10-Q



	September 30, 2015			December 31, 2014
Assets
Current Assets:
Cash and cash equivalents	$	333,670		$	1,777,414
Accounts receivable, net of allowance for doubtful accounts of $-0- at September 30, 2015 and December 31, 2014	1,849,623			1,820,945
Prepaid expenses and other current assets	477,438			397,689
Total current assets	2,660,731			3,996,048
Property and equipment, net	320,084			411,755
Amortizable intangible assets, net	—			2,008,227
Goodwill	—			1,448,000
Other assets	168,219			169,330
Total Assets	3,149,034			8,033,360

Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable and accrued expenses	3,478,960			3,918,493
Warrant liability	570,459			—
Convertible debt	419,728			—
Deferred revenue	5,073,365			5,125,932
Total current liabilities	9,542,512			9,044,425
Long Term Liabilities:
Royalty liability	5,148,082			4,982,306
Long-term deferred revenue	2,281,955			871,677
Other long-term liabilities	39,937			50,779
Total Liabilities	17,012,486			14,949,187

Stockholders’ Deficit:
Common stock, $0.01 par value. Authorized 150,000,000 shares as Class A; 59,946,141 shares issued and outstanding at September 30, 2015 and 45,962,324 at December 31, 2014	599,461			459,623
Common stock, $0.01 par value. Authorized 13,000,000 shares as Class B; 8,885 shares issued and outstanding at September 30, 2015 and December 31, 2014	89			89
Capital in excess of par value	429,334,193			422,745,539
Accumulated deficit	(443,797,195		)	(430,121,078		)
Total Stockholders’ Deficit	(13,863,452		)	(6,915,827		)
Total Liabilities and Stockholders’ Deficit	$	3,149,034		$	8,033,360



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net revenues:
Licensing and maintenance	$	2,562,462		$	4,032,104		$	7,590,133		$	13,804,463
Services	—			300,000			—			300,000
Total net revenues	2,562,462			4,332,104			7,590,133			14,104,463
Operating expenses:
Licensing and maintenance — cost of net revenues	254,758			260,828			1,083,490			912,175
Services - cost of net revenues	—			73,000			—			73,000
Selling, general and administrative	3,047,864			4,006,625			11,138,440			14,589,760
Research and development	1,848,193			2,069,272			6,836,264			7,608,358
Impairment of goodwill	—			—			1,448,000			—
Impairment of amortizable intangible assets	—			—			1,753,546			—
Total operating expenses	5,150,815			6,409,725			22,259,740			23,183,293
Operating loss	(2,588,353		)	(2,077,621		)	(14,669,607		)	(9,078,830		)
Other income (expense), net:
Net currency transaction loss	(14,008		)	(3,913		)	(87,746		)	(7,862		)
Change in fair value of warrant liability	982,616			—			1,276,441			—
Net interest expense	(74,073		)	(24,325		)	(195,205		)	(108,202		)
Total other income (expense), net	894,535			(28,238		)	993,490			(116,064		)
Net loss	$	(1,693,818	)	$	(2,105,859	)	$	(13,676,117	)	$	(9,194,894	)
Loss per common share — basic and diluted	$	(0.03	)	$	(0.05	)	$	(0.25	)	$	(0.22	)
Weighted average number of common shares outstanding during the period	59,946,141			45,895,118			55,095,077			42,049,167



	Class A Common Stock			Class B Common Stock			Capital in Excess of Par Value			Accumulated Deficit			Total
	Shares	Amount		Shares	Amount		Capital in Excess of Par Value			Accumulated Deficit			Total
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	—	—		—	—		—			(13,676,117		)	(13,676,117		)

Issuance of Class A common stock at $0.65 per share, less issuance costs of $245,009	5,513,044	55,130		—	—		3,283,340			—			3,338,470

Issuance of Class A common stock at $0.65 per share, less issuance costs of $588,491	8,395,000	83,950					4,784,309						4,868,259

Issuance of 4,197,500 warrants, measured at fair value on issuance date	—	—		—	—		(1,846,900		)	—			(1,846,900		)

Issuance of Class A Common Stock pursuant to the Wave Employee Stock Purchase Plan at $0.561 per share	75,773	758		—	—		41,750			—			42,508

Issuance of 1,225,000 warrants, measured at relative fair value on issuance date.							84,295						84,295

Share-based compensation	—	—		—	—		241,860			—			241,860
Balance as of September 30, 2015	59,946,141	$	599,461	8,885	$	89	$	429,334,193		$	(443,797,195	)	$	(13,863,452	)



