Resonate Blends, Inc. - Quarter Report: 2005 September (Form 10-Q)
UNITED
STATES
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 September 30, 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 #)
|
5775
Glenridge Drive NE, Bldg E
Atlanta,
GA
30328
(Address
of
principal executive offices)770-250-0349
(Telephone
number
of registrant)
2859
Paces
Ferry Road, Suite 1000
Atlanta,
GA
30339
(Former
address, if
changed from last report)
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
by check
mark whether the registrant is a shell company (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 November 10, 2005:
Common
Stock, no
par value 2,729,135
shares
FIRSTWAVE
TECHNOLOGIES, INC.
FORM
10-Q
For
the
quarter ended September 30, 2005
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No.
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Part
I. FINANCIAL INFORMATION
Item
1. Financial Statements
|
FIRSTWAVE
TECHNOLOGIES, INC.
|
|||||||
|
Consolidated
Balance Sheet
|
|||||||
|
(in
thousands)
|
|||||||
|
Dec
31,
|
Sep
30,
|
||||||
|
2004
|
2005
|
||||||
|
(Unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
1,286
|
$
|
298
|
|||
|
Accounts
receivable: less allowance for doubtful
accounts of $61 and $38, respectively
|
605
|
499
|
|||||
|
Note
receivable, current
|
0
|
335
|
|||||
|
Other
prepaid expenses
|
565
|
541
|
|||||
|
Total
current assets
|
2,456
|
1,673
|
|||||
|
Property
and equipment, net
|
264
|
91
|
|||||
|
Software
development costs, net
|
1,095
|
537
|
|||||
|
Intangible
assets
|
800
|
629
|
|||||
|
Goodwill
|
1,658
|
593
|
|||||
|
Note
receivable
|
0
|
1,044
|
|||||
|
Total
assets
|
$
|
6,273
|
$
|
4,567
|
|||
|
|
|||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
581
|
$
|
481
|
|||
|
Deferred
revenue
|
1,351
|
978
|
|||||
|
Accrued
employee compensation and benefits
|
156
|
106
|
|||||
|
Dividends
payable
|
46
|
63
|
|||||
|
Other
accrued liabilities
|
290
|
30
|
|||||
|
Total
current liabilities
|
2,424
|
1,658
|
|||||
|
Shareholders'
equity
|
3,849
|
2,909
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
6,273
|
$
|
4,567
|
|||
|
The
accompanying notes are an integral part of these financial
statements.
|
|||||||
|
FIRSTWAVE
TECHNOLOGIES, INC.
|
|||||||||||||
|
Consolidated
Statement
of
Operations
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
|||||||||||||
|
(unaudited)
|
|||||||||||||
|
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
|
Sep
30,
|
|
Sep
30,
|
|
Sep
30,
|
|
Sep
30,
|
|
||||||
|
|
|
2004
|
|
2005
|
|
2004
|
|
2005
|
|||||
|
Net
Revenues
|
|||||||||||||
|
Software
|
$
|
373
|
$
|
241
|
$
|
690
|
$
|
414
|
|||||
|
Services
|
161
|
199
|
901
|
576
|
|||||||||
|
Maintenance
|
586
|
481
|
1,891
|
1,566
|
|||||||||
|
Other
|
11
|
7
|
39
|
46
|
|||||||||
|
1,131
|
928
|
3,521
|
2,602
|
||||||||||
|
Cost
and Expenses
|
|||||||||||||
|
Cost
of revenues
|
|||||||||||||
|
Software
|
321
|
199
|
1,011
|
614
|
|||||||||
|
Services
|
305
|
155
|
858
|
561
|
|||||||||
|
Maintenance
|
93
|
88
|
305
|
240
|
|||||||||
|
Other
|
11
|
6
|
29
|
30
|
|||||||||
|
Sales
and marketing
|
376
|
93
|
1,329
|
435
|
|||||||||
|
Product
development
|
260
|
187
|
933
|
575
|
|||||||||
|
General
and administrative
|
367
|
349
|
1,233
|
1,125
|
|||||||||
|
Charge
for goodwill impairment
|
0
|
528
|
0
|
528
|
|||||||||
|
1,733
|
1,605
|
5,698
|
4,108
|
||||||||||
|
Operating
loss
|
(602
|
)
|
(677
|
)
|
(2,177
|
)
|
(1,506
|
)
|
|||||
|
Interest
income/(expense), net
|
(5
|
)
|
20
|
(11
|
)
|
87
|
|||||||
|
Loss
from continuing operations before taxes
|
(607
|
)
|
(657
|
)
|
(2,188
|
)
|
(1,419
|
)
|
|||||
|
Income
taxes
|
0
|
0
|
0
|
0
|
|||||||||
|
Loss
from continuing operations
|
(607
|
)
|
(657
|
)
|
(2,188
|
)
|
(1,419
|
)
|
|||||
|
|
|||||||||||||
|
Income/(Loss)
from discontinued operations
|
(110
|
)
|
-
|
197
|
(457
|
)
|
|||||||
|
Gain
on sale of discontinued operations
|
-
|
-
|
-
|
327
|
|||||||||
|
Net
Income/(Loss) from discontinued operations
|
(110
|
)
|
-
|
197
|
(130
|
)
|
|||||||
|
|
|||||||||||||
|
Net
Loss
|
(717
|
)
|
(657
|
)
|
(1,991
|
)
|
(1,549
|
)
|
|||||
|
|
|||||||||||||
|
Dividends
on preferred stock
|
(71
|
)
|
(71
|
)
|
(184
|
)
|
(213
|
)
|
|||||
|
|
|||||||||||||
|
Net
loss applicable to common shareholders
|
$
|
(788
|
)
|
$
|
(728
|
)
|
$
|
(2,175
|
)
|
$
|
(1,762
|
)
|
|
|
|
|||||||||||||
|
Income/(Loss)
per common share - Basic and Diluted
|
|||||||||||||
|
Income/(Loss)
from continuing operations
|
$
|
(0.25
|
)
|
$
|
(0.27
|
)
|
$
|
(0.88
|
)
|
$
|
(0.60
|
)
|
|
|
Income/(Loss)
from discontinued operations
|
(0.04
|
)
|
-
|
0.07
|
(0.05
|
)
|
|||||||
|
Net
income/(loss) per common share
|
$
|
(0.29
|
)
|
$
|
(0.27
|
)
|
$
|
(0.81
|
)
|
$
|
(0.65
|
)
|
|
|
Weighted
average shares - Basic and Diluted
|
2,694
|
2,729
|
2,680
|
2,704
|
|||||||||
|
The
accompanying notes are an integral part of these financial
statements.
