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, 2003MARCH 31, 2004
COMMISSION FILE NUMBER 0-21202
FIRSTWAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Georgia | 58-1588291 | |
(State of incorporation) | (IRS Employer ID #) |
2859 Paces Ferry Road, Suite 1000
Atlanta, GA 30339
(Address of principal executive offices)
770-431-1200
(Telephone number of registrant)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No ___
|
|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes___ No _X_
|
|
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding as of May 13, 2004: | |
Common Stock, no par value | 2,693,431 shares |
Outstanding as of November 12, 2003:
Common Stock, no par value 2,671,866 shares
FIRSTWAVE TECHNOLOGIES, INC.
FORM 10-Q
For the quarter ended September 30, 2003March 31, 2004
Index
Page No. | |||
Part I. | Financial Information | ||
Item 1. | Financial Statements | ||
Consolidated Balance Sheet - December 31, | 3 | ||
March 31, 2004 | 4 | ||
March 31, 2004 | 5 | ||
March 31, 2004 | 6 | ||
7 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | ||
Quantitative and Qualitative Disclosures About Market Risk |
| 17 | |
Controls and Procedures | 18 | ||
Other Information | |||
Exhibits and Reports on Form 8-K |
| ||
|
2
FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Balance Sheet
(in thousands)(unaudited)
|
| Dec 31, |
| Sept 30, |
| ||||||||
|
|
|
| Dec 31, 2003 | Mar 31, 2004 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|
|
|
|
|
| (unaudited) | ||||||
Current assets: |
|
|
|
|
|
| |||||||
Cash and cash equivalents |
| $ | 3,779 |
| $ | 2,834 |
| $ | 2,704 | $ | 1,711 | ||
Accounts receivable, less allowance for doubtful accounts of $88 and $386, respectively |
|
| 2,406 |
| 1,570 |
| |||||||
Accounts receivable, less allowance for doubtful accounts of $98 and $115, respectively | 1,230 | 1,086 | |||||||||||
Prepaid expenses and other assets |
|
| 664 |
| 1,143 |
| 991 | 1,273 | |||||
Total current assets | 4,925 | 4,070 | |||||||||||
|
|
|
| ||||||||||
Total current assets |
| 6,849 |
| 5,547 |
| ||||||||
Property and equipment, net |
|
| 738 |
| 570 |
| 489 | 489 | |||||
Software development costs, net |
|
| 2,041 |
| 3,012 |
| 2,966 | 2,693 | |||||
Intangible assets |
|
| 0 |
| 1,086 |
| 1,029 | 971 | |||||
Goodwill |
|
| 175 |
| 2,390 |
| 2,398 | 2,401 | |||||
|
|
|
| $ | 11,807 | $ | 10,624 | ||||||
|
| $ | 9,803 |
| $ | 12,605 |
| ||||||
|
|
|
| ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| |||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||
Current liabilities: |
|
|
|
|
|
| |||||||
Accounts payable |
| $ | 909 |
| $ | 785 |
| $ | 568 | $ | 923 | ||
Deferred revenue |
|
| 812 |
| 1,191 |
| 1,429 | 1,594 | |||||
Accrued employee compensation and benefits |
|
| 417 |
| 508 |
| 368 | 221 | |||||
Borrowings |
|
| 0 |
| 500 |
| 500 | 500 | |||||
Dividends payable |
|
| 42 |
| 41 |
| 41 | 41 | |||||
Other accrued liabilities |
|
| 802 |
| 394 |
| 532 | 248 | |||||
Total current liabilities | 3,438 | 3,527 | |||||||||||
|
|
|
| ||||||||||
Total current liabilities |
| 2,982 |
| 3,419 |
| ||||||||
Shareholders’ equity |
|
| 6,821 |
| 9,186 |
| |||||||
Shareholders' equity | 8,369 | 7,097 | |||||||||||
|
|
|
| $ | 11,807 | $ | 10,624 | ||||||
|
| $ | 9,803 |
| $ | 12,605 |
| ||||||
|
|
|
|
The accompanying notes are an integral part of these financial statements.
3
FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Statement of Operations
(in thousands, except per share amounts)
(unaudited)
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||||||||||
|
|
|
| ||||||||||||||||||
|
| Sept 30, |
| Sept 30, |
| Sept 30, |
| Sept 30, |
| For the Three Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
| Mar 31, 2003 | Mar 31, 2004 | ||||||||||||||
Net Revenues |
|
|
|
|
|
|
|
|
|
| |||||||||||
Software |
| $ | 405 |
| $ | 640 |
| $ | 1,784 |
| $ | 3,019 |
| $ | 1,607 | $ | 341 | ||||
Services |
| 2,325 |
| 1,045 |
| 7,740 |
| 4,702 |
| 2,140 | 622 | ||||||||||
Maintenance |
| 407 |
| 668 |
| 1,258 |
| 1,887 |
| 529 | 664 | ||||||||||
Other |
| 4 |
| 16 |
| 16 |
| 32 |
| 5 | 34 | ||||||||||
|
|
|
|
|
| ||||||||||||||||
|
|
| 3,141 |
| 2,369 |
| 10,798 |
| 9,640 |
| |||||||||||
|
|
|
|
|
| 4,281 | 1,661 | ||||||||||||||
Cost and Expenses |
|
|
|
|
|
|
|
|
|
| |||||||||||
Cost of revenues |
|
|
|
|
|
|
|
|
| ||||||||||||
Software |
| 281 |
| 386 |
| 928 |
| 865 |
| 290 | 371 | ||||||||||
Services |
| 759 |
| 786 |
| 2,465 |
| 2,535 |
| 953 | 620 | ||||||||||
Maintenance |
| 118 |
| 181 |
| 398 |
| 494 |
| 141 | 141 | ||||||||||
Other |
| 4 |
| 16 |
| 16 |
