**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTER ENDED SEPTEMBER 30,2002**

 

**COMMISSION FILE NUMBER   0-21202**

 

 

**FIRSTWAVETECHNOLOGIES, INC.**

 

| **7372**                                                            |   | **GEORGIA**              |   | **58-1588291**                   |
|---------------------------------------------------------------------|--------|--------------------------|--------|----------------------------------|
| (Primary Std. Ind.  Classification Code #)                          |   | (State of incorporation) |   | (IRS Employer  Identification #) |
|                                                                |   |                     |   |                             |
| **2859 Paces Ferry Road, Suite 1000  Atlanta, Georgia  30339** |
| (Address of principal executive offices)                            |
|                                                                |   |                     |   |                             |
| **(770-431-1200)**                                                  |
| (Telephone number of registrant)                                    |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES      ý                                  NO         o

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 
| **Outstanding as of November 11, 2002** |   |             |
|-----------------------------------------|--------|------------------|
|                                    |   |             |
| Common Stock, no  par value             |   | 2,220,394 Shares |

 

 

----

 

**FIRSTWAVETECHNOLOGIES, INC.**

** **

**FORM 10-Q**

** **

**For thequarter ended September 30, 2002**

** **

** **

**Index**

 
| Part I.                                                                                                                | Financial Information                                                                       |   |
|------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|--------|
|                                                                                                                   |                                                                                        |   |
| Item 1.                                                                                                                | Financial Statements                                                                        |   |
|                                                                                                                   |                                                                                        |
| Consolidated Balance Sheet -  December 31, 2001 and September 30, 2002                                                 |                                                                                        |
|                                                                                                                   |                                                                                        |
| Consolidated Statement  of Operations - For the Three and Nine Months Ended September 30, 2001 and  September 30, 2002 |
|                                                                                                                   |                                                                                        |
| Consolidated  Statement of Changes in Shareholders’ Equity - For the Nine Months Ended  September 30, 2002        |                                                                                        |
|                                                                                                                   |                                                                                        |
| Consolidated  Statement of Cash Flows - For the Nine Months Ended September 30, 2001 and  September 30, 2002           |                                                                                        |
|                                                                                                                   |                                                                                        |
| Notes to  Consolidated Financial Statements                                                                            |                                                                                        |
|                                                                                                                   |                                                                                        |
| Item 2.                                                                                                                | Management’s Discussion  and Analysis of Financial Condition and Results of Operations |   |
|                                                                                                                   |                                                                                        |   |
| Item 3.                                                                                                                | Quantitative and Qualitative  Disclosures About Market Risk                                 |   |
|                                                                                                                   |                                                                                        |   |
| Item 4.                                                                                                                | Controls and Procedures                                                                     |   |
|                                                                                                                   |                                                                                        |   |
| Part II.                                                                                                               | Other Information                                                                           |   |

 

2

----

 

**PART I.  FINANCIALINFORMATION**

 

**Item 1.    Financial Statements**

** **

**FIRSTWAVETECHNOLOGIES, INC.**

**ConsolidatedBalance Sheet**

**(inthousands)**

 
|                                                                                        |   | **Dec 31,  2001** |   | **Sept 30,  2002** |   |
|---------------------------------------------------------------------------------------------|--------|-------------------|--------|--------------------|--------|
|                                                                                        |   |              |   | **(unaudited)**    |   |
| **ASSETS**                                                                                  |   |              |   |               |   |
|                                                                                        |   |              |   |               |   |
| **Current  assets:**                                                                        |   |              |   |               |   |
| **Cash and  cash equivalents**                                                              |   | $                 | 1,860  |               | $      | 3,663 |   |
| **Accounts  receivable, less allowance for doubtful accounts of $90 and $70, respectively** |   | 1,333             |   | 2,022              |   |
| **Prepaid  expenses and other assets**                                                      |   | 474               |   | 733                |   |
| **Total  current assets**                                                                   |   | 3,667             |   | 6,418              |   |
|                                                                                        |   |              |   |               |   |
| **Property  and equipment, net**                                                            |   | 421               |   | 831                |   |
| **Software  development costs, net**                                                        |   | 1,762             |   | 1,435              |   |
| **Goodwill**                                                                                |   | 166               |   | 172                |   |
|                                                                                        |   | $                 | 6,016  |               | $      | 8,856 |   |
|                                                                                        |   |              |   |               |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                               |   |              |   |               |   |
|                                                                                        |   |              |   |               |   |
| **Current  liabilities:**                                                                   |   |              |   |               |   |
| **Accounts  payable**                                                                       |   | $                 | 575    |               | $      | 1,195 |   |
| **Deferred  revenue**                                                                       |   | 663               |   | 675                |   |
| **Accrued  employee compensation and benefits**                                             |   | 145               |   | 309                |   |
| **Dividends  payable**                                                                      |   | 223               |   | 43                 |   |
| **Other  accrued liabilities**                                                              |   | 453               |   | 452                |   |
| **Total  current liabilities**                                                              |   | 2,059             |   | 2,674              |   |
|                                                                                        |   |              |   |               |   |
| **Shareholders’  equity**                                                              |   | 3,957             |   | 6,182              |   |
|                                                                                        |   | $                 | 6,016  |               | $      | 8,856 |   |