|
|||||||||||||
|
FIRSTWAVE
TECHNOLOGIES, INC.
|
||||||||||||||||||||||||||||
|
Consolidated
Statement
of Changes in Shareholders'
Equity
|
||||||||||||||||||||||||||||
|
(In
thousands, except share data)
|
||||||||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||||||
|
For
the Nine Months Ended September 30, 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
|
16,051
|
35
|
35
|
|||||||||||||||||||||||||
|
Issuance
of common stock
|
18,343
|
32
|
32
|
|||||||||||||||||||||||||
|
Dividends
|
(212
|
)
|
(212
|
)
|
||||||||||||||||||||||||
|
Comprehensive
loss
|
||||||||||||||||||||||||||||
|
Net
loss
|
($1,549
|
)
|
(1,549
|
)
|
(1,549
|
)
|
||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
754
|
754
|
754
|
|||||||||||||||||||||||||
|
Comprehensive
loss
|
($795
|
)
|
||||||||||||||||||||||||||
|
Balance
at end of period
|
2,728,387
|
$
|
13
|
34,020
|
$
|
3,011
|
$
|
25,340
|
$
|
0
|
($25,455
|
)
|
$
|
2,909
|
||||||||||||||
|
The
accompanying notes are an integral part of these financial
statements.
|
||||||||||||||||||||||||||||
|
FIRSTWAVE
TECHNOLOGIES, INC.
|
|||||||
|
Consolidated
Statement
of Cash
Flows
|
|||||||
|
(in
thousands)
|
|||||||
|
(unaudited)
|
|||||||
|
For
the Nine Months Ended
|
|
||||||
|
|
|
September
30,
|
|
September
30,
|
|
||
|
|
|
2004
|
|
2005
|
|||
|
Cash
flows provided by/(used in) operating activities
|
($1,724
|
)
|
($1,081
|
)
|
|||
|
Cash
flows from investing activities
|
|||||||
|
Software
development costs
|
(94
|
)
|
0
|
||||
|
Purchases
of property and equipment, net
|
(87
|
)
|
(15
|
)
|
|||
|
Sale
of UK subsidiary
|
0
|
256
|
|||||
|
Net
cash provided by/(used in) investing activities
|
(181
|
)
|
241
|
||||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from issuance of common stock
|
5
|
37
|
|||||
|
Proceeds
from issuance of preferred stock
|
678
|
0
|
|||||
|
Payment
of dividends on preferred stock
|
(179
|
)
|
(195
|
)
|
|||
|
Net
cash used in financing activities
|
504
|
(158
|
)
|
||||
|
Foreign
currency translation adjustment
|
(30
|
)
|
10
|
||||
|
Decrease
in cash and cash equivalents
|
(1,431
|
)
|
(988
|
)
|
|||
|
Cash
and cash equivalents, beginning of period
|
2,704
|
1,286
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
1,273
|
$
|
298
|
|||
|
Supplemental
disclosure of cash flow information
|
|||||||
|
Cash
paid for income taxes
|
$
|
0
|
$
|
0
|
|||
|
Cash
paid for interest
|
$
|
17
|
$
|
0
|
|||
|
The
accompanying notes are an integral part of these financial
statements.
|
|||||||
FIRSTWAVE
TECHNOLOGIES, INC.
Notes
to
Consolidated Financial Statements
September
30, 2005
1. Description
of Business and Basis of Presentation
Description
of the Company
Headquartered
in
Atlanta, Georgia, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is
a
provider of strategic CRM solutions specifically designed for the High
Technology industry. 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 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 year 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.