| 32 |
| 5 | 26 | ||||||||||
Sales and marketing |
| 791 |
| 991 |
| 2,435 |
| 3,068 |
| 1,101 | 774 | ||||||||||
Product development |
| 213 |
| 507 |
| 480 |
| 1,013 |
| 239 | 360 | ||||||||||
General and administrative |
| 475 |
| 630 |
| 1,638 |
| 1,851 |
| 783 | 500 | ||||||||||
|
|
|
|
|
| 3,512 | 2,792 | ||||||||||||||
|
|
| 2,641 |
| 3,497 |
| 8,360 |
| 9,858 |
| |||||||||||
Operating income/(loss) | 769 | ( | 1,131 | ) | |||||||||||||||||
|
|
|
|
|
| ||||||||||||||||
Operating income/(loss) |
| 500 |
| (1,128 | ) |
| 2,438 |
| (218 | ) | |||||||||||
Interest income |
|
| 17 |
| 8 |
| 41 |
| 28 |
| |||||||||||
|
|
|
|
|
| ||||||||||||||||
Interest income/(expense) | 11 | (1 | ) | ||||||||||||||||||
Income/(loss) before income taxes |
|
| 517 |
| (1,120 | ) |
| 2,479 |
| (190 | ) | 780 | ( | 1,132 | ) | ||||||
Income taxes |
| 0 |
| 0 |
| 0 |
| (1 | ) | (1 | ) | 0 | |||||||||
|
|
|
|
|
| ||||||||||||||||
Net income/(loss) |
| $ | 517 |
| $ | (1,120 | ) | $ | 2,479 |
| $ | (191 | ) | $ | 779 | ($ | 1,132 | ) | |||
|
|
|
|
|
| ||||||||||||||||
Dividends on preferred stock |
|
| (62 | ) |
| (55 | ) |
| (192 | ) |
| (165 | ) | (55 | ) | (55 | ) | ||||
|
|
|
|
|
| ||||||||||||||||
Net income/(loss) applicable to common shareholders |
| $ | 455 |
| $ | (1,175 | ) | $ | 2,287 |
| $ | (356 | ) | ||||||||
|
|
|
|
|
| $ | 724 | ($ | 1,187 | ) | |||||||||||
Basic: |
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings/(loss) per share |
| $ | 0.21 |
| $ | (0.44 | ) | $ | 1.07 |
| $ | (0.14 | ) | $ | 0.30 | ($ | 0.44 | ) | |||
|
|
|
|
|
| ||||||||||||||||
Weighted average shares |
| 2,212 |
| 2,660 |
| 2,132 |
| 2,547 |
| 2,430 | 2,674 | ||||||||||
|
|
|
|
|
| ||||||||||||||||
Diluted: |
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings/(loss) per share |
| $ | 0.16 |
| $ | (0.44 | ) | $ | 0.79 |
| $ | (0.14 | ) | $ | 0.24 | ($ | 0.44 | ) | |||
|
|
|
|
|
| ||||||||||||||||
Weighted average shares |
| 3,200 |
| 2,660 |
| 3,143 |
| 2,547 |
| 3,299 | 2,674 | ||||||||||
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
4
FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Statement of Changes in Shareholders’Shareholders' Equity
(In thousands, except share data)
(unaudited)
For the NineThree Months Ended September 30, 2003March 31, 2004
|
|
| Add’l |
| Compre- |
| Accumulated |
| Accumulated |
| Total |
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
| Common Stock |
| Preferred Stock |
| Shares | Amount | Shares | Amount | Add'l paid-in capital | Compre- hensive loss | Accumulated Other compre- hensive loss | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2003 | 2,672,728 | $ 13 | 27,020 | td,333 | td5,691 | $ 0 | ($ 400 | ) | ($ 19,268 | ) | $8,369 | ||||||||||||||||||||||||||||||||||||||||
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of common stock options | 625 | 4 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Add’l |
| Compre- |
| Accumulated |
| Accumulated |
| Total |
| ||||||||||||||||||||||||||||||||
Issuance of common stock | 455 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2002 |
|
| 2,328,713 |
| $ | 12 |
| 29,020 |
| $ | 2,483 |
| ) |
| |||||||||||||||||||||||||||||||||||||
Exercise of common stock options |
|
| 55,580 |
| 1 |
|
|
|
|
| 231 |
|
|
|
|
|
|
| 232 |
| |||||||||||||||||||||||||||||||
Issuance of common stock |
|
| 3,444 |
|
|
|
|
|
|
| 40 |
|
|
|
|
|
|
| 40 |
| |||||||||||||||||||||||||||||||
Shares issued for Connect Care acquisition |
|
| 200,000 |
|
|
|
|
|
|
| 2,535 |
|
|
|
|
|
|
| 2,535 |
| |||||||||||||||||||||||||||||||
Conversion of Series C Preferred Stock to common stock |
|
| 83,333 |
|
|
| (2,000 | ) |
| (150 | ) |
| 150 |
|
|
|
|
|
|
| 0 |
| |||||||||||||||||||||||||||||
Dividends |
|
|
|
|
|
|
|
|
|
| (165 | ) |
|
|
|
|
|
|
| (165 | ) | (55 | ) | (55 | ) | ||||||||||||||||||||||||||
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
| (191 | ) |
|
|
| (191 | ) |
| (191 | ) | (1,132 | ) | (1,132 | ) | (1,132 | ) | |||||||||||||||||||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
| (86 | ) |
| (86 | ) |
|
|
| (86 | ) | (91 | ) | (91 | ) | (91 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
| (277 | ) |
|
|
|
|
|
|
| (1,223 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2003 |
|
| 2,671,070 |
| $ | 13 |
| 27,020 |
| $ | 2,333 |
| $ | 25,741 |
|
|
| $ | (217 | ) | $ | (18,684 | ) | $ | 9,186 |
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2004 | 2,673,808 | $ 13 | 27,020 | $2,333 | $25,642 | ($ 491 | ) | ($ 20,400 | ) | $ 7,097 |
The accompanying notes are an integral part of these financial statements.
