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 ___

Yes  x

No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes___ No _X_

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 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

Part I.  Financial Information

Item 1.

Financial Statements

Item 1.  Financial Statements

Consolidated Balance Sheet - December 31, 20022003 and September 30, 2003

March 31, 2004

3

Consolidated Statement of Operations - For the Three and Nine Months Ended September 30, 2002March 31, 2003 and September 30, 2003

March 31, 2004

4

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

March 31, 2004

5

Consolidated Statement of Cash Flows - For the NineThree Months Ended September 30, 2002March 31, 2003 and September 30, 2003

March 31, 2004

6

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

17

Item 4.

Controls and Procedures

18

Part II.

Other Information

Item 6.

Exhibits and Reports on Form 8-K

19

Item 10.  Exhibits – Material Contracts

19

18

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Balance Sheet
(in thousands)
(unaudited)

 

Dec 31,
2002

 

Sept 30,
2003

 

 

 

 

 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,
2002

 

Sept 30,
2003

 

Sept 30,
2002

 

Sept 30,
2003

 

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
paid-in capital

 

Compre-
hensive
loss

 

Accumulated
Other
compre-
hensive
loss

 

Accumulated
Deficit

 

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, 20032,672,728   $      13   27,020   td,333   td5,691    $     0    ($ 400)   ($ 19,268)   $8,369 

 

 

 

                  
Exercise of common stock options625       4        4 

 

Shares

 

Amount

 

Shares

 

Amount

 

Add’l
paid-in capital

 

Compre-
hensive
loss

 

Accumulated
Other
compre-
hensive
loss

 

Accumulated
Deficit

 

Total

 

                  
Issuance of common stock455       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, 20042,673,808 $      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 Statements
September 30, 2003March 31, 2004

1.

Description of Business and Basis of Presentation


Description of the Company
Headquartered in Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a leading provider of Customer 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 to manage customer interactions and information. As a provider of sports and high tech CRM, Firstwave offers a suite of industry-focused solutions. Firstwave CRM is adaptive, scalable and easily integrates with existing systems. Firstwave supports several product lines: Firstwave CRM (includes eCRM and v.10 products), Firstwave Sports, Firstwave Technology and TakeControl.


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

Basis of Presentation


The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements contained in the Company’s Form 10-K/A10-K for the period ended December 31, 2002.2003. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements have been included.


The consolidated balance sheet at December 31, 20022003 has been derived from the audited consolidated financial statements for the Company at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.


The consolidated financial statements include the accounts of Firstwave Technologies, Inc. and its wholly owned subsidiaries, Connect-Care, Inc. and Firstwave Technologies UK, Ltd. All intercompany transactions and balances have been eliminated in consolidation.


2.

Use of estimates and Critical Accounting Policies


Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples of estimates which require management’s judgment include revenue recognition, accounts receivable reserve, valuation of long-lived assets and intangible assets, and goodwill. Management bases its estimates on historical experience and on other various factors which are believed to be reasonable under the circumstances. All accounting estimates and the basis for these estimates are discussed between the Company’s senior management and the Audit Committee. Actual results could differ from those estimates.


Critical Accounting Policies


The Company believes that the following accounting policies are critical to understanding the consolidated financial statements:

     •
·    Revenue Recognition

     •
·    Capitalization of Software Development Costs
·    Intangible Assets


3.

     •     Intangible Assets

3.

Summary of Significant Accounting Policies


Revenue recognition


The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue Recognition”,Recognition,” as amended by SOP 98-9, and related interpretations.


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 revenue.  revenues under the per-user model are recognized under the Company’s revenue recognition polices when revenue recognition criteria are met. Hosting services are priced as a monthly or yearly fixed amount based upon number of users, and are recognized ratably by month over the period of service. Hosting services revenues are consolidated into services revenues on the Company’s financial statements.


Services revenue is recognized as services are performed. MaintenanceOur 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 revenue is recognized ratably over the periodaccounted for separately in accordance with Paragraph 69 of coverage.SOP 97-2.

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 vendor-specificvendor specific objective evidence becauseas the price charged for each element is the same as when the element would be sold separately from any other element. PricingStandard pricing does not vary by customer or by duration, or by requirements of the arrangement.