On
June 3, 2005, Firstwave entered into a Stock Purchase Agreement (the
“Agreement”) with AllAboutTickets LLC (the “Buyer”) doing business as First
Sports International. Pursuant to the Agreement, effective May 1, 2005, the
Company sold to Buyer all of the issued share capital of Firstwave Technologies
UK, Ltd., a subsidiary of the Company, located at The Pavillion, 1 Atwell
Place,
Thames Ditton, Surrey, England, KT7 ONF (the “Target”). The Company has also
entered into a License Agreement (the “License Agreement”) with Buyer and
Target, dated June 3, 2005, pursuant to which it granted to Buyer a
non-exclusive, non-transferable, non-assignable, limited worldwide and revocable
license to use, modify, recompile, reproduce, distribute and maintain the
object
code version of certain portions of its software and the Source Code materials
relating to that software for use only in the “sports industry,” as defined in
the License Agreement. Both the Stock Purchase Agreement and the License
Agreement were filed with the Securities and Exchange Commission as Exhibits
to
Form 8-K on June 9, 2005. This sale of the Company’s UK Subsidiary has been
treated as a discontinued operation in the accompanying unaudited consolidated
financial statements.
Subsequent
Event
On
October 10, 2005, the Company entered into a three-year OEM/Outsourcing
Agreement with M1 Global Solutions, Inc., an Atlanta-based technology company.
Under the terms of the agreement, both Firstwave and M1 Global are contributing
to the ongoing development, maintenance and support of Firstwave products;
M1
Global has licensed the Firstwave CRM database schema to develop its future
products; Firstwave is outsourcing its Professional Services and Support
functions to M1 Global; and M1 Global will be a non-exclusive reseller of
Firstwave products. Firstwave will retain all maintenance revenues and pay
to M1
Global $154,315 per quarter in consideration for M1 Global providing support
services to Firstwave customers. The
agreement
provides that M1 Global will also pay royalty commissions to Firstwave. Both
the
OEM/Outsourcing Agreement and the License Agreement were filed with the
Securities and Exchange Commission under Form 8-K on October 14,
2005.
The
consolidated
financial statements include the accounts of Firstwave Technologies, Inc.
and
its wholly owned subsidiary, Connect-Care, Inc., and, where appropriate,
its
former subsidiary, Firstwave Technologies UK, Ltd., up until the effective
date
(May 1, 2005) of its sale. 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.
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 prior Sports business,
where the Company recognized revenue based on a per-ticket or per-fan membership
basis after the actual event occurred. The amount the Company would receive
per
ticket or membership was variable, but was pre-determined in the terms of
the
agreements. Although tickets may have been sold in advance of the event,
the
Company would recognize these revenues after the event occurred. 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.
Independent
distributors and primarily Firstwave UK, prior to the sale of the UK Subsidiary,
who offer licenses of the Company’s non-sports products in specific geographic
areas, generate international revenues, consisting primarily of maintenance
revenues from non-sports customers in the UK. 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 for 2005 through
September 30, 2005.
Maintenance
revenue
is recognized on a pro
rata basis over
the term of the maintenance agreements. 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.
Prior
to the sale
of the UK Subsidiary, the Company’s US accounting management oversaw reporting
procedures in the United Kingdom and monitored their transactions on a timely
basis. The US management reviewed transactions and sales contracts as such
transactions and sales occurred to ensure that revenues were 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 reported directly
to US management, with US management substantially involved in all aspects
of UK
operations. As such, US management had established procedures designed to
insure
that international revenues were 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, loss of key personnel or the sale
of a
significant portion of a reporting unit. 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 at September 30, 2005 for impairment during the third quarter of
2005
in accordance with SFAS No. 142. The fair value was estimated using the expected
net present value of future cash flows. As a result of this evaluation, 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 $528,000 to write-off a portion of the carrying value
of
goodwill.
Concentration
of credit risk
The
Company is
subject to credit risk primarily due to its trade receivables and its note
receivable. The note receivable from AllAboutTickets LLC is more fully detailed
in Note 4, Discontinued Operations. The Company has credit risk due to the
high
concentration of trade receivables through certain customers. The customer
accounts receivable that represented more than 10% of total accounts receivable
are shown below.
|
Dec
31,
|
Sep
30,
|
||||||
|
2004
|
2005
|
||||||
|
Argos,
Ltd
|
13.8
|
%
|
0.0
|
%
|
|||
|
CapGemini
UK
|
12.6
|
%
|
0.0
|
%
|
|||
|
KCI
Therapeutic Services, Inc.
|
0.0
|
%
|
28.5
|
%
|
|||
|
Manhattan
Associates
|
1.6
|
%
|
19.9
|
%
|
|||
|
Sungard
HTE,
Inc.
|
15.0
|
%
|
3.3
|
%
|
|||
Significant
Customers
The
table below
identifies customers who contributed more than 10% of total revenue from
continuing operations for each period shown.
|
For
the Three Months Ended
|
|
||||||
|
|
|
Sep
30,
|
|
Sep
30,
|
|
||
|
|
|
2004
|
|
2005
|
|||
|
M1
Global
Solutions, Inc.
|
0.0
|
%
|
16.0
|
%
|
|||
|
Medi-Flex
|
0.3
|
%
|
10.7
|
%
|
|||
|
The
Football
Association
|
16.2
|
%
|
0.0
|
%
|
|||
The
M1 Global
Solutions, Inc. relationship is explained in detail under Note 1, Subsequent
Events.
