"Due to the early stage nature of its market category Wave is unable to predict with a high enough level of certainty whether enough revenue will be generated in calendar 2012 to fund its cash flow requirements. Given the uncertainty with respect to Wave's revenue forecast for 2012, Wave will be required to raise additional capital through either equity or debt financing in order to adequately fund its capital requirements for the year ending December 31, 2012. As of December 31, 2011, we had approximately $3.4 million of cash on hand and negative working capital of approximately $2.0 million. Considering our current cash balance and Wave's projected operating cash requirements, we project that we have enough liquid assets to continue operating through December 31, 2012. While we project that we have enough liquid assets to continue operating through December 31, 2012, our current cash and negative working capital positions coupled with our capital needs over the next year and beyond including the fact that we may require additional financing and the general uncertainty as to whether we will achieve our sales forecast for our products and services, causes substantial doubt to exist with respect to our ability to continue as a going concern."

"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 may 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, respond to competitive pressures or continue as a going concern."

"Liquidity and Capital Resources

Wave has incurred substantial operating losses since its inception and, as of December 31, 2011, has an accumulated deficit of $362,953,668. We may also incur an operating loss for the fiscal year of 2012. As of December 31, 2011, we had negative working capital of $1,984,916.

During January 2012, we entered into an At the Market Sales Agreement with MLV & Co. LLC ("MLV") under which we are able to sell shares of our common stock for aggregate gross proceeds of $20,000,000 from time to time through MLV. As of March 26, 2012, we issued approximately 1.1 million shares of our common stock in at the market offerings through MLV and raised net proceeds of approximately $2.4 million after deducting offering costs of approximately $73,000.

Sources and Uses of Cash

At December 31, 2011 we had $3,385,035 in cash and cash equivalents versus $3,595,076 as of December 31, 2010, resulting in a net decrease in cash of $210,041 for the year ended December 31, 2011. The table below shows the year-to-year comparison of the significant elements of cash used in or provided by operating, investing and financing activities and a reconciliation of each year's operating results reported in the statement of operations to the total increase (decrease) in cash for the years ended December 31, 2011, 2010 and 2009. The overall net loss increased by $6,671,919 (to $10,794,736 from $4,122,817) for the year ended December 31, 2011 versus the year ended December 31, 2010, and cash used in operating activities decreased by $1,254,287 (to $1,226,383 from $2,480,670). In comparing the year ended December 31, 2010 to 2009, the overall net loss increased by $776,566 (to $4,122,817 from $3,346,251) for the year ended December 31, 2010 versus the year ended December 31, 2009, and cash used in operating activities decreased by $2,199,760 (to $2,480,670 from $4,680,430).

As shown below, the total net change in cash over the last three years has fluctuated from net cash increases for the years ended December 31, 2009 and 2010 of $948,451 and $1,695,062, respectively, to a net cash decrease for the year ended December 31, 2011 of $210,041."

"Cash used in operations

The amount of cash used in operations decreased to $1,225,603 for the year ended December 31, 2011 from $2,480,670 used for the year ended December 31, 2010, which decreased from $4,680,430 used for the year ended December 31, 2009. As shown above, the fluctuations in cash used in operations were the result of the changes in the net losses in each of the three years ended December 31, 2011, as discussed in detail in the previous Results of Operations section, adjusted for non-cash items of the net losses such as non-cash share-based compensation and changes to assets and liabilities for net cash outlays and/or receipts, which, under generally accepted accounting principles, are not reported in the Statement of Operations.

Our largest source of operating cash flow is cash collections from our customers. Cash collections from customers amounted to $37,203,389, $24,343,140 and $18,512,712 for the years ended December 31, 2011, 2010 and 2009, respectively. Our primary uses of cash in operations are for personnel related expenditures and other general operating expenses.

