10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

OR

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

For the transition period from                      to                     

Commission File Number 0-24752

Wave Systems Corp.

(Exact name of registrant as specified in its charter)

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

480 Pleasant Street

Lee, Massachusetts 01238

(Address of principal executive offices)

Registrant’s telephone number, including area code:

(413) 243-1600

Indicate by check mark whether the Registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes oNo x

The number of shares outstanding of each of the issuer’s classes of common stock as of August 6, 2013: 31,240,739 shares of Class A Common Stock and 8,722 shares of Class B Common Stock.

nTable of Contents

Wave Systems Corp. and Subsidiaries

Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2013

Index

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at June 30, 2013 and December 31, 2012	3
	Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2013 and 2012	4
	Consolidated Statement of Stockholders’ Deficit for the Six Months Ended June 30, 2013	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6.	Exhibits	50

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

	June 30,			December 31,
	2013			2012
Assets
Current assets:
Cash and cash equivalents	$	922,299		$	2,112,769
Accounts receivable, net of allowance for doubtful accounts of $-0- at June 30, 2013 and December 31, 2012	3,542,027			5,034,422
Pledged receivables	743,426			1,801,683
Prepaid expenses and other current assets	518,913			421,769
Total current assets	5,726,665			9,370,643
Property and equipment, net	752,603			871,568
Amortizable intangible assets, net	2,121,177			4,028,333
Goodwill	1,448,000			4,038,000
Other assets	238,946			324,614
Total Assets	10,287,391			18,633,158
Liabilities and Stockholders’ Deficit
Current liabilities:
Secured borrowings	631,912			1,537,710
Accounts payable and accrued expenses	7,262,409			7,570,723
Current portion of capital lease payable	6,501			44,658
Deferred revenue	6,129,810			5,949,087
Total current liabilities	14,030,632			15,102,178
Other long-term liabilities	100,583			97,996
Royalty liability	4,497,733			4,486,129
Long-term deferred revenue	1,434,143			1,812,312
Total liabilities	20,063,091			21,498,615
Stockholders’ Deficit:
Common stock, $.01 par value.  Authorized 150,000,000 shares as Class A;  29,219,695 shares issued and outstanding in 2013 and 26,251,968 in 2012	292,197			262,520
Common stock, $.01 par value.  Authorized 13,000,000 shares as Class B; 8,889 shares issued and outstanding in 2013 and 2012	89			89
Capital in excess of par value	400,552,282			393,788,150
Accumulated deficit	(410,620,268		)	(396,916,216		)
Total Stockholders’ Deficit	(9,775,700		)	(2,865,457		)
Total Liabilities and Stockholders’ Deficit	$	10,287,391		$	18,633,158

(1)All shares and per share data presented in these consolidated financial statements and accompanying footnotes have been retroactively adjusted to reflect the 1-for-4 reverse stock split.

See accompanying notes to unaudited consolidated financial statements.

3

WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

	Three months ended						Six months ended
	June 30, 2013			June 30, 2012			June 30,2013			June 30,2012
Net revenues:
Licensing and maintenance	$	6,133,304		$	7,361,102		$	11,127,030		$	14,019,369
Services	608,938			400,372			1,408,938			724,242
Total net revenues	6,742,242			7,761,474			12,535,968			14,743,611
Operating expenses:
Licensing and maintenance — cost of net revenues	382,311			792,737			2,607,910			1,482,367
Services — cost of net revenues	105,155			74,760			212,516			136,590
Selling, general and administrative	6,774,719			8,290,191			13,953,722			17,837,974
Research and development	2,912,128			5,050,625			6,761,110			10,068,104
Impairment of goodwill	—			—			2,590,000			—
Total operating expenses	10,174,313			14,208,313			26,125,258			29,525,035
Operating loss	(3,432,071		)	(6,446,839		)	(13,589,290		)	(14,781,424		)
Other income (expense):
Net currency transaction gain (loss)	(8,363		)	(13,812		)	(6,732		)	9,788
Net interest expense	(49,863		)	(60,504		)	(108,030		)	(62,609		)
Total other income (expense)	(58,226		)	(74,316		)	(114,762		)	(52,821		)
Net loss	$	(3,490,297	)	$	(6,521,155	)	$	(13,704,052	)	$	(14,834,245	)
Loss per common share — basic and diluted	$	(0.12	)	$	(0.28	)	$	(0.50	)	$	(0.65	)
Weighted average number of common shares outstanding during the period	28,317,577			23,120,873			27,326,711			22,839,637

(1)All shares and per share data presented in these consolidated financial statements and accompanying footnotes have been retroactively adjusted to reflect the 1-for-4 reverse stock split.

See accompanying notes to unaudited consolidated financial statements.

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WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Statement of Stockholders’ Deficit

(Unaudited)

	Class A Common			Class B Common			Capital in
	Stock			Stock			Excess of Par		Accumulated
	Shares	Amount		Shares	Amount		Value		Deficit			Total
Balance as of December 31, 2012	26,251,968	$	262,520	8,889	$	89	$	393,788,150	$	(396,916,216	)	$	(2,865,457	)
Net loss	—	—		—	—		—		(13,704,052		)	(13,704,052		)
Issuance of Class A Common Stock at prices ranging from $1.52 to $2.90 per share, less issuance costs of $53,999	935,569	9,356		—	—		1,634,271		—			1,643,627
Issuance of Class A Common Stock at $2.00 per share, less issuance costs of $250,200	1,585,000	15,850		—	—		2,903,950		—			2,919,800
Private placement of Class A Common Stock at $3.32 per share, less issuance costs of $90,000	301,205	3,012		—	—		906,989		—			910,001
Employee stock options exercised at $3.24 per share	12,983	130		—	—		41,909		—			42,039
Issuance of Class A Common Stock pursuant to the Wave Employee Stock Purchase Plan at $1.29	132,970	1,329		—	—		170,467		—			171,796
Stock based compensation	—	—		—	—		1,106,546		—			1,106,546
Balance as of June 30, 2013	29,219,695	$	292,197	8,889	$	89	$	400,552,282	$	(410,620,268	)	$	(9,775,700	)

(1)All shares and per share data presented in these consolidated financial statements and accompanying footnotes have been retroactively adjusted to reflect the 1-for-4 reverse stock split.

See accompanying notes to unaudited consolidated financial statements.

5

WAVE SYSTEMS CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended
	June 30,			June 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(13,704,052	)	$	(14,834,245	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	547,269			1,072,520
Compensation associated with issuance of stock options	1,106,546			2,644,078
Impairment of goodwill and intangible assets	4,205,000
Accretion of royalty liability	40,700
Changes in assets and liabilities:
Decrease in accounts receivable	1,644,854			3,520,229
(Increase) decrease in prepaid expenses and other current assets	(97,144		)	65,455
Decrease in other assets	85,668			9,597
(Decrease) increase in accounts payable and accrued expenses	(262,314		)	1,069,813
Decrease in deferred revenue	(197,446		)	(1,322,250		)
(Decrease) increase in royalty liability	(75,096		)	92,844
Increase in other long-term liabilities	2,587			30,041
Net cash used in operating activities	(6,703,428		)	(7,651,918		)
Cash flows from investing activities:
Acquisition of property and equipment	(136,148		)	(103,302		)
Net cash used in investing activities	(136,148		)	(103,302		)
Cash flows from financing activities:
Payments on capital lease obligation	(38,157		)	(35,348		)
Proceeds from employee stock purchase plan	171,796			474,233
Proceeds from exercise of warrants	—			291,500
Proceeds from employee stock option exercises	42,039			66,497
Net proceeds from issuance of common stock	5,473,428			5,143,876
Net cash provided by financing activities	5,649,106			5,940,758
Net decrease in cash and cash equivalents	(1,190,470		)	(1,814,462		)
Cash and cash equivalents at beginning of period	2,112,769			3,385,035
Cash and cash equivalents at end of period	$	922,299		$	1,570,573
Supplemental cash flow information:
Non-cash financing activities:
Cashless exercise of warrants	$	—		$	404
Cash paid during the period for: Interest	$	74,299		$	54,070

See accompanying notes to unaudited consolidated financial statements.

6

WAVE SYSTEMS CORP. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

June 30, 2013 and 2012

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. as of June 30, 2013 and December 31, 2012, its results of operations for the three-month and six-month periods ended June 30, 2013 and 2012, its changes in stockholder’s deficit for the six-month period ended June 30, 2013, and its cash flows for the six-month periods ended June 30, 2013 and 2012.  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 (the “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, 2012, included in its Form 10-K filed on March 18, 2013.  The results of operations for the three-month and six-month periods ended June 30, 2013 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; and Safend, Ltd. (referred to individually, as the context so requires, as “Safend”), a wholly-owned subsidiary acquired on September 22, 2011.  All significant intercompany transactions have been eliminated.

1.Critical Accounting Policies

The preparation of the Company’s consolidated 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 depreciation and amortization, revenue recognition, accounts receivable reserves, valuation of long-lived and intangible assets, goodwill, software development, contingencies and share based compensation. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A detailed description of the accounting policies deemed critical to the understanding of the consolidated financial statements is included in the notes to Wave’s audited financial statements for the year ended December 31, 2012, included in its Form 10-K filed with the Securities and Exchange Commission on March 18, 2013.

Revenue Recognition — Wave’s business model targets revenues from various sources including: licensing of the EMBASSY Trust Suite, Safend’s endpoint data loss protection suite, eTMS software products and development contracts.  Many of these sales arrangements include multiple-elements and/or require significant modification or customization of Wave’s software.

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Wave recognizes revenue when it is realized or realizable and earned. Wave considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.  In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue.

Licenses

Wave receives revenue from licensing its EMBASSY Trust Suite software through distribution arrangements with its OEM partners, software development and other services.  Wave’s distribution arrangements have given rise to separate software license upgrade agreements with the end users of the products distributed by the OEMs.  Wave applies software revenue recognition guidance to all transactions except those where no software is involved.  Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured.  Persuasive evidence is generally a binding purchase order or license agreement.  Delivery occurs when product is shipped, for its OEM distribution arrangements, or delivered via a license key, for our license upgrade agreements.

Wave enters into perpetual software license agreements, referred as license upgrade agreements, through direct sales to customers and indirect sales through its OEM partners, distributors and resellers with the end users of the products distributed by the OEMs.  Wave has defined its two classes of end user customers as large and small based on those with orders in excess of 5,000 licenses and those with less than 5,000 licenses, respectively.  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.

Beginning in the quarter ended March 31, 2011, Wave had sufficient independent maintenance renewals to establish VSOE of fair value of maintenance for its small class of customers.  Through June 30, 2013, Wave continues to lack sufficient independent maintenance renewals to establish VSOE for its large customer class.  As a result, beginning in the quarter ended March 31, 2011, for the small customer class, Wave has allocated the arrangement consideration amount the elements included in our 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 still the case for Wave’s large customer class, the entire arrangement fee is recognized ratably over the performance period as licensing revenue.  At June 30, 2013, Wave’s deferred revenue consists of the unamortized balance of maintenance for sales to its small class of customers during 2013 and arrangements where VSOE does not exist.

Safend receives revenue from licensing its endpoint data loss protection products and services through its distribution channels.  Safend 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 delivered via a license key.

Safend enters into perpetual software license agreements through direct sales to customers and indirect sales through its OEM partners, distributors and resellers.  These license arrangements, generally also 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 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 licensing

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revenue.  VSOE of fair value is based upon the price for which the undelivered element is sold separately.

Safend has VSOE of fair value of maintenance for its Encryptor, Protector and Inspector products.  As a result Safend allocates the arrangement consideration among the elements included in its 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 still the case for Safend’s Discover, Reporter and Auditor products, the entire arrangement fee is recognized ratably over the performance period as licensing revenue.

Licensing and maintenance - cost of net revenues includes customer support personnel costs, foreign tax withholdings, amortization expense of the developed technology intangible asset, a consulting services engagement with one of the world’s leading international oil and gas companies and share-based compensation expense.

Services

Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price, long-term service or development contracts is recognized using the percentage of completion method. The Company measures the percentage of completion by reference to the proportion of contract hours incurred for work performed to date to the estimated total contract hours expected to be incurred.  Losses on fixed price contracts are recognized during the period in which the loss first becomes apparent.

Services - cost of net revenues includes non-recurring government time and materials costs incurred in connection with a contract with the United States Department of Defense and share-based compensation expense.

Share-based Compensation — We recognize compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan. Share-based compensation expense recognized is based on the value of the portion of share-based payment award that is ultimately expected to vest and has been reduced for estimated forfeitures.  We value share-based payment awards at grant date using an option-pricing model.  Our determination of the fair value of the share-based payment award on the date of grant using the option-pricing model 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, our expected stock price volatility over the term of the award and actual and projected employee stock option exercise behaviors.

Reclassifications - Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation.  These reclassifications include:  (i) the $105,000 reclassification of support expense from selling, general and administrative expense to licensing and maintenance — cost of net revenue for the three and six-months ended June 30, 2012, (ii) the $229,500 reclassification of amortization on the developed technology intangible asset from selling, general and administrative expense to licensing and maintenance — cost of net revenues for the three-months ended June 30, 2012 and (iii) the $455,500 reclassification of amortization on the developed technology intangible asset from selling, general and administrative expense to licensing and maintenance — cost of net revenues for the six-months ended June 30, 2012.  These reclassifications have not changed the results of operations of the prior periods.

All references to common shares and per common share amounts of the Company have been adjusted to give effect to the implementation of a 1-for-4 reverse stock split of the Company’s authorized and issued common stock which was effected on July 1, 2013.  See Note 2 below.

2.Reverse Stock Split

On June 28, 2013, our Board of Directors approved a reverse stock split of our common stock at a ratio of 1-for-4, causing each four outstanding shares of Class A common stock and Class B common stock to

9

convert automatically into one share of Class A common stock or Class B common stock, respectively. The par value of Class A common stock and Class B common stock remains $0.01 per share. The reverse split became effective on July 1, 2013.  Stockholders’ equity has been restated to give retroactive recognition to the reverse split for all periods presented by reclassifying the excess par value resulting from the reduced number of shares from common stock to paid-in capital. Except as otherwise noted, all references to common share and per common share amounts (including warrant shares, shares reserved for issuance and applicable exercise prices) for all periods presented have been retroactively restated to reflect this reverse split.

3.Liquidity

The accompanying consolidated financial statements have been prepared assuming that Wave will continue as a going concern.  Wave has had substantial operating losses since its inception, and as of June 30, 2013, had an accumulated deficit of $410,620,268.  We also expect Wave will incur an operating loss for the fiscal year 2013.  As of June 30, 2013, we had negative working capital of $8,303,967.

Wave does not expect to generate enough revenue to fund its cash flow requirements for the twelve-months ending June 30, 2014.  As of June 30, 2013, we had approximately $922,000 of cash on hand.  Given Wave’s forecasted capital requirements for the twelve-months ending June 30, 2014, and our cash balance as of June 30, 2013, Wave will be required to raise additional capital prior to June 30, 2014 to continue to fund its operations.  Wave’s ability to raise additional capital is primarily based on three sources:

·Sales of registered Class A Common Stock under an existing shelf registration statement;

·Sales of registered Class A Common Stock via the At the Market Sales Agreement with MLV & Co. LLC (“MLV”) entered into during January, 2012; and

·Sales of Class A Common Stock through private placements.

On July 25, 2013, Wave sold 1,204,470 shares of Class A Common Stock at $1.27 per share for gross proceeds of $1,529,677.  This financing was completed under a $30,000,000 shelf registration filed with the SEC on June 21, 2011 and was declared effective by the Commission on July 22, 2011 (the shelf registration statement). Security Research Associates, Inc. (“SRA”) entered into a placement agency agreement with Wave in which they agreed to act as placement agent in connection with the offering.  Wave agreed to pay SRA a fee equal to 6% of the gross proceeds of this offering.  We realized approximately $1,408,000 in net proceeds after deducting the placement agent fees of approximately $92,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000.  In connection with the financing, we also issued warrants to SRA to purchase up to 72,268 shares of Wave Class A Common Stock for $1.27 per share.  These warrants expire on July 25, 2016.

On April 23, 2013, Wave sold 1,585,000 shares of Class A Common Stock at $2.00 per share for gross proceeds of $3,170,000. This financing was completed under the shelf registration statement.  Dawson James Securities, Inc. (“Dawson”) 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 Dawson a fee equal to 6% of the gross proceeds of this offering.  We realized approximately $2,920,000 in net proceeds after deducting the placement agent fees of $190,200 and additional legal and other fees associated with the issuance of these securities totaling approximately $60,000. In connection with the financing, we also issued warrants to the subscribers to purchase up to 792,500 shares of Wave Class A Common Stock for $2.48 per share. These warrants expire on October 23, 2018.

During the six-month period ended June 30, 2013, Wave sold 935,569 shares of its Class A common stock through its At the Market Sales Agreement with MLV at an average price of $1.81 per share, for net proceeds of approximately $1,644,000 after deducting offering costs of approximately

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$54,000.   Subsequent to June 30, 2013, Wave sold 807,913 shares of its Class A common stock through MLV at an average price of $1.40 per share, for net proceeds of approximately $1,098,000 after deducting offering costs of approximately $36,000.   As of August 6, 2013, Wave has sold a total of approximately 3.7 million shares of its common stock through MLV, raising net proceeds of approximately $11.8 million after deducting offering costs of approximately $380,000.

On March 13, 2013, Wave entered into agreements with certain institutional investors for a private placement of 301,205 shares of its Class A common stock at a price of $3.32 per share, yielding gross proceeds of $1,000,000.  Wave agreed to pay the placement agent a fee equal to 6% of the gross proceeds of this offering. Wave realized approximately $910,000 in net proceeds after deducting the placement agent fees of $60,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000.  Wave also issued warrants to the subscribers to purchase 150,603 shares of Class A common stock at an exercise price of $3.32 per share.  These warrants expire in October 2018. On March 13, 2013 Wave also entered into a Registration Rights Agreement with the subscribers in which Wave agreed to file a registration statement with the SEC to cover the private placement.  The failure to file the registration statement with the SEC in accordance with the dates outlined in the Registration Rights Agreement triggers liquidated damage payments to the subscribers.  As the payment of liquidated damages did not appear probable at inception of the private placement, Wave did not record any contingent liability as an allocation of the gross proceeds from the private placement.  During the three-months ended June 30, 2013, Wave paid liquidated damages of $40,000 to the subscribers as a result of the failure to file the registration statement with the SEC per the date agreed to in the Registration Rights Agreement.  The $40,000 is included as an expense in Selling, general and administrative expenses in the Statement of Operations.  A registration statement covering the private placement was declared effective on June 20, 2013 by the SEC, which resolved the contingency regarding the registration statement being declared effective.

As of August 6, 2013, approximately $1,748,000 in gross proceeds are available under the June 21, 2011 shelf registration statement, which may be utilized for future financings. During the next twelve months we anticipate that we will file an additional S-3 shelf registration statement with the SEC for future financings.

Due to our current cash position, our forecasted capital needs over the next twelve months and beyond, the fact that we will require additional financing and uncertainty as to whether we will achieve our sales forecast for our products and services, substantial doubt exists with respect to our ability to continue as a going concern.

4.Secured Borrowings and Pledged Receivables

Pursuant to an agreement entered into on April 23, 2012 with The Receivables Exchange (“TRE”), an unrelated third party, we have transferred certain accounts receivable to buyers which are accounted for as secured borrowings. The transferred receivables are classified as pledged receivables and our obligation to repurchase the transferred receivables is presented as secured borrowings on the consolidated balance sheet. The carrying value of each secured borrowing approximates 85% of each associated pledged receivable and takes into consideration a 15% holdback provision per the TRE agreement.  The customers’ payment of the pledged receivables constitutes the repayment of the related amounts borrowed. The interest rate on the secured borrowings was approximately 1.20% for every thirty days outstanding.

With our approval, TRE establishes arrangements with buyers providing for borrowings that are secured by our accounts receivable, and for which recourse exists against us. We can be required to repurchase the receivables under certain circumstances in case of specific defaults by our customers as set forth in the program terms.  TRE acts as the servicing agent for receivables transferred to buyers.  TRE collects the pledged receivables from our customers and makes the repayment to the buyers on our behalf once the receivables are collected.

At June 30, 2013 and December 31, 2012, receivables totaling $743,426 and $1,801,683, respectively, were transferred to buyer, remain uncollected and are subject to repurchase. The secured borrowings

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totaled $631,912 and $1,537,710 as of June 30, 2013 and December 31, 2012, respectively. We recognized $66,222 and $58,735 of interest expense associated with the secured borrowings for the six-months ended June 30, 2013 and 2012, respectively and $29,141 and $58,735 of interest expense for the three-months ended June 30, 2013 and 2012, respectively.  Proceeds from the transfer of receivables are included in cash provided by operating activities in the consolidated statements of cash flows.  Proceeds from the transfer of pledged receivables were $4,673,508 and $3,894,609 for the six months ended June 30, 2013 and 2012, respectively.  TRE collected $4,041,596 and $3,041,661 of pledged receivables in the six months ended June 30, 2013 and 2012, respectively, which thereby reduced our repurchase obligation and were accounted for as reductions of pledged receivables and secured borrowings on the consolidated balance sheet.  No pledged receivables were repurchased by the Company in the three and six-months ended June 30, 2013 and 2012.