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
|
For
the Nine Months Ended
|
||||||||||||
|
Sep
30, 2004
|
Sep
30, 2005
|
Sep
30, 2004
|
Sep
30, 2005
|
||||||||||
|
Net
loss
applicable to common
|
|||||||||||||
|
shareholders,
as reported
|
$
|
(788
|
)
|
$
|
(728
|
)
|
$
|
(2,175
|
)
|
$
|
(1,762
|
)
|
|
|
Stock
based
employee compensation, net of related
|
|||||||||||||
|
tax
effects
under the fair value based method
|
150
|
24
|
844
|
566
|
|||||||||
|
Net
loss
applicable to common
|
|||||||||||||
|
shareholders,
as adjusted
|
$
|
(938
|
)
|
$
|
(752
|
)
|
$
|
(3,019
|
)
|
$
|
(2,328
|
)
|
|
|
Loss
per
share:
|
|||||||||||||
|
Basic
- as
reported
|
$
|
(0.29
|
)
|
$
|
(0.27
|
)
|
$
|
(0.81
|
)
|
$
|
(0.65
|
)
|
|
|
Basic
- as
adjusted
|
$
|
(0.35
|
)
|
$
|
(0.28
|
)
|
$
|
(1.13
|
)
|
$
|
(0.86
|
)
|
|
|
Diluted
- as
reported
|
$
|
(0.29
|
)
|
$
|
(0.27
|
)
|
$
|
(0.81
|
)
|
$
|
(0.65
|
)
|
|
|
Diluted
- as
adjusted
|
$
|
(0.35
|
)
|
$
|
(0.28
|
)
|
$
|
(1.13
|
)
|
$
|
(0.86
|
)
|
|
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, 2004 and September 30, 2005, respectively:
dividend yield of 0% for both quarters; expected volatility of 128% and 124%,
and risk-free interest rate of 3.51% and 4.04%. For the nine month period
ended
September 30, 2004 and September 30, 2005, respectively, the assumptions
used
were dividend yield of 0% for both years, average expected volatility of
130%
and 126%, and average risk-free interest rate of 3.41% and 3.93%.
There
was a
decrease in pro forma stock-based employee compensation for the quarters
ended
September 30 from $150,000 in 2004 to $24,000 in 2005, and
for the nine
months ended September 30, there was a decrease from $844,000 in 2004 to
$566,000 in 2005. The decreases of $136,000 for the quarter and $278,000
for the
nine months were primarily the result of cancellations of stock options due
to
staff resignations.
There
is no tax
benefit included in the pro forma stock-based employee compensation expense
determined under the fair-value-based method for the three and nine month
periods ended September 30, 2004 and September 30, 2005, as the Company
established a full valuation allowance for its net deferred tax
assets.
In
the second quarter of 2005, the Board of Directors of the Company voted to
immediately vest all outstanding unvested options held by employees and
directors of the Company. We believe that the Company would have had to record
significant non-monetary compensation expense once SFAS 123(R) is adopted
in
2006. This adoption of SFAS 123(R) would have had a material impact on the
Company’s financial performance, commencing in 2006, which can now be avoided by
the Company’s decision.
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 Nine Months Ended
|
|
||||||||||||||||
|
|
|
September
30, 2005
|
|
September
30, 2005
|
|
||||||||||||||
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
||||||
|
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
|
(Numerator)
|
|
(Denominator)
|
|
Amount
|
|||||||
|
Net
loss
|
$
|
(657
|
)
|
$
|
(1,549
|
)
|
|||||||||||||
|
Less:
Preferred Stock Dividends
|
(71
|
)
|
(213
|
)
|
|||||||||||||||
|
Basic
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(728
|
)
|
2,729
|
$
|
(0.27
|
)
|
$
|
(1,762
|
)
|
2,704
|
$
|
(0.65
|
)
|
|||||
|
Effect
of Dilutive Securities
(1)
|
|||||||||||||||||||
|
Warrants
|
19
|
19
|
|||||||||||||||||
|
Convertible
Preferred Stock
|
71
|
898
|
213
|
898
|
|||||||||||||||
|
Stock
Options
|
242
|
242
|
|||||||||||||||||
|
71
|
1,159
|
213
|
1,159
|
||||||||||||||||
|
Diluted
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(728
|
)
|
2,729
|
$
|
(0.27
|
)
|
$
|
(1,762
|
)
|
2,704
|
$
|
(0.65
|
)
|
|||||
|
(1)
Not
included because anti-dilutive
|
|||||||||||||||||||
|
|
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||||||||
|
September
30, 2004
|
September
30, 2004
|
||||||||||||||||||
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
||
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
Net
loss
|
$
|
(717
|
)
|
$
|
(1,991
|
)
|
|||||||||||||
|
Less:
Preferred Stock Dividends
|
(71
|
)
|
(184
|
)
|
|||||||||||||||
|
Basic
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(788
|
)
|
2,694
|
(0.29
|
)
|
$
|
(2,175
|
)
|
2,680
|
$
|
(0.81
|
)
|
||||||
|
Effect
of Dilutive Securities
(1)
|
|||||||||||||||||||
|
Warrants
|
19
|
19
|
|||||||||||||||||
|
Convertible
Preferred Stock
|
71
|
898
|
184
|
755
|
|||||||||||||||
|
Stock
Options
|
3
|
25
|
|||||||||||||||||
|
71
|
920
|
184
|
799
|
||||||||||||||||
|
Diluted
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(788
|
)
|
2,694
|
(0.29
|
)
|
$
|
(2,175
|
)
|
2,680
|
$
|
(0.81
|
)
|
||||||
|
(1)
Not
included because anti-dilutive
|
|||||||||||||||||||
Foreign currency translation
The
financial
statements of the Company's former 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 discontinued
operations in the Company’s financial statements (See Note 4). Net exchange
gains or losses resulting from the translation of assets and liabilities
of the
UK subsidiary 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.
