Resonate Blends, Inc. - Quarter Report: 2003 September (Form 10-Q)

Georgia

58-1588291

(State of incorporation)

(IRS Employer ID #)

Yes   x

No   o

Yes   o

No   x

Page No.

Part I.  Financial Information

Item 1.  Financial Statements

Consolidated Balance Sheet - December 31, 2002 and September 30, 2003

3

Consolidated Statement of Operations - For the Three and Nine Months Ended September 30, 2002 and September 30, 2003

4

Consolidated Statement of Changes in Shareholders’ Equity - For the Nine Months Ended September 30, 2003

5

Consolidated Statement of Cash Flows - For the Nine Months Ended September 30, 2002 and September 30, 2003

6

Notes to Consolidated Financial Statements

7

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

15

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

18

Item 4.  Controls and Procedures

18

Part II.  Other Information

Item 6.  Exhibits and Reports on Form 8-K

19

Item 10.  Exhibits – Material Contracts

19

Dec 31,
2002

Sept 30,
2003

ASSETS

Current assets:

Cash and cash equivalents

$

3,779

$

2,834

Accounts receivable, less allowance for doubtful accounts of $88 and $386, respectively

2,406

1,570

Prepaid expenses and other assets

664

1,143

Total current assets

6,849

5,547

Property and equipment, net

738

570

Software development costs, net

2,041

3,012

Intangible assets

0

1,086

Goodwill

175

2,390

$

9,803

$

12,605

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

909

$

785

Deferred revenue

812

1,191

Accrued employee compensation and benefits

417

508

Borrowings

0

500

Dividends payable

42

41

Other accrued liabilities

802

394

Total current liabilities

2,982

3,419

Shareholders’ equity

6,821

9,186

$

9,803

$

12,605

For the Three Months Ended

For the Nine Months Ended

Sept 30,
2002

Sept 30,
2003

Sept 30,
2002

Sept 30,
2003

Net Revenues

Software

$

405

$

640

$

1,784

$

3,019

Services

2,325

1,045

7,740

4,702

Maintenance

407

668

1,258

1,887

Other

4

16

16

32

3,141

2,369

10,798

9,640

Cost and Expenses

Cost of revenues

Software

281

386

928

865

Services

759

786

2,465

2,535

Maintenance

118

181

398

494

Other

4

16

16

32

Sales and marketing

791

991

2,435

3,068

Product development

213

507

480

1,013

General and administrative

475

630

1,638

1,851

2,641

3,497

8,360

9,858

Operating income/(loss)

500

(1,128

)

2,438

(218

)

Interest income

17

8

41

28

Income/(loss) before income taxes

517

(1,120

)

2,479

(190

)

Income taxes

0

0

0

(1

)

Net income/(loss)

$

517

$

(1,120

)

$

2,479

$

(191

)

Dividends on preferred stock

(62

)

(55

)

(192

)

(165

)

Net income/(loss) applicable to common shareholders

$

455

$

(1,175

)

$

2,287

$

(356

)

Basic:

Earnings/(loss) per share

$

0.21

$

(0.44

)

$

1.07

$

(0.14

)

Weighted average shares

2,212

2,660

2,132

2,547

Diluted:

Earnings/(loss) per share

$

0.16

$

(0.44

)

$

0.79

$

(0.14

)

Weighted average shares

3,200

2,660

3,143

2,547

Add’l
paid-in capital

Compre-
hensive
loss

Accumulated
Other
compre-
hensive
loss

Accumulated
Deficit

Total

Common Stock

Preferred Stock

Shares

Amount

Shares

Amount

Balance at December 31, 2002

2,328,713

$

12

29,020

$

2,483

$

22,950

$

0

$

(131

)

$

(18,493

)

$

6,821

Exercise of common stock options

55,580

1

231

232

Issuance of common stock

3,444

40

40

Shares issued for Connect Care acquisition

200,000

2,535

2,535

Conversion of Series C Preferred Stock  to common stock

83,333

(2,000

)

(150

)

150

0

Dividends

(165

)

(165

)

Comprehensive loss:

Net loss

(191

)

(191

)

(191

)

Foreign currency translation adjustment

(86

)

(86

)

(86

)

Comprehensive loss

(277

)

Balance at September 30, 2003

2,671,070

$

13

27,020

$

2,333

$

25,741

$

(217

)

$

(18,684

)

$

9,186

For the Nine Months Ended

Sept 30, 2002

Sept 30, 2003

Cash flows provided by operating activities

$

3,517

$

616

Cash flows from investing activities

Software development costs

(581

)

(1,722

)

Purchases of property and equipment

(690

)

(89

)

Acquisition of Connect-Care

0

(225

)

Net cash used in investing activities

(1,271

)

(2,036

)

Cash flows from financing activities

Proceeds from issuance of common stock

5

232

Proceeds from borrowings

0

500

Payment of dividends on preferred stock

(372

)

(166

)

Net cash provided by/(used in) financing activities

(367

)

566

Foreign currency translation adjustment

(76

)

(91

)

Increase/(decrease) in cash and cash equivalents

1,803

(945

)

Cash and cash equivalents, beginning of period

1,860

3,779

Cash and cash equivalents, end of period

$

3,663

$

2,834

Supplemental disclosure of cash flow information

Cash paid for income taxes

$

0

$

1

Cash paid for interest

$

0

$

0

Supplemental schedule of noncash investing and financing activities:

1.

