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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2005

 
 
COMMISSION FILE NUMBER 0-21202

FIRSTWAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)



Georgia
58-1588291
(State of incorporation)
(IRS Employer ID #)
 


2859 Paces Ferry Road, Suite 1000
Atlanta, GA 30339
(Address of principal executive offices)


770-431-1200
(Telephone number of registrant)



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 __


Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes__ No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Outstanding as of May 12, 2005:

Common Stock, no par value   2,707,458 shares

 


FIRSTWAVE TECHNOLOGIES, INC.

FORM 10-Q

For the quarter ended March 31, 2005


Index


 
Page No.
   
 
   
 
   
 3
 
  
4
   
5
   
5
   
7
   
   
14
 
   
16
   
16
   
16


2

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

FIRSTWAVE TECHNOLOGIES, INC.
  
Consolidated Balance Sheet
  
(in thousands)
  
(Unaudited)
  
   
Dec 31,
  
Mar 31,
  
   
2004
 
2005
 
           
           
 
ASSETS
          
           
Current assets
              
Cash and cash equivalents
  
$
1,286
  
$
842
  
Accounts receivable, less allowance for
              
doubtful accounts of $98 and $81, respectively
    
605
   
504
 
Other prepaid expenses
    
565
   
546
 
Total current assets
    
2,456
   
1,892
 
               
Property and equipment, net
    
264
   
208
 
Software development costs, net
   
1,095
   
904
 
Intangible assets
    
800
   
743
 
Goodwill
    
1,658
   
1,639
 
Total assets
  
$
6,273
  
$
5,386
  
               
               
               
LIABILITIES AND SHAREHOLDERS' EQUITY
              
               
Current liabilities
              
Accounts payable
  
$
581
  
$
585
  
Deferred revenue
    
1,351
   
1,308
 
Accrued employee compensation and benefits
    
156
   
154
 
Dividends payable
    
46
   
46
 
Other accrued liabilities
    
290
   
120
 
Total current liabilities
    
2,424
   
2,212
 
               
               
Shareholders' equity
    
3,849
   
3,174
 
Total liabilities and shareholders' equity
  
$
6,273
  
$
5,386
  
               
               
               
The accompanying notes are an integral part of these financial statements.
  

3



FIRSTWAVE TECHNOLOGIES, INC.
 
Consolidated Statement of Operations
  
(in thousands, except per share amounts)
  
(unaudited)
  
           
           
   
For the Three Months Ended
  
   
Mar 31,
  
Mar 31,
  
   
2004
 
2005
 
Net Revenues
              
Software
  
$
341
  
$
82
  
Services
    
622
   
412
 
Maintenance
    
664
   
654
 
Other
    
34
   
22
 
     
1,661
   
1,170
 
Cost and Expenses
              
Cost of revenues
              
Software
    
371
   
204
 
Services
    
620
   
504
 
Maintenance
    
141
   
102
 
Other
    
27
   
22
 
Sales and marketing
    
774
   
321
 
Product development
    
360
   
194
 
General and administrative
    
626
   
475
 
Foreign currency exchange (Gain)/Loss
    
(127
)
  
158
 
     
2,792
   
1,980
 
               
Operating loss
    
(1,131
)
  
(810
)
               
Interest income/(expense),net
    
(1
)
  
60
 
Loss before income taxes
    
(1,132
)
  
(750
)
Income taxes
    
0
   
0
 
Net loss
   $ 
(1,132
)
 $ 
(750
)
               
Dividends on preferred stock
    
(55
)
  
(71
)
               
               
Net loss applicable to
              
common shareholders
   $ 
(1,187
)
 $ 
(821
)
               
Basic:
              
Loss per share
   $ 
(0.44
)
 $ 
(0.30
)
Weighted average shares
    
2,674
   
2,694
 
               
Diluted:
              
Loss per share
   $ 
(0.44
)
 $ 
(0.30
)
Weighted average shares
    
2,674
   
2,694
 
               
               
The accompanying notes are an integral part of these financial statements.
  



4


FIRSTWAVE TECHNOLOGIES, INC.
  
