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 ~~MARCH 31,~~JUNE 30, 2004

COMMISSION FILE NUMBER 0-21202

FIRSTWAVE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)

Georgia		~~58-1588291~~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

~~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_~~ X    No ~~___~~__
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
~~Yes___~~
Yes __ No ~~_X_~~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 August 10, 2004:
                                Common Stock, no par value           2,693,623 shares
FIRSTWAVE TECHNOLOGIES, INC.
FORM 10-Q
For the quarter ended ~~March 31,~~June 30, 2004
Index
~~Page No.~~
~~Part I.~~    ~~Financial Information~~
Page No.
Part I. Financial Information
Item 1. ~~Financial~~1.Financial Statements

Consolidated Balance Sheet - December 31, 2003 and ~~March 31,~~
June 30, 2004

3

Consolidated Statement of Operations - For the Three and Six
Months Ended ~~March 31,~~June 30, 2003 and ~~March 31,~~June 30, 2004
4

Consolidated Statement of Changes in Shareholders' Equity -
For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2004
5

Consolidated Statement of Cash Flows - For the ~~Three~~Six Months Ended ~~March 31,~~
June 30, 2003 and ~~March 31,~~June 30, 2004
6

Notes to Consolidated Financial Statements 7
Item 2. ~~Management’s~~ Management's Discussion and Analysis of
Financial Condition and Results of Operations 15

Item 3. Quantitative and Qualitative Disclosures About Market Risk 1718
Item 4. Controls and Procedures 19
Part II. Other Information
Item 4. ~~Controls and Procedures~~ 18

~~Part II.~~ ~~Other Information~~Submission of Matters to a Vote of Security Holders
19
Item 6. Exhibits and Reports on Form 8-K 1820
2

2
~~PART~~Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Balance Sheet
(in thousands)
Dec 31,
2003 Mar 31,
2004
ASSETS
(unaudited)
Current assets:
  Cash and cash equivalents       $   2,704       $ 1,711
  Accounts receivable, less allowance for doubtful accounts of $98 and $115, respectively 1,230 1,086
  Prepaid expenses and other assets 991 1,273
                    Total current assets 4,925 4,070

  Property and equipment, net 489 489
  Software development costs, net 2,966 2,693
  Intangible assets 1,029 971
  Goodwill 2,398 2,401
$ 11,807 $ 10,624
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable $ 568 $ 923
  Deferred revenue 1,429 1,594
  Accrued employee compensation and benefits 368 221
  Borrowings 500 500
  Dividends payable 41 41
  Other accrued liabilities 532 248
                    Total current liabilities 3,438 3,527

Shareholders' equity 8,369 7,097
$ 11,807 $ 10,624
Dec 31, June 30,
2003
2004
   (unaudited)
ASSETS

Current assets
Cash and cash equivalents $2,704

$1,861
Accounts receivable, less allowance for
    doubtful accounts of $98 and $97, respectively 1,230 779
Prepaid marketing expenses 200 817
Other prepaid expenses 791 965
Total current assets 4,925 4,422

Property and equipment, net 489 403
Software development costs, net 2,966 2,408
Intangible assets 1,029 914
Goodwill 2,398 2,400
Total assets $11,807 $10,547

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable $568 $672
Deferred revenue 1,429 1,240
Accrued employee compensation and benefits 368 199
Borrowings 500 500
Dividends payable 41 43
Other accrued liabilities 532 235
Total current liabilities 3,438 2,889

Shareholders' equity 8,369 7,658
Total liabilities and shareholders' equity $11,807 $10,547
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
Mar 31,
2003 Mar 31,
2004
Net Revenues
  Software $ 1,607                    $ 341
  Services 2,140 622
  Maintenance 529 664
  Other 5 34
4,281 1,661
Cost and Expenses
  Cost of revenues
    Software 290 371
    Services 953 620
    Maintenance 141 141
    Other 5 26
  Sales and marketing 1,101 774
  Product development 239 360
  General and administrative 783 500
3,512 2,792

    Operating income/(loss) 769 ( 1,131 )

Interest income/(expense) 11 (1 )
Income/(loss) before income taxes 780 ( 1,132 )
Income taxes (1 ) 0
Net income/(loss) $ 779 ($ 1,132 )

Dividends on preferred stock (55 ) (55 )

Net income/(loss) applicable to common shareholders
$ 724 ($ 1,187 )
Basic:
Earnings/(loss) per share $ 0.30 ($ 0.44 )
Weighted average shares 2,430 2,674

Diluted:
Earnings/(loss) per share $ 0.24 ($ 0.44 )
Weighted average shares 3,299 2,674
For the Three Months Ended        For the Six Months Ended
June 30,        June 30, June 30,        June 30,
2003 2004 2003 2004

Net Revenues
Software $772 $927 $2,379 $1,268
Services 1,517 711 3,657 1,333
Maintenance 690 698 1,219 1,362
Other 11 29 16 63
2,990 2,365 7,271 4,026
Cost and Expenses
Cost of revenues
    Software 189 318 479 689
    Services 796 622 1,749 1,242
    Maintenance 172 116 313 257
    Other 11 27 16 53
Sales and marketing 976 618 2,077 1,392
Product development 267 313 506 673
General and administrative 438 489 1,221 989
2,849 2,503 6,361 5,295

    Operating income/(loss) 141 (138) 910 (1,269)

Interest income/(expense) 9 (4) 20 (5)
Income/(loss) before income taxes 150 (142) 930 (1,274)
Income taxes 0 0 (1) 0
Net income/(loss) $150 ($142) $929 ($1,274)

Dividends on preferred stock (55) (58) (110) (113)

Net income/(loss) applicable to
common shareholders $95 ($200) $819 ($1,387)

Basic:
Earnings/(loss) per share $0.04 ($0.07) $0.33 ($0.52)
Weighted average shares 2,632 2,682 2,505 2,676

Diluted:
Earnings/(loss) per share $0.04 ($0.07) $0.28 ($0.52)
Weighted average shares 3,460 2,682 3,354 2,676
The accompanying notes are an integral part of these financial statements.
4
FIRSTWAVE TECHNOLOGIES, INC.
Consolidated Statement of Changes in Shareholders' Equity
(In thousands, except share data)
(unaudited)
For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2004
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     $2,333     $25,691     $     0     ($ 400 )     ($ 19,268 )     $8,369

Exercise of common stock options 625 4 4

Issuance of common stock 455 2 2

Dividends (55 ) (55 )

Comprehensive loss:
Net loss (1,132 ) (1,132 ) (1,132 )
Foreign currency translation adjustment (91 ) (91 ) (91 )
Comprehensive loss (1,223 )

Balance at March 31, 2004 2,673,808 $      13 27,020 $2,333 $25,642 ($ 491 ) ($ 20,400 ) $   7,097
Accumulated
Other

Common Stock

Preferred Stock
Additional Compre- compre-
paid-in hensive hensive Accumulated
Shares       Amount       Shares       Amount       capital        loss        loss        Deficit      Total

Balance at December 31, 2003 2,672,728 $13 27,020 $2,333 $25,691 ($400) ($19,268) $8,369

Issuance of Series D Preferred Stock 7,000 680 $680

Exercise of common stock options 2,292 4 4

Issuance of common stock 18,411 44 44

Dividends (113) (113)

Comprehensive loss
Net loss (1,274) (1,274) (1,274)
Foreign currency translation
       adjustment (52) (52) (52)
Comprehensive loss (1,326)

Balance at June 30, 2004 2,693,431 $13 34,020 $3,013 $25,626 ($452) ($20,542) $7,658
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 Three Months Ended
March 31, 2003
March 31, 2004
Cash flows provided by/(used in) operating activities $868 ($686 )
Cash flows from investing activities
  Software development costs (975 ) (74 )
  Purchases of property and equipment, net (54 ) (85 )
  Acquisition of Connect-Care (98 ) 0
       Net cash used in investing activities (1,127 ) (159 )
Cash flows from financing activities
  Proceeds from issuance of common stock 59 4
  Payment of dividends on preferred stock (56 ) (55 )
       Net cash provided by/(used in) financing activities 3 (51 )
Foreign currency translation adjustment 34 (97 )
Increase/(decrease) in cash and cash equivalents (222 ) (993 )
Cash and cash equivalents, beginning of period 3,779 2,704
Cash and cash equivalents, end of period $3,557 $1,711
Supplemental disclosure of cash flow information
  Cash paid for income taxes $1 $0
  Cash paid for interest $0 $6