 

**Theaccompanying notes are an integral part of these financial statements.**

 

3

----

 

**FIRSTWAVETECHNOLOGIES, INC.**

**ConsolidatedStatement of Operations**

**(inthousands, except per share amounts)**

**(unaudited)**

 
|                                                     |   | **For the  Three Months Ended** |   | **For the  Nine Months Ended** |   |
|----------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
|                                                     |   | **Sept 30,  2001**              |   | **Sept 30,  2002**             |   | **Sept 30,  2001** |   | **Sept 30,  2002** |   |
|                                                     |   |                            |   |                           |   |   |   |   |   |
| **Net  Revenues**                                        |   |                            |   |                           |   |   |   |   |   |
| **Software**                                             |   | $                               | 325    |                           | $      | 405 |   | $ | 790 |   | $ | 1,784 |   |
| **Services**                                             |   | 1,209                           |   | 2,325                          |   | 2,755 |   | 7,740 |   |
| **Maintenance**                                          |   | 743                             |   | 407                            |   | 2,027 |   | 1,258 |   |
| **Other**                                                |   | 11                              |   | 4                              |   | 74 |   | 16 |   |
|                                                     |   | 2,288                           |   | 3,141                          |   | 5,646 |   | 10,798 |   |
| **Cost and  Expenses**                                   |   |                            |   |                           |   |   |   |   |   |
| **Cost of  revenues**                                    |   |                            |   |                           |   |   |   |   |   |
| **Software**                                             |   | 335                             |   | 281                            |   | 948 |   | 928 |   |
| **Services**                                             |   | 472                             |   | 759                            |   | 1,433 |   | 2,465 |   |
| **Maintenance**                                          |   | 249                             |   | 118                            |   | 693 |   | 398 |   |
| **Other**                                                |   | 4                               |   | 4                              |   | 46 |   | 16 |   |
| **Sales and  marketing**                                 |   | 546                             |   | 791                            |   | 1,876 |   | 2,435 |   |
| **Product  development**                                 |   | 105                             |   | 213                            |   | 447 |   | 480 |   |
| **General  and administrative**                          |   | 550                             |   | 475                            |   | 1,814 |   | 1,638 |   |
|                                                     |   | 2,261                           |   | 2,641                          |   | 7,257 |   | 8,360 |   |
|                                                     |   |                            |   |                           |   |   |   |   |   |
| **Operating  income/(loss)**                             |   | 27                              |   | 500                            |   | (1,611 | ) | 2,438 |   |
|                                                     |   |                            |   |                           |   |   |   |   |   |
| **Interest  income/(expense)**                           |   | (15                             | )      | 17                             |   | (59 | ) | 41 |   |
| **Other  income, net**                                   |   | 0                               |   | 0                              |   | 80 |   | 0 |   |
| **Income/(loss)  before income taxes**                   |   | 12                              |   | 517                            |   | (1,590 | ) | 2,479 |   |
| **Income  taxes**                                        |   | (5                              | )      | 0                              |   | (6 | ) | 0 |   |
| **Net  income/(loss)**                                   |   | $                               | 7      |                           | $      | 517 |   | $ | (1,596 | ) | $ | 2,479 |   |
|                                                     |   |                            |   |                           |   |   |   |   |   |
| **Dividends  on preferred stock**                        |   | (462                            | )      | (62                            | )      | (538 | ) | (192 | ) |
|                                                     |   |                            |   |                           |   |   |   |   |   |
| **Net  income/(loss) applicable to common shareholders** |   | $                               | (455   | )                              | $      | 455 |   | $ | (2,134 | ) | $ | 2,287 |   |
|                                                     |   |                            |   |                           |   |   |   |   |   |
| **Basic:**                                               |   |                            |   |                           |   |   |   |   |   |
| **Earnings/(loss)  per share**                           |   | $                               | (0.22  | )                              | $      | 0.21 |   | $ | (1.02 | ) | $ | 1.07 |   |
| **Weighted  average shares**                             |   | 2,100                           |   | 2,212                          |   | 2,099 |   | 2,132 |   |
|                                                     |   |                            |   |                           |   |   |   |   |   |
| **Diluted:**                                             |   |                            |   |                           |   |   |   |   |   |
| **Earnings/(loss)  per share**                           |   | $                               | (0.22  | )                              | $      | 0.16 |   | $ | (1.02 | ) | $ | 0.79 |   |
| **Weighted  average shares**                             |   | 2,100                           |   | 3,200                          |   | 2,099 |   | 3,143 |   |