Consolidated Statement of Changes in Shareholders' Equity
  
(In thousands, except share data)
  
(unaudited)
  
                                       
For the Three Months Ended March 31, 2005
  
                                       
                           
Accumulated
          
                           
Other
          
   
Common Stock  
  
Preferred Stock  
  
Additional
  
Compre-
  
compre-
          
                   
paid-in
  
hensive
  
hensive
  
Accumulated
      
   
Shares
 
Amount
  
Shares
  
Amount
  
capital
  
loss
  
loss
  
Deficit
  
Total
  
                                       
                                       
Balance at December 31, 2004
    
2,693,993
 
$
13
    
34,020
 
$
3,011
  
$
25,485
          
($754
)
 $ 
(23,906
)
$
3,849
  
                                                         
Exercise of common stock options
   
666
                     
1
                     
1
 
                                                         
Issuance of common stock
    
518
                     
1
                     
1
 
                                                         
Dividends
                            
(71
)
                    
(71
)
                                                         
Comprehensive loss
                                                        
Net loss
                                  
($750
)
        
(750
)
  
(750
)
Foreign currency translation adjustment
                                  
144
   
144
         
144
 
Comprehensive loss
                                       
($606
)
                     
                                                         
Balance at March 31, 2005
    
2,695,177
 
$
13
    
34,020
 
$
3,011
  
$
25,416
          
($610
)
 $ 
(24,656
)
$
3,174
  
                                                         
The accompanying notes are an integral part of these financial statements.
    


5

FIRSTWAVE TECHNOLOGIES, INC.
  
Consolidated Statement of Cash Flows
  
(in thousands)
  
(unaudited)
  
           
           
           
   
For the Three Months Ended
  
   
March 31, 2004
  
March 31, 2005
  
           
           
Cash flows provided by/(used in) operating activities
   $ 
(686
)
 $ 
(529
)
               
Cash flows from investing activities
              
Software development costs
    
(74
)
  
0
 
Purchases of property and equipment, net
    
(85
)
  
(10
)
Acquisition of Connect-Care
    
0
   
16
 
Net cash provided by/(used in) investing activities
    
(159
)
  
6
 
               
Cash flows from financing activities
             
Proceeds from issuance of preferred stock
    
0
   
0
 
Proceeds from issuance of common stock
    
4
   
2
 
Payment of dividends on preferred stock
    
(55
)
  
(71
)
Net cash used in financing activities
    
(51
)
  
(69
)
               
               
Foreign currency translation adjustment
    
(97
)
  
148
 
               
Decrease in cash and cash equivalents
    
(993
)
  
(444
)
Cash and cash equivalents, beginning of period
    
2,704
   
1,286
 
Cash and cash equivalents, end of period
  
$
1,711
  
$
842
  
               
Supplemental disclosure of cash flow information
    
   
 
Cash paid for income taxes
  
$
0
  
$
0
  
               
Cash paid for interest
  
$
6
  
$
0
  
               
               
               
The accompanying notes are an integral part of these financial statements.
  



6

FIRSTWAVE TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
March 31, 2005


1.  Description of Business and Basis of Presentation

Description of the Company
Headquartered in Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a global provider of strategic CRM solutions specifically designed for the High Technology and Sports industries. Firstwave’s solutions provide companies with fit-to-purpose features that are designed to optimize how companies win, maintain and grow customer and organizational relationships while improving the overall customer experience. Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information. Firstwave supports several product lines: Firstwave CRM (includes eCRM and v.10 products), Firstwave Sports, Firstwave Technology and TakeControl.

Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements contained in the Company’s Form 10-K for the period ended December 31, 2004. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements have been included.

The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements for the Company at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The consolidated financial statements include the accounts of Firstwave Technologies, Inc. and its wholly owned subsidiaries, Connect-Care, Inc. and Firstwave Technologies UK, Ltd. All intercompany transactions and balances have been eliminated in consolidation.
 
2. Use of Estimates and Critical Accounting Policies

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and the reported amounts of revenues and expenses during the reporting period. Examples of estimates that require management’s judgment include revenue recognition, accounts receivable reserve, valuation of long-lived assets and intangible assets, and goodwill. Management bases its estimates on historical experience and on other various factors that are believed to be reasonable under the circumstances. All accounting estimates and the basis for these estimates are discussed among the Company’s senior management and members of the Audit Committee. Actual results could differ from those estimates.

Critical Accounting Policies
The Company believes that the following accounting policies are critical to understanding the consolidated financial statements:
· Revenue Recognition
· Capitalization of Software Development Costs
· Intangible Assets

3. Summary of Significant Accounting Policies

Revenue recognition
The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, and related interpretations.

7

Revenue from software product sales (other than ticketing and fan memberships described below) is recognized upon shipment of the product when the Company has a signed contract, the fees are fixed and determinable, no significant obligations remain and collection of the resulting receivable is probable. The Company accrues for estimated warranty costs at the time it recognizes revenue.