For the Six Months Ended

June 30, 2003 June 30, 2004

Cash flows provided by/(used in) operating activities $1,338 ($1,181)

Cash flows from investing activities
Software development costs (1,510) (94)
Purchases of property and equipment, net (74) (86)
Acquisition of Connect-Care (178) 0
       Net cash used in investing activities (1,762) (180)

Cash flows from financing activities
Proceeds from issuance of preferred stock 0 680
Proceeds from issuance of common stock 193 5
Payment of dividends on preferred stock (111) (111)
       Net cash provided by financing activities 82 574

Foreign currency translation adjustment (49) (56)

Increase/(decrease) in cash and cash equivalents (391) (843)
Cash and cash equivalents, beginning of period 3,779 2,704
Cash and cash equivalents, end of period $3,388 $1,861

Supplemental disclosure of cash flow information
Cash paid for income taxes $1 $0

Cash paid for interest $0 $11
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~~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
~~March~~June 30, 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 global provider of strategic CRM solutions specifically designed for the Sports and High Technology industries. Firstwave’s solutions provide companies with fit-to-purpose features that are designed to optimize how companies win, maintain and grow customer and organizational relationships while improving the overall customer experience. Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information. Firstwave supports several product lines: Firstwave CRM (includes eCRM and v.10 products), First Sports, Firstwave Technology and TakeControl.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements contained in the Company’s Form 10-K for the period ended December 31, ~~2004~~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.
1.
~~Description of Business and Basis of Presentation~~
The consolidated balance sheet at December 31, 2003 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
~~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.
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 among the Company’s senior management and members of the Audit Committee. Actual results could differ from those estimates.
Critical Accounting Policies
~~Basis of Presentation~~
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the consolidated financial statements contained in the Company’s Form 10-K for the period ended December 31, 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 Company believes that the following accounting policies are critical to understanding the consolidated financial statements:
Revenue Recognition
Capitalization of Software Development Costs
Intangible Assets
3.     Summary of Significant Accounting Policies
Revenue recognition
The consolidated balance sheet at December 31, 2003 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 Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, “Software Revenue 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 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. Our software product is able to function independently in a customer’s environment without additional services. Our training, implementation, and customization services are optional services to our customers and are not necessary for the functioning of the software product. Our software is offered as a stand-alone product. It can be implemented with minimal services. The essential functionality of the software, such as database support and maintenance, preparation of marketing campaigns, and standard workflow, is functional and can be utilized by the customer upon installation as intended by the customer. At a customer’s request, the software can also be implemented with additional services, such as data conversion and workflow modifications, which are not significant to the functionality of the software, but rather tailor features to most effectively function in the customer’s environment.
The revenue for the customization or implementation services is recognized as the services are provided and earned. Revenue is allocated to software and services based on vendor specific objective evidence of fair values. Because the software is a stand-alone product that can be used for the customer’s purpose upon installation, and because any services performed have insignificant effect on the functionality of the software, services revenues are accounted for separately in accordance with Paragraph 69 of SOP 97-2.
The Company has not recorded any unbilled receivables related to implementation and customization service revenues, and the Company has accounted for any implementation and customization service revenues that have been billed as the services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.
The Company has arrangements with customers that provide for the delivery of multiple elements, including software licenses and services. The Company allocates and recognizes revenue related to each of the multiple elements based on vendor specific objective evidence of the fair value of each element and when there are no undelivered elements essential to the functionality of the delivered element. Vendor specific objective evidence is based on standard pricing for each of the elements in our multiple element arrangements. Revenue associated with the various elements of multiple element arrangements is based on such vendor specific objective evidence as the price charged for each element is the same as when the element would be sold separately from any other element. Standard pricing does not vary by customer or by duration, or by requirements of the arrangement.
The Company has agreements with customers, particularly relating to sporting events, whereby it will recognize revenue at a future date based on a per-ticket or per-fan membership basis. The amount the Company will receive per ticket or membership is variable, but is pre-determined in the terms of the agreements. Although tickets may be sold in advance of the event, the Company will recognize these revenues after the events occur. During the second quarter of 2004, we did not recognize any revenues from ticketing or fan memberships.
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 collect license fees and maintenance revenues on behalf of the Company, and remit 50% to 60% of standard license fees and maintenance revenues they produce. Pursuant to EITF 99-19, the Company recognizes these distributor sales at the gross license amount because the Company retains title to the products, holds the risk and rewards of ownership, such as risk of loss for collection, and responsibility for providing the product to the customer. The Company is responsible for establishing and maintaining the pricing of the product and performs any source code changes to the product. The independent distributors are considered agents of the Company and work on a commission basis. The commissions paid are reflected as a selling expense in the Company’s financial statements. The maintenance fees generated by distributor revenues are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue.
8
Revenues from non-monetary exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident. During the second quarter of 2004, the Company entered into agreements with three customers which involved an exchange of software licenses, services, and/or maintenance for marketing sponsorships. In two of the agreements, the payments involved both cash and exchanges for marketing sponsorships. The total revenue recorded in the second quarter of 2004 related to these transactions was $855,000 in software license revenue and $64,000 in services revenue. These three agreements represented $451,000 in accounts receivable, $635,000 in prepaid marketing expenses, and $167,000 in deferred revenue during the second quarter of 2004. The deferred revenue will be recognized as services revenues when the services are performed and as maintenance revenues ratably over the term of the maintenance agreement. The prepaid marketing expense of $635,000 is reflected in other assets on the Company’s balance sheet. The sponsorship packages include “Official CRM Supplier” designations, rights to use customer logos in marketing materials, links to client websites, and tickets, hospitality packages, and ads in programs of specific future sporting events. These prepaid items will be shown as marketing expenses ratably over the term of the agreement as it relates to an Official Designation or when the future sporting event occurs.
The designation of “Official CRM Supplier” and other sponsorship benefits supports the Company’s marketing strategy and brand awareness efforts. Firstwave has an official designation with the Rugby Football Union, the ChampionsWorld Soccer Series, the Arena Football League, the Atlanta Sports Council, the Chick-fil-A Peach Bowl and iSe Hospitality. Within the Sports Industry, sponsorships are a common tool for a company to promote its goods and/or services with a popular organization or event.
These types of designations provide two primary benefits. First, the Company receives recognition in the general marketing and advertising that the organization or event executes, thereby helping to promote and identify our brand in the market. As a sponsor, we receive advertising and logo placement within event programs, on-site signage such as field boards, and additional forms of awareness opportunities.
In addition, we are able to capitalize upon on relationship with the organization through the use of the organization’s marks and logos in our marketing materials. We believe this helps establish our credibility when we attend conferences, generates publicity when announcing the sponsorship and helps open doors for sales contacts. Organizations in the sports industry keep a close watch on each other’s sponsors, partners and vendors. We plan to continue to maximize our association with these high profile organizations and search out additional opportunities that help distinguish our brand in the market, and to use these relationships and opportunities in our marketing materials and campaigns to increase market awareness and generate future revenue producing opportunities.
Maintenance revenue is recognized on a pro rata basis over the term of the maintenance agreements.
Advanced billings for services and maintenance contracts are recorded as deferred revenue on the Company's balance sheet, with revenue recognized as the services are performed and on a pro-rata basis over the term of the maintenance agreements.
The Company provides an allowance for doubtful accounts based on management’s estimate of receivables that will be uncollectible. The estimate is based on historical charge-off activity and current account status.
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 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.
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
9
based on the existence of a working model of the software product. Capitalized costs may include costs related to product enhancements resulting in new features and increased functionality as well as writing the code in a new programming language. In this case, as the version enhancements are built on an already detailed design under an existing source code, technological feasibility is established early for each version. All costs incurred to establish the technological feasibility of software products are classified as research and development and are expensed as incurred.
The Company evaluates the realizability of unamortized capitalized software costs at each balance sheet date. Software development costs which are capitalized are subsequently reported at the lower of unamortized cost or net realizable value. If the unamortized capitalized software cost exceeds the net realizable value of the asset, the amount would be written off accordingly. The net realizable value of the capitalized software development costs is the estimated future gross revenues of the software product reduced by the estimated future costs of completing and disposing of that product. Amortization of capitalized software costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which is not more than three years. It is possible that those estimates of anticipated product revenues, the remaining estimated economic life of the product, or both could be reduced due to changing technologies. The amortization of software development costs is presented as a cost of software revenue in the Company’s financial statements.
Goodwill and other intangibles
2.
~~Use of estimates and Critical Accounting Policies~~
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 matters requiring management’s judgment regarding the existence of impairment of an intangible asset, and the resulting fair value, would include management’s assessment of adverse changes in legal factors, market conditions, or loss of key personnel. If the fair value of the intangible asset is determined to be less than the carrying value, the Company would record an impairment loss. SFAS No 142 prescribes a two-phase approach for impairment testing of goodwill. The first phase screens for impairment; while the second phase (if necessary) measures the impairment. Goodwill was evaluated for impairment during the second quarter of 2004 in accordance with SFAS 142 “Goodwill and Other Intangible Assets,” and it was determined there was no instance of impairment of recorded Goodwill.
Concentration of credit risk
~~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.
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 certain customers. The customer accounts receivable which represented more than 10% of total accounts receivable are shown below.
Dec 31, June 30,
2003 2004
sports coach UK 65.3% 4.3%
Rugby Football Union 2.9% 49.1%
iSe Hospitality 0.0% 16.1%
The Football Association 0.0% 12.3%