	Nine months ended
	September 30, 2015			September 30, 2014
Cash flows from operating activities:
Net loss	$	(13,676,117	)	$	(9,194,894	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	429,347			677,317
Accretion of convertible debt discount	14,023			—
Share-based compensation expense	241,860			303,894
Impairment of goodwill and amortizable intangible assets	3,201,546			—
Change in fair value of warrant liability	(1,276,441		)	—
Accretion of royalty liability	87,151			72,975
Changes in assets and liabilities:
(Decrease) increase in accounts receivable	(28,678		)	1,021,997
Increase (decrease) in prepaid expenses and other current assets	(79,749		)	55,290
Increase (decrease) in other assets	1,111			(5,763		)
Decrease in accounts payable and accrued expenses	(367,181		)	(3,164,296		)
Increase (decrease) in deferred revenue	1,357,711			(1,922,643		)
Increase (decrease) in royalty liability	6,273			(193,623		)
Decrease in other long-term liabilities	(10,842		)	(21,482		)
Net cash used in operating activities	(10,099,986		)	(12,371,228		)

Cash flows from investing activities:
Acquisition of property and equipment	(82,995		)	(95,239		)
Net cash used in investing activities	(82,995		)	(95,239		)

Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants	8,206,729			14,457,789
Net proceeds from issuance of convertible debt and warrants	490,000			—
Proceeds from warrant exercises	—			121,862
Proceeds from employee stock purchase plan	42,508			99,495
Net cash provided by financing activities	8,739,237			14,679,146

Net (decrease) increase in cash and cash equivalents	(1,443,744		)	2,212,679

Cash and cash equivalents at beginning of period	1,777,414			2,120,102

Cash and cash equivalents at end of period	$	333,670		$	4,332,781

Supplemental cash flow information:

Cash paid during the period for:
Interest	$	28,168		$	60,209

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 September 30, 2015 and December 31, 2014, its results of operations for the three-month and nine-month periods ended September 30, 2015 and 2014, its changes in stockholder’s deficit for the nine-month period ended September 30, 2015, and its cash flows for the nine-month periods ended September 30, 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 and nine-month periods ended September 30, 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.

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 allowance, depreciation and amortization, valuation of long-lived assets, 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.

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.

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 greater than or equal to 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 one-year of 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.

Valuation of Long Lived Assets - We review long lived assets 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.

Share-based Compensation — We recognize compensation expense for all share-based compensation awards made to employees, directors and consultants, including employee stock options, restricted stock units 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 determine the fair value of restricted stock units based on the closing market price of the Company's common stock on the date of grant. We estimate the fair value of employee stock option awards at grant date using a Black-Scholes option-pricing model. Our estimate of the fair value of the stock option 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 permitted for annual reporting periods starting January 1, 2017. 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.

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 September 30, 2015, has an accumulated deficit of approximately $443,797,000. We also expect Wave will incur an operating loss for the fiscal year 2015. As of September 30, 2015, Wave had negative working capital of approximately $6,882,000 and due to our limited financial resources, we have experienced difficulties in remaining current on rent, vendor payments and other obligations. As of September 30, 2015, we had approximately $334,000 of cash on hand.

On July 28, 2015, Wave initiated a global restructuring of the Company's business in conjunction with a review of Wave's options for raising capital and pursuing customer transactions and other strategic alternatives. Wave's restructuring involved immediate steps to reduce the Company's global workforce by approximately 60% to a core team of employees spread across all functional areas. Thereafter, the Company has continued to evaluate and manage headcount taking into account its very limited financial resources. Since we initiated the restructuring, we have also experienced a significant number of employee departures. Wave will be required to raise additional capital in the short term in order to continue its current operations. Wave's ability to raise additional capital is currently primarily based on:

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 November 11, 2015, approximately $1,016,000 in gross proceeds remains under the 2015 shelf registration statement. However, based on the price of Wave's common equity over the applicable 60 day period and the one-third rule computation, none of the remaining gross proceeds are available for future financings as of November 11, 2015.

Wave will be required to sell shares of common stock, preferred stock, obtain debt or other financing or engage in a combination of these financing alternatives, to raise additional capital to continue to fund its operations. If Wave is not successful in executing its global restructuring and raising additional financing in the near term, it will be required to cease operations or pursue other alternatives. If Wave is able to raise additional financing, it will continue to explore strategic alternatives which could include additional capital raising transactions or a merger or other sale of Wave's business or assets. No assurance can be provided that any of these initiatives will be successful. Due to the foregoing, substantial doubt exists with respect to Wave's ability to continue as a going concern.

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 or if the carrying value of the reporting unit is negative, which is the case for the Safend reporting unit, 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

During the second quarter of 2015, the Company determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the Safend reporting unit. These indicators included, among others, the impact of the major corporate restructuring announced on July 28, 2015, a significant decline in the Company's market cap and downward revisions to management's short-term and long-term forecast for Safend. The revised forecast reflected changes related to revenue growth, expense structure and other expectations impacting the anticipated short-term and long-term operating results of Safend. Due to the aforementioned indicators, the Company concluded that there were qualitative factors for the Safend unit that indicated it is more likely than not that goodwill and intangible assets were impaired.

