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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001
COMMISSION FILE NUMBER 0-21202
FIRSTWAVE TECHNOLOGIES, INC.
7372 GEORGIA 58-1588291
(Primary Std. Ind. (State of incorporation) (IRS Employer
Classification Code #) Identification #)
2859 PACES FERRY ROAD, SUITE 1000
ATLANTA, GEORGIA 30339
(Address of principal executive offices)
(770-431-1200)
(Telephone number of registrant)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of August 10, 2001
---------------------------------
Common Stock, no par value 6,300,841 Shares
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FIRSTWAVE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - December 31, 2000 and June 30, 2001 3
Consolidated Statement of Operations - For the Three and Six Months Ended
June 30, 2000 and June 30, 2001 4
Consolidated Statement of Changes in Shareholders' Equity -
For the Six Months Ended June 30, 2001 5
Consolidated Statement of Cash Flows - For the Six Months Ended
June 30, 2000 and June 30, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
DEC 31, JUNE 30,
2000 2001
------- --------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $1,281 $ 738
RESTRICTED CASH 2,200 0
ACCOUNTS RECEIVABLE, LESS ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $287 AND $275, RESPECTIVELY 1,774 742
PREPAID EXPENSES AND OTHER ASSETS 444 413
------ ------
TOTAL CURRENT ASSETS 5,699 1,893
PROPERTY AND EQUIPMENT, NET 717 502
SOFTWARE DEVELOPMENT COSTS, NET 2,580 2,291
GOODWILL 311 232
------ ------
$9,307 $4,918
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 679 $ 496
DEFERRED REVENUE 1,047 682
ACCRUED EMPLOYEE COMPENSATION AND BENEFITS 216 108
BORROWINGS 2,836 750
DIVIDENDS PAYABLE 113 82
OTHER ACCRUED LIABILITIES 188 170
------ ------
TOTAL CURRENT LIABILITIES 5,079 2,288
REDEEMABLE PREFERRED STOCK 1,702 1,702
SHAREHOLDERS' EQUITY 2,526 928
------ ------
$9,307 $4,918
====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 2001 2000 2001
-------- -------- -------- --------
NET REVENUES
SOFTWARE $ 967 $ 333 $ 1,704 $ 465
SERVICES 741 796 1,413 1,546
MAINTENANCE 916 581 2,010 1,284
OTHER 86 35 152 63
-------- -------- -------- --------
2,710 1,745 5,279 3,358
-------- -------- -------- --------
COST AND EXPENSES
COST OF REVENUES
SOFTWARE 224 329 519 613
SERVICES 654 492 1,291 961
MAINTENANCE 408 172 838 444
OTHER 59 24 123 42
SALES AND MARKETING 1,233 539 2,196 1,330
PRODUCT DEVELOPMENT 295 147 537 342
GENERAL AND ADMINISTRATIVE 692 601 1,423 1,264
-------- -------- -------- --------
3,565 2,304 6,927 4,996
-------- -------- -------- --------
OPERATING LOSS (855) (559) (1,648) (1,638)
INTEREST INCOME/(EXPENSE) 34 (14) 77 (44)
OTHER INCOME, NET 0 92 0 80
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (821) (481) (1,571) (1,602)
INCOME TAXES (10) (1) (30) (1)
-------- -------- -------- --------
NET LOSS $ (831) $ (482) $ (1,601) $ (1,603)
======== ======== ======== ========
DIVIDENDS ON PREFERRED STOCK (30) (38) (75) (76)
-------- -------- -------- --------
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS $ (861) $ (520) $ (1,676) $ (1,679)
======== ======== ======== ========
BASIC AND DILUTED
NET LOSS PER SHARE $ (0.14) $ (0.08) $ (0.29) $ (0.27)
======== ======== ======== ========
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES OUTSTANDING 6,057 6,300 5,836 6,295
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2001
COMMON STOCK ACCUMULATED
------------------- ADD'L COMPRE- OTHER
PAID-IN HENSIVE COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL LOSS LOSS DEFICIT TOTAL
--------- ------ -------- ------- ------------- ----------- -------
BALANCE AT DECEMBER 31, 2000 6,288,472 $ 12 $ 22,587 $ 0 $ (28) $(20,045) $ 2,526
EXERCISE OF COMMON STOCK OPTIONS 1,700 3 3
EMPLOYEE STOCK PLAN PURCHASES 10,669 9 9
COMPREHENSIVE LOSS:
NET LOSS (1,603) (1,603) (1,603)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (7) (7) (7)