5.Loss per Share

Basic net loss per common share has been calculated based upon the weighted-average number of shares of common stock outstanding during the period.  Diluted net loss per share is also computed using the weighted average number of common shares and excludes dilutive potential common shares outstanding, as their effect is anti-dilutive.  Dilutive potential common shares consist primarily of employee stock options and stock warrants.  Diluted net loss per share is equal to basic net loss per share and is therefore not presented separately in the financial statements.  The weighted average number of potential common shares that would have been included in diluted loss per share, had their effect not been anti-dilutive for each of the three-month and six-month periods ended June 30, 2013, were approximately 114,000 shares and 298,000 shares, respectively, versus 487,000 shares and 748,000 shares for the three-month and six-month periods ended June 30, 2012, respectively.  Employee stock options and other stock warrants to purchase a weighted average of approximately 5,464,000 and 5,181,000 shares were outstanding for the three-month and six-month periods ended June 30, 2013, respectively, versus 2,513,000 and 1,991,000 shares for the three-month and six-month periods ended June 30, 2012, respectively, but have not been included in the computation of diluted loss per share because their exercise price was greater than the average share price of Wave’s common shares and, therefore, their effect would have been anti-dilutive.

6.Share-based Compensation

Wave recognized $668,840 and $1,288,326 of share-based compensation during the three-months ended June 30, 2013 and 2012, respectively, and $1,106,546 and $2,644,078 for the six-month periods ended June 30, 2013 and 2012, respectively.  During the three-month period ended June 30, 2013, Wave granted 69,000 stock options at a weighted-average estimated fair value of $0.80.  During the three-month period ended June 30, 2012, Wave granted 37,745 stock options at a weighted-average estimated fair value of $0.90.

The following table summarizes the effect of share based compensation in Wave’s statement of operations, for the three-month and six-month periods ended June 30, 2013 and 2012:

	Three months ended  June 30,				Six months ended June 30,
	2013		2012		2013		2012
Cost of Sales	$	6,655	$	12,071	$	15,089	$	24,065
Selling, General & Administrative	532,789		882,769		834,398		1,854,589
Research & Development	129,396		393,486		257,059		765,424
Total	$	668,840	$	1,288,326	$	1,106,546	$	2,644,078

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7.Goodwill and Amortizable Intangible Assets

The following schedule presents the changes in the carrying amount of goodwill during the period ended June 30, 2013:

Balances as of December 31, 2012	$	4,038,000
Impairment loss	(2,590,000		)
Balances as of June 30, 2013	$	1,448,000

Wave tests goodwill for impairment annually on September 30 and during interim periods whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.  Wave uses a fair value approach in testing goodwill for impairment in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other. The goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss.

During the first quarter of fiscal 2013 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, significantly lower than expected revenue and billings during the first quarter of 2013, and downward revisions to management’s short-term and long-term forecast for Safend. The revised forecast reflected changes related to revenue growth rates, current market trends 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 the fair value of the Safend reporting unit was less than its carrying amount.

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’s 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 cash flows. Based on the results of the recoverability test, the Company determined that the carrying value of the Safend asset group exceeded its undiscounted cash flows and was 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 an impairment charge of $1,615,000 on the developed technology intangible asset during the three-months ended March 31, 2013.  The decline in the fair value of the Safend intangible assets is attributable to the same factors as discussed above for the fair value of the Safend reporting unit.

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After adjusting the carrying value of the reporting unit for the impairment of the intangibles noted above, the Company completed the two step goodwill impairment test for the Safend reporting unit. The step two goodwill impairment test resulted in an implied fair value of goodwill substantially below the carrying value of the goodwill. As a result, the Company recorded a goodwill impairment charge of approximately $2.6 million during the three-months ended March 31, 2013, which resulted in a $1.4 million remaining carrying value of Safend goodwill. The goodwill impairment charge is included in the impairment of goodwill line item in the consolidated statements of operations for the six-months ended June 30, 2013. The developed technology impairment charge of $1,615,000 is included in the licensing and maintenance-cost of net revenues line item in the consolidated statements of operations for the six-months ended June 30, 2013.

The following schedule presents the details of intangible assets as of June 30, 2013 and December 31, 2012:

June 30, 2013

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			AccumulatedImpairmentLoss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,254,056	)	$	(5,038,100	)	$	133,844	5.2
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(601,327		)	(1,786,673		)	1,584,000		8.2
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(696,667		)	—			403,333		1.8
	$	11,678,000	$	(2,642,050	)	$	(6,914,773	)	$	2,121,177

December 31, 2012

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			AccumulatedImpairmentLoss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,167,900	)	$	(3,423,100	)	$	1,835,000	5.8
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(505,327		)	(1,786,673		)	1,680,000		8.8
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(586,667		)	—			513,333		2.4
	$	11,678,000	$	(2,349,894	)	$	(5,299,773	)	$	4,028,333

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The acquired patents were purchased for $1,100,000 on May 7, 2010 from a company owned by Robert Thibadeau, Ph. D., a noted computer security expert who joined Wave in February 2010 as Senior Vice President and Chief Scientist.  The patents were issued in 2006 and 2008 and are valid until 2021.  Both patents concern the methods and systems for promoting security in a computer employing attached storage devices.  The patents are being amortized on a straight-line basis over 5 years based upon their estimated useful life.

Amortization expense associated with intangible assets was $109,374 and $292,156 for the three and six months ended June 30, 2013, respectively and $406,300 and $809,100 for the three and six months ended June 30, 2012, respectively. The estimated amortization expense for intangible assets for the next five years and thereafter is as follows (in thousands):

Period	Estimated Amortization Expense
Remainder of 2013	$	219
2014	437
2015	291
2016	217
2017	217
Thereafter	740
Total	$	2,121

8.     Income Taxes

Wave has not recorded any income tax expense due to the net loss incurred for all periods presented.  Wave has federal and state net operating loss carryforwards of approximately $286.9 million, which expire beginning in 2013 through 2032 and include approximately $7.7 million of net operating loss carryforwards of Safend, Inc., a wholly owned US-based subsidiary of Safend.  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 occurred prior to or following Wave’s initial public offering in September 1994 and in periods following, thus raising the likelihood that such net operating and capital loss carryforwards are subject to annual limitations.  In addition, the Company maintains approximately $17 million of operating loss carryforwards associated with Safend, Ltd., an entity in Israel.

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9.     Segment Reporting

Wave’s products include the Wave EMBASSY® digital security products and services (“EMBASSY®”) and Safend’s endpoint data loss protection products and services.  These products and services constitute Wave’s reportable segments as of June 30, 2013.

Net losses for reportable segments exclude net interest income (expense) and net currency transaction gains and losses.  These items are not reported by segment since they are excluded from the measurement of segment performance reviewed by Wave’s Chief Financial Officer.

The following sets forth reportable segment data:

	Three months ended  June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net Revenues:
EMBASSY® digital security products and services	$	5,627,124		$	6,118,250		$	10,247,910		$	11,964,960
Safend endpoint data loss protection products and services	1,115,118			1,643,224			2,288,058			2,778,651
Total Net Revenues	$	6,742,242		$	7,761,474		$	12,535,968		$	14,743,611
Operating Loss:
EMBASSY® digital security products and services	$	(3,001,360	)	$	(5,786,603	)	$	(8,405,277	)	$	(13,014,558	)
Safend endpoint data loss protection products and services	(430,711		)	(660,236		)	(5,184,013		)	(1,766,866		)
Total Segments Operating Loss	(3,432,071		)	(6,446,839		)	(13,589,290		)	(14,781,424		)
Net currency transaction gain (loss)	(8,363		)	(13,812		)	(6,732		)	9,788
Net interest expense	(49,863		)	(60,504		)	(108,030		)	(62,609		)
Net Loss	$	(3,490,297	)	$	(6,521,155	)	$	(13,704,052	)	$	(14,834,245	)
Impairment of Goodwill:
EMBASSY® digital security products and services	$	—		$	—		$	2,590,000		$	—
Safend endpoint data loss protection products and services	—			—			—			—
Total Impairment of Goodwill	$	—		$	—		$	2,590,000		$	—
Depreciation and Amortization Expense:
EMBASSY® digital security products and services	$	166,954		$	180,438		$	344,082		$	345,855
Safend endpoint data loss protection products and services	64,406			365,293			203,187			726,665
Total Depreciation and Amortization Expense	$	231,360		$	545,731		$	547,269		$	1,072,520
Capital Expenditures:
EMBASSY® digital security products and services	33,195			46,947			125,504			81,975
Safend endpoint data loss protection products and services	9,030			8,997			10,644			21,327
Total Capital Expenditures	$	42,225		$	55,944		$	136,148		$	103,302

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	June 30,		December 31,
	2013		2012
Assets:
EMBASSY® digital security products and services	$	5,801,016	$	9,695,864
Safend endpoint data loss protection products and services	4,486,375		8,937,294
Total Assets	$	10,287,391	$	18,633,158

The following table details Wave’s sales by geographic area for the three and six-month periods ended June 30, 2013 and 2012.  Geographic area is based on the location of where the products were shipped or services rendered.

	United States of America			Europe			Asia			Total
Three months ended June 30, 2013:
EMBASSY® digital security products and services	$	4,078,689		$	1,180,565		$	367,870		$	5,627,124
Safend endpoint data loss protection products and services	427,518			591,071			96,529			1,115,118
Total	$	4,506,207		$	1,771,636		464,399			$	6,742,242
% of Total Revenue	67		%	26		%	7		%	100		%
Three months ended June 30, 2012:
EMBASSY® digital security products and services	$	5,004,840		$	970,610		$	142,800		$	6,118,250
Safend endpoint data loss protection products and services	606,925			623,786			412,513			1,643,224
Total	$	5,611,765		$	1,594,396		$	555,313		$	7,761,474
% of Total Revenue	72		%	21		%	7		%	100		%
Six months ended June 30, 2013:
EMBASSY® digital security products and services	7,801,676			1,927,259			518,975			10,247,910
Safend endpoint data loss protection products and services	971,916			1,149,402			166,740			2,288,058
Total	8,773,592			3,076,661			685,715			12,535,968
% of Total Revenue	70		%	25		%	5		%	100		%
Six months ended June 30, 2012:
EMBASSY® digital security products and services	10,135,244			1,646,916			182,800			11,964,960
Safend endpoint data loss protection products and services	1,046,910			1,224,070			507,671			2,778,651
Total	11,182,154			2,870,986			690,471			14,743,611
% of Total Revenue	76		%	19		%	5		%	100		%

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

Customers, by segment, from which Wave derived revenue in excess of 10% for the three and six-month periods ended June 30, 2013 and 2012 are as follows:

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		Three months ended  June 30,						Six months ended June 30,
		2013			2012			2013			2012
Customer	Segment	Revenue						Revenue
Dell, Inc.	EMBASSY®	$	3,225,452		$	4,164,109		$	5,683,862		$	8,290,098
% of Total Revenue		48		%	54		%	45		%	56		%

10.  Issuance of Common Stock

On April 23, 2013, Wave sold 1,585,000 shares of Class A Common Stock at $2.00 per share for gross proceeds of $3,170,000. This financing was completed under a $30,000,000 shelf registration filed with the SEC on June 21, 2011 and declared effective by the SEC on July 22, 2011.  Dawson 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 Dawson a fee equal to 6% of the gross proceeds of this offering.  We realized approximately $2,920,000 in net proceeds after deducting the placement agent fees of $190,200 and additional legal and other fees associated with the issuance of these securities totaling approximately $60,000. In connection with the financing, we also issued warrants to the subscribers to purchase up to 792,500 shares of Wave Class A Common Stock for $2.48 per share. These warrants expire on October 23, 2018.

During the three-month period ended June 30, 2013, Wave received net proceeds of $1,380,682 after deducting offering costs of approximately $45,000, in connection with the issuance of 840,581 shares of Class A Common Stock in its at the market offerings through MLV.  The shares were sold at prices ranging from $1.52 - $2.68 per share.

On June 1, 2013, Wave issued 132,970 shares of Class A common stock to Wave employees for $1.29 per share, pursuant to the Wave 2004 Employee Stock Purchase Plan.  Wave received proceeds of $171,796 from the sale of these shares.

On March 13, 2013, Wave entered into agreements with certain institutional investors for a private placement of 301,205 shares of its Class A Common Stock at a price of $3.32 per share, yielding gross proceeds of $1,000,000.  Wave agreed to pay Dawson, the placement agent, a fee equal to 6% of the gross proceeds of this offering. Wave realized approximately $910,000 in net proceeds after deducting the placement agent fees of $60,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000.  Wave also issued warrants to the subscribers to purchase 150,603 shares of Class A common stock at an exercise price of $3.32 per share.  These warrants expire in October 2018. On March 13, 2013 Wave also entered into a Registration Rights Agreement with the subscribers in which Wave agreed to file a registration statement with the SEC to cover the private placement.  The failure to file the registration statement with the SEC in accordance with the dates outlined in the Registration Rights Agreement triggers liquidated damage payments to the subscribers.  As the payment of liquidated damages did not appear probable at inception of the private placement, Wave did not record any contingent liability as an allocation of the gross proceeds from the private placement.  During the three-months ended June 30, 2013, Wave paid liquidated damages of $40,000 to the subscribers as a result of the failure to file the registration statement with the SEC per the date agreed to in the Registration Rights Agreement.  The $40,000 is included as an expense in Selling, general and administrative expenses in the Statement of Operations.  A registration

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statement covering the private placement was declared effective on June 20, 2013 by the SEC, which resolved the contingency regarding the registration statement being declared effective.

During the three-month period ended March 31, 2013, Wave received net proceeds of $262,945 after deducting offering costs of approximately $8,700, in connection with the issuance of 94,988 shares of Class A Common Stock in its at the market offerings through MLV.  The shares were sold at prices ranging from $2.80 - $2.92 per share.

During the three-month period ended March 31, 2013, Wave received gross proceeds of $42,039 in connection with the issuance of 12,983 shares of Class A Common Stock upon the exercise of employee stock options.  The employee stock options were exercised at $3.24 per share.

11.Fair Value Measurement

As of June 30, 2013, Wave’s financial assets that are measured at fair value on a recurring basis are comprised of overnight money market fund investments.  Wave invests excess cash from its operating cash accounts in overnight money market funds and reflects these amounts ($36,807 at June 30, 2013) within cash and cash equivalents on the consolidated balance sheet using quoted prices in active markets for identical assets (Level 1) at a net value of 1:1 for each dollar invested.

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

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

12.  Contingencies

Landmark Ventures, Inc. (“Landmark”) has asserted that Safend Inc. (“Safend USA”), a subsidiary of Safend Ltd. (Wave’s Israeli subsidiary), has breached a consulting agreement between Landmark and Safend USA (the “Consulting Agreement”) which was terminated by Safend USA in July of 2011. According to an amended complaint filed in January 2012 by Landmark in the federal district court in New York, Safend USA (a) owes unspecified amounts to Landmark and (b) violated a provision of the Consulting Agreement by working with a former Landmark employee, resulting in damages of no less than $5,000,000.  Landmark has also named Safend Ltd. and Wave Systems Corp. (“Wave”) as defendants, alleging that both companies are legally responsible for Safend USA’s alleged breaches.  Safend USA, Safend Ltd. and Wave have moved to dismiss the Landmark amended complaint in its entirety.  On September 4, 2012, the federal district court granted Safend Inc.’s motion to dismiss the Landmark lawsuit and ordered the dismissal of the amended complaint with prejudice.  Landmark thereafter filed a timely notice of appeal to the United States Court of Appeals for the Second Circuit, which affirmed the judgment of the federal district court on March 12, 2013.  Landmark had 90 days to petition the United States Supreme Court for an application to permit an appeal.  Landmark  never exercised their right to petition the United States Supreme Court within the 90 days and as such the case has concluded.

13.  Subsequent Events

On July 24, 2013, the Company received notice from the NASDAQ Listing Qualifications Department that Wave has regained compliance with the minimum $1.00 per share bid price requirement for continued inclusion under NASDAQ Marketplace Rule 5550(a)(2).  Shares of the Company’s Class A Common Stock maintained a closing bid price of at least $1.00 per share for the required ten consecutive days, from July 9 through July 22, 2013.

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CERTAIN FORWARD-LOOKING INFORMATION:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These statements include, but are not limited to, statements regarding contingencies, future prospects, liquidity and capital expenditures herein under “Part I Financial Information—Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  The words “may,” “would,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend” and similar expressions and variations thereof are intended to identify forward-looking statements.  Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control.  Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and detailed in our other filings with the Commission during the past 12 months.  Wave assumes no duty to and does not undertake to update any forward-looking statements.

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

On June 28, 2013, our Board of Directors approved a reverse stock split of our common stock at a ratio of 1-for-4, causing each four outstanding shares of Class A common stock and Class B common stock to convert automatically into one share of Class A common stock or Class B common stock, respectively. The par value of Class A common stock and Class B common stock remains $0.01 per share. The reverse split became effective on July 1, 2013.  Stockholders’ equity has been restated to give retroactive recognition to the reverse split for all periods presented by reclassifying the excess par value resulting from the reduced number of shares from common stock to paid-in capital. Except as otherwise noted, all references to common share and per common share amounts (including warrant shares, shares reserved for issuance and applicable exercise prices) for all periods presented have been retroactively restated to reflect this reverse split.

Overview

Our Business

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

Wave develops, produces and markets products for hardware-based digital security, including security applications and services that are complementary to, and work with, the specifications of the Trusted Computing Group (“TCG”), www.trustedcomputinggroup.org, an industry standards organization comprised of computer and device manufacturers, software vendors and other computing products manufacturers. Specifications developed by the TCG are designed to address a broad range of current and evolving digital security issues.  These issues include: identity protection, data security, digital signatures, electronic transaction integrity, platform trustworthiness, network security and regulatory compliance.

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 (the “TCG Board”).  Wave has also elevated its membership status to the highest level of TCG “Promoter.”  Permanent members of the TCG Board provide guidance to the organization’s work groups in the creation of the specifications to protect personal computers (“PCs”) and other computing devices from attacks and to help prevent data loss and theft.  Wave’s enhanced membership 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

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blocks and software interfaces.  Wave is eligible to serve on and chair the TCG Board, Work Groups and Special Committees thereof.  Wave is permitted to submit revisions and addendum proposals for specifications with design guides and is similarly permitted to review and comment on design guides prior to their adoption.

One of the current TCG specifications recommends 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, including platform authentication, protected cryptographic processes and capabilities 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 CPU(s) that enables secure protection of files and other digital secrets, and performs critical security functions such as generating, storing and protecting “cryptographic keys,” which are secret codes used to decipher encrypted or coded data.  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.

Prior to the formation of the TCG, Wave developed its pioneering EMBASSY (EMBedded Application Security SYstem) Trust System.  The EMBASSY Trust System is a combination of client hardware consisting of the EMBASSY 2100 security chip (the “EMBASSY chip”) and its firmware, and software consisting of the Trust Assurance Network (“TAN”), a back-office infrastructure that manages its security functions.  As the market for TPM-enabled products has developed with computing devices being shipped in volume by leaders in the PC industry, Wave has enabled the development work on the EMBASSY Trust System to support security hardware based on the TCG specifications by repurposing these product assets.  Wave has since developed a set of applications known as the EMBASSY Trust Suite, EMBASSY Trust Server products, middleware and software tools to work with various other chip manufacturers’ TCG-specified TPMs that are now available.  Wave’s products support cross-platform interoperability for the currently available TPM chips from Nuvoton Technology Corporation, Atmel, Broadcom, Infineon Technologies AG, and ST Microelectronics and have been verified for usage on TPM platforms shipped by Dell, Acer, Intel, Lenovo, HP, ASUS, NEC and Fujitsu.

Wave’s operations to-date have consisted primarily of product development, performance under contract to develop products and marketing and sales to PC and semi-conductor chip (“Chip”) OEMs, resellers, and enterprises.  Wave has been successful in signing distribution and reseller contracts with Intel, Nuvoton, ST Microelectronics, Dell, Acer, ASUS, Broadcom and Samsung.

Our Products

Client-side Applications

EMBASSY Trust Suite

The current version of the EMBASSY Trust Suite consists of a set of applications and services that is designed to bring functionality and user value to TPM-enabled products.  Designed to make the TPM easy for users to set up and use, the EMBASSY Trust Suite includes the EMBASSY Security Center (the “ESC”), Trusted Drive Manager (“TDM”), Document Manager (“DM”), Private Information Manager (“PIM”) and Key Transfer Manager (“KTM”).

The ESC enables the user to set up and configure the TPM platform.  In addition to the basic function of making the TPM operational, ESC is designed to enable the user to manage extended TPM-based security settings and policies, including strong authentication, Windows logon preferences to add biometrics and streamlined password policy management.  The TCG has published storage specifications for another major trusted hardware component, the self-encrypting drive (“SED”).  The ESC software contains advanced lifecycle management tools for the SED.  Trusted Drive Manager is the software utilized for managing SEDs.  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

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speeds.  Because the drives are factory-installed, the systems can be configured such that encryption is “always on” for the protection of proprietary information.  The TCG has issued storage specifications over SEDs.  These specifications are based upon the Opal Security Subsystem Class (SSC) specification — an industry standard issued by the TCG.  The SSC specification gives vendors an industry standard for developing SEDs that secure data.  Wave’s products currently support all Opal-based, proprietary and solid-state SEDs.

