Resonate Blends, Inc. - Quarter Report: 2005 June (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 June 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 #)
|
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 August 11, 2005:
Common
Stock, no
par value 2,728,723
shares
FIRSTWAVE
TECHNOLOGIES, INC.
FORM
10-Q
For
the
quarter ended June 30, 2005
|
Page
No.
|
|
|
3
|
|
|
|
|
|
4
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|
|
5
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|
|
6
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|
|
7
|
|
|
15
|
|
|
17
|
|
|
18
|
|
|
18
|
|
|
19
|
|
FIRSTWAVE
TECHNOLOGIES, INC.
|
||||||||||
|
Consolidated
Balance Sheet
|
||||||||||
|
(in
thousands)
|
||||||||||
|
Dec
31,
|
June
30,
|
|||||||||
|
2004
|
2005
|
|||||||||
|
(Unaudited)
|
||||||||||
|
ASSETS
|
|
|||||||||
|
Current
assets
|
||||||||||
|
Cash
and cash equivalents
|
$
|
1,286
|
$
|
552
|
||||||
|
Accounts
receivable: less allowance for
|
||||||||||
|
doubtful
accounts of $61 and $38, respectively
|
605
|
275
|
||||||||
|
Note
receivable, current
|
0
|
370
|
||||||||
|
Other
prepaid expenses
|
565
|
488
|
||||||||
|
Total
current assets
|
2,456
|
1,685
|
||||||||
|
Property
and equipment, net
|
264
|
133
|
||||||||
|
Software
development costs, net
|
1,095
|
713
|
||||||||
|
Intangible
assets
|
800
|
686
|
||||||||
|
Goodwill
|
1,658
|
1,121
|
||||||||
|
Note
Receivable
|
0
|
1,023
|
||||||||
|
Total
assets
|
$
|
6,273
|
$
|
5,361
|
||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||
|
Current
liabilities
|
||||||||||
|
Accounts
payable
|
$
|
581
|
$
|
521
|
||||||
|
Deferred
revenue
|
1,351
|
1,005
|
||||||||
|
Accrued
employee compensation and benefits
|
156
|
103
|
||||||||
|
Dividends
payable
|
46
|
63
|
||||||||
|
Other
accrued liabilities
|
290
|
33
|
||||||||
|
Total
current liabilities
|
2,424
|
1,725
|
||||||||
|
Shareholders'
equity
|
3,849
|
3,636
|
||||||||
|
Total
liabilities and shareholders' equity
|
$
|
6,273
|
$
|
5,361
|
||||||
|
FIRSTWAVE
TECHNOLOGIES, INC.
|
|||||||||||||
|
Consolidated
Statement of Operations
|
|||||||||||||
|
(in
thousands, except per share amounts)
|
|||||||||||||
|
(unaudited)
|
|||||||||||||
|
For
the Three Months Ended
|
For
the Six Months Ended
|
||||||||||||
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
||||||||||
|
2004
|
2005
|
2004
|
2005
|
||||||||||
|
Net
Revenues
|
|||||||||||||
|
Software
|
$
|
72
|
$
|
91
|
$
|
316
|
$
|
173
|
|||||
|
Services
|
118
|
177
|
740
|
377
|
|||||||||
|
Maintenance
|
641
|
506
|
1,305
|
1,085
|
|||||||||
|
Other
|
7
|
19
|
28
|
39
|
|||||||||
|
838
|
793
|
2,389
|
1,674
|
||||||||||
|
Cost
and Expenses
|
|||||||||||||
|
Cost
of revenues
|
|||||||||||||
|
Software
|
318
|