Significant Customer
~~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~~
The table below identifies customers who contributed more than 10% of total revenue for each period shown.
Qtr ending Qtr ending
June 30, June 30,
2003 2004
Electronic Data Systems, Ltd. 46.6% 12.1%
Rugby Football Union 0.0% 30.9%
10
Stock-based compensation
3.
~~Summary of Significant Accounting Policies~~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.

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

7The 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 123 to stock-based employee awards (in thousands, except per share data):
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 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. Our software product is able to function independently in a customer’s environment without additional services. Our training, implementation, and customization services are optional services to our customers and are not necessary for the functioning of the software product. Our software is offered as a stand-alone product. It can be implemented with minimal services. The essential functionality of the software, such as database support and maintenance, preparation of marketing campaigns, and standard workflow, is functional and can be utilized by the customer upon installation as intended by the customer. At a customer’s request, the software can also be implemented with additional services, such as data conversion and workflow modifications, which are not significant to the functionality of the software, but rather tailor features to most effectively function in the customer’s environment.

The revenue for the customization or implementation services is recognized as the services are provided and earned. Revenue is allocated to software and services based on vendor specific objective evidence of fair values. Because the software is a stand-alone product that can be used for the customer’s purpose upon installation, and because any services performed have insignificant effect on the functionality of the software, services revenue is accounted for separately in accordance with Paragraph 69 of SOP 97-2.

The Company has not recorded any unbilled receivables related to implementation and customization service revenues, and the Company has accounted for any implementation and customization service revenues that have been billed as the services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.

The Company has arrangements with customers that provide for the delivery of multiple elements, including software licenses, and services. The Company allocates and recognizes revenue related to each of the multiple elements based on vendor specific objective evidence of the fair value of each element and when there are no undelivered elements essential to the functionality of the delivered element. Vendor specific objective evidence is based on standard pricing for each of the elements in our multiple element arrangements. Revenue associated with the various elements of multiple element arrangements is based on such vendor specific objective evidence as the price charged for each element is the same as when the element would be sold separately from any other element. Standard pricing does not vary by customer or by duration, or by requirements of the arrangement.

International revenues 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 collected license fees and maintenance revenues on behalf of the Company, and remitted 50% to 60% of standard license fees and maintenance revenues they produced. Pursuant to EITF 99-19, the Company recognizes these distributor sales at the gross license amount because the Company retains title to the products, holds the risk and rewards of ownership, such as risk of loss for collection, and responsibility for providing the product to the customer. The Company is responsible for establishing and maintaining the pricing of the product and performs any source code changes to the product. The independent distributors are considered agents of the Company and work on a commission basis. The commissions paid are reflected as a selling expense in the Company’s financial statements. The maintenance fees generated by distributor revenues are reflected as maintenance revenues, with the amount retained by distributors shown as a cost of maintenance revenue.

Revenues from non-monetary exchanges are recorded at the fair value of the products and services provided or received, whichever is more clearly evident. There were no non-monetary transactions during 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 over the term of the maintenance agreements.

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

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. In this case, as the version enhancements are built on an already detailed design under an existing source code, technological feasibility is established early for each version. All costs incurred to establish the technological feasibility of software products are classified as research and development and are expensed as incurred.

The Company evaluates the realizability of unamortized capitalized software costs at each balance sheet date. Software development costs which are capitalized are subsequently reported at the lower of unamortized cost or net realizable value. If the unamortized capitalized software cost exceeds the net realizable value of the asset, the amount would be written off accordingly. The net realizable value of the capitalized software development costs is the estimated future gross revenues of the software product reduced by the estimated future costs of completing and disposing of that product. Amortization of capitalized software costs is provided at the greater of the ratio of current product revenue to the total of current and anticipated product revenue or on a straight-line basis over the estimated economic life of the software, which is not more than three years. It is possible that those estimates of anticipated product revenues, the remaining estimated economic life of the product, or both could be reduced due to changing technologies. The amortization of software development costs is presented as a cost of software revenue in the Company’s financial statements.

~~Goodwill and other intangibles~~
In accordance with SFAS No 142 “Goodwill and Other Intangible Assets”, intangible assets with indefinite useful lives must be tested periodically for impairment. Examples of matters requiring management’s judgment regarding the existence of impairment of an intangible asset and the resulting fair value, would include management’s assessment of adverse changes in legal factors, market conditions, 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~~
~~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 certain 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 Systems, Ltd. The table below identifies customers who contributed more than 10% of total revenue for 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 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 123 to stock-based employee awards, (in thousands, except for per share data).

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 )
For the Three Months Ended       For the Six Months Ended
June 30, June 30,
2003       2004         2003       2004
Net income/(loss) applicable to common
shareholders, as reported
$
95
$
(200)

$
819

$
(1,387)

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

148

522

277

694
Net income/(loss) applicable to common
shareholders, as adjusted
$
(53)

$
(722)

$
542

$
(2,081)

Earnings/(loss) per share:
Basic - as reported
$
0.04

$
(0.07)

$
0.33
$ (0.52)
Basic - as adjusted
$
(0.02)

$
(0.27)

$
0.22
$ (0.78)

Diluted - as reported
$
0.04

$
(0.07)

$
0.28
$ (0.52)
Diluted - as adjusted $
0.00
$
(0.27)
$
0.19
$ (0.78)
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,~~June 30, 2003 and ~~March 31,~~June 30, 2004, ~~respectively;~~respectively: dividend yield of 0% for both quarters; expected volatility of ~~143%~~145% and ~~133%~~130%, and risk-free interest rate of ~~2.91%~~2.55% and ~~2.99%~~3.72%. For the six month period ended June 30, 2003 and June 30, 2004, respectively; the assumptions used were dividend yield of 0% for both years; average expected volatility of 146% and 132%, and average risk-free interest rate of 2.73% and 3.36%.
The increase in the compensation expense from ~~$129,000~~$148,000 in the ~~first~~second quarter of 2003 compared to ~~$172,000~~$522,000 in the ~~first~~second quarter of 2004 is primarily due to options issued during ~~2003 resulting in a higher number~~the second quarter 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.~~2004 that were immediately vested.
There is no tax benefit included in the stock-based employee compensation expense determined under the fair-value-based method for the three and six month periods ended ~~March 31,~~June 30, 2003 and ~~March 31,~~June 30, 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.
11
Shown below is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing ~~operations.~~operations (in thousands, except per share data):
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 )
For the Three Months Ended For the Six Months Ended
June 30, 2004 June 30, 2004
Income       Shares       Per Share       Income      Shares       Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Net loss
$
(142)