The Company’s products are licensed on a per-user model, except for hosting services. In accordance with Paragraph 8 of SOP 97-2, license revenues under the per-user model are recognized under the Company’s revenue recognition polices when revenue recognition criteria are met. Hosting services are priced as a monthly or yearly fixed amount based upon number of users, and are recognized ratably by month over the period of service. Hosting services revenues are consolidated into services revenues on the Company’s financial statements.

The Company has agreements with customers, whereby it will recognize revenue at a future date. This type of agreement is mostly found in the Company’s Sports business, where the Company recognizes revenue based on a per-ticket or per-fan membership basis after the actual event has occurred. The amount the Company will receive per ticket or membership is variable, but is pre-determined in the terms of the agreements. Although tickets may be sold in advance of the event, the Company will recognize these revenues after the event occurs. Ticketing revenue is consolidated into software revenues on the Company’s financial statements.

Services revenue is recognized as services are performed. Our software product is able to function independently in a customer’s environment without additional services. Our training, implementation, and customization services are optional services to our customers and are not necessary for the functioning of the software product. Our software is offered as a stand-alone product. It can be implemented with minimal services. The essential functionality of the software, such as database support and maintenance, preparation of marketing campaigns, and standard workflow, is functional and can be utilized by the customer upon installation as intended by the customer. At a customer’s request, the software can also be implemented with additional services, such as data conversion and workflow modifications, which are not significant to the functionality of the software, but rather tailor features to most effectively function in the customer’s environment.

The revenue for the customization or implementation services is recognized as the services are provided and earned. Revenue is allocated to software and services based on vendor specific objective evidence of fair values. Because the software is a stand-alone product that can be used for the customer’s purpose upon installation, and because any services performed have insignificant effect on the functionality of the software, services revenues are accounted for separately from Software Revenues in accordance with Paragraph 69 of SOP 97-2. 

The Company has not recorded any unbilled receivables related to implementation and customization service revenues, and the Company has accounted for any implementation and customization service revenues that have been billed as the services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.

The Company has arrangements with customers that provide for the delivery of multiple elements, including software licenses and services. The Company allocates and recognizes revenue related to each of the multiple elements based on vendor specific objective evidence of the fair value of each element and when there are no undelivered elements essential to the functionality of the delivered element. Vendor specific objective evidence is based on standard pricing for each of the elements in our multiple element arrangements. Revenue associated with the various elements of multiple element arrangements is based on such vendor specific objective evidence as the price charged for each element is the same as when the element would be sold separately from any other element. Standard pricing does not vary by customer or by duration, or by requirements of the arrangement.

International revenues are primarily generated by Firstwave UK and independent distributors who offer licenses of the Company's products in specific geographic areas. Under the terms of the Company's international distributor agreements, international distributors collect license fees and maintenance revenues on behalf of the Company, and remit 50% to 60% of standard license fees and maintenance revenues they produce. Pursuant to EITF 99-19, the Company recognizes these distributor sales at the gross license amount because the Company retains title to the products, holds the risk and rewards of ownership, such as risk of loss for collection, and responsibility for providing the product to the customer. The Company is responsible for establishing and maintaining the pricing of the product and performs any source code changes to the product. The independent distributors are considered agents of the Company and work on a commission basis. The commissions paid are reflected as a selling expense in the Company’s financial statements. The maintenance fees generated by distributor revenues are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue. Revenues from non-monetary exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident. There were no non-monetary transactions in the first quarter of 2005.
 
Maintenance revenue is recognized on a pro rata basis over the term of the maintenance agreements.

8


Advanced billings for services and maintenance contracts are recorded as deferred revenue on the Company's balance sheet, with revenue recognized as the services are performed and on a pro-rata basis over the term of the maintenance agreements.

The Company provides an allowance for doubtful accounts based on management’s estimate of receivables that will be uncollectible. The estimate is based on historical charge-off activity and current account status. Accounts Receivable are stated at invoiced amounts.

The Company’s US accounting management oversees reporting procedures in the United Kingdom and monitors their transactions on a timely basis. The US management reviews transactions and sales contracts as such transactions and sales are occurring to ensure that revenues are recognized under the Company’s revenue recognition policy and that expenses and other transactions are reported in accordance with accounting principles generally accepted in the United States. Management of the UK subsidiary report directly to US management, with US management substantially involved in all aspects of UK operations. As such, US management has established procedures to insure that international revenues are recognized properly and on a timely basis.