Comparison of the years ended December 31, 2011 and 2010

Net cash used in operating activities decreased primarily due to an increase in cash received from customers resulting from the collection of $8.1 million of accounts receivable for orders received in late December 2010 through our OEM partners on behalf of their customer, a U.S.-based global automaker and the collection of $3.5 million of accounts receivable for orders fulfilled in May 2011 with BASF during the year ended December 31, 2011 as compared to 2010. This increase was offset by an increase in cash payments for personnel related expenditures, primarily resulting from a higher average headcount during the year ended December 31, 2011 as compared to 2010, and an increase in payments to consultants and other professionals, primarily for legal costs associated with the acquisition of Safend and other professional recruitment services. The decrease in net cash used in operations was also offset by an increase in cash payments to suppliers, primarily as a result of increased tradeshow and marketing activities during 2011 as compared to 2010. The net decrease in accounts receivable, prepaid expenses and other assets was primarily due to the collection of $8.1 million of orders invoiced and delivered in late December 2010 and the $3.5 million of orders invoiced and delivered in early May 2011. In late December 2010, Wave received $5.2 million in additional license and maintenance orders through its PC OEM partners on behalf of a U.S.-based automotive company. The orders increased the total value of the automaker's software orders to $10.9 million, $6.7 million of which was recorded as revenue during 2011, $1.9 million of which was recorded as revenue in 2010 and $2.3 million of which is expected to be recognized as revenue in 2012 through 2014. In early May 2011, Wave received $3.5 million in license and maintenance orders from BASF. Wave recognized approximately $3.0 million of license sales and the 2011 maintenance as revenue ratably during the remainder of 2011, with 2012 maintenance of approximately $682,000 expected to be recognized ratably over the full year of 2012. Wave has not established VSOE for the fair value of each undelivered element for software and maintenance services for their "large" class of customers. Accordingly, the license and maintenance sales from these orders are recorded as deferred revenue and recognized generally over the undelivered maintenance period. As a result, the decrease in deferred revenue during the year ended December 31, 2011 was due primarily to the recognition of revenue on the orders from the U.S.-based global automaker and BASF.

Comparison of the years ended December 31, 2010 and 2009

Net cash used in operating activities decreased primarily due to an increase in cash received from customers resulting from an increase in net revenues in 2010 as compared to 2009. This decrease was offset by an increase in cash payments for personnel related expenditures, primarily resulting from a higher average headcount during 2010 as compared to 2009, and an increase in payments to consultants, primarily for outsourced engineering services. The decrease in net cash used in operations was also offset by an increase in cash payments to suppliers, primarily as a result of increased tradeshow and marketing activities during 2010 as compared to 2009. The increase in prepaid expenses, receivables and other assets was primarily due to the fulfillment of $8.1 million of orders invoiced and delivered in late December 2010. Wave received $5.2 million in additional license and maintenance orders through its PC OEM partners on behalf of a U.S.-based automotive company. The orders increased the total value of the automaker's software orders to $10.9 million, $6.7 million of which will be recorded as revenue over the next 12 months, $1.9 million of which was recorded as revenue in 2010 and $2.3 million of which is expected to be recognized as revenue in 2012 through 2014. As of December 31, 2010 we have not established VSOE for the fair value of each undelivered element for our software and maintenance services. Accordingly, our license and maintenance sales are recorded as deferred revenue and then recognized generally over a 365-day period. As a result, the increase in deferred revenue was due primarily to the order referred to above.

Cash flows from investing activities

Cash used in investing activities consisted of funds used to acquire capital assets totaling $995,403, $528,138 and $88,007 for the years ended December 31, 2011, 2010 and 2009, respectively, the acquisition of Safend, net of cash acquired on September 22, 2011, amounting to $803,315 and amortizable intangible assets totaling $1,100,000 during the year ended December 31, 2010. Wave expects to continue to acquire capital assets primarily to replace computer equipment to be used internally. These capital expenditures are expected to continue at approximately the same level as the 2011 expenditures. In May 2010 Wave acquired two U.S. patents pertaining to security subsystems for storage devices. The patents describe certain elements of core technology underlying SEDs. The purchase price was $1.1 million in cash. These patents (U.S. patents #7,036,020 and #7,426,747) were acquired by Wave from a company owned by Robert Thibadeau, Ph.D., a noted computer security expert who joined Wave in February 2010 as Senior Vice President and Chief Scientist. The patents were issued in 2006 and 2008 and are valid until 2021. As a result of higher capital expenditures and the acquisition of Safend, net cash used in investing activities increased by $170,580 for the year ended December 31, 2011 versus the year ended December 31, 2010. As a result of higher expenditures for capital and amortizable intangible assets, net cash used in investing activities increased by $1,540,131 for the year ended December 31, 2010 versus the year ended December 31, 2009.

