100		%
2014
Wave products and services	$	3,564,080		$	1,277,955		$	490,504		$	5,332,539
% of Total	67		%	24		%	9		%	100		%

 Approximately 90% of all tangible assets of Wave are located within the United States of America and approximately 10% are located in the State of Israel. 

10.  Fair Value Measurement

As of March 31, 2015, Wave’s financial assets that are measured at fair value on a recurring basis are comprised of overnight money market fund investments.  Wave invests excess cash from its operating cash accounts in overnight money market funds and reflects these amounts ($2,596,331 at March 31, 2015) within cash and cash equivalents on the consolidated balance sheet using quoted prices in active markets for identical assets (Level 1) at a net value of 1:1 for each dollar invested.

Financial instruments not measured or recorded at fair value in the accompanying unaudited consolidated financial statements consist of accounts receivable and accounts payable and accrued expenses. The estimated fair value of accounts receivable and accounts payable and accrued expenses approximates their carrying value.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

CERTAIN FORWARD-LOOKING INFORMATION:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These statements include, but are not limited to, statements regarding contingencies, future prospects, liquidity and capital expenditures herein under “Part I Financial Information—Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  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 our ability to control.  Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and detailed in our other filings with the Commission during the past 12 months.  Wave assumes no duty to and does not undertake to update any forward-looking statements.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude. Our MD&A is presented in five sections:

lOverview

lBusiness Update

lResults of Operations

lLiquidity and Capital Resources

lContractual Obligations

Our MD&A should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014, as well as our reports on Forms 10-Q and 8-K and other publicly available information.

Overview

Our Business

Wave was incorporated in Delaware under the name Indata Corp. on August 12, 1988. We changed our name to Cryptologics International, Inc. on December 4, 1989. We changed our name again to Wave Systems Corp. on January 22, 1993. Our principal executive offices are located at 480 Pleasant Street, Lee, Massachusetts 01238 and our telephone number is (413) 243-1600.

Wave reduces the complexity, cost and uncertainty of data protection and authentication by starting inside the device. Unlike other vendors who try to secure information by adding layers of software for security, Wave leverages the hardware security capabilities built directly into endpoint computing platforms themselves. Wave has been among the foremost experts on 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 (TCG).

Industry Background

The market for information security products and services is being driven by three key factors: the adoption of cloud-computing; the mobilization of the workforce; and the "Bring Your Own Device" trend. Each of these factors pose significant new challenges for a company's Information Technology ("IT") department. This is resulting in increasing allocation of IT budget and resources to improve key security areas, such as user authentication and data protection. In many industries, such as Finance, Energy, and Healthcare, compliance requirements play a key role.

The increasing frequency and sophistication of cyberattacks against corporations mean that security is no longer purely the concern of IT. Senior level executives and board members are spending more time focused on security and risk. In 2014, major data breaches occurred at companies including Sony, J.P. Morgan Chase, Target, and Home Depot. In the public sector, hacks have occurred at the State Department, the White House, the U.S. Postal Service, and the National Oceanic and Atmospheric Administration. These high profile attacks are leading many companies to question whether continuing with a software-only approach to security will provide them with sufficient protection.

Wave believes that software alone does not offer sufficient protection against cyberattack. Wave has been instrumental in the development of purpose-built hardware to enable secure cryptographic operations. In other words, security is not an afterthought addressed with a software download, but rather it is a capability embedded within the device itself. This approach is commonly referred to as "Trusted Computing".

Trusted Computing is widely supported across the PC industry. The TCG was formed in April 2003 by its promoting founders: AMD, HP, IBM, Intel, and Microsoft. Wave was initially invited to join the founding group as a contributing member. Since 2008, Wave has held a permanent seat on the TCG Board of Directors. Permanent members of the TCG Board of Directors provide guidance to the organization's work groups in the creation of specifications used to protect computing devices from attacks and to help prevent data loss and theft. Wave's status allows it to take a more active role in helping to develop, define and promote hardware-enabled trusted computing security technologies, including related hardware building blocks and software interfaces.

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The TCG promotes a hardware-based trusted computing platform, which is a platform that uses a semiconductor device, known as a Trusted Platform Module ("TPM") that contains protected storage and performs protected activities allowing for the attestation of the state of the platform which provides the first level of trust for the computing platform (a "Trusted Platform"). The TPM is a hardware chip that is separate from the platform's main central processing unit(s) that enables secure protection of files and other digital secrets and performs critical security functions. While TPMs provide the anchor for hardware security, known as the "root of trust," trust is achieved by integrating the TPM within a carefully architected trust infrastructure and supporting the TPM with essential operational and lifecycle services, such as key management and credential authentication.

The TCG also promotes the use of self-encrypting drives ("SEDs"). SEDs are based on TCG specifications which enable integrated encryption and access control within the protected hardware of the disk drive. SEDs are designed to provide advanced data protection technology and they differ from software-based full disk encryption in that encryption takes place in hardware in a manner designed to provide robust security without slowing processing speeds. Because the drives can be factory-installed, these systems can be configured such that encryption is "always on" for the protection of proprietary information.

The majority of Wave's TPM and SED related products, as detailed below in Products and Services, utilize the standards and specifications set by the TCG.

Our Products and Services

Cyberattacks are a constant threat to every company. As the sophistication of cyberattacks grows, the inadequacies of many legacy, software-based solutions are exposed. Wave's products are purpose-built to prevent such attacks. Wave's products can be combined to form a hardened cybersecurity solution covering access management, encryption, and data protection. Wave's products provide a complementary set of solutions that focus on authentication, encryption and data-loss protection. Unlike other solutions that depend on software as the foundation of security, Wave's solutions utilize hardware as the security foundation for devices. This security foundation is provided by built in hardware that is part of the device, not added on. With hardware as the security foundation, IT has unprecedented, yet straightforward control over exactly who has access to sensitive data and control over what devices can access that data.

Wave provides centralized remote management of its products in both on-premise and cloud platforms. For on-premise configurations, EMBASSY Remote Administration Server ("ERAS") hosts Wave’s Virtual Smart Card 2.0, TPM Management, SED Management and BitLocker Management products. The Data Protection Server hosts the Protector, Inspector and Encryptor products. For cloud configurations, Wave Cloud Encryption Management hosts SED Management, BitLocker Management and Macintosh Operating Systems ("Mac OS") Encryption management. Wave’s core set of offerings are set forth below:

•Authentication Solutions

◦Wave Virtual Smart Card 2.0 ("VSC") provides two factor authentication for Windows login as well as authentication for any software application that supports the Microsoft Smart Card infrastructure. Currently, Wave’s VSC product eliminates the expense of distributing physical tokens and the expense of replacing lost tokens, removing the biggest barrier to entry for enterprises to use two factor solutions.