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. Discontinued
Operations
On
June 3, 2005, Firstwave entered into the Stock Purchase Agreement with
AllAboutTickets
LLC
that is detailed under Note 1, Basis of Presentation. The Company sold
its UK
Subsidiary to re-focus on the high technology market and to direct its
efforts
away from the Sports business that was concentrated in the UK market. Pursuant
to the Agreement, effective May 1, 2005, the Company sold to Buyer all
of the
issued share capital of Firstwave Technologies UK, Ltd., a subsidiary of
the
Company. This sale of the Company’s UK Subsidiary has been treated as a
discontinued operation in the accompanying unaudited consolidated financial
statements. The total price for the stock purchase transaction was $2,214,000,
of which $256,000 in cash was received at closing, $1,620,000 is due
under
a non-interest bearing Promissory Note that calls for payments to be made
over a
maximum of three years, and $338,000 is due as software revenues are achieved
by
the Buyer and which will reimburse the Company for certain prepaid royalties.
As
of September 30, 2005, the remaining balance of the promissory note is
$1,585,000 payable in installments. The short-term portion of the note is
$335,000, is payable prior to September 30, 2006, and has been classified
as a
current asset on the Balance Sheet. The long-term portion of the note is
$1,250,000, is payable in installments, and is classified as a non-current
asset
on the Balance Sheet. Under the License Agreement, Buyer will pay quarterly
royalty amounts to the Company if such royalty amounts exceed the quarterly
payments due under the Promissory Note, and such amounts will be applied
to the
uncollected balance of the note receivable. In accordance with APB 21,”Interest
on Receivables and Payables,” imputed interest was calculated at 8%, resulting
in an unamortized discount at May 31, 2005 totaling $233,000 and recorded
as a
direct reduction from the face amount of the note. Through September 2005,
$27,000 was amortized, resulting in a balance of $206,000 in imputed interest
as
of September 30, 2005.
The
sale of the UK
subsidiary included $79,000 of total assets, consisting of accounts receivable,
prepaid assets, furniture and equipment. The total liabilities sold were
$67,000, consisting of accounts payable, taxes payable, benefits payable
and
deferred revenue. Net income/(loss) from discontinued operations was ($130,000)
for the first nine months of 2005 and $197,000 for the first nine months
of
2004. Total revenues from discontinued operations were $341,000 and
$2,172,000 for the first nine months of 2005 and 2004,
respectively.
As
a result of the sale of the UK Subsidiary, the Company has recognized a pre-tax
gain of $327,000 in 2005, which is combined and reported as income/(loss)
from
discontinued operations in the Consolidated Income Statements.
5. Goodwill
and 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,
loss of key personnel or the sale of a significant portion of a reporting
unit.
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 at September 30, 2005 for impairment during the third quarter of
2005
in accordance with SFAS No. 142. The fair value was estimated using the expected
net present value of future cash flows. Based on lower-than-expected operating
results as a result of this evaluation, 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 $528,000
to
write-off a portion of the carrying value of goodwill. As of September 30,
2005,
the Company had $629,000 of Intangible Assets and $593,000 of Goodwill as
a
result of acquisitions in 1998 and 2003, including subsequent amortization
expense and impairment charges.
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 third quarter of 2005 and $171,000 in the nine months ended
September 30, 2005.
The
following table
presents details of intangible assets with definite lives (in
thousands):
|
December
31, 2004
|
September
30, 2005
|
||||||||||||
|
Gross
carrying
|
|
Accumulated
|
|
Gross
carrying
|
|
Accumulated
|
|
||||||
|
|
|
amount
|
|
amortization
|
|
amount
|
|
amortization
|
|||||
|
Amortizable
intangible assets
|
|||||||||||||
|
Connect-Care
Technology
|
$
|
300
|
$
|
175
|
$
|
300
|
$
|
250
|
|||||
|
Connect-Care
Customer Relationships
|
900
|
225
|
900
|
321
|
|||||||||
|
Total
|
$
|
1,200
|
$
|
400
|
$
|
1,200
|
$
|
571
|
|||||
|
|
|||||||||||||
|
Aggregrate
Amortization Expense
|
|||||||||||||
|
For
the Nine
months ended September 30, 2005
|
$
|
171
|
|||||||||||
|
|
|||||||||||||
|
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
|
|||||||||||
|
For
year
ended December 31, 2010
|
$
|
30
|
|||||||||||
6. Borrowings
At
September 30, 2005, the Company had no borrowings. At September 30, 2004,
the
Company had $500,000 in borrowings, and had paid $21,000 in interest expense
for
the nine months ended September 30, 2004. The Company repaid its $500,000
of
borrowings under the Line of Credit and carried no debt as of December 31,
2004.
The Company subsequently canceled the Line of Credit.