 

**Theaccompanying notes are an integral part of these financial statements.**

 

4

----

 

**FIRSTWAVETECHNOLOGIES, INC.**

**ConsolidatedStatement of Changes in Shareholders’ Equity**

**(Inthousands, except share data)**

**(unaudited)**

** **

**For the NineMonths Ended September 30, 2002**

 
|                                                        |   | **Common  Stock** |       | **Preferred  Stock** |       | **Add’l  paid-in  capital** |       | **Compre-  hensive  income** |       | **Accumulated  Other  Comprehensive  Income/(loss)** |       | **Accumulated  Deficit** |       | **Total** |       |
|-------------------------------------------------------------|--------|-------------------|------------|----------------------|------------|----------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|--------------------------|------------|-----------|------------|
| **Shares**                                                  |   | **Amount**        | **Shares** |                 | **Amount** |
|                                                        |   |              | ** ** |                 | ** ** |                             | ** ** |                         | ** ** |                                                 | ** ** |                     | ** ** |      | ** ** |   | ** ** |   | ** ** |
| **Balance at  December 31, 2001**                           |   | 2,100,351         |       | $                    | 12         |                             | 33,687     |                         | $          | 2,833                                                |       | $                        | 22,403     |      | $          | 0 |   | $ | (26 | ) | $ | (21,265 | ) | $ | 3,957 |   |
|                                                        |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
| **Exercise of  common stock options**                       |   | 4,212             |       |                 |       |                             |       |                         |       | 5                                                    |       |                     |       |      |       |   |   | 5 |   |
|                                                        |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
| **Employee  stock purchases**                               |   | 25                |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
|                                                        |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
| **Conversion  of Series C Preferred Stock to Common Stock** |   | 111,125           |       |                 |       | (2,667                           | )          | (200                         | )          | 200                                                  |       |                     |       |      |       |   |   | 0 |   |
|                                                        |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
| **Dividends**                                               |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       | (192 | ) | (192 | ) |
|                                                        |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
| **Comprehensive  income:**                                  |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
| **Net income**                                              |   |              |       |                 |       |                             |       |                         |       |                                                 |       | 2,479                    |       |      |       | 2,479 |   | 2,479 |   |
| **Foreign  currency translation adjustment**                |   |              |       |                 |       |                             |       |                         |       |                                                 |       | (67                      | )          | (67       | )          |   |   | (67 | ) |
| **Accumulated  comprehensive income**                       |   |              |       |                 |       |                             |       |                         |       |                                                 |       | 2,412                    |       |      |       |   |   |   |   |
|                                                        |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
|                                                        |   |              |       |                 |       |                             |       |                         |       |                                                 |       |                     |       |      |       |   |   |   |   |
| **Balance at  September 30, 2002**                          |   | 2,215,713         |       | $                    | 12         |                             | 31,020     |                         | $          | 2,633                                                |       | $                        | 22,608     |      |       |   | $ | (93 | ) | $ | (18,978 | ) | $ | 6,182 |   |
|                                                             |        |                   |            |                      |            |                                  |            |                              |            |                                                      |            |                          |            |           |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Theaccompanying notes are an integral part of these financial statements.**

 

5

----

 