Description of Business and Basis of Presentation

Description of the Company

Firstwave^® Technologies, Inc. is a global provider of strategic, industry-focused, CRM software solutions that automate and optimize how companies win, maintain and grow customer relationships.  The Firstwave product line consists of the Firstwave CRM Product Suite, which provides focused solutions to the following four industries: software and technology, sports and entertainment, manufacturing and the public sector. The Firstwave CRM Product Suite includes Firstwave eCRM^®, Firstwave IDE^® and Firstwave for Technology. Firstwave eCRM is a web-based application, built with COM+ technology or .NET technology.  Firstwave IDE is the toolset supporting Firstwave eCRM.  In addition to the Firstwave CRM Product Suite, Firstwave also provides and supports Takecontrol^®, a client-server based product, and Firstwave for UNIX^®.

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/A for the period ended December 31, 2002.  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, 2002 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.  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.

Revenue from software product sales 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 license revenue.  Services revenue is recognized as services are performed.  Maintenance revenue is recognized ratably over the period of coverage.

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. 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, because the price charged for each element is the same as when the element would be sold separately from any other element.  Pricing does not vary by customer, 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 to the Company 50% to 60% of standard license fees and maintenance revenues they produce.  The Company recognizes international sales at the gross license amount, with the amount paid to the distributors reflected as a sales and marketing expense.  The Company’s international maintenance fees are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue.  There have been no revenues derived from independent international distributors during 2003.

Revenues from nonmonetary exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident.  There have been no nonmonetary exchanges during 2003.

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 for maintenance.

The Company provides an allowance for doubtful accounts based on management’s estimate of receivables that may become uncollectible.  The estimate is based on historical charge-off activity and current account status.

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.  Since 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.

Impairment of Intangible Assets

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 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 in excess of the carrying value, the Company would record an impairment loss.

Concentration of credit risk and revenue

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 Firstwave UK, whose customer, Electronic Data Services, Ltd, represented 72% of the Company’s total revenues for the first quarter of 2003, 47% of the Company’s total revenues for the second quarter of 2003, and 62% of the Company’s total revenues for the third quarter of 2003.  This customer also accounted for 59% of the Company’s total Accounts Receivable outstanding at March 31, 2003, 42% of the Company’s total Accounts Receivable outstanding at June 30, 2003, and 67% of the Company’s total Accounts Receivable outstanding at September 30, 2003.  If this customer decreases its purchasing of the Company’s software and services, revenues would significantly decrease if not replaced with other customer accounts.

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 income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee awards, (in thousands, except for per share data).

For the Three Months Ended
Sept 30,

For the Nine Months Ended
Sept 30,

2002

2003

2002

2003

Net income/(loss) as reported

$

455

$

(1,175

)

$

2,287

$

(356

)

Stock based employee compensation, net of related tax effects included in net income as reported

—

—

—

—

Stock based employee compensation, net of related tax effects under the fair value based method

456

171

537

448

Net income/(loss) as adjusted

$

(1

)

$

(1,346

)

$

1,750

$

(804

)

Earnings/(loss) per share:

Basic - as reported

$

0.21

$

(0.44

)

$

1.07

$

(0.14

)

Basic - as adjusted

(0.00

)

$

(0.51

)

$

0.82

$

(0.32

)

Diluted - as reported

$

0.16

$

(0.44

)

$

0.79

$

(0.14

)

Diluted - as adjusted

(0.00

)

$

(0.51

)

$

0.62

$

(0.32

)

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 September 30, 2002 and September 30, 2003, respectively; dividend yield of 0% for both quarters; expected volatility of 149% and 141%, and risk-free interest rate of 3.82% and 3.14%.  For the nine month periods ended September 30, 2002 and September 30, 2003, respectively, the assumptions used were dividend yield of 0% for both periods; average expected volatility of 149% and 144%, and average risk-free interest rate of 3.82% and 2.87%.

The decrease in the compensation expense from $456,000 in the third quarter of 2002 compared to $171,000 in the third quarter of 2003 is primarily due to options issued in the third quarter of 2002 related to a Stock Exchange Program.  On March 19, 2002 the Company completed a Stock Exchange Program that offered each of its directors and employees who held options under the Option Plan with an exercise price of greater than $10.00 the opportunity to surrender those options for cancellation in exchange for new options to be granted no sooner than six months and one day after cancellation.  The options cancelled in March 2002 under this program totaled 81,684. The Company granted 81,684 new options on September 20, 2002.  Options are issued at the market price of the Company’s common stock at the date of grant. 

There is no tax benefit included in the stock-based employee compensation expense determined under the fair-value-based method for the three and nine month periods ended September 30, 2003 and September 30, 2002, as the Company established a full valuation allowance for its net deferred tax assets.

Basic and diluted net income per common share

Basic net income 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 income 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 per share computations for income from continuing operations.

For Quarter Ended Sept 30, 2003

For Nine Months Ended Sept 30, 2003

Income (000’s)
(Numerator)

Shares (000’s)
(Denominator)

Per Share
Amount

Income (000’s)
(Numerator)

Shares (000’s)
(Denominator)

Per Share
Amount

Net income/(loss)

(1,120

)

(191

)

Less: Preferred Stock Dividends

(55

)

(165

)

Basic EPS

Income available to common shareholders

(1,175

)

2,660

$

(0.44

)

(356

)

2,547

$

(0.14

)

Effect of Dilutive Securities

Warrants

19

19

Convertible Preferred Stock

55

665

165

665

Stock Options

61

132

55

(1)

745

(1)

165

(1)

816

(1)

Diluted EPS

Income available to common shareholders

(1,175

)

2,660

$

(0.44

)

(356

)

2,547

$

(0.14

)

(1) Not included because anti-dilutive

For Quarter Ended Sept 30, 2002

For Nine Months Ended Sept 30, 2002

Income (000’s)
(Numerator)

Shares (000’s)
(Denominator)

Per Share
Amount

Income (000’s)
(Numerator)

Shares (000’s)
(Denominator)

Per Share
Amount

Net income

517

2,479

Less: Preferred Stock Dividends

(62

)

(192

)

Basic EPS