Resonate Blends, Inc. - Quarter Report: 2006 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, 2006
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, Suite 400
Atlanta,
GA 30328
(Address
of principal executive offices)
770-250-0349
(Telephone
number of registrant)
(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 o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o 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 9, 2006:
Common
Stock, no par value 2,868,302 shares
FIRSTWAVE
TECHNOLOGIES, INC.
FORM
10-Q
For
the quarter ended September 30, 2006
Index
|
Page
No.
|
||
|
Part
I.
|
Financial
Information
|
|
|
Item
1.
|
Financial
Statements (unaudited)
|
|
|
3
|
||
|
4
|
||
|
5
|
||
|
6
|
||
|
7
|
||
|
Item
2.
|
16
|
|
|
Item
3.
|
19
|
|
|
Item
4.
|
19
|
|
|
Item
5.
|
19
|
|
|
Part
II.
|
20
|
|
|
Item
1A
|
20
|
|
|
Item
6.
|
20
|
|
|
21
|
||
|
22
|
||
2
Item
1. Financial Statements
FIRSTWAVE
TECHNOLOGIES, INC.
Condensed
Consolidated Balance Sheets
(in
thousands)
|
|
December
31,
2005
|
September
30,
2006
|
|||||
|
|
(unaudited)
|
||||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
360
|
$
|
963
|
|||
|
Accounts
receivable, less allowance for doubtful accounts of $43 and $38,
respectively
|
399
|
317
|
|||||
|
Note
receivable, current
|
300
|
500
|
|||||
|
Prepaid
expenses
|
475
|
473
|
|||||
|
Total
current assets
|
1,534
|
2,253
|
|||||
|
Property
and equipment, net
|
82
|
55
|
|||||
|
Investment
|
50
|
15
|
|||||
|
Software
development costs, net
|
363
|
—
|
|||||
|
Intangible
assets
|
572
|
450
|
|||||
|
Goodwill
|
593
|
593
|
|||||
|
Note
receivable
|
1,065
|
558
|
|||||
|
Total
assets
|
$
|
4,259
|
$
|
3,924
|
|||
|
LIABILITIES
AND SHAREHOLDERS’
EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
302
|
$
|
213
|
|||
|
Deferred
revenue
|
1,117
|
750
|
|||||
|
Accrued
employee compensation and benefits
|
99
|
59
|
|||||
|
Dividends
payable
|
46
|
47
|
|||||
|
Other
accrued liabilities
|
32
|
22
|
|||||
|
Total
current liabilities
|
1,596
|
1,091
|
|||||
|
Shareholders’
equity
|
2,663
|
2,833
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
4,259
|
$
|
3,924
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
FIRSTWAVE
TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Operations
(in
thousands, except per share amounts)
(unaudited)
|
For
the Three Months Ended
|
For
the Nine Months Ended
|
||||||||||||
|
September
30,
2005
|
September
30,
2006
|
September
30,
2005
|
September
30,
2006
|
||||||||||
|
Net
Revenues
|
|
|
|
|
|||||||||
|
Software
|
$
|
241
|
$
|
59
|
$
|
414
|
$
|
648
|
|||||
|
Services
|
199
|
98
|
576
|
212
|
|||||||||
|
Maintenance
|
481
|
420
|
1,566
|
1,274
|
|||||||||
|
Other
|
7
|
6
|
46
|
6
|
|||||||||
|
|
928
|
583
|
2,602
|
2,140
|
|||||||||
|
Cost
and Expenses
|
|||||||||||||
|
Cost
of revenues
|
|||||||||||||
|
Software
|
199
|
12
|
614
|
397
|
|||||||||
|
Services
|
155
|
88
|
561
|
92
|
|||||||||
|
Maintenance
|
88
|
113
|
240
|
470
|
|||||||||
|
Other
|
6
|
6
|
30
|
6
|
|||||||||
|
Sales
and marketing
|
93
|
109
|
435
|
190
|
|||||||||
|
Product
development
|
187
|
74
|
575
|
224
|
|||||||||
|
General
and administrative
|
349
|
204
|
1,125
|
667
|
|||||||||
|
Goodwill
Impairment
|
528
|
—
|
528
|
—
|
|||||||||
|
|
1,605
|
605
|
4,108
|
2,045
|
|||||||||
|
Operating
Income (loss)
|
(677
|
)
|
(22
|
)
|
(1,506
|
)
|
95
|
||||||
|
Gain
(loss) on Investment
|
(51
|
)
|
—
|
(51
|
)
|
||||||||
|
Interest
income
|
20
|
29
|
87
|
78
|
|||||||||
|
Income
(loss) from continuing operations before income
taxes
|
(657
|
)
|
(44
|
)
|
(1,419
|
)
|
122
|
||||||
|
Income
taxes
|
—
|
—
|
—
|
—
|
|||||||||
|
Income
(loss) from continuing operations
|
(657
|
)
|
(44
|
)
|
(1,419
|
)
|
122
|
||||||
|
Income
(loss) from discontinued operations
|
—
|
—
|
(457
|
)
|
—
|
||||||||
|
Gain
on sale of discontinued operations
|
—
|
—
|
327
|
—
|
|||||||||
|
Net
income (loss) from discontinued operations
|
—
|
—
|
(130
|
)
|
—
|
||||||||
|
Net
Income (loss)
|
(657
|
)
|
(44
|
)
|
(1,549
|
)
|
122
|
||||||
|
Dividends