**FIRSTWAVETECHNOLOGIES, INC.**

**ConsolidatedStatement of Cash Flows**

**(inthousands)**

**(unaudited)**

 
|                                                         |   | **For the  Nine Months Ended** |       |
|--------------------------------------------------------------|--------|--------------------------------|------------|
|                                                         |   | **Sept 30,  2001**             |       | **Sept 30,  2002** |   |
|                                                         |   |                           | ** ** |   | ** ** |
| **Cash flows  (used in)/provided by operating activities**   |   | $                              | (106       | ) | $ | 3,517 |   |
|                                                         |   |                           |       |   |   |
| **Cash flows  from investing activities**                    |   |                           |       |   |   |
| **Software  development costs**                              |   | (373                           | )          | (581 | ) |
| **Purchases  of property and equipment**                     |   | (49                            | )          | (690 | ) |
| **Purchase  of investment securities**                       |   | (711                           | )          | 0 |   |
| **Proceeds  from sale/maturity of investment securities**    |   | 691                            |       | 0 |   |
| **Loss on  investment securities**                           |   | 20                             |       | 0 |   |
| **Net cash  used in investing activities**                   |   | (422                           | )          | (1,271 | ) |
|                                                         |   |                           |       |   |   |
| **Cash flows  from financing activities**                    |   |                           |       |   |   |
| **Proceeds  from borrowings**                                |   | 750                            |       | 0 |   |
| **Repayment  of borrowings**                                 |   | (3,586                         | )          | 0 |   |
| **Proceeds  from restricted cash used to secure borrowings** |   | 2,200                          |       | 0 |   |
| **Proceeds  from issuance of preferred stock**               |   | 1,131                          |       | 0 |   |
| **Proceeds  from issuance of common stock**                  |   | 12                             |       | 5 |   |
| **Payment of  dividends on preferred stock**                 |   | (45                            | )          | (372 | ) |
| **Net cash  provided by/(used in) financing activities**     |   | 462                            |       | (367 | ) |
|                                                         |   |                           |       |   |   |
| **Foreign  currency translation adjustment**                 |   | 16                             |       | (76 | ) |
|                                                         |   |                           |       |   |   |
| **Increase/(decrease)  in cash and cash equivalents**        |   | (50                            | )          | 1,803 |   |
| **Cash and  cash equivalents, beginning of period**          |   | 1,281                          |       | 1,860 |   |
| **Cash and  cash equivalents, end of period**                |   | $                              | 1,231      |   | $ | 3,663 |   |
|                                                         |   |                           |       |   |   |
| **Supplemental  disclosure of cash flow information**        |   |                           |       |   |   |
| **Cash paid  for income taxes**                              |   | $                              | 6          |   | $ | 0 |   |
|                                                         |   |                           |       |   |   |
| **Cash paid  for interest**                                  |   | $                              | 86         |   | $ | 0 |   |

 

**Theaccompanying notes are an integral part of these financial statements.**

 

6

----

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Notes to Consolidated FinancialStatements**

**September 30, 2002**

 

**A.****                                    Basisof Presentation**

 

Firstwave Technologies,Inc. (the “Company”) is a provider of flexible Internet-based CustomerRelationship Management (CRM) solutions that optimize and strengthen therelationship between a company and its customers.  The Firstwave eCRM (Internet-based Customer RelationshipManagement) Suite is an integrated, Internet-based suite of applications thateasily integrate with existing systems, allowing for rapid deployment and easycustomization.

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americaand instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States and should be read in conjunction with the consolidatedfinancial statements contained in the Company’s Form 10-K for the period endedDecember 31, 2001.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring adjustments)considered necessary for a fair presentation of the consolidated financialstatements have been included.

 

The consolidated financialstatements include the accounts of Firstwave Technologies, Inc. and its whollyowned subsidiary Firstwave Technologies UK, Ltd.  All significant intercompany transactions and balances have beeneliminated in consolidation.

 

**B.****           ****Accounting Policies**

 

**Concentrationof revenue**

During the third quarterof 2002 and for the nine months ended September 30, 2002, the Company has asubstantial majority of software and services revenue derived from itspartnership with a leading global services company.  If this partner decreases its purchasing of the Company’s software andservices, revenues would be subject to significant decrease if not replacedwith other significant accounts.

 

**Revenuerecognition**

Revenue from softwareproduct sales is recognized upon shipment of the product when the Company has asigned contract, the fees are fixed and determinable, no significant obligationsremain and collection of the resulting receivable is probable.  The Company accrues for estimated warrantycosts at the time it recognizes revenue. Services revenue is recognized as services are performed.  Maintenance revenue is recognized on a****prorata basis over the term of the maintenance agreements.

