**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

** **

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

** **

**FOR THE QUARTER ENDED SEPTEMBER 30, 2001**

** **

**COMMISSION FILE NUMBER   0-21202**

** **

**FIRSTWAVE TECHNOLOGIES, 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 bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. ý YES o NO 

 

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 9, 2001

 

Common Stock, no par value                                       2,100,351 Shares

 

 

 

 

 

 

 

**FIRSTWAVETECHNOLOGIES, INC.**

** **

**FORM 10-Q**

** **

**For the quarter ended September 30, 2001**

 

 

**Index**

 
| Part I.  Financial Information                                                                                          |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                         |   |
| Item 1. Financial  Statements                                                                                                |   |
|                                                                                                                         |   |
|  Consolidated Balance Sheet -  December 31, 2000 and September 30, 2001                                                 |   |
|                                                                                                                         |   |
|  Consolidated  Statement of Operations - For the Three and Nine Months Ended September 30,  2000 and September 30, 2001 |   |
|                                                                                                                         |   |
|  Consolidated  Statement of Changes in Shareholders' Equity - For the Nine Months Ended  September 30, 2001             |   |
|                                                                                                                         |   |
|  Consolidated  Statement of Cash Flows - For the Nine Months Ended  September 30, 2000 and September 30, 2001 |   |
|                                                                                                                         |   |
|  Notes to  Consolidated Financial Statements                                                                            |   |
|                                                                                                                         |   |
|                                                                                                                         |   |
|                                                                                                                         |   |
| Item 2.Management's  Discussion and Analysis of Financial Condition and Results of Operations                                |   |
|                                                                                                                         |   |
|                                                                                                                         |   |
| Part II. Other Information                                                                                                   |   |

 

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**FIRSTWAVE TECHNOLOGIES, INC.** 

**Consolidated Balance Sheet**

**(in thousands)**

 
|                                                                                          |   | **Dec 31, 2000** |   | **Sept 30, 2001** |   |
|-----------------------------------------------------------------------------------------------|--------|------------------|--------|-------------------|--------|
|                                                                                          |   |             |   | **(unaudited)**   |   |
|                                                                                          |   |             |   |              |   |
| **ASSETS**                                                                                    |   |             |   |              |   |
|                                                                                          |   |             |   |              |   |
| Current assets:                                                                               |   |             |   |              |   |
| Cash and cash equivalents                                                                     |   | $                | 1,281  |              | $      | 1,230 |   |
| Restricted cash                                                                               |   | 2,200            |   | 0                 |   |
| Accounts receivable, less allowance for doubtful accounts  of $287 and $95, respectively |   | 1,774            |   | 939               |   |
| Prepaid expenses and other assets                                                             |   | 444              |   | 475               |   |
| Total current assets                                                                          |   | 5,699            |   | 2,644             |   |
|                                                                                          |   |             |   |              |   |
| Property and equipment, net                                                                   |   | 717              |   | 464               |   |
| Software development costs, net                                                               |   | 2,580            |   | 2,034             |   |
| Goodwill                                                                                      |   | 311              |   | 203               |   |
|                                                                                          |   | $                | 9,307  |              | $      | 5,345 |   |
|                                                                                          |   |             |   |              |   |
| **LIABILITIES AND  SHAREHOLDERS' EQUITY**                                                     |   |             |   |              |   |
|                                                                                          |   |             |   |              |   |
| Current liabilities:                                                                          |   |             |   |              |   |
| Accounts payable                                                                              |   | $                | 679    |              | $      | 636 |   |
| Deferred revenue                                                                              |   | 1,047            |   | 485               |   |
| Accrued employee compensation and benefits                                                    |   | 216              |   | 111               |   |
| Borrowings                                                                                    |   | 2,836            |   | 0                 |   |
| Dividends payable                                                                             |   | 113              |   | 74                |   |
| Other accrued liabilities                                                                     |   | 188              |   | 265               |   |
| Total current liabilities                                                                     |   | 5,079            |   | 1,571             |   |
|                                                                                          |   |             |   |              |   |
| Redeemable preferred stock                                                                    |   | 1,702            |   | 0                 |   |
|                                                                                          |   |             |   |              |   |
| Shareholders' equity                                                                          |   | 2,526            |   | 3,774             |   |
|                                                                                          |   | $                | 9,307  |              | $      | 5,345 |   |

** **

The accompanying notes are an integral part of these financialstatements.