◦TPM Management - The TPM Management solution provides device and user identification management by allowing IT administrators to manage and provision TPMs. TPM Management provides the ability to use TPM security for authentication to Virtual Private Networks, 802.1x Wireless and Microsoft Direct Access. Access to a network can be restricted to only known devices based on a TPM based certificate, providing further protection for the corporate network.

•Encryption Solutions

◦SED Management provides full lifecycle management of Opal 1 and Opal 2 SEDs. SEDs are the industry leading standard for hardware-based end point device encryption. Wave’s solution offers SED initialization, user management, SED locking, SED user recovery and SED crypto erase. Wave's solution support substantially more Opal SED's than any other product on the market today.

◦BitLocker® Managementprovides automated turn-key management for Microsoft BitLocker® encryption. Bitlocker is a suitable interim encryption solution for organizations that have not yet fully phased SEDs into their environment. Wave’s BitLocker® Management allows IT to set policies and monitor security

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from a single console-simplifying an organization's deployment by reducing the need for specialized knowledge or costly systems.

◦Mac OS Encryption provides management of encryption on Mac OS devices. It is available from the Wave Cloud Encryption platform only. Mac OS devices are typically a small percentage of an enterprise's population of devices. Wave Cloud Encryption Management of Mac OS devices provides an economic way to protect data for the enterprise.

• Data Loss Protection

◦The Protector product ("Protector") provides port control and removable media encryption. Protector blocks users from connecting to unauthorized devices or using unauthorized interfaces (including public hot spots). As an example, Protector allows an IT Administrator to define if users can use USB memory devices. Also when the action is authorized, it enforces encryption, automatically guiding the user through securing data.

◦The Inspector product ("Inspector") provides enforcement of data-centric security policies across multiple channels, including email, web (HTTP, HTTPS), FTP, external storage devices, CD/DVD burners, iPhone, iPad and other smart phones, file repositories, print screen, local printers, and network printers. Inspector will inspect, classify and block leakage of sensitive data in real time. Enterprise users access large amounts of data in the course of their normal jobs, Inspector ensures they do not mistakenly send a document with sensitive data to an unauthorized source.

◦The Encryptor product ("Encryptor") provides software full disk encryption. It is suitable as part of an enterprise migration to SED to cover their legacy systems running Windows XP or Vista.

Market Overview

Software has traditionally secured critical information on networks and PCs and allowed for user access to various applications. Virus attacks and breaches of security are on the rise and have demonstrated that software, on its own, is not always capable of completely securing a network or platform. Because of these security concerns, we believe that there is a need in the computer industry for the development and deployment of a more robust and reliable security infrastructure including new security hardware in devices to guard against these persistent security risks. Wave is seeking to become a software, application and services leader in the hardware-based digital security market. We believe Wave has been a pioneer in developing hardware-based computer security systems and that we are distinctly positioned to take advantage of our unique knowledge, significant technology assets and trusted computing intellectual property. Our objective is to make our products and services the preferred applications and infrastructure for Trusted Platforms.

We operate in the information security market, a highly competitive and fragmented environment that is characterized by rapidly evolving technology. The competitive factors defining these evolving markets include product features, compatibility, standards compliance, quality and reliability, ease of use, performance, customer service and support, distribution and price. The features of Wave's products should allow it to compete favorably primarily because of its cross-platform interoperability and ease of use. The rate of market acceptance of trusted computing solutions continues to reflect its formative and early stages despite the substantial increase in distribution of the technology.

Our key competitors currently include WinMagic, Inc. ("WinMagic"), RSA Security, Inc., Sophos Ltd. ("Sophos"), Symantec Corporation ("Symantec"), McAfee Inc. ("McAfee"), SafeNet Inc. ("SafeNet"), Softex, Inc. ("Softex"), Entrust, Inc. and Absolute Software Corporation ("Absolute Software"). Recent consolidations of large competitors (including acquisitions made by our competitors named above) within our market have further increased the size and resources of some of these firms. These competitors are often able to offer more scale, which in some instances has enabled them to significantly discount their services in exchange for revenues in other areas or at later dates. Additionally, in an effort to maintain market share, many of our competitors are heavily discounting their services.

Marketing and Sales

Wave provides hardened cybersecurity solutions for the protection of corporate data. Many of our customers operate in industries that are subject to stringent data protection regulations. Our products focus on protecting these companies against the threats posed by unauthorized access and data breach. Our principal competitive strengths include our longstanding focus on

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hardware-enabled security; our experience with large national and multi-national deployments; and our direct partnerships with many of the major hardware manufacturers and PC OEMs.

We market and sell our solutions worldwide primarily through our direct sales force and through indirect distribution channel partners and strategic partners. The direct sales force is responsible for providing highly responsive, quality service and ensuring client satisfaction. Strategic partnerships and alliances provide us with additional access to potential clients. We also market our solutions to original equipment manufacturers ("OEMs") in an effort to get our solutions in personal computers ("PCs") that are ultimately purchased by enterprise customers. Key decision makers involved in the sales process on the

customer side typically consist of information technology executives, finance executives and managers of communications assets and networks.

Our marketing strategy is to focus on large national and multinational corporations, as well as significant opportunities in the government sector. The information security market is crowded with competitors. We believe we are differentiated by our consistent focus on leveraging the native capabilities of many computing devices in order to offer solutions that combine stronger security with a better user experience. We have developed a strong corporate identity and are focused on driving increased market awareness with a combination of corporate marketing and partner marketing programs. Our solutions are marketed to a precisely targeted set of customers within specific industry verticals.

Wave is an innovative company and thought leadership is a key component of our messaging strategy. We engage in a wide variety of marketing activities including digital marketing, e-mail and direct mail campaigns, co-marketing strategies designed to leverage existing strategic relationships, website marketing, webcasts, public relations campaigns, speaking engagements and forums. We participate in and sponsor conferences that cater to our target market and demonstrate and promote our software and services at trade shows targeted to information technology and finance executives. We also publish "white papers" relating to relevant cybersecurity issues and develop customer reference programs, such as customer case studies, in an effort to promote better awareness of industry issues and demonstrate that our solutions can address many of these risks to an organization.

Business Update

The past several quarters have been a period of critical transition for Wave — marked by numerous changes to its operations, a more focused sales and marketing strategy and targeted headcount changes across the organization.  Management has improved efficiency across Wave’s business, particularly in the manner in which Wave develops, markets and sells its products.

During the three-months ended March 31, 2015, Wave received a $2.3 million, multi-year order from a major, US-headquartered insurance company for over 250,000 licenses of both Wave Protector and Wave Reporter. The order was the largest order in Wave's history with respect to the number of seats sold. Wave made significant changes to the sales team during 2014 with the focus of securing large enterprise sales. Wave is beginning to see the strategic decisions made during 2014 generate results in 2015.

Wave added R. Stephen Cheheyl to the Board of Directors. Mr. Cheheyl was the former Chief Financial Officer of several public technology companies and has served as a director of many public and private companies.