211
|
690
|
415
|
|||||||||
|
Services
|
267
|
183
|
552
|
406
|
|||||||||
|
Maintenance
|
93
|
73
|
212
|
152
|
|||||||||
|
Other
|
4
|
11
|
18
|
24
|
|||||||||
|
Sales
and marketing
|
426
|
178
|
954
|
342
|
|||||||||
|
Product
development
|
313
|
194
|
673
|
388
|
|||||||||
|
General
and administrative
|
343
|
390
|
866
|
776
|
|||||||||
|
1,764
|
1,240
|
3,965
|
2,503
|
||||||||||
|
Operating
loss
|
(926
|
)
|
(447
|
)
|
(1,576
|
)
|
(829
|
)
|
|||||
|
Interest
income/(expense), net
|
(4
|
)
|
7
|
(5
|
)
|
67
|
|||||||
|
Loss
from continuing operations before taxes
|
(930
|
)
|
(440
|
)
|
(1,581
|
)
|
(762
|
)
|
|||||
|
Income
taxes
|
0
|
0
|
0
|
0
|
|||||||||
|
Loss
from continuing operations
|
(930
|
)
|
(440
|
)
|
(1,581
|
)
|
(762
|
)
|
|||||
|
Income/(Loss)
from discontinued operations
|
788
|
(29
|
)
|
307
|
(457
|
)
|
|||||||
|
Gain
on sale of discontinued operations
|
-
|
327
|
-
|
327
|
|||||||||
|
Net
Income/(Loss) from discontinued operations
|
788
|
298
|
307
|
(130
|
)
|
||||||||
|
Net
Loss
|
(142
|
)
|
(142
|
)
|
(1,274
|
)
|
(892
|
)
|
|||||
|
Dividends
on preferred stock
|
(58
|
)
|
(71
|
)
|
(113
|
)
|
(142
|
)
|
|||||
|
Net
loss applicable to common shareholders
|
$
|
(200
|
)
|
$
|
(213
|
)
|
$
|
(1,387
|
)
|
$
|
(1,034
|
)
|
|
|
Income/(Loss)
per common share - Basic and Diluted
|
|||||||||||||
|
Income/(Loss)
from continuing operations
|
$
|
(0.36
|
)
|
$
|
(0.19
|
)
|
$
|
(0.63
|
)
|
$
|
(0.33
|
)
|
|
|
Income/(Loss)
from discontinued operations
|
0.29
|
0.11
|
0.11
|
(0.05
|
)
|
||||||||
|
Net
income/(loss) per common share
|
$
|
(0.07
|
)
|
$
|
(0.08
|
)
|
$
|
(0.52
|
)
|
$
|
(0.38
|
)
|
|
|
Weighted
average shares - Basic and Diluted
|
2,682
|
2,710
|
2,676
|
2,698
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
|
Consolidated
Statement of Changes in Shareholders'
Equity
|
||||||||||||||||||||||||||||
|
(In
thousands, except share data)
|
||||||||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||||||
|
For
the Six Months Ended June 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
|
4,051
|
35
|
35
|
|||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Issuance
of common stock
|
30,343
|
32
|
32
|
|||||||||||||||||||||||||
|
Dividends
|
(142
|
)
|
(142
|
)
|
||||||||||||||||||||||||
|
Comprehensive
loss
|
||||||||||||||||||||||||||||
|
Net
loss
|
$ |
(892
|
)
|
(892
|
)
|
(892
|
)
|
|||||||||||||||||||||
|
Foreign
currency translation adjustment
|
754
|
754
|
754
|
|||||||||||||||||||||||||
|
Comprehensive
loss
|
$ |
(138
|
)
|
|||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance
at June 30, 2005
|
2,728,387
|
$
|
13
|
34,020
|
$
|
3,011
|
$
|
25,410
|
$
|
0
|
$ |
(24,798
|
)
|
$
|
3,636
|
|||||||||||||
|
FIRSTWAVE
TECHNOLOGIES, INC.