Cash flows from financing activities

Because Wave did not have sufficient cash on hand, nor did it generate sufficient revenues to fund the amount of cash used in operations and acquisition of capital assets for the year ended December 31, 2009, we needed to finance much of our operations through the sale of newly issued equity securities as described below."

"Summary analysis of historical cash flows and future outlook

It is evident from the table above that Wave's use of cash to fund operations has fluctuated significantly over the three-year period presented. The detailed discussion of this trend is presented in the analysis of the results of operations above. In addition, over this time Wave has needed to raise a significant amount of additional funds primarily from issuing new shares of common stock as detailed in the above discussion of cash flows from financing activities.

Liquidity requirements and future sources of capital

Wave estimates that its total cash expenditures to fund operations for the year ending December 31, 2012 will be approximately $51,200,000, including research and development, acquisition of capital assets, sales and marketing, general corporate expenses and overhead.

Sources of capital may include the following:

•
cash on hand of $3,385,035 as of December 31, 2011;

•
collection of receivables; and

•
additional financings.

Given Wave's capital requirements for the year ending December 31, 2012 as indicated above, our cash balance as of December 31, 2011, and the uncertainty as to whether we will generate sufficient revenue, Wave will be required to raise additional capital to continue to fund its operations. We will obtain additional funding as needed from further sales of newly issued shares of Class A Common Stock, including the sale of Class A Common Stock under the remaining availability of our $30,000,000 shelf registration statement that we filed on June 21, 2011 and was declared effective by the Commission on July 22, 2011. Approximately $25,543,000 in gross proceeds are available under the June 21, 2011 shelf registration statement, which may be utilized for future financings. We can provide no assurances as to whether, if necessary, we will be successful in raising the needed capital to continue as a going concern.

During January 2012, we entered into an At the Market Sales Agreement with MLV & Co. LLC ("MLV") under which we are able to sell shares of our common stock for aggregate gross proceeds of $20,000,000 from time to time through MLV. As of March 26, 2012, we issued approximately 1.1 million shares of our common stock in at the market offerings through MLV and raised net proceeds of approximately $2.4 million after deducting offering costs of approximately $73,000."

"Revenue outlook

Wave receives revenue from licensing its EMBASSY Trust Suite software through distribution arrangements with its OEM partners. In addition, Wave received revenues from software development and other services. Total cash received from all revenue sources in 2011 was approximately $37,200,000 versus approximately $24,343,000 in 2010. This increase in total cash received was primarily due to the collection of accounts receivables associated with (i) the fulfillment of $8.1 million of orders invoiced and delivered in late December 2010 (Wave received $5.2 million in additional license and maintenance orders through its PC OEM partners on behalf of a U.S.-based automotive company in December 2010) and (ii) the fulfillment of approximately $3.5 million of orders received in early May 2011 from BASF.

On November 30, 2011, through one of its distribution partners, we delivered in-full against a $1.7 million order from one of the world's leading international oil and gas companies for our ERAS, EMBASSY Protector software and related maintenance services to manage laptop computers with self-encrypting drives. The order, which involves tens of thousands of licenses and related software maintenance through the end of 2012, is a "large" class order (5,000 or more licenses) for which VSOE has not yet been achieved. As a result, we expect to record $1.7 million as revenue ratably through the end of 2012.