International revenues are primarily generated by Firstwave UK and independent distributors who offer licenses of the Company’s products in specific geographic areas. Under the terms of the Company’s international distributor agreements, international distributors collectcollected license fees and maintenance revenues on behalf of the Company, and remit to the Companyremitted 50% to 60% of standard license fees and maintenance revenues they produce.  Theproduced. Pursuant to EITF 99-19, the Company recognizes internationalthese distributor sales at the gross license amount withbecause the amount paidCompany retains title to the products, holds the risk and rewards of ownership, such as risk of loss for collection, and responsibility for providing the product to the customer. The Company is responsible for establishing and maintaining the pricing of the product and performs any source code changes to the product. The independent distributors are considered agents of the Company and work on a commission basis. The commissions paid are reflected as a sales and marketing expense.selling expense in the Company’s financial statements. The Company’s international maintenance fees generated by distributor revenues are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue.  There have been no revenues derived from independent international distributors during 2003.


Revenues from nonmonetarynon-monetary exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident. There have beenwere no nonmonetary exchangesnon-monetary transactions during 2003.the first quarter of 2004.


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 for maintenance.over the term of the maintenance agreements.


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


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


Capitalized software development costs consist principally of salaries, contract services, and certain other expenses related to development and modifications of software products capitalized in accordance with the provisions of SFAS 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Capitalization of such costs begins only upon establishment of technological feasibility as defined in SFAS 86 and ends when the resulting product is available for sale. The Company evaluates the establishment of technological feasibility based on the existence of a working model of the software product. Capitalized costs may include costs related to product enhancements resulting in new features and increased functionality as well as writing the code in a new programming language. SinceIn 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.

8


Impairment of Intangible AssetsGoodwill and other intangibles


In accordance with SFAS No 142 “Goodwill and Other Intangible Assets”, intangible assets with indefinite useful lives must be tested periodically for impairment. Examples of Management’smatters 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, or loss of key personnel. If the fair value of the intangible asset is determined to be in excess of the carrying value, the Company would record an impairment loss. SFAS No 142 prescribes a two-phase approach for impairment testing of goodwill. The first phase screens for impairment; while the second phase (if necessary) measures the impairment. The Company completed its annual analysis during the fourth quarter of 2003 and found no instance of impairment of its recorded goodwill.


Concentration of credit risk and revenue


The Company is subject to credit risk primarily due to its trade receivables. The Company has credit risk due to the high concentration of trade receivables through Firstwave UK, whosecertain customers.

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
The Company continued to have a concentration of revenue derived from its relationship with Electronic Data Services, Ltd, represented 72%Systems, Ltd. The table below identifies customers who contributed more than 10% of the Company’s total revenuesrevenue for the first quarter of 2003, 47% of the Company’s total revenues for the second quarter of 2003, and 62% of the Company’s total revenues for the third quarter of 2003.  This customer also accounted for 59% of the Company’s total Accounts Receivable outstanding at March 31, 2003, 42% of the Company’s total Accounts Receivable outstanding at June 30, 2003, and 67% of the Company’s total Accounts Receivable outstanding at September 30, 2003.  If this customer decreases its purchasing of the Company’s software and services, revenues would significantly decrease if not replaced with other customer accounts.each period shown.


Qtr ending
Mar 31,
Qtr ending
Mar 31,
2003
2004
                 EDS   72.6% 22.5%
                 sports coach UK   0.0% 13.6%

Stock-Based CompensationStock-based compensation


Effective for 2002, the Company adopted SFAS 148, “Accounting for Stock-Based Compensation -— Transition and Disclosure,” which did not have a material impact on the consolidated financial statements. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and to elect the disclosure option of SFAS 123, “Accounting for Stock-Based Compensation.” Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock.


The Company has adopted the disclosure-only provisions of SFAS 123, “Accounting for Stock-Based Compensation.” The following table illustrates the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee awards, (in thousands, except for per share data).


 

 

For the Three Months Ended
Sept 30,

 

For the Nine Months Ended
Sept 30,

 

 

 

 

 

 

 

2002

 

2003

 

2002

 

2003

 

 

 

 

 

 

 

Net income/(loss) as reported

 

$

455

 

$

(1,175

)

$

2,287

 

$

(356

)

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

 

 

—

 

 

—

 

 

—

 

 

—

 

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

 

 

456

 

 

171

 

 

537

 

 

448

 

 

 

 

 

 

 

Net income/(loss) as adjusted

 

$

(1

)

$

(1,346

)

$

1,750

 

$

(804

)

 

 

 

 

 

 

Earnings/(loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic - as reported

 

$

0.21

 

$

(0.44

)

$

1.07

 

$

(0.14

)

 

 

 

 

 

 

Basic - as adjusted

 

 

(0.00

)

$

(0.51

)

$

0.82

 

$

(0.32

)

 

 

 

 

 

 

Diluted - as reported

 

$

0.16

 

$

(0.44

)

$

0.79

 

$

(0.14

)

 

 

 

 

 

 

Diluted - as adjusted

 

 

(0.00

)

$

(0.51

)

$

0.62

 

$

(0.32

)

 

 

 

 

 

 


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.