|
|||||||
|
Consolidated
Statement of Cash Flows
|
|||||||
|
(in
thousands)
|
|||||||
|
(unaudited)
|
|||||||
|
For
the Six Months Ended
|
|||||||
|
June
30, 2004
|
June
30, 2005
|
||||||
|
Cash
flows provided by/(used in) operating activities
|
$ |
(1,181
|
)
|
$ |
(899
|
)
|
|
|
Cash
flows from investing activities
|
|||||||
|
Software
development costs
|
(94
|
)
|
0
|
||||
|
Purchases
of property and equipment, net
|
(86
|
)
|
(13
|
)
|
|||
|
Sale
of UK subsidiary
|
0
|
256
|
|||||
|
Net
cash provided by/(used in) investing activities
|
(180
|
)
|
243
|
||||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from issuance of common stock
|
5
|
37
|
|||||
|
Proceeds
from issuance of preferred stock
|
680
|
0
|
|||||
|
Payment
of dividends on preferred stock
|
(111
|
)
|
(125
|
)
|
|||
|
Net
cash used in financing activities
|
574
|
(88
|
)
|
||||
|
Foreign
currency translation adjustment
|
(56
|
)
|
10
|
||||
|
Decrease
in cash and cash equivalents
|
(843
|
)
|
(734
|
)
|
|||
|
Cash
and cash equivalents, beginning of period
|
2,704
|
1,286
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
1,861
|
$
|
552
|
|||
|
Supplemental
disclosure of cash flow information
|
|||||||
|
Cash
paid for income taxes
|
$
|
0
|
$
|
0
|
|||
|
Cash
paid for interest
|
$
|
11
|
$
|
0
|
|||
FIRSTWAVE
TECHNOLOGIES, INC.
Notes
to
Consolidated Financial Statements
June
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 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.
On
June
3, 2005, Firstwave Technologies, Inc. (the “Company”) 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.
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.
International
revenues were primarily generated by Firstwave UK, prior to the sale of the
UK
Subsidiary, and independent distributors who offer licenses of the Company's
non-sports 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 second quarter
of 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 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.
During
the second quarter of 2005, the Company completed the sale of its UK Subsidiary,
Firstwave Technologies UK Ltd. We allocated $488,187 of goodwill to this
component that was sold. The resulting amount of goodwill was then evaluated
at
the end of the second quarter of 2005, and it was determined there was no
impairment of recorded goodwill.
Concentration
of credit risk
The
Company is subject to credit risk primarily due to its trade receivables
and its
note receivable. 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,
|
Jun
30,
|
||||||
|
2004
|
2005
|
||||||
|
Argos,
Ltd
|
13.8%
|
|
0.0%
|
|
|||
|
CapGemini
UK
|
12.6%
|
|
0.0%
|
|
|||
|
Sungard
HTE,
Inc.
|
15.0%
|
|
6.3%
|
|
|||
|
Manhattan
Associates
|
1.6%
|
|
18.2%
|
|
|||
|
Northrop
Grumman
|
0.2%
|
|
10.0%
|
|
|||
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
|
|||||||
|
Jun
30,
|
Jun
30,
|
||||||
|
2004
|
2005
|
||||||
|
Electronic
Data Systems, Ltd.
|
12.1%
|
|
7.2%
|
|
|||
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 Six Months Ended
|
||||||||||||
|
June
30, 2004
|
June
30, 2005
|
June
30, 2004
|
June
30, 2005
|
||||||||||
|
Net
loss
applicable to common
|
|||||||||||||
|
shareholders,
as reported
|
$
|
(200
|
)
|
$
|
(213
|
)
|
$
|
(1,387
|
)
|
$
|
(1,034
|
)
|
|
|
Stock
based
employee compensation, net of related
|
|||||||||||||
|
tax
effects
under the fair value based method
|
522
|
522
|
694
|
542
|
|||||||||
|
Net
loss
applicable to common
|
|||||||||||||
|
shareholders,
as adjusted
|
$
|
(722
|
)
|
$
|
(735
|
)
|
$
|
(2,081
|
)
|
$
|
(1,576
|
)
|
|
|
Loss
per
share:
|
|||||||||||||
|
Basic
- as
reported
|
$
|
(0.07
|
)
|
$
|
(0.08
|
)
|
$
|
(0.52
|
)
|
$
|
(0.38
|
)
|
|
|
Basic
- as
adjusted
|
$
|
(0.27
|
)
|
$
|
(0.27
|
)
|
$
|
(0.78
|
)
|
$
|
(0.58
|
)
|
|
|
Diluted
- as
reported
|
$
|
(0.07
|
)
|
$
|
(0.08
|
)
|
$
|
(0.52
|
)
|
$
|
(0.38
|
)
|
|
|
Diluted
- as
adjusted
|
$
|
(0.27
|
)
|
$
|
(0.27
|
)
|
$
|
(0.78
|
)
|
$
|
(0.58
|
)
|
|
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 June 30, 2004 and June 30, 2005,
respectively: dividend yield of 0% for both quarters; expected volatility
of
130% and 126%, and risk-free interest rate of 3.72% and 3.87%. For the six
month
period ended June 30, 2004 and June 30, 2005, respectively, the assumptions
used were dividend yield of 0% for both years, average expected volatility
of
132% and 127%, and average risk-free interest rate of 3.36% and
3.88%.