 

International revenues areprimarily generated by Firstwave UK and independent distributors who offerlicenses of the Company’s products in specific geographic areas.  Under the terms of the Company’sinternational distributor agreements, international distributors collectlicense fees and maintenance revenues on behalf of the Company, and generallyremit 50% to 60% of standard license fees and maintenance revenues theyproduce.  The Company recognizesinternational sales at the gross license amount, with the amount paid to thedistributors reflected as a selling expense. The Company’s international maintenance fees are reflected asmaintenance revenues, with the amount retained by distributors shown as a costof maintenance revenue.

 

Revenues from nonmonetaryexchanges are recorded at the fair value of the products and services providedor received, whichever is more clearly evident.

 

Advanced billings forservices and maintenance contracts are recorded as deferred revenue on theCompany’s balance sheet, with services revenue recognized as the services areperformed and maintenance revenue recognized on a pro-rata basis.

 

**Basic and diluted net income orloss per common share**

Basic net income or netloss per common share is based on the weighted average number of shares ofcommon stock outstanding during the period. Stock options and convertible preferred stock have been included in thediluted earnings per share calculation when they are not antidilutive.  Net income or loss applicable to commonshareholders includes a charge for dividends related to the Company’soutstanding preferred stock.

 

7

----

 

**Foreign currency translation**

The financial statements of the Company’s international subsidiary aretranslated into U.S. dollars at current exchange rates, except for revenues andexpenses, which are translated at average exchange rates during each reportingperiod.  Currency transaction gains orlosses are included in the results of operations.  Net exchange gains or losses resulting from the translation ofassets and liabilities are included as a component of accumulated othercomprehensive income in shareholders’ equity.

 

**Use of estimates**

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Impairment of long-lived assets**

The Company evaluates impairment of long-lived assets whenever events orchanges in circumstances indicate that the carrying amount of such assets maynot be recoverable.  If the sum of theexpected future undiscounted cash flows is less than the carrying amount of theasset, an impairment loss would be recognized. Measurement of an impairment loss for long-lived assets would be basedon the fair value of the asset.

 

**Segment reporting**

Management believes that it has only a single segment consisting ofsoftware sales with related services and support.  The information presented in the consolidated statement ofoperations reflects the revenues and costs associated with this segment thatmanagement uses to make operating decisions and assess performance.

 

**Recent accounting pronouncements**

In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 133, Accounting for DerivativeInstruments and Hedging Activities (“SFAS 133”).  SFAS 133 establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities. The Company adopted SFAS 133 effective January 1, 2001 and it did nothave a material impact on the consolidated financial statements.

 

In September 2000, the FASBissued SFAS No. 140, “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.” This statement replaces SFAS No. 125 and is effective for transfers andservicing occurring after June 30, 2001 and, for certain provisions, fiscalyears ending after December 15, 2000. The Company has no activity to account for pursuant to SFAS No. 140.

 

In July 2001, the FASBissued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill andOther Intangible Assets.”  Under thesenew standards, the FASB eliminated accounting for certain mergers andacquisitions as pooling of interests, eliminated amortization of goodwill andindefinite life intangible assets and established new impairment measurementprocedures for goodwill.  For calendaryear reporting companies, the standards become effective for all acquisitionscompleted on or after June 30, 2001, except with regard to businesscombinations initiated prior to July 1, 2001. Changes in financial statement treatment for goodwill and intangibleassets arising from mergers and acquisitions completed prior to June 30, 2001became effective January 1, 2002.   AsSFAS 141 is effective for transactions on or after June 30, 2001, the Companyhas effectively adopted this statement with no material impact on theconsolidated financial statements.  TheCompany adopted SFAS 141 effective January 1, 2002 and the adoption did nothave a material impact on the consolidated financial statements.  SFAS No. 142 requires goodwill andintangible assets that have indefinite useful lives no longer be amortized butrather tested at least annually for impairment.  During the first nine months of 2002, the Company did not recordany impairment of goodwill.

 

 

**C.****                                    Borrowings**

 

In second quarter of 2001,the Company signed an Accounts Receivable Purchase Agreement with a commercialbank whereby the Company could sell up to $500,000 of its eligible accountsreceivable, as defined in the agreement. This agreement had a one-year term and expired on June 5, 2002.

 

The Company has no outstanding long-term debt.