5
FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
|
| For the Nine Months Ended |
| For the Three Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
| March 31, 2003 | March 31, 2004 | |||||||||||
|
|
| Sept 30, 2002 |
|
| Sept 30, 2003 |
| ||||||||
|
|
|
| ||||||||||||
Cash flows provided by operating activities |
| $ | 3,517 |
| $ | 616 |
| ||||||||
Cash flows provided by/(used in) operating activities | $868 | ($686 | ) | ||||||||||||
|
|
|
| ||||||||||||
Cash flows from investing activities |
|
|
|
|
|
| |||||||||
Software development costs |
| (581 | ) |
| (1,722 | ) | (975 | ) | (74 | ) | |||||
Purchases of property and equipment |
| (690 | ) |
| (89 | ) | |||||||||
Purchases of property and equipment, net | (54 | ) | (85 | ) | |||||||||||
Acquisition of Connect-Care |
| 0 |
| (225 | ) | (98 | ) | 0 | |||||||
|
|
|
| ||||||||||||
Net cash used in investing activities |
| (1,271 | ) |
| (2,036 | ) | (1,127 | ) | (159 | ) | |||||
|
|
|
| ||||||||||||
Cash flows from financing activities |
|
|
|
|
|
| |||||||||
Proceeds from issuance of common stock |
| 5 |
| 232 |
| 59 | 4 | ||||||||
Proceeds from borrowings |
| 0 |
| 500 |
| ||||||||||
Payment of dividends on preferred stock |
| (372 | ) |
| (166 | ) | (56 | ) | (55 | ) | |||||
|
|
|
| ||||||||||||
Net cash provided by/(used in) financing activities |
| (367 | ) |
| 566 |
| 3 | (51 | ) | ||||||
|
|
|
| ||||||||||||
Foreign currency translation adjustment |
|
| (76 | ) |
| (91 | ) | 34 | (97 | ) | |||||
|
|
|
| ||||||||||||
Increase/(decrease) in cash and cash equivalents |
|
| 1,803 |
| (945 | ) | (222 | ) | (993 | ) | |||||
Cash and cash equivalents, beginning of period |
|
| 1,860 |
| 3,779 |
| 3,779 | 2,704 | |||||||
|
|
|
| ||||||||||||
Cash and cash equivalents, end of period |
| $ | 3,663 |
| $ | 2,834 |
| $3,557 | $1,711 | ||||||
|
|
|
| ||||||||||||
Supplemental disclosure of cash flow information |
|
|
|
|
|
| |||||||||
Cash paid for income taxes |
| $ | 0 |
| $ | 1 |
| $1 | $0 | ||||||
|
|
|
| ||||||||||||
Cash paid for interest |
| $ | 0 |
| $ | 0 |
| $0 | $6 | ||||||
|
|
|
| ||||||||||||
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
Supplemental schedule of noncash investing and
financing activities:
The Company acquired Connect-Care, Inc. on March 3, 2003 in a transaction whereby Connect Care merged into a subsidiary of the Company in exchange for 200,000 shares of Firstwave common stock. At the time of the acquisition, Connect Care had liabilities of $624,244 which, by virtue of the merger, became liabilities of our new wholly-owned subsidiary,Connect-Care, Inc.
The accompanying notes are an integral part of these financial statements.
6
FIRSTWAVE TECHNOLOGIES, INC.
Notes to Consolidated Financial StatementsSeptember 30, 2003March 31, 2004
1. | Description of Business and Basis of Presentation |
Description of the Company |
| |
Basis of Presentation | |
|
The consolidated balance sheet at December 31, |
The consolidated financial statements include the accounts of Firstwave Technologies, Inc. and its wholly owned subsidiaries, Connect-Care, Inc. and Firstwave Technologies UK, Ltd. All intercompany transactions and balances have been eliminated in consolidation. |
2. | Use of estimates and Critical Accounting Policies |
Use of Estimates | |
|
Critical Accounting Policies | |
| |
| |
|
3. |
| |
| Summary of Significant Accounting Policies |
Revenue recognition | |
|
7
Revenue from software product sales is recognized upon shipment of the product when the Company has a signed contract, the fees are fixed and determinable, no significant obligations remain and collection of the resulting receivable is probable. The Company accrues for estimated warranty costs at the time it recognizes 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 |
Services revenue is recognized as services are performed. |
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 revenue is |
7
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 |
International revenues are primarily generated by Firstwave UK and independent distributors who offer licenses of the Company’s products in specific geographic areas. Under the terms of the Company’s international distributor agreements, international distributors |
Revenues from |
8
Maintenance revenue is recognized on apro 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 |
The Company provides an allowance for doubtful accounts based on management’s estimate of receivables that |
The Company’s US accounting management oversees reporting procedures in the UK and monitors their transactions on a timely basis. The US management reviews transactions and sales contracts as such transactions and sales are occurring to ensure that revenues are recognized under the Company’s revenue recognition policy and that expenses and other transactions are reported in accordance with accounting principles generally accepted in the United States. Management of the UK subsidiary report directly to US management, with US management substantially involved in all aspects of UK operations. As such, US management has established procedures to insure that international revenues are recognized properly and on a timely basis. |
Software development costs | |
|
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. |
8
| |
|
Concentration of credit risk | |
|
9
The customer accounts receivable which represented more than 10% of total accounts receivable are shown below: |
Dec 31, | Mar 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
2003 | 2004 | ||||||||
sports coach UK | 65.3 | % | 30.3 | % |
Significant Customer |
Qtr ending Mar 31, | Qtr ending Mar 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
2003 | 2004 | ||||||||
EDS | 72.6 | % | 22.5 | % | |||||
sports coach UK | 0.0 | % | 13.6 | % |
| |
|