There
was no reduction in pro forma stock-based employee compensation from the
quarter
ended June 30, 2004 to the quarter ended June 30, 2005, and
for
the six months ended June 30, there was a decrease from $694,000 in 2004
to
$542,000 in 2005. The year to date decrease of $152,000 was the result of
cancellations of stock options due to staff resignations of certain long-term
employees, offset by the acceleration of vesting of all outstanding options.
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 six
month
periods ended June 30, 2004 and June 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 Six Months Ended
|
||||||||||||||||||
|
June
30, 2005
|
June
30, 2005
|
||||||||||||||||||
|
Income
|
Shares
|
Per
Share
|
Income
|
Shares
|
Per
Share
|
||||||||||||||
|
(Numerator)
|
(Denominator)
|
Amount
|
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||||||
|
Net
loss
|
$
|
(142
|
)
|
$
|
(892
|
)
|
|||||||||||||
|
Less:
Preferred Stock Dividends
|
(71
|
)
|
(142
|
)
|
|||||||||||||||
|
Basic
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(213
|
)
|
2,710
|
$
|
(0.08
|
)
|
$
|
(1,034
|
)
|
2,698
|
$
|
(0.38
|
)
|
|||||
|
Effect
of Dilutive Securities
(1)
|
|||||||||||||||||||
|
Warrants
|
19
|
19
|
|||||||||||||||||
|
Convertible
Preferred Stock
|
71
|
898
|
142
|
898
|
|||||||||||||||
|
Stock
Options
|
242
|
242
|
|||||||||||||||||
|
71
|
1,159
|
142
|
1,159
|
||||||||||||||||
|
Diluted
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(213
|
)
|
2,710
|
$
|
(0.08
|
)
|
$
|
(1,034
|
)
|
2,698
|
$
|
(0.38
|
)
|
|||||
|
For
the Three Months Ended
|
For
the Six Months Ended
|
||||||||||||||||||
|
June
30, 2004
|
June
30, 2004
|
||||||||||||||||||
|
Income
|
Shares
|
Per
Share
|
Income
|
Shares
|
Per
Share
|
||||||||||||||
|
(Numerator)
|
(Denominator)
|
Amount
|
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||||||
|
Net
loss
|
$
|
(142
|
)
|
$
|
(1,274
|
)
|
|||||||||||||
|
Less:
Preferred Stock Dividends
|
(58
|
)
|
(113
|
)
|
|||||||||||||||
|
Basic
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(200
|
)
|
2,682
|
$ |
(0.07
|
)
|
$
|
(1,387
|
)
|
2,676
|
$
|
(0.52
|
)
|
|||||
|
Effect
of Dilutive Securities
(1)
|
|||||||||||||||||||
|
Warrants
|
19
|
19
|
|||||||||||||||||
|
Convertible
Preferred Stock
|
58
|
703
|
113
|
684
|
|||||||||||||||
|
Stock
Options
|
18
|
24
|
|||||||||||||||||
|
58
|
740
|
113
|
727
|
||||||||||||||||
|
Diluted
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(200
|
)
|
2,682
|
$ |
(0.07
|
)
|
$
|
(1,387
|
)
|
2,676
|
$
|
(0.52
|
)
|
|||||
|
(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 Technologies, Inc. (the “Company”) entered into a Stock
Purchase Agreement (the “Agreement”) with AllAboutTickets LLC (the “Buyer”)
doing business as First Sports International. 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,
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, 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 under Form 8-K on June 9, 2005.