During November 2011, we entered into a strategic distribution agreement with Ingram Micro, Inc. ("Ingram") authorizing Ingram to distribute our EMBASSY management software, including ERAS, our enterprise-grade console for the centralized management of endpoint security for data protection and authentication. Ingram is the world's largest technology distributor and a leading technology, sales, marketing and logistics company for the IT industry worldwide. As a vital link in the technology value chain, Ingram connects technology solution providers with vendors worldwide, supporting global operations through an extensive sales and distribution network throughout North America, Europe, the Middle East and Africa (EMEA), Latin America and Asia-Pacific. Ingram serves more than 150 countries on six continents and maintains the world's most comprehensive portfolio of IT products and services. Also during November 2011, we announced an agreement to provide Samsung Electronics with engineering services, consulting, validation and a customized version of our local management software for Samsung's Trusted Platform Module (TPM) security chips designed for OEM distribution. On September 22, 2011, Wave acquired 100% of the equity interests of Safend. Safend provides endpoint data loss protection solutions, including port and device control, encryption for removable media and content inspection and discovery.

Wave also continues to work with all of its partners and customers to introduce and promote its existing software products and new software products which are under development, in an effort to expand the market for TPM-based secure computing and thereby increase its market share and revenues. However, it should be noted that because of the early stage of Wave's market and other factors, a high level of uncertainty exists with respect to the ability to forecast future revenues. Although there has been a substantial increase in the volume of shipments of TPM-equipped PCs and self-encrypting drives, which our business model depends upon, this remains a new and developing category within the computer security market and the ultimate size of this market and the timeframe for its development are unknown and difficult to predict.

Wave's OEM distribution agreements began to generate royalty revenue during 2006. The aggregate amount of royalty revenue from these arrangements has been a significant contributor to Wave's revenue growth to date. Revenue from these contracts in future years may also be material. We expect to continue to generate cash flow from these agreements as long as the agreements remain in effect and our software continues to ship with these products.

Our OEM distribution agreements have given rise to separate software upgrade contracts with the end users of the products distributed by the OEMs. The contracts, referred to by us as license upgrade agreements, include a software license and a maintenance agreement. The contracts are separately negotiated with end users and are not associated with our OEM distribution agreements. Sales from the license upgrade agreements began in the latter part of the third quarter of fiscal year 2007. The sales consist of licensed use of Wave's EMBASSY Trust Suite of products, primarily Wave's EMBASSY Security Center paired with our ERAS server product, and our Safend Data Protection Suite of products. As noted above, on November 30, 2011, we delivered in-full against a $1.7 million order from one of the world's leading international oil and gas companies for our ERAS, EMBASSY Protector software and related maintenance services to manage laptop computers with self-encrypting drives. The order, which involves tens of thousands of licenses and related software maintenance through the end of 2012, is a "large" class order (5,000 or more licenses) for which VSOE has not yet been achieved. As a result, we expect to record $1.7 million as revenue ratably through the end of 2012. During May 2011, we fulfilled a $3.5 million order from BASF in which we provided the global chemical firm with our EMBASSY client and server software and maintenance services for its global fleet of personal computers. The order involved tens of thousands of ERAS licenses, maintenance orders for 2011 and additional maintenance orders for all of 2012 and is a "large" class order for which VSOE has not yet been achieved. As a result we recognized approximately $3.0 million of license sales and 2011 maintenance as revenue ratably over the balance of 2011, with 2012 maintenance of approximately $682,000 to be recognized ratably over the full year of 2012. In late December 2010 Wave received a series of significant license and maintenance orders for its ERAS software from a U.S.-based automotive company. The orders were received by Wave through its PC OEM partners and totaled approximately $5.2 million. The orders increased the total value of the automaker's software orders to $10.9 million, $1.9 million of which was recorded as revenue in 2010, $6.7 million of which was recorded as revenue in 2011, and $2.3 million of which is expected to be recognized as revenue in 2012 through 2014. Initial orders for software licenses and maintenance totaling $5.7 million were received by Wave in December 2009 through a PC OEM partner.

At December 31, 2011, as a result of establishing VSOE for the fair value of each undelivered element for our software and maintenance services for our small customer class effective January 1, 2011, our deferred revenue consists primarily of the unamortized balance of maintenance for sales to our large customer class during the year ended December 31, 2011 and arrangements where VSOE does not exist—small customer orders received prior to January 1, 2011. For arrangements where VSOE for the fair value of each undelivered element does not exist, our license and maintenance sales are recorded as deferred revenue and then recognized over the maintenance period which is typically a 365-day period. The current portion of deferred revenue decreased $1,834,772 (to $6,619,257 from $8,454,029) at December 31, 2011 versus December 31, 2010 primarily as the result of the recognition of revenue on the additional automaker orders received in late December 2010 as noted above, offset by the acquisition of Safend's current portion of deferred revenue which amounted to $1,463,162 at December 31, 2011. Wave recognized approximately $14,544,000, $4,284,000 and $1,397,000 of license upgrade revenue during 2011, 2010 and 2009, respectively.