Software development costs
Capitalized software development costs consist principally of salaries, contract services, and certain other expenses related to development and modifications of software products capitalized in accordance with the provisions of SFAS 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Capitalization of such costs begins only upon establishment of technological feasibility as defined in SFAS 86 and ends when the resulting product is available for sale. The Company evaluates the establishment of technological feasibility based on the existence of a working model of the software product. Capitalized costs may include costs related to product enhancements resulting in new features and increased functionality as well as writing the code in a new programming language. In this case, as the version enhancements are built on an already detailed design under an existing source code, technological feasibility is established early for each version. All costs incurred to establish the technological feasibility of software products are classified as research and development and are expensed as incurred.

The Company evaluates the realizability of unamortized capitalized software costs at each balance sheet date. Software development costs which are capitalized are subsequently reported at the lower of unamortized cost or net realizable value. If the unamortized capitalized software cost exceeds the net realizable value of the asset, the amount would be written off accordingly. The net realizable value of the capitalized software development costs is the estimated future gross revenues of the software product reduced by the estimated future costs of completing and disposing of that product. Amortization of capitalized software costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which is not more than three years. It is possible that those estimates of anticipated product revenues, the remaining estimated economic life of the product, or both could be reduced due to changing technologies. The amortization of software development costs is presented as a cost of software revenue in the Company’s financial statements.

Goodwill and other intangibles
In accordance with SFAS 142 “Goodwill and Other Intangible Assets,” intangible assets with indefinite useful lives must be tested periodically for impairment. Examples of matters requiring management’s judgment regarding the existence of impairment of an intangible asset, and the resulting fair value, would include management’s assessment of adverse changes in legal factors, market conditions, or loss of key personnel. If the fair value of the intangible asset is determined to be less than the carrying value, the Company would record an impairment loss. SFAS 142 prescribes a two-phase approach for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures the impairment. Goodwill was evaluated for impairment at the end of the first quarter of 2005 in accordance with SFAS 142 “Goodwill and Other Intangible Assets,” and it was determined there was no instance of impairment of recorded Goodwill.

Concentration of credit risk
The Company is subject to credit risk primarily due to its trade receivables. The Company has credit risk due to the high concentration of trade receivables through certain customers. The Company has three customers, two in its Technology business and one in its Sports business, which individually accounted for more than ten percent of the Company’s total accounts receivable at December 31, 2004 and at March 31, 2005. The customer accounts receivable that represented more than 10% of total accounts receivable are shown below.

9


 
   
Dec 31,
  
Mar 31,
  
   
2004
  
2005
  
Argos, Ltd
    
13.8
%
  
0.0
%
British Canoe Union
    
10.7
%
  
3.6
%
CapGemini UK
    
12.6
%
  
0.0
%
Sungard HTE, Inc.
    
15.0
%
  
5.2
%
Manhattan Associates
    
1.6
%
  
20.8
%

Significant Customers
The table below identifies customers who contributed more than 10% of total revenue for each period shown.
 

   
For the Three Months Ended
  
   
Mar 31,
  
Mar 31,
  
   
2004
  
2005
  
Electronic Data Systems, Ltd.
    
22.5
%
  
6.2
%
Sports Coach UK
    
13.6
%
  
2.9
%

For a more detailed description of the information presented in the table above, see the discussion under the heading “Results of Operations” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Stock-based compensation
Effective for 2002, the Company adopted SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure,” which did not have a material impact on the consolidated financial statements. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations and to elect the disclosure option of SFAS 123, "Accounting for Stock-Based Compensation.” Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.

The Company has adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee awards (in thousands, except per share data):


   
For the Three Months Ended
  
   
March 31, 2004
  
March 31, 2005
  
Net loss applicable to common
              
shareholders, as reported
  
$
(1,187
)
$
(821
)
               
Stock based employee compensation, net of related
              
tax effects under the fair value based method
    
172
   
21
 
               
Net loss applicable to common
              
shareholders, as adjusted
  
$
(1,359
)
$
(842
)
Loss per share:
              
Basic - as reported
  
$
(0.44
)
$
(0.30
)
Basic - as adjusted
  
$
(0.51
)
$
(0.31
)
               
Diluted - as reported
  
$
(0.44
)
$
(0.30
)
Diluted - as adjusted
  
$
(0.51
)
$
(0.31
)



10


The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the quarters ended March 31, 2004 and March 31, 2005, respectively: dividend yield of 0% for both quarters; expected volatility of 133% and 127%, and risk-free interest rate of 2.99% and 3.88%.