$
(1,274)

Less: Preferred Stock Dividends
  (58)

(113)

Basic EPS
Loss applicable to common shareholders
$
(200)

2,682

$
(0.07)

$
(1,387)

2,676

$
(0.52)

Effect of Dilutive Securities (1)
Warrants
      19

      19

Convertible Preferred Stock
58

    703

113

    684

Stock Options
      18

      24

  58

    740

113

    727

Diluted EPS
Loss applicable to common shareholders
$
(200)

2,682

$
(0.07)

$
(1,387)

2,676

$
(0.52)

(1) Not included because anti-dilutive

For the Three Months Ended For the Six Months Ended
June 30, 2003 June 30, 2003
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Net income
$
150

$
929

Less: Preferred Stock Dividends
     (55)

(110)

Basic EPS
Income applicable to common shareholders
$
95

2,632

$
0.04

$
819

2,505

$
0.33

Effect of Dilutive Securities
Warrants
      19

19

Convertible Preferred Stock
55

665

110

665

Stock Options
144

165

55

828

110

849

Diluted EPS
Income applicable to common shareholders
$
150

3,460

$
0.04

$
929

3,354

$
0.28
Foreign currency translation
~~(1)~~
~~Not included because anti-dilutive~~

11
For Quarter Ended March 31, 2003
Income (000's)
(Numerator)
Shares (000's)
(Denominator)
Per Share
Amount
     Net income 779
     Less: Preferred Stock Dividends (55 )
     Basic EPS
     Income available to common shareholders 724 2,430 $ 0.30

     Effect of Dilutive Securities
     Warrants 19
     Convertible Preferred Stock 55 665
     Stock Options 185
55 (1) 869
     Diluted EPS
     Income available to common shareholders 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’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.

~~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.
~~Acquisition~~

On March 3, 2003, Firstwave acquired Connect-Care, Inc., a 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
~~The following table presents the unaudited 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 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. Of the $3,410,000 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 $2,210,000 was assigned to goodwill. The value assigned to customer relationships was based on potential future revenues that may be derived from such customer relationships. We believe this goodwill reflects such matters as (but not limited to) personnel 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 142 “Goodwill and Other Intangible Assets.”

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. Goodwill was evaluated for impairment during the first quarter of 2004 in accordance with SFAS 142 “Goodwill and Other Intangible Assets” and it was determined there was no change in the carrying amount of goodwill.

~~The following table presents details of acquired intangible assets (in thousands):~~

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.
~~Borrowings~~

On July 29, 2003, the Company signed 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 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 as 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 March 31, 2004, the Company was in compliance with the required covenants.

14
12
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.      Acquisition
On March 3, 2003, Firstwave acquired Connect‑Care, Inc., a 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.
The following table presents the unaudited pro forma consolidated results of operations as if the acquisition had occurred as of January 1, 2003 (in thousands, except per share data):
For the Six Months Ended
June 30,
2003        2004

Revenues
$
7,618

$
4,026

Net income/(loss) applicable
to common shareholders
$
395

$
(1,387)

Earnings/(loss) per share
Basic
$
0.15

$
(0.52)
Diluted
$
0.15

$
(0.52)
5.     Goodwill and Intangibles
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. Of the $3,410,000 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 $2,210,000 was assigned to goodwill. The value assigned to customer relationships was based on potential future revenues that may be derived from such customer relationships. We believe this goodwill reflects such matters as (but not limited to) personnel 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 142 “Goodwill and Other Intangible Assets.”
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. Goodwill was evaluated for impairment during the second quarter of 2004 in accordance with SFAS 142 “Goodwill and Other Intangible Assets,” and it was determined there was no instance of impairment of recorded Goodwill.
13
The following table presents details of acquired intangible assets (in thousands):
      December 31, 2003           June 30, 2004
Gross carrying
Accumulated
Gross carrying
Accumulated
amount
amortization
amount
amortization
Amortizable intangible assets
Connect-Care Technology
$
300
$
75

$
300

$
125
Connect-Care Customer Relationships
900

   96

900

161
    Total
$
1,200

$
171

$
1,200

$
286
Aggregate Amortization Expense

For the six months ended June 30, 2004
$
115

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.     Borrowings
On July 29, 2003, the Company signed a one-year “Revolving Credit Facility” loan with RBC Centura whereby the Company was able to borrow up to $1,000,000. The Company had borrowings of $500,000 against the line of credit as of June 30, 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 June 30, 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 as 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 June 30, 2004, the Company was in compliance with the required covenants.
7.     Preferred Stock
During June 2004, the Company issued 7,000 shares of Series D Convertible Preferred Stock in a private placement. The Company received $700,000 in gross proceeds and incurred approximately $20,000 in expenses related to this offering. The Preferred Stock has voting rights and accumulates dividends at an annual rate of 9%, payable monthly in cash or shares of common stock, and is convertible at the holder’s option into Common Stock of the Company at anytime after June 15, 2005, at a conversion rate of $3.00 per share of Common Stock. The Series D Convertible Preferred Stock has a liquidation preference of $100 per share plus all accrued and unpaid dividends but ranks junior to the Company’s Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock with respect to payment upon liquidation and dividends.
8.     Related Party Transactions
The President and COO of the Company participated in the Series D Convertible Preferred Stock offering during June 2004 purchasing 300 shares of Series D Convertible Preferred Stock for a total investment of $30,000. He will be paid monthly dividends of $225. The Chairman and CEO of the Company is paid $16,875 monthly for dividends related to his $2,250,000 investment in Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock.
14
9.     Subsequent Events
On July 29, 2004, the Company renewed its Revolving Line of Credit with RBC Centura. The renewal was made on the terms and conditions set forth in the original Loan Agreement dated July 29, 2003 with the following modifications: the principal amount was decreased from a maximum of $1,000,000 to a maximum of $500,000, no margin formula or certified borrowing base is required for any borrowings under the Line of Credit, and the maturity date was extended to July 27, 2005.Under the terms of the original Loan Agreement, the Company is required to maintain a balance of $750,000 in a depository account with RBC Centura for the term of the credit facility.
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 for the year ended December 31, 2003. This section contains forward-looking statements that reflect management’s expectations, estimates, and projections for future periods based on information (financial and otherwise) available to management as of the end of the period covered by this Quarterly Report. These statements may be identified by the use of forward-looking words such as “may”, “will”, “believe”, “anticipate”, “estimate”, “expect”, “projects”, or “intends”. Actual events and results may differ from the results anticipated by the forward-looking statements. Factors that might cause such differences include, but are not limited to, those items discussed under the caption ~~“Certain~~"Certain Factors Affecting Forward-Looking ~~Statements”~~Statements" presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Overview
~~Overview~~
Headquartered in Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies, Inc. (“Firstwave” or “the Company”) is a ~~leading~~global provider of ~~Customer Relationship Management (CRM)~~strategic CRM solutions specifically designed for the Sports and High Tech industries. Firstwave’s solutions provide companies with fit-to-purpose features that are designed to ~~mid-size~~optimize how companies win, maintain and ~~large-scale enterprises worldwide.~~grow customer and organizational relationships while improving the overall customer experience. Firstwave’s corporate and product mission reflects our customer-first commitment: To develop and integrate the best software solutions to manage customer interactions and information. ~~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~~First Sports, Firstwave Technology and TakeControl.
Results of Operations