on preferred stock
|
(71
|
)
|
(70
|
)
|
(213
|
)
|
(212
|
)
|
|||||
|
Net
Income (loss) applicable to common shareholders
|
$
|
(728
|
)
|
$
|
(114
|
)
|
$
|
(1,762
|
)
|
$
|
(90
|
)
|
|
|
Income
(loss) per common share - Basic
|
|||||||||||||
|
Income
(loss) from continuing operations
|
$
|
(0.27
|
)
|
$
|
(0.04
|
)
|
$
|
(0.60
|
)
|
$
|
(0.03
|
)
|
|
|
Income
(loss from discontinued operations
|
—
|
—
|
(0.05
|
)
|
—
|
||||||||
|
Net
income (loss) per common share- Basic
|
$
|
(0.27
|
)
|
$
|
(0.04
|
)
|
$
|
(0.65
|
)
|
$
|
(0.03
|
)
|
|
|
Income
(loss) per common share - Diluted
|
|||||||||||||
|
Income
(loss) from continuing operations
|
$
|
(0.27
|
)
|
$
|
(0.04
|
)
|
$
|
(0.60
|
)
|
$
|
(0.03
|
)
|
|
|
Income
(loss) from discontinued operations
|
—
|
—
|
(0.05
|
)
|
—
|
||||||||
|
Net
Income (loss) per common share - Diluted
|
$
|
(0.27
|
)
|
$
|
(0.04
|
)
|
$
|
(0.65
|
)
|
$
|
(0.03
|
)
|
|
|
Weighted
average shares - Basic
|
2,729
|
2,868
|
2,704
|
2,774
|
|||||||||
|
Weighted
average shares - Diluted
|
2,729
|
2,868
|
2,704
|
2,774
|
|||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
FIRSTWAVE
TECHNOLOGIES, INC.
Condensed
Consolidated Statement of Changes in Shareholders’
Equity
(In
thousands, except share data)
(unaudited)
For
the Nine Months Ended September 30, 2006
|
Common
Stock
|
Preferred
Stock
|
|||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
paid-in
capital
|
Comprehensive
income
|
Accumulated
Other
comprehensive
loss
|
Accumulated
Deficit
|
Total
|
||||||||||||||||||||
|
Balance
at December 31, 2005
|
2,729,135
|
$
|
13
|
34,020
|
$
|
3,011
|
$
|
25,269
|
$
|
(16
|
)
|
$
|
(25,614
|
)
|
$
|
2,663
|
||||||||||||
|
Exercise
of common stock options
|
64,167
|
95
|
95
|
|||||||||||||||||||||||||
|
Issuance
of common stock in exchange for
services rendered
|
65,000
|
127
|
127
|
|||||||||||||||||||||||||
|
Conversion
of preferred stock
|
10,000
|
(300
|
)
|
(30
|
)
|
30
|
—
|
|||||||||||||||||||||
|
Dividends
on preferred stock
|
(212
|
)
|
(212
|
)
|
||||||||||||||||||||||||
|
Stock
option expense
|
22
|
22
|
||||||||||||||||||||||||||
|
Comprehensive
income
|
||||||||||||||||||||||||||||
|
Net
income
|
$
|
122
|
122
|
122
|
||||||||||||||||||||||||
|
Unrealized
loss on equity securities: available-for-sale
|
—
|
16
|
16
|
|||||||||||||||||||||||||
|
Comprehensive
income
|
$
|
122
|
||||||||||||||||||||||||||
|
Balance
at end of period
|
2,868,302
|
$ |
13
|
33,720
|
$
|
2,981
|
$
|
25,331
|
$
|
—
|
$
|
(25,492
|
)
|
$
|
2,833
|
|||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
FIRSTWAVE
TECHNOLOGIES, INC.
Condensed
Consolidated Statements of Cash Flows
(in
thousands)
(unaudited)
|
For
the Nine Months Ended
|
|||||||
|
September
30,
2005
|
September
30,
2006
|
||||||
|
Cash
flows provided by/(used in) operating activities
|
$
|
(899
|
)
|
$
|
719
|
||
|
Cash
flows from investing activities
|
|||||||
|
Purchases
of property and equipment
|
(13
|
)
|
—
|
||||
|
Sale
of Sports Business
|
256
|
—
|
|||||
|
Net
cash provided by investing activities
|
243
|
—
|
|||||
|
Cash
flows from financing activities
|
|||||||
|
Proceeds
from options exercised
|
37
|
95
|
|||||
|
Proceeds
from issuance of common stock
|
—
|
—
|
|||||
|
Payment
of dividends on preferred stock
|
(125
|
)
|
(211
|
)
|
|||
|
Net
cash used in financing activities
|
(88
|
)
|
(116
|
)
|
|||
|
Foreign
currency translation adjustment
|
10
|
—
|
|||||
|
Increase/(decrease)
in cash and cash equivalents
|
(734
|
)
|
603
|
||||
|
Cash
and cash equivalents, beginning of period
|
1,286
|
360
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
552
|
$
|
963
|
|||
|
Supplemental
disclosure of cash flow information
|
|||||||
|
Cash
paid for income taxes
|
$
|
—
|
$
|
—
|
|||
|
Cash
paid for interest
|
$
|
—
|
$
|
—
|
|||
|
Supplemental
disclosure of non-cash investing and financing activities
|
|||||||
|
Issuance
of common stock in exchange for services rendered
|
$
|
—
|
$
|
127
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
FIRSTWAVE
TECHNOLOGIES,
INC.