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ACCUMULATED COMPREHENSIVE LOSS (1,610)
-------
--------- ---- -------- ----- -------- -------
BALANCE AT JUNE 30, 2001 6,300,841 $ 12 $ 22,599 $ (35) $(21,648) $ 928
========= ==== ======== ===== ======== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
--------------------------------
JUNE 30, 2000 JUNE 30, 2001
------------- -------------
CASH FLOWS USED IN OPERATING ACTIVITIES $ (533) $ (315)
CASH FLOWS FROM INVESTING ACTIVITIES
SOFTWARE DEVELOPMENT COSTS (875) (307)
PURCHASES OF PROPERTY AND EQUIPMENT (181) (28)
PURCHASE OF INVESTMENT SECURITIES (493) (711)
PROCEEDS FROM SALE/MATURITY OF INVESTMENT SECURITIES 2,146 691
LOSS ON INVESTMENT SECURITIES 0 20
-------- --------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 597 (335)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
PROCEEDS FROM EMPLOYEE STOCK PURCHASE PLAN 3 9
PAYMENT OF DIVIDENDS ON PREFERRED STOCK (123) (31)
PROCEEDS FROM BORROWINGS 1,500 750
REPAYMENT OF BORROWINGS 0 (2,836)
PROCEEDS FROM RESTRICTED CASH USED TO SECURE BORROWINGS 0 2,200
EXERCISE OF COMMON STOCK OPTIONS 195 3
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,575 95
-------- --------
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 8 12
-------- --------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 1,647 (543)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,029 1,281
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,676 $ 738
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
-------- --------
CASH PAID FOR INCOME TAXES $ 30 $ 1
======== ========
CASH PAID FOR INTEREST $ 0 $ 79
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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FIRSTWAVE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
A. BASIS OF PRESENTATION
Firstwave Technologies, Inc. (the "Company") is a provider of Internet
customer relationship management solutions. The Firstwave eCRM
(Internet-based Customer Relationship Management) Suite is an
integrated, Internet-based suite of applications created to fulfill and
manage the e-business relationship needs of a company in the areas of
sales, marketing, and support.
The accompanying unaudited consolidated financial statements have been
prepared in accordance 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 generally accepted accounting principles 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, 2000. In the
opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation of
the consolidated financial statements have been included.
The consolidated financial statements include the accounts of Firstwave
Technologies, Inc. and its wholly owned subsidiary Firstwave
Technologies UK, Ltd. All significant intercompany transactions and
balances have been eliminated in consolidation.
B. ACCOUNTING POLICIES
REVENUE RECOGNITION
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. Services revenue is
recognized as services are performed. Maintenance revenue is recognized
on a pro rata basis over the term of the maintenance agreements.
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 generally remit 50% to 60% of standard license fees and maintenance
revenues they produce. The Company recognizes international sales at
the gross license amount, with the amount paid to the distributors
reflected as a selling expense. The Company's international maintenance
fees are reflected as maintenance revenues, with the amount retained by
distributors shown as a cost of maintenance revenue.
Revenues from nonmonetary exchanges are recorded at the fair value of
the products and services provided or received, whichever is more
clearly evident.
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Advanced billings for services and maintenance contracts are recorded
as deferred revenue on the Company's balance sheet, with revenue
recognized as the services are performed and on a pro-rata basis for
maintenance.