Total revenues decreased ~~61.2%~~20.9% from ~~$4,281,000~~$2,990,000 in the ~~first~~second quarter of 2003 to ~~$1,661,000~~$2,365,000 in the ~~first~~second quarter of 2004 primarily due to decreased services revenues partially offset by increased software revenue. As of June 30, 2004, total revenues decreased 44.6% from $7,271,000 in 2003 to $4,026,000 in 2004 due to decreases in software and services ~~revenues.~~revenue. The primary cause of the decrease in total revenues is due to diminished revenue from our relationship with Electronic Data Systems, Ltd., which contributed 61.5% of our total revenue during the first six months 2003, compared to 16.4% of total revenue during the first six months of 2004. Although we successfully completed implementation of the multi-year services project for Electronic Data Systems, Ltd. during 2003, we continue to provide additional services and support and maintenance to this customer. During the second quarter of 2004 two customers represented 43.0% of total revenues: Rugby Football Union representing 30.9% and Electronic Data Systems, Ltd. representing 12.1%.
We believe that by concentrating on vertical markets to increase prospects for our solutions in our pipeline with targeted companies, we may begin to transition our revenue stream away from dependence on a few large customers. The vertical markets we are currently targeting are high technology and sports and entertainment.
Software revenues ~~decreased 78.8%~~increased 20.1% from ~~$1,607,000~~$772,000 in the ~~first~~second quarter of 2003 to ~~$341,000~~$927,000 in the ~~first~~second quarter of ~~2004. The revenues we expected~~2004 primarily due to ~~receive as a result of the launch in October 2003~~licensing of our new Sports and Entertainment ~~initiative, Firstwave~~solution. There were no software revenues from our Sports ~~have not been realized as quickly as we originally anticipated.~~solution in the second quarter of 2003. As of June 30, 2004, software revenue decreased 46.7% from $2,379,000 in 2003 to $1,268,000 in 2004. During the first quarter of 2003, we ~~closed~~recognized a large software license ~~contract related to our relationship~~agreement with Electronic Data Systems, Ltd.~~, but there were no corresponding large contract commitments in the first quarter 2004 to offset the resulting decrease in revenues.~~ Our software revenues remain significantly dependent upon the size and timing of closing of license agreements.
During the second quarter of 2004, the Company entered into agreements with three customers which involved an exchange of software licenses, services, and/or maintenance for marketing sponsorships. In two of the agreements, the payments involved both cash and exchanges for marketing sponsorships. The total revenue recorded in the second quarter of 2004 related to these transactions was $855,000 in software license revenue and $64,000 in services revenue. These three agreements represented an additional $451,000 in accounts receivable, $635,000 in prepaid marketing expenses, and $167,000 in deferred
15
revenue during the second quarter of 2004. The deferred revenue will be recognized as services revenues when the services are performed and as maintenance revenues ratably over the term of the maintenance agreement. The prepaid marketing expense of $635,000 is reflected in other assets on the Company’s balance sheet. The sponsorship packages include “Official CRM Supplier” designations, rights to use customer logos in marketing materials, links to client websites, and tickets, hospitality packages, and ads in programs of specific future sporting events. These prepaid items will be shown as marketing expenses ratably over the term of the agreement as it relates to an Official Designation or when the future sporting event occurs.
The designation of “Official CRM Supplier” and other sponsorship benefits supports the Company’s marketing strategy and brand awareness efforts. Firstwave has an official designation with the Rugby Football Union, the ChampionsWorld Soccer Series, the Arena Football League, the Atlanta Sports Council, the Chick-fil-A Peach Bowl and iSe Hospitality. Within the Sports Industry, sponsorships are a common tool for a company to promote its goods and/or services with a popular organization or event.
These types of designations provide two primary benefits. First, the Company receives recognition in the general marketing and advertising that the organization or event executes, thereby helping to promote and identify our brand in the market. As a sponsor, we receive advertising and logo placement within event programs, on-site signage such as field boards, and additional forms of awareness opportunities.
In addition, we are able to capitalize upon our relationship with the organization through the use of the organization’s marks and logos in our marketing materials. We believe this helps establish our credibility when we attend conferences, generates publicity when announcing the sponsorship and helps open doors for sales contacts. Organizations in the sports industry keep a close watch on each other’s sponsors, partners and vendors. We plan to continue to maximize our association with these high profile organizations and search out additional opportunities that help distinguish our brand in the market, and to use these relationships and opportunities in our marketing materials and campaigns to increase market awareness and generate future revenue producing opportunities.
Services revenues decreased ~~70.9%~~53.1% from ~~$2,140,000~~$1,517,000 in the ~~first~~second quarter of 2003 to ~~$622,000~~$711,000 in the ~~first~~second quarter of 2004, and as of June 30, 2004, decreased 63.6% from $3,657,000 in 2003 to $1,333,000 in 2004. Although we successfully ~~delivered~~completed implementation of the multi-year services project for Electronic Data Systems, Ltd ~~we continued to receive work and have a concentration of revenue derived from our relationship with this customer~~ during ~~the first quarter of 2004. Electronic Data Systems, Ltd contributed 72.6% of our total revenue during the first quarter of~~ 2003, ~~compared to 22.5% of total revenue during the first quarter of 2004. We~~we continue to provide additional services ~~and receive support and maintenance revenues from~~to this customer. Our services revenues will significantly decrease from 2003 levels if the services ~~revenue~~revenues we derived from the multi-year contract is not replaced with other customer accounts. Our services revenues are subject to fluctuations based on variations in the length of and number of active service engagements in a given quarter.
We are pursuing strategies 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 vertical markets we are currently targeting are high tech companies and sports associations.
Maintenance revenues increased ~~25.5%~~1.2% from ~~$529,000 in~~$690,000 during the ~~first~~second quarter of 2003 to ~~$664,000~~$698,000 in the ~~first~~second quarter of 2004. As of June 30, 2004, maintenance increased 11.7% from $1,219,000 in 2003 to $1,362,000 in 2004. The year to date increase is due to the addition of maintenance revenues from the Connect-Care acquisition and additional revenues associated with the CRM product ~~line.~~line, including First Sports. Maintenance revenues are the result of renewal agreements from previous software license sales as well as new license agreements.
Cost of software revenues increased ~~27.9%~~68.3% from ~~$290,000~~$189,000 in the ~~first~~second quarter of 2003 to ~~$371,000~~$318,000 in the ~~first~~second quarter of 2004 and as of June 30, 2004, increased 43.8% from $479,000 in 2003 to $689,000 in 2004 due to increased amortization expense related to the June 30, 2003 release of Firstwave CRM Version 10 and Firstwave IDE. 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~~revenues increased from ~~18.1%~~24.5% in the ~~first~~second quarter of 2003 to ~~108.8%~~34.3% the ~~first~~second quarter of ~~2004~~2004. The decrease in software margin is primarily due to the increase in amortization of capitalized software expense related to the release of Firstwave CRM Version 10 and Firstwave IDE ~~in conjunction with a decrease~~partially offset by the increase in software ~~revenue resulting in a 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.revenue.
Cost of revenues for services decreased ~~34.9%~~21.9% from ~~$953,000~~$796,000 in the ~~first~~second quarter of 2003 to ~~$620,000~~$622,000 in the ~~first~~second quarter of 2004 and as of June 30, 2004, decreased 29.0% from $1,749,00 in 2003 to $1,242,000 in 2004. ~~This decrease is~~These decreases are primarily due to decreases in payroll, resulting from a reduction in the number of services personnel, and payroll related costs, including travel expenses, consistent with decreased services revenues. The cost of revenues for services as a percentage of services revenues increased from ~~44.5%~~52.5% in the ~~first~~second quarter of 2003 to ~~99.7%~~87.5% in the ~~first~~second quarter of 2004 primarily due to certain fixed personnel costs, which at lower revenue levels result in a decrease in the services revenue margin.
Cost of revenues for maintenance ~~remained consistent at $141,000~~decreased 32.6% from $172,000 in the ~~first~~second quarter of 2003 ~~and~~to $116,000 in the ~~first~~second quarter of 2004 and as of June 30, 2004, decreased 17.9% from $313,000 in 2003 to $257,000 in 2004. These decreases are due to decreases in payroll costs associated with a reduction in
16
the number of maintenance personnel. The cost of revenues for maintenance as a percentage of maintenance revenue decreased from ~~26.7%~~24.9% in the ~~first~~second quarter of 2003 to ~~21.2%~~16.6% in the ~~first~~second quarter of 2004 due to the ~~increase~~decreases in ~~maintenance revenues.~~cost of revenues for maintenance.
Sales and marketing expense decreased ~~29.7%~~36.7% from ~~$1,101,000~~$976,000 in the ~~first~~second quarter of 2003 to ~~$774,000~~$618,000 in the ~~first~~second quarter of 2004 and as of June 30, 2004, decreased 33.0% from $2,077,000 in 2003 to $1,392,000 in 2004. The ~~decrease is~~decreases are the result of decreases in payroll expenses, telemarketing costs, and ~~commission expense consistent with the decrease in software revenue.~~costs relating to investor relations.
The Company’s product innovation and development expenditures, which includes amounts capitalized, decreased ~~64.3%~~58.5% from ~~$1,214,000~~$802,000 in the ~~first~~second quarter of 2003 to ~~$434,000~~$333,000 in the ~~first~~second quarter of ~~2004.~~2004 and as of June 30, 2004, decreased 62.0% from $2,016,000 in 2003 to $767,000. The ~~decrease is~~decreases are primarily related to a decrease in payroll costs and expenses associated with outside contractors related to the development of CRM Version 10 and the IDE, both of which were released in June 2003. Software development costs capitalized during the three and six months ended ~~March 31,~~June 30, 2003 were $534,000 and $1,509,000 respectively and for the three and six months ended June 30, 2004 were ~~$975,000~~$20,000 and ~~$74,000~~$94,000 respectively. A net realizable analysis was performed at June 30, 2004 in accordance SFAS 86. It was determined that the unamortized capitalized software does not exceed its net realizable value; therefore, no impairment loss was recorded.
General and administrative expenses ~~decreased 36.1%~~increased 11.6% from ~~$783,000~~$438,000 in the ~~first~~second quarter of 2003 to ~~$500,000~~$489,000 in the ~~first~~second quarter of ~~2003.~~2004 primarily due to an unfavorable foreign currency exchange rate during the second quarter of 2004 partially offset by decreased payroll and professional services. As of June 30, 2004, general and administrative expenses decreased 19.0% from $1,221,000 in 2003 to $989,000 in 2004. The year-to-date decrease is primarily due to decreases in payroll costs and ~~favorable~~fluctuations in the foreign currency ~~translation rates during the first quarter of 2004.~~exchange rate.
Dividends on preferred stock ~~remained consistent at~~increased slightly from $55,000 in ~~both~~ the ~~first~~second quarter of 2003 ~~and~~to $58,000 in the ~~first~~second quarter of 2004 due to pro-rated dividends related to the issuance of $700,000 of Series D Convertible Preferred Stock in June of 2004.
The above factors combined to result in a net loss of ~~$1,187,000~~$200,000 in the ~~first~~second quarter of 2004 ~~representing a decrease of 264.0% from~~compared to net income of ~~$724,000~~$95,000 in the ~~first~~second quarter of 2003. Net income per basic and diluted share was ~~$0.30 and $0.24 respectively,~~$0.04 for the ~~first~~second quarter of 2003 compared to a net loss of ~~$0.44~~$0.07 per basic and diluted share for the ~~first~~second quarter of 2004. At ~~March 31,~~June 30, 2003, the number of basic weighted average shares outstanding were ~~2,430,000~~2,632,000 compared to ~~2,674,000~~2,682,000 at ~~March 31,~~June 30, 2004. ~~The increase in basic weighted average shares outstanding is primarily related the issuance of 200,000 shares related to the Connect-Care acquisition in March of 2003.~~
Balance Sheet