7. 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 third quarter of 2005 and $2,025
for the
nine months ended September 30, 2005 related to his $30,000 investment in
Series
D Convertible Preferred Stock from June of 2004, which former President and
COO
of the Company is also the Chairman of the Buyer of the UK Subsidiary. The
Chairman and CEO of the Company earned $50,625 in the third quarter and $151,875
for the nine months ended September 30, 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.
On
October 10, 2005, the Company entered into a three-year OEM/Outsourcing
Agreement with M1 Global Solutions, Inc., an Atlanta-based technology company.
Details of this transaction are presented in Note 1, Subsequent
Events.
8. 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 has evaluated the impact
that the adoption of SFAS No. 123(R) will have on its financial position,
results of operations and cash flows. The Board of Directors voted in the
Second
Quarter of 2005 to immediately
vest all
outstanding unvested options to avoid this impact. Therefore, the Company
believes the adoption of SFAS No. 123(R) will not have a material impact
to its
future results of operations based on the existing grants of options. However,
the impact from the allocation of future share-based payments will depend
upon
levels and other factors of such share-based payments as determined by the
Board
of Directors.
In
April 2005, the Securities and Exchange Commission’s Office of the Chief
Accountant and its Division of Corporation Finance 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).
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, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is
a
provider of strategic CRM solutions specifically designed for the High
Technology industry. 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 and
TakeControl.
On
October 10, 2005, the Company entered into a three-year OEM/Outsourcing
Agreement with M1 Global Solutions, Inc., an Atlanta-based technology company.
Under the terms of the agreement, both Firstwave and M1 Global are contributing
to the ongoing development, maintenance and support of Firstwave products;
M1
Global has licensed the Firstwave CRM database schema to develop its future
products; Firstwave is outsourcing its Professional Services and Support
functions to M1 Global; and M1 Global will be a non-exclusive reseller of
Firstwave products. Firstwave will retain all maintenance revenues and pay
to M1
Global $154,315 per quarter in consideration for M1 Global providing support
services to Firstwave customers. The agreement provides that M1 Global will
pay
royalty commissions to Firstwave.
Results
of
Continuing Operations
On
June 3, 2005, Firstwave entered into a Stock Purchase Agreement (the
“Agreement”) with AllAboutTickets LLC (the “Buyer”) doing business as First
Sports International. Pursuant to the Agreement, effective May 1, 2005, the
Company sold to Buyer all of the issued share capital of Firstwave Technologies
UK, Ltd., a subsidiary of the Company. The Company sold its UK Subsidiary
to
re-focus on the high technology market and to direct its efforts away from
the
Sports business that was concentrated in the UK market. This Management’s
Discussion and Analysis of Financial Condition compares the Company’s results
from continuing operations.
Total
revenues
decreased 17.9% from $1,131,000 in the third quarter of 2004 to $928,000
in the
third quarter of 2005 primarily due to decreased software and maintenance
revenues. Total revenues decreased 26.1% from $3,521,000 for the nine months
ended September 30, 2004 to $2,602,000 for the same period in 2005 due to
decreases in software, services and maintenance revenue.
Software
revenues
decreased 35.4% from $373,000 in the third quarter of 2004 to $241,000 in
the
third quarter of 2005. Software revenue decreased 40.0% from $690,000 for
the
nine months ended September 30, 2004 to $414,000 for the same period in 2005.
During the nine months ended September 30, 2004, we recognized three large
software license agreements with Manhattan Associates, Inc., SmartMail, LLC,
and
Northrop Grumman; while during the nine months ended September 30, 2005 we
recognized just one large software license with M1 Global Solutions. Our
software revenues remain significantly dependent upon the size and timing
of
closing of license agreements.
Services
revenues
increased 23.6% from $161,000 in the third quarter of 2004 to $199,000 in
the
third quarter of 2005. This increase is primarily the result of a focus on
existing CRM customers. Services revenues decreased 36.1% from $901,000 for
the
nine months ended September 30, 2004 to $576,000 for the same period in 2005.
This decrease was primarily due to a decrease in services 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 17.9% from $586,000 during the third quarter of 2004 to
$481,000 in the third quarter of 2005. Maintenance revenues decreased 17.2%
from
$1,891,000 for the nine months ended September 30, 2004 to $1,566,000 for
the
same period in 2005. Maintenance revenues are the result of renewal agreements
from previous software license sales as well as new license agreements. The
decreases were primarily due to reduced renewals of maintenance agreements
from
existing customers and reduced new software licenses.
Cost
of software
revenues decreased 38.0% from $321,000 in the third quarter of 2004 to $199,000
in the third quarter of 2005. Cost of software revenues decreased 39.3% from
$1,011,000 for the nine months ended September 30, 2004 to $614,000 for the
same
period in 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
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 decreased from 86.1% in the third quarter
of
2004 to 82.6% in the third quarter of 2005, primarily due to a decrease in
amortization expense in costs of revenues.
Cost
of revenues
for services decreased 49.2% from $305,000 in the third quarter of 2004 to
$155,000 in the third quarter of 2005. Cost of revenue for services decreased
34.6% from $858,000 for the nine months ended September 30, 2004 to $561,000
for
the same period in 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
decreased from 189.4% in the third quarter of 2004 to 77.9% in the third
quarter
of 2005.