Data protection is also addressed by the DM, which is offered to provide document encryption, decryption and client-side storage of documents. The DM works with Microsoft Windows and Microsoft Office to secure documents against unauthorized users and hackers.  Wave’s software supports the Microsoft Windows 8, 7 and Vista operating systems, building upon their data protection feature sets, providing full-featured EMBASSY solutions for data protection and strong authentication.

Password management can be a security challenge due to the increasing number of passwords required and the tendency of users to select easily guessed passwords.  To help address these password issues PIM uses the TPM to securely store and manage user information, such as user names, passwords, credit card numbers and other personal information.  It retrieves login information to efficiently fill in applications, web forms and web login information.

Backup and recovery of keys used for logon, signing and protection of data can be an essential requirement for deployment of TPM-based systems.  KTM is an archive application for the cryptographic keys that is designed to provide a method to securely archive, restore and transfer keys, having the property of being migratable, that are secured by the TPM.

Wave has also developed TPM Wizards as part of the EMBASSY Trust Suite allowing users to setup and use the TPM for securing 802.11x networks, the Windows Encrypting File System and encrypted email.

Wave Cloud

Wave Cloud is a cloud-based service for managing SEDs and TPMs.  With Wave Cloud, organizations do not need to buy, build and test (or maintain) server infrastructure as the management of TPMs and SEDs is done using a web interface.  The platform allows enterprises to rapidly deploy centrally-managed hardware-based data encryption on laptops — all without the complexity and cost associated with maintaining on-premise servers. Wave Cloud provides activation, ownership and management of TPMs from a central location and puts TPM management under IT control.  Wave Cloud provides an organization with drive initialization, user management, drive locking and user recovery for all OPAL-based, proprietary and solid-state SEDs.

Wave Endpoint Monitor

Wave Endpoint Monitor (“WEM”) detects malware by leveraging the capabilities of the TPM. WEM provides increased visibility into endpoint health to help protect enterprise resources and minimize the potential cost of advanced persistent threats such as rootkits.  Rootkit attacks are particularly harmful in their ability to hide in host systems, evade current mainstream detection methods (such as anti-virus programs or whitelisting at the operating system level) and their capacity to replace legitimate IT system firmware. Such attacks occur before the operating system loads, targeting the system BIOS and Master Boot Record, and can persistently infect higher-level system functions including operating systems and applications.   WEM captures verifiable PC health and security metrics before the operating system loads by utilizing information stored within the TPM. If anomalies are detected, IT is alerted immediately with real-time analytics.  Capabilities of WEM include reporting of PC integrity measurements, ensuring data comes from a known endpoint, alerting IT administrators to anomalous behaviors, providing configurable reporting and query tools, ensuring strong device identity through the use of hardware-based digital certificates and remote provisioning of the TPM.

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Wave for BitLocker® Management

Wave provides automated turn-key management for Microsoft BitLocker® encryption, which is suitable for organizations that have not yet phased SEDs into their computers and who are migrating to Windows 7 that have Microsoft Enterprise Agreements or Software Assurance for Volume Licensing.  Wave for BitLocker® Management allows an organization to set policies with a click of a button, and monitor security from a single console — simplifying an organization’s deployment by eliminating the need for specialized knowledge or costly systems.  Key features of Wave for BitLocker® include centralized policy enforcement, recoverability of data in the event of a PC crash, securing of BitLocker® recovery passwords in an encrypted database, remote discovery and activation of BitLocker® client machines, remote activation of encryption without end-user involvement and a seamless migration path to SEDs.

Scrambls for Enterprise

Scrambls for Enterprise provides control over access rights to content that is posted on a social network or distributed electronically.  Scrambls encrypts and decrypts data with the permission controlled by group membership.  The keys that are needed to read a web post or descramble a file are held by a Scrambls server.  When the content needs to be displayed in clear text or when a file is descrambled, Scrambls applies the key to make it readable again.  The business administrator owns the key and can set the policy for when and for whom to make them available through simple group management.

Wave Mobility Pro — Tablet Edition

Wave Mobility Pro — Tablet Edition provides authentication and managed encryption for tablets running the Windows 8 operating system by utilizing the TPM included onboard Windows 8 tablets.  Wave Mobility Pro — Tablet Edition can be used to secure VPN, WiFi and DirectAccess without the use of passwords by utilizing the TPM as a token for device identification.   The use of encryption is also offered using hardware or software, including port and removable media control.

Wave plans to continue to develop and enhance the current products being developed within this product group and to develop new applications and services as the trusted computing market continues to evolve.  Current planned development costs for this product group are expected to be approximately $3.9 million for the twelve months ending June 30, 2014.

Middleware and Tools

TCG-Enabled Toolkit

The Wave TCG-Enabled Toolkit is a compilation of software designed to assist application developers writing new applications or modifying existing ones to function on TCG-compliant personal computers having TPM security chips. Wave provides two versions of the Toolkit, Discovery and Commercial, which can enable developers to leverage basic and enhanced TCG services such as integrated key lifecycle management, including key escrow and key recovery. The Discovery Toolkit offers application developers a license for internal evaluation only, whereas the Commercial Toolkit is a license for external redistribution.

Wave TCG-Enabled Cryptographic Service Provider (“CSP”)

Wave offers a TCG-enabled CSP which can allow software developers to utilize the enhanced security of a TCG standards-based platform facilitating a common user experience independent of the platform.  It is also designed to enable applications to utilize functionality available on TCG-compliant platforms directly through the Microsoft cryptographic application programming interface without requiring user knowledge of any specific TCG software stack layer.

Current planned development costs for this product group are expected to be approximately $1.9 million for the twelve months ending June 30, 2014.

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EMBASSY Trust Server Applications

EMBASSY Key Management Server (“EKMS”)

EKMS is a server application that is designed to provide corporate-level backup and transition of the TPM keys, a process known as key migration. Key migration using EKMS is designed to help prevent the risk of serious data loss in the event that a TPM, hard drive or motherboard becomes corrupted or a user leaves the organization.  EKMS may assist an organization that requires access to a former employee’s encrypted data or TPM-secured keys for business continuity or disaster recovery purposes.  EKMS enables enterprise-level key protection services while ensuring proper archive procedures and recovery capabilities.

EMBASSY Authentication Server (“EAS”)

EAS is offered to provide centralized management, provisioning and enforcement of multifactor domain access policies.  With EAS, authentication policies can be based on TPM credentials, smart card credentials, user passwords and fingerprint templates.  With EAS, authentication policies can be provisioned and managed from the domain controller.  EAS also has an integrated biometric template capability.

EMBASSY Remote Administration Server (“ERAS”)

ERAS is a server product that is offered to provide centralized management and auditing of TPMs and SEDs.  ERAS for TPMs provides device and user identification management.  ERAS software presents the TPM as a virtual smart card so existing solutions such as Microsoft Windows Login and Remote Desktop may be easily integrated.  This provides true, hardware-based, multi-factor authentication that uses the hardware within the device.  ERAS for TPMs also provides security compliance as the software documents exactly which devices and users are on a network, and provides data protection as access to a network can be restricted to only known devices.  ERAS for SEDs delivers drive initialization, user management, drive locking, user recovery and crypto erase for all Opal-based, proprietary and solid-state SEDs.  ERAS is designed to provide auditing capabilities that aid in compliance management by allowing for validation of TPM and SED security settings and to allow IT administrators to assess the risk of whether a lost or compromised PC is adequately secure.  ERAS is designed to facilitate enterprise adoption of TPM and SED technology as it provides IT administrators with tools to utilize the security of these devices while reducing deployment and management costs.

Current planned development costs for this product group are expected to be approximately $2.8 million for the twelve months ending June 30, 2014.

Electronic/Digital Signature and Electronic Document Management

eSign Transaction Management Suite

Our SmartSAFE Bundle, previously known as eSign Transaction Management Suite or eTMS, allows enterprises to manage their business processes and transactions entirely online.  Maintaining an electronically signed record is essential to the lifecycle of a legally binding transaction. Once created, these electronic records are verified for authenticity and are securely deposited in SmartSAFE. All records are verified and authenticated from eDelivery through eRetention, helping to ensure that the access or signing credential (i.e. digital certificate, username or password) is verified and that the records remain free from tampering. Additionally, the SmartSAFE continuously updates the status of the transaction’s execution for up-to-the-minute reporting purposes.  SmartSAFE also supports signer access to the user’s electronically or digitally signed documents as required by the ESIGN Act. Users may access and print certified copies, while the actual archived eSigned document is left untouched, meeting applicable legal and compliance requirements. SmartSAFE enables authorized individuals to

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manage, search, transfer and share electronic files, signed or unsigned, via the Web. All components within the SmartSAFE can be private-labeled for individual customer branding.  SmartSAFE consists of three critical standard capabilities:  eDeliver, eSignature and eRetention. The eDelivery component provides a VirtualRoom within the SmartSAFE which creates a secure environment for invitees to review and/or sign documents. An invitee is an authenticated individual within the SmartSAFE that is given a set of permissions that is allowed certain actions. The SmartSAFE eSignature component allows invitees to sign independently or together on any type of document. In addition, eSignature supports full signatures or initials, each of which can be configured as required or optional. ESIGN consent is automatically captured for each invitee and deposited into the SmartSAFE where it is retained for future retrieval. The SmartSAFE eRetention component embodies the storage and management capabilities of electronic records. Centralized and secure repository for document lifecycle eRetention is automatically fed by eDelivery and eSignature activities. The SmartSAFE maintains audit trails necessary for legal compliance, as well as the authoritative copy.

There are several optional modules available to expand the capabilities of SmartSAFE including SmartIDENTITY, SmartFORMS, SmartREPORTING and SmartCLOSE.  SmartIDENTITY provides real-time identification online, preserving the integrity of documents.  SmartFORMS handles the creating of custom forms based on merging form templates and data supplied by an end-user.  The SmartFORMS module expedites the path to eSignatures for enterprises that create and manage their own forms.  The SmartREPORTING module includes dashboards, reports and ad hoc reporting capabilities.  The SmartCLOSE module has been designed to allow for mortgage closing documents to be signed and notarized in a secure environment.  The electronic note is then registered through the Mortgage Electronic Registry System, a system for electronically tracking mortgage ownership and servicing rights.  SmartCLOSE also offers lenders protection against borrowers claiming not to have understood their debt obligation by requiring the borrower to electronically sign and initial key line items while providing audit capabilities for the entire transaction.  SmartCLOSE has been designed to allow a lender to originate, sign, track, access, store and transfer electronic mortgages.

Wave’s SmartSAFE Bundle is being independently marketed to insurance, mortgage, banking and governmental institutions, offering electronic signature solutions that are designed to comply with the Electronic Signatures in Global and National Commerce Act (“ESIGN”) and Uniform Electronic Transaction Act (“UETA”).  Some of the flagship organizations that are currently utilizing the SmartSAFE Bundle include: Bank of NY Mellon, Mortgage Cadence, Medallion Analytics, Ellie Mae, ala mode, DocuTech, SigniaDocs, Xerox Mortgage Services and Insurance Administrative Solutions.

Wave plans to continue to allocate resources toward marketing and sales to promote these products.  Current planned development costs for this product group are expected to be approximately $250,000 for the twelve months ending June 30, 2014.

Endpoint Data Loss Protection

Wave provides endpoint data loss protection solutions, including port and device control, encryption for removable media and content inspection and discovery through its wholly-owned subsidiary, Safend - an Israeli-based company.

Safend Data Protection Suite

Safend Encryptor (“Encryptor”)

Encryptor provides transparent hard disk encryption, protecting enterprise data from loss and theft and allowing an enterprise to waive disclosure requirements in the event of machine loss or theft with provable encryption.  Encryptor enables compliance with regulatory, data security and privacy standards.

Safend Protector (“Protector”)

Protector provides granular control of ports and devices.  Protector blocks users from connecting to unauthorized devices or using unauthorized interfaces while logging movements of data in and out

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of an organization.  Protector also blocks or detects both USB and PS/2 hardware keyloggers, turns U3 USB drives into regular USB drives while attached to endpoints, protects against auto-launch programs by blocking autorun, detects and restricts devices by device type, device model or unique serial number, controls transfer of files both to and from external storage devices according to the file types and encrypts data in motion on removable storage devices.

Safend Inspector (“Inspector”)

Inspector inspects and blocks leakage of sensitive content through email, instant messaging, Web, external storage and printers.  Inspector enforces a data-centric security policy across multiple channels whether the machine is connected to an organization’s network or a home network or used offline.   Inspector allows for multi-tiered anti-tampering capabilities for permanent control over an organization’s endpoints.

Safend Discoverer (“Discoverer”)

Discoverer maps, classifies and locates data stored on organizational endpoints and networks.  Discoverer provides insight to unsecured data that can assist an organization in improving security and compliance initiatives.

Safend Reporter (“Reporter”)

Reporter creates detailed graphical reports used for compliance assessment.  These reports detail information on endpoint encryption status, show security incidents by type, user and organization unit, give an overview of the most common security incidents, identify endpoints that do not have a valid policy applied to them and list physical devices that were used within a defined time frame.

Safend Auditor (“Auditor”)

Auditor non-intrusively scans endpoints for past and present connected devices and Wi-Fi networks.  Auditor transparently queries organizational network endpoints, locating and documenting devices that are or have been locally connected.  Auditor checks all USB, PCMCIA, Firewire and Wi-Fi ports — granularly identifying endpoint devices connected for each user - both current and historical.  Auditor provides organizations with visibility to identify and mange endpoint vulnerabilities.

Current planned development costs for this product group are expected to be approximately $3.1 million for the year ending June 30, 2014.

Broadband Media Distribution Services

Wave offered broadband content distribution products and services through Wavexpress and its TVTonic consumer media service, which was a joint venture between Wave and Sarnoff Corporation.  On September 23, 2008, Wave, Sarnoff Corporation and Wavexpress entered into a Restructuring Agreement and an Amended and Restated Stockholder Agreement whereby, among other things, the parties agreed to terminate the Joint Venture Agreement between the parties, dated October 15, 1999.  As of June 30, 2013, Wave owned 97.3% of Wavexpress, while Sarnoff owned 1.7% (on a fully diluted basis).  Wavexpress suspended its TVTonic consumer media service.

Our Market

Software has traditionally secured critical information on networks and PCs and allowed for user access to various applications.  Virus attacks and breaches of security 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.  TCG was formed to develop, define and promote open industry standard specifications for embedded hardware-enabled trusted computing and security technologies, including secure hardware and software interfaces across multiple platforms, peripherals and devices.  The underlying premise of the creation of a Trusted Platform that meets the TCG specification is that only when a platform is secured by hardware, in effect creating a root of

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trust and a security environment which can be authenticated within the computer itself, will the information stored on the platform be adequately secure.  Wave is seeking to become a software, application and services leader in hardware-based digital security and e-commerce products markets.  We believe Wave has been a pioneer in developing hardware-based computer security systems and that we are distinctively positioned to take advantage of our unique knowledge, significant technology assets and trusted computing intellectual properties.

Hardware-based trusted computing solutions can involve a new approach to conducting business and exchanging information using computer systems.  We believe that these solutions will require traditional software-based security to be augmented with next-generation hardware-based security and an enhanced support infrastructure. Intensive marketing and sales efforts have been, and will continue to be, necessary in order to generate demand for products using Wave’s technology and to ensure that Wave’s solution is accepted in this emerging market.  Our objective is to make our EMBASSY branded products and services the preferred applications and infrastructure for Trusted Platforms.

R&D

Wave’s products incorporate encryption/decryption, client and server software applications and other technologies in which we have made a substantial investment in research and development (“R&D”).  We will likely be required to continue to make substantial investments in the design of information security applications and services, including the EMBASSY Trust Suite, EMBASSY Server applications, eTMS products and endpoint data loss protection solutions.  For the years ended December 31, 2012, 2011 and 2010, we spent approximately $19.1 million, $16.1 million and $10.3 million, respectively, on R&D activities. Planned development expenditures for the twelve-month period ending June 31, 2014 are expected to be approximately $12 million.

Results of Operations

Since the acquisition of Safend, which occurred on September 22, 2011, we have determined that Safend’s endpoint data loss protection products and services represent a separate segment.  As the 2012 Safend results include a full year of Safend activity, we have prepared our results of operations by segment.  The 2012 results have been restated to conform to this presentation.

EMBASSY® digital security products and services

Three-Months Ended June 30, 2013 and 2012

	Three- Months Ended June 30, 2013		Three-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance	$	5,018,186	$	5,717,878	$	(699,692	)	(12	)%
Services	608,938		400,372		208,566			52	%
Total Net Revenues	$	5,627,124	$	6,118,250	$	(491,126	)	(8	)%

The decrease in licensing and maintenance revenues was due primarily to a decrease in OEM revenue of approximately $700,000, primarily as the result of a decrease in the volume of Dell shipments during the three-months ended June 30, 2013 as compared to the comparable period in 2012.

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Services revenue earned during the three-months ended June 30, 2013 and 2012 was from fixed-price modifications to a contract awarded by the United States Department of Defense.

	Three- Months Ended June 30, 2013		Three-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance — cost of net revenues	$	361,861	$	524,875	$	(163,014	)	(31	)%
Services — cost of net revenues	105,155		74,760		30,395			41	%
Selling, general and administrative	6,303,065		7,499,562		(1,196,497		)	(16	)%
Research and development	1,858,403		3,805,656		(1,947,253		)	(51	)%
Total operating expenses	$	8,628,484	$	11,904,853	(3,276,369		)	(28	)%

The decrease in licensing and maintenance — cost of net revenues during the three-months ended June 30, 2013 as compared to the same period in 2012 was due primarily to (i) a decrease in Wave salaries of approximately $69,000 and (ii) a decrease in tax certificates associated with OEM revenue due to declining OEM shipments of approximately $87,000.

Services — cost of net revenues incurred during the three-months ended June 30, 2013 and 2012 was for work performed on fixed-price modifications to a contract with the United States Department of Defense.

The decrease in selling, general and administrative expense (“SG&A”) expenses during the three-months ended June 30, 2013 as compared to the same period in 2012 was due primarily to (i) a decrease in Wave salaries and related benefits totaling approximately $755,000, (ii) a decrease of approximately $115,000 in travel expenses and (iii) a decrease of approximately $417,000 in Wave’s trade show and marketing expenses.

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

The decrease in R&D expenses during the three-months ended June 30, 2013 was due primarily to (i) a decrease in Wave salaries and related benefits totaling approximately $1,300,000 and (ii) a credit of $600,000 related to the completion of funded software development for Dell. In November 2012 Wave received $600,000 from Dell for the performance of certain software development services. The $600,000 received from Dell was deferred as a current liability on the consolidated balance sheet at December 31, 2012 and was offset against research and development expense during the three-month period ended June 30, 2013 upon completion of the software development.

Due to the reasons set forth above, the EMBASSY® digital security products and services segment operating loss to common stockholders for the three-months ended June 30, 2013 was $3,001,360 as compared to $5,786,603 for the comparable period of 2012.

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Six-Months Ended June 30, 2013 and 2012

	Six- Months Ended June 30, 2013		Six-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance	$	8,838,972	$	11,240,718	$	(2,401,746	)	(21	)%
Services	1,408,938		724,242		684,696			95	%
Total Net Revenues	$	10,247,910	$	11,964,960	$	(1,717,050	)	(14	)%

The decrease in licensing and maintenance revenues was due primarily to a decrease in OEM revenue of approximately $2,002,000, primarily as the result of a decrease in the volume of Dell shipments and a net decrease in revenue recognized on Wave’s license upgrade sales of approximately $437,000 during the six-months ended June 30, 2013 as compared to the comparable period in 2012.

The decrease in license upgrade revenue of approximately $437,000 recognized on our license upgrade sales was due primarily to a decrease of approximately $392,000 in revenue recognized for an order from one of the world’s leading international oil and gas companies.  The order, which involved tens of thousands of licenses, related software maintenance and consulting services through the end of 2012, was a “large” class order for which VSOE has not yet been achieved. As a result, we recorded the $1.7 million of license and maintenance revenue ratably through the end of 2012.  Beginning in the second quarter of 2012 we also recognized revenue from consulting services for this same customer as the services were completed.  During the three-months ended June 30, 2012 consulting services amounted to approximately $304,000.  For this same customer, we recognized approximately $126,000 during the six-months ended June 30, 2013 for continued maintenance and an additional $575,000 for consulting services.

Services revenue earned during the six-months ended June 30, 2013 and 2012 was from fixed-price modifications to a contract awarded by the United States Department of Defense.