Wave has made several  improvements to corporate governance including replacing plurality voting with majority voting in director elections, a more efficient board compensation policy, and instituted a stock ownership policy for board members.  Please refer to Wave's recently filed Proxy statement for more detail.

Results of Operations

Comparison of the Three-Months Ended March 31, 2015 and 2014

Net Revenues:

	Three-Months Ended March 31, 2015		Three-Months Ended March 31, 2014		Increase (Decrease)			% Change
Licensing and maintenance	$	2,452,535	$	5,332,539	$	(2,880,004	)	(54	)%
Total Net Revenues	$	2,452,535	$	5,332,539	$	(2,880,004	)	(54	)%

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The decrease in licensing and maintenance revenues was due primarily to a decrease in OEM revenue of approximately $1,980,000 and a decrease in enterprise licensing and maintenance revenue of $900,000.

The decrease in OEM revenue of approximately $1,980,000 primarily consisted of lower Dell royalty revenue of approximately $1,825,000 as the result of a decrease in the volume of Dell shipments. We anticipate that the Dell royalty revenue will continue to decline as prior generation Dell platforms that include Wave software decrease in shipping volume.  Additionally, during the three-months ended March 31, 2014, the Company recognized approximately $224,000 in revenue related to a license and service agreement with an OEM partner.  The total value of the license and service agreement with the OEM partner was recognized ratably beginning in March 2013 through March 2014.  There was no revenue recognized during the three-months ended March 31, 2015 relating to the license and services agreement with this OEM partner.

The decrease in enterprise licensing and maintenance revenue of approximately $900,000 primarily related to a lower deferred revenue base during the three-months ended March 31, 2015 as compared to the same period in 2014. The lower deferred revenue base was the result of a lower volume of orders billed during the periods leading up to the three-months ended March 31, 2015. The current portion of deferred revenue was approximately $5,126,000 at December 31, 2014 as opposed to $6,996,000 at December 31, 2013.

Operating Expenses:

	Three-Months Ended March 31, 2015		Three-Months Ended March 2014		Increase (Decrease)			%  Change
Licensing and maintenance — cost of net revenues	$	444,794	$	312,828	$	131,966		42	%
Selling, general and administrative	4,301,674		5,201,968		(900,294		)	(17	)%
Research and development	2,499,046		3,064,673		(565,627		)	(18	)%
Total operating expenses	$	7,245,514	$	8,579,469	$	(1,333,955	)	(16	)%

Licensing and maintenance — cost of net revenues consists primarily of customer support personnel costs, amortization on developed technology intangible assets and share-based compensation expense.  The increase in licensing and maintenance — cost of net revenues during the three-months ended March 31, 2015 as compared to the same period in 2014 was due primarily to a consulting fee of approximately $70,000 relating to the large class order received from a US-headquartered insurance company and an increase in Wave technical support costs consisting primarily of salaries and related benefits of approximately $86,000.

The decrease in selling, general and administrative expense (“SG&A”) during the three-months ended March 31, 2015 compared to the same period in 2014 was due primarily to a decrease in Wave salaries and related benefits totaling approximately $685,000 and a decrease of approximately $146,000 in travel expenses. The decreases in salaries and related benefits and travel expenses were primarily the result of targeted headcount reductions that occurred throughout 2014.

The activities supported by SG&A expenses include business development, sales, marketing, corporate communications and public relations, information technology and management information systems, human resources, accounting, executive management, corporate governance and general administrative functions.

The decrease in research and development (“R&D”) expenses during the three-months ended March 31, 2015 compared to the same period in 2014 was due primarily to a decrease in salaries and related benefits of approximately $218,000 and a decrease of approximately $309,000 in professional fees.  The decrease in salaries and related benefits was primarily due to a decrease in headcount within the R&D group. The decrease in professional fees was the result of fewer third party engineering services needed during the three-months ended March 31, 2015 compared to the same period in 2014.

Due to the reasons set forth above, the Wave's operating loss for the three-months ended March 31, 2015 was $4,792,979 as compared to $3,246,930 for the comparable period in 2014.

Liquidity and Capital Resources

Summary

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We closely manage our liquidity and capital resources.  Key variables we use to manage our liquidity requirements include discretionary SG&A and R&D spending, capital expenditures, financing arrangements and working capital management.  We plan to exercise a disciplined approach to liquidity and capital management, while investing in key areas such as product development and research and development.

Given Wave’s forecasted working capital requirements for the twelve-months ending March 31, 2016, as detailed below in Liquidity requirements and future sources of capital, and our cash balance as of March 31, 2015, Wave will be required to raise additional capital prior to March 31, 2016 to continue to fund its operations.  During the three-months ended March 31, 2015, Wave’s ability to raise additional capital was primarily based on two sources:

lSales of registered Class A Common Stock under a $15,000,000 shelf registration statement filed with the U.S. Securities and Exchange Commission ("SEC") on December 18, 2014 and declared effective by the SEC on January 7, 2015 ("2015 shelf registration statement"); and

lSales of Class A common Stock through private placements.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the three-months ended March 31:

	2015			2014
Total cash provided by (used in):
Operating activities	$	(1,924,643	)	$	(3,075,458	)
Investing activities	(34,432		)	(24,757		)
Financing activities	3,338,470			5,323,717
Increase in cash and cash equivalents	$	1,379,395		$	2,223,502

Operating Activities

The net cash used in operating activities of approximately $1,925,000 during the three-months ended March 31, 2015 was primarily related to the net loss adjusted for non-cash items of approximately $4,560,000, a decrease in accounts receivable of approximately $590,000 and an increase in deferred revenue of approximately $1,967,000.  The increase in deferred revenue was largely due to the $2,327,000 multi-year order received during the three-months ended March 31, 2015 from a major, US-headquartered insurance company for over 250,000 licenses. The revenue on this arrangement is recognized ratably over the maintenance term.

The net cash used in operating activities of approximately $3,075,458 during the three-months ended March 31, 2014 was primarily related to the net loss adjusted for non-cash items of approximately $2,618,000, a decrease in accounts receivable of approximately $317,000 and an increase of approximately $594,000 in accounts payable and accrued expenses. The increase in accounts payable and accrued expenses was largely related to the severance liability of approximately $413,000 payable to Wave's former Chief Financial Officer that was recorded during the three-months ended March 31, 2014.

Investing Activities

During the three-months ended March 31, 2015 and 2014, acquisition of property and equipment was approximately $34,000 and $25,000, respectively.  The slight increase in acquisitions during the three-months ended March 31, 2015 was the result of an increase in capital equipment needs. 

Financing Activities

The decrease in net cash provided by financing activities during the three-months ended March 31, 2015 compared to the same period in 2014 of approximately $1,986,000 was primarily the result of decreases in net proceeds from the issuance of common stock via At The Market sales through MLV of approximately $5,324,000, offset by an increase of approximately $3,338,000 in registered share offerings.