There were no new options granted during the first quarter of 2005. The reduction in stock based employee compensation from $172,000 to $21,000 is a result of a large number of cancellations of stock options during the quarter due to staff resignations of certain long-term employees.
 
There is no tax benefit included in the stock-based employee compensation expense determined under the fair-value-based method for the three month periods ended March 31, 2004 and March 31, 2005, as the Company established a full valuation allowance for its net deferred tax assets.
 
Basic and diluted net loss per common share
Basic net loss per common share is based on the weighted average number of shares of common stock outstanding during the period. Stock options and convertible preferred stock are included in the diluted earnings per share calculation when they are not antidilutive. Net loss applicable to common shareholders includes a charge for dividends related to the Company’s outstanding preferred stock.

Shown below is a reconciliation of the numerators and denominators of the basic and diluted loss per share computations. (in thousands, except per share data):
 

   
For the Three Months Ended
  
For the Three Months Ended
  
   
March 31, 2004
  
March 31, 2005 
  
   
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
 
 
 
(Numerator)
  
(Denominator)
 
Amount
 
(Numerator)
 
(Denominator)
 
Amount
  
Net loss
  
$
(1,132
)
            
$
(750
)
            
Less: Preferred Stock Dividends
    
(55
)
              
(71
)
            
                                       
Basic EPS
                                      
Loss applicable to common shareholders
  
$
(1,187
)
  
2,674
 
$
(0.44
)
$
(821
)
  
2,694
 
$
(0.30
)
                                       
Effect of Dilutive Securities (1)
                                      
Warrants
          
19
               
19
       
Convertible Preferred Stock
    
55
   
665
         
71
   
898
       
Stock Options
            
22
                   
4
       
     
55
   
706
         
71
   
921
       
Diluted EPS
                                      
Loss applicable to common shareholders
  
$
(1,187
)
  
2,674
 
$
(0.44
)
$
(821
)
  
2,694
 
$
(0.30
)
                                       
(1) Not included because anti-dilutive
                                      
 
Foreign currency translation
The financial statements of the Company's international subsidiary are translated into U.S. dollars at current exchange rates, except for revenues and expenses, which are translated at average exchange rates during each reporting period. Currency transaction gains or losses are included in the results of operations as general and administrative expenses in the Company’s financial statements. Net exchange gains or losses resulting from the translation of assets and liabilities are included as a component of accumulated other comprehensive loss in shareholders' equity.
 
Impairment of long-lived assets
The Company evaluates impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets would be based on the fair value of the asset.

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Segment reporting
Management believes that the Company has only a single segment consisting of software sales with related services and support. The information presented in the consolidated statement of operations reflects the revenues and costs associated with this segment that management uses to make operating decisions and assess performance.
 
4. Goodwill and Intangibles

The Company has $743,000 of Intangible Assets and $1,639,000 of Goodwill as a result of acquisitions in 1998 and 2003.

In accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible assets with indefinite useful lives must be tested periodically for impairment. Examples of Management’s judgment regarding the existence of impairment of an intangible asset and the resulting fair value, would include management’s estimates of future net cash flows and assessment of adverse changes in legal factors, market conditions, or loss of key personnel. If the fair value of the intangible asset is determined to be less than the carrying value, the Company would record an impairment loss. SFAS No. 142 prescribes a two-phase approach for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures the impairment. During year-end 2004 Goodwill was evaluated for impairment in accordance with SFAS No. 142. As a result of the review, it was determined that there was an impairment of goodwill, and the second phase was required. The second phase resulted in the Company recording a non-cash impairment charge of $750,000 to write-off a portion of the carrying value of goodwill at December 31, 2004. Goodwill was again evaluated for impairment during the first quarter of 2005 and it was determined there was no further impairment of recorded goodwill.
 
The weighted average amortization period for the intangible assets with definite lives is six years. There are no significant residual values in the intangible assets. The Company began amortization of the above mentioned intangible assets relating to the acquisitions effective April 1, 2003, recording $57,000 in amortization expense in the first quarter of 2005.
 