Notes
to Condensed Consolidated Financial Statements
September
30, 2006
(Unaudited)
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 demand
generation, lead leakage and revenue retention solutions built on top of the
Company’s suite of CRM (Customer Relationship Management) products. Firstwave’s
solutions increase visibility throughout the sales cycle, keeping customer
pipelines perpetually full of qualified leads, their prospects warm, and their
customers loyal. With 20 years of sales management software, Firstwave’s modular
internet marketing, sales lead and customer management solutions, customers
achieve results at every opportunity. Firstwave supports several product lines:
The Wave Series of Internet Based Products, Firstwave CRM (includes eCRM and
v.10 products), Firstwave Technology and TakeControl.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the
condensed consolidated financial statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America 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, 2005. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the unaudited condensed
consolidated financial statements have been included.
The
condensed consolidated balance sheet at December 31, 2005 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 of America for complete
financial statements.
On
June
3, 2005, Firstwave entered into a Stock Purchase Agreement (the “Agreement”)
with AllAboutTickets LLC (the “Buyer”) now 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 condensed
consolidated financial statements.
On
October 10, 2005, the Company entered into a three-year OEM/Outsourcing
Agreement with M1 Global Solutions, Inc. (“M1 Global”), 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 is a non-exclusive reseller
of
Firstwave products. Firstwave retains all maintenance revenues and pays M1
Global a quarterly 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. In July of 2006, M1 Global Solutions, Inc. (“M1 Global”)
and Firstwave made changes to its OEM/Outsourcing Agreement. The changes involve
immaterial modifications to the parties’ relationship concerning the ongoing
development, maintenance and support of Firstwave products, the quarterly
payments from Firstwave in consideration of M1 providing support services to
Firstwave’s customers, and the royalty payments from M1 Global to Firstwave.
7
On
May 2,
2006, the Company completed an IP Assignment Agreement for its .Net Integrated
Development Environment (“IDE”) tool with Galactus Software. Under the
Agreement, Galactus assumes ownership of the IDE tool, while Firstwave has
the
exclusive right to use and license the software in the CRM Market. The
purchase price for the assignment was Five Hundred Thousand Dollars ($500,000)
and, as directed by the agreement, was paid by cashier’s check on the Assignment
Effective Date of May 2, 2006. Complete details of the agreement were filed
with
the Securities and Exchange Commission under Form 8-K on May 5, 2006.
On
May
31, 2006, Firstwave entered into an agreement with ListK that granted Firstwave
the right to use ListK’s marketing lists, custom marketing list generation
capabilities, and email delivery capabilities in exchange for a royalty and
services prepayment of $97,500 payable in unregistered Firstwave common stock.
Fifty thousand shares of common stock were issued representing the royalty
payment, calculated on the closing price of Firstwave stock at May 31, 2006,
the
contract closing date. Future royalty and service payments to ListK will be
made
partially in cash and partially in additional unregistered stock after the
initial prepayment has been applied to amounts due for royalties and services
delivered. As of September 30, 2006 there were no other transactions with ListK
that affected the royalty and service prepayments. Firstwave has no future
performance commitments regarding the prepayment agreement.
The
condensed 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 of America 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, investment(s) and intangible assets, and goodwill. Management
bases its estimates on historical experience and on various other 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 condensed consolidated financial statements:
| · |
Revenue
Recognition
|
| · |
Capitalization
of Software Development Costs
|
| · |
Valuation
of Intangible Assets
|
3. Summary
of Significant Accounting Policies
Revenue
recognition
The
Company recognizes revenue, where applicable, 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 licenses 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. 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
Statements of Operations.
8
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.
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.
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.
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.
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 Statement of Financial
Accounting Standards 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.
9
There
was
no capitalized software development balance at September 30, 2006 due to
year-to-date amortization expense and the assignment of the Net Integrated
Development Environment Tool to Galactus in May 2006.
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. The first phase screens for
impairment, while the second phase (if necessary) measures the impairment.
Goodwill and Other Intangible Assets were evaluated for impairment at the end
of
the third quarter of 2006 in accordance with SFAS 142 “Goodwill and Other
Intangible Assets,” and it was determined there was no instance of impairment of
recorded Goodwill or Other Intangible Assets.
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.
|
|
December
31, 2005
|
September
30, 2006
|
|
|
Argos,
Ltd
|
16.4%
|
0.0%
|
|
|
Barclaycard
IT
|
10.0%
|
0.0%
|
|
|
CapGemini
UK
|
14.2%
|
0.0%
|
|
|
M1
Global Solutions
|
10.9%
|
0.0%
|
|
|
Manhattan
Associates
|
0.0%
|
22.4%
|
|
|
Northrop
Grumman
|
0.17%
|
0.0%
|
Significant
Customers
For
the
nine months ended September 30, 2005, 2 of our customers contributed more
than
10% of total revenue, and for the nine months ended September 30, 2006, one
customer, Galactus, contributed 19.2% of total revenues.
Basic
and diluted net income (loss) per common share
Basic
net
income (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 income (loss) applicable to common shareholders
includes a charge for dividends related to the Company’s outstanding preferred
stock.
The
potentially dilutive common shares relate to options granted under the Company’s
stock compensation plans and convertible preferred shares. The Company has
excluded all outstanding stock options to purchase common stock from the
calculation of diluted earnings per share at September 30, 2006 and at September
30, 2005 because all such securities are antidilutive.
Preferred
shares convertible to shares of common stock outstanding but not included
in the
computation of diluted EPS were 898,000 for the three and nine month period
ending September 30, 2005 and 815,000 for the three and nine month period
ending
September 30, 2006.