	Six- Months Ended June 30, 2013		Six-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance — cost of net revenues	$	866,242	$	955,727	$	(89,485	)	(9	)%
Services — cost of net revenues	212,516		136,590		75,926			56	%
Selling, general and administrative	12,975,643		16,207,249		(3,231,606		)	(20	)%
Research and development	4,598,786		7,679,952		(3,081,166		)	(40	)%
Total operating expenses	$	18,653,187	$	24,979,518	$	(6,326,331	)	(25	)%

The decrease in licensing and maintenance — cost of net revenues during the six-months ended June 30, 2013 as compared to the same period in 2012 was due primarily to (i) a decrease in Wave salaries of approximately $169,000 and (ii) a decrease in tax certificates associated with OEM revenue due to declining OEM shipments of approximately $100,000 offset by an increase of approximately $180,000 in support costs associated with service arrangements.

Services — cost of net revenues incurred during the six-months ended June 30, 2013 and 2012 was for work performed on fixed-price modifications to a contract with the United States Department of Defense.

The decrease in SG&A expenses during the six-months ended June 30, 2013 and 2012 was due primarily to (i) a decrease in Wave salaries and related benefits totaling approximately $2,099,000, (ii) a decrease of approximately $294,000 in travel expenses, (iii) a decrease of $269,000 in Wave

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professional services expenses, consisting primarily of consulting, audit and recruitment fees and (iv) a decrease of approximately $585,000 in Wave’s trade show and marketing expenses.

The decrease in R&D expenses during the six-months ended June 30, 2013 was due primarily to (i) a decrease in Wave salaries and related benefits totaling approximately $2,200,000, (ii) a decrease in outsourced engineering totaling approximately $155,000 and (iii) a credit of $600,000 related to the completion of funded software development for Dell. In November 2012 Wave received $600,000 from Dell for the performance of certain software development services. The $600,000 received from Dell was deferred as a current liability on the consolidated balance sheet at December 31, 2012 and was offset against research and development expense during the six-month period ended June 30, 2013 upon completion of the software development.

Due to the reasons set forth above, the EMBASSY® digital security products and services segment operating loss to common stockholders for the six-months ended June 30, 2013 was $8,405,277 as compared to $13,014,558 for the comparable period of 2012.

Safend endpoint data loss security products and services

Three-Months Ended June 30, 2013 and 2012

	Three- Months Ended June 30, 2013		Three-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance	$	1,115,118	$	1,643,224	$	(528,106	)	(32	)%
Total Net Revenues	$	1,115,118	$	1,643,224	$	(528,106	)	(32	)%

The decrease in licensing and maintenance revenues was due primarily to a decrease in license sales and a lower maintenance base during the three-months ended June 30, 2013 compared to the same period in 2012.

	Three- Months Ended June 30, 2013		Three-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance — cost of net revenues	$	20,450	$	267,862	$	(247,412	)	(92	)%
Selling, general and administrative	471,654		790,629		(318,975		)	(40	)%
Research and development	1,053,725		1,244,969		(191,244		)	(15	)%
Total Operating Expenses	$	1,545,829	$	2,303,460	(757,631		)	(33	)%

Licensing and maintenance — cost of net revenues, consists primarily of foreign tax withholdings, customer support personnel costs, share-based compensation expense and amortization expense on the developed technology intangible asset.   The decrease in licensing and maintenance — cost of net revenues was due primarily a decrease in amortization expense on the developed technology intangible asset as a result of the accumulated impairment charges to the developed technology intangible asset.  Amortization expense on the developed technology intangible asset was approximately $6,000 for the three-months ended June 30, 2013 as compared to approximately $230,000 for the same period in 2012.

The decrease in SG&A expenses during the three-months ended June 30, 2013 was due primarily to (i) a decrease in Safend salaries and related benefits totaling approximately $228,000, (ii) a decrease of approximately $88,000 in travel expenses, (iii) a decrease of approximately $76,000 in Safend’s amortization expense on the customer relationship intangible asset as the result of the

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impairment charges to the customer relationship intangible asset in the fourth- quarter of 2012 and first quarter of 2013, (iv) a decrease of approximately $90,000 in office expenses, offset by (iv) an increase of approximately $168,000 in professional service expenses, consisting primarily of fees for an audit of Safend’s financial statements for the period January 1, 2011 through September 21, 2011.

The decrease in R&D expenses during the three-months ended June 30, 2013 was due primarily to (i) a decrease in Safend salaries and related benefits totaling approximately $133,000 and (ii) a decrease of approximately $47,000 in travel expenses.

Due to the reasons set forth above, the Safend endpoint data loss security products and services segment operating loss to common stockholders for the three-months ended June 30, 2013 was $430,711 as compared to $660,236 for the comparable period of 2012.

Six-Months Ended June 30, 2013 and 2012

	Six- Months Ended June 30, 2013		Six-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance	$	2,288,058	$	2,778,651	$	(490,593	)	(18	)%
Total Net Revenues	$	2,288,058	$	2,778,651	$	(490,593	)	(18	)%

The decrease in licensing and maintenance revenues was due primarily to a decrease in license sales and a lower maintenance base during the six-months ended June 30, 2013 compared to the same period in 2012.

	Six- Months Ended June 30, 2013		Six-Months Ended June 30, 2012		Increase (Decrease)			% Change
Licensing and maintenance — cost of net revenues	$	1,741,668	$	526,640	$	1,215,028		231	%
Selling, general and administrative	978,079		1,630,725		(652,646		)	(40	)%
Research and development	2,162,324		2,388,152		(225,828		)	(9	)%
Impairment of goodwill	2,590,000		—		2,590,000			100	%
Total operating expenses	7,472,071		$	4,545,517	2,926,554			64	%

Licensing and maintenance — cost of net revenues, consists primarily of foreign tax withholdings, customer support personnel costs, share-based compensation expense, amortization expense on the developed technology intangible asset and impairment on the developed technology intangible asset.   The increase in licensing and maintenance — cost of net revenues was due primarily to the $1,615,000 impairment on the developed technology intangible asset during the six-months ended June 30, 2013 offset by a decrease in amortization expense on the developed technology intangible asset as a result of the accumulated impairment charges to the developed technology intangible asset.  Amortization expense on the developed technology intangible asset was approximately $86,000 for the six-months ended June 30, 2013 as compared to approximately $456,000 for the same period in 2012.

The decrease in SG&A expenses during the six-months ended June 30, 2013 was due primarily to (i) a decrease in Safend salaries and related benefits totaling approximately $281,000, (ii) a decrease of approximately $152,000 in travel expenses, (iii) a decrease of approximately $152,000 in Safend’s amortization expense on the customer relationship intangible asset as the result of the impairment charge to the customer relationship intangible asset in the fourth quarter of 2012, (iv) a decrease of approximately $106,000 in office expenses, offset by (v) an increase of approximately $129,000 in

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professional service expenses, consisting primarily of fees for an audit of Safend’s financial statements for the period January 1, 2011 through September 21, 2011.

During the first quarter of fiscal 2013 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, significantly lower than expected revenue and billings during the first quarter of 2013 and downward revisions to management’s short-term and long-term forecast for the Safend business. The revised forecast reflected changes related to revenue growth rates, current market trends 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 the fair value of the Safend reporting unit was less than its carrying amount.

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 cash flows. Based on the results of the recoverability test, the Company determined that the carrying value of the Safend asset group exceeded its undiscounted cash flows and was 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 an impairment charge of $1,615,000 on developed technology. The decline in the fair value of the Safend intangible assets is attributable to the same factors as discussed above for the fair value of the Safend reporting unit.

After adjusting the carrying value of the reporting unit for the impairment of the intangibles noted above, the Company completed the two step goodwill impairment test for the Safend reporting unit. The step two goodwill impairment test resulted in an implied fair value of goodwill substantially below the carrying value of the goodwill. As a result, the Company recorded a goodwill impairment charge of $2.6 million, which resulted in a $1.4 million remaining carrying value of Safend goodwill as of June 30, 2013. The goodwill impairment totaling approximately $2.6 million was included in the impairment of goodwill line item in the consolidated statements of operations. The developed technology impairment charge of $1,615,000 is included in the licensing and maintenance—cost of net revenues line item in the consolidated statements of operations.

Due to the reasons set forth above, the Safend endpoint data loss security products and services segment operating loss to common stockholders for the six-months ended June 30, 2013 was $5,184,013 as compared to $1,766,866 for the comparable period of 2012.

Liquidity and Capital Resources

Wave has incurred substantial operating losses since its inception, and as of June 30, 2013, has an accumulated deficit of $410,620,268.  We expect to incur an operating loss for the fiscal year of 2013.  As of June 30, 2013, we had negative working capital of $8,303,967.

Sources and uses of cash

As of June 30, 2013, Wave had $922,299 in cash and cash equivalents.  As of December 31, 2012, Wave had $2,112,769 in cash and cash equivalents.  The decrease in cash and cash equivalents of $1,190,470 resulted from (i) $6,703,428 used in operating activities and (ii) $136,148 used in investing activities for the acquisition of capital assets, offset by $5,649,106 provided by financing activities, primarily from the issuance of shares of our Class A common stock.

Our largest source of operating cash flow is cash collections from our customers.  Cash collections from customers amounted to approximately $14,382,000 and $16,602,000 for the six-months ended June 30, 2013 and 2012, respectively.  The decrease is due primarily to a decrease in billings during the six-months ended

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June 30, 2013 compared to the same period in 2012.  Our primary uses of cash in operations are for personnel related expenditures, marketing and other general operating expenses.

Comparison of the periods ended June 30, 2013 and 2012

Cash provided by (used in) operating activities

During the six-months ended June 30, 2013, the amount of cash used in operations was $6,703,428 as compared to $7,651,918 used in operations for the comparable period of 2012.  The fluctuations in cash used in operations were the result of the changes in the net losses in each of the six-months ended June 30, 2013 and 2012, as discussed in detail in the previous Results of Operations section, adjusted for non-cash items of the net losses such as non-cash share-based compensation and changes to assets and liabilities for net cash outlays and/or receipts.  Additionally, Wave experienced a decrease in cash collected from customers during the six-months ended June 30, 2013 as compared to the same period in 2012 due to a decrease in billings as mentioned above.  Also, the decrease in cash used in operating activities during the six-months ended June 30, 2013 as compared to the comparable period in 2012 resulted from a decrease in cash payments for personnel related expenditures, primarily from a lower average headcount during the six-months ended June 30, 2013 as compared to the comparable period of 2012, and a decrease in payments for professional services.

Cash flows from investing activities

Cash used in investing activities consisted of funds used to acquire capital assets totaling $136,148 and $103,302 for the six-months ended June 30, 2013 and 2012, respectively.  Wave expects to continue to acquire capital assets primarily to replace computer equipment to be used internally. These expenditures are expected to continue for the remainder of 2013 at approximately the same level expended during the six-months ended June 30, 2013.  As a result of higher capital expenditures, net cash used in investing activities increased by $32,846 for the six-months ended June 30, 2013 as compared to the comparable period of 2012.

Cash flows from financing activities

For the six-months ended June 30, 2013, cash provided by financing activities totaled $5,649,106 and consisted of: $2,919,800 after deducting placement agent fees of approximately $190,000 and legal and other expenses of approximately $60,000 from the issuance of 1,585,000 shares of Class A Common Stock associated with the April 23 financing; $910,001 after deducting placement agent fees of approximately $60,000 and legal and other expenses of approximately $30,000 from the issuance of 1,204,820 shares of Class A Common Stock associated with the March 13 private placement; $1,643,627, after deducting offering costs of approximately $54,000, in connection with the issuance of 935,569 shares of Class A Common Stock in its at the market offerings through MLV; $171,796 from the sale of shares pursuant to the Wave 2004 Employee Stock Purchase Plan; and $42,039 of employee stock option exercises offset by $38,157 of payments on a capital lease obligation.  For the six-months ended June 30, 2012, cash provided by financing activities totaled $5,940,758 and consisted of: $5,143,876, after deducting offering costs of approximately $164,000, in connection with the issuance of 898,436 shares of Class A common stock in its at the market offerings through MLV; $291,500 of investor stock warrant exercises related to our 2009 and 2008 financings; $66,497 of employee stock option exercises; and $474,233 from the sale of shares pursuant to the Wave 2004 Employee Stock Purchase Plan offset by $35,348 of payments on a capital lease obligation.

Liquidity requirements and future sources of capital

Wave estimates that its total expenditures to fund operations for the twelve-months ending June 30, 2014 will be approximately $29,000,000, including research and development, acquisition of capital assets, sales and marketing, general corporate expenses and overhead.

Sources of capital may include the following:

·cash on hand of  $922,299 as of June 30, 2013;

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·collection of receivables; and

·additional financings

Wave does not expect to generate enough revenue to fund its cash flow requirements for the twelve-months ending June 30, 2014.  As of June 30, 2013, we had approximately $922,000 of cash on hand.  Given Wave’s forecasted capital requirements for the twelve-months ending June 30, 2014, and our cash balance as of June 30, 2013, Wave will be required to raise additional capital prior to June 30, 2014 to continue to fund its operations.  Wave’s ability to raise additional capital is primarily based on three sources:

·Sales of registered Class A Common Stock under an existing shelf registration statement;

·Sales of registered Class A Common Stock via the At the Market Sales Agreement with MLV & Co. LLC (“MLV”) entered into during January, 2012; and

·Sales of Class A common Stock through private placements.

On July 25, 2013, Wave sold 1,204,470 shares of Class A Common Stock at $1.27 per share for gross proceeds of $1,529,677.  This financing was completed under a $30,000,000 shelf registration filed with the SEC on June 21, 2011 and was declared effective by the Commission on July 22, 2011 (the shelf registration statement). 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.  We realized approximately $1,408,000 in net proceeds after deducting the placement agent fees of approximately $92,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000.  In connection with the financing, we also issued warrants to SRA to purchase up to 72,268 shares of Wave Class A Common Stock for $1.27 per share.  These warrants expire on July 25, 2016.

As of August 6, 2013, approximately $1,748,000 in gross proceeds are available under the shelf registration statement, which may be utilized for future financings. During the next twelve months we anticipate that we will file an additional S-3 shelf registration statement with the SEC for future financings.

Due to our current cash position, our forecasted capital needs over the next twelve months and beyond, the fact that we will require additional financing and uncertainty as to whether we will achieve our sales forecast for our products and services, substantial doubt exists with respect to our ability to continue as a going concern.

As noted above, we have transferred certain accounts receivable to buyers through TRE that are accounted for as secured borrowings because we are required to repurchase the pledged receivables under certain circumstances in case of specific defaults by our customers as set forth in the program terms.  The carrying value of each secured borrowing approximates 85% of each associated pledged receivable taking into consideration a 15% holdback provision per the TRE agreement.  The customers’ payment of the pledged receivables constitutes the repayment of the related amounts borrowed. The interest rate on the secured borrowings was approximately 1.20% for every thirty days outstanding.

Revenue outlook

Wave receives revenue from licensing its EMBASSY Trust Suite software and Safend’s data loss protection through distribution arrangements with its OEM partners.  In addition, Wave received revenues from software development and other services.  As noted above, total cash received from all

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revenue sources for the six-months ended June 30, 2013 was approximately $14,382,000 versus approximately $16,602,000 for the comparable period of 2012.

During 2013, Wave expanded its distribution channel, highlighted by strategic agreements with Infodat Technologies in India; TechSearch Corp. in Korea; Bangkok Systems & Software in Thailand; QWAED Technologies in Saudi Arabia; KEDU IT Infrastructure in Dubai; Intelligent Decisions in the United States of America; Axiad IDS in the United States of America and Infinigate Deutschland GmbH in Germany, Austria and the UK.  These new distribution partners are now authorized to offer their customers Wave’s solutions for data protection, data loss prevention, authentication, security compliance and malware protection.

During February 2013, Wave announced the development of enterprise-grade management and security on the newest generation of tablets running Microsoft’s Windows 8 operating system through its Wave Mobility Pro-Tablet Edition product offering. Wave-managed Windows 8 tablets can address many of the mobile security and support issues that have plagued IT departments since the Bring Your Own Device trend emerged. Wave provides support that can fully leverage the Trusted Computing infrastructure that is part of every Windows 8 device, ensuring that the full security benefit of the platform can be realized. Additionally, Wave solutions can leverage the security hardware built in by the factory that can establish that the device is free of changes caused by malware and to keep data secure.  During May 2013, Wave signed a global distribution agreement with Fujitsu America.  It is expected that Fujitsu will emphasize the availability of Wave Mobility Pro-Tablet Edition.

During December 2012, we received a $1.7 million maintenance renewal from BASF for our ERAS software to manage laptop computers with self-encrypting drives. The renewal is for a three year term ending on December 31, 2015.  As a result, we expect to record $1.7 million as revenue ratably beginning in 2013 through the end of 2015.

During July 2012, Wave entered into a worldwide distribution agreement with Lenovo, the world’s second-largest PC company, under which Lenovo will offer Wave’s security solutions on a resale basis and through its channel partners.  Also, during July 2012, Wave signed a Basic Ordering Agreement (BOA) with the NATO Communications and Information Agency (NCI Agency). The BOA provides the framework for all 28 member countries (which includes the United States European Command (EUCOM)) to access Wave’s complete portfolio of trusted computing security solutions. Under the agreement, Wave is entitled to compete on bids pertaining to the company’s areas of expertise.  A BOA is the primary part in a two-stage contracting procedure, whereby the contract is negotiated and placed with a supplier for specific types of products. It serves as a written instrument of understanding, negotiated between the NCI Agency and Wave that includes terms and clauses applicable to future task order awards, a description of supplies or services to be provided and methodology for pricing, issuing and delivering future task orders.  No orders have yet been placed under the BOA.

During November 2011, we entered into an agreement to provide Samsung Electronics with engineering services, consulting, validation and a customized version of our local management software for Samsung’s Trusted Platform Module (TPM) security chips designed for OEM distribution.  This work was completed during March 2013 and as a result, approximately $960,000 will be recognized as revenue ratably through the end of March 2014 for the customization work performed for Samsung.  We anticipate additional revenue from an existing distribution arrangement with Samsung during the third quarter of 2013.

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

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category within the computer security market and the ultimate size of this market and the timeframe for its development are unknown and difficult to predict.

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

Our OEM distribution agreements have given rise to separate software upgrade contracts with the end users of the products distributed by the OEMs.  The contracts, referred to by us as license upgrade agreements, include a software license and a maintenance agreement.  The contracts are separately negotiated with end users and are not associated with our OEM distribution agreements.  Sales from the license upgrade agreements began in the latter part of the third quarter of fiscal year 2007.  The sales consist of licensed use of Wave’s EMBASSY Trust Suite of products, primarily Wave’s EMBASSY Security Center paired with our ERAS server product, and our Safend Data Protection Suite of products.  In late December 2010 Wave received a series of significant license and maintenance orders for its ERAS software from a U.S.-based automotive company.  The orders were received by Wave through its PC OEM partners and totaled approximately $5.2 million.  The orders increased the total value of the automaker’s software orders to $10.9 million, $1.9 million of which was recorded as revenue in 2010, $6.7 million of which was recorded as revenue in 2011, and $774,000 of which was recorded as revenue in 2012, and approximately $896,000 of which is expected to be recognized as revenue in 2013 through 2014.

At June 30, 2013, as a result of establishing VSOE for the fair value of each undelivered element for our software and maintenance services for our small customer class effective January 1, 2011, our deferred revenue consists primarily of the unamortized balance of maintenance and arrangements where VSOE does not exist — orders from our large class customers.  For arrangements where VSOE for the fair value of each undelivered element does not exist, our license and maintenance sales are recorded as deferred revenue and then recognized over the maintenance period which is typically a 365-day period.  The current portion of deferred revenue increased $180,723 (to $6,129,810 from $5,949,087) at June 30, 2013 versus December 31, 2012.  Wave recognized approximately $5,693,000 and $3,842,000 of license upgrade revenue during the six-months ended June 30, 2013 and 2012, respectively.

Known trends and uncertainties affecting future cash flows

Because Wave does not have sufficient cash to fund operations for the twelve-months ending June 30, 2014, and there is uncertainty as to whether Wave will generate sufficient revenues to fund its operations over this time period, Wave has been, and will continue to be, actively engaged in financing activities in order to generate additional funding to cover its operating costs for the twelve-months ending June 30, 2014.  Subsequent to June 30, 2013 and as of August 9, 2013 these activities have included the sale of approximately 808,000 shares of our common stock in at the market offerings through MLV, raising net proceeds of approximately $1.1 million after deducting issuance costs of approximately $36,000, and the sale of approximately 1.2 million shares of our common stock on July 25, 2013, raising net proceeds of approximately $1.4 million after deducting issuance costs of approximately $122,000.

We will be required to sell additional shares of common stock or preferred stock or engage in a combination of these financing alternatives, to raise additional capital to continue to fund our operations for the twelve-months ending June 30, 2014.  The availability and amount of any such financings are unknown at this time. Based upon the available cash currently on hand, including the net proceeds from the financing completed on July 25, 2013 and the subsequent at the market offerings through MLV, if we meet our current revenue and expenditure forecast for the twelve-months ending June 30, 2014 (both of which are uncertain), we estimate that we will need at least $3,000,000 in additional cash in order to continue as a going concern for the next twelve-months

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ending June 30, 2014.  The foregoing is based on meeting our current revenue forecast for both Dell and non-Dell revenues for the twelve-months ending June 30, 2014.  While the foregoing assumes current shipment volumes, which have continued to decline over the past year from historic amounts, our contract with Dell contains no guaranteed minimum royalties or minimum shipment volume requirements.   Due to our current cash position, our forecasted capital needs over the next twelve months and beyond, the fact that we will require additional financing and uncertainty as to whether we will achieve our sales forecast for our products and services, substantial doubt exists with respect to our ability to continue as a going concern.