The Company has adopted the disclosure-only provisions of SFAS 123, “Accounting for Stock-Based Compensation.” The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS |
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
|
| 2002 |
| 2003 |
| 2002 |
| 2003 |
| ||||
|
|
|
|
|
| ||||||||
Net income/(loss) as reported |
| $ | 455 |
| $ | (1,175 | ) | $ | 2,287 |
| $ | (356 | ) |
Stock based employee compensation, net of related tax effects included in net income as reported |
|
| — |
|
| — |
|
| — |
|
| — |
|
Stock based employee compensation, net of related tax effects under the fair value based method |
|
| 456 |
|
| 171 |
|
| 537 |
|
| 448 |
|
|
|
|
|
|
| ||||||||
Net income/(loss) as adjusted |
| $ | (1 | ) | $ | (1,346 | ) | $ | 1,750 |
| $ | (804 | ) |
|
|
|
|
|
| ||||||||
Earnings/(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - as reported |
| $ | 0.21 |
| $ | (0.44 | ) | $ | 1.07 |
| $ | (0.14 | ) |
|
|
|
|
|
| ||||||||
Basic - as adjusted |
|
| (0.00 | ) | $ | (0.51 | ) | $ | 0.82 |
| $ | (0.32 | ) |
|
|
|
|
|
| ||||||||
Diluted - as reported |
| $ | 0.16 |
| $ | (0.44 | ) | $ | 0.79 |
| $ | (0.14 | ) |
|
|
|
|
|
| ||||||||
Diluted - as adjusted |
|
| (0.00 | ) | $ | (0.51 | ) | $ | 0.62 |
| $ | (0.32 | ) |
|
|
|
|
|
|
For the Three Months Ended Mar 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|
2003 | 2004 | ||||||||
Net income/(loss) as reported | $ | 724 | $ | (1,187 | ) | ||||
Stock based employee compensation, net of related | |||||||||
tax effects included in net income as reported | -- | -- | |||||||
Stock based employee compensation, net of related | |||||||||
tax effects under the fair value based method | 129 | 172 | |||||||
Net income/(loss) as adjusted | $ | 595 | $ | (1,359 | ) | ||||
10
For the Three Months Ended Mar 31, | ||||||||
---|---|---|---|---|---|---|---|---|
2003 | 2004 | |||||||
Earnings/(loss) per share: | ||||||||
Basic - as reported | $ | 0.30 | $ | (0.44 | ) | |||
Basic - as adjusted | $ | 0.24 | $ | (0.51 | ) | |||
Diluted - as reported | $ | 0.24 | $ | (0.44 | ) | |||
Diluted - as adjusted | $ | 0.20 | $ | (0.51 | ) | |||
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the quarters ended March 31, 2003 and March 31, 2004, respectively; dividend yield of 0% for both quarters; expected volatility of 143% and 133%, and risk-free interest rate of 2.91% and 2.99%.
9The increase in the compensation expense from $129,000 in the first quarter of 2003 compared to $172,000 in the first quarter of 2004 is primarily due to options issued during 2003 resulting in a higher number of options outstanding and subject to valuation. Options are issued at the market price of the Company’s common stock at the date of grant.
Basic and diluted net income per common share
Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Stock options and convertible preferred stock are included in the diluted earnings per share calculation when they are not antidilutive. Net income applicable to common shareholders includes a charge for dividends related to the Company’s outstanding preferred stock.
For Quarter Ended March 31, 2004 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Income (000's) (Numerator) | Shares (000's) (Denominator) | Per Share Amount | |||||||||
Net income/(loss) | (1,132 | ) | |||||||||
Less: Preferred Stock Dividends | (55 | ) | |||||||||
Basic EPS | |||||||||||
Income available to common shareholders | (1,187 | ) | 2,674 | $ | (0.44 | ) | |||||
Effect of Dilutive Securities | |||||||||||
Warrants | 19 | ||||||||||
Convertible Preferred Stock | 55 | 665 | |||||||||
Stock Options | 22 | ||||||||||
55 | (1) | 706 | (1) | ||||||||
Diluted EPS | |||||||||||
Income available to common shareholders | (1,187 | ) | 2,674 | $ | (0.44 | ) | |||||
(1) |
| |
| ||
| ||
| ||
| ||
| ||
because anti-dilutive |
|
| For Quarter Ended Sept 30, 2003 |
| For Nine Months Ended Sept 30, 2003 |
| ||||||||||||||
|
|
|
| ||||||||||||||||
|
| Income (000’s) |
| Shares (000’s) |
| Per Share |
| Income (000’s) |
| Shares (000’s) |
| Per Share |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||
Net income/(loss) |
|
| (1,120 | ) |
|
|
|
|
|
|
| (191 | ) |
|
|
|
|
|
|
Less: Preferred Stock Dividends |
|
| (55 | ) |
|
|
|
|
|
|
| (165 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
| (1,175 | ) |
| 2,660 |
| $ | (0.44 | ) |
| (356 | ) |
| 2,547 |
| $ | (0.14 | ) |
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
| 19 |
|
|
|
|
|
|
|
| 19 |
|
|
|
|
Convertible Preferred Stock |
|
| 55 |
|
| 665 |
|
|
|
|
| 165 |
|
| 665 |
|
|
|
|
Stock Options |
|
|
|
|
| 61 |
|
|
|
|
|
|
|
| 132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
| 55 | (1) |
| 745 | (1) |
|
|
|
| 165 | (1) |
| 816 | (1) |
|
|
|
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders |
|
| (1,175 | ) |
| 2,660 |
| $ | (0.44 | ) |
| (356 | ) |
| 2,547 |
| $ | (0.14 | ) |
(1) Not included because anti-dilutive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
10
|
| For Quarter Ended Sept 30, 2002 |
| For Nine Months Ended Sept 30, 2002 |
| |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||
|
| Income (000’s) |
| Shares (000’s) |
| Per Share |
| Income (000’s) |
| Shares (000’s) |
| Per Share |
| For Quarter Ended March 31, 2003 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
|
| Income (000's) (Numerator) | Shares (000's) (Denominator) | Per Share Amount | ||||||||||||||||||||
Net income |
|
| 517 |
|
|
|
|
| 2,479 |
|
|
|
|
| 779 | |||||||||||||||
Less: Preferred Stock Dividends |
|
| (62 | ) |
|
|
|
|
| (192 | ) |
|
|
|
|
| (55 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Basic EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Income available to common shareholders |
|
| 455 |
| 2,212 |
| $ | 0.21 |
| 2,287 |
| 2,132 |
| $ | 1.07 |
| 724 | 2,430 | $ | 0.30 | ||||||||||
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Warrants |
|
|
|
| 19 |
|
|
|
|
| 19 |
|
|
| 19 | |||||||||||||||
Convertible Preferred Stock |