There is no tax benefit included in the stock-based employee compensation expense determined under the fair-value-based method for the three month periods ended March 31, 2003 and March 31, 2004, as the Company established a full valuation allowance for its net deferred tax assets.

Basic and diluted net income per common share
Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Stock options and convertible preferred stock are included in the diluted earnings per share calculation when they are not antidilutive. Net income applicable to common shareholders includes a charge for dividends related to the Company’s outstanding preferred stock.

Shown below is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing operations.

For Quarter Ended 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)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the quarters ended September 30, 2002 and September 30, 2003, respectively; dividend yield of 0% for both quarters; expected volatility of 149% and 141%, and risk-free interest rate of 3.82% and 3.14%.  For the nine month periods ended September 30, 2002 and September 30, 2003, respectively, the assumptions used were dividend yield of 0% for both periods; average expected volatility of 149% and 144%, and average risk-free interest rate of 3.82% and 2.87%.

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

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

Basic and diluted net income per common share

Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period.  Stock options and convertible preferred stock are included in the diluted earnings per share calculation when they are not antidilutive.  Net income applicable to common shareholders includes a charge for dividends related to the Company’s outstanding preferred stock.

Shown below is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing operations.

because anti-dilutive


 

 

For Quarter Ended Sept 30, 2003

 

For Nine Months Ended Sept 30, 2003

 

 

 

 

 

 

 

Income (000’s)
(Numerator)

 

Shares (000’s)
(Denominator)

 

Per Share
Amount

 

Income (000’s)
(Numerator)

 

Shares (000’s)
(Denominator)

 

Per Share
Amount

 

 

 

 

 

 

 

 

 

Net income/(loss)

 

 

(1,120

)

 

 

 

 

 

 

 

(191

)

 

 

 

 

 

 

Less: Preferred Stock Dividends

 

 

(55

)

 

 

 

 

 

 

 

(165

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

 

 

(1,175

)

 

2,660

 

$

(0.44

)

 

(356

)

 

2,547

 

$

(0.14

)

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

19

 

 

 

 

 

 

 

 

19

 

 

 

 

Convertible Preferred Stock

 

 

55

 

 

665

 

 

 

 

 

165

 

 

665

 

 

 

 

Stock Options

 

 

 

 

 

61

 

 

 

 

 

 

 

 

132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55

(1)

 

745

(1)

 

 

 

 

165

(1)

 

816

(1)

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

 

 

(1,175

)

 

2,660

 

$

(0.44

)

 

(356

)

 

2,547

 

$

(0.14

)

(1) Not included because anti-dilutive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

10

 

For Quarter Ended Sept 30, 2002

 

For Nine Months Ended Sept 30, 2002

 

 

 

 

 

Income (000’s)
(Numerator)

 

Shares (000’s)
(Denominator)

 

Per Share
Amount

 

Income (000’s)
(Numerator)

 

Shares (000’s)
(Denominator)

 

Per Share
Amount

 

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


The financial statements of the Company’s international subsidiary are translated into U.S. dollars at current exchange rates, except for revenues and expenses, which are translated at average exchange rates during each reporting period. Currency transaction gains or losses are included in the results of operations as general and administrative expenses in the Company’s financial statements. Net exchange gains or losses resulting from the translation of assets and liabilities are included as a component of accumulated other comprehensive income in shareholders’ equity.


Impairment of long-lived assets


The Company evaluates impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets would be based on the fair value of the asset.


Segment reporting


Management believes that the Company has only a single segment consisting of software sales with related services and support. The information presented in the consolidated statement of operations reflects the revenues and costs associated with this segment that management uses to make operating decisions and assess performance.


4.

Borrowings

On July 29, 2003, the Company signed a “Revolving Facility” loan with RBC Centura whereby the Company may borrow up to $1,000,000.  The Company borrowed $500,000 against the line of credit effective September 30, 2003. 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’s option.  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 and 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, the Company was in compliance with all required covenants.

5.