 

8

----

 

**Item 2.**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Management’s Discussion andAnalysis of**

**FinancialCondition and Results of Operations**

 

**Overview**

 

FirstwaveTechnologies Inc. (NASDAQ:FSTW) is a web-based, Customer RelationshipManagement (CRM) software innovator that provides Internet-based customer relationship management (eCRM)solutions that automate and optimize the way companies win and keepcustomers.  Headquartered in Atlanta, Georgia with an office in Surrey, England, weenable businesses to improve customer relations by streamlining sales,marketing and service processes.  Wesupport three product lines: a web-based CRM solution, Firstwave eCRM; aclient-server solution, Takecontrol®; and Firstwave for Unix.

 

 

**Results of Operations**

 

During the third quarter of 2002 we reported our fourth consecutivequarter of profitability.  Totalrevenues increased 37.3% from $2,288,000 in the third quarter of 2001 to$3,141,000 in the third quarter of 2002 primarily due to increased software andservices revenue.  Year to date totalrevenues increased 91.3% from $5,646,000 in 2001 to $10,798,000 in 2002.  Software revenues increased 24.6% from$325,000 in the third quarter of 2001 to $405,000 in the third quarter of2002.  During the third quarter of 2002,we entered into agreements with two customers to exchange a total of $351,000in licenses and services for telemarketing and public relations services.  The revenue recognized on these twotransactions was approximately $226,000 in the third quarter.  Year to date, software revenues increased125.8% from $790,000 in 2001 to $1,784,000 in 2002.  Our software revenues are significantly dependent upon the timingof closing of license agreements. Services revenues increased 92.3% from $1,209,000 in the third quarterof 2001 to $2,325,000 in the third quarter of 2002, and year to date increased180.9% from $2,755,000 in 2001 to $7,740,000 in 2002.

 

The quarterly and year to date increases insoftware and services revenues are primarily due to revenues generated throughour partnership with a leading global services company.  This partnership has accounted for a substantialmajority of our total revenue in 2002.  We expect that the revenues from this partnership will remain at highlevels for the next two quarters based upon projects already in process.  If thispartner decreases its purchasing of our software and services, our revenueswould be subject to significant decrease if not replaced with other significantaccounts.

 

Maintenance revenues decreased 45.2% from$743,000 in the third quarter of 2001 to $407,000 in the third quarter of 2002and year to date decreased 37.9% from $2,027,000 in 2001 to $1,258,000 in2002.  These decreases are primarily dueto cancellations of maintenance agreements of customers who were using theTakecontrol and Firstwave for Unix product lines.  Maintenance revenues are the result of renewal agreements fromprevious software license sales as well as new license agreements.  While we anticipate increases in maintenancerevenues related to the eCRM product, which will be relative to new softwarelicense sales, we anticipate a continued decrease in maintenance revenue fromthe Takecontrol and Unix product lines based on the age and life cycle of thoseproducts.  During 2002, we expect anoverall decrease of maintenance revenues as compared to 2001 due to anexpectation that the decrease in maintenance revenues related to Takecontrolcancellations will exceed the increase in revenues related to new eCRMmaintenance agreements.  As our eCRMlicense revenues increase we would expect an improvement in this trend.

 

Cost of software revenues decreased 16.1%from $335,000 in the third quarter of 2001 to $281,000 in the third quarter of2002.  The decrease is due to decreasedamortization of capitalized software related to an earlier version of theFirstwave eCRM product line that is now fully amortized.  Year to date cost of software revenuesdecreased 2.1% from $948,000 in 2001 to $928,000 in 2002.  Cost of software revenues include costs ofthird party software, amortization of capitalized software costs and mediacosts.

 

Cost of revenues for services increased60.8% from $472,000 in the third quarter of 2001 to $759,000 in the thirdquarter of 2002, and year to date increased 72.0% from $1,433,000 in 2001 to$2,465,000 in 2002.  The increases are aresult of increases in payroll, outside consultants, and bundled travelconsistent with the increase in services revenue.  Cost of revenues for services as a percentage of servicesrevenues decreased from 39.0% in the third quarter of 2001 to 32.7% in thethird quarter of 2002 due to higher utilization rates of servicepersonnel.  Cost of revenues formaintenance decreased 52.6% from $249,000 in the third quarter of 2001 to$118,000 in the third quarter of 2002, and year to date decreased 42.6% from$693,000 in 2001 to $398,000 in 2002 primarily due to lower royalty costsconsistent with decreased maintenance revenues generated by internationaldistributors.