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share is based on the weighted average number
of shares of common stock outstanding during the period. Stock options
and convertible preferred stock would have been included in the diluted
earnings per share calculation had they not been antidilutive. Net loss
applicable to common shareholders includes a charge for dividends
related to the Company's outstanding preferred stock.
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,
which are included in the results of operations, are insignificant for
all periods presented. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could
differ from those estimates.
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 it 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Company adopted SFAS 133
effective January 1, 2001 and it did not have a material impact on the
consolidated financial statements.
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In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement replaces SFAS No. 125 and is effective for
transfers and servicing occurring after June 30, 2001 and, for certain
provisions, fiscal years ending after December 15, 2000. Upon its
adoption, the Company will account for activity under its Accounts
Receivable Purchase Agreement (discussed in Note C) pursuant to SFAS
No. 140.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." Under these
new standards, the FASB eliminated accounting for certain mergers and
acquisitions as pooling of interests, eliminated amortization of
goodwill and indefinite life intangible assets and established new
impairment measurement procedures for goodwill. For calendar year
reporting companies, the standards become effective for all
acquisitions completed on or after June 30, 2001, except with regard to
business combinations initiated prior to July 1, 2001. Changes in
financial statement treatment for goodwill and intangible assets
arising from mergers and acquisitions completed prior to June 30, 2001
become effective January 1, 2002.
The Company is currently assessing the impact of implementing these
standards, and believes they will not have a material impact on the
consolidated financial statements.
C. BORROWINGS
On April 5, 2001, the Company liquidated its $1,500,000 US Treasury
bill and paid off the related $1,500,000 line of credit.
On April 16, 2001, the Company liquidated its $700,000 certificate of
deposit and paid off the related $700,000 promissory note.
On May 8, 2001, the Company paid off the remaining balance on its
revolving line of credit and the agreement was terminated.
On June 5, 2001 the Company signed an Accounts Receivable Purchase
Agreement with a commercial bank whereby the Company may sell up to
$500,000 of its eligible accounts receivable, as defined in the
agreement. Said agreement will expire one year from execution, bear
interest at 1.85% per month, and be secured by the assets of the
Company. As of June 30, 2001 there were no outstanding borrowings under
this agreement.
D. SUBSEQUENT EVENTS
On July 19, 2001 the Company executed a Convertible Note Purchase
Agreement with Mercury Fund II, Ltd. in the amount of $500,025. The
note bears interest at 9% per annum and is due and payable on the
earlier of conversion to shares of Series C Preferred Stock (upon
shareholder approval) or October 31, 2001.
In response to a notification from the Nasdaq Stock Market Inc.
("Nasdaq") of a deficiency in the continued listing requirements of net
tangible assets and market value of public float, the Company presented
a plan to regain and sustain compliance at a
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hearing before the Nasdaq Listing Qualifications Panel on July 19,
2001. The plan includes the following:
1. The sale and issuance of (i) 6,667 shares of Series C
Preferred Stock upon the conversion of the promissory
note in the original principal amount of $500,025
previously issued to Mercury Fund II, Ltd. and (ii)
warrants to acquire up to 125,025 shares of common
stock.
2. The sale and issuance of 10,000 shares of Series C
Preferred Stock to Richard T. Brock, President and
CEO of the Company, in exchange for the promissory
note of the Company in the aggregate principal amount
of $750,000 held by Mr. Brock.
3. An amendment to the Company's Articles of
Incorporation to eliminate certain provisions that
require the Company to treat $1,702,000 of the
Company's Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock as "redeemable
securities" rather than permanent equity in the
Company's consolidated balance sheet.
4. An amendment to the Company's Articles of
Incorporation to effect a reverse stock split of all
issued and outstanding shares of the Company's common
stock at a ratio not to exceed one-for-three.
The Company filed a Preliminary Proxy statement with the Securities and
Exchange Commission on July 25, 2001, and a special meeting of
shareholders is currently scheduled for August 29, 2001. At the meeting
on August 29, 2001, shareholders will vote on the above transactions,
each of which has been approved by the Board of Directors of the
Company subject to shareholder approval.