The
total price 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.
The
promissory note in the amount of $1,620,000 is payable in five installments.
The
short-term portion of the note is $370,000, is payable prior to June 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. In June
of
2005, $6,000 was amortized, resulting in a balance of $227,000 in imputed
interest as of June 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 six months of 2005 and $307,000 for the first six
months of 2004. Total revenues from discontinued operations were
$342,000 and $1,637,000 for the first six months of 2005 and 2004,
respectively.
As
a
result of the sale of the UK Subsidiary, the Company recognized a pre-tax
gain
of $327,000 in the second quarter of 2005, which is combined and reported
as
income/(loss) from discontinued operations in the Consolidated Income
Statements.
5. Goodwill
and Intangibles
The
Company has $686,000 of Intangible Assets and $1,121,000 of Goodwill as a
result
of acquisitions in 1998 and 2003.
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.
During
the second quarter of 2005, the Company completed the sale of its UK Subsidiary,
Firstwave Technologies UK Ltd. We allocated $488,187 of goodwill to this
component that was sold. The resulting amount of goodwill was then evaluated
at
the end of the second quarter of 2005 and it was determined there was no
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 second quarter of 2005 and $114,000 in the six
months ended June 30, 2005.
The
following table presents details of intangible assets with definite lives
(in
thousands):
|
December
31, 2004
|
June
30, 2005
|
||||||||||||
|
Gross
carrying
|
Accumulated
|
Gross
carrying
|
Accumulated
|
||||||||||
|
amount
|
amortization
|
amount
|
amortization
|
||||||||||
|
Amortizable
intangible assets
|
|||||||||||||
|
Connect-Care
Technology
|
$
|
300
|
$
|
175
|
$
|
300
|
$
|
225
|
|||||
|
Connect-Care
Customer Relationships
|
900
|
225
|
900
|
289
|
|||||||||
|
Total
|
$
|
1,200
|
$
|
400
|
$
|
1,200
|
$
|
514
|
|||||
|
Aggregrate
Amortization Expense
|
|||||||||||||
|
For
the six
months ended June 30, 2005
|
$
|
114
|
|||||||||||
|
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
June
30, 2005, the Company had no borrowings. At June 30, 2004, the Company had
$500,000 in borrowings, and had paid $13,000 in interest expense for the
six
months ended June 30, 2004. The Company repaid its $500,000 of borrowings
on
December 30, 2004.
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 second quarter of 2005 and $1,350
for the six months ended June 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 second quarter
and
$101,250 for the six months ended June 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.
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 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).
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.
Results
of Continuing Operations
On
June
3, 2005, Firstwave Technologies, Inc. (the “Company”) 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. The Company has no further commitments or contingencies with respect
to
the UK Subsidiary. We believe that by concentrating on the high technology
market to increase prospects for our solutions in our pipeline with targeted
companies and on companies looking to license our technology for use in their
solutions offerings, we may begin to increase our revenue stream. This
Management’s Discussion and Analysis of Financial Condition compares the
Company’s results from continuing operations.
Total
revenues decreased 5.4% from $838,000 in the second quarter of 2004 to $793,000
in the second quarter of 2005 primarily due to decreased maintenance revenues.
For the six months ended June 30, 2005, total revenues decreased 29.9% from
$2,389,000 in 2004 to $1,674,000 in 2005 due to decreases in software, services
and maintenance revenue.