 

Sales and marketing expense increased 44.9% from $546,000 in the thirdquarter of 2001 to $791,000 in the third quarter of 2002.  Year to date sales and marketing expenseincreased 29.8% from $1,876,000 in 2001 to $2,435,000 in 2002.  The increases are attributed to increases inpayroll costs due to the expansion of the sales team as well as increases intelemarketing services and public relations. During the remainder of 2002, we anticipate continued increases in salesand

 

9

----

 

marketing expenses as we continue to engage in a full range ofmarketing programs focused on creating awareness and generating qualifiedleads.

 

The Company’s product developmentexpenditures, which includes amounts capitalized, increased 266.3% from$172,000 in the third quarter of 2001 to $630,000 in the third quarter of 2002and year to date increased 29.4% from $820,000 in 2001 to $1,061,000 in 2002,primarily due to increased payroll costs related to an increase in developmentpersonnel and increased use of outside consultants related to enhancements tothe eCRM product line.  Softwaredevelopment costs capitalized during the three and nine months ended September30, 2001 were $67,000 and $373,000, and for the three and nine months endedSeptember 30, 2002, were $417,000 and $581,000 respectively.  We believe development expenditures willincrease for the balance of 2002 as we continue further enhancements to theproduct to respond to the needs of existing and prospective customers.

 

General and administrative expensesdecreased 13.6% from $550,000 in the third quarter of 2001 to $475,000 in thethird quarter of 2002 primarily due to a favorable change in the foreign currencytranslation rate during the quarter. Year to date general and administrative expenses decreased 9.7% from$1,814,000 in 2001 to $1,638,000 in 2002. The year to date decrease is the net effect of the favorable foreigncurrency rate offset by the write off in the first quarter of 2002 of a thirdparty software asset related to a change in the technology used for ourinternal web-site development and increased incentives in 2002 related toemployee incentive plans.

 

Net interest income/expense decreased 213.3%from $15,000 net interest expense in the third quarter of 2001 to $17,000 netinterest income in the third quarter of 2002. We eliminated interest expense effective September 2001 with theelimination of long-term debt.  Otherincome of $80,000 in 2001 was related to a settlement agreement pursuant to thecancellation by a third party of a sublease of office space offset by losses onsecurities investments.

 

Dividends on preferred stock decreased 86.6%from $462,000 in the third quarter of 2001 to $62,000 in the third quarter of2002.  Third quarter 2001 included aone-time non-cash charge of $417,000 applicable to a beneficial conversionfeature associated with the issuance of Series C Convertible Preferred Stock.

 

The above factors combined to result in a200.0% increase in net income available to common shareholders from a net lossof $455,000 in the third quarter of 2001 to a net income of  $455,000 in the third quarter of 2002, and anet loss per basic and diluted share of $0.22 for the third quarter of 2001compared to a net income per basic share of $0.21 and net income per diluted share of $0.16 for the third quarter of2002.   Year to date, net incomeavailable to common shareholders increased 207.2% from a net loss of $2,134,000in 2001 to a net income of  $2,287,000in 2002, and a net loss per basic and diluted share of $1.02 in 2001 comparedto a net income per basic share of $1.07 and net income per diluted share of $0.79 for 2002.

 

** **

**Balance Sheet**

 

Net accounts receivable increased 51.7% from$1,333,000 at December 31, 2001 to $2,022,000 at September 30, 2002 primarilydue to outstanding receivables related to services and software revenue.  Other assets increased 54.6% from $474,000at December 31, 2001 to $733,000 at September 30, 2002 primarily due to prepaidmarketing expense related to a one-year telemarketing commitment associatedwith the non-cash revenue transaction discussed previously.  Property and equipment increased 97.4% from$421,000 at December 31, 2001 to $831,000 at September 30, 2002, due to year todate depreciation and the write off of a third party software asset resultingfrom a change in technology used in our internal web-site development offset bythe third quarter purchase of technology from Extreme Logic to be used toenhance our eCRM solutions (See “Liquidity and Capital Resources” below).  Capitalized software decreased 18.6% from$1,762,000 at December 31, 2001 to $1,435,000 at September 30, 2002 due toadditional capitalization of $581,000 in development costs net of $908,000 inamortization.  Accounts Payableincreased 107.8% from $575,000 at December 31, 2001 to $1,195,000 at September30, 2002 primarily due to payables associated with the Extreme Logic contractand increased marketing and public relations activities.  Accrued employee compensation and benefitsincreased 113.1% from $145,000 at December 31, 2001 to $309,000 at September30, 2002 due to increased accruals related to increased incentives andcommissions consistent with increased software revenues and improved overallfinancial performance.  Some of theseaccrued incentives are not payable until current year-end results aredetermined.  Dividends payable decreased80.7% from $223,000 at December 31, 2001 to $43,000 at September 30, 2002 dueto the payment of dividends on preferred stock.