Other uncertainties that may impact the future business outlook

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

Furthermore, the achievement of sufficient revenue is dependent upon continued significant expenditures, which will likely be required for research and development and sales and marketing to increase market awareness for our products.  Therefore, if Wave is not able to begin to generate significant revenues by June 30, 2014 to cover its operating costs, it will need to generate capital from other sources, including raising funds through the issuance of additional common stock, preferred stock and/or debt to fund its operations beyond June 30, 2014.  The challenges presented by the current economic climate may have a negative impact on the volume of shipments by our OEM partners of products equipped with our software and general demand for our products.

Commitments

Safend is required to pay back grants received from the Israeli government through the Office of the Chief Scientist of Israel’s Ministry of Industry, Trade and Labor (“OCS”) for the financing of a portion of its research and development expenditures in Israel.  Safend’s repayments are based on a royalty rate of 3.5% of total Safend revenues and there is no termination date for the payments.  Wave determined the fair value of this liability to be $4,043,000 at September 22, 2011.  At June 30, 2013 and December 31, 2012, the liability amounted to $4,661,733 and $4,696,129, respectively, reflecting additional grants received since the acquisition date, less amounts repaid since the acquisition date and accretion of the discount.

Wave has a capitalized lease obligation for computer equipment due July 2013 of $6,501 and $44,658 as of June 30, 2013 and December 31, 2012, respectively.  The interest rate is 7.7% per annum.  This lease obligation is collateralized by the related assets with a net book value of $-0- as of June 30, 2013 reflecting an impairment charge recorded during 2008 due to the suspension of Wavexpress’ TVTonic consumer media services on December 1, 2008.

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

	Within one year		Years two and three		Years four and five		Thereafter		Total
Capital lease commitment	$	6,501	$	—	$	—	$	—	$	6,501
Operating leases commitments	864,873		1,291,657		74,796		—		2,231,326
Total commitments	$	871,374	$	1,291,657	$	74,796	$	—	$	2,237,827

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Net operating and capital loss carryforwards

As of December 31, 2012, Wave had available net operating loss carryforwards for Federal income tax purposes of approximately $286.9 million, inclusive of approximately $7.7 million of Safend, Inc., a U.S.-based subsidiary of Safend, which expire beginning in 2013 through 2032.  Because of the “change in ownership” provisions of the Tax Reform Act of 1986, our net operating loss carryforwards may be subject to an annual limitation on the utilization of these carryforwards against taxable income in future periods if a cumulative change in ownership of more than 50 percent of Wave occurs within any three-year period.  We have made no determination concerning 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, we believe that it is likely that such a change in ownership occurred prior to or following the completion of our initial public offering in September 1994 and in periods following.  As a result, all of the utilization of our net operating losses is likely to be subject to annual limitations.   In addition, the Company maintains approximately $17 million of operating loss carryforwards associated with Safend, Ltd., and entity in Israel.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

a)    Disclosure controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2013. 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 June 30, 2013, and due to the material weakness in our internal control over financial reporting described in Management’s Report on Internal Control over Financial Reporting included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 18, 2013, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective.

b)    Changes in Internal Control Over Financial Reporting

During the six months ended June 30, 2013, no changes other than those in conjunction with certain remediation efforts described below, were identified to our internal control over financial reporting that

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materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

c)     Remediation Efforts

In the six-months ended June 30, 2013, we are continuing to implement the following measures, originally described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 18, 2013, to improve our internal controls over the financial reporting process. We plan to further enhance these measures in the remaining quarters of 2013:

·ensure that we utilize sufficient accounting personnel and/or consulting resources with appropriate expertise in the evaluation of significant, complex accounting matters and to evaluate and determine the manner in which the matters  affect our financial statements,

·organize and design our internal review and evaluation process to include more formal management and audit committee oversight of the methods and review procedures utilized and the conclusions reached, including for purposes of evaluating and ensuring sufficiency of accounting resources, and

·appropriately document and evidence the financial review conducted, the internal reporting and evaluation measures  undertaken and the material conclusions reached by our finance department.

d)    Remediation Plans

We have made no significant changes in our remediation plans during the six-months ended June 30, 2013 that could materially affect, or are reasonably likely to materially affect, our internal control over financial reporting. For further information with regard to our “Remediation Plans,” please refer to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 18, 2013.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Landmark Ventures, Inc. (“Landmark”) has asserted that Safend Inc. (“Safend USA”), a subsidiary of Safend Ltd. (Wave’s Israeli subsidiary), has breached a consulting agreement between Landmark and Safend USA (the “Consulting Agreement”) which was terminated by Safend USA in July of 2011. According to an amended complaint filed in January 2012 by Landmark in the federal district court in New York,  Safend USA (a) owes unspecified amounts to Landmark and (b) violated a provision of the Consulting Agreement by working with a former Landmark employee, resulting in damages of no less than $5,000,000.  Landmark has also named Safend Ltd. and Wave Systems Corp. (“Wave”) as defendants, alleging that both companies are legally responsible for Safend USA’s alleged breaches.  Safend USA, Safend Ltd. and Wave have moved to dismiss the Landmark amended complaint in its entirety.  On September 4, 2012, the federal district court granted Safend Inc.’s motion to dismiss the Landmark lawsuit and ordered the dismissal of the amended complaint with prejudice.  Landmark thereafter filed a timely notice of appeal to the United States Court of Appeals for the Second Circuit, which affirmed the judgment of the federal district court on March 12, 2013.  Landmark had 90 days to petition the United States Supreme Court for an application to permit an appeal.  Landmark  never exercised their right to petition the United States Supreme Court within the 90 days and as such the case has concluded.

Item 1a. Risk Factors.

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

In preparing our financial statements for the fiscal year ended December 31, 2012, we identified a material weakness in our internal control over financial reporting, and our failure to remedy this or other material weaknesses could result in material misstatements in our financial statements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act.  Our management identified a material weakness in our internal control over financial reporting as of December 31, 2012. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified by management as of December 31, 2012 related to our failure to maintain sufficient professional accounting resources to effectively execute our internal controls and procedures over significant, complex accounting matters.  See “Item 9A - Management’s annual report on internal control over financial reporting” included in the December 31, 2012 Form 10-K filed on March 18, 2013 for further information.  In addition, based on an evaluation of our disclosure controls and procedures as of June 30, 2013, and due to the material weakness in our internal control over financial reporting described above, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were not effective.  See “Part I — Item 4 — Controls and Procedures” of this Form 10-Q.

We have begun to implement remedial measures designed to address this material weakness. If our remedial measures are insufficient to address this material weakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results.

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

The recent global economic downturn could significantly and adversely affect our business, financial condition and results of operation in various ways.  The decline in economic conditions has negatively impacted the demand for our products and services and our ability to conduct our business, thereby reducing our revenues and earnings.  In addition, the economic downturn, has negatively impacted, and/or may negatively impact among other things:

· the continued growth and development of our business;

· our liquidity;

· our ability to raise capital and obtain financing; and

· the price of our common stock.

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

We have experienced significant losses and negative cash flow from operations since our inception. We have not realized a net operating profit in any quarter since we began our operations.  Wave’s revenue during the six-months ended June 30, 2013 was less than operating expenses as our products have not yet attained widespread commercial acceptance. This is due in part to the early stage nature of the digital security industry in which we operate. As of June 30, 2013, we had an accumulated deficit of approximately $410.6 million and negative working capital of approximately $8.3 million. Given the lack of widespread adoption of the technology for our products and services, there is little basis for evaluating the financial viability of our business and our long-term prospects. You should consider our prospects in light of the risks, expenses and difficulties that companies in their early stage of development encounter, particularly companies in new and rapidly evolving markets, such as digital security and online commerce.

To achieve profitability we must, among other things:

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

· convince computer end users and enterprise computer users to purchase our upgrade software and server products for trusted computing:

· convince consumers to choose to order, purchase and accept products using our products and services;

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

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

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

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

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

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

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

A single customer accounts for a significant portion of our revenues and, therefore, the loss of that customer may have a material adverse effect on our results of operations.

We expect that a small number of customers will continue to account for a large portion of our revenues for the foreseeable future. We have one customer that accounted for approximately 45% of our revenue for the six-month period ended June 30, 2013.  If our relationship with any of our significant customers were disrupted, we could lose a significant portion of our anticipated revenues which may have a material adverse effect on our results of operations as discussed below.

Factors that could influence our relationships with our customers include, among other things:

·our ability to sell our products at prices that are competitive with our competitors;

·our ability to maintain features and quality standards for our products sufficient to meet the expectations of our customers; and

·our ability to produce and deliver a sufficient quantity of our products in a timely manner to meet our customers’ requirements.

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

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

Sales to a relatively small number of OEM customers, as opposed to direct retail sales to end customers, comprise a large portion of our revenues.  Dell accounted for approximately 45% of our revenue for the six-months ended June 30, 2013. From time to time Dell updates its hardware platforms with new security solutions packages.  Our bundled software has been included on Dell platforms since 2006 (including on the Dell Data Protection Access solution (DDPA) that is currently shipping).   On March 15, 2013, Dell notified us that it will be replacing the DDPA solution in its next generation of client hardware platforms expected to begin shipping later this year.  As it has with other solution upgrades since 2006, Dell has also informed us that it will continue to discuss with Wave opportunities to include our software on new and future Dell platforms and that it plans to continue to include our bundled software with Dell hardware platforms that are currently shipping.  However, Dell has not communicated to us any decisions regarding the next platform and we have no assurance that our software will be included in Dell’s new or future platforms.  If we are not successful in continuing to sell our technologies with Dell’s new and future platforms, this could have a material adverse impact on our revenues in years after 2013.

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

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

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

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

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

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

Although Wave has expended considerable resources in developing technology and products that utilize our technology and in business development activities in an attempt to drive the development

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of the hardware security market, we do not have a track record as a substantial supplier or service provider to consumers of computer systems. Therefore, uncertainty remains as to whether we will be accepted as a supplier to the enterprise and consumer markets, which will likely be necessary for us to be a successful commercial enterprise.

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

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

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

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

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

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

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

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

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

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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 RSA Security, Inc. (a division of EMC), Symantec, CA, Verisign, Inc., Entrust, Inc., Utimaco (acquired by Sophos), PGP (acquired by Symantec), Credant, SafeBoot (acquired by McAfee), SafeNet, WinMagic, Secude (acquired by SAP) and GuardianEdge (acquired by Symantec) and major systems integrators such as IBM, HP and EDS.  In addition, Wave competes with other client security applications companies that are developing trusted computing applications including Softex Incorporated, Phoenix Technologies Ltd., Infineon Technologies AG and Microsoft.

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

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

Due in large part to Wave’s early stage and 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.

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

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

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

We believe that our future success depends upon the continued service of our key technical personnel and on our ability to attract and retain highly skilled technical, sales and marketing personnel. Our industry is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurance that our current employees will continue to work for us or that we will be able to hire any additional personnel necessary for our growth. Our

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future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel. Competition for these employees can be intense. We may not be able to attract, assimilate or retain qualified technical and managerial personnel in the future, and the failure of us to do so would have a material adverse effect on our business.

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

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

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

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

Safend’s operations are located in the State of Israel which will constitute a material portion of our business.  Accordingly, political, economic and military conditions in Israel and the surrounding region may affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. A state of hostility, varying in degree and intensity, has caused security and economic problems in Israel. Although Israel has entered into peace treaties with Egypt and Jordan, and various agreements with the Palestinian Authority, there has been a marked increase in violence, civil unrest and hostility, including armed clashes, between the State of Israel and the Palestinians and others, since September 2000. The establishment in 2006 of a government in the Gaza Strip by representatives of the Hamas militant group has created heightened unrest and uncertainty in the region. In mid-2006, Israel engaged in an armed conflict with Hezbollah, a Shiite Islamist militia group based in Lebanon, and in June 2007, there was an escalation in violence in the Gaza Strip. From December 2008 through January 2009, Israel engaged in an armed conflict with Hamas, which involved missile strikes against civilian targets in various parts of Israel and which negatively affected business conditions in Israel.  Presently, there is 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.

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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.

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

We may not be able to realize all of the anticipated benefits of our acquisition of Safend if we fail to integrate Safend successfully, which could reduce our profitability.

Our ability to realize the anticipated benefits of our acquisition of Safend will depend, in part, on our ability to integrate the business of Safend successfully and efficiently with our business. The combination of two independent companies is a complex, costly and time-consuming process. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, preclude realization of the full benefits expected by us. If we are not successful in this integration, our financial results could be adversely impacted. Our management will be required to dedicate significant time and effort to this integration process, which could divert their attention from other business concerns. In addition, the overall integration of the two companies may result in unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other relationships, a loss of key employees, and diversion of management’s attention, and may cause our stock price to decline. The difficulties of combining the operations of the two companies include, among others:

·challenges associated with minimizing the diversion of management attention from ongoing business concerns;

·addressing differences in the business cultures of Wave and Safend;

·coordinating geographically separate organizations which may be subject to additional complications resulting from being geographically distant from our other operations;

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·coordinating and combining international operations, information systems, relationships, and facilities, and eliminating duplicative operations;

·retaining key employees and maintaining employee morale;

·unanticipated changes in general business or market conditions that might interfere with our ability to carry out all of its integration plans; and

·preserving important strategic and customer relationships.

In addition, even if Safend’s operations are integrated successfully with ours, we may not realize the full potential benefits of the transaction, including the leveraging of production and combined research and development that are expected. Such benefits may not be achieved within our anticipated time frame, or at all.

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

Most of our software products are controlled under various United States export control laws and regulations and may require export licenses for certain exports of the products and components outside of the United States and Canada. With respect to our EMBASSY Trust Suite and EMBASSY Trust Server 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 on having access to international markets.  A violation of foreign regulations could limit our access to such markets and have a negative effect on our results of operations.

Our stock price is volatile.

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

·quarterly variations in operating results;

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

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

·news reports relating to trends in our markets.

In addition, the stock market in general, and the market prices for technology-related companies in particular, have experienced significant price and volume fluctuations. These broad market fluctuations may adversely affect the market price of our Class A common stock or 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 affect on our business.  In addition, any negative publicity or perceived negative publicity of any such litigation could have an adverse impact on our business.

Sales of our common stock in our ATM Program, or the perception that such sales may occur, could cause the market price of our common stock to fall.

During January 2012, we entered into an At Market Issuance Sales Agreement (“2012 ATM”) with MLV & Co. LLC (“MLV”) under which we are able to sell shares of our common stock from time to time through MLV.  Continued sales of our common stock, if any, under the 2012 ATM will depend upon market conditions and other factors to be determined by us and may be made in negotiated transactions or transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act of 1933.  Future sales of our common stock are not guaranteed, and there are no firm commitments to receive funding under the 2012 ATM.  The issuance from time to time of these new shares of common stock, or the perception that such sales may occur, could have the effect of depressing the market price of our common stock.

We may be subject to conflicts of interest that could adversely slow our corporate governance process.

Our Board of Directors does not include any representatives of our strategic partners. However, our Board of Directors has included in the past, and may include in the future, representatives of our strategic partners. It is possible that those corporations may be competing against us, or each other, directly or indirectly. A director who also represents another company may voluntarily abstain from voting on matters where there could be conflicts of interest. Even if such a director does abstain, his presence on the Board could affect the process or the results of the Board’s deliberations. We have adopted no policies or procedures to reduce or avoid such conflicts. If such conflicts of interest arise, they may have a materially adverse effect on our business.

Governmental regulation may slow our growth and decrease our profitability.

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

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

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

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

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

Our common stock is listed on the NASDAQ Capital Market.  In order to maintain our NASDAQ listing NASDAQ Marketplace Rule 5550(a)(2) requires that the bid price for our common stock not fall below $1.00 per share for a period of 30 consecutive trading days.  Because of the volatility in our common stock price there can be no assurance that we will be able to maintain compliance with this requirement. If our minimum bid price remains below $1.00 for 30 consecutive trading days, under the current NASDAQ Capital Market rules, we will have a period of 180 days to attain compliance by meeting the minimum bid price requirement for 10 consecutive days during the compliance period. In the event that we do not regain compliance during such 180 day period we would be entitled to an additional 180 day compliance period if we meet the other initial listing requirements of the NASDAQ Capital Market at the end of such initial 180 day 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.

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

None.

Item 6.   Exhibits.

(a)Exhibits

Exhibit No.		Description of Exhibit
31.1	—	Certification of the Chief Executive Officer pursuant to Rule 13a-14a, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	—	Certification of the Chief Financial Officer pursuant to Rule 13a-14a, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	—	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1	—	XBRL Instance Document
101.2	—	XBRL Taxonomy Extension Schema Document
101.3	—	XBRL Taxonomy Extension Calculation Linkbase Document
101.4	—	XBRL Taxonomy Extension Definition Linkbase Document
101.5	—	XBRL Taxonomy Extension Label Linkbase Document
101.6	—	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

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

	WAVE SYSTEMS CORP.
	(Registrant)
Dated: August 8, 2013	By:	/s/ Steven K. Sprague
	Name:	Steven K. Sprague
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)
Dated: August 8, 2013	By:	/s/ Gerard T. Feeney
	Name:	Gerard T. Feeney
	Title:	Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER

I, Steven K. Sprague, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Wave Systems Corp.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2013

/s/ Steven K. Sprague

Steven K. Sprague, President

and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

I, Gerard T. Feeney, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Wave Systems Corp.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2013

/s/ Gerard T. Feeney

Gerard T. Feeney, Chief Financial Officer

EX-32.1

EXHIBIT 32.1

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Wave Systems Corp. (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  August 8, 2013	/s/ Steven K. Sprague
	Name: Steven K. Sprague
	Chief Executive Officer
Dated:  August 8, 2013	/s/ Gerard T. Feeney
	Name: Gerard T. Feeney
	Chief Financial Officer

The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

A signed original of the written statement required by Section 906 has been provided to Wave Systems Corp. and will be retained by Wave Systems Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

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Segment Reporting

6 Months Ended

Jun. 30, 2013

Segment Reporting

Segment Reporting

9.     Segment Reporting

Wave’s products include the Wave EMBASSY® digital security products and services (“EMBASSY®”) and Safend’s endpoint data loss protection products and services.  These products and services constitute Wave’s reportable segments as of June 30, 2013.

Net losses for reportable segments exclude net interest income (expense) and net currency transaction gains and losses.  These items are not reported by segment since they are excluded from the measurement of segment performance reviewed by Wave’s Chief Financial Officer.

The following sets forth reportable segment data:

	Three months ended  June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net Revenues:
EMBASSY® digital security products and services	$	5,627,124		$	6,118,250		$	10,247,910		$	11,964,960
Safend endpoint data loss protection products and services	1,115,118			1,643,224			2,288,058			2,778,651
Total Net Revenues	$	6,742,242		$	7,761,474		$	12,535,968		$	14,743,611
Operating Loss:
EMBASSY® digital security products and services	$	(3,001,360	)	$	(5,786,603	)	$	(8,405,277	)	$	(13,014,558	)
Safend endpoint data loss protection products and services	(430,711		)	(660,236		)	(5,184,013		)	(1,766,866		)
Total Segments Operating Loss	(3,432,071		)	(6,446,839		)	(13,589,290		)	(14,781,424		)
Net currency transaction gain (loss)	(8,363		)	(13,812		)	(6,732		)	9,788
Net interest expense	(49,863		)	(60,504		)	(108,030		)	(62,609		)
Net Loss	$	(3,490,297	)	$	(6,521,155	)	$	(13,704,052	)	$	(14,834,245	)
Impairment of Goodwill:
EMBASSY® digital security products and services	$	—		$	—		$	2,590,000		$	—
Safend endpoint data loss protection products and services	—			—			—			—
Total Impairment of Goodwill	$	—		$	—		$	2,590,000		$	—
Depreciation and Amortization Expense:
EMBASSY® digital security products and services	$	166,954		$	180,438		$	344,082		$	345,855
Safend endpoint data loss protection products and services	64,406			365,293			203,187			726,665
Total Depreciation and Amortization Expense	$	231,360		$	545,731		$	547,269		$	1,072,520
Capital Expenditures:
EMBASSY® digital security products and services	33,195			46,947			125,504			81,975
Safend endpoint data loss protection products and services	9,030			8,997			10,644			21,327
Total Capital Expenditures	$	42,225		$	55,944		$	136,148		$	103,302

	June 30,		December 31,
	2013		2012
Assets:
EMBASSY® digital security products and services	$	5,801,016	$	9,695,864
Safend endpoint data loss protection products and services	4,486,375		8,937,294
Total Assets	$	10,287,391	$	18,633,158

The following table details Wave’s sales by geographic area for the three and six-month periods ended June 30, 2013 and 2012.  Geographic area is based on the location of where the products were shipped or services rendered.