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The significant amount of proceeds received during the three-months ended March 31, 2015 and 2014 from the sale of common stock were necessary to support Wave’s growth strategy and SG&A and R&D expense requirements.

Liquidity requirements and future sources of capital

Sources of working capital may include the following:

lcash on hand of  approximately $3,157,000 as of March 31, 2015;

lcollection of receivables; and

ladditional financings

If Wave is not successful in improving sales performance, Wave will not generate enough sales to fund its cash flow requirements for the twelve-months ending March 31, 2016. As of March 31, 2015, we had approximately $3,157,000 of cash on hand. Given Wave’s forecasted capital requirements for the twelve-months ending March 31, 2016, and our cash balance as of March 31, 2015, Wave will be required to raise additional capital prior to March 31, 2016 to continue to fund its operations. Wave has historically raised additional capital from registered share offerings and through private placements.

For registered offerings, Wave is required to calculate the amount of capital the Company is allowed to raise in accordance with the General Instruction I.B.6. on Form S-3 (“the one-third rule”). The one-third rule restricts the amount of capital that can be raised in a 12-month period provided that the registrant’s aggregate market value of the common equity held by non-affiliates is less than $75 million. As a result of the application of the one-third rule, the funds available on the 2015 shelf registration statement are reduced. Until Wave attains an aggregate market value of $75 million or more for shares held by non-affiliates, its available funds under the 2015 shelf registration statement will remain restricted to the one-third rule computation. To determine the amount available under the one-third rule for future financings, the aggregate market value of the common equity is calculated using the price at which the common equity was last sold, or the average of the bid and asked prices of the common equity as of a date within 60 days prior to the date of filing. As of April 27, 2015, approximately $9,872,000 in gross proceeds remains under the 2015 shelf registration statement. Based on the price of Wave's common equity over the last 60 days and the one-third rule computation, all of the remaining gross proceeds are available for future financings as of April 27, 2015.

Wave will be required to sell shares of common stock, preferred stock, obtain debt financing or engage in a combination of these financing alternatives, to raise additional capital to continue to fund its operations for the twelve months ending March 31, 2016. If Wave is not successful in executing its business plan, it will be required to sell additional shares of common stock, preferred stock, obtain debt financing or engage in a combination of these financing alternatives or it could be forced to reduce expenses which may significantly impede its ability to meet its sales, marketing and development objectives, cease operations or merge with another company. No assurance can be provided that any of these initiatives will be successful. Due to its current cash position, capital needs over the next year and beyond, and the uncertainty as to whether it will achieve its sales forecast for its products and services, substantial doubt exists with respect to Wave's ability to continue as a going concern.

Known trends and uncertainties affecting future cash flows

Because Wave does not have sufficient cash to fund its operations for the twelve-months ending March 31, 2016, and there is uncertainty as to whether Wave will generate sufficient revenues to fund its operations over this time period, Wave has been, and will continue to be, actively engaged in financing activities in order to generate additional funding to cover its operating costs for the twelve-months ending March 31, 2016. As detailed above, the funds available under the 2015 shelf registration statement will remain restricted if Wave is unable to exceed $75 million in aggregate market value of the common equity held by non-affiliates. As such, our ability to raise the necessary capital to fund operations may not be sufficient for the twelve-months ending March 31, 2016.

We will be required to sell additional shares of common stock or preferred stock or engage in a combination of these financing alternatives, to raise additional capital to continue to fund our operations for the twelve-months ending March 31, 2016. The availability and amount of any such financings are unknown at this time and as a result of the one-third rule as detailed above, proceeds available to us under the 2015 shelf registration statement or any other registration we may file may not be adequate. Due to our current cash position, our forecasted capital needs over the next year and beyond, the fact that we will require additional financing and uncertainty as to whether we will achieve our sales forecast for our products and services, substantial doubt exists with respect to our ability to continue as a going concern. 

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Other uncertainties that may impact the future business outlook

Because the information security services market and the TCG hardware security category in particular are in early stages of development, customer requirements may change or new competitive pressures can emerge which could require a shift in product development and/or market strategy. Should such shifts occur, they may require development, marketing and sales strategies to re-start or expand, which would likely increase operating costs and require additional capital. Such shifts have occurred several times throughout Wave's history, requiring significant changes in strategy and business plan.

Furthermore, the achievement of sufficient revenue is dependent upon continued significant expenditures, which will likely be required for research and development and sales and marketing to increase market awareness for our products. Therefore, if Wave is not able to begin to generate significant revenues by March 31, 2016 to cover its operating costs, it will need to generate capital from other sources, including raising funds through the issuance of additional common stock, preferred stock and/or debt to fund its operations beyond March 31, 2016.

Contractual Obligations

Royalty Liability

Safend is required to pay back grants received from the Israeli government through the Office of the Chief Scientist ("OCS") for the financing of a portion of its research and development expenditures in Israel. Safend's repayments are based on a royalty rate of 3.5% of total Safend revenues and there is no termination date for the payments. Interest is accrued based on the 12 month LIBOR rate at the time of each individual grant and remains fixed at that rate until the grant is repaid. At March 31, 2015 and December 31, 2014, the book value of the liability amounted to $5,130,486 and $5,157,306, respectively. The actual amount owed to the OCS is approximately $6,200,000 at March 31, 2015 and December 31, 2014. The difference between the undiscounted amount owed at March 31, 2015 and December 31, 2014 and the book values relates to the remaining accretion of the fair value discount recorded when Safend was acquired.  

Operating Leases

Wave has no significant long-term contractual obligations other than the royalty liability obligation described above and operating leases for its facilities, which are all listed below:

	Within  one year		Years two and three		Years four and five		Thereafter		Total
Operating lease commitments	$	1,021,000	$	235,000	$	—	$	—	$	1,256,000
Total commitments	$	1,021,000	$	235,000	$	—	$	—	$	1,256,000

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The exposure to market risk associated with interest rate-sensitive instruments is not material.  Wave’s cash and cash equivalents consist primarily of money market funds that meet high credit quality standards and the amount of credit exposure to any one issue is limited.

Item 4.  Controls and Procedures

a) Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective.

b) Changes in Internal Control Over Financial Reporting

During the three-months ended March 31, 2015, no changes were identified to our internal control over financial reporting that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None.

Item 1a.  Risk Factors.

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to certain factors, including those discussed below, and elsewhere in this Quarterly Report on Form 10-Q.

Our business, financial condition and results of operations may be adversely affected by the unprecedented economic and market conditions.