 

10

----

 

**Liquidity and Capital Resources**

 

As of September 30, 2002, the balance ofcash and cash equivalents was $3,663,000 compared to $1,860,000 at December 31,2001, which is an increase of $1,803,000 resulting from increased cash flowfrom operations.  We have no outstandinglong-term debt.

 

During 2002, asubstantial majority of our total revenue has been attributed to ourpartnership with a leading global services company.  While we expect that the revenues from this partnership willremain at high levels for the next two quarters based upon projects already inprocess, if this partnerdecreases its purchasing of our software and services, our revenues and cash positionwould be subject to significant decrease if not replaced with other significantaccounts.

 

On July 30, 2002, Firstwave signed anagreement with Extreme Logic, Microsoft’s Partner of the Year, to provide a..Net-based workflow and scripting engine and services to enhance our eCRMtechnology.  By licensing this proventechnology, we feel the technology risk associated with new development isdiminished, we gain a time-to-market advantage, and the cost to develop is lessthan building the technology in-house.

 

Our future capital requirements will dependon many factors, including our ability to maintain positive cash flows, as wellas the timing and extent of spending to support product development efforts andexpansion of sales and marketing, and market acceptance of our products.  We believe that our current cash positionand cash received from operations will continue to satisfy our cashrequirements for ongoing business operations. Our future capital needs will be highly dependent upon any changes in corporatestrategy that may occur, as well as our ability to control expenses andgenerate revenues.  Any projections offuture cash needs and cash flows are subject to substantial uncertainty.  If we are not able to generate sufficientcash from revenues, we may need to raise additional capital.

 

##### **Item 3**.  Quantitative and QualitativeDisclosures About Market Risk

 

Not applicable

 

##### ** **

##### **Item 4**.  Controls and Procedures

 

Our management, including our chiefexecutive officer and chief financial officer, supervised and participated inan evaluation of our disclosure controls and procedures (as defined in federalsecurities rules) within the 90 days before we filed this report.  Based on that evaluation, our CEO and CFOhave concluded that our disclosure controls and procedures were effective as ofthe date of that evaluation.

 

There were no significant changes in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

 

**PARTII.  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 ofSecurity Holders

None

 

Item 5.    Other Information

Not applicable

 

Item 6.    Exhibits and Reports on form 8-K

Exhibit10.26 Customer Agreement and Source Code License Agreement between FirstwaveTechnologies, Inc. and Extreme Logic, Inc. dated July 30, 2002.

Exhibit99.1

 

11

----

 

**SIGNATURES**

 

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

 
|                                |   | FIRSTWAVE TECHNOLOGIES,  INC. |                    |   |
|-------------------------------------|--------|-------------------------------|-------------------------|--------|
|                                |   |                          |                    |   |   |
|                                |   |                          |                    |   |   |
| DATE:   November 12, 2002 |   |                          | /s/ Judith A. Vitale    |   |   |   |
|                                |   |                          | Judith A. Vitale        |   |   |
|                                |   |                          | Chief Financial Officer |   |   |
|                                     |        |                               |                         |        |  |  |  |  |

 

12

----

 

I, Richard T. Brock, Chief Executive Officerof Firstwave Technologies, Inc., certify that:

 

1.  Ihave reviewed this quarterly report on Form 10-Q of Firstwave Technologies,Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material  weaknesses.

 
|   | Date:  November 12, 2002 |
|--------|-------------------------------|
|   |                          |   |
|   |                          | /s/ Richard T. Brock |   |
|   |                          | Richard T. Brock |

 

13

----

 

I, Judith A. Vitale, Chief Financial Officerof Firstwave Technologies, Inc.,, certify that:

 

1.  Ihave reviewed this quarterly report on Form 10-Q of Firstwave Technologies,Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this quarterlyreport is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material  weaknesses.

 
|   | Date:  November 12, 2002 |
|--------|-------------------------------|
|   |                          |   |
|   |                          | /s/ Judith A. Vitale |   |
|   |                          | Judith A. Vitale |

 

14

----