"During the third quarter ended September 30, 2004, Wave Systems completed licensed contracts amounting to $340,000. These contracts which were not reflected as part of the third quarter revenue results will be booked as deferred revenue and be recorded as revenue over future reporting periods. We also expect to receive the $340,000 in cash related to these contracts before the end of this year."
What was added during Q&A:
"Paulson: Okay. If I heard correctly I heard Gerry Feeney say that the 340,000 of the deferred revenues, you’re expecting to collect that in Q4? Would that then mean that there’d be at least a minimum of 340,000 in revenues in Q4?
SKS: No, I don’t think that’s a good way to look at it. In some cases, so I’ll use an example. Part of the $340,000 is for example a license payment that we fully expect will be booked over either all or some portion of the deployed units in the marketplace. So we’re taking an appropriately conservative approach to the accounting of this, which is very typical as it relates to how the SEC wants these types of revenue items addressed. But we felt that it was important to communicate that there is a beginning of what we would consider reasonably significant contracts in the marketplace. Because if I defer something over a couple years of deployment in volume, it would be very hard to detect that a significant event happened. And so we thought this was a fair and appropriate way to communicate it to the shareholders, because everybody has been waiting for that point in time where we understand that the real beginnings of engagement of Wave’s products are happening in the marketplace based on products that are not one time deals, but are products that we expect to sell over and over and over again.
Paulson: But did I hear Gerry correctly that you’re anticipating on collecting that 340,000 in Q4?
SKS: Yes. We fully expect having the 340,000 in cash, in hand before the end of Q4.
Feeney: And Steven, if I could just add to that. The nature of these contracts is that we signed the contracts before the end of September. They were billable as of the end of September, but in the case of one or two of them the bills were not put out until the beginning of October. Regardless, we didn’t recognize them as revenue in the quarter anyway. All things being the same, you will see this as we’ve billed out all these contracts now, the end of this quarter would show as deferred revenue, so you’d see the deferred revenue on the balance sheet increase by the amount of this 340,000 in aggregate. All of the, the nature of all of these contracts that have been billed out now, they’re all for non-cancelable non-refundable. So it’s the obligation of the customer to pay this portion of the 340,000 in cash, and it’s expected to be received before the end of this year. So our cash balances will be going up by that amount. However as you’d stated earlier in the question, we don’t anticipate that we’re going to be recognizing all of these as revenue this quarter. This will be over multiple quarters.
Paulson: Okay. Now based on that 340K in deferred revenue for contracts or deployments going forward would it be fair to say that Q4 would be at least that amount or higher for deferred revenue going forward after that.
SKS: Yeah. I think we certainly hope so. The challenge in this is we have a good pipeline forming up. I think we’re very confident in that pipeline. We also continue to be in the early stage of this market. There are a number of what we consider significant events that we hope to participate in that help drive the business. We’re very bullish on the business going forward. We’re at the early stages of engagement. I think that it’d be nice to make sure that we had a relatively smooth line on this. Ultimately I think our revenue, recognized revenue, will reflect a smoother line than necessarily booked contracts one way or another. Because the bulk of our business is based on per seat licensing. So any pre-pays that we have on per seat licensing ultimately then get booked out as recognized revenue over the life of those per seats. So, realistically I think you’ll see a fairly smooth trans – a smooth growth – we hope, on realized revenue and you know, whether something gets booked on the 31st of December or the 2nd of January, you know, we’ll see how it ultimately forms up. Especially with the holidays, it’s always a little interesting to note.
Berkshires, that's a nice thought, and it would be great if it plays out that way. However, on the last CC, sks stated that 350k deferred would be recognized over a few quarters.
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