Software
revenues increased 26.4% from $72,000 in the second quarter of 2004 to $91,000
in the second quarter of 2005. For the six months ended June 30, 2005, software
revenue decreased 45.3% from $316,000 in 2004 to $173,000 in 2005. During
the
first quarter of 2004, we recognized two large software license agreements
with
Manhattan Associates, Inc. and SmartMail, LLC. Our software revenues remain
significantly dependent upon the size and timing of closing of license
agreements.
Services
revenues increased 50.0% from $118,000 in the second quarter of 2004 to $177,000
in the second quarter of 2005, primarily as a result of renewed focus on
selling
to existing non-sports CRM customers. For the six months ended June 30, 2005,
services revenues decreased 49.1% from $740,000 in 2004 to $377,000 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 21.1% from $641,000 during the second quarter of 2004
to
$506,000 in the second quarter of 2005. For the six months ended June 30,
2005,
maintenance decreased 16.9% from $1,305,000 in 2004 to $1,085,000 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 new software licenses and non-renewals of maintenance
agreements.
Cost
of
software revenues decreased 33.6% from $318,000 in the second quarter of
2004 to
$211,000 in the second quarter of 2005 and for the six months ended June
30,
2005, decreased 39.9% from $690,000 in 2004 to $415,000 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 441.7% in the second quarter of 2004 to 231.9% in the second quarter
of
2005, primarily due to the decrease in software revenues and a decrease in
amortization expense in costs of revenues.
Cost
of
revenues for services decreased 31.5% from $267,000 in the second quarter
of
2004 to $183,000 in the second quarter of 2005 and for the six months ended
June
30, 2005, decreased 26.4% from $552,000 in 2004 to $406,000 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 226.3% in the
second quarter of 2004 to 103.4% in the second quarter of 2005.
Cost
of
revenues for maintenance decreased 21.5% from $93,000 in the second quarter
of
2004 to $73,000 in the second quarter of 2005 and for the six months ended
June
30, 2005, decreased 28.3% from $212,000 in 2004 to $152,000 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 remained constant at 14.5% in the second
quarter of 2004 and 14.4% in the second quarter of 2005.
Sales
and marketing expense decreased 58.2% from $426,000 in the second quarter
of
2004 to $178,000 in the second quarter of 2005 and for the six months ended
June
30, 2005, decreased 64.2% from $954,000 in 2004 to $342,000 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
investor relations.
The
Company’s product innovation and development expenditures, which includes
amounts capitalized, decreased 38.0% from $313,000 in the second quarter
of 2004
to $194,000 in the second quarter of 2005 and for the six months ended June
30,
2005, decreased 42.3% from $673,000 in 2004 to $388,000. 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 and six months ended June
30,
2004 were $20,000 and $94,000 respectively. There were no development costs
capitalized during the second quarter of 2005 or for the six months ended
June
30, 2005. A net realizable analysis was performed at June 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 increased 13.7% from $343,000 in the second quarter
of 2004 to $390,000 in the second quarter of 2005 and for the six months
ended
June 30, decreased 10.4% from $866,000 in 2004 to $776,000 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.
Income
from discontinued operations was $788,000 for the second quarter of 2004,
compared to $298,000 for the second quarter of 2005. For the six months ended
June 30, 2004, income from discontinued operations was $307,000 compared
to a
loss of $130,000 for the six months ended June 30, 2005.
Dividends
on preferred stock increased 22.4% from $58,000 in the second quarter of
2004 to
$71,000 in the first quarter of 2005 and for the six months ended June 30,
dividends increased from $113,000 in 2004 to $142,000 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 $213,000 in the second
quarter
of 2005 compared to a net loss of $200,000 in the second quarter of 2004.
Net
loss per basic and diluted share was $0.07 for the second quarter of 2004
compared to a net loss of $0.08 per basic and diluted share for the second
quarter of 2005. Year to date, the net loss applicable to common shareholders
was $1,387,000 for the six months ended June 30, 2004, or $0.52 per basic
and
diluted share, compared to a net loss of $1,034,000 for the six months ended
June 30, 2005, or $0.38 per basic and diluted share. At June 30, 2004, the
number of basic weighted average shares outstanding was 2,682,000 compared
to
2,710,000 at June 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 can now be avoided by
the Company’s decision.