Acquisition



On March 3, 2003, Firstwave Technologies, Inc. (“Firstwave”), a Georgia corporation, acquired Connect-Care, Inc. (“Connect-Care”), a Georgia corporation that provides customer relationship management (CRM)provider of CRM software solutions for software companies. Connect-Care was acquired pursuant to a Merger Agreement dated March 3, 2003 (the “Merger Agreement”) by and among Firstwave, CC Subsidiary, Inc., a wholly-owned subsidiary of Firstwave (“Merger Sub”), Connect-Care, and certain shareholders of Connect-Care. Pursuant to the Merger Agreement, Merger Sub merged with and into Connect-Care, and Connect-Care, which was the surviving corporation in the Merger, became a wholly-owned subsidiary of Firstwave. The results of Connect-Care’s operations have been included in the Company’s financial statements since March 3, 2003.


12

11

In exchange for all outstanding shares of Connect-Care stock, Firstwave issued 200,000 shares of Firstwave common stock to the shareholders of Connect-Care and granted such shareholders certain registration rights.  Additional consideration of $300,000 in cash may be payable if certain revenue goals, as set forth in Section 3.1 of the Merger Agreement, are attained.  Such amount would be paid on or prior to the earlier of (i) the date Firstwave files its Annual Report on Form 10-K with respect to the fiscal year ending December 31, 2003 or (ii) March 31, 2004.

The $300,000 earn-out provision of the merger agreement with Connect-Care makes this payment contingent upon the attainment of certain total revenues, including license revenues and associated maintenance revenues that would be recognized according to SOP 97-2, during 2003 from March through December.  Such earn-out is contingent consideration based upon future financial performance.  Such revenue attainment is offset by any net accounts receivable shown as of February 28, 2003, not collected by December 31, 2003.  If the revenue targets are realized, the $300,000 will be paid in full.  If the revenue targets are partially realized, then the payout is payable ratably.  If the revenue target is met, the payout will be accounted for on Firstwave’s financial statements as an increase to the purchase price of the acquisition and an increase to goodwill.

The Company is accounting for the $300,000 as contingent consideration in accordance with paragraphs 25 through 28 of SFAS 141. Because the amount, if any, of contingent consideration was not determinable at the acquisition date, no amount for the contingency will be recorded in the Company’s financial statements until the contingency is resolved, or the consideration is issued or becomes issuable. The Company expects that, should any amount of contingent consideration be issuable, such amount would result in an additional element of the cost of acquiring Connect-Care.

An analysis of each material asset acquired and each material liability assumed from the acquisition of Connect-Care was completed to ensure accuracy of fair value.  All line items represented fair value because of each item’s short-term nature.  The Company evaluated each asset and liability and the timing in which assets would be received and liabilities would be settled and determined that these amounts represented their fair values.

The following table summarizespresents the estimated fair valueunaudited pro forma consolidated results of operations as if the acquisition had occurred as of January 1, 2003 (in thousands):


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

The primary objective of the assets acquiredConnect-Care acquisition was to acquire the customer relationships of the customer base of Connect-Care and, liabilities assumed at the dateto a lesser degree, to acquire utilization of acquisition.


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 $3,409,762 of acquired intangible assets,$3,410,000 purchase price, $300,000 was assigned as an estimated fair value ofto the intangible asset Connect-Care technology with an estimated useful life of three years, $900,000 was assigned as an estimated fair value forto the intangible asset Connect-Care customer relationships with an estimated useful life of seven years, and $2,210,000 was assigned to goodwill. The value assigned to customer relationships was based on potential future revenues that may be derived from such customer relationships and the remaining balance of $2,209,762 was assigned to goodwill with an indefinite life.relationships. We believe this goodwill reflects such matters as (but not limited to) personnel that we obtained in the acquisition, new customer opportunities that we will have as a result of our involvement with the acquired customers, relationships we will develop through the acquisition, and expertise and name recognition we will receive through this acquisition. Goodwill will be evaluated periodically for impairment in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.”

During the third quarter of 2003 an additional $4,792 in acquisition costs were recorded related to the Connect-Care acquisition.

12

The following table summarizes the comprehensive purchase price, including net liabilities assumed and costs to date related to the acquisition.