10
Shown
below is a reconciliation of the numerators and denominators of the basic
and
diluted income (loss) per share computations. (in thousands, except per share
data):
|
For
the Three Months Ended
September
30, 2006
|
For
the Nine Months Ended
September
30, 2006
|
||||||||||||||||||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per
Share
Amount
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per
Share
Amount
|
||||||||||||||
|
Net
income(loss)
|
$
|
(44
|
)
|
$
|
122
|
||||||||||||||
|
Less:
Preferred Stock Dividends
|
(70
|
)
|
(212
|
)
|
|||||||||||||||
|
Basic
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(114
|
)
|
2,868
|
$
|
(0.04
|
)
|
$
|
(90
|
)
|
2,774
|
$
|
(0.03
|
)
|
|||||
|
Effect
of Anti-Dilutive Securities
|
|||||||||||||||||||
|
Convertible
Preferred Stock
|
71
|
815
|
142
|
815
|
|||||||||||||||
|
Stock
Options
|
27
|
27
|
|||||||||||||||||
|
Diluted
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(114
|
)
|
2,868
|
$
|
(0.04
|
)
|
$
|
(90
|
)
|
2,774
|
$
|
(0.03
|
)
|
|||||
|
For
the Three Months Ended
September
30, 2005
|
For
the Nine Months Ended
September
30, 2005
|
||||||||||||||||||
|
Income
(Numerator)
|
Shares
(Denominator)
|
Per
Share
Amount
|
Loss
(Numerator)
|
Shares
(Denominator)
|
Per
Share
Amount
|
||||||||||||||
|
Net
loss
|
$
|
(142
|
)
|
$
|
(1,549
|
)
|
|||||||||||||
|
Less:
Preferred Stock Dividends
|
(71
|
)
|
(213
|
)
|
|||||||||||||||
|
Basic
EPS
|
|||||||||||||||||||
|
Loss
applicable to common shareholders
|
$
|
(213
|
)
|
2,710
|
$
|
(0.08
|
)
|
$
|
(1,762
|
)
|
2,698
|
$
|
(0.65
|
)
|
|||||
|
Effect
of Anti-Dilutive Securities
|
|||||||||||||||||||
|
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
|
)
|
$
|
(1,762
|
)
|
2,698
|
$
|
(0.65
|
)
|
|||||
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 condensed
consolidated statement of operations reflects the revenues and costs associated
with this segment that management uses to make operating decisions and
assess
performance.
Cash
and Cash Equivalents
Cash
and
cash equivalents include amounts on deposit with financial institutions
and
money market investments with original maturities of less than ninety
days.
11
4. Discontinued
Operations
On
June
3, 2005, Firstwave entered into the Stock Purchase Agreement with
AllAboutTickets LLC (“Buyer”), now doing business as First Sports International,
as described in 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 condensed 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. The Company had previously prepaid $338,000
of
royalties to a third party, the benefit of which was sold in the transaction
and
included in the purchase price. The buyer is paying the company for the
use of
such prepaid royalties as software revenue is achieved by the buyer.
As
of
September 30, 2006, the remaining balance of the promissory note is $1,175,000
and is payable in installments. The short-term portion of the note, $500,000,
is
payable prior to June 30, 2007, and has been classified as a current asset
on
the Balance Sheet. The long-term portion of the note, $675,000, 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 against the final payment
due
on the note. 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 2006, $116,000 was amortized, resulting
in
a balance of $117,000 in unamortized discount as of September 30, 2006.
As of
September 30, 2006, the receivable from the buyer relating to the prepaid
royalty balance sold was $238,000.
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. There was no activity from discontinued operations
for the
first nine months ended September 30, 2006 and a loss of $457,000 for the
nine
months ended September 30, 2005. 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.
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, the first phase screens for
impairment, while the second phase (if necessary) measures the impairment.
As
of
September 30, 2006, the Company had $450,000 of Intangible Assets and $593,000
of Goodwill as a result of acquisitions in 1998 and 2003, after subsequent
amortization expense and impairment charges. Goodwill and Other Intangible
Assets were evaluated for impairment at the end of the third quarter of
2006 in
accordance with SFAS 142 “Goodwill and Other Intangible Assets,” and it was
determined there was no instance of impairment of recorded Goodwill or
Other
Intangible Assets.
The
weighted average amortization period for the intangible assets with finite
useful 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.
12
The
following table presents details of intangible assets with finite lives
(in
thousands):
|
December
31, 2005
|
September
30, 2006
|
||||||||||||
|
Gross
carrying
amount
|
Accumulated
amortization
|
Gross
carrying
amount
|
Accumulated
amortization
|
||||||||||
|
Amortizable
intangible assets
|
|
|
|
|
|||||||||
|
Connect-Care
Technology
|
$
|
300
|
$
|
275
|
$
|
300
|
$
|
300
|
|||||
|
Connect-Care
Customer Relationships
|
900
|
354
|
900
|
450
|
|||||||||
|
Total
|
$
|
1,200
|
$
|
629
|
$
|
1,200
|
$
|
750
|
|||||
|
Aggregrate
Amortization Expense
|
|||||||||||||
|
For
the Nine months ended September 30, 2006
|
$
|
121
|
|||||||||||
|
Estimated
Amortization Expense
|
|||||||||||||
|
For
the three months ended December 31, 2006
|
$
|
33
|
|||||||||||
|
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. Stock-Based
Compensation
Stock
Incentive Plan
In
May
2005 the shareholders of Firstwave Technologies, Inc. approved the Company’s
2005 Stock incentive Plan which provides for the granting of options and
other
types of awards for shares of our Company’s common stock for the Company’s
employees, directors, advisors and consultants. There was an aggregate of
428,258 shares remaining available for issuance under the Company’s stock
incentive plan at September 30, 2006. Stock options granted to date generally
have had an exercise price per share equal to the closing market value per
share
of the common stock on the day before the grant and expire in ten years from
the
date of grant. Some of these options become exercisable in annual increments
over a four-year period beginning one year from the grant date while others
became immediately exercisable upon their grant.