The U.S. and numerous other leading markets around the world continue to experience slow recoveries or more challenging economic conditions, and we believe meaningful risk remains of returned deterioration in economic conditions and of substantial and continuing financial market disruptions in certain large economies. Conditions in the global financial markets and economic and geopolitical conditions throughout the world are outside of our control and difficult to predict, being influenced by factors such as national and international political circumstances (including governmental instability, wars, terrorist acts or security operations), interest rates, market volatility, asset or market correlations, equity prices, availability of credit, inflation rates, economic uncertainty, changes in laws or regulation including as regards taxation, trade barriers, commodity prices, interest rates, currency exchange rates and controls. While many governments, including the U.S. federal government, have taken substantial steps to stabilize economic conditions in an effort to increase liquidity and capital availability, if economic conditions should weaken, the business environment in our principal markets would be adversely affected, which may negatively impact, among other things:

•the continued growth and development of our business;

•our liquidity;

•our ability to raise capital and obtain financing; and

•the price of our common stock.

We have a history of net losses and expect net losses will continue. If we continue to operate at a loss, our business will not be financially viable.

We have experienced significant losses and negative cash flow from operations since our inception. We have not realized a net operating profit in any quarter since we began our operations. Wave's revenue during the three-months ended March 31, 2015 was less than operating expenses as our products have not yet attained widespread commercial acceptance. This is due in part to the early stage nature of our products with respect to the digital security industry in which we operate. As of March 31, 2015, we had an accumulated deficit of approximately $435.0 million and negative working capital of approximately $4.7 million. Given the lack of widespread adoption of the technology for our products and services, there is little basis for evaluating the financial viability of our business and our long-term prospects. You should consider our prospects in light of the risks, expenses and difficulties that companies in their early stage of development encounter, particularly companies in new and rapidly evolving markets such as digital security.

To achieve profitability we must, among other things:

• continue to convince chip, personal computer motherboard, personal computer and computer peripheral manufacturers to license and distribute our products and services and/or make them available to their customers through their sales channels;

• convince computer end users and enterprise computer customers to purchase our upgrade software and server products for trusted computing;

• continue to maintain the necessary resources, especially talented software programmers;

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• continue to develop relationships with personal computer manufacturers, computer chip manufacturers and computer systems integrators to facilitate and to maximize acceptance of our products and services; and

• generate substantial revenue, complete one or more commercial or strategic transactions or raise additional capital to support our operations until we can generate sufficient revenues and cash flows.

If we do not succeed in these objectives we will not generate revenues, hence our business will not be sustainable.

We may be unable to raise or generate the additional financing or cash flow, which will be necessary to continue as a going concern for the next twelve months.

Since we began our operations we have incurred net losses and experienced significant negative cash flow from operations. This is due to the early stage nature of market development for our products and services and the digital security industry as a whole. Wave expects to continue to incur substantial additional expenses associated with continued research and development and business development activities that will be necessary to commercialize our technology. We may be unable to raise or generate the additional financing or cash flow which will be necessary to continue as a going concern for the next twelve months.

In addition to our efforts to generate revenue sufficient to fund our operations, or complete one or more commercial or strategic transactions, Wave may evaluate additional financing options to generate additional capital in order to continue as a going concern, to capitalize on business opportunities and market conditions and to insure the continued development of our technology, products and services. We do not know if additional financing will be available or that, if available, it will be available on favorable terms. If we issue additional shares of our stock our stockholders' ownership will be diluted and the shares issued may have rights, preferences or privileges senior to those of our common stock. In addition, if we pursue debt financing we will be required to pay interest costs. The failure to generate sufficient cash flow to fund our forecasted expenditures would require us to reduce our cash burn rate which would in turn impede our ability to achieve our business objectives. Even if we are successful in raising additional capital, uncertainty with respect to Wave's viability will continue until we are successful in achieving our objectives. Furthermore, although we may be successful at achieving our business objectives, a positive cash flow from operations may not ultimately be realized unless we are able to sell our products and services at a profit. Given the early stage nature of the markets for our products and services considerable uncertainty exists as to whether or not Wave's business model is viable. If we are not successful in generating sufficient cash flow or obtaining additional funding we may be unable to continue our operations, develop or enhance our products, take advantage of future opportunities or respond to competitive pressures. Due to our current cash position, our forecasted capital needs over the next twelve months and beyond, the fact that we will require additional financing and uncertainty as to whether we will achieve our sales forecast for our products and services, substantial doubt exists with respect to our ability to continue as a going concern.

If our OEM customers fail to purchase our components or to sell sufficient quantities of their products incorporating our components or if our OEM customers’ sales timing and volume fluctuates, it may have an adverse effect on our results of operations.

In general, our ability to make sales to OEM customers depends on our ability to compete on price, delivery and quality. The timing and volume of these sales depend upon the sales levels and shipping schedules for the products into which our OEM customers incorporate our products. Thus, even if we develop a successful component, our sales will not increase unless the product into which our component is incorporated is successful. If our OEM customers decide not to incorporate our products as components of their products or fail to sell a sufficient quantity of products incorporating our components, or if the OEM customers' sales timing and volume fluctuate, it may lead to a reduction in our sales and have an adverse effect on our results of operations.

Our market is in the early stage of development so we are unable to accurately ascertain the size and growth potential for revenue in such a market.

The market for our products and services is still developing and is continually evolving. As a result, substantial uncertainty exists with respect to the size of the market for these products and the level of capital that will be required to meet the evolving technical requirements of the marketplace.

Wave’s business model relies on an assumed market of tens of millions of units shipping with built-in security hardware. Because this market remains in the early stage of development, there is significant uncertainty with respect to the validity of the future size of the market.  If the market for computer systems that utilize our products and services does not grow to the extent necessary for us to realize our business plan, we may not be successful.

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As this early stage market develops and evolves, significant capital will likely be required to fund the resources needed to meet the changing technological demands of the marketplace. There is uncertainty with respect to the level of capital that may be required to meet these changing technological demands. If the amount of capital resources needed exceeds our ability to obtain such capital, we may not be a viable enterprise.

Wave is not established in the industry so we may not be accepted as a supplier or service provider to the market.

 Wave's product offering represents a highly complex architecture designed to solve many of the security issues currently present with computer systems such as identity theft, fraudulent transactions, virus attacks, unauthorized access to restricted networks and other security problems that users of computer systems generally encounter. We are uncertain as to whether the marketplace will accept our solution to these security problems. We will not be successful if the market does not accept the value proposition that we perceive to be present in our products and services.

Although Wave has expended considerable resources in developing technology and products that utilize our technology and in business development activities in an attempt to drive the development of the hardware security market, we do not have a track record as a substantial supplier or service provider to consumers of computer systems. Therefore, uncertainty remains as to whether we will be accepted as a supplier to the enterprise and consumer markets which will likely be necessary for us to be a successful commercial enterprise.

Our products have not been accepted as industry standards which may slow their sales growth.