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 primary objective of the Connect-Care acquisition was to acquire the customer relationships of the customer base of Connect-Care and, to a lesser degree, to acquire utilization of Connect-Care technology. The Connect-Care technology asset consists of the source code for the Connect-Care product.  We believe we will continue to derive revenue from licensing this product to new and existing customers.  The customer relationship asset represents the existing customer base of Connect-Care which we believe will continue to contribute revenue from the purchase of additional licenses of the Connect-Care product, purchase of additional service engagements, and renewals of annual maintenance agreements.  We also expect that some of the existing active customers or former customers may transition to the Firstwave eCRM product. Of the $3,409,762 purchase price, $300,000 was assigned as an estimated fair value to the intangible asset Connect-Care technology with an estimated useful life of three years, $900,000 was assigned as an estimated fair value to the intangible asset Connect-Care customer relationships with an estimated useful life of seven years, and $2,209,762 was assigned to goodwill.  The weighted average amortization period for these intangible assets subject to amortization is six years. There are no significant residual values in the intangible assets. The Company began amortization of the intangible assets effective April 1, 2003, recording $57,141 in amortization expense in both the second and third quarters of 2003. Goodwill will bewas evaluated for impairment during the first quarter of 2004 in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets.”  ThereAssets” and it was determined there was no change in the carrying amount of goodwill during the third quarter of 2003.goodwill.


The following table presents details of Acquired Intangible Assets:acquired intangible assets (in thousands):


 

 

December 31, 2002

 

September 30, 2003

 

 

 

 

 

 

 

Gross carrying
amount

 

Accumulated
amortization

 

Gross carrying
amount

 

Accumulated
amortization

 

 

 

 

 

 

 

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.

The following table presents the unaudited pro forma consolidated results of operations as if the acquisition had occurred as of January 1 of each year presented, (in thousands, except per share data).Borrowings


 

 

Quarter Ended

 

Nine Months Ended

 

 

 

 

 

 

 

 

Sept 30,
2002

 

 

Sept 30,
2003

 

 

Sept 30,
2002

 

 

Sept 30,
2003

 

 

 

 

 

 

 

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

)


6.

Subsequent Events

During the third quarter ofOn July 29, 2003, the Company continued worksigned a one-year “Revolving Credit Facility” loan with RBC Centura whereby the Company may borrow up to $1,000,000. The Company had borrowings of $500,000 against the line of credit 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 our 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 material services project which was required to be deliverednon-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 as determined by September 30, 2003. Becausea 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 March 31, 2004, the Company did not meet that delivery date, it was in compliance with the required to deliver the project by October 31, 2003.  The Company did deliver the project on October 31, 2003, and the customer began acceptance testing.covenants.


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. 

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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.

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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.

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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.

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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.

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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.

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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.

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings
                Not Applicable

Item 2.    Changes in Securities
                Not Applicable

Item 3.    Defaults Upon Senior Securities
                Not Applicable

Item 4.     Submission of Matters to a Vote of Security Holders
                Not Applicable

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Item 5.    Other Information
                Not Applicable

Not Applicable

Item 6.    Exhibits and Reports on Form 8-K

a.

Exhibit 10.33 Waiver and First Amendment to Secured Loan Agreement dated July 29, 2003, by the Company in favor of RBC Centura.

a. 


Exhibit 31.1 Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.


Exhibit 31.2 Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.


Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.


b.

Reports of Form 8-K filed during the quarter ended March 31, 2004:

b. 

Reports of Form 8-K filed during the quarter ended September 30, 2003:

Firstwave filed a Form 8-K/A on May 1, 2003, June 10, 2003 and July 14, 2003. These Forms 8-K/A’s amended the 8-K filed on March 4, 2003, with respect to its acquisition of Connect-Care, Inc.

On July 11, 2003, Firstwave filed a current report on Form 8-K with the press release of July 11, 2003 reporting preliminary financial results for the second


On February 10, 2004, Firstwave filed a current report on Form 8-K with the press release of February 10, 2004 reporting financial results for the fourth quarter of 2003 and year ending 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRSTWAVE TECHNOLOGIES, INC.


DATE: May 13, 2004

On July  29, 2003, Firstwave filed a current report on Form 8-K with the press release of July 29, 2003 reporting actual financial results for the second quarter of 2003.

Item 10.    Exhibits – Material Contracts

/s/ Judith A. Vitale


Judith A. Vitale
Chief Financial Officer
(Principal Financial Officer)


10.3019

Secured Loan Agreement in the amount of up to $1,000,000 dated July 29, 2003 by the Company in favor of RBC Centura.

10.31

Commercial Promissory Note in the amount of up to $1,000,000 dated July 29, 2003 by the Company in favor of RBC Centura.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRSTWAVE TECHNOLOGIES, INC.

DATE:  November 12, 2003

/s/ Judith A. Vitale

Judith A. Vitale
Chief Financial Officer
(Principal Financial Officer)

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