Accounting
for Share-Based Compensation
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123(R) (“SFAS 123(R)”), which requires the measurement of compensation expense
for all share-based awards made to employees and directors based on estimated
fair values on the date of grant and recognition of compensation expense
over
the expected vesting period. We adopted SFAS 123(R) using the modified
prospective transition method, and accordingly, prior period results have
not
been restated. Under the transition method, compensation cost recognized
on or
after January 1, 2006 includes: (a) compensation cost for all share-based
awards
granted prior to, but not yet vested as of January 1, 2006, based on the
grant
date fair value estimated in accordance with the original provisions of SFAS
123, and (b) compensation cost for all share-based awards granted on or after
January 1, 2006, based on the grant date fair value estimated in accordance
with
SFAS 123(R). No stock-based compensation expense related to stock options
was
recognized in the Statement of Operations for options granted during periods
prior to January 1, 2006, as all stock options granted prior to such date
were
fully vested as of December 31, 2005. The Company did not grant any stock
options during the three months ended March 31, 2006. Based on the above,
in
accordance with SFAS 123(R), no compensation expense was recorded in the
three
months ended March 31, 2006. During the three months ended September 30,
2006,
the Company granted 152,500 stock options, resulting in option compensation
expense of $291,000 over the vesting period of the options of which $20,000
was
recorded during the three months ended September 30, 2006. For the nine months
ended September 30, 2006, the company granted a total of 174,500 stock options,
resulting in option compensation expense of $330,000 over the vesting period
of
the options, of which $22,000 was recorded during the nine months ending
September 30, 2006. The recorded compensation expense did not have an impact
on
basic or diluted earnings per share for the nine and three months ended
September 30, 2006. The Company does not anticipate the recognition of
compensation expense under SFAS 123R in future periods for options currently
outstanding to have a material impact on its results of operation or financial
position.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model. Expected volatility of 120.56%, an interest
rate at date of grant of 5.10%, and an expected life of 6 years were used
for
calculating the fair value of the options granted during the three months
ended
September 30, 2006.
Effective
January 1, 2006, expected volatilities are based on historical volatility
of our
stock. We also use historical data to estimate the term that options are
expected to be outstanding and the forfeiture rate of options granted. The
interest rate is based on the U.S. Treasury rates. Using these assumptions,
the
weighted average fair value of the stock options granted during the three
months
ended September 30, 2006 is $1.76. The total value of the award is expensed
on a
straight line basis over the vesting period. As of September 30, 2006,
unrecognized compensation cost related to unvested stock option awards totaled
$292,613 and is expected to be recognized over a weighted average period
of 4
years.
On
November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No FAS 123(R)-3 (“FSP 123(R)-3”), Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards. We have adopted
the
transition method provided in FSP 123(R)-3 for calculating the tax effects
of
stock-based compensation expense. We use the “with and without” approach, which
compares the actual income taxes payable for the period to the amount of
tax
payable that would have been incurred absent the deduction for employee
share-based awards in excess of the amount of compensation expense recognized
for financial reporting. As a result of this approach, tax net operating
loss
carryforwards not generated from share-based awards in excess of expense
recognized for financial reporting are considered utilized before the current
period’s share-based compensation expense deduction. As a result of this
accounting treatment, no tax expense was recorded during the three months
ended
September 30, 2006. Stock compensation expense reduced income before income
taxes by $20,000 and is recorded directly to Additional Paid in Capital.
After
all tax net loss carryforwards are utilized, we will incur an income tax
benefit
which will be credited to equity.
13
For
periods prior to January 1, 2006, SFAS 123 required disclosure of the pro
forma amount of net income and per share amounts including the amount of
fair
value based compensation expense that would have been recognized in those
periods had compensation expense been recorded. The following table includes
the
impact on net income and per share amounts for the nine and three months
ended
September 30, 2005 had the Company recognized fair value compensation costs
for
the period:
|
For
the Nine
Months Ended |
For
the Three
Months Ended |
||||||
|
September,
2005
|
September,
2005
|
||||||
|
(unaudited)
|
(unaudited)
|
||||||
|
Net
loss applicable to common shareholders, as reported
|
$
|
(1,034
|
)
|
$
|
(213
|
)
|
|
|
Stock
based employee compensation, net of related tax effects under
the fair
value based method
|
542
|
522
|
|||||
|
Net
loss applicable to common shareholders, as adjusted
|
$
|
(1,576
|
)
|
$
|
(735
|
)
|
|
|
Loss
per share:
|
|||||||
|
Basic
- as reported
|
$
|
(0.38
|
)
|
$
|
(0.08
|
)
|
|
|
Basic
- as adjusted
|
$
|
(0.58
|
)
|
$
|
(0.27
|
)
|
|
|
Diluted
- as reported
|
$
|
(0.38
|
)
|
$
|
(0.08
|
)
|
|
|
Diluted
- as adjusted
|
$
|
(0.58
|
)
|
$
|
(0.27
|
)
|
|
|
Weighted
average common shares outstanding
|
2,698,000
|
2,710,000
|
|||||
Stock
Options
The
following table summarizes the activity with respect to the stock options
of the
Company for the nine months ended September 30, 2006.