Net accounts receivable decreased ~~11.7%~~36.7% from $1,230,000 at December 31, 2003 to ~~$1,086,000~~$779,000 at ~~March 31,~~June 30, 2004 primarily due to the collection of outstanding receivables and ~~to reduced invoicing during the first quarter of 2004 consistent with~~ lower software license revenues ~~compared to fourth quarter 2003. Other assets~~invoiced. Prepaid marketing expenses increased ~~28.5%~~308.5% from ~~$991,000~~$200,000 at December 31, 2003 to ~~$1,273,000~~$817,000 at ~~March~~June 30, 2004 due to an increase in prepaid expenses related to sports sponsorships. Other prepaid expenses increased 22.0% from $791,000 at December 31, 2003 to $965,000 at June 30, 2004, primarily due to an increase in prepaid expenses related to third party ~~royalties, prepaid rent, and prepaid trade show deposits.~~software royalties. Property and equipment ~~remained~~decreased 17.6% from $489,000 at ~~$489,000, with~~December 31, 2003 to $403,000 at June 30, 2004 as a result of year-to-date depreciation ~~equaling~~partially offset by new asset purchases. Capitalized software decreased ~~9.2%~~18.8% from $2,966,000 at December 31, 2003 to ~~$2,693,000~~$2,408,000 at ~~March 31,~~June 30, 2004 ~~despite~~due to additional capitalization of ~~$74,000~~$94,000 in development costs ~~due~~offset by to year-to-date amortization expense of ~~$347,000.~~$652,000. Intangible assets ofdecreased 11.2% from $1,029,000 at December 31,2003 ~~relate~~ to ~~the $1,200,000 acquisition of Connect-Care technology and customer relationship intangibles, net of $229,000~~$914,000 at June 30, 2004 due to $115,000 in year-to-date amortization expense.
Accounts payable increased ~~62.5%~~18.3% from $568,000 at December 31, 2003 to ~~$923,000~~$672,000 at ~~March 31,~~June 30, 2004 due to the timing of payment of certain payables. Deferred revenue ~~increased 11.6%~~decreased 13.2% from $1,429,000 at December 31, 2003 to ~~$1,594,000~~$1,240,000 at ~~March 31,~~June 30, 2004 due to ~~increases~~six months of revenue recognition of annual maintenance contracts billed in advance at year end, offset by billings and ~~the timing~~amortization of ~~billing for~~current year annual maintenance renewals. Accrued employee compensation decreased ~~40.0%~~45.9% from $368,000 at December 31, 2003 to ~~$221,000~~$199,000 at ~~March 31,~~June 30, 2004 due to the payment of commissions and incentives during the first six months of 2004 which were accrued at year end 2003 and lower ~~first~~second quarter ~~accruals, consistent with the decrease in revenue.~~2004 incentive accruals. Borrowings at ~~March 31,~~June 30, 2004 remained at $500,000, ~~due to~~ the initial draw on the Company’s Line of Credit with RBC Centura. Other accrued liabilities decreased ~~53.4%~~55.8% from $532,000 at December 31, 2003 to ~~$248,000~~$235,000 at ~~March 31,~~June 30, 2004 primarily due to a decrease in and timing of the accrued VAT payable in the ~~UK consistent with decreased revenue.~~UK.
1617
Liquidity and Capital Resources
As of ~~March 31,~~June 30, 2004, the balance of cash and cash equivalents was ~~$1,711,000~~$1,861,000 compared to $2,704,000 at December 31, 2003.
During the year 2003, 55.2% of our total revenue was attributed to our relationship with Electronic Data Systems Ltd, a leading global services company. During the first ~~three~~six months of 2004, this same relationship accounted for ~~22.5%~~16.4% of total revenues. Although we ~~have~~ successfully completed ~~delivery~~implementation of their multi-year services project, we continue to provide additional services and receive support and maintenance revenues from this customer. Our revenues ~~will~~could 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, we signed a one-year “Revolving Credit Facility” loan with RBC Centura whereby we ~~may~~were able to borrow up to $1,000,000. On July 29, 2004, the Company renewed its Revolving Line of Credit with RBC Centura, which lowered the maximum amount we may borrow under the facility to a maximum of $500,000. We had borrowings of $500,000 against the line of credit as of ~~March 31,~~June 30, 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,~~June 30, 2004 was 4.10%. The ~~first $500,000~~Revolving Line of ~~the Revolving Facility~~Credit is available on a non-formula basis. ~~Once advances~~All loans under the ~~Revolving Facility exceed $500,000, any advances~~facility are ~~based on a borrowing base of 75% of eligible accounts receivable as determined by a certified borrowing base report. The loan is~~ secured by the assets of the Company. The maturity date is July 27, 2005. The Company must comply with certain financial covenants per the terms of the agreement. As of ~~March 31,~~June 30, 2004, the Company was in compliance with the required covenants.
During June 2004, the Company issued 7,000 shares of Series D Convertible Preferred Stock in a private placement. The Company received $700,000 in gross proceeds and incurred approximately $20,000 in expenses related to this offering. The Company intends to use the net proceeds of the Series D Convertible Preferred Stock for working capital and general corporate purposes including further marketing and sales efforts in connection with its vertical market strategy in the Sports and Entertainment industry.
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 April 2004, we implemented cost-cutting measures throughout the organization, designed 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.
We have no material commitments for capital expenditures. We do not believe that inflation has historically had a material effect on our ~~Company’s~~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 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~~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
18
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.
17The 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.
The Company manages the currency fluctuation risk by monitoring on a regular basis the ~~fluctuations in~~ foreign currency exchange rates as they relate to our UK Subsidiary, and attempts 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 for the 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,~~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)~~13a‑15(e) and ~~15d-15(e)~~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~~10‑Q and other Exchange Act filings.
PART II. OTHER INFORMATION
Item 1.    Legal Proceedings