The following table presents details of intangible assets with definite lives (in thousands):
 

                   
   
December 31, 2004
  
March 31, 2005
  
   
Gross carrying
 
Accumulated
 
Gross carrying
 
Accumulated
  
   
amount
 
amortization
 
amount
 
amortization
  
Amortizable intangible assets
                          
Connect-Care Technology
  
$
300
  
$
175
  
$
300
  
$
200
  
Connect-Care Customer Relationships
    
900
   
225
   
900
   
257
 
Total
  
$
1,200
  
$
400
  
$
1,200
  
$
457
  
                           
Aggregrate Amortization Expense
                          
For the three months ended March 31, 2005
  
$
57
                    
                           
Estimated Amortization Expense
                          
For year ended December 31, 2005
  
$
229
                    
For year ended December 31, 2006
  
$
154
                    
For year ended December 31, 2007
  
$
129
                    
For year ended December 31, 2008
  
$
129
                    
For year ended December 31, 2009
  
$
129
                    

5. Borrowings

On July 29, 2003, the Company signed a one-year “Revolving Credit Facility” loan with RBC Centura whereby the Company may borrow up to $1,000,000. The Company had borrowings of $500,000 against the line of credit as of March 31, 2004. The Revolving Facility bears interest at a variable rate equal to the one month London Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC Centura Prime Rate” plus 0.50%, at our option. The weighted average interest rate for the three months ended March 31, 2004 was 4.10%. The first $500,000 of the Revolving Facility is available on a non-formula basis. Once advances under the Revolving Facility exceed $500,000,

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any advances are based on a borrowing base of 75% of eligible accounts receivable as determined by a certified borrowing base report. The loan is secured by the assets of the Company. The Company must comply with certain financial covenants per the terms of the agreement. As of March 31, 2004, the Company was in compliance with the required covenants.

The Company repaid its $500,000 of borrowings under the line of credit in full on December 30, 2004 and, on March 1, 2005, cancelled the Revolving Credit Facility. The Company had no borrowings at March 31, 2005. The Company paid $6,500 in interest expense in the first quarter of 2004, and no interest expense was incurred during the first quarter of 2005.

6. Related Party Transactions 

The former President and COO of the Company, who resigned from the Company on March 22, 2005, was paid dividends of $675 in the first quarter of 2005 related to his $30,000 investment in Series D Convertible Preferred Stock from June of 2004. The Chairman and CEO of the Company was paid $50,625 in the first quarter of 2005 for dividends related to his $2,250,000 investment in Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock.

7. Impact of Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective as of the first annual reporting period beginning after December 15, 2005. The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial position, results of operations and cash flows. The cumulative effect of adoption, if any, will be measured and recognized in the statement of operations on the date of adoption.

In April 2005, the Securities and Exchange Commission’s Office of the Chief Accountant and its Division of Corporation Finance has released Staff Accounting Bulletin (SAB)_No. 107 to provide guidance regarding the application of FASB Statement No. 123 (revised 2004), “Share-Based Payment”, Statement No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SAB 107 provides interpretive guidance related to the interaction between Statement No. 123(R) and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to the Statement No. 123(R).


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

The following discussion should be read in conjunction with the Financial Statements and Notes thereto of the Company presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. This Report contains forward-looking statements that reflect management’s expectations, estimates, and projections for future periods based on information (financial and otherwise) available to management as of the end of the period covered by this Quarterly Report. These statements may be identified by the use of forward-looking words such as “may”, “will”, “believe”, “anticipate”, “estimate”, “expect”, “projects”, or “intends”. Actual events and results may differ from the results anticipated by the forward-looking statements. Factors that might cause such differences include, but are not limited to, those items discussed under the caption "Certain Factors Affecting Forward-Looking Statements" presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and other factors discussed in the Company’s press releases and other Reports filed with the Securities and Exchange Commission.

Overview
Headquartered in Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a global provider of strategic CRM solutions specifically designed for the High Tech and Sports industries. Firstwave’s solutions provide companies with fit-to-purpose features that are designed to optimize how companies win, maintain and grow customer and organizational relationships while improving the overall customer experience. Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information. Firstwave supports several products: Firstwave CRM, Firstwave Technology, First Sports and TakeControl.

Results of Operations
Total revenues decreased 29.6% from $1,661,000 in the first quarter of 2004 to $1,170,000 in the first quarter of 2005 primarily due to decreased software and services revenues. The primary cause of the decrease in total revenues is due to lower revenues from our relationships with Electronic Data Systems, Ltd. and Sports Coach, which contributed 22.5% and 13.6% respectively, of our total revenue during the first quarter of 2004, compared to 6.2% and 2.9% respectively, of total revenue during the first quarter of 2005. Although we successfully completed implementation of the multi-year services project for Electronic Data Systems, Ltd. during 2003, we continue to provide additional services and support and maintenance to this customer.