On August 3, 2001, Nasdaq notified the Company that its securities will
continue to be listed on the Nasdaq SmallCap Market with a temporary
exception from the Net Tangible Asset and Minimum Bid Price
requirements. The exception requires the Company to report net tangible
assets in excess of $3.5 million by September 4, 2001, and for the
Company's common stock to demonstrate a closing bid price at or above
$1.00 per share on or before September 4, 2001 and immediately
thereafter a closing bid price at or above $1.00 for at least 10
consecutive trading days. Satisfaction of these conditions will require
that the Company's shareholders approve the various transactions
outlined above at the special meeting of shareholders. In the event the
Company is deemed to have met the terms of the exception, its common
stock shall continue to be listed on The Nasdaq SmallCap Market. If the
above transactions are not approved by shareholders and the Company is
delisted from Nasdaq, these events could adversely impact the Company's
ability to raise additional capital.
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ITEM 2.
FIRSTWAVE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Firstwave Technologies, Inc. provides Internet-based customer relationship
management (eCRM) solutions. The Company is based in Atlanta, Georgia with an
office located in London, England. Firstwave offers powerful applications that
optimize the sales, marketing and customer service functions through a series of
solutions. The Company supports three product lines: Firstwave eCRM,
Takecontrol(R), and Firstwave for Unix.
RESULTS OF OPERATIONS
Total revenues decreased 35.6% from $2,710,000 in the second quarter of 2000 to
$1,745,000 in the second quarter of 2001. Year to date total revenues decreased
36.4% from $5,279,00 in 2000 to $3,358,000 in 2001. These decreases are
primarily due to decreases in software sales and decreases in maintenance
revenues due to cancellation of maintenance agreements by Takecontrol software
customers. Software revenues decreased 65.6% from $967,000 in the second quarter
of 2000 to $333,000 in the second quarter of 2001. Year to date software
revenues decreased 72.7% from $1,704,000 in 2000 to $465,000 in 2001. The
Company's software revenues are significantly dependent upon the timing of
closing of license agreements.
Services revenues increased 7.4% from $741,000 in the second quarter of 2000 to
$796,000 in the second quarter of 2001, and year to date increased 9.4% from
$1,413,000 in 2000 to $1,546,000 in 2001. The increases are primarily due to
increases in services engagements with existing customers.
Maintenance revenues decreased 36.6% from $916,000 in the second quarter of 2000
to $581,000 in the second quarter of 2001, and year to date, decreased 36.1%
from $2,010,000 for the first six months of 2000 compared to $1,284,000 for the
first six months of 2001. Maintenance revenues are the result of renewal
agreements from previous software license sales. The decreases are primarily due
to a decrease in the Company's Takecontrol installed base of systems covered
under maintenance agreements.
Cost of software revenues increased 46.9% from $224,000 in the second quarter of
2000 to $329,000 in the second quarter of 2001. Year to date, cost of software
revenues increased 18.1% from $519,000 in 2000 to $613,000 in 2001. The
increases are a result of the amortization of capitalized software additions of
the Firstwave eCRM product line. Cost of software revenues include costs of
third party software, amortization of capitalized software costs, media costs,
and documentation materials.
Cost of revenues for services decreased 24.8% from $654,000 in the second
quarter of 2000 to $492,000 in the second quarter of 2001 due to decreased
payroll and related costs. Cost of revenues for maintenance decreased 57.8% from
$408,000 in the second quarter of 2000 to $172,000 in the second quarter of 2001
primarily due to decreased international maintenance
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costs associated with decreased international maintenance revenue and decreased
payroll and related costs.
Sales and marketing expense decreased 56.3% from $1,233,000 in the second
quarter of 2000 to $539,000 in the second quarter of 2001 and year to date
decreased 39.4% from $2,196,000 in 2000 to $1,330,000 in 2001. The decreases are
related to changes in the Company's marketing strategy which resulted in expense
reductions for advertising, direct mail and e-mail campaigns, as well as, lower
payroll costs and lower commission expense consistent with lower software
revenue.