                Not Applicable
Item 2.    Changes in Securities

                Not Applicable
Item 3.    Defaults Upon Senior Securities

                Not Applicable
Item 4.    Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 6, 2004, in Atlanta, Georgia, at which the following matters were submitted to a vote of the shareholders:
1. Votes cast for or withheld regarding the election of two (2) Directors for a term of three years.
Name of Nominee

Votes For Votes Withheld Non-votes
David R. Simmons
2,957,075 49,484
332,393
John N. Spencer, Jr.
2,907,979 98,580
332,393
     Both Nominees for Director were elected by a majority.
2. Votes cast for the ratification of the classification of the director positions into three classes
     ~~Not Applicable~~which will serve staggered three-year terms.
Votes For Votes Against Abstain Non-votes
882,783 205,023 2,168
     2,248,978
Due to broker non-votes, we were not able to complete a formal ratification from shareholders. The non-ratification has no impact on the mandate of the classification of the Board as required by the Company’s Articles of Incorporation. The Board will continue to be classified as specified in the proxy statement dated April 1, 2004.
19
Item 5.    Other Information

            Not Applicable
Item 6.    Exhibits and Reports on Form 8-K
a.
Exhibit 10.34 Second Amendment to Loan Agreement and Revolving Line of Credit Note by and between Firstwave Technologies, Inc. and RBC Centura Bank.
a.
~~Exhibit 10.33 Waiver and First Amendment to Secured Loan Agreement dated July 29, 2003, by the Company in favor of RBC Centura.~~

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.

b.
Reports of Form 8-K filed during the quarter ended ~~March 31,~~June 30, 2004:

On ~~February 10,~~April 27, 2004, Firstwave filed a current report on Form 8-K with the press release of ~~February 10,~~April 27, 2004 reporting financial results for the ~~fourth~~first quarter of ~~2003 and year ending 2003.~~
2004.
On June 18, 2004, Firstwave filed a current report on Form 8-K with the press release of June 18, 2004 reporting the issuance of 7,000 shares of Series D Convertible Preferred Stock.
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.
FIRSTWAVE TECHNOLOGIES, INC.

~~DATE: May 13,~~
DATE:   August 11, 2004
/s/ Judith A. Vitale

Judith A. Vitale

Chief Financial Officer

(Principal Financial Officer)

19
20

~~Outstanding as of May 13, 2004:~~

~~Common Stock, no par value~~	~~2,693,431 shares~~

			~~Page No.~~
~~Part I.~~	~~Financial Information~~
				Page No.
Part I. Financial Information
Item 1.			~~Financial~~1.Financial Statements

	Consolidated Balance Sheet - December 31, 2003 and ~~March 31,~~ June 30, 2004		3

	Consolidated Statement of Operations - For the Three and Six Months Ended ~~March 31,~~June 30, 2003 and ~~March 31,~~June 30, 2004		4

	Consolidated Statement of Changes in Shareholders' Equity - For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2004		5

	Consolidated Statement of Cash Flows - For the ~~Three~~Six Months Ended ~~March 31,~~ June 30, 2003 and ~~March 31,~~June 30, 2004		6

	Notes to Consolidated Financial Statements		7

Item 2.	~~Management’s~~	Management's Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		1718
Item 4.		Controls and Procedures		19
Part II.		Other Information
Item 4.	~~Controls and Procedures~~		18

~~Part II.~~	~~Other Information~~Submission of Matters to a Vote of Security Holders
			19
Item 6.		Exhibits and Reports on Form 8-K		1820

	Dec 31, 2003		Mar 31, 2004
ASSETS			(unaudited)
Current assets:
Cash and cash equivalents	$	2,704	$	1,711
Accounts receivable, less allowance for doubtful accounts of $98 and $115, respectively		1,230		1,086
Prepaid expenses and other assets		991		1,273
Total current assets		4,925		4,070

Property and equipment, net		489		489
Software development costs, net		2,966		2,693
Intangible assets		1,029		971
Goodwill		2,398		2,401
	$	11,807	$	10,624
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	568	$	923
Deferred revenue		1,429		1,594
Accrued employee compensation and benefits		368		221
Borrowings		500		500
Dividends payable		41		41
Other accrued liabilities		532		248
Total current liabilities		3,438		3,527

Shareholders' equity		8,369		7,097
	$	11,807	$	10,624

		Dec 31,	June 30,
		2003	2004
			(unaudited)
ASSETS

Current assets
Cash and cash equivalents		$2,704	$1,861
Accounts receivable, less allowance for
doubtful accounts of $98 and $97, respectively		1,230	779
Prepaid marketing expenses		200	817
Other prepaid expenses		791	965
	Total current assets	4,925	4,422

Property and equipment, net		489	403
Software development costs, net		2,966	2,408
Intangible assets		1,029	914
Goodwill		2,398	2,400
	Total assets	$11,807	$10,547

	LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable		$568	$672
Deferred revenue		1,429	1,240
Accrued employee compensation and benefits		368	199
Borrowings		500	500
Dividends payable		41	43
Other accrued liabilities		532	235
	Total current liabilities	3,438	2,889


Shareholders' equity		8,369	7,658
	Total liabilities and shareholders' equity	$11,807	$10,547

	For the Three Months Ended
	Mar 31, 2003			Mar 31, 2004
Net Revenues
Software	$	1,607		$	341
Services		2,140			622
Maintenance		529			664
Other		5			34
		4,281			1,661
Cost and Expenses
Cost of revenues
Software		290			371
Services		953			620
Maintenance		141			141
Other		5			26
Sales and marketing		1,101			774
Product development		239			360
General and administrative		783			500
		3,512			2,792

Operating income/(loss)		769		(	1,131	)

Interest income/(expense)		11			(1	)
Income/(loss) before income taxes		780		(	1,132	)
Income taxes		(1	)		0
Net income/(loss)	$	779		($	1,132	)

Dividends on preferred stock		(55	)		(55	)

Net income/(loss) applicable to common shareholders
	$	724		($	1,187	)
Basic:
Earnings/(loss) per share	$	0.30		($	0.44	)
Weighted average shares		2,430			2,674

Diluted:
Earnings/(loss) per share	$	0.24		($	0.44	)
Weighted average shares		3,299			2,674

	For the Three Months Ended		For the Six Months Ended
	June 30,	June 30,	June 30,	June 30,
	2003	2004	2003	2004

Net Revenues
Software	$772	$927	$2,379	$1,268
Services	1,517	711	3,657	1,333
Maintenance	690	698	1,219	1,362
Other	11	29	16	63
	2,990	2,365	7,271	4,026
Cost and Expenses
Cost of revenues
Software	189	318	479	689
Services	796	622	1,749	1,242
Maintenance	172	116	313	257
Other	11	27	16	53
Sales and marketing	976	618	2,077	1,392
Product development	267	313	506	673
General and administrative	438	489	1,221	989
	2,849	2,503	6,361	5,295

Operating income/(loss)	141	(138)	910	(1,269)

Interest income/(expense)	9	(4)	20	(5)
Income/(loss) before income taxes	150	(142)	930	(1,274)
Income taxes	0	0	(1)	0
Net income/(loss)	$150	($142)	$929	($1,274)