We believe platforms adopting integrated hardware security into the PC will become a significant standard feature in the overall PC marketplace. However, our technologies have not been accepted as industry standards. Standards for trusted computing are still evolving. To be successful, we must obtain acceptance of our technologies as industry standards, modify our products and services to meet whatever industry standards ultimately develop and/or adapt our products to be complementary to whatever these standards become. If we fail to do any of these, we will not be successful in commercializing our technology; and therefore, we will not generate sales to fund our operations and develop into a self-sustaining, profitable business.

If we do not keep up with technological changes our product development and business growth will suffer.

Because the market in which we operate is characterized by rapidly changing technology, changes in customer requirements, frequent new products, service introductions and enhancements and emerging industry standards, our success will depend upon, among other things, our ability to improve our products, develop and introduce new products and services that keep pace with technological developments, remain compatible with changing computer system platforms, respond to evolving customer requirements and achieve market acceptance on a timely and cost-effective basis. If we do not identify, develop, manufacture, market and support new products and deploy new services effectively and timely, our business will not grow, our financial results will suffer and we may not have the ability to remain in business.

We are subject to risks relating to potential security breaches of our software products.

Although we have implemented in our products various security mechanisms, our products and services may nevertheless be vulnerable to break-ins, piracy and similar disruptive problems caused by Internet users. Any of these disruptions would harm our business. Advances in computer capabilities, new discoveries in the field of security or other developments may result in a compromise or breach of the technology we use to protect products and information in electronic form. Computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through the computer systems of users of our products, which may result in significant liability to us and may also deter potential customers.

A party who is able to circumvent our security measures could misappropriate proprietary electronic content or cause interruptions in our operations and those of our strategic partners. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by breaches. Our attempts to implement contracts that limit our liability to our customers, including liability arising from a failure of security features contained in our products and services, may not be enforceable. We currently do not have product liability insurance to protect against these risks. If the security of products or services is breached, our results of operations may be materially adversely affected by the liability resulting from the breach.

Competition and competing technologies may render some or all of our products non-competitive or obsolete.

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An increasing number of market entrants have introduced or are developing products and services that compete with Wave's. Our competitors may be able to develop products and services that are more attractive to customers than our products and services. Many of our competitors and potential competitors have substantially greater financial, technical and marketing resources than we have. Also, many current and potential competitors have greater name recognition and larger customer bases that could be leveraged to enable them to gain market share or product acceptance to our detriment. Wave's potential competitors include security solutions providers such as WinMagic, RSA Security, Inc., Sophos, Symantec, McAfee, SafeNet, Softex, Entrust, Inc. and Absolute Software.

Other companies have developed or are developing technologies that are, or may become, the basis for competitive products in the field of security and electronic content distribution. Some of those technologies may have an approach or means of processing that is entirely different from ours. Existing or new competitors may develop products that are superior to ours or that otherwise achieve greater market acceptance than ours. Due to Wave's early stage and lower relative name recognition compared to many of our competitors and potential competitors, our competitive position in the marketplace is vulnerable.

We have a high dependence on relationships with strategic partners that must continue or our ability to successfully market our products will be impaired.

Due in large part to Wave’s early stage and lessor name recognition, we depend upon strategic partners such as large, well established personal computer and semiconductor manufacturers and computer systems’ integrators to adopt our products and services within the Trusted Computing marketplace. These companies may choose not to use our products and could develop or market products or technologies that compete directly with us. We cannot predict whether these third parties will commit the resources necessary to achieve broad-based commercial acceptance of our technology. Any delay in the use of our technology by these partners could impede or prohibit the commercial acceptance of our products. Although we have established some binding commitments from some of our strategic partners there can be no assurance that we will be able to enter into additional definitive agreements or that the terms of such agreements will be satisfactory. It will be necessary for Wave to expand upon our current business relationships with our partners, or form new ones, in order to sell more products and services for Wave to become a viable, self-sufficient enterprise.

Product defects or development delays may limit our ability to sell our products.

We may experience delays in the development of our new products and services and the added features and functionality to our existing products and services that our customers and prospective customers are demanding. If we are unable to successfully develop products that contain the features and functionality being demanded by these customers and prospective customers in a timely manner, we may lose business to our competitors. In addition, despite testing by us and potential customers, it is possible that our products may nevertheless contain defects. Development delays or defects could have a material adverse effect on our business if such defects and delays result in our inability to meet the market’s demand.

If we lose our key personnel, or fail to attract and retain additional personnel, we will be unable to continue to develop our products and technology.

We believe that our future success depends upon the continued service of our key technical personnel and on our ability to attract and retain highly skilled technical, sales and marketing personnel. Our industry is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurance that our current employees will continue to work for us or that we will be able to hire any additional personnel necessary for our growth. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. Competition for these employees can be intense. We may not be able to attract, assimilate or retain qualified technical and managerial personnel in the future, and the failure of us to do so would have a material adverse effect on our business.

We have a limited ability to protect our intellectual property rights and others could infringe on or misappropriate our proprietary rights.

Our success depends, in part, on our ability to enjoy or obtain protection for our products and technologies under United States and foreign patent laws, copyright laws and other intellectual property laws and to preserve our trade secrets. We cannot assure you that any patent owned or licensed by us will provide us with adequate protection or will not be challenged, invalidated, infringed or circumvented.

We rely on trade secrets and proprietary know-how which we protect, in part, by confidentiality agreements with our employees and contract partners. However, our confidentiality agreements may be breached and we may not have adequate

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remedies for these breaches. Our trade secrets may become known or be independently discovered by competitors. We also rely on intellectual property laws to prevent the unauthorized duplication of our software and hardware products. However, intellectual property laws may not adequately protect our technology. We have registered various trademark and service mark registrations with the United States Patent and Trademark Office. Wave may apply for additional name and logo marks in the United States and foreign jurisdictions in the future, but we cannot be assured that registration of any of these trademarks will be granted.

We conduct a portion of our operations in the State of Israel and, therefore, political, economic and military instability in Israel and its region may adversely affect our business.

Safend's operations are located in the State of Israel which will constitute a material portion of our business. Accordingly, political, economic and military conditions in Israel and the surrounding region may affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has caused security and economic problems in Israel. Although Israel has entered into peace treaties with Egypt and Jordan, and various agreements with the Palestinian Authority, there has been a marked increase in violence, civil unrest and hostility, including armed clashes, between the State of Israel and the Palestinians and others, since September 2000. The establishment in 2006 of a government in the Gaza Strip by representatives of the Hamas militant group has created heightened unrest and uncertainty in the region. In mid-2006, Israel engaged in an armed conflict with Hezbollah, a Shiite Islamist militia group based in Lebanon, and in June 2007, there was an escalation in violence in the Gaza Strip. From December 2008 through January 2009, Israel engaged in an armed conflict with Hamas, which involved missile strikes against civilian targets in various parts of Israel and which negatively affected business conditions in Israel. During July 2014, Israel was again engaged in an armed conflict with Hamas involving missile strikes against civilian targets in various parts of Israel which negatively affected business conditions in the region. Also, there continues to be great international concern in connection with Iran’s efforts to develop and enrich uranium which could lead to the development of nuclear weapons. Iran’s successful enrichment of uranium could significantly alter the geopolitical landscape in the Middle East, including the threat of international war, which could significantly impact business conditions in Israel.