|
|
Number
of Shares
|
Exercised
Price Per Share
|
|
|
Outstanding
at December 31, 2005
|
333,586
|
$1.47
- $16.50
|
|
|
Granted
|
182,000
|
$1.95
- $2.18
|
|
|
Exercised
|
(64,167)
|
$1.32
- $1.71
|
|
|
Forfeited
|
|||
|
Expired
|
(9,917)
|
$1.51
- $2.16
|
|
|
Outstanding
at September 30, 2006
|
441,502
|
$1.47
- $16.50
|
7. Related
Party Transactions
The
former President and COO of the Company, who resigned from the Company on
March
22, 2005, invested $30,000 in Series D Convertible Preferred Stock in June
of
2004. In addition, he is the General Manager of First Sports, the buyer of
the
Company’s UK Subsidiary as detailed above in Item 1, Basis of Presentation. On
May 1, 2006, Mr. Simmons converted his Series D Convertible Preferred Stock
into 10,000 shares of the Company’s common stock; therefore, there were no
dividends paid to Mr. Simmons in the third quarter of 2006. For the nine
months ended September 30, 2006, $1,475.00 in dividends were paid to
Mr. Simmons.
14
The
Chairman and CEO of the Company earned $50,625 in the third quarter of 2006
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. For
the
nine months ended September 30, 2006, $151,875.00 in dividends were earned
by
the Chairman and CEO of the Company.
8. Income
Taxes
During
the third quarter of 2006, the Company made no tax provision for income tax
expense due to its tax net loss carryforwards which were fully reserved at
December 31, 2005. The Company has U.S. net operating loss carryforwards
of
approximately $27,000,000 which expire in years 2009 through 2019.
10.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued Financial
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109.” FIN 48 addresses the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48
prescribes specific criteria for the financial statement recognition and
measurement of the tax effects of a position taken or expected to be taken
in a
tax return. This interpretation also provides guidance on derecognition of
previously recognized tax benefits, classification of tax liabilities on
the
balance sheet, recording interest and penalties on tax underpayments, accounting
in interim periods, and disclosure requirements. FIN 48 is effective for
fiscal
periods beginning after December 15, 2006. The Company is currently assessing
the impact, if any, that the adoption of FIN 48 will have on its financial
statements.
15
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, 2005. 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, 2005 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 demand
generation, lead leakage and revenue retention solutions built on top of
the
Company’s suite of CRM (Customer Relationship Management) products. Firstwave’s
solutions increase visibility throughout the sales cycle, keeping customer
pipelines perpetually full of qualified leads, their prospects warm, and
their
customers loyal. With 20 years of sales management software, Firstwave’s modular
internet marketing, sales lead and customer management solutions, customers
achieve results at every opportunity. Firstwave supports several product
lines:
The Wave Series of Internet Based Products, Firstwave CRM (includes eCRM
and
v.10 products), Firstwave Technology and TakeControl.
On
October 10, 2005, the Company entered into a three-year OEM/Outsourcing
Agreement and a licensing agreement with M1 Global Solutions, Inc. (“M1
Global”), an Atlanta-based technology company. Under the terms of the
agreements, 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 is a non-exclusive reseller of Firstwave products.
Firstwave retains all maintenance revenues. In July of 2006, M1 Global
Solutions, Inc. (“M1 Global”) and Firstwave made changes to its OEM/Outsourcing
Agreement. The changes involve immaterial modifications to the parties’
relationship concerning the ongoing development, maintenance and support
of
Firstwave products, the quarterly payments from Firstwave in consideration
of M1
providing support services to Firstwave’s customers, and the royalty payments
from M1 Global to Firstwave. Firstwave paid to M1 Global $154,315 in each
of the
first and second quarters of 2006, and $92,149 in the third quarter of 2006,
in
consideration for M1 Global providing support services to Firstwave customers.
On
May 2,
2006, the Company completed an IP Assignment Agreement for its .Net Integrated
Development Environment (“IDE”) tool with Galactus Software, an application
platform conversion company. Under the Agreement, Galactus assumes ownership
of
the IDE tool, while Firstwave has the exclusive right to use and license
the
software in the CRM Market. The
purchase price for the assignment was Five Hundred Thousand Dollars ($500,000)
and, as directed by the agreement, was paid by cashier’s check on the Assignment
Effective Date of May 2, 2006. Complete details of the agreement were filed
with
the Securities and Exchange Commission under Form 8K on May 5, 2006.
Results
of Continuing Operations
On
June
3, 2005, Firstwave entered into a Stock Purchase Agreement (the “Agreement”)
with AllAboutTickets LLC doing business as First Sports International (“First
Sports”). Under the terms of the Agreement, the Company sold to First Sports all
of the issued share capital of Firstwave Technologies UK, Ltd., a subsidiary
of
the Company. The total purchase price for the shares of stock was $2,214,000,
of
which $256,000 was paid at closing, $1,620,000 is being paid pursuant to
a
promissory note and $338,000 is paid as software revenues are achieved to
reimburse the Company for certain prepaid royalties. 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 and Results of
Operations compares the Company’s results from continuing operations.
Total
revenues decreased 37.2% from $928,000 in the third quarter of 2005 to $583,000
in the third quarter of 2006 due to decreases in all revenue lines. For the
nine
months ended September 30, 2006 total revenues decreased 17.8% to $2,140,000
from $2,602,000 for the nine months ended September 30, 2005, due to decreases
in services and maintenance revenues offset by an increase in software
revenues.