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 its undiscounted future cash flows expected to be generated by the asset group, including its ultimate disposition. Based on the results of the recoverability test performed during the second quarter of 2015, the Company determined that the carrying value of the Safend asset group and the carrying value of Wave's internal-use software exceeded its undiscounted cash flows and were therefore not recoverable. The Company estimated the fair value of the intangible assets under an income approach as described above. Based on the analysis, the Company recorded impairment charges of $1,753,546 on amortizable intangible assets during the second quarter of 2015 consisting of an $82,856 impairment on the developed technology intangible asset, a $470,690 impairment on the internal-use software intangible asset and a $1,200,000 impairment on the customer relationships intangible asset. The decline in the fair value of the Safend intangible assets and Wave's internal-use software intangible asset are attributable to the same factors as discussed above for the fair value of the Safend reporting unit.



Intangible Asset	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Loss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,305,044	)	$	(5,120,956	)	$	—	0
Customer Relationships	3,972,000		(985,327		)	(2,986,673		)	—		0
Internal-use software	726,000		(255,310		)	(470,690		)	—		0
Acquired Patents	1,100,000		(1,100,000		)	—			—		0
	$	12,224,000	$	(3,645,681	)	$	(8,578,319	)	$	—



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

On September 23, 2015, the Company entered into a Convertible Bridge Instrument and Warrant Subscription Agreements with certain investors, consisting of a $490,000 unsecured bridge instrument that is required to be repaid on or before December 24, 2015 with an aggregate repayment amount of $588,000 and warrants to purchase up to 1,225,000 shares of Wave's Class A common stock at an exercise price of $0.18 per share. The warrants are exercisable six months after the issuance date and expire after five years. If the Company fails to pay the bridge instrument repayment amount by the repayment date of December 24, 2105, holders may (but are not required to) elect to convert the bridge instrument into shares of our Class A common stock at a conversion rate based on the applicable repayment amount divided by an amount equal to the lesser of $0.168 per share and 80% of Wave's variable weighted average stock price ("VWAP") for the five trading day period prior to the date on which the conversion election is made. The bridge instrument may not be converted into more than 19.9% of the outstanding common shares immediately preceding the transaction, unless a shareholder approval is obtained by the Company.

The Company assessed the classification of warrants as of the date of the transaction and determined that such instruments meet the criteria for equity classification. The warrants are reported on the consolidated balance sheet as a component of additional paid in capital within stockholders equity. At the time of issuance, the relative fair value of the warrants was estimated at $84,000 using the Black-Scholes model and the relative fair value of the convertible debt was estimated at $406,000 using a Monte Carlo simulation.

On May 21, 2015, Wave sold 7,300,000 units with each unit consisting of one share of Class A Common Stock and a warrant to purchase 0.5 shares of Class A Common Stock, at a public offering price of $0.65 per unit. The underwriter, Roth Capital, fully exercised its option to purchase an additional 1,095,000 shares of Class A Common Stock and warrants to purchase up to 547,500 shares of Class A Common Stock. The original exercise price of the warrants was $0.81 per share and they expire on May 21, 2020. On September 23, 2015, the issuance of convertible bridge instruments and warrants resulted in the reset of the exercise price of the warrants to $0.07. Wave agreed to pay Roth Capital a fee equal to 7% of the gross proceeds of this public offering. Wave realized approximately $4,868,000 in net proceeds after deducting the underwriter fees of approximately $382,000 and additional legal and other fees associated with the issuance of these securities totaling

The warrants issued in the May public offering contain a change in control feature that allow the warrant holders to require the successor entity to purchase the warrants by paying the warrant holder cash in an amount equal to the fair value of the remaining unexercised portion of the warrants on the change in control date. The warrants also contain a down round feature that adjusts the exercise price of the warrants to equal the price of common stock or convertible securities offered in a future financing if the price of a future financing is below $0.81 per share. The terms of the warrants require classification as a liability and the Company has therefore recorded the fair value as a liability as of the date of issuance for an aggregate fair value of $1,846,900. See Note 10 for more information on the fair value model used to value the warrants.

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.