Recent political uprisings, regime changes and social unrest in various countries in the Middle East and North Africa are affecting the political stability of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these countries and have raised new concerns regarding security in the region and the potential for armed conflict. Among other things, this instability may affect the global economy and marketplace through changes in oil and gas prices. Further escalation of tensions or violence might result in a significant downturn in the economic or financial condition of Israel, which could have a material adverse effect on our operations in Israel and the portion of our business related to our operations there.

Safend received Israeli government grants for certain of its research and development activities. The terms of these grants may require Safend to meet certain requirements in order to manufacture products and transfer technologies outside of Israel. Safend may be required to pay penalties in addition to repayment of the grants.  Such grants may be terminated or reduced in the future, which would increase our costs.

The research and development efforts of Safend have been financed, in part, through grants that Safend has received from the Israeli Office of the Chief Scientist, or OCS. Safend therefore must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984, and related regulations, or the Research Law regarding the intellectual property and products generated by Safend. The terms of these grants and the Research Law restrict the transfer of know-how if such know-how is related to products, know-how and/or technologies which were developed using the OCS grants, and the transfer of manufacturing or manufacturing rights of such products, technologies and/or know-how outside of Israel without the prior approval, pursuant to the Research Law, of the appropriate authority of the OCS. Therefore, the discretionary approval of an OCS committee will be required for any transfer to third parties outside of Israel of rights related to certain of Safend's technologies which have been developed with OCS funding. Safend may not receive the required approvals should it wish to transfer this technology and/or development outside of Israel in the future. Safend did not receive any grants during the three-months ended March 31, 2015 and does not intend on applying for new grants in the future.

Furthermore, the OCS may impose certain conditions on any arrangement under which Safend transfers technology or development out of Israel. Overseas transfers of technology, manufacturing and/or development from OCS funded programs, even if approved by the OCS, may be subject to restrictions set forth in the Research Law. We cannot be certain that any approval of the OCS will be obtained on terms that are acceptable to us, or at all. If Safend fails to comply with the conditions imposed by the OCS, including the payment of royalties with respect to grants received, we may be required to refund any OCS payments previously received by Safend, together with interest and penalties, and may also be subject to criminal penalties.

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Failure to comply with the Foreign Corrupt Practices Act (“FCPA”), and other similar anti-corruption laws, could subject us to penalties and damage our reputation.

We are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain certain policies and procedures. Certain of the jurisdictions in which we conduct business are at a heightened risk for corruption, extortion, bribery, pay-offs, theft and other fraudulent practices. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. If we, or our intermediaries, fail to comply with the requirements of the FCPA, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.

Regulation of international transactions may limit our ability to sell our products in foreign markets.

Most of our software products are controlled under various United States export control laws and regulations and may require export licenses for certain exports of the products and components outside of the United States and Canada. With respect to our software applications, we have applied for and received export classifications that allow us to export our products without a license and with no restrictions to any country throughout the world with the exception of Cuba, Iran, North Korea, Sudan and Syria.

Any new product offerings will be subject to review by the Bureau of Export Administration to determine what export classification they will receive. Enhancements to existing products may be subject to review by the Bureau of Export Administration to determine their export classification.  Some of our partners demand that our products be allowed to be exported without restrictions and/or reporting requirements. Current export regulations have, in part, allowed us to receive the desired classification without undue cost or effort. However, the export regulations may be modified at any time. Currently, we are allowed to export the products for which we have received classification in an unrestricted manner without a license. However, modifications to the export regulations could prevent us from exporting our existing and future products in an unrestricted manner without a license. Such modifications could also make it difficult to receive the desired classification. If export regulations were to be modified in such a way, we may be put at a competitive disadvantage with respect to selling our products internationally.

In addition, import and export regulations of encryption/decryption technology vary from country to country. We may be subject to different statutory or regulatory controls in different foreign jurisdictions, and as such, our technology may not be permitted in these foreign jurisdictions. Violations of foreign regulations or regulation of international transactions could prevent us from being able to sell our products in international markets. Our success depends in large part to having access to international markets.  A violation of foreign regulations could limit our access to such markets and have a negative effect on our results of operations.

Our stock price is volatile.

The price of our Class A Common Stock has been, and likely will continue to be, subject to wide fluctuations in response to a number of events and factors such as:

• quarterly variations in operating results;

• announcements of technological innovations, new products, acquisitions, capital commitments or strategic alliances by us or our competitors;

• the operating and stock price performance of other companies that investors may deem comparable to us; and

• news reports relating to trends in our markets.

In addition, the stock market in general and the market prices for technology-related companies in particular have experienced significant price and volume fluctuations. These broad market fluctuations may adversely affect the market price of our Class A Common Stock and any of our other securities for which a market develops regardless of our operating performance. Securities class action litigation has often been instituted against companies that have experienced periods of volatility in the market price for their securities. It is possible that we could become the target of additional litigation of this kind that would require substantial management attention and expense.  The diversion of management’s attention and capital

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resources could have a material adverse effect on our business.  In addition, any negative publicity or perceived negative publicity of any such litigation could have an adverse impact on our business. 

Governmental regulation may slow our growth and decrease our profitability.

There are currently few laws or regulations that apply directly to the Internet. Because our business is dependent, in significant respect, on the Internet, the adoption of new local, state, national or international laws or regulations may decrease the growth of Internet usage or the acceptance of Internet commerce which could decrease the demand for our products and services and increase our costs or otherwise have a material adverse effect on our business.

Tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce. New state tax regulations may subject us to additional state sales, use and income taxes.

If we make any acquisitions we will incur a variety of costs and may never realize the anticipated benefits.

If appropriate opportunities become available, we may attempt to acquire businesses, technologies, services or products that we believe are a strategic fit with our business. If we do undertake any transaction of this sort, the process of integrating an acquired business, technology, service or product may result in operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to certain intangible assets and increased operating expenses which could adversely affect our results of operations and financial condition.

If our common stock ceases to be listed for trading on the NASDAQ Capital Market, it may harm our stock price and make it more difficult to sell shares.