|
| 62 |
| 831 |
|
|
| 192 |
| 884 |
|
|
| 55 | 665 | ||||||||||||||
Stock Options |
|
|
|
| 138 |
|
|
|
|
| 108 |
|
|
| 185 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
| 62 |
| 988 |
|
|
| 192 |
| 1,011 |
|
|
| 55 | (1) | 869 | |||||||||||||
Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Income available to common shareholders |
|
| 517 |
| 3,200 |
| $ | 0.16 |
| 2,479 |
| 3,143 |
| $ | 0.79 |
| 779 | 3,299 | $ | 0.24 |
Foreign currency translation | |
|
Impairment of long-lived assets | |
|
Segment reporting | |
|
4. |
| |
| ||
| Acquisition | |
|
12
11
| |
| |
| |
| |
The following table |
Quarter Ended | ||||||||
---|---|---|---|---|---|---|---|---|
Mar 31, 2003 | Mar 31, 2004 | |||||||
Revenues | $ | 4,628 | $ | 1,661 | ||||
Net Income | $ | 300 | $ | (1,187 | ) | |||
Earnings per share | ||||||||
Basic | $ | 0.11 | $ | (0.44 | ) | |||
Diluted | $ | 0.10 | $ | (0.44 | ) |
5. | Goodwill and Intangibles |
Current Assets |
| $ | 771,660 |
|
Property and Equipment |
| $ | 29,504 |
|
Intangible Assets |
| $ | 1,200,000 |
|
Goodwill |
| $ | 2,209,762 |
|
|
|
| ||
Total assets acquired |
| $ | 4,210,926 |
|
|
|
| ||
Current liabilities |
| $ | (1,425,408 | ) |
|
|
| ||
Net assets acquired |
| $ | 2,785,518 |
|
|
|
|
Connect-Care technology. Of the | |
|
12
|
Purchase Price |
| $ | 2,630,000 |
|
| 200,000 shares at $13.15 |
|
Net liabilities assumed |
| $ | 624,244 |
|
|
|
|
Cost of acquisition to date |
| $ | 155,518 |
|
|
|
|
|
|
|
|
|
| ||
Comprehensive purchase price |
| $ | 3,409,762 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents details of |
|
| December 31, 2002 |
| September 30, 2003 |
| ||||||||
|
|
|
| ||||||||||
|
| Gross carrying |
| Accumulated |
| Gross carrying |
| Accumulated |
| ||||
|
|
|
|
|
| ||||||||
Amortized intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Connect-Care Technology |
|
| — |
|
| — |
|
| 300,000 |
|
| 50,000 |
|
Connect-Care Customer Relationships |
|
| — |
|
| — |
|
| 900,000 |
|
| 64,282 |
|
|
|
|
|
|
| ||||||||
Total |
|
| — |
|
| — |
|
| 1,200,000 |
|
| 114,282 |
|
|
|
|
|
|
| ||||||||
Aggregrate Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine months ended September 30, 2003 |
|
| 114,282 |
|
|
|
|
|
|
|
|
|
|
Estimated Amortization Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2003 |
|
| 171,429 |
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2004 |
|
| 228,571 |
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2005 |
|
| 228,571 |
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2006 |
|
| 153,571 |
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2007 |
|
| 128,571 |
|
|
|
|
|
|
|
|
|
|
December 31, 2003 | March 31, 2004 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | |||||||||||
Amortized intangible assets | ||||||||||||||
Connect-Care Technology | $ | 300 | $ | 75 | $ | 300 | $ | 100 | ||||||
Connect-Care Customer Relationships | 900 | 96 | 900 | 129 | ||||||||||
Total | $ | 1,200 | $ | 171 | $ | 1,200 | $ | 229 | ||||||
13
Aggregrate Amortization Expense | |||||
For the three months ended March 31, 2004 | $ | 58 | |||
Estimated Amortization Expense | |||||
For year ended December 31, 2004 | $ | 229 | |||
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 |
6. |
|
|
| Quarter Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
|
|
| Sept 30, |
|
| Sept 30, |
|
| Sept 30, |
|
| Sept 30, |
|
|
|
|
|
|
| ||||||||
Revenues |
| $ | 4,237 |
| $ | 2,369 |
| $ | 12,736 |
| $ | 9,987 |
|
Net Income |
| $ | 538 |
| $ | (1,175 | ) | $ | 1,822 |
| $ | (780 | ) |
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.22 |
| $ | (0.44 | ) | $ | 0.78 |
| $ | (0.30 | ) |
Diluted |
| $ | 0.18 |
| $ | (0.44 | ) | $ | 0.60 |
| $ | (0.30 | ) |
|
|
|
14
Item 2.
FIRSTWAVE TECHNOLOGIES, INC.
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/A10-K for the year ended December 31, 2002.2003. This section contains forward-looking statements that reflect management’s expectations, estimates, and projections for future periods.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/A10-K for the year ended December 31, 2002.2003.
Overview
Headquartered in Atlanta, Georgia, with an office in Surrey, England, Firstwave® Technologies, Inc. (“Firstwave” or “the Company”) is a globalleading provider of strategic, industry-focused, CRMCustomer Relationship Management (CRM) solutions to mid-size and large-scale enterprises worldwide. Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions that automateto manage customer interactions and optimize how companies win, maintaininformation. As a provider of sports and grow customer relationships. Thehigh tech CRM, Firstwave product line consistsoffers a suite of theindustry-focused solutions. Firstwave CRM Product Suite, which provides focused solutions to the following four industries: softwareis adaptive, scalable and technology, sports and entertainment, manufacturing and the public sector. Theeasily integrates with existing systems. Firstwave supports several product lines: Firstwave CRM Product Suite includes Firstwave(includes eCRM® and v.10 products), Firstwave IDE® Sports, Firstwave Technology and Firstwave for Technology. Firstwave eCRM is a web-based application, built with COM+ technology or .NET technology. Firstwave IDE is the toolset supporting Firstwave eCRM. In addition to the Firstwave CRM Product Suite, Firstwave also provides and supports Takecontrol®, a client-server based product, and Firstwave for UNIX®.TakeControl.
Results of Operations
Total revenues decreased 24.6%61.2% from $3,141,000$4,281,000 in the third quarter of 2002 to $2,369,000 in the thirdfirst quarter of 2003 primarilyto $1,661,000 in the first quarter of 2004 due to a decrease indecreased software and services revenues. For the nine month period ended September 30th, total revenues decreased 10.7% from $10,798,000 in 2002 to $9,640,000 in 2003.