On June 11, 2014, Wave entered into agreements with certain institutional investors for a private placement of 5,225,560 shares of its Class A Common Stock at a price of $1.90 per share yielding gross proceeds of $9,928,564. This financing was completed under the 2013 shelf registration statement together with the related registration statement on Form S-3 filed pursuant to Rule 462(b). Craig-Hallum Capital Group LLC ("Craig-Hallum") 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 Craig-Hallum a fee equal to 7% of the gross proceeds of this offering. We realized approximately $9,075,000 in net proceeds after deducting the placement agent fees of $695,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $159,000. In connection with the financing, we also issued warrants to the subscribers to purchase up to 2,090,224 shares of Wave Class A Common Stock for $1.90 per share. These warrants expire on June 11, 2019. The warrants have been accounted for as equity. A prospectus supplement related to the offering was filed with the SEC on June 13, 2014.

Wave recognized $143,331 and $(547,950) of share-based compensation during the three-months ended September 30, 2015 and 2014, respectively and $241,860 and $303,894 for the nine-month periods ended September 30, 2015 and 2014, respectively. During the three-month periods ended September 30, 2015 and 2014, Wave granted 22,000 and 178,100 in share-based awards at a weighted-average estimated fair value of $0.44 and $0.71, respectively. During the nine-month periods ended September 30, 2015 and 2014, Wave granted 1,127,750 and 1,856,100 share-based awards at a weighted-average estimated fair value of $0.78 and $0.54, respectively.

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. The Company maintains a full valuation allowance on the deferred tax asset associated with the operating loss carryforwards.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Numerator
Net loss attributable to common shareholders	$	(1,693,818	)	$	(2,105,859	)	$	(13,676,117	)	$	(9,194,894	)

Denominator
Weighted Average basic common shares	59,946,141			45,895,118			55,095,077			42,049,167
Effect of dilutive securities (1)	—			—			—			—
Weighted average dilutive common share	59,946,141			45,895,118			55,095,077			42,049,167
Basic loss per share	(0.03)			(0.05)			(0.25)			(0.22)
Diluted loss per share	(0.03)			(0.05)			(0.25)			(0.22)

(1) Diluted loss per share was computed without consideration to potentially dilutive instruments as their inclusion would have been antidilutive. Potentially dilutive instruments include stock options, unvested restricted stock awards and warrants. As of September 30, 2015 and 2014, there were options to purchase 3.3 million and 4.2 million shares of common stock, respectively, and as of September 30, 2015 and 2014 there were warrants to purchase 24.0 million and 4.1 million shares of common stock, respectively, which were excluded from the computation as they would be antidilutive.

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.



For the three months ended September 30,	United States of America			Europe			Asia			Total
2015
Wave products and services	$	1,502,776		$	791,787		$	267,899		$	2,562,462
% of Total	59		%	31		%	10		%	100		%
2014
Wave products and services	$	3,003,495		$	1,087,141		$	241,468		$	4,332,104
% of Total	69		%	25		%	6		%	100		%


For the nine months ended September 30,	United States of America			Europe			Asia			Total
2015
Wave products and services	$	4,058,608		$	2,748,205		$	783,320		$	7,590,133
% of Total	54		%	36		%	10		%	100		%
2014
Wave products and services	$	9,526,785		$	3,470,402		$	1,107,276		$	14,104,463
% of Total	67		%	25		%	8		%	100		%

Liabilities measured at fair value on a recurring basis include a warrant liability resulting from the Company's May 2015 public offering. The Company uses a Monte Carlo Simulation to estimate the fair value of the warrants. The estimation of the fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility, risk-free interest rate, expected life and expectations of the timing and amount of future financing the Company may require. The fair value of the embedded down round feature is revalued each balance sheet date utilizing the Monte Carlo simulation-based model computations. A decrease or increase in fair value of the warrants is reported in the consolidated statements of operation as other income or expense, respectively. In addition, the use of a Monte Carlo simulation-based model requires the input of highly subjective assumptions, and other reasonable assumptions could provide differing results.

The Company remeasured the warrants as of September 30, 2015, using a Monte Carlo model with the following assumptions: a term of 2.2 years, exercise price of $0.07, volatility rate of 103.60%, and a risk-free interest rate of 0.68%. As of September 30, 2015, the fair value of the warrants was $570,459, or $0.14 per share, and was recorded as a liability on the accompanying consolidated balance sheet. An increase in any of the variables would cause an increase in the fair value of the warrants. Likewise, a decrease in any variable would cause a decrease in the value of the warrants.

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.

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:

all functional areas. Therefore the Company has continued to evaluate and manage headcount taking into account its very limited financial resources. Since we initiated the restructuring, we have also experienced a significant number of employee departures. The Company has been unable to remain current with many of its vendors, and have received notices that certain services, including leased facilities, could be discontinued which will have a material impact on our ability to continue operations. Unless Wave is able to raise additional financing in the near term, we will be required to cease operations or pursue other alternatives.