Our common stock is listed on the National Association of Securities Dealers Automated Quotations Capital Market ("NASDAQ"). In order to maintain our NASDAQ listing, NASDAQ Marketplace Rule 5550(a)(2) (the “Bid Price Rule”) requires that the bid price for our common stock not fall below $1.00 per share for a period of 30 consecutive trading days. On January 15, 2015, we received notification from the Listing Qualifications Department of the NASDAQ Stock Market indicating that our common stock is subject to potential delisting from the NASDAQ Capital Market because for a period of 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share requirement for continued inclusion under the Bid Price Rule. The NASDAQ notice indicated that, in accordance with NASDAQ Marketplace Rule 5810(c)(3)(A), we will be provided 180 calendar days, or until July 14, 2015, to regain compliance. If, at anytime before July 14, 2015, the bid price of the our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ staff will provide written notification that it has achieved compliance with the Bid Price Rule. If we fail to regain compliance with the Bid Price Rule before July 14, 2015 but we meet all of the other applicable standards for initial listing on the NASDAQ Capital Market with the exception of the minimum bid price, then we may be eligible to have an additional 180 calendar days, or until January 10, 2016, to regain compliance with the Bid Price Rule. In addition to the Bid Price Rule, in order to remain listed on the NASDAQ Capital Market, we must also maintain compliance with all of the other required continued listing requirements of the NASDAQ Capital Market, including the $35 million market capitalization requirement. If our common stock ceases to be listed for trading on the NASDAQ Capital Market, we expect that our common stock would be traded on the Financial Industry Regulatory Authority’s Over-the-Counter Bulletin Board (OTC-BB). The level of trading activity of our common stock may decline if it is no longer listed on the NASDAQ Capital Market. If our common stock ceases to be listed for trading on the NASDAQ Capital Market for any reason, it may harm our stock price, increase the volatility of our stock price and make it more difficult to sell your shares of our common stock.

Our ability to raise capital may be limited by applicable laws and regulations.

Our ability to raise capital using a shelf registration statement may be limited by, among other things, current Securities and Exchange Commission (“SEC”) rules and regulations. Under current SEC rules and regulations, we must meet certain requirements to use a Form S−3 registration statement to raise capital without restriction as to the amount of the market value of securities sold thereunder. One such requirement is that the market value of our outstanding common stock held by non−affiliates, or public float, be at least $75.0 million as of a date within 60 days prior to the date of filing the Form S−3 (and the date of any Form 10-K filing thereafter, which is deemed a "re-evaluation date") . If we do not meet that requirement, then the aggregate market value of securities sold by us or on our behalf under the Form S−3 in any 12−month period is limited to an aggregate of one−third of our public float. Moreover, even if we meet the public float requirement at the time we file a Form S−3, SEC rules and regulations require that we periodically re−evaluate the value of our public float, and if, at a re−evaluation

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date, our public float is less than $75.0 million, we would become subject to the one−third of public float limitation described above. If our ability to utilize a Form S−3 registration statement for a primary offering of our securities is limited to one−third of our public float, we may conduct such an offering pursuant to an exemption from registration under the Securities Act or under a Form S−1 registration statement and we would expect either of those alternatives to increase the cost of raising additional capital relative to utilizing a Form S−3 registration statement.

In addition, under current SEC rules and regulations, our common stock must be listed and registered on a national securities exchange in order to utilize a Form S−3 registration statement (i) for a primary offering, if our public float is not at least $75.0 million as of a date within 60 days prior to the date of filing the Form S−3, or a re−evaluation date, whichever is later, and (ii) to register the resale of our securities by persons other than us (i.e., a resale offering). While currently our common stock is listed on the NASDAQ, there can be no assurance that we will be able to maintain such listing. The NASDAQ reviews the appropriateness of continued listing of any issuer that falls below the exchange’s continued listing standards. Previously, including as recently as January 2015, we were not in compliance with certain NASDAQ continued listing standards and were at risk of having our common stock delisted from the NASDAQ. For additional information regarding this risk, see the risk factor above titled “If our common stock ceases to be listed for trading on the NASDAQ Capital Market, it may harm our stock price and make it more difficult to sell shares.”

Our ability to timely raise sufficient additional capital also may be limited by the NASDAQ’s stockholder approval requirements for transactions involving the issuance of our common stock or securities convertible into our common stock. For instance, the NASDAQ requires that we obtain stockholder approval of any transaction involving the sale, issuance or potential issuance by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book or

market value, which (together with sales by our officers, directors and principal stockholders) equals 20% or more of our then outstanding common stock, unless the transaction is considered a “public offering” by the NASDAQ staff. Based on 51,475,368 shares of our common stock outstanding as of April 27, 2015 and the closing price per share of our common stock on such date, which was $0.76, we could not raise more than approximately $7.8 million without obtaining stockholder approval, unless the transaction is deemed a public offering or does not involve the sale, issuance or potential issuance by us of our common stock (or securities convertible into our common stock) at a price less than the greater of book or market value. In addition, certain prior sales by us may be aggregated with any offering we may propose in the future, further limiting the amount we could raise in any future offering that is not considered a public offering by the NASDAQ staff and involves the sale, issuance or potential issuance by us of our common stock (or securities convertible into our common stock) at a price  less than the greater of book or market value. The NASDAQ also requires that we obtain stockholder approval if the issuance or potential issuance of  additional shares will be considered by the NASDAQ staff to result in a change of control of our company.

Obtaining stockholder approval is a costly and time-consuming process. If we are required to obtain stockholder approval for a potential transaction, we would expect to spend substantial additional money and resources. In addition, seeking stockholder approval would delay our receipt of otherwise available capital, which may materially and adversely affect our ability to execute our current business strategy, and there is no guarantee our stockholders ultimately would approve a proposed transaction. A public offering under the NASDAQ rules typically involves broadly announcing the proposed ultimately would approve a proposed transaction. A public offering under the NASDAQ rules typically involves broadly announcing the proposed transaction, which often times has the effect of depressing the issuer’s stock price. Accordingly, the price at which we could sell our securities in a public offering may be less, and the dilution existing stockholders experience may in turn be greater, than if we were able to raise capital through other means.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 6.   Exhibits.

(a)Exhibits

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Exhibit No.		Description of Exhibit
4.1	—	Form of Warrant issued to Purchasers (incorporated by reference to Exhibit 4.1 of Wave's Current Report on Form 8-K, filed January 27, 2015, File # 0-24752).
10.1		Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 of Wave's Current Report on Form 8-K, filed January 27, 2015, File # 0-24752).
31.1	—	Certification of the Chief Executive Officer pursuant to Rule 13a-14a, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	—	Certification of the Chief Financial Officer pursuant to Rule 13a-14a, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	—	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1	—	XBRL Instance Document
101.2	—	XBRL Taxonomy Extension Schema Document
101.3	—	XBRL Taxonomy Extension Calculation Linkbase Document
101.4	—	XBRL Taxonomy Extension Definition Linkbase Document
101.5	—	XBRL Taxonomy Extension Label Linkbase Document
101.6	—	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WAVE SYSTEMS CORP.
	(Registrant)
Dated: May 1, 2015	By:	/s/ William M. Solms
	Name:	William M. Solms
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)
Dated: May 1, 2015	By:	/s/ Walter A. Shephard
	Name:	Walter A. Shephard
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

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