The Company's product innovation and development expenditures, which includes
amounts capitalized, decreased 65.6% from $670,000 in the second quarter of 2000
to $230,000 in the second quarter of 2001. Year to date, product innovation and
development expenditures decreased 54.0% from $1,412,000 in 2000 to $649,000 in
2001. The decreases are primarily related to decreased use of outside
development contractors and the temporary reallocation of some development
resources to the services organization during second quarter 2000. Software
development costs capitalized during the three months and six months ended June
30, 2000 and June 30, 2001 were $375,000 and $875,000 and $83,000 and $307,000
respectively.
General and administrative expenses decreased 13.2% from $692,000 in the second
quarter of 2000 to $601,000 in the second quarter of 2001, and year to date
decreased 11.2% from $1,423,000 in 2000 to $1,264,000 in 2001, in each case
primarily due to decreases in personnel and personnel related costs.
Net interest income decreased 141.2% from $34,000 net interest income in the
second quarter of 2000 to $14,000 net interest expense in the second quarter of
2001 due to the decrease in invested cash balances and changes in the level of
borrowings during the period.
Other income results from a settlement agreement related to the cancellation by
a third party of a sublease of office space from the Company, offset by losses
related to the Company's securities investments.
The above factors combined to result in a 39.6% decrease in net loss from
$861,000 in the second quarter of 2000 to $520,000 in the second quarter of
2001, and a net loss per share of $0.14 for the second quarter of 2000 compared
to a net loss per share of $0.08 for the second quarter of 2001. Year to date,
net loss remained consistent at $1,679,000 in 2001 compared to $1,676,000 in
2000. Year to date, net loss per share decreased 6.9% from $0.29 per share in
2000 compared to $0.27 per share in 2001. The net loss per share amounts for the
quarters ended June 30, 2000 and June 30, 2001 also include dividends accrued on
preferred stock of $75,000 and $76,000 respectively.
BALANCE SHEET
Net accounts receivable decreased 58.2% from $1,774,000 at December 31, 2000 to
$742,000 at June 30, 2001 due to collection of outstanding receivables and
decreased billings consistent with lower revenues. Property and equipment
decreased 30.0% from $717,000 at December 31, 2000 to $502,000 at June 30, 2001,
due to year to date depreciation offset by additional fixed asset purchases.
Capitalized software decreased 11.2% from $2,580,000 at December 31, 2000 to
$2,291,000 at June 30, 2001 due to year to date amortization offset by
additional capitalization of development costs. Accounts payable decreased 27.0%
from $679,000 to
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$496,000 due to vendor payments and decreased expenses. Deferred revenue
decreased 34.9% from $1,047,000 at December 31, 2000 to $682,000 at June 30,
2001 primarily due to the recognition of six months of maintenance revenues
related to annual contracts billed in advance at year end. Accrued employee
compensation and benefits decreased 50.0% from $216,000 at December 31, 2000 to
$108,000 at June 30, 2001 due to decreased accruals related to lower personnel
counts and decreased commission accruals consistent with lower software
revenues. Borrowings decreased 73.5% from $2,836,000 at December 31, 2000 to
$750,000 at June 30, 2001 due to repayment of borrowings net of new borrowings.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the balance of cash and cash equivalents was $738,000
compared to $1,281,000 at December 31, 2000. Since December 31, 2000, the
Company has repaid its bank debt of $636,000. The Company has implemented
several measures in an effort to reduce the Company's expenses and to help the
Company preserve cash.
The Company's future capital requirements will depend on many factors, including
its ability to increase revenue levels and reduce costs of operations to
generate positive cash flows, as well as the timing and extent of spending to
support product development efforts and expansion of sales and marketing, and
market acceptance of the Company's products. Although the Company has
historically been able to satisfy its cash requirements, there can be no
assurance that efforts to obtain sufficient financing for operations will be
successful in the future. The Company's future capital needs will be highly
dependent upon the Company's ability to control expenses and generate additional
software license revenues, and any projections of future cash needs and cash
flows are subject to substantial uncertainty. If the Company is not able to
generate the revenues it is projecting, it may need to raise additional capital.