Software revenues decreased 76.0% from $341,000 in the first quarter of 2004 to $82,000 in the first quarter of 2005. This decrease is primarily due to lower-than-anticipated software license revenues of our sports solution from companies expected to replace prior revenues from Electronic Data Systems. Our software revenues remain significantly dependent upon the size and timing of closing of license agreements.
 
Services revenues decreased 33.8% from $622,000 in the first quarter of 2004 to $412,000 in the first quarter of 2005. This decrease was primarily due to a decrease in services engagements in the UK and the fact that we were unable to replace the large services engagements in the UK in the past with new customer engagements. Our services revenues are subject to fluctuations based on variations in the length of and number of active service engagements in a given quarter.

Maintenance revenues decreased 1.5% from $664,000 during the first quarter of 2004 to $654,000 in the first quarter of 2005. Maintenance revenues are the result of renewal agreements from previous software license sales as well as new license agreements.

Cost of software revenues decreased 45.0% from $371,000 in the first quarter of 2004 to $204,000 in the first quarter of 2005. Cost of software revenues includes amortization of capitalized software costs, costs of third party software, media costs, and documentation materials. The decrease is primarily due to a decrease in amortization expense of $156,000 related to the write-off of two product lines in the fourth quarter of 2004, resulting in lower amortization expense in 2005. Cost of software as a percentage of software revenues increased from 108.8% in the first quarter of 2004 to 248.8% in the first quarter of 2005, primarily due to the decrease in software revenue.

Cost of revenues for services decreased 18.7% from $620,000 in the first quarter of 2004 to $504,000 in the first quarter of 2005. The decrease is primarily due to decreases in payroll, resulting from a reduction in the number of services personnel, and payroll related costs, including travel expenses, consistent with decreased services revenues. The cost of revenues for services as a percentage of services revenues increased from 99.7% in the first quarter of 2004 to 122.3% in the first quarter of 2005 primarily due to certain fixed personnel costs, which at lower revenue levels result in a decrease in the services revenue margin.

Cost of revenues for maintenance decreased 27.7% from $141,000 in the first quarter of 2004 to $102,000 in the first quarter of 2005. This decrease is due to decreased payroll costs associated with a reduction in the number of maintenance personnel. The cost of revenues for maintenance as a percentage of maintenance revenue decreased from 21.2% in the first quarter of 2004 to 15.6% in the first quarter of 2005 due to these reductions in payroll and personnel.

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Sales and marketing expense decreased 58.5% from $774,000 in the first quarter of 2004 to $321,000 in the first quarter of 2005. The decreases are the result of decreases in payroll and commission expenses associated with a reduction in the number of sales and marketing personnel, telemarketing costs, trade show costs and travel expenses.
 
The Company’s product innovation and development expenditures, which includes amounts capitalized, decreased 46.1% from $360,000 in the first quarter of 2004 to $194,000 in the first quarter of 2005. The decreases are primarily related to decreases in payroll costs associated with staff reductions, and reductions associated with fewer outside contractors. Software development costs capitalized during the three months ended March 31, 2004 were $74,000. There were no development costs capitalized during the first quarter of 2005. A net realizable analysis was performed at March 31, 2005 in accordance with SFAS 86. It was determined that the unamortized software development costs do not exceed net realizable value; therefore, no impairment loss was recorded.

General and administrative expenses decreased 24.1% from $626,000 in the first quarter of 2004 to $475,000 in the first quarter of 2005. The decrease is primarily due to reductions in rent expense and payroll costs associated with a reduction in personnel, as well as a reduction in base salaries for certain executive personnel.

The Foreign Currency exchange loss for the first quarter of 2005 was $158,000 compared to a gain of $127,000 in the first quarter of 2004 due to a less favorable exchange rate.

Dividends on preferred stock increased 29.1% from $55,000 in the first quarter of 2004 to $71,000 in the first quarter of 2005 due to dividends related to the issuance of shares of Series D Convertible Preferred Stock in June of 2004 for a purchase price of $700,000.

The above factors combined to result in a net loss of $821,000 in the first quarter of 2005 compared to a net loss of $1,187,000 in the first quarter of 2004. Net loss per basic and diluted share was $0.30 for the first quarter of 2005 compared to a net loss of $0.44 per basic and diluted share for the first quarter of 2004. At March 31, 2005, the number of basic weighted average shares outstanding was 2,694,000 compared to 2,674,000 at March 31, 2004.