On August 11, 2015, The Company received notice from the NASDAQ Listings Qualifications Staff indicating that the Company no longer satisfies the minimum $35 million market value of listed securities requirement as required for continued listing on The NASDAQ Capital Market and set forth in NASDAQ Listing Rule 5550(b)(2) (the “Rule”). In accordance with the NASDAQ Listing Rules, the Company has been provided a grace period of 180 calendar days, through February 8, 2016, to evidence compliance with the Rule. In order to satisfy the Rule, the Company must evidence a market value of listed securities of at least $35 million for a minimum of 10 consecutive business days. The notice has no effect on the listing or trading of the Company’s common stock on The NASDAQ Capital Market during the 180 day grace period.

Wave will be required to continue to sell shares of common stock, preferred stock, obtain debt or other financing or engage in a combination of these financing alternatives, to raise additional capital to continue to fund its operations. If Wave is not successful in raising additional financing in the near term, it will be required to cease operations or pursue other alternatives. If Wave is able to raise additional financing, it will continue to explore strategic alternatives which could include additional capital raising transactions or a merger or other sale of Wave's business or assets. No assurance can be provided that any of these initiatives will be successful. Due to the foregoing, substantial doubt exists with respect to Wave's ability to continue as a going concern.

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).

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.

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.

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:

◦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.

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

◦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.

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.

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 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

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. 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.

The decrease in licensing and maintenance revenues was due primarily to a decrease in OEM revenue of approximately $1,112,000, a decrease in enterprise licensing and maintenance revenue of $184,000 and $174,000 in revenue from the eSign product which was sold in October of 2014 . The decrease in service revenue was due to the rendering of a service contract specific to one individual customer, which did not repeat in 2015.



	Three Months Ended September 30, 2015		Three Months Ended September 30, 2014		Increase (Decrease)			% Change
Licensing and maintenance — cost of net revenues	$	254,758	$	260,828	$	(6,070	)	(2	)%
Services — cost of net revenues	—		73,000		(73,000		)	(100	)%
Selling, general and administrative	3,047,864		4,006,625		(958,761		)	(24	)%
Research and development	1,848,193		2,069,272		(221,079		)	(11	)%
Total operating expenses	$	5,150,815	$	6,409,725	$	(1,258,910	)	(20	)%

The decrease in selling, general and administrative ("SG&A") expense during the three months ended September 30, 2015 compared to the same period in 2014 was due primarily to a decrease in Wave salaries and salary related expenses totaling approximately $454,000, a decrease of $149,000 in professional fees a decrease of approximately $230,000 in travel expenses, a decrease of $108,000 in depreciation and amortization and a decrease of $76,000 in marketing and advertising expenses. The decreases in the expense categories were primarily the result of targeted headcount reductions and cost cutting measures that occurred throughout 2014 into 2015.

The decrease in research and development (“R&D”) expenses of approximately $221,000 during the three months ended September 30, 2015 compared to the same period in 2014 was due primarily to a decrease in salaries and salary related expenses resulting from staffing reductions and a decrease in professional fees resulting from fewer third party engineering services being required during the period.

The decrease in licensing and maintenance revenues was due primarily to a decrease in OEM revenue of approximately $4,413,000, a decrease in enterprise licensing and maintenance revenue of $1,381,000 and a decrease of $420,000 in revenue from the eSign product which was sold in October of 2014. The decrease in service revenue was due to the rendering of a service contract specific to one individual customer, which did not repeat in 2015.

The decrease in enterprise licensing and maintenance revenue of approximately $1,381,000 related to a lower revenue base for the nine months ended September 30, 2015 as compared to the same period in 2014. This was the result of an inability to obtain and maintain larger customer sales which resulted in a lower volume of orders billed during the periods leading up to the nine months ended September 30, 2015 as compared to the same period in 2014.



	Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014		Increase (Decrease)			% Change
Licensing and maintenance — cost of net revenues	$	1,083,490	$	912,175	$	171,315		19	%
Services — cost of net revenues	—		73,000		(73,000		)	(100	)%
Selling, general and administrative	11,138,440		14,589,760		(3,451,320		)	(24	)%
Research and development	6,836,264		7,608,358		(772,094		)	(10	)%
Impairment of goodwill	1,448,000		—		1,448,000			100	%
Impairment of amortizable intangible assets	1,753,546		—		1,753,546			100	%
Total operating expenses	$	22,259,740	$	23,183,293	$	(923,553	)	(4	)%

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 of approximately $171,000 during the nine months ended September 30, 2015 as compared to the same period in 2014 was due primarily to an increase in Wave technical support costs.

The decrease in SG&A expense of approximately $3,451,000 during the nine months ended September 30, 2015 compared to the same period in 2014 was due primarily to a decrease in Wave salaries and salary related expenses totaling approximately $2,369,000, a decrease in professional fees of approximately $131,000, a decrease in travel expenses of approximately $467,000, a decrease of marketing costs of $118,000 and a decrease in maintenance agreements and license fees of $104,000. The decreases in these expense categories were primarily the result of targeted headcount reductions and cost cutting measures that occurred throughout 2014 and into 2015.