16
Software
revenues decreased 75.5% from $241,000 in the third quarter of 2005 to $59,000
in the third quarter of 2006 due to fewer software license agreements closed
during the third quarter of 2006. For the nine months ended September 30,
2006,
software revenues increased 56.5% to 648,000 from $414,000 for the nine months
ended September 30, 2005, due to a one-time transaction of $500,000 in software
license revenues in the second quarter of 2006. Our software revenues remain
significantly dependent upon the size and timing of closing of license
agreements.
Services
revenues decreased 50.8% from $199,000 in the third quarter of 2005 to $98,000
in the third quarter of 2006. For the nine months ended September 30, 2006,
services revenues decreased 63.2% to $212,000 from $576,000 for the nine
months
ended September 30, 2005. These decreases are primarily the result of our
outsourcing agreement with M1 Global and a focus on existing CRM customers
while
the M1 Global product is in development. 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 12.7% from $481,000 during the third quarter of 2005 to
$420,000 in the third quarter of 2006. For the nine months ended September
30,
2006, maintenance revenues decreased 18.6% to $1,274,000 from $1,566,000
for the
nine months ended September 30, 2005. Maintenance revenues are the result
of
renewal agreements from previous software license sales as well as new license
agreements. The decreases were due to reduced renewals of maintenance agreements
from existing customers and reduced new software licenses.
Cost
of
software revenues decreased 94.1% from $199,000 in the third quarter of 2005
to
$12,000 in the third quarter of 2006 and for the nine months ended September
30,
2006 decreased 35.3% to $397,000 from $614,000 for the nine months ended
September 30, 2005. Cost of software revenues includes amortization of
capitalized software costs, costs of third party software, media costs, and
documentation materials. These decreases are due to a lower amortization
expense
related to three product lines being fully amortized in 2005. Cost of software
as a percentage of software revenues decreased from 82.6% in the third quarter
of 2005 to 20.3% in the third quarter of 2006. The decrease relates to a
decrease in amortization expense relating to the amortization of software
development costs (see Note 3 to the unaudited condensed consolidated financial
statements).
Cost
of
revenues for services decreased 43.2% from $155,000 in the third quarter
of 2005
to $88,000 in the third quarter of 2006 and for the nine months ended September
30, 2006 decreased 83.6% to $92,000 from $561,000 for the nine months ended
September 30, 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, as a result of the outsourcing
agreement with M1 Global whereby M1 is providing the services to customers.
The
cost of revenues for services as a percentage of services revenues increased
from 77.9% in the third quarter of 2005 to 89.8% in the third quarter of
2006.
Cost
of
revenues for maintenance increased 28.4% from $88,000 in the third quarter
of
2005 to $113,000 in the third quarter of 2006, and for the nine months ended
September 30, 2006 increased 95.8% to $470,000 from $240,000 for the nine
months
ended September 30, 2005. The increase is the result of quarterly fees paid
to
M1 Global under the outsourcing arrangement for the support of our domestic
customers, and the fees paid to First Sports for the support of our U.K.
CRM
customers. The cost of revenues for maintenance as a percentage of maintenance
revenue increased from 18.3% in the third quarter of 2005 to 26.9% in the
third
quarter of 2006.
Sales
and
marketing expense increased 17.2% from $93,000 in the third quarter of 2005
to
$109,000 in the third quarter of 2006. This increase is due to added sales
and
marketing activity in the third quarter. For the nine months ended September
30,
2006, decreased 56.3% to $190,000 from $435,000 for the nine months ended
September 30, 2005. The decrease is a result of decreases in payroll expenses
associated with a reduction in the number of personnel, personnel costs,
and
telemarketing costs, as a result of the outsourcing agreement with M1 Global.
The
Company’s product innovation and development expenditures decreased 60.4% from
$187,000 in the third quarter of 2005 to $74,000 in the third quarter of
2006
and for the nine months ended September 30, 2006 decreased 61.0% to $224,000
from $575,000 for the nine months ended September 30, 2005. The decreases
are
primarily related to decreases in payroll costs associated with staff
reductions, and reductions associated with fewer outside contractors. No
development costs have been capitalized during 2005 or 2006.
17
General
and administrative expenses decreased 41.5% from $349,000 in the third quarter
of 2005 to $204,000 in the third quarter of 2006 and for the nine months
ended
September 30, 2006, decreased 40.7% from $1,125,000 in 2005 to $667,000 in
2006.
These changes were primarily due to reduced payroll costs associated with
a
reduction in personnel and decreased rent expense. As a result of our
relationship with M1 Global, we anticipate that general and administrative
expense will continue at these decreased levels as a result of the reduced
cost
related to staffing and overhead.
There
was
no loss from discontinued operations for the three months ended September
30,
2005 and for the nine months ended September 30, 2005 the loss from discontinued
operations was $130,000. There was no activity from discontinued operations
during the three and nine months ended September 30, 2006.
Dividends
on preferred stock were $71,000 for the three months ended September 30,
2005,
and $70,000 for the three months ended September 30, 2006, and for the nine
months ended September 30, 2005, dividends were $213,000 and $212,000 for
the
nine months ended September 30, 2006.
The
above
factors combined to result in a net loss applicable to common shareholders
of
$114,000 in the third quarter of 2006 compared to a net loss applicable to
common shareholders of $728,000 in the third quarter of 2005. Net loss per
basic
and diluted share was $0.04 for third quarter of 2006 compared to a net loss
per
basic and diluted share of $0.27 for the third quarter of 2005. For the nine
months ended September 30, 2006, the net loss applicable to common shareholders
was $90,000, or $0.03 per basic and diluted share, compared to a net loss
of
$1,762,000, or $0.65 per basic and diluted share for the nine months ended
September 30, 2005. For the three months ended September 30, 2006, the number
of
basic and diluted weighted average shares outstanding was 2,868,000 compared
to
2,729,000 basic and diluted outstanding shares for the three months ended
September 30, 2005. For the nine months ended September 30, 2006 the number
of
basic and diluted weighted average shares outstanding was 2,774,000.