Cost
of revenues
for maintenance decreased 5.4% from $93,000 in the third quarter of 2004
to
$88,000 in the third quarter of 2005. Cost of revenues for maintenance decreased
21.3% from $305,000 for the nine months ended September 30, 2004 to $240,000
for
the same period in 2005. These decreases are due to decreases in payroll
costs
associated with a reduction in the number of maintenance personnel. The cost
of
revenues for maintenance as a percentage of maintenance revenue increased
from
15.9% in the third quarter of 2004 to 18.3% in the third quarter of 2005.
Sales
and marketing
expense decreased 75.3% from $376,000 in the third quarter of 2004 to $93,000
in
the third quarter of 2005. Sales and Marketing expense decreased 67.3% from
$1,329,000 for the nine months ended September 30, 2004 to $435,000 for the
same
period in 2005. The decreases are the result of decreases in payroll expenses
associated with a reduction in the number of personnel, telemarketing costs,
and
costs relating to sports sponsorships in the U.S.
The
Company’s
product innovation and development expenditures, which includes amounts
capitalized, decreased 28.1% from $260,000 in the third quarter of 2004 to
$187,000 in the third quarter of 2005. Product innovation and development
expenditures decreased 38.4% from $933,0000 for the nine months ended September
30, 2004 to $575,000 for the same period in 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 nine months ended September 30, 2004 were $94,000,
there
were no capitalized costs during the third quarter of 2004. No development
costs
were capitalized during the third quarter of 2005 or for the nine months
ended
September 30, 2005. A net realizable analysis was performed at September
30,
2005 in accordance SFAS 86. It was determined that the unamortized capitalized
software does not exceed its net realizable value; therefore, no impairment
loss
was recorded.
General
and
administrative expenses decreased 4.4% from $367,000 in the third quarter
of
2004 to $349,000 in the third quarter of 2005. General and administrative
expenses decreased 8.6% from $1,233,000 for the nine months ended September
30,
2004 to $1,125,000 for the same period in 2005. These changes were primarily
due
to reduced payroll costs associated with a reduction in personnel and decreased
rent, offset by increased professional services and changes to the allowance
for
doubtful accounts.
A
non-cash charge for goodwill impairment amounting to $528,000 in the third
quarter of 2005 was the result of an evaluation conducted in accordance with
SFAS No. 142 as explained in Note #5 to our consolidated financial statements.
Loss
from
discontinued operations was $110,000 for the third quarter of 2004. There
was no
activity from discontinued operations during the third quarter of 2005. Income
from discontinued operations was $197,000 for the nine months ended September
30, 2004 compared to a loss of $130,000 for the nine months ended September
30,
2005.
Dividends
on
preferred stock were unchanged at $71,000 in both the third quarter of 2004
and
of 2005. Dividends on preferred stock increased from $184,000 for the nine
months ended September 30, 2004 to $213,000 for the same period in 2005.
These
increases were 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 $728,000 (after the $528,000 non-cash
charge
for goodwill impairment) in the third quarter of 2005 compared to a net loss
of
$788,000 in the third quarter of 2004. Net loss per basic and diluted share
was
$0.29 for the third quarter of 2004 compared to a net loss of $0.27 per basic
and diluted share for the third quarter of 2005. Year to date, the net loss
applicable to common shareholders was $2,175,000 for the nine months ended
September 30, 2004, or $0.81 per basic and diluted share, compared to a net
loss
of $1,762,000 for the nine months ended September 30, 2005, or $0.65 per
basic
and diluted share. At September 30, 2004, the number of basic weighted average
shares outstanding was 2,694,000 compared to 2,729,000 at September 30, 2005.
In
the second quarter of 2005, the Board of Directors of the Company voted
to
immediately vest all outstanding unvested options held by employees and
directors of the Company. We believe that the Company would have had to
record
significant non-monetary compensation expense once SFAS 123(R) is adopted
in
2006. This adoption of SFAS 123(R) would have had a material impact on
the
Company’s financial performance, commencing in 2006, which the Company believes
can now be avoided by the Company’s decision.
Balance
Sheet
Net
accounts
receivable decreased 17.5% from $605,000 at December 31, 2004 to $499,000
at
September 30, 2005, primarily due to lower software license and services
revenues invoiced. Property and equipment decreased 65.5% from $264,000 at
December 31, 2004 to $91,000 at September 30, 2005 as a result of the sale
of
the UK Subsidiary and year-to-date depreciation partially offset by new asset
purchases. Capitalized software development decreased 51.0% from $1,095,000
at
December 31, 2004 to $537,000 at September 30, 2005 due to year-to-date
amortization expense of $558,000. Intangible assets decreased 21.4% from
$800,000 at December 31,2004 to $629,000 at September 30, 2005 due to $171,000
in year-to-date amortization expense.
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 were 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. Goodwill was
evaluated at September 30, 2005 for impairment during the third quarter of
2005
in accordance with SFAS No. 142. The fair value was estimated using the expected
net present value of future cash flows. As a result of this evaluation, 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 $528,000 to write-off a portion of the carrying value
of
goodwill.