Software revenues increased 58.0%decreased 78.8% from $405,000$1,607,000 in the thirdfirst quarter of 20022003 to $640,000$341,000 in the thirdfirst quarter of 2003. For2004. The revenues we expected to receive as a result of the nine month period ended September 30th, software revenues increased 69.2% from $1,784,000launch in 2002 to $3,019,000 in 2003. These increases are primarily due toOctober 2003 of our new Sports and Entertainment initiative, Firstwave Sports, have not been realized as quickly as we originally anticipated. During the first quarter of 2003, we closed a large software license agreements entered intocontract related to our relationship with Electronic Data Services,Systems, Ltd. during, but there were no corresponding large contract commitments in the first and third quarters of 2003.quarter 2004 to offset the resulting decrease in revenues. Our software revenues areremain significantly dependent upon the timing of closing of license agreements and current quarterly results may not be indicative of future performance. agreements.
Services revenues decreased 55.1%70.9% from $2,325,000$2,140,000 in the third quarter of 2002 to $1,045,000 in the thirdfirst quarter of 2003 and,to $622,000 in the first quarter of 2004. Although we successfully delivered the multi-year services project for the nine month period ended September 30th, decreased 39.3% from $7,740,000 in 2002 to $4,702,000 in 2003. During 2002 we had a significant services engagement with Electronic Data Services, Ltd. WhileSystems, Ltd, we continued to receive work and have a concentration of revenue derived from our services engagementrelationship with this customer during the first quarter of 2004. Electronic Data Services,Systems, Ltd contributed 72.6% of our total revenue during the first quarter of 2003 compared to 22.5% of total revenue during the scalefirst quarter of 2004. We continue to provide additional services and receive support and maintenance revenues from this customer. Our services revenues will significantly decrease from 2003 levels if the services decreased compared to 2002.revenue we derived from the multi-year contract is not replaced with other customer accounts. Our services revenues are subject to fluctuations based on variations ofin the length of and number of active service engagements in a given quarter.
During the third quarter of 2003, we continued to have a concentration of revenue derived from our relationship with Electronic Data Services, Ltd. During 2003, this customer contributed 72% of our total revenue for the first quarter, 47% of total revenue during the second quarter, and 62% of total revenue during the third quarter. If this customer decreases its purchasing of our software and services, our revenues would significantly decrease if not replaced with other customer accounts. We are pursuing strategies to continue to transition our revenue stream away from dependency on a few large customers to a more diverse customer base. We believe that by concentrating on vertical markets to increase prospects in our pipeline with targeted companies for our solutions, we may begin to transition our revenue stream away from dependence on a few large customers. The acquisition of Connect-Care has assisted in diversifying our customer base.vertical markets we are currently targeting are high tech companies and sports associations.
Maintenance revenues increased 64.1%25.5% from $407,000$529,000 in the third quarter of 2002 to $668,000 in the thirdfirst quarter of 2003 and, forto $664,000 in the nine month period ended September 30th, increased 50.0% from $1,258,000 in 2002 to $1,887,000 in 2003.first quarter of 2004. The increase is due to the addition of maintenance revenues from the Connect-Care acquisition and additional revenues associated with the CRM product line. Maintenance revenues are the result of renewal agreements from previous software license sales as well as new license agreements.
The Connect-Care acquisition brought a customer base to Firstwave with recurring maintenance revenues and the potential for software license upgrades and additional services engagements. These revenues will be recognized in accordance with SOP 97-2 and in the same manner as previously recognized on Connect-Care’s financial statements. In addition, the nature of the costs associated with these revenues is similar to the nature of Firstwave’s costs of revenues (i.e., labor associated with performing the services and maintenance work), and we do not anticipate price increases. There are no materials or inventory to consider with respect to cost of revenues.
15
Cost of software revenues increased 37.4%27.9% from $281,000$290,000 in the thirdfirst quarter of 20022003 to $386,000$371,000 in the thirdfirst quarter of 20032004 due to increased amortization expense related to the June 30, 2003 release of Firstwave CRM Version 10 and Firstwave IDE. For the nine month period ended September 30th,cost of software revenues decreased 6.8% from $928,000 in 2002 to $865,000 in 2003. The decrease is due to lower amortization expense related to full amortization of previous versions of our software, partially offset by higher amortization expense related to the most recent version of the software released on June 30, 2003. Cost of software revenues includes amortization of capitalized software costs, costs of third party software, media costs, and documentation materials. Cost of software as a percentage of software revenue decreasedincreased from 69.4%18.1% in the thirdfirst quarter of 20022003 to 60.3%108.8% the thirdfirst quarter of 20032004 primarily due to the decreaseincrease in amortization of capitalized software expense detailed aboverelated to the release of Firstwave CRM Version 10 and Firstwave IDE in conjunction with an increasea decrease in software revenue resulting in an increasea decrease in the software revenue margin.
15
An impairment analysis was performed at March 31, 2004 in accordance with paragraph 15 of FAS 142. It was determined that the carrying amount of capitalized software is recoverable and does not exceed its fair value; therefore, no impairment loss was recorded.
Cost of revenues for services increased 3.6%decreased 34.9% from $759,000$953,000 in the thirdfirst quarter of 20022003 to $786,000$620,000 in the thirdfirst quarter of 2003.2004. This increasedecrease is primarily due to increasesdecreases in payroll, resulting from a reduction in the number of services personnel, and payroll related costs, associated with additional employees resulting from the Connect-Care acquisition, offset by decreases in costs for outside consultants andincluding travel expenses, consistent with decreased services revenues. The cost of revenues for services as a percentage of services revenues increased from 32.7%44.5% in the thirdfirst quarter of 20022003 to 75.2%99.7% in the thirdfirst quarter of 20032004 primarily due to certain fixed personnel costs, which at lower revenue levels result in a decrease in the services revenue margin. For the nine month period ended September 30th, cost of revenues for services increased 2.8% from $2,465,000 in 2002 to $2,535,000 in 2003 primarily due to increased payroll costs.