Dividends on preferred stock	(55)	(58)	(110)	(113)

Net income/(loss) applicable to
common shareholders	$95	($200)	$819	($1,387)

Basic:
Earnings/(loss) per share	$0.04	($0.07)	$0.33	($0.52)
Weighted average shares	2,632	2,682	2,505	2,676

Diluted:
Earnings/(loss) per share	$0.04	($0.07)	$0.28	($0.52)
Weighted average shares	3,460	2,682	3,354	2,676

	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	$2,333	$25,691		$ 0		($ 400	)	($ 19,268	)	$8,369

Exercise of common stock options	625				4								4

Issuance of common stock	455				2								2

Dividends					(55	)							(55	)

Comprehensive loss:
Net loss							(1,132	)			(1,132	)	(1,132	)
Foreign currency translation adjustment							(91	)	(91	)			(91	)
Comprehensive loss							(1,223	)

Balance at March 31, 2004	2,673,808	$ 13	27,020	$2,333	$25,642				($ 491	)	($ 20,400	)	$ 7,097

							Accumulated
							Other
	Common Stock		Preferred Stock		Additional	Compre-	compre-
					paid-in	hensive	hensive	Accumulated
	Shares	Amount	Shares	Amount	capital	loss	loss	Deficit	Total


Balance at December 31, 2003	2,672,728	$13	27,020	$2,333	$25,691		($400)	($19,268)	$8,369

Issuance of Series D Preferred Stock			7,000	680					$680

Exercise of common stock options	2,292				4				4

Issuance of common stock	18,411				44				44

Dividends					(113)				(113)

Comprehensive loss
Net loss						(1,274)		(1,274)	(1,274)
Foreign currency translation adjustment						(52)	(52)		(52)
Comprehensive loss						(1,326)


Balance at June 30, 2004	2,693,431	$13	34,020	$3,013	$25,626		($452)	($20,542)	$7,658

	For the Three Months Ended
	March 31, 2003			March 31, 2004
Cash flows provided by/(used in) operating activities		$868			($686	)

Cash flows from investing activities
Software development costs		(975	)		(74	)
Purchases of property and equipment, net		(54	)		(85	)
Acquisition of Connect-Care		(98	)		0

Net cash used in investing activities		(1,127	)		(159	)

Cash flows from financing activities
Proceeds from issuance of common stock		59			4
Payment of dividends on preferred stock		(56	)		(55	)

Net cash provided by/(used in) financing activities		3			(51	)

Foreign currency translation adjustment		34			(97	)

Increase/(decrease) in cash and cash equivalents		(222	)		(993	)
Cash and cash equivalents, beginning of period		3,779			2,704

Cash and cash equivalents, end of period		$3,557			$1,711

Supplemental disclosure of cash flow information
Cash paid for income taxes		$1			$0

Cash paid for interest		$0			$6

	For the Six Months Ended
	June 30, 2003	June 30, 2004


Cash flows provided by/(used in) operating activities	$1,338	($1,181)

Cash flows from investing activities
Software development costs	(1,510)	(94)
Purchases of property and equipment, net	(74)	(86)
Acquisition of Connect-Care	(178)	0
Net cash used in investing activities	(1,762)	(180)

Cash flows from financing activities
Proceeds from issuance of preferred stock	0	680
Proceeds from issuance of common stock	193	5
Payment of dividends on preferred stock	(111)	(111)
Net cash provided by financing activities	82	574


Foreign currency translation adjustment	(49)	(56)

Increase/(decrease) in cash and cash equivalents	(391)	(843)
Cash and cash equivalents, beginning of period	3,779	2,704
Cash and cash equivalents, end of period	$3,388	$1,861

Supplemental disclosure of cash flow information
Cash paid for income taxes	$1	$0

Cash paid for interest	$0	$11

	Dec 31,	June 30,
	2003	2004
sports coach UK	65.3%	4.3%
Rugby Football Union	2.9%	49.1%
iSe Hospitality	0.0%	16.1%
The Football Association	0.0%	12.3%

	Qtr ending	Qtr ending
	June 30,	June 30,
	2003	2004
Electronic Data Systems, Ltd.	46.6%	12.1%
Rugby Football Union	0.0%	30.9%

	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	)

	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	)

		For the Three Months Ended				For the Six Months Ended
		June 30,				June 30,
		2003		2004		2003		2004
Net income/(loss) applicable to common
	shareholders, as reported	$	95	$	(200)	$	819	$	(1,387)

	Stock based employee compensation, net of related
	tax effects under the fair value based method		148		522		277		694
Net income/(loss) applicable to common
	shareholders, as adjusted	$	(53)	$	(722)	$	542	$	(2,081)

Earnings/(loss) per share:
	Basic - as reported	$	0.04	$	(0.07)	$	0.33	$	(0.52)
	Basic - as adjusted	$	(0.02)	$	(0.27)	$	0.22	$	(0.78)

	Diluted - as reported	$	0.04	$	(0.07)	$	0.28	$	(0.52)
	Diluted - as adjusted	$	0.00	$	(0.27)	$	0.19	$	(0.78)

	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	)

	For the Three Months Ended					For the Six Months Ended
	June 30, 2004					June 30, 2004
	Income		Shares	Per Share		Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Net loss	$	(142)				$	(1,274)
Less: Preferred Stock Dividends	(58)					(113)

Basic EPS
Loss applicable to common shareholders	$	(200)	2,682	$	(0.07)	$	(1,387)	2,676	$	(0.52)

Effect of Dilutive Securities (1)
Warrants			19					19
Convertible Preferred Stock	58		703			113		684
Stock Options			18					24
	58		740			113		727
Diluted EPS
Loss applicable to common shareholders	$	(200)	2,682	$	(0.07)	$	(1,387)	2,676	$	(0.52)

(1) Not included because anti-dilutive

	For the Three Months Ended					For the Six Months Ended
	June 30, 2003					June 30, 2003
	Income		Shares	Per Share		Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount
Net income	$	150				$	929
Less: Preferred Stock Dividends	(55)					(110)

Basic EPS
Income applicable to common shareholders	$	95	2,632	$	0.04	$	819	2,505	$	0.33

Effect of Dilutive Securities
Warrants			19					19
Convertible Preferred Stock	55		665			110		665
Stock Options			144					165
	55		828			110		849
Diluted EPS
Income applicable to common shareholders	$	150	3,460	$	0.04	$	929	3,354	$	0.28

	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	)

	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


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

4. Acquisition

Item 2.FIRSTWAVE TECHNOLOGIES, INC.Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

Item 2.
FIRSTWAVE TECHNOLOGIES, INC.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations

	December 31, 2003				June 30, 2004
	Gross carrying		Accumulated		Gross carrying		Accumulated
	amount		amortization		amount		amortization
Amortizable intangible assets
Connect-Care Technology	$	300	$	75	$	300	$	125
Connect-Care Customer Relationships	900		96		900		161
Total	$	1,200	$	171	$	1,200	$	286
Aggregate Amortization Expense
For the six months ended June 30, 2004	$	115


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

Name of Nominee	Votes For	Votes Withheld	Non-votes
David R. Simmons	2,957,075	49,484	332,393
John N. Spencer, Jr.	2,907,979	98,580	332,393

Votes For		Votes Against		Abstain		Non-votes
882,783		205,023		2,168		2,248,978

a.	Exhibit 10.34 Second Amendment to Loan Agreement and Revolving Line of Credit Note by and between Firstwave Technologies, Inc. and RBC Centura Bank.
	a.	~~Exhibit 10.33 Waiver and First Amendment to Secured Loan Agreement dated July 29, 2003, by the Company in favor of RBC Centura.~~

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

	On ~~February 10,~~April 27, 2004, Firstwave filed a current report on Form 8-K with the press release of ~~February 10,~~April 27, 2004 reporting financial results for the ~~fourth~~first quarter of ~~2003 and year ending 2003.~~ 2004.
	On June 18, 2004, Firstwave filed a current report on Form 8-K with the press release of June 18, 2004 reporting the issuance of 7,000 shares of Series D Convertible Preferred Stock.