Balance
Sheet
Net
accounts receivable decreased 54.5% from $605,000 at December 31, 2004 to
$275,000 at June 30, 2005, primarily due to lower software license and services
revenues invoiced. Property and equipment decreased 49.6% from $264,000 at
December 31, 2004 to $133,000 at June 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 34.9% from $1,095,000
at
December 31, 2004 to $713,000 at June 30, 2005 due to year-to-date amortization
expense
of $382,000. Intangible assets decreased 14.3% from $800,000 at December
31,2004
to $686,000 at June 30, 2005 due to $114,000 in year-to-date amortization
expense.
As
a
result of the sale of the UK Subsidiary, a note receivable in the amount
of
$1,620,000 was received. The short-term portion of the note is $370,000,
is payable prior to June 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.
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. In June of 2005, $6,000 was amortized, resulting in a
balance of $227,000 in imputed interest as of June 30, 2005.
Accounts
payable decreased 10.3% from $581,000 at December 31, 2004 to $521,000 at
June
30, 2005 primarily due to the reduction in expenses. Deferred revenue decreased
25.6% from $1,351,000 at December 31, 2004 to $1,005,000 at June 30, 2005
due to
reductions in and the timing of billing for annual maintenance renewals.
Accrued
employee compensation and benefits decreased 34.0% from $156,000 at December
31,
2005 to $103,000 at June 30, 2005 primarily as a result of staff reductions.
Other accrued liabilities decreased 88.6% from $290,000 at December 31, 2004
to
$33,000 at June 30, 2005 primarily as a result of the sale of the UK Subsidiary
related to elimination of accrued Value Added Tax and employee
incentives.
Liquidity
and Capital Resources
As
of
June 30, 2005, the balance of cash and cash equivalents was $552,000 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.
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 Technologies, Inc. (the “Company”) entered into a Stock
Purchase and Sale 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 and Sale Agreement and the License Agreement were filed with the
Securities and Exchange Commission under Form 8-K on June 9, 2005, and are
incorporated herein by reference.
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 in the second quarter of 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, 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.
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
|
The
Annual Meeting of Shareholders was held on May 31, 2004, in Atlanta, Georgia,
at
which the following matters were submitted to a vote of the
shareholders:
| 1. |
Votes
cast for or withheld regarding the election of one (1) Director
for a term
of one year.
|
|
Name
of
Nominee
|
Votes
For
|
Votes
Withheld
|
Non-votes
|
||
|
I.
Sigmund
Mosley, Jr.
|
2,882,120
|
107,645
|
16,667
|
|
The
nominee for director was elected by a
majority.
|
|
2.
|
Votes
cast for the approval of the company’s 2005 stock incentive plan
increasing the number of shares available by 300,000, from 516,667
to
816,667.
|
|
Votes
For
|
Votes
Against
|
Abstain
|
Non-votes
|
|||
|
825,518
|
262,651
|
4,632
|
1,913,630
|
The
requirement to approve this proposal was the affirmative vote of the
shareholders having a majority of the voting power of all shares present,
in
person or by proxy, and voted at the Annual Meeting. Therefore the motion
to
approve the Company’s 2005 Stock Incentive Plan was adopted.
| 3. |
Ratification
of selection of Cherry, Bekaert & Holland, L.L.P. as Company’s
independent auditors.
|
The
ratification was adopted by a majority.
|
Votes
For
|
Votes
Against
|
Abstain
|
||
|
2,996,085
|
5,728
|
4,619
|
| Item 5. |
Other
Information
|
Not
Applicable
| Item 6. |
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: August 11, 2005 | By: | /s/ Judith A. Vitale |
|
Judith
A. Vitale
Chief
Financial Officer
(Principal
Financial Officer)
|
||
19