Cost of revenues for maintenance increased 53.4% from $118,000remained consistent at $141,000 in the third quarter of 2002 to $181,000 in the thirdfirst quarter of 2003 and the first quarter of 2004. The cost of revenues for maintenance as a percentage of maintenance revenue decreased from 26.7% in the nine month period ended September 30th, increased 24.1% from $398,000first quarter of 2003 to 21.2% in 2002 to $494,000 in 2003. The increase is primarilythe first quarter of 2004 due to increased payroll costs related to the Connect-Care acquisition. This increase is consistent with increasedin maintenance revenue. revenues.
Sales and marketing expense increased 25.3%decreased 29.7% from $791,000$1,101,000 in the third quarter of 2002 to $991,000 in the thirdfirst quarter of 2003 and, forto $774,000 in the nine month period ended September 30th, increased 26.0% from $2,435,000 in 2002 to $3,068,000 in 2003.first quarter of 2004. The increases aredecrease is the result of increasesdecreases in payroll, costs,telemarketing, and commission expenses and travel expenses. expense consistent with the decrease in software revenue.
The Company’s product innovation and development expenditures, which includes amounts capitalized, increased 14.3%decreased 64.3% from $630,000$1,214,000 in the thirdfirst quarter of 20022003 to $720,000$434,000 in the thirdfirst quarter of 2003. For the nine month period ended September 30th, product development expenditures increased 157.8% from $1,061,000 in 2002 to $2,735,000 in 2003.2004. The increasedecrease is primarily related to increaseda decrease in payroll costs and feesexpenses associated with outside contractors related to the development of our latest versionCRM Version 10 and the IDE, both of the CRM product.which were released in June 2003. Software development costs capitalized during the three and nine months ended September 30, 2002March 31, 2003 and 2004 were $417,000$975,000 and $581,000 respectively, and for the three and nine months ended September 30, 2003 were $213,000 and $1,722,000$74,000 respectively. We believe total product innovation and development expenditures will decrease somewhat from these levels for the remainder of the year, but if the Company pursues other development opportunities, these expenses could increase.
General and administrative expenses increased 32.6%decreased 36.1% from $475,000$783,000 in the third quarter of 2002 to $630,000 in the thirdfirst quarter of 2003 and, forto $500,000 in the nine month period ended September 30th, increased 13.0% from $1,638,000 in 2002 to $1,851,000 infirst quarter of 2003. These increases wereThe decrease is primarily due to amortizationdecreases in payroll costs and favorable foreign currency translation rates during the first quarter of intangible assets related to the Connect-Care acquisition and increased personnel resulting in increased payroll and payroll related costs.2004.
Dividends on preferred stock decreased 11.3% from $62,000remained consistent at $55,000 in both the thirdfirst quarter of 2002 to $55,000 in the third quarter of 2003 due to the conversion of Series C Convertible Preferred Stock, held by an outside investor, into common stock during the second half of 2002 and the first quarter of 2003.2004.
The above factors combined to result in a 358.2%net loss of $1,187,000 in the first quarter of 2004, representing a decrease in net income available to common shareholdersof 264.0% from a net income of $455,000$724,000 in the thirdfirst quarter of 2002 to a net loss of $1,175,000 in the third quarter of 2003, and a net2003. Net income per basic and diluted share of $0.21was $0.30 and $0.16$0.24 respectively, for the thirdfirst quarter of 20022003 compared to a net loss of $.044$0.44 per basic and diluted share for the thirdfirst quarter of 2003.2004. At September 30, 2002March 31, 2003 the number of basic weighted average shares outstanding were 2,212,0002,430,000 compared to 2,660,0002,674,000 at September 30, 2003.March 31, 2004. The increase in basic weighted average shares outstanding is primarily related to the conversion of Series C Convertible Preferred Shares, held by an outside investor, into approximately 278,000 common shares and the issuance of 200,000 shares related to the Connect-Care acquisition.acquisition in March of 2003.
16
Balance Sheet
Net accounts receivable decreased 34.8%11.7% from $2,406,000$1,230,000 at December 31, 20022003 to $1,570,000$1,086,000 at September 30, 2003March 31, 2004 primarily due to the collection of outstanding receivables relatedand to a large license agreement and two large services agreements invoicedreduced invoicing during December 2002, offset by the additionfirst quarter of current receivables related2004 consistent with lower revenues compared to customers obtained in the Connect-Care acquisition. The allowance for doubtful accountsfourth quarter 2003. Other assets increased 338.6%28.5% from $88,000$991,000 at December 31, 20022003 to $386,000$1,273,000 at September 30, 2003 primarily due to the Connect-Care acquisition. At the date of acquisition, Connect-Care had a general reserve for bad debt of $66,534 and an additional reserve of $229,342 related to a customer dispute in arbitration. The amount in dispute was fully reserved due to the uncertainty of the recoverability of the receivable. Other assets increased 72.1% from $664,000 at DecemberMarch 31, 2002 to $1,143,000 at September 30, 20032004, primarily due to an increase in prepaid expenses related to the deferral of costs associated with the material services project that has continued into the fourth quarter of 2003 and the prepayment of third party license royalties.royalties, prepaid rent, and prepaid trade show deposits. Property and equipment remained at $489,000, with year-to-date depreciation equaling new asset purchases. Capitalized software decreased 22.8%9.2% from $738,000$2,966,000 at December 31, 20022003 to $570,000$2,693,000 at September 30, 2003,March 31, 2004 despite additional capitalization of $74,000 in development costs due to year-to-date depreciation offset by new asset purchases and the additionamortization expense of Connect-Care fixed assets. Capitalized software increased 47.6% from $2,041,000 at December 31, 2002 to $3,012,000 at September 30, 2003 due to additional capitalization of $1,722,000 in development costs related to Firstwave CRM Version 10 and Firstwave IDE, less $751,000 in year-to-date amortization expense.$347,000. Intangible assets of $1,086,000$1,029,000 at September 30, 2003December 31,2003 relate to the $1,200,000 acquisition of Connect-Care technology and customer relationship intangibles, net of $114,000$229,000 in amortization expense. Goodwill
Accounts payable increased 1265.7%62.5% from $175,000$568,000 at December 31, 20022003 to $2,390,000$923,000 at September 30, 2003March 31, 2004 due to the Connect-Care acquisition. Accounts payable decreased 13.6%timing of payment of certain payables. Deferred revenue increased 11.6% from $909,000$1,429,000 at December 31, 20022003 to $785,000$1,594,000 at September 30,March 31, 2004 due to increases in and the timing of billing for annual maintenance renewals. Accrued employee compensation decreased 40.0% from $368,000 at December 31, 2003 to $221,000 at March 31, 2004 due to the payment of commissions accrued at year end and lower first quarter accruals, consistent with the decrease of payables related to outside consultants offset by current payables related to the Connect-Care acquisition. Deferred revenue increased 46.7% from $812,000 at December 31, 2002 to $1,191,000 at September 30, 2003 primarily due to deferred maintenance and professional services revenues acquired in the Connect-Care acquisition. Accrued employee compensation increased 21.8% from $417,000 at December 31, 2002 to $508,000 at September 30, 2003 due to increased vacation and incentive compensation accruals related to the addition of employees from the Connect-Care acquisition.revenue. Borrowings at September 30, 2003 wereMarch 31, 2004 remained at $500,000 due to the initial draw on the Company’s Line of Credit with RBC Centura. The Company had no borrowings at December 31, 2002. Other accrued liabilities decreased 50.9%53.4% from $802,000$532,000 at December 31, 20022003 to $394,000$248,000 at September 30, 2003March 31, 2004 primarily due to a decrease ofin the accrued VAT payable in the UK consistent with decreased revenue.