	United States of America			Europe			Asia			Total
Three months ended June 30, 2013:
EMBASSY® digital security products and services	$	4,078,689		$	1,180,565		$	367,870		$	5,627,124
Safend endpoint data loss protection products and services	427,518			591,071			96,529			1,115,118
Total	$	4,506,207		$	1,771,636		464,399			$	6,742,242
% of Total Revenue	67		%	26		%	7		%	100		%
Three months ended June 30, 2012:
EMBASSY® digital security products and services	$	5,004,840		$	970,610		$	142,800		$	6,118,250
Safend endpoint data loss protection products and services	606,925			623,786			412,513			1,643,224
Total	$	5,611,765		$	1,594,396		$	555,313		$	7,761,474
% of Total Revenue	72		%	21		%	7		%	100		%
Six months ended June 30, 2013:
EMBASSY® digital security products and services	7,801,676			1,927,259			518,975			10,247,910
Safend endpoint data loss protection products and services	971,916			1,149,402			166,740			2,288,058
Total	8,773,592			3,076,661			685,715			12,535,968
% of Total Revenue	70		%	25		%	5		%	100		%
Six months ended June 30, 2012:
EMBASSY® digital security products and services	10,135,244			1,646,916			182,800			11,964,960
Safend endpoint data loss protection products and services	1,046,910			1,224,070			507,671			2,778,651
Total	11,182,154			2,870,986			690,471			14,743,611
% of Total Revenue	76		%	19		%	5		%	100		%

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

Customers, by segment, from which Wave derived revenue in excess of 10% for the three and six-month periods ended June 30, 2013 and 2012 are as follows:

		Three months ended  June 30,						Six months ended June 30,
		2013			2012			2013			2012
Customer	Segment	Revenue						Revenue
Dell, Inc.	EMBASSY®	$	3,225,452		$	4,164,109		$	5,683,862		$	8,290,098
% of Total Revenue		48		%	54		%	45		%	56		%

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Consolidated Statements of Operations (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net revenues:
Licensing and maintenance	$ 6,133,304	$ 7,361,102	$ 11,127,030	$ 14,019,369
Services	608,938	400,372	1,408,938	724,242
Total net revenues	6,742,242	7,761,474	12,535,968	14,743,611
Operating expenses:
Licensing and maintenance - cost of net revenues	382,311	792,737	2,607,910	1,482,367
Services - cost of net revenues	105,155	74,760	212,516	136,590
Selling, general and administrative	6,774,719	8,290,191	13,953,722	17,837,974
Research and development	2,912,128	5,050,625	6,761,110	10,068,104
Impairment of goodwill			2,590,000
Total operating expenses	10,174,313	14,208,313	26,125,258	29,525,035
Operating loss	(3,432,071)	(6,446,839)	(13,589,290)	(14,781,424)
Other income (expense):
Net currency transaction gain (loss)	(8,363)	(13,812)	(6,732)	9,788
Net interest expense	(49,863)	(60,504)	(108,030)	(62,609)
Total other income (expense)	(58,226)	(74,316)	(114,762)	(52,821)
Net loss	$ (3,490,297)	$ (6,521,155)	$ (13,704,052)	$ (14,834,245)
Loss per common share - basic and diluted (in dollars per share)	$ (0.12)	$ (0.28)	$ (0.50)	$ (0.65)
Weighted average number of common shares outstanding during the period (in shares)	28,317,577	23,120,873	27,326,711	22,839,637

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Reverse Stock Split

6 Months Ended

Jun. 30, 2013

Reverse Stock Split

Reverse Stock Split

2. Reverse Stock Split

On June 28, 2013, our Board of Directors approved a reverse stock split of our common stock at a ratio of 1-for-4, causing each four outstanding shares of Class A common stock and Class B common stock to convert automatically into one share of Class A common stock or Class B common stock, respectively. The par value of Class A common stock and Class B common stock remains $0.01 per share. The reverse split became effective on July 1, 2013.  Stockholders’ equity has been restated to give retroactive recognition to the reverse split for all periods presented by reclassifying the excess par value resulting from the reduced number of shares from common stock to paid-in capital. Except as otherwise noted, all references to common share and per common share amounts (including warrant shares, shares reserved for issuance and applicable exercise prices) for all periods presented have been retroactively restated to reflect this reverse split

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Goodwill and Amortizable Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2013

Goodwill and Amortizable Intangible Assets

Schedule of changes in the carrying amount of goodwill

Balances as of December 31, 2012	$	4,038,000
Impairment loss	(2,590,000		)
Balances as of June 30, 2013	$	1,448,000

Schedule of the details of intangible assets

June 30, 2013

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			AccumulatedImpairmentLoss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,254,056	)	$	(5,038,100	)	$	133,844	5.2
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(601,327		)	(1,786,673		)	1,584,000		8.2
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(696,667		)	—			403,333		1.8
	$	11,678,000	$	(2,642,050	)	$	(6,914,773	)	$	2,121,177

December 31, 2012

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			AccumulatedImpairmentLoss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,167,900	)	$	(3,423,100	)	$	1,835,000	5.8
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(505,327		)	(1,786,673		)	1,680,000		8.8
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(586,667		)	—			513,333		2.4
	$	11,678,000	$	(2,349,894	)	$	(5,299,773	)	$	4,028,333

Summary of estimated amortization expense for intangible assets

The estimated amortization expense for intangible assets for the next five years and thereafter is as follows (in thousands):

Period	Estimated Amortization Expense
Remainder of 2013	$	219
2014	437
2015	291
2016	217
2017	217
Thereafter	740
Total	$	2,121

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Issuance of Common Stock

6 Months Ended

Jun. 30, 2013

Issuance of Common Stock

Issuance of Common Stock

10.  Issuance of Common Stock

On April 23, 2013, Wave sold 1,585,000 shares of Class A Common Stock at $2.00 per share for gross proceeds of $3,170,000. This financing was completed under a $30,000,000 shelf registration filed with the SEC on June 21, 2011 and declared effective by the SEC on July 22, 2011.  Dawson 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 Dawson a fee equal to 6% of the gross proceeds of this offering.  We realized approximately $2,920,000 in net proceeds after deducting the placement agent fees of $190,200 and additional legal and other fees associated with the issuance of these securities totaling approximately $60,000. In connection with the financing, we also issued warrants to the subscribers to purchase up to 792,500 shares of Wave Class A Common Stock for $2.48 per share. These warrants expire on October 23, 2018.

During the three-month period ended June 30, 2013, Wave received net proceeds of $1,380,682 after deducting offering costs of approximately $45,000, in connection with the issuance of 840,581 shares of Class A Common Stock in its at the market offerings through MLV.  The shares were sold at prices ranging from $1.52 - $2.68 per share.

On June 1, 2013, Wave issued 132,970 shares of Class A common stock to Wave employees for $1.29 per share, pursuant to the Wave 2004 Employee Stock Purchase Plan.  Wave received proceeds of $171,796 from the sale of these shares.

On March 13, 2013, Wave entered into agreements with certain institutional investors for a private placement of 301,205 shares of its Class A Common Stock at a price of $3.32 per share, yielding gross proceeds of $1,000,000.  Wave agreed to pay Dawson, the placement agent, a fee equal to 6% of the gross proceeds of this offering. Wave realized approximately $910,000 in net proceeds after deducting the placement agent fees of $60,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000.  Wave also issued warrants to the subscribers to purchase 150,603 shares of Class A common stock at an exercise price of $3.32 per share.  These warrants expire in October 2018. On March 13, 2013 Wave also entered into a Registration Rights Agreement with the subscribers in which Wave agreed to file a registration statement with the SEC to cover the private placement.  The failure to file the registration statement with the SEC in accordance with the dates outlined in the Registration Rights Agreement triggers liquidated damage payments to the subscribers.  As the payment of liquidated damages did not appear probable at inception of the private placement, Wave did not record any contingent liability as an allocation of the gross proceeds from the private placement.  During the three-months ended June 30, 2013, Wave paid liquidated damages of $40,000 to the subscribers as a result of the failure to file the registration statement with the SEC per the date agreed to in the Registration Rights Agreement.  The $40,000 is included as an expense in Selling, general and administrative expenses in the Statement of Operations.  A registration statement covering the private placement was declared effective on June 20, 2013 by the SEC, which resolved the contingency regarding the registration statement being declared effective.

During the three-month period ended March 31, 2013, Wave received net proceeds of $262,945 after deducting offering costs of approximately $8,700, in connection with the issuance of 94,988 shares of Class A Common Stock in its at the market offerings through MLV.  The shares were sold at prices ranging from $2.80 - $2.92 per share.

During the three-month period ended March 31, 2013, Wave received gross proceeds of $42,039 in connection with the issuance of 12,983 shares of Class A Common Stock upon the exercise of employee stock options.  The employee stock options were exercised at $3.24 per share.

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Issuance of Common Stock (Details) (USD $)	3 Months Ended	6 Months Ended		3 Months Ended	0 Months Ended	3 Months Ended		3 Months Ended		6 Months Ended					0 Months Ended
	Jun. 30, 2013	Jun. 30, 2013	Jun. 30, 2012	Mar. 31, 2013 Class A Common Stock	Jun. 02, 2013 Class A Common Stock 2004 Employee Stock Purchase Plan	Mar. 31, 2013 Class A Common Stock Stock Options	Mar. 13, 2013 Class A Common Stock Warrants Issued, March 2013	Jun. 30, 2013 Class A Common Stock At the market offerings through MLV	Mar. 31, 2013 Class A Common Stock At the market offerings through MLV	Jun. 30, 2013 Class A Common Stock At the market offerings through MLV	Jun. 30, 2013 Class A Common Stock At the market offerings through MLV Minimum	Mar. 31, 2013 Class A Common Stock At the market offerings through MLV Minimum	Jun. 30, 2013 Class A Common Stock At the market offerings through MLV Maximum	Mar. 31, 2013 Class A Common Stock At the market offerings through MLV Maximum	Mar. 13, 2013 Class A Common Stock Equity issuance	Apr. 23, 2013 Class A Common Stock Shelf Registration	Apr. 23, 2013 Class A Common Stock Shelf Registration Warrants - April 2013 financing - Subscribers	Jun. 21, 2011 Common Stock Shelf Registration Funding plan
Common Stock
Number of shares sold								840,581	94,988	935,569					301,205	1,585,000
Share price (in dollars per share)					$ 1.29						$ 1.52	$ 2.80	$ 2.68	$ 2.92	$ 3.32	$ 2.00
Gross proceeds from issuance of common stock															$ 1,000,000	$ 3,170,000
Shelf registration statement, amount																		30,000,000
Placement agent fees equal to gross proceeds from offering (as a percent)															6.00%	6.00%
Net proceeds from issuance of common stock		5,473,428	5,143,876					1,380,682	262,945	1,644,000					910,000	2,920,000
Placement agent fees															60,000	190,200
Legal and other fees															30,000	60,000
Number of shares under warrants							150,603										792,500
Exercise price of warrants (in dollars per share)							$ 3.32										$ 2.48
Liquidated damages paid to subscribers for failure to file registration statement with SEC	40,000
Offering costs								45,000	8,700	54,000
Gross proceeds received from exercise of warrants			291,500
Proceeds from employee stock option exercises		42,039	66,497			42,039
Issuance of shares upon exercise of employee stock options						12,983
Exercise price of employee stock options exercised (in dollars per share)				$ 3.24
Issuance of shares					132,970
Proceeds from employee stock purchase plan		$ 171,796	$ 474,233		$ 171,796

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Reverse Stock Split (Details) (USD $)	0 Months Ended	6 Months Ended	0 Months Ended			0 Months Ended
	Jun. 28, 2013	Jun. 30, 2013	Jun. 28, 2013 Class A Common Stock	Jun. 30, 2013 Class A Common Stock	Dec. 31, 2012 Class A Common Stock	Jun. 28, 2013 Class B Common Stock	Jun. 30, 2013 Class B Common Stock	Dec. 31, 2012 Class B Common Stock
Reverse stock split
Reverse stock split ratio	0.25	0.25	0.25			0.25
Common stock, par value (in dollars per share)			$ 0.01	$ 0.01	$ 0.01	$ 0.01	$ 0.01	$ 0.01

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Critical Accounting Policies (Details) (USD $)	0 Months Ended	3 Months Ended	6 Months Ended
	Jun. 28, 2013	Jun. 30, 2012	Jun. 30, 2013 item	Jun. 30, 2012
Revenue Recognition
Number of classes of end user customers			2
Minimum order of licenses of end user customers defined as large			5,000
Maximum order of licenses of end user customers defined as small			5,000
Reclassifications
Reclassification of support expense		$ 105,000		$ 105,000
Reclassification of amortization on the developed technology intangible asset		$ 229,500		$ 455,500
Reverse stock split ratio	0.25		0.25

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Income Taxes (Details) (USD $) In Millions, unless otherwise specified	Jun. 30, 2013
Income Taxes
Net operating loss	$ 286.9
Safend, Inc.
Income Taxes
Net operating loss	7.7
Safend
Income Taxes
Net operating loss	$ 17.0

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Contingencies (Details) (Landmark, USD $)	6 Months Ended	1 Months Ended
	Jun. 30, 2013	Jan. 31, 2012 Breach of consulting agreement between Landmark and Safend USA Minimum
Contingencies
Damages		$ 5,000,000
Period for petition to United States Supreme Court for an application to permit an appeal	90 days

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Share-based Compensation (Details) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Share-based Compensation
Stock options granted (in shares)	69,000	37,745
Weighted average grant date fair value (in dollars per share)	$ 0.80	$ 0.90
Share-based Compensation
Share-based Compensation expense	$ 668,840	$ 1,288,326	$ 1,106,546	$ 2,644,078
Cost of Sales
Share-based Compensation
Share-based Compensation expense	6,655	12,071	15,089	24,065
Selling, General & Administrative
Share-based Compensation
Share-based Compensation expense	532,789	882,769	834,398	1,854,589
Research & Development
Share-based Compensation
Share-based Compensation expense	$ 129,396	$ 393,486	$ 257,059	$ 765,424

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Segment Reporting (Tables)

6 Months Ended

Jun. 30, 2013

Segment Reporting

Schedule of reportable segment data

	Three months ended  June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net Revenues:
EMBASSY® digital security products and services	$	5,627,124		$	6,118,250		$	10,247,910		$	11,964,960
Safend endpoint data loss protection products and services	1,115,118			1,643,224			2,288,058			2,778,651
Total Net Revenues	$	6,742,242		$	7,761,474		$	12,535,968		$	14,743,611
Operating Loss:
EMBASSY® digital security products and services	$	(3,001,360	)	$	(5,786,603	)	$	(8,405,277	)	$	(13,014,558	)
Safend endpoint data loss protection products and services	(430,711		)	(660,236		)	(5,184,013		)	(1,766,866		)
Total Segments Operating Loss	(3,432,071		)	(6,446,839		)	(13,589,290		)	(14,781,424		)
Net currency transaction gain (loss)	(8,363		)	(13,812		)	(6,732		)	9,788
Net interest expense	(49,863		)	(60,504		)	(108,030		)	(62,609		)
Net Loss	$	(3,490,297	)	$	(6,521,155	)	$	(13,704,052	)	$	(14,834,245	)
Impairment of Goodwill:
EMBASSY® digital security products and services	$	—		$	—		$	2,590,000		$	—
Safend endpoint data loss protection products and services	—			—			—			—
Total Impairment of Goodwill	$	—		$	—		$	2,590,000		$	—
Depreciation and Amortization Expense:
EMBASSY® digital security products and services	$	166,954		$	180,438		$	344,082		$	345,855
Safend endpoint data loss protection products and services	64,406			365,293			203,187			726,665
Total Depreciation and Amortization Expense	$	231,360		$	545,731		$	547,269		$	1,072,520
Capital Expenditures:
EMBASSY® digital security products and services	33,195			46,947			125,504			81,975
Safend endpoint data loss protection products and services	9,030			8,997			10,644			21,327
Total Capital Expenditures	$	42,225		$	55,944		$	136,148		$	103,302

	June 30,		December 31,
	2013		2012
Assets:
EMBASSY® digital security products and services	$	5,801,016	$	9,695,864
Safend endpoint data loss protection products and services	4,486,375		8,937,294
Total Assets	$	10,287,391	$	18,633,158

Schedule of sales by geographic area

	United States of America			Europe			Asia			Total
Three months ended June 30, 2013:
EMBASSY® digital security products and services	$	4,078,689		$	1,180,565		$	367,870		$	5,627,124
Safend endpoint data loss protection products and services	427,518			591,071			96,529			1,115,118
Total	$	4,506,207		$	1,771,636		464,399			$	6,742,242
% of Total Revenue	67		%	26		%	7		%	100		%
Three months ended June 30, 2012:
EMBASSY® digital security products and services	$	5,004,840		$	970,610		$	142,800		$	6,118,250
Safend endpoint data loss protection products and services	606,925			623,786			412,513			1,643,224
Total	$	5,611,765		$	1,594,396		$	555,313		$	7,761,474
% of Total Revenue	72		%	21		%	7		%	100		%
Six months ended June 30, 2013:
EMBASSY® digital security products and services	7,801,676			1,927,259			518,975			10,247,910
Safend endpoint data loss protection products and services	971,916			1,149,402			166,740			2,288,058
Total	8,773,592			3,076,661			685,715			12,535,968
% of Total Revenue	70		%	25		%	5		%	100		%
Six months ended June 30, 2012:
EMBASSY® digital security products and services	10,135,244			1,646,916			182,800			11,964,960
Safend endpoint data loss protection products and services	1,046,910			1,224,070			507,671			2,778,651
Total	11,182,154			2,870,986			690,471			14,743,611
% of Total Revenue	76		%	19		%	5		%	100		%

Schedule of customers by segment, from which Wave derived revenue in excess of 10%

		Three months ended  June 30,						Six months ended June 30,
		2013			2012			2013			2012
Customer	Segment	Revenue						Revenue
Dell, Inc.	EMBASSY®	$	3,225,452		$	4,164,109		$	5,683,862		$	8,290,098
% of Total Revenue		48		%	54		%	45		%	56		%

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Consolidated Statements of Stockholders' Deficit (USD $)	Total	Capital in Excess of Par Value	Accumulated Deficit	Class A Common Stock Common Stock	Class B Common Stock Common Stock
Balance at Dec. 31, 2012	$ (2,865,457)	$ 393,788,150	$ (396,916,216)	$ 262,520	$ 89
Balance (in shares) at Dec. 31, 2012				26,251,968	8,889
Increase (Decrease) in Stockholders' Equity
Net loss	(13,704,052)		(13,704,052)
Issuance of Class A Common Stock at prices ranging from $1.52 to $2.90 per share, less issuance costs of $53,999	1,643,627	1,634,271		9,356
Issuance of Class A Common Stock at prices ranging from $1.52 to $2.90 per share, less issuance costs of $53,999 (in shares)				935,569
Issuance of Class A Common Stock at $2.00 per share, less issuance costs of $250,200	2,919,800	2,903,950		15,850
Issuance of Class A Common Stock at $2.00 per share, less issuance costs of $250,200 (in shares)				1,585,000
Private placement of Class A Common Stock at $3.32 per share, less issuance costs of $90,000	910,001	906,989		3,012
Private placement of Class A Common Stock at $3.32 per share, less issuance costs of $90,000 (in shares)				301,205
Employee stock options exercised at $3.24 per share	42,039	41,909		130
Employee stock options exercised at $3.24 per share (in shares)				12,983
Issuance of Class A Common Stock pursuant to the Wave Employee Stock Purchase Plan at $1.29	171,796	170,467		1,329
Issuance of Class A Common Stock pursuant to the Wave Employee Stock Purchase Plan at $1.29 (in shares)				132,970
Stock based compensation	1,106,546	1,106,546
Balance at Jun. 30, 2013	(9,775,700)	400,552,282	(410,620,268)	292,197	89
Balance (in shares) at Jun. 30, 2013				29,219,695	8,889
Balance at Mar. 31, 2013
Increase (Decrease) in Stockholders' Equity
Net loss	(3,490,297)
Employee stock options exercised at $3.24 per share (in shares)				840,581
Balance at Jun. 30, 2013	$ (9,775,700)			$ 292,197	$ 89
Balance (in shares) at Jun. 30, 2013				29,219,695	8,889

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Consolidated Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities:
Net loss	$ (13,704,052)	$ (14,834,245)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	547,269	1,072,520
Compensation associated with issuance of stock options	1,106,546	2,644,078
Impairment of goodwill and intangible assets	4,205,000
Accretion of royalty liability	40,700
Changes in assets and liabilities:
Decrease in accounts receivable	1,644,854	3,520,229
(Increase) decrease in prepaid expenses and other current assets	(97,144)	65,455
Decrease in other assets	85,668	9,597
(Decrease) increase in accounts payable and accrued expenses	(262,314)	1,069,813
Decrease in deferred revenue	(197,446)	(1,322,250)
(Decrease) increase in royalty liability	(75,096)	92,844
Increase in other long-term liabilities	2,587	30,041
Net cash used in operating activities	(6,703,428)	(7,651,918)
Cash flows from investing activities:
Acquisition of property and equipment	(136,148)	(103,302)
Net cash used in investing activities	(136,148)	(103,302)
Cash flows from financing activities:
Payments on capital lease obligation	(38,157)	(35,348)
Proceeds from employee stock purchase plan	171,796	474,233
Proceeds from exercise of warrants		291,500
Proceeds from employee stock option exercises	42,039	66,497
Net proceeds from issuance of common stock	5,473,428	5,143,876
Net cash provided by financing activities	5,649,106	5,940,758
Net decrease in cash and cash equivalents	(1,190,470)	(1,814,462)
Cash and cash equivalents at beginning of period	2,112,769	3,385,035
Cash and cash equivalents at end of period	922,299	1,570,573
Non-cash financing activities:
Cashless exercise of warrants		404
Cash paid during the period for:
Interest	$ 74,299	$ 54,070

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Liquidity

6 Months Ended

Jun. 30, 2013

Liquidity

Liquidity

3. Liquidity

The accompanying consolidated financial statements have been prepared assuming that Wave will continue as a going concern.  Wave has had substantial operating losses since its inception, and as of June 30, 2013, had an accumulated deficit of $410,620,268.  We also expect Wave will incur an operating loss for the fiscal year 2013.  As of June 30, 2013, we had negative working capital of $8,303,967.