Balance Sheet

Net accounts receivable decreased 16.7% from $605,000 at December 31, 2004 to $504,000 at March 31, 2005, primarily due to lower software license and services revenues invoiced. Property and equipment decreased 21.2% from $264,000 at December 31, 2004 to $208,000 at March 31, 2005 as a result of year-to-date depreciation partially offset by new asset purchases. Capitalized software development decreased 17.4% from $1,095,000 at December 31, 2004 to $904,000 at March 31, 2005 due to year-to-date amortization expense of $191,000. Intangible assets decreased 7.1% from $800,000 at December 31,2004 to $743,000 at March 31, 2005 due to $57,000 in year-to-date amortization expense.

Deferred revenue decreased 3.2% from $1,351,000 at December 31, 2004 to $1,308,000 at March 31, 2005 due to reductions in and the timing of billing for annual maintenance renewals. Other accrued liabilities decreased 58.6% from $290,000 at December 31, 2004 to $120,000 at March 31, 2005 primarily due to a decrease in accrued Value Added Tax in the UK and sales tax in the US consistent with lower revenues.

Liquidity and Capital Resources

As of March 31, 2005, the balance of cash and cash equivalents was $842,000 compared to $1,286,000 at December 31, 2004.

Our future capital requirements will depend on many factors, including our ability to obtain positive cash flows, market acceptance of our products, and the timing and extent of spending to support product development efforts and expansion of sales and marketing. Our future capital needs will be highly dependent upon our ability to control expenses and generate additional software license revenues, and any projections of future cash needs and cash flows are subject to substantial uncertainty. If we are unable to fund expenses from operations or obtain the necessary additional capital, we may be required to reduce the scope of planned product development and sales and marketing efforts, as well as further reduce the size of current staff, all of which could have a material adverse effect on our business, financial condition, and ability to reduce losses or generate profits.

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We have no material commitments for capital expenditures. We do not believe that inflation has historically had a material effect on our Company's results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
The Company is subject to market risk exposures of varying correlations and volatilities, including interest rate risk and foreign exchange rate risk. Currently, the Company maintains its cash position in money market funds and other bank accounts. The Company does not currently engage in hedging activities or otherwise use derivatives to alter the interest characteristics of its financial assets. Although a decrease in interest rates could reduce our interest income, at this time management does not believe a change in interest rates will materially affect the Company's financial position or results of operations.

The results of operations of Firstwave Technologies, UK Ltd, our wholly owned subsidiary located in Surrey, England, are exposed to foreign exchange rate fluctuations as the financial results of this subsidiary are translated from the local currency to U.S. Dollars upon consolidation. As a result of this translation, as exchange rates vary, net sales and other operating results, when translated, may differ materially from our prior performance and our expectations. In addition, we could also be significantly affected by weak economic conditions in foreign markets that could reduce demand for our products and further negatively impact the results of our operations in a material and adverse manner. As a result of these market risks, the price of our stock could decline significantly and rapidly.

The Company does not engage in any hedging activities. As foreign currency exchange rates vary, the fluctuations in revenues and expenses may materially impact the financial statements upon consolidation. A weaker US dollar would result in an increase to revenues and expenses upon consolidation, and a stronger US dollar would result in a decrease to revenues and expenses upon consolidation.

The Company manages the currency fluctuation risk by monitoring on a regular basis the foreign currency exchange rates as they relate to our UK Subsidiary, and attempts to take action if the foreign currency exchange rate would result in a material impact to the Company’s financial statements upon translation from the local currency, the British pound, to the US Dollar. The action taken in these instances by the Company is to move the currency from the UK Subsidiary to the Company’s headquarters when doing so would be beneficial for the Company.

Item 4. Controls and Procedures

Based on their most recent evaluation, which was completed in consultation with management as of the end of the period covered by the filing of this Form 10-Q, the Company’s Chairman and Chief Executive Officer and Chief Financial Officer believe the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the date of such evaluation in timely alerting the Company’s management to material information required to be included in this Form 10-Q and other Exchange Act filings.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings
Not Applicable

Item 2. Changes in Securities
Not Applicable

Item 3. Defaults Upon Senior Securities
Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable

Item 5. Other Information
Not Applicable


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Item 6. Exhibits
Exhibit 31.1 Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
Exhibit 31.2 Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.








SIGNATURES


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.
 
 
    FIRSTWAVE TECHNOLOGIES, INC. 
 
 		  
 		  
 
DATE: May 13, 2005    /s/  Judith A. Vitale
 
Judith A. Vitale
Chief Financial Officer 
(Principal Financial Officer)