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 its undiscounted future cash flows expected to be generated by the asset group, including its ultimate disposition. Based on the results of the recoverability test performed during the second quarter of 2015, the Company determined that the carrying value of the Safend asset group and Wave's internal-use software exceeded its undiscounted cash flows and were therefore not recoverable. The Company estimated the fair value of the intangible assets under an income approach as described above. Based on the analysis, the Company recorded impairment charges of $1,753,546 on amortizable intangible assets during the second quarter of 2015 consisting of an $82,856 impairment on the developed technology intangible asset, a $470,690 impairment on the internal-use software intangible asset and a $1,200,000 impairment on the customer relationships intangible asset. The decline in the fair value of the Safend intangible assets and Wave's internal-use software intangible asset are attributable to the same factors as discussed above for the fair value of the Safend reporting unit.

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 September 30, 2015, has an accumulated deficit of approximately $443,797,000. We also expect Wave will incur an operating loss for the fiscal year 2015. As of September 30, 2015, Wave had negative working capital of approximately $6,882,000 and due to our limited financial resources, we have experienced difficulties in remaining current on rent, vendor payments and other obligations. We have received notices that certain services, including leased facilities could be discontinued which will have a material impact on our ability to continue operations. As of September 30, 2015, we had approximately $334,000 of cash on hand

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 November 11, 2015, approximately $1,016,000 in gross proceeds remains under the 2015 shelf registration statement. However, based on the price of Wave's common equity over the applicable 60 day period and the one-third rule computation, none of the remaining gross proceeds are available for future financings as of November 11, 2015.

Wave will be required to sell shares of common stock, preferred stock, obtain debt or other financing or engage in a combination of these financing alternatives, in order to raise additional capital required to fund its operations. If Wave is not successful in executing its global restructuring and raising additional financing in the near term, it will be required to cease operations or pursue other alternatives. If Wave is able to raise additional financing, it will continue to explore strategic alternatives which could include additional capital raising transactions or a merger or other sale of Wave's business or assets. No assurance can be provided that any of these initiatives will be successful. Due to the foregoing, substantial doubt exists with respect to Wave's ability to continue as a going concern.

The net cash used in operating activities of approximately $10,100,000 during the nine months ended September 30, 2015 was primarily related to the net loss of $13,676,000 and a decrease in accounts payable and accrued expenses of approximately $381,000 partially offset by an increase in deferred revenue of approximately $1,358,000. Significant non-cash items included goodwill and amortizable intangible asset impairment of $3,202,000, depreciation and amortization of $429,000, share-based compensation expense of approximately $242,000 and unrealized gain of $1,276,000 related to the change in the fair value of the outstanding liability treated warrants. The decrease in accounts payable and accrued expenses of approximately $381,000 was due in part to the timing of the September 23, 2015 issuance of convertible debt and warrants proceeds used to pay down outstanding accounts payable and accrued expenses. The increase in deferred revenue of approximately $1,357,000 is the result of a large multi-year order received in February 2015 and timing of maintenance renewals, partially offset by ratable recognition of the sale and recognition from prior period billings.

Because Wave does not have sufficient cash to fund its operations for the near term, and there is uncertainty as to whether Wave will raise additional financing and generate sufficient billings to fund its operations over the near term, Wave may not be able to continue its current operations. As detailed above, the funds available under the 2015 shelf registration statement will remain unavailable if Wave's aggregate market value of the common equity held by non-affiliates does not increase. Our ability to raise the necessary capital to fund operations is limited and has been made more difficult by our recent decline in market capitalization.

Due to the sensitive nature and technical requirements of the information security services market and the TCG hardware security category, 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.

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. 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 September 30, 2015 and December 31, 2014, the book value of the liability amounted to $5,250,730 and $5,155,917 respectively. The actual amount owed to the OCS is approximately $6,200,000 at September 30, 2015 and December 31, 2014. The difference between the actual amount owed at September 30, 2015 and December 31, 2014 and the book values relates to the remaining accretion of the fair value discount recorded when Safend was acquired. The OCS liability is not included in the commitments table due to the uncertainty of the timing of payments beyond one year. Due to our limited financial resources, we have been unable to remain current on our royalty obligation.

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 September 30, 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 September 30, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective. Such conclusion is due to the presence of a material weakness in internal control over financial reporting due to insufficient resources with financial reporting and technical skills within the organization. Management anticipates that our disclosure controls and procedures will remain ineffective until the material weakness is remediated.