Wave does not expect to generate enough revenue to fund its cash flow requirements for the twelve-months ending June 30, 2014.  As of June 30, 2013, we had approximately $922,000 of cash on hand.  Given Wave’s forecasted capital requirements for the twelve-months ending June 30, 2014, and our cash balance as of June 30, 2013, Wave will be required to raise additional capital prior to June 30, 2014 to continue to fund its operations.  Wave’s ability to raise additional capital is primarily based on three sources:

· Sales of registered Class A Common Stock under an existing shelf registration statement;

· Sales of registered Class A Common Stock via the At the Market Sales Agreement with MLV & Co. LLC (“MLV”) entered into during January, 2012; and

· Sales of Class A Common Stock through private placements.

On July 25, 2013, Wave sold 1,204,470 shares of Class A Common Stock at $1.27 per share for gross proceeds of $1,529,677.  This financing was completed under a $30,000,000 shelf registration filed with the SEC on June 21, 2011 and was declared effective by the Commission on July 22, 2011 (the shelf registration statement). Security Research Associates, Inc. (“SRA”) entered into a placement agency agreement with Wave in which they agreed to act as placement agent in connection with the offering.  Wave agreed to pay SRA a fee equal to 6% of the gross proceeds of this offering.  We realized approximately $1,408,000 in net proceeds after deducting the placement agent fees of approximately $92,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000.  In connection with the financing, we also issued warrants to SRA to purchase up to 72,268 shares of Wave Class A Common Stock for $1.27 per share.  These warrants expire on July 25, 2016.

On April 23, 2013, Wave sold 1,585,000 shares of Class A Common Stock at $2.00 per share for gross proceeds of $3,170,000. This financing was completed under the shelf registration statement.  Dawson James Securities, Inc. (“Dawson”) 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 Dawson a fee equal to 6% of the gross proceeds of this offering.  We realized approximately $2,920,000 in net proceeds after deducting the placement agent fees of $190,200 and additional legal and other fees associated with the issuance of these securities totaling approximately $60,000. In connection with the financing, we also issued warrants to the subscribers to purchase up to 792,500 shares of Wave Class A Common Stock for $2.48 per share. These warrants expire on October 23, 2018.

During the six-month period ended June 30, 2013, Wave sold 935,569 shares of its Class A common stock through its At the Market Sales Agreement with MLV at an average price of $1.81 per share, for net proceeds of approximately $1,644,000 after deducting offering costs of approximately $54,000.   Subsequent to June 30, 2013, Wave sold 807,913 shares of its Class A common stock through MLV at an average price of $1.40 per share, for net proceeds of approximately $1,098,000 after deducting offering costs of approximately $36,000.   As of August 6, 2013, Wave has sold a total of approximately 3.7 million shares of its common stock through MLV, raising net proceeds of approximately $11.8 million after deducting offering costs of approximately $380,000.

On March 13, 2013, Wave entered into agreements with certain institutional investors for a private placement of 301,205 shares of its Class A common stock at a price of $3.32 per share, yielding gross proceeds of $1,000,000.  Wave agreed to pay the placement agent a fee equal to 6% of the gross proceeds of this offering. Wave realized approximately $910,000 in net proceeds after deducting the placement agent fees of $60,000 and additional legal and other fees associated with the issuance of these securities totaling approximately $30,000.  Wave also issued warrants to the subscribers to purchase 150,603 shares of Class A common stock at an exercise price of $3.32 per share.  These warrants expire in October 2018. On March 13, 2013 Wave also entered into a Registration Rights Agreement with the subscribers in which Wave agreed to file a registration statement with the SEC to cover the private placement.  The failure to file the registration statement with the SEC in accordance with the dates outlined in the Registration Rights Agreement triggers liquidated damage payments to the subscribers.  As the payment of liquidated damages did not appear probable at inception of the private placement, Wave did not record any contingent liability as an allocation of the gross proceeds from the private placement.  During the three-months ended June 30, 2013, Wave paid liquidated damages of $40,000 to the subscribers as a result of the failure to file the registration statement with the SEC per the date agreed to in the Registration Rights Agreement.  The $40,000 is included as an expense in Selling, general and administrative expenses in the Statement of Operations.  A registration statement covering the private placement was declared effective on June 20, 2013 by the SEC, which resolved the contingency regarding the registration statement being declared effective.

As of August 6, 2013, approximately $1,748,000 in gross proceeds are available under the June 21, 2011 shelf registration statement, which may be utilized for future financings. During the next twelve months we anticipate that we will file an additional S-3 shelf registration statement with the SEC for future financings.

Due to our current cash position, our forecasted capital needs over the next twelve months and beyond, the fact that we will require additional financing and uncertainty as to whether we will achieve our sales forecast for our products and services, substantial doubt exists with respect to our ability to continue as a going concern.

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Critical Accounting Policies

6 Months Ended

Jun. 30, 2013

Critical Accounting Policies

Critical Accounting Policies

1. Critical Accounting Policies

The preparation of the Company’s consolidated 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 depreciation and amortization, revenue recognition, accounts receivable reserves, valuation of long-lived and intangible assets, goodwill, software development, contingencies and share based compensation. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A detailed description of the accounting policies deemed critical to the understanding of the consolidated financial statements is included in the notes to Wave’s audited financial statements for the year ended December 31, 2012, included in its Form 10-K filed with the Securities and Exchange Commission on March 18, 2013.

Revenue Recognition — Wave’s business model targets revenues from various sources including: licensing of the EMBASSY Trust Suite, Safend’s endpoint data loss protection suite, eTMS software products and development contracts.  Many of these sales arrangements include multiple-elements and/or require significant modification or customization of Wave’s software.

Wave recognizes revenue when it is realized or realizable and earned. Wave considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.  In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue.

Licenses

Wave receives revenue from licensing its EMBASSY Trust Suite software through distribution arrangements with its OEM partners, software development and other services.  Wave’s distribution arrangements have given rise to separate software license upgrade agreements with the end users of the products distributed by the OEMs.  Wave applies software revenue recognition guidance to all transactions except those where no software is involved.  Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured.  Persuasive evidence is generally a binding purchase order or license agreement.  Delivery occurs when product is shipped, for its OEM distribution arrangements, or delivered via a license key, for our license upgrade agreements.

Wave enters into perpetual software license agreements, referred as license upgrade agreements, through direct sales to customers and indirect sales through its OEM partners, distributors and resellers with the end users of the products distributed by the OEMs.  Wave has defined its two classes of end user customers as large and small based on those with orders in excess of 5,000 licenses and those with less than 5,000 licenses, respectively.  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.

Beginning in the quarter ended March 31, 2011, Wave had sufficient independent maintenance renewals to establish VSOE of fair value of maintenance for its small class of customers.  Through June 30, 2013, Wave continues to lack sufficient independent maintenance renewals to establish VSOE for its large customer class.  As a result, beginning in the quarter ended March 31, 2011, for the small customer class, Wave has allocated the arrangement consideration amount the elements included in our 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 still the case for Wave’s large customer class, the entire arrangement fee is recognized ratably over the performance period as licensing revenue.  At June 30, 2013, Wave’s deferred revenue consists of the unamortized balance of maintenance for sales to its small class of customers during 2013 and arrangements where VSOE does not exist.

Safend receives revenue from licensing its endpoint data loss protection products and services through its distribution channels.  Safend 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 delivered via a license key.

Safend enters into perpetual software license agreements through direct sales to customers and indirect sales through its OEM partners, distributors and resellers.  These license arrangements, generally also 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 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 licensing revenue.  VSOE of fair value is based upon the price for which the undelivered element is sold separately.

Safend has VSOE of fair value of maintenance for its Encryptor, Protector and Inspector products.  As a result Safend allocates the arrangement consideration among the elements included in its 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 still the case for Safend’s Discover, Reporter and Auditor products, the entire arrangement fee is recognized ratably over the performance period as licensing revenue.

Licensing and maintenance - cost of net revenues includes customer support personnel costs, foreign tax withholdings, amortization expense of the developed technology intangible asset, a consulting services engagement with one of the world’s leading international oil and gas companies and share-based compensation expense.

Services

Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price, long-term service or development contracts is recognized using the percentage of completion method. The Company measures the percentage of completion by reference to the proportion of contract hours incurred for work performed to date to the estimated total contract hours expected to be incurred.  Losses on fixed price contracts are recognized during the period in which the loss first becomes apparent.

Services - cost of net revenues includes non-recurring government time and materials costs incurred in connection with a contract with the United States Department of Defense and share-based compensation expense.

Share-based Compensation — We recognize compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan. Share-based compensation expense recognized is based on the value of the portion of share-based payment award that is ultimately expected to vest and has been reduced for estimated forfeitures.  We value share-based payment awards at grant date using an option-pricing model.  Our determination of the fair value of the share-based payment award on the date of grant using the option-pricing model 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, our expected stock price volatility over the term of the award and actual and projected employee stock option exercise behaviors.

Reclassifications - Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation.  These reclassifications include:  (i) the $105,000 reclassification of support expense from selling, general and administrative expense to licensing and maintenance — cost of net revenue for the three and six-months ended June 30, 2012, (ii) the $229,500 reclassification of amortization on the developed technology intangible asset from selling, general and administrative expense to licensing and maintenance — cost of net revenues for the three-months ended June 30, 2012 and (iii) the $455,500 reclassification of amortization on the developed technology intangible asset from selling, general and administrative expense to licensing and maintenance — cost of net revenues for the six-months ended June 30, 2012.  These reclassifications have not changed the results of operations of the prior periods.

All references to common shares and per common share amounts of the Company have been adjusted to give effect to the implementation of a 1-for-4 reverse stock split of the Company’s authorized and issued common stock which was effected on July 1, 2013.  See Note 2 below.

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Subsequent Events (Details) (Subsequent event, USD $)	0 Months Ended
	Jul. 23, 2013
Subsequent Events
Minimum bid price per share required to regain compliance with listing qualifications (in dollars per share)	$ 1.00
Minimum consecutive business days for which a minimum specified bid price per share is required to regain listing compliance	10 days
Class A Common Stock | Minimum
Subsequent Events
Share price (in dollars per share)	$ 1.00

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Liquidity (Details) (USD $)	3 Months Ended	6 Months Ended					0 Months Ended	3 Months Ended		6 Months Ended	1 Months Ended					0 Months Ended				0 Months Ended
	Jun. 30, 2013	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012	Dec. 31, 2011	Mar. 13, 2013 Class A Common Stock Warrants Issued, March 2013	Aug. 06, 2013 At the Market Sales Agreement Common Stock Subsequent event	Jun. 30, 2013 At the Market Sales Agreement Class A Common Stock	Mar. 31, 2013 At the Market Sales Agreement Class A Common Stock	Jun. 30, 2013 At the Market Sales Agreement Class A Common Stock	Jun. 30, 2013 At the Market Sales Agreement Class A Common Stock Subsequent event	Jun. 30, 2013 At the Market Sales Agreement Class A Common Stock Average	Jun. 30, 2013 At the Market Sales Agreement Class A Common Stock Average Subsequent event	Aug. 06, 2013 Shelf Registration Common Stock Funding plan	Jun. 21, 2011 Shelf Registration Common Stock Funding plan	Apr. 23, 2013 Shelf Registration Class A Common Stock	Jul. 25, 2013 Shelf Registration Class A Common Stock Subsequent event	Jul. 25, 2013 Shelf Registration Class A Common Stock Warrants - July 2013 financing - Subscribers Subsequent event	Apr. 23, 2013 Shelf Registration Class A Common Stock Warrants - April 2013 financing - Subscribers	Mar. 13, 2013 Equity issuance Class A Common Stock
Liquidity
Accumulated deficit	$ 410,620,268	$ 410,620,268		$ 396,916,216
Negative working capital	8,303,967	8,303,967
Cash on hand	922,299	922,299	1,570,573	2,112,769	3,385,035
Liquidity
Shelf registration statement, amount															30,000,000
Number of shares sold							3,700,000	840,581	94,988	935,569	807,913					1,585,000	1,204,470			301,205
Share price (in dollars per share)												$ 1.81	$ 1.40			$ 2.00	$ 1.27			$ 3.32
Gross proceeds from issuance of common stock																3,170,000	1,529,677			1,000,000
Placement agent fees equal to gross proceeds from offering (as a percent)																6.00%	6.00%			6.00%
Net proceeds from issuance of common stock		5,473,428	5,143,876				11,800,000	1,380,682	262,945	1,644,000	1,098,000					2,920,000	1,408,000			910,000
Offering costs							380,000	45,000	8,700	54,000	36,000
Placement agent fees																190,200	92,000			60,000
Legal and other fees																60,000	30,000			30,000
Common stock agreed to be issued against warrants (in shares)						150,603												72,268	792,500
Exercise price of warrants (in dollars per share)						$ 3.32												$ 1.27	$ 2.48
Liquidated damages paid to subscribers for failure to file registration statement with SEC	40,000
Gross proceeds available under the shelf registration statement														$ 1,748,000

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Goodwill and Amortizable Intangible Assets (Details) (USD $)	3 Months Ended			6 Months Ended			3 Months Ended	6 Months Ended	12 Months Ended			6 Months Ended	12 Months Ended			1 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012	Mar. 31, 2013 Developed Technology	Jun. 30, 2013 Developed Technology	Dec. 31, 2012 Developed Technology	Jun. 30, 2013 In-Process Technology	Dec. 31, 2012 In-Process Technology	Jun. 30, 2013 Customer Relationships	Dec. 31, 2012 Customer Relationships	Jun. 30, 2013 Trade Name	Dec. 31, 2012 Trade Name	May 31, 2010 Acquired Patents	Jun. 30, 2013 Acquired Patents	Dec. 31, 2012 Acquired Patents	Mar. 31, 2013 Safend
Changes in the carrying amount of goodwill
Balances at the beginning of the period		$ 4,038,000		$ 4,038,000															$ 1,400,000
Impairment loss		2,600,000		(2,590,000)
Balances at the end of the period	1,448,000			1,448,000															1,400,000
Impairment charge on intangible assets							1,615,000	1,615,000
Intangible Asset
Gross Carrying Amount	11,678,000			11,678,000		11,678,000		6,426,000	6,426,000	90,000	90,000	3,972,000	3,972,000	90,000	90,000		1,100,000	1,100,000
Accumulated Amortization	(2,642,050)			(2,642,050)		(2,349,894)		(1,254,056)	(1,167,900)			(601,327)	(505,327)	(90,000)	(90,000)		(696,667)	(586,667)
Accumulated Impairment loss	(6,914,773)			(6,914,773)		(5,299,773)		(5,038,100)	(3,423,100)	(90,000)	(90,000)	(1,786,673)	(1,786,673)
Net	2,121,177			2,121,177		4,028,333		133,844	1,835,000			1,584,000	1,680,000				403,333	513,333
Weighted Average Remaining Useful Life								5 years 2 months 12 days	5 years 9 months 18 days			8 years 2 months 12 days	8 years 9 months 18 days				1 year 9 months 18 days	2 years 4 months 24 days
Patents acquired																1,100,000
Estimated useful life																	5 years
Intangible assets amortization expense	$ 109,374		$ 406,300	$ 292,156	$ 809,100

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Segment Reporting (Details 3) (EMBASSY digital security products and services, Dell, Inc., USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
EMBASSY digital security products and services | Dell, Inc.
Major customers, by segment
Revenue	$ 3,225,452	$ 4,164,109	$ 5,683,862	$ 8,290,098
% of Total Revenue	48.00%	54.00%	45.00%	56.00%

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Consolidated Balance Sheets (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 0	$ 0
Reverse stock split ratio	0.25
Class A Common Stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, Authorized shares	150,000,000	150,000,000
Common stock, shares issued	29,219,695	26,251,968
Common stock, shares outstanding	29,219,695	26,251,968
Class B Common Stock
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, Authorized shares	13,000,000	13,000,000
Common stock, shares issued	8,889	8,889
Common stock, shares outstanding	8,889	8,889

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Share-based Compensation

6 Months Ended

Jun. 30, 2013

Share-based Compensation

Share-based Compensation

6. Share-based Compensation

Wave recognized $668,840 and $1,288,326 of share-based compensation during the three-months ended June 30, 2013 and 2012, respectively, and $1,106,546 and $2,644,078 for the six-month periods ended June 30, 2013 and 2012, respectively.  During the three-month period ended June 30, 2013, Wave granted 69,000 stock options at a weighted-average estimated fair value of $0.80.  During the three-month period ended June 30, 2012, Wave granted 37,745 stock options at a weighted-average estimated fair value of $0.90.

The following table summarizes the effect of share based compensation in Wave’s statement of operations, for the three-month and six-month periods ended June 30, 2013 and 2012:

	Three months ended  June 30,				Six months ended June 30,
	2013		2012		2013		2012
Cost of Sales	$	6,655	$	12,071	$	15,089	$	24,065
Selling, General & Administrative	532,789		882,769		834,398		1,854,589
Research & Development	129,396		393,486		257,059		765,424
Total	$	668,840	$	1,288,326	$	1,106,546	$	2,644,078

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Consolidated Statements of Operations (Parenthetical)	0 Months Ended	6 Months Ended
	Jun. 28, 2013	Jun. 30, 2013
Consolidated Statements of Operations
Reverse stock split ratio	0.25	0.25

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Consolidated Balance Sheets (USD $)	Jun. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 922,299	$ 2,112,769
Accounts receivable, net of allowance for doubtful accounts of $-0-at June 30, 2013 and December 31, 2012	3,542,027	5,034,422
Pledged receivables	743,426	1,801,683
Prepaid expenses and other current assets	518,913	421,769
Total current assets	5,726,665	9,370,643
Property and equipment, net	752,603	871,568
Amortizable intangible assets, net	2,121,177	4,028,333
Goodwill	1,448,000	4,038,000
Other assets	238,946	324,614
Total Assets	10,287,391	18,633,158
Current liabilities:
Secured borrowings	631,912	1,537,710
Accounts payable and accrued expenses	7,262,409	7,570,723
Current portion of capital lease payable	6,501	44,658
Deferred revenue	6,129,810	5,949,087
Total current liabilities	14,030,632	15,102,178
Other long-term liabilities	100,583	97,996
Royalty liability	4,497,733	4,486,129
Long-term deferred revenue	1,434,143	1,812,312
Total liabilities	20,063,091	21,498,615
Stockholders' Deficit:
Capital in excess of par value	400,552,282	393,788,150
Accumulated deficit	(410,620,268)	(396,916,216)
Total Stockholders' Deficit	(9,775,700)	(2,865,457)
Total Liabilities and Stockholders' Deficit	10,287,391	18,633,158
Class A Common Stock
Stockholders' Deficit:
Common Stock	292,197	262,520
Class B Common Stock
Stockholders' Deficit:
Common Stock	$ 89	$ 89

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Secured Borrowings and Pledged Receivables (Details) (Secured borrowings collateralized by receivables, USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Secured borrowings collateralized by receivables
Secured Borrowings and Collateralized Receivables
Carrying value of secured borrowing as a percentage of associated pledged receivable			85.00%
Percentage of holdback provision as per the TRE agreement			15.00%
Interest rate on secured borrowings for every thirty days outstanding (as a percent)	1.20%		1.20%
Receivables transferred to buyer and remain uncollected	$ 743,426		$ 743,426		$ 1,801,683
Secured borrowings	631,912		631,912		1,537,710
Interest expense associated with the secured borrowings	29,141	58,735	66,222	58,735
Proceeds from the transfer of pledged receivables			4,673,508	3,894,609
Amount of pledged receivables collected by TRE			4,041,596	3,041,661
Pledged receivables repurchased	$ 0	$ 0	$ 0	$ 0

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Share-based Compensation (Tables)

6 Months Ended

Jun. 30, 2013

Share-based Compensation

Summary of effect of share based compensation in the entity's statement of operations

	Three months ended  June 30,				Six months ended June 30,
	2013		2012		2013		2012
Cost of Sales	$	6,655	$	12,071	$	15,089	$	24,065
Selling, General & Administrative	532,789		882,769		834,398		1,854,589
Research & Development	129,396		393,486		257,059		765,424
Total	$	668,840	$	1,288,326	$	1,106,546	$	2,644,078