Known trends and uncertainties affecting future cash flows

Because Wave does not have sufficient cash to fund operations for the year ending December 31, 2012, 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 year ending December 31, 2012. These activities have included the issuance of approximately 1.1 million shares of our common stock during the first quarter of 2012 through the 2012 ATM and raised net proceeds of approximately $2.4 million after deducting offering costs of approximately $73,000.

We will be required to sell additional shares of common stock or preferred stock, obtain debt financing or engage in a combination of these financing alternatives, to raise additional capital to continue to fund our operations for the year ending December 31, 2012. The availability and amount of any such financings are unknown at this time. Wave may also be required to reduce expenses, which may significantly impede its ability to meet its sales, marketing and development objectives. Based upon the available cash currently on hand, including the net proceeds from the 2012 ATM described above, if we meet our current revenue and expenditure forecast for the year ending December 31, 2012 (both of which are uncertain), we estimate that we will need at least $2,000,000 in additional cash in order to continue as a going concern for the next twelve months ending December 31, 2012. The foregoing is based on meeting our current revenue forecast for both Dell and non-Dell revenues for the year ending December 31, 2012. Dell revenue increased during 2010 and 2009 primarily as a result of an amendment signed in December 2008 where the per-unit royalties that Wave receives for each Dell PC model with Wave's EMBASSY Trust Suite software were increased by at least 100% per unit, retroactive to November 1, 2008. Wave's software license agreement with Dell was amended again during January 2012, retroactive to November 1, 2011. As a result of this amendment the per-unit royalties that Wave receives for each Dell PC model shipped with Wave's EMBASSY Trust Suite software were decreased by approximately 25%. The amended agreement increases the per unit royalty rate by approximately 33% for each trusted drive unit shipped after October 31, 2011. Additionally, the amended agreement provides for a 285% per unit additional royalty for notebooks shipping with both a universal serial hub module and at least one internal authentication hardware solution such as a fingerprint reader or smart card. Finally, the amendment extends the term of the software license agreement through January 18, 2017. While the foregoing assumes current shipment volumes at a per-unit royalty rate throughout 2012, our contract with Dell contains no guaranteed minimum royalties or minimum shipment volume requirements."

"(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 December 31, 2011, has an accumulated deficit of $362,953,668. Wave may incur an operating loss for the calendar year of 2012. As of December 31, 2011, Wave had negative working capital of $1,984,916.

Wave has begun market introduction of its security and other software products and has signed initial distribution contracts for these applications. However, due to the early stage nature of this market, Wave may not generate sufficient revenue to cover all of its cash flow needs to fund its operating requirements for the year ending December 31, 2012.

Because Wave will not have sufficient cash to fund operations for the year ending December 31, 2012; and given the uncertainties described above with respect to Wave's revenue outlook for 2012, Wave has been and may continue to be actively engaged in financing activities in order to generate additional funding to cover its operating costs for the year ending December 31, 2012. These activities included the filing of a $25,000,000 S-3 shelf registration with the SEC on April 18, 2008, which was declared effective on June 23, 2008; and the subsequent sales of shares of preferred and common stock pursuant to this shelf registration statement during 2009 (See notes 9 and 10). No additional proceeds are available under this shelf registration statement. Wave filed a new $30,000,000 S-3 shelf registration with the SEC on June 21, 2011, which was declared effective on July 22, 2011. Approximately $25,543,000 in gross proceeds are available under the June 21, 2011 shelf registration statement, which may be used for future financings, although there can be no assurances that future financings will be attainable.

Wave will be required to sell additional 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 December 31, 2012. 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."

http://www.faqs.org/sec-filings/120330/WAVE-SYSTEMS-CORP_10-K/