Balance
Sheet
Cash
and
cash equivalents of $963,000 at September 30, 2006 increased 167.5% from
the
cash and cash equivalents balance of $360,000 at December 31, 2005. The increase
is primarily due to the elimination of certain expenses as a result of the
outsourcing agreement with M1 Global, the cash received from FSI of $300,000
in
June of 2006 as payment on the note receivable, and the $500,000 cash received
from the closing of the Galactus agreement in the second quarter of 2006.
Net
accounts receivable decreased 20.6% from $399,000 at December 31, 2005 to
$317,000 at September 30, 2006, primarily due to lower software license and
services revenues invoiced and outstanding as of September 30, 2006. Prepaid
expenses decreased slightly from $475,000 at December 31, 2005 to $473,000
at
September 30, 2006. Property and equipment, net decreased 32.9% from $82,000
at
December 31, 2005 to $55,000 at September 30, 2006 as a result of year-to-date
depreciation. Capitalized software development costs were $363,000 at December
31, 2005 while there was no capitalized software development balance at
September 30, 2006 due to year-to-date amortization expense and the assignment
of the Net Integrated Development Environment Tool to Galactus. Intangible
assets decreased 21.3% from $572,000 at December 31, 2005 to $450,000 at
September 30, 2006 due to year-to-date amortization expense.
As
a
result of the sale in 2005 of the Company’s UK Subsidiary, a note receivable in
the amount of $1,620,000 was received. At September 30, 2006 the portion
of the
note payable due prior to June 30, 2007 was $500,000 and is recorded as a
current asset on the Balance Sheet. The long-term portion of the note is
$675,000, payable in installments, and is recorded as a non-current asset
on the
Balance Sheet. During the third quarter of 2006, FSI paid $19,299 to Firstwave
against its prepaid royalties. No payments were due from FSI against the
note
receivable during the three months ended September 30, of 2006. Total payments
against the note receivable since the effective date are $673,615. 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 2006, $116,000 has been amortized, resulting in a balance
of $117,000 in unamortized discount as of September 30, 2006.
Accounts
payable decreased 29.5% from $302,000 at December 31, 2005 to $213,000 at
September 30, 2006 due to payment of the majority of aged accounts payable
prior
to September 30, 2006. Deferred
revenue decreased 32.9% from $1,117,000 at December 31, 2005 to $750,000
at
September 30, 2006 due to reductions in and the timing of billing for annual
maintenance renewals. Accrued employee compensation and benefits decreased
40.4%
from $99,000 at December 31, 2005 to $59,000 at September 30, 2006, primarily
as
a result of the elimination of staff salary accruals relating to the decrease
in
the number of personnel. Other accrued liabilities decreased 31.3% from $32,000
at December 31, 2005 to $22,000 at September 30, 2006 due to the lower sales
tax
payable.
18
Liquidity
and Capital Resources
Cash
and
cash equivalents of $963,000 at September 30, 2006 increased 167.5% from
the
cash and cash equivalents balance of $360,000 at December 31, 2005. The increase
is primarily due to the elimination of certain expenses as a result of the
outsourcing agreement with M1 Global, the cash received from FSI of $300,000
in
June of 2006 as payment on the note receivable, and the $500,000 cash received
from the closing of the Galactus agreement in the second quarter of 2006.
The
Company carries no debt.
Our
future capital requirements will depend on many factors, including our ability
to generate positive cash flows, to collect the note receivable from First
Sports, to realize royalty revenues from the M1 Global relationship, to retain
our maintenance revenues from existing customers, to control expenses, and
to
generate additional revenues from other sources. Any projections of future
cash
needs and cash flows are subject to substantial uncertainty. 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 (“Buyer”), now doing business as First Sports International,
that is detailed under Note 1, Basis of Presentation, to the unaudited condensed
consolidated financial statements. 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 condensed 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. The Company
had previously prepaid $338,000 of royalties to a third party, the benefit
of
which was sold in the transaction and included in the purchase price. The
buyer
is paying the company for the use of such prepaid royalties as software revenue
is achieved by the buyer.
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. 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
the 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, Chief Executive Officer and Principal Financial Officer
believes 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.
Item
5. Effect of New Accounting
Pronouncements
In
December 2004, the Financial Accounting Standards Board issued Statement
of
Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment,” (SFAS No. 123(R)), which became effective
January 1, 2006 for the Company. See Note 6 for the impact on the
Company’s consolidated financial statements from the adoption of SFAS
No. 123(R).
19
PART
II. OTHER INFORMATION
Item
1A. Risk
Factors
There
were no material changes to the risk factors disclosed in the Company’s Form 10K
for the year ended December 31, 2005 as filed with the Securities and Exchange
Commission..
Item
6. Exhibits
The Exhibits to this Report on Form 10Q are listed in the accompanying Exhibit
Index.
20
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. (Registrant) |
| Date: November 14, 2006 | /s/ Richard T. Brock | |
|
Richard
T. Brock
Chief
Executive Officer and
Principal
Accounting Officer
|
||
21
|
Exhibit
Number
|
Description
|
|
|
Exhibit
31.1
|
Certification
of Periodic Report by the Chief
Executive Officer and 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.
|
22