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Fair Value Measurement (Details) (Recurring basis, Level 1, USD $)	Jun. 30, 2013
Recurring basis | Level 1
Disclosures about the Fair Value of Financial Instruments
Overnight money market funds	$ 36,807
Ratio for the net value of money market funds for each dollar invested based on quoted prices in active markets for identical assets (level 1)	1

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Segment Reporting (Details) (USD $)	3 Months Ended			6 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Segment Reporting
Net Revenues	$ 6,742,242		$ 7,761,474	$ 12,535,968	$ 14,743,611
Segments Operating Loss	(3,432,071)		(6,446,839)	(13,589,290)	(14,781,424)
Net currency transaction gain (loss)	(8,363)		(13,812)	(6,732)	9,788
Net interest expense	(49,863)		(60,504)	(108,030)	(62,609)
Net loss	(3,490,297)		(6,521,155)	(13,704,052)	(14,834,245)
Impairment of Goodwill		(2,600,000)		2,590,000
Depreciation and Amortization Expense	231,360		545,731	547,269	1,072,520
Capital Expenditures	42,225		55,944	136,148	103,302
Assets	10,287,391			10,287,391		18,633,158
EMBASSY digital security products and services
Segment Reporting
Net Revenues	5,627,124		6,118,250	10,247,910	11,964,960
Segments Operating Loss	(3,001,360)		(5,786,603)	(8,405,277)	(13,014,558)
Impairment of Goodwill				2,590,000
Depreciation and Amortization Expense	166,954		180,438	344,082	345,855
Capital Expenditures	33,195		46,947	125,504	81,975
Assets	5,801,016			5,801,016		9,695,864
Safend endpoint data loss protection products and services
Segment Reporting
Net Revenues	1,115,118		1,643,224	2,288,058	2,778,651
Segments Operating Loss	(430,711)		(660,236)	(5,184,013)	(1,766,866)
Depreciation and Amortization Expense	64,406		365,293	203,187	726,665
Capital Expenditures	9,030		8,997	10,644	21,327
Assets	$ 4,486,375			$ 4,486,375		$ 8,937,294

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Segment Reporting (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Segment Reporting
Total net revenues	$ 6,742,242	$ 7,761,474	$ 12,535,968	$ 14,743,611
United States of America
Segment Reporting
Total net revenues	4,506,207	5,611,765	8,773,592	11,182,154
Europe
Segment Reporting
Total net revenues	1,771,636	1,594,396	3,076,661	2,870,986
Asia
Segment Reporting
Total net revenues	464,399	555,313	685,715	690,471
Revenue | Geographic area
Segment Reporting
% of Total Revenue	100.00%	100.00%	100.00%	100.00%
Revenue | Geographic area | United States of America
Segment Reporting
% of Total Revenue	67.00%	72.00%	70.00%	76.00%
Revenue | Geographic area | Europe
Segment Reporting
% of Total Revenue	26.00%	21.00%	25.00%	19.00%
Revenue | Geographic area | Asia
Segment Reporting
% of Total Revenue	7.00%	7.00%	5.00%	5.00%
Long-lived assets | Geographic area | United States of America
Segment Reporting
% of Total Revenue			90.00%
Long-lived assets | Geographic area | ISRAEL
Segment Reporting
% of Total Revenue			10.00%
EMBASSY digital security products and services
Segment Reporting
Total net revenues	5,627,124	6,118,250	10,247,910	11,964,960
EMBASSY digital security products and services | United States of America
Segment Reporting
Total net revenues	4,078,689	5,004,840	7,801,676	10,135,244
EMBASSY digital security products and services | Europe
Segment Reporting
Total net revenues	1,180,565	970,610	1,927,259	1,646,916
EMBASSY digital security products and services | Asia
Segment Reporting
Total net revenues	367,870	142,800	518,975	182,800
Safend endpoint data loss protection products and services
Segment Reporting
Total net revenues	1,115,118	1,643,224	2,288,058	2,778,651
Safend endpoint data loss protection products and services | United States of America
Segment Reporting
Total net revenues	427,518	606,925	971,916	1,046,910
Safend endpoint data loss protection products and services | Europe
Segment Reporting
Total net revenues	591,071	623,786	1,149,402	1,224,070
Safend endpoint data loss protection products and services | Asia
Segment Reporting
Total net revenues	$ 96,529	$ 412,513	$ 166,740	$ 507,671

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Loss per Share

6 Months Ended

Jun. 30, 2013

Loss per Share

Loss per Share

5. Loss per Share

Basic net loss per common share has been calculated based upon the weighted-average number of shares of common stock outstanding during the period.  Diluted net loss per share is also computed using the weighted average number of common shares and excludes dilutive potential common shares outstanding, as their effect is anti-dilutive.  Dilutive potential common shares consist primarily of employee stock options and stock warrants.  Diluted net loss per share is equal to basic net loss per share and is therefore not presented separately in the financial statements.  The weighted average number of potential common shares that would have been included in diluted loss per share, had their effect not been anti-dilutive for each of the three-month and six-month periods ended June 30, 2013, were approximately 114,000 shares and 298,000 shares, respectively, versus 487,000 shares and 748,000 shares for the three-month and six-month periods ended June 30, 2012, respectively.  Employee stock options and other stock warrants to purchase a weighted average of approximately 5,464,000 and 5,181,000 shares were outstanding for the three-month and six-month periods ended June 30, 2013, respectively, versus 2,513,000 and 1,991,000 shares for the three-month and six-month periods ended June 30, 2012, respectively, but have not been included in the computation of diluted loss per share because their exercise price was greater than the average share price of Wave’s common shares and, therefore, their effect would have been anti-dilutive.

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Loss per Share (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Weighted average potential common shares
Loss per Share
Antidilutive securities excluded from earnings per share	114,000	487,000	298,000	748,000
Weighted average employee stock options and other stock warrants
Loss per Share
Antidilutive securities excluded from earnings per share	5,464,000	2,513,000	5,181,000	1,991,000

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Income Taxes

6 Months Ended

Jun. 30, 2013

Income Taxes

Income Taxes

8.     Income Taxes

Wave has not recorded any income tax expense due to the net loss incurred for all periods presented.  Wave has federal and state net operating loss carryforwards of approximately $286.9 million, which expire beginning in 2013 through 2032 and include approximately $7.7 million of net operating loss carryforwards of Safend, Inc., a wholly owned US-based subsidiary of Safend.  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 occurred prior to or following Wave’s initial public offering in September 1994 and in periods following, thus raising the likelihood that such net operating and capital loss carryforwards are subject to annual limitations.  In addition, the Company maintains approximately $17 million of operating loss carryforwards associated with Safend, Ltd., an entity in Israel.

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Secured Borrowings and Pledged Receivables

6 Months Ended

Jun. 30, 2013

Secured Borrowings and Pledged Receivables

Secured Borrowings and Pledged Receivables

4. Secured Borrowings and Pledged Receivables

Pursuant to an agreement entered into on April 23, 2012 with The Receivables Exchange (“TRE”), an unrelated third party, we have transferred certain accounts receivable to buyers which are accounted for as secured borrowings. The transferred receivables are classified as pledged receivables and our obligation to repurchase the transferred receivables is presented as secured borrowings on the consolidated balance sheet. The carrying value of each secured borrowing approximates 85% of each associated pledged receivable and takes into consideration a 15% holdback provision per the TRE agreement.  The customers’ payment of the pledged receivables constitutes the repayment of the related amounts borrowed. The interest rate on the secured borrowings was approximately 1.20% for every thirty days outstanding.

With our approval, TRE establishes arrangements with buyers providing for borrowings that are secured by our accounts receivable, and for which recourse exists against us. We can be required to repurchase the receivables under certain circumstances in case of specific defaults by our customers as set forth in the program terms.  TRE acts as the servicing agent for receivables transferred to buyers.  TRE collects the pledged receivables from our customers and makes the repayment to the buyers on our behalf once the receivables are collected.

At June 30, 2013 and December 31, 2012, receivables totaling $743,426 and $1,801,683, respectively, were transferred to buyer, remain uncollected and are subject to repurchase. The secured borrowings totaled $631,912 and $1,537,710 as of June 30, 2013 and December 31, 2012, respectively. We recognized $66,222 and $58,735 of interest expense associated with the secured borrowings for the six-months ended June 30, 2013 and 2012, respectively and $29,141 and $58,735 of interest expense for the three-months ended June 30, 2013 and 2012, respectively.  Proceeds from the transfer of receivables are included in cash provided by operating activities in the consolidated statements of cash flows.  Proceeds from the transfer of pledged receivables were $4,673,508 and $3,894,609 for the six months ended June 30, 2013 and 2012, respectively.  TRE collected $4,041,596 and $3,041,661 of pledged receivables in the six months ended June 30, 2013 and 2012, respectively, which thereby reduced our repurchase obligation and were accounted for as reductions of pledged receivables and secured borrowings on the consolidated balance sheet.  No pledged receivables were repurchased by the Company in the three and six-months ended June 30, 2013 and 2012.

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Consolidated Statements of Stockholders' Deficit (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2013
Issuance of Class A Common Stock, per share, Lower range	$ 1.52
Issuance of Class A Common Stock, per share, Upper range	$ 2.90
Issuance of Class A Common Stock, issuance costs (in dollars)	$ 53,999
Issuance of Class A Common Stock, per share	$ 2.00
Issuance of Class A Common Stock, issuance cost (in dollars)	250,200
Private placement of Class A Common Stock, per share	$ 3.32
Private placement of Class A Common Stock, issuance costs (in dollars)	$ 90,000
Employee stock options exercised	$ 3.24
Shares of Class A Common Stock Issued pursuant to the Wave Employee Stock Purchase Plan, per share	$ 1.29
Reverse stock split ratio	0.25

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Goodwill and Amortizable Intangible Assets (Details 2) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Estimated Amortization Expense
Remainder of 2013	$ 219,000
2014	437,000
2015	291,000
2016	217,000
2017	217,000
Thereafter	740,000
Net	$ 2,121,177	$ 4,028,333

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Fair Value Measurement

6 Months Ended

Jun. 30, 2013

Fair Value Measurement

Fair Value Measurement

11. Fair Value Measurement

As of June 30, 2013, Wave’s financial assets that are measured at fair value on a recurring basis are comprised of overnight money market fund investments.  Wave invests excess cash from its operating cash accounts in overnight money market funds and reflects these amounts ($36,807 at June 30, 2013) within cash and cash equivalents on the consolidated balance sheet using quoted prices in active markets for identical assets (Level 1) at a net value of 1:1 for each dollar invested.

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

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

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Goodwill and Amortizable Intangible Assets

6 Months Ended

Jun. 30, 2013

Goodwill and Amortizable Intangible Assets

Goodwill and Amortizable Intangible Assets

7. Goodwill and Amortizable Intangible Assets

The following schedule presents the changes in the carrying amount of goodwill during the period ended June 30, 2013:

Balances as of December 31, 2012	$	4,038,000
Impairment loss	(2,590,000		)
Balances as of June 30, 2013	$	1,448,000

Wave tests goodwill for impairment annually on September 30 and during interim periods whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.  Wave uses a fair value approach in testing goodwill for impairment in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other. The goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss.

During the first quarter of fiscal 2013 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, significantly lower than expected revenue and billings during the first quarter of 2013, and downward revisions to management’s short-term and long-term forecast for Safend. The revised forecast reflected changes related to revenue growth rates, current market trends 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 the fair value of the Safend reporting unit was less than its carrying amount.

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’s 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 cash flows. Based on the results of the recoverability test, the Company determined that the carrying value of the Safend asset group exceeded its undiscounted cash flows and was 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 an impairment charge of $1,615,000 on the developed technology intangible asset during the three-months ended March 31, 2013.  The decline in the fair value of the Safend intangible assets is attributable to the same factors as discussed above for the fair value of the Safend reporting unit.

After adjusting the carrying value of the reporting unit for the impairment of the intangibles noted above, the Company completed the two step goodwill impairment test for the Safend reporting unit. The step two goodwill impairment test resulted in an implied fair value of goodwill substantially below the carrying value of the goodwill. As a result, the Company recorded a goodwill impairment charge of approximately $2.6 million during the three-months ended March 31, 2013, which resulted in a $1.4 million remaining carrying value of Safend goodwill. The goodwill impairment charge is included in the impairment of goodwill line item in the consolidated statements of operations for the six-months ended June 30, 2013. The developed technology impairment charge of $1,615,000 is included in the licensing and maintenance-cost of net revenues line item in the consolidated statements of operations for the six-months ended June 30, 2013.

The following schedule presents the details of intangible assets as of June 30, 2013 and December 31, 2012:

June 30, 2013

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			AccumulatedImpairmentLoss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,254,056	)	$	(5,038,100	)	$	133,844	5.2
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(601,327		)	(1,786,673		)	1,584,000		8.2
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(696,667		)	—			403,333		1.8
	$	11,678,000	$	(2,642,050	)	$	(6,914,773	)	$	2,121,177

December 31, 2012

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			AccumulatedImpairmentLoss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,167,900	)	$	(3,423,100	)	$	1,835,000	5.8
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(505,327		)	(1,786,673		)	1,680,000		8.8
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(586,667		)	—			513,333		2.4
	$	11,678,000	$	(2,349,894	)	$	(5,299,773	)	$	4,028,333

The acquired patents were purchased for $1,100,000 on May 7, 2010 from a company owned by Robert Thibadeau, Ph. D., a noted computer security expert who joined Wave in February 2010 as Senior Vice President and Chief Scientist.  The patents were issued in 2006 and 2008 and are valid until 2021.  Both patents concern the methods and systems for promoting security in a computer employing attached storage devices.  The patents are being amortized on a straight-line basis over 5 years based upon their estimated useful life.

Amortization expense associated with intangible assets was $109,374 and $292,156 for the three and six months ended June 30, 2013, respectively and $406,300 and $809,100 for the three and six months ended June 30, 2012, respectively. The estimated amortization expense for intangible assets for the next five years and thereafter is as follows (in thousands):

Period	Estimated Amortization Expense
Remainder of 2013	$	219
2014	437
2015	291
2016	217
2017	217
Thereafter	740
Total	$	2,121

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Critical Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2013

Critical Accounting Policies

Revenue Recognition

Revenue Recognition — Wave’s business model targets revenues from various sources including: licensing of the EMBASSY Trust Suite, Safend’s endpoint data loss protection suite, eTMS software products and development contracts.  Many of these sales arrangements include multiple-elements and/or require significant modification or customization of Wave’s software.

Wave recognizes revenue when it is realized or realizable and earned. Wave considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured.  In addition to the aforementioned general policy, the following are the specific revenue recognition policies for each major category of revenue.

Licenses

Wave receives revenue from licensing its EMBASSY Trust Suite software through distribution arrangements with its OEM partners, software development and other services.  Wave’s distribution arrangements have given rise to separate software license upgrade agreements with the end users of the products distributed by the OEMs.  Wave applies software revenue recognition guidance to all transactions except those where no software is involved.  Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured.  Persuasive evidence is generally a binding purchase order or license agreement.  Delivery occurs when product is shipped, for its OEM distribution arrangements, or delivered via a license key, for our license upgrade agreements.

Wave enters into perpetual software license agreements, referred as license upgrade agreements, through direct sales to customers and indirect sales through its OEM partners, distributors and resellers with the end users of the products distributed by the OEMs.  Wave has defined its two classes of end user customers as large and small based on those with orders in excess of 5,000 licenses and those with less than 5,000 licenses, respectively.  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.

Beginning in the quarter ended March 31, 2011, Wave had sufficient independent maintenance renewals to establish VSOE of fair value of maintenance for its small class of customers.  Through June 30, 2013, Wave continues to lack sufficient independent maintenance renewals to establish VSOE for its large customer class.  As a result, beginning in the quarter ended March 31, 2011, for the small customer class, Wave has allocated the arrangement consideration amount the elements included in our 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 still the case for Wave’s large customer class, the entire arrangement fee is recognized ratably over the performance period as licensing revenue.  At June 30, 2013, Wave’s deferred revenue consists of the unamortized balance of maintenance for sales to its small class of customers during 2013 and arrangements where VSOE does not exist.

Safend receives revenue from licensing its endpoint data loss protection products and services through its distribution channels.  Safend 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 delivered via a license key.

Safend enters into perpetual software license agreements through direct sales to customers and indirect sales through its OEM partners, distributors and resellers.  These license arrangements, generally also 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 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 licensing revenue.  VSOE of fair value is based upon the price for which the undelivered element is sold separately.

Safend has VSOE of fair value of maintenance for its Encryptor, Protector and Inspector products.  As a result Safend allocates the arrangement consideration among the elements included in its 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 still the case for Safend’s Discover, Reporter and Auditor products, the entire arrangement fee is recognized ratably over the performance period as licensing revenue.

Licensing and maintenance - cost of net revenues includes customer support personnel costs, foreign tax withholdings, amortization expense of the developed technology intangible asset, a consulting services engagement with one of the world’s leading international oil and gas companies and share-based compensation expense.

Services

Revenue from time and material service contracts is recognized as the services are provided. Revenue from fixed price, long-term service or development contracts is recognized using the percentage of completion method. The Company measures the percentage of completion by reference to the proportion of contract hours incurred for work performed to date to the estimated total contract hours expected to be incurred.  Losses on fixed price contracts are recognized during the period in which the loss first becomes apparent.

Services - cost of net revenues includes non-recurring government time and materials costs incurred in connection with a contract with the United States Department of Defense and share-based compensation expense.

Share-based Compensation

Share-based Compensation — We recognize compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan. Share-based compensation expense recognized is based on the value of the portion of share-based payment award that is ultimately expected to vest and has been reduced for estimated forfeitures.  We value share-based payment awards at grant date using an option-pricing model.  Our determination of the fair value of the share-based payment award on the date of grant using the option-pricing model 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, our expected stock price volatility over the term of the award and actual and projected employee stock option exercise behaviors.

Reclassifications

Reclassifications - Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation.  These reclassifications include:  (i) the $105,000 reclassification of support expense from selling, general and administrative expense to licensing and maintenance — cost of net revenue for the three and six-months ended June 30, 2012, (ii) the $229,500 reclassification of amortization on the developed technology intangible asset from selling, general and administrative expense to licensing and maintenance — cost of net revenues for the three-months ended June 30, 2012 and (iii) the $455,500 reclassification of amortization on the developed technology intangible asset from selling, general and administrative expense to licensing and maintenance — cost of net revenues for the six-months ended June 30, 2012.  These reclassifications have not changed the results of operations of the prior periods.

All references to common shares and per common share amounts of the Company have been adjusted to give effect to the implementation of a 1-for-4 reverse stock split of the Company’s authorized and issued common stock which was effected on July 1, 2013.  See Note 2 below.

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Contingencies

6 Months Ended

Jun. 30, 2013

Contingencies

Contingencies

12.  Contingencies

Landmark Ventures, Inc. (“Landmark”) has asserted that Safend Inc. (“Safend USA”), a subsidiary of Safend Ltd. (Wave’s Israeli subsidiary), has breached a consulting agreement between Landmark and Safend USA (the “Consulting Agreement”) which was terminated by Safend USA in July of 2011. According to an amended complaint filed in January 2012 by Landmark in the federal district court in New York, Safend USA (a) owes unspecified amounts to Landmark and (b) violated a provision of the Consulting Agreement by working with a former Landmark employee, resulting in damages of no less than $5,000,000.  Landmark has also named Safend Ltd. and Wave Systems Corp. (“Wave”) as defendants, alleging that both companies are legally responsible for Safend USA’s alleged breaches.  Safend USA, Safend Ltd. and Wave have moved to dismiss the Landmark amended complaint in its entirety.  On September 4, 2012, the federal district court granted Safend Inc.’s motion to dismiss the Landmark lawsuit and ordered the dismissal of the amended complaint with prejudice.  Landmark thereafter filed a timely notice of appeal to the United States Court of Appeals for the Second Circuit, which affirmed the judgment of the federal district court on March 12, 2013.  Landmark had 90 days to petition the United States Supreme Court for an application to permit an appeal.  Landmark  never exercised their right to petition the United States Supreme Court within the 90 days and as such the case has concluded.

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 06, 2013 Class A Common Stock	Aug. 06, 2013 Class B Common Stock
Entity Registrant Name	WAVE SYSTEMS CORP
Entity Central Index Key	0000919013
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		31,240,739	8,722
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

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Subsequent Events

6 Months Ended

Jun. 30, 2013

Subsequent Events

Subsequent Events

13.  Subsequent Events

On July 24, 2013, the Company received notice from the NASDAQ Listing Qualifications Department that Wave has regained compliance with the minimum $1.00 per share bid price requirement for continued inclusion under NASDAQ Marketplace Rule 5550(a)(2).  Shares of the Company’s Class A Common Stock maintained a closing bid price of at least $1.00 per share for the required ten consecutive days, from July 9 through July 22, 2013.

CERTAIN FORWARD-LOOKING INFORMATION:

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These statements include, but are not limited to, statements regarding contingencies, future prospects, liquidity and capital expenditures herein under “Part I Financial Information—Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  The words “may,” “would,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend” and similar expressions and variations thereof are intended to identify forward-looking statements.  Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control.  Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and detailed in our other filings with the Commission during the past 12 months.  Wave assumes no duty to and does not undertake to update any forward-looking statements.