We are evaluating measures to remediate the material weakness by continuing to augment our existing resources with additional consultants or employees to assist in financial statement preparation and the analysis and recording of complex accounting transactions. Our ability to undertake remediation measures is largely dependent upon securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, we will not be able to undertake these remediation efforts.

The Company's former Senior Vice President, Finance and Administration and Chief Financial Officer, whose employment with the Company terminated on April 30, 2014, has filed a lawsuit against the company for unpaid compensation in the amount of approximately $313,000, as well as treble damages and other amounts. The Company plans to defend all of these claims and is evaluating potential counter claims.

An investment in Wave’s Class A common stock is risky. Prior to making a decision about investing in Wave’s Class A common stock, you should carefully consider the specific risks discussed below, together with all of the other information contained in this prospectus or otherwise incorporated by reference in this prospectus. The risks and uncertainties described below and in Wave’s SEC filings are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. If any of the risks or uncertainties described in this prospectus or Wave’s SEC filings or any such additional risks and uncertainties actually occur, our business, results of operations, cash flows and financial condition could be materially and adversely affected. In that case, the value of Wave’s Class A common stock could decline, and you might lose all or part of your investment.

The U.S. and numerous other leading markets around the world continue to experience 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:

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 nine months ended September 30, 2015 was less than operating expenses as our products have not yet attained widespread commercial acceptance. As of September 30, 2015, we had an accumulated deficit of approximately $443 million and negative working capital of approximately $6.9 million. As noted below, based on our financial condition and limited liquidity resources, we will require significant financing in the near term in order to continue our operations. 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 development encounter, particularly companies in new and rapidly evolving markets such as digital security.

Since we began our operations we have incurred net losses and experienced significant negative cash flow from operations. This is due to the evolving nature of market development for our products and services and the digital security industry as a whole. Without further financing we will be unable to sustain 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 and may be required to cease operations or undertake other alternatives.

On July 28, 2015, Wave initiated a global restructuring of the Company's business in conjunction with a review of Wave's options for raising capital and pursuing customer transactions and other strategic alternatives. Wave's restructuring involved immediate steps to reduce the Company's global workforce by approximately 60% to a core team of employees spread across all functional areas. Thereafter, the Company has continued to evaluate and manage headcount taking into account its very limited financial resources. In addition to the headcount reduction, we have also experienced a significant number of employee departures. We have received notices that certain services, including leased facilities, could be discontinued which will have a material impact on our ability to continue operations.

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 has and will require us to reduce our cash burn rate impeding 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 evolving 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 will 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, the fact that we will require additional financing and uncertainty as to whether we will secure such financing, substantial doubt exists with respect to our ability to continue as a going concern.

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.

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 an evolving 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.

As this evolving market develops, 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 will not be a viable enterprise.

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.

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 or are unable 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.

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.

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.

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 evolving stage, limited financial resources and lower relative name recognition compared to many of our competitors and potential competitors, our competitive position in the marketplace is vulnerable.

Due in large part to Wave’s lesser 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.

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.

We believe that our near term success depends upon the continued service of our key technical personnel that were retained by the Company after the global restructuring. The Company is experiencing a high degree of financial uncertainty and is limited in its resources. 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 to sustain operations. 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. As noted herein, we have substantially reduced our workforce as a result of our limited financial resources and have experienced a significant number of employee departures.

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 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.

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 nine-months ended September 30, 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

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.

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.

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 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.

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.

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. Our current financial resources would not permit us to undertake any such activities. 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.

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 were provided 180 calendar days, or until July 14, 2015, to regain compliance. We were unable to regain compliance with the Bid Price Rule during the initial 180 calendar days and were not subject to the automatic 180 day extension due to the fact that we did not meet all other applicable standards for initial listing on the NASDAQ Capital Market with the exception of the Bid Price Rule. On September 16, 2015, we were granted an extension by NASDAQ to regain compliance with the minimum $1.00 per share requirement for continued inclusion under the Bid Price Rule until January 12, 2015. Our common shares will remain listed on NASDAQ pending the expiration of the extension granted by the NASDAQ Listing Qualifications Panel. There can be no assurance that the NASDAQ Listing Qualifications Panel will grant our request for continued listing on NASDAQ.

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. On August 11, 2015, The Company received notice from the NASDAQ Listings Qualifications Staff indicating that the Company no longer satisfies the minimum $35 million market value of listed securities requirement as required for continued listing on The NASDAQ Capital Market and set forth in NASDAQ Listing Rule 5550(b)(2) (the “Rule”). In accordance with the NASDAQ Listing Rules, the Company has been provided a grace period of 180 calendar days, through February 8, 2016, to evidence compliance with the Rule. In order to satisfy the Rule, the Company must evidence a market value of listed securities of at least $35 million for a minimum of 10 consecutive business days. The notice has no effect on the listing or trading of the Company’s common stock on The NASDAQ Capital Market during the 180 day grace period.