16
Liquidity and Capital Resources
As of September 30, 2003,March 31, 2004, the balance of cash and cash equivalents was $2,834,000$1,711,000 compared to $3,779,000$2,704,000 at December 31, 2002. 2003.
During the year 2002, 71.9%2003, 55.2% of our total revenue was attributed to our relationship with Electronic Data ServicesSystems Ltd, a leading global services company. During the first ninethree months of 2003,2004, this same relationship accounted for 61.9%22.5% of total revenues. IfAlthough we have successfully completed delivery of their multi-year services project, we continue to provide additional services and receive support and maintenance revenues from this party decreases its purchasing of our software and services, ourcustomer. Our revenues and cash position wouldwill significantly decrease from 2003 levels if the services revenue we derived from the delivered multi-year contract is not replaced with other customer accounts.
On July 29, 2003, the Companywe signed a one-year “Revolving Credit Facility” loan with RBC Centura whereby the Companywe may borrow up to $1,000,000. The Company borrowedWe had borrowings of $500,000 against the line of credit effective September 30, 2003.as of March 31, 2004. The Revolving Facility bears interest at a variable rate equal to the one month London Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC Centura Prime Rate” plus 0.50%, at Borrower’sour option. The weighted average interest rate for the three months ended March 31, 2004 was 4.10%. The first $500,000 of the Revolving Facility is available on a non-formula basis. Once advances under the Revolving Facility exceed $500,000, any advances are based on a borrowing base of 75% of eligible accounts receivable andas determined by a certified borrowing base report. The loan is secured by the assets of the Company. The Company must comply with certain financial covenants per the terms of the agreement. As of September 30, 2003,March 31, 2004, the Company was in compliance with allthe required covenants.
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. At the end of the third quarter of 2003,April 2004, we implemented cost-cutting measures throughout the organization, which were structured so they should have little or no impact ondesigned to reduce costs while maintaining our ability to deliver license revenues and maintain customer satisfaction. However, 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.
17
We have no material commitments for capital expenditures. We do not believe that inflation has historically had a material effect on our Company’s results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk exposures of varying correlations and volatilities, including interest rate risk and foreign exchange rate risk. Currently, the Company maintains its cash position primarily in money market funds and other bank accounts. The Company does not currently engage in hedging activities or otherwise use derivatives to alter the interest characteristics of its financial assets. Although a decrease in interest rates could reduce our interest income, at this time management does not believe a change in interest rates will materially affect the Company’s financial position or results of operations.
The Company has a variable interest rate on the current line of credit which bears interest at the London Interbank Offered Rate (“LIBOR”) plus 3.00%. Due to the amount of the borrowings and the short term nature of the debt, we do not believe we have a significant risk due to potential fluctuations in interest rates for loans at this time. Changes in interest rates could make it more costly to borrow money in the future and may impede our future acquisition and growth strategies if management determines that the costs associated with borrowing funds are too high to implement these strategies.
The results of operations of Firstwave Technologies, UK Ltd, our wholly owned subsidiary located in Surrey, England, are exposed to foreign exchange rate fluctuations as the financial results of this subsidiary are translated from the local currency to U.S. Dollars upon consolidation. Because of the significance of the operations of this subsidiary to our consolidated operations, as exchange rates vary, net sales and other operating results, when translated, may differ materially from our prior performance and our expectations. In addition, because of the significance of our overseas operations, we could also be significantly affected by weak economic conditions in foreign markets that could reduce demand for our products and further negatively impact the results of our operations in a material and adverse manner. As a result of these market risks, the price of our stock could decline significantly and rapidly.
17
The Company manages the risk by monitoring on a regular basis the fluctuations in foreign currency exchange rates as they relate to our UK Subsidiary, and takesattempts to take action if the foreign currency exchange rate would result in a material impact to the Company’s financial statements upon translation from the local currency, the British pound, to the US Dollar. The action taken in these instances by the Company is to move the currency from the UK Subsidiary to the Company’s headquarters when doing so would be beneficial onfor the Company’s financial statements. Company.
The Company does not engage in any hedging activities. As foreign currency exchange rates vary, the fluctuations in revenues and expenses may materially impact the financial statements upon consolidation. A weaker US dollar would result in an increase to revenues and expenses upon consolidation, and a stronger US dollar would result in a decrease to revenues and expenses upon consolidation.
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.
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
18
Item 5. Other Information | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Item 6. Exhibits and Reports on Form 8-K
18 | 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.
DATE: May 13, 2004 |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||
/s/ Judith A. Vitale Judith A. Vitale |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
19
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.
| |||
|
| ||
| |||
20