If the Company is unable to obtain the necessary additional capital, it may be
required to reduce the scope of planned product development and sales and
marketing efforts, as well as reduce the size of current staff, all of which
could have a material adverse effect on its business, financial condition, and
the Company's ability to reduce losses or generate profits.
On July 19, 2001 the Company entered into a Convertible Note Purchase Agreement
with an investor providing funds to the Company in the amount of $500,025 in
exchange for a 9% secured promissory note. The note is automatically convertible
into 6,667 shares of Series C Convertible Preferred Stock upon approval of the
conversion by the Company's shareholders at a special meeting of shareholders
currently scheduled for August 29, 2001. The note bears interest at 9% per annum
through the date of conversion or repayment, and is secured by a lien on
substantially all of the assets of the Company. If the conversion of the note is
not approved by the shareholders of the Company, it will be due and payable on
October 31, 2001.
In response to a notification from Nasdaq of a deficiency in the continued
listing requirements of net tangible assets and market value of public float,
and the Company's presentation of a plan to regain and sustain compliance at a
hearing before the Nasdaq Listing Qualifications Panel on July 19, 2001, Nasdaq
notified the Company that its securities will continue to be listed on the
Nasdaq SmallCap Market with a temporary exception from the Net Tangible Asset
and Minimum Bid Price requirements. The exception requires the Company to report
net tangible assets in excess of $3.5 million by September 4, 2001, and for the
Company's common stock to demonstrate a closing bid price at or above $1.00 per
share on or before September 4, 2001 and immediately thereafter a closing bid
price at or above $1.00 for at least 10 consecutive trading days. Satisfaction
of these conditions will require that the Company's shareholders
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approve the various transactions at the special meeting of shareholders.
Approval of the transactions would increase the Company's net tangible assets by
$2,952,000, to $3,591,000 as of July 31, 2001, a level that would allow the
Company to regain compliance with Nasdaq's SmallCap Market minimum net tangible
assets listing requirements. In the event the Company is deemed to have met the
terms of the exception, its common stock shall continue to be listed on The
Nasdaq SmallCap Market.
The Company believes it can meet these conditions and maintain its listing on
the Nasdaq SmallCap Market, but there can be no assurance that such will be the
case. If the above transactions are not approved by the Company's shareholders,
the Company's common stock would likely be delisted from Nasdaq, the Company
would be required to repay the 9% convertible secured promissory note on or
before October 31, 2001, and Mr. Brock's note would not convert into Series C
Preferred Stock. If the Company's shares are delisted from Nasdaq, the Company
believes it would be more difficult for the Company to raise additional capital.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
None
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 15, 2001, 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
five (5) Directors for a term of one (1) year were as
follows:
Name of Nominee Votes For Votes Withheld
--------------- --------- ---------------
Roger A. Babb 5,081,130 322,551
Richard T. Brock 5,081,130 322,551
John F. Keane 5,081,130 322,551
Michael T. McNeight 5,081,130 322,551
James R. Porter 5,081,130 322,551
2. Votes cast for, against or abstained regarding an
amendment of the Company's 1993 Stock Option Plan to
increase the number of shares reserved for future
grants under the plan from 1,200,000 to 1,400,000.
Votes For Votes Against Abstain
--------- ------------- -------
4,900,622 499,604 3,455
3. Votes cast for, against, or abstained regarding an
amendment of the Company's Employee Stock Purchase
Plan to increase the number of shares of Common Stock
reserved for possible purchase by Company employees
from 70,000 to 90,000.
Votes For Votes Against Abstain
--------- ------------- -------
5,378,320 21,981 3,380
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTWAVE TECHNOLOGIES, INC.
DATE: August 10, 2001 /s/ Judith A. Vitale
--------------------------------------------
Judith A. Vitale
Vice President of Finance and Administration
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