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.

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 date, our public float is less than $75.0 million, we would become subject to the one−third of public float limitation described above. Based on our public float as of October 21, 2015 and the financing we have completed over the preceding 12-month periods, we are currently not eligible to complete primary offerings using Form S-3. Because our ability to utilize a Form S−3 registration statement for a primary offering of our securities is currently restricted, we would be required to 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 (the “20% Cap”), unless the transaction is considered a “public offering” by the NASDAQ staff. Because the terms of the Convertible Bridge Instrument described herein includes a conversion rate that is subject to adjustment up to the 20% Cap (unless stockholder approval is granted for conversion in excess of the 20% Cap) that transaction may be aggregated with any offering we may propose in the future, restricting us from completing offerings that are not considered public offerings by the NASDAQ staff and that 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. 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 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



Exhibit No.		Description of Exhibit
4.1	—	Form of Subscription Agreement (incorporated by reference to Exhibit 4.1 of Wave's Current Report on form 8-K, filed on September 29, 2015, File No. 0-24752)
4.2	—	Form of Bridge Instrument issued to selling stockholders (incorporated by reference to Exhibit 4.2 of Wave's Current Report on Form 8-K, filed on September 29, 2015, File No. 0-24752)
4.3	—	Form of Warrant issued to selling stockholders (incorporated by reference to Exhibit 4.3 of Wave's Current Report on Form 8-K, filed on September 29, 2015, File No. 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



Delaware		13-3477246
(State or other jurisdiction of incorporation or organization)		(I.R.S.Employer Identification No.)



Large accelerated filer o		Accelerated filer o

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



		PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheet at September 30, 2015 and December 31, 2014	3

	Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2015 and 2014	4

	Consolidated Statements of Stockholders' Deficit for the Nine Months Ended September 30, 2015	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

Item 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 6.	Exhibits	35



	2015		2014
Accounts payable	$	1,601,746	$	1,080,167
Accrued payroll and related costs	1,266,955		2,211,565
Accrued consulting and professional fees	171,141		157,500
Royalty liability	102,648		175,000
Other accrued expenses	336,470		294,261
Total accounts payable and accrued expenses	$	3,478,960	$	3,918,493



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Cost of Sales	$	(2,359	)	$	3,129		$	2,437		$	10,310
Selling, General & Administrative	140,405			(365,262		)	262,809			296,837
Research & Development	5,285			(185,817		)	(23,386		)	(3,253		)
Total	$	143,331		$	(547,950	)	$	241,860		$	303,894



	Level 1		Level 2		Level 3			Total
Cash and cash equivalents	$	333,670	$	—	$	—		$	333,670
Warrant liability	—		—		(570,459		)	$	(570,459	)



	Warrant Liability
Beginning balance - June 30, 2015	$	1,553,075
Issuances	—
Conversions	—
Unrealized gains	(982,616		)
Ending balance - September 30, 2015	$	570,459



	Warrant Liability
Beginning balance - December 31, 2014	$	—
Issuances	1,846,900
Conversions	—
Unrealized gains	(1,276,441		)
Ending balance - September 30, 2015	$	570,459



	Estimated Fair Value		Carrying Value
Convertible Debt, due December 23, 2015	$	746,000	$	419,728



	Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014		Increase (Decrease)			% Change
Licensing and maintenance	$	7,590,133	$	13,804,463	$	(6,214,330	)	(45	)%
Services	—		300,000		(300,000		)	(100	)%
Total Net Revenues	$	7,590,133	$	14,104,463	$	(6,514,330	)	(46	)%



	Nine Months Ended September 30, 2015			Nine Months Ended September 30, 2014
Total cash (used in) provided by:
Operating activities	$	(10,099,986	)	$	(12,371,228	)
Investing activities	(82,995		)	(95,239		)
Financing activities	8,739,237			14,679,146
(Decrease) increase in cash and cash equivalents	$	(1,443,744	)	$	2,212,679



	Within one year		Years two and three		Years four and five		Thereafter		Total
Operating lease commitments	$	661,888	$	68,015	$	—	$	—	$	729,903
Total commitments	$	661,888	$	68,015	$	—	$	—	$	729,903


•	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;


•	Debt financing.


•	Debt financing.


•	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;


•	generate substantial revenue, complete one or more commercial or strategic transactions; and


•	raise additional capital to support our operations until we can generate sufficient revenues and cash flows.


•	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



	WAVE SYSTEMS CORP.
	(Registrant)


Dated: November 23, 2015	By:	/s/ William M. Solms
	Name:	William M. Solms
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)


Dated: November 23, 2015	By:	/s/ Walter A. Shephard
	Name:	Walter A. Shephard
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)