As
a result of the sale of the UK Subsidiary, a note receivable in the amount
of
$1,620,000 was received. At September 30, 2005 the portion of the note
payable prior to September 30, 2006 was $335,000 and was classified as a
current
asset on the Balance Sheet. The long-term portion of the note is $1,250,000,
is
payable in installments, and is classified as a non-current asset on the
Balance
Sheet. In accordance with APB 21,”Interest on Receivables and Payables,” imputed
interest, which was calculated at 8%, resulted in an unamortized discount
at May
31, 2005 totaling $233,000 and recorded as a direct reduction from the face
amount of the note. Through September of 2005, $27,000 was amortized, resulting
in a balance of $206,000 in imputed interest as of September 30, 2005.
Accounts
payable
decreased 17.2% from $581,000 at December 31, 2004 to $481,000 at September
30,
2005 primarily due to the reduction in expenses. Deferred revenue decreased
27.6% from $1,351,000 at December 31, 2004 to $978,000 at September 30, 2005
due
to reductions in and the timing of billing for annual maintenance renewals.
Accrued employee compensation and benefits decreased 32.1% from $156,000
at
December 31, 2005 to $106,000 at September 30, 2005 primarily as a result
of
staff reductions. Other accrued liabilities decreased 89.7% from $290,000
at
December 31, 2004 to $30,000 at September 30, 2005 primarily related to the
elimination of Value Added Tax and employee incentives as a result of the
sale
of the UK Subsidiary.
Liquidity
and Capital Resources
As
of September 30, 2005, the balance of cash and cash equivalents was $298,000
compared to $1,286,000 at December 31, 2004.
On
October 10, 2005, the Company entered into a three-year OEM/Outsourcing
Agreement with M1 Global Solutions, Inc., an Atlanta-based technology company.
Under the terms of the agreement, both Firstwave and M1 Global are contributing
to the ongoing development, maintenance and support of Firstwave products;
M1
Global has licensed the Firstwave CRM database schema to develop its future
products; Firstwave is outsourcing its Professional Services and Support
functions to M1 Global; and M1 Global will be a non-exclusive reseller of
Firstwave products. Firstwave will retain all maintenance revenues and pay
to M1
Global $154,315 per quarter in consideration for M1 Global providing support
services to Firstwave customers. The agreement provides that M1 Global will
also
pay royalty commissions to Firstwave. Both the OEM/Outsourcing Agreement
and the
License Agreement were filed with the Securities and Exchange Commission
under
Form 8-K on October 14, 2005.
Our
future capital
requirements will depend on many factors, including our ability to obtain
positive cash flows, to collect our note receivable from First-Sports
International, to realize royalty revenues from the M1 Global transaction
referenced above, to retain our maintenance revenues from existing customers,
to
control expenses, and to generate additional revenues from other sources.
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.
Discontinued
Operations
On
June 3, 2005, Firstwave entered into the Stock Purchase Agreement with
AllAboutTickets LLC that is detailed under Note 1, Basis of Presentation.
The
Company sold its UK Subsidiary to re-focus on the high technology market
and to
direct its efforts away from the Sports business that was concentrated in
the UK
market. Pursuant to the Agreement, effective May 1, 2005, the Company sold
to
Buyer all of the issued share capital of Firstwave Technologies UK, Ltd.,
a
subsidiary of the Company. This sale of the Company’s UK Subsidiary has been
treated as a discontinued operation in the accompanying unaudited consolidated
financial statements.
The
total purchase
price for the sale was $2,214,000, of which $256,000 in cash was paid at
closing, $1,620,000 is payable under a non-interest bearing Promissory
Note that
calls for payments to be made over a maximum of three years, and $338,000
is to
be paid as software revenues are achieved to reimburse the Company for
certain
prepaid royalties.
As
a result of the sale of the UK Subsidiary, the Company recognized a pre-tax
gain
of $327,000 through September 30, 2005, which is recorded separately below
income/(loss) from discontinued operations in the Consolidated Income
Statements.
Item
3. Quantitative and Qualitative Disclosures
About Market
Risk
The
Company is
subject to market risk exposures of varying correlations and volatilities,
primarily relating to interest 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.
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. Unregistered Sales of Equity Securities
and Use of
Proceeds
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
Item
6. Exhibits
|
Exhibit
10.1
|
Licensing
Agreement between Firstwave Technologies, Inc. and M1 Global Solutions,
Inc. dated
September 30, 2005 (incorporated by reference to Exhibit 10.1 of
Form 8-K
filed on October 14, 2005).
|
|
|
Exhibit
10.2
|
OEM/Outsourcing
Agreement between Firstwave Technologies, Inc. and M1 Global Solutions,
Inc. Dated October 10, 2005 (incorporated by reference to Exhibit
10.1 of
Form 8-K filed on October 14, 2005).
|
|
|
Exhibit
10.3
|
Stock
Purchase Agreement between Firstwave Technologies, Inc and
AllAboutTickets, LLC dated June 3, 2005 ((incorporated by reference
to
Exhibit 10.1 of Form 8-K filed on June 9, 2005).
|
|
|
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 Principal Financial Officer pursuant
to Rule
13a-14(a) of the Securities Exchange Act of 1934.
|
|
|
Exhibit
32
|
Certification
of Chief Executive Officer and Principal 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:
November 11, 2005
|
|
|
/s/
David
G. Kane
|
|
|
David
G.
Kane
|
|
|
Controller
|
|
|
(Principal
Financial Officer)
|
20