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Operations**

**(in thousands, except per share amounts)**

**(unaudited)**

 
|                                                       |   | **For the Three Months Ended** |   | **For the Nine Months Ended** |
|------------------------------------------------------------|--------|--------------------------------|--------|-------------------------------|
|                                                       |   | **Sept 30,**                   |   | **Sept 30,**                  |   | **Sept 30,** |   | **Sept 30,** |   |
|                                                       |   | **2000**                       |   | **2001**                      |   | **2000** |   | **2001** |   |
| Net Revenues                                               |   |                           |   |                          |   |   |   |   |   |
| Software                                                   |   | $                              | 551    |                          | $ | 325 |   | $ | 2,255 |   | $ | 790 |   |
| Services                                                   |   | 770                            |   | 1,209                         |   | 2,183 |   | 2,755 |   |
| Maintenance                                                |   | 814                            |   | 743                           |   | 2,824 |   | 2,027 |   |
| Other                                                      |   | 42                             |   | 11                            |   | 194 |   | 74 |   |
|                                                       |   | 2,177                          |   | 2,288                         |   | 7,456 |   | 5,646 |   |
| Cost and Expenses                                          |   |                           |   |                          |   |   |   |   |   |
| Cost of revenues                                           |   |                           |   |                          |   |   |   |   |   |
| Software                                                   |   | 240                            |   | 335                           |   | 759 |   | 948 |   |
| Services                                                   |   | 544                            |   | 472                           |   | 1,835 |   | 1,433 |   |
| Maintenance                                                |   | 377                            |   | 249                           |   | 1,215 |   | 693 |   |
| Other                                                      |   | 31                             |   | 4                             |   | 154 |   | 46 |   |
| Sales and marketing                                        |   | 907                            |   | 546                           |   | 3,103 |   | 1,876 |   |
| Product development                                        |   | 181                            |   | 105                           |   | 718 |   | 447 |   |
| General and administrative                                 |   | 619                            |   | 550                           |   | 2,042 |   | 1,814 |   |
|                                                       |   | 2,899                          |   | 2,261                         |   | 9,826 |   | 7,257 |   |
|                                                       |   |                           |   |                          |   |   |   |   |   |
| Operating income/(loss)                                    |   | (722                           | )      | 27                            |   | (2,370 | ) | (1,611 | ) |
|                                                       |   |                           |   |                          |   |   |   |   |   |
| Interest income/(expense)                                  |   | 2                              |   | (15                           | ) | 79 |   | (59 | ) |
| Other income,  net                                         |   | 0                              |   | 0                             |   | 0 |   | 80 |   |
| Income/(loss) before income taxes                          |   | (720                           | )      | 12                            |   | (2,291 | ) | (1,590 | ) |
| Income taxes                                               |   | 0                              |   | (5                            | ) | (30 | ) | (6 | ) |
| Net income/(loss)                                          |   | $                              | (720   | )                             | $ | 7 |   | $ | (2,321 | ) | $ | (1,596 | ) |
|                                                       |   |                           |   |                          |   |   |   |   |   |
| Dividends on preferred stock                               |   | (23                            | )      | (462                          | ) | (98 | ) | (538 | ) |
|                                                       |   |                           |   |                          |   |   |   |   |   |
|                                                       |   |                           |   |                          |   |   |   |   |   |
| Net loss applicable to common shareholders                 |   | $                              | (743   | )                             | $ | (455 | ) | $ | (2,419 | ) | $ | (2,134 | ) |
|                                                       |   |                           |   |                          |   |   |   |   |   |
| Basic and diluted net loss per share                  |   | $                              | (0.35  | )                             | $ | (0.22 | ) | $ | (1.22 | ) | $ |  (1.02 | ) |
|                                                       |   |                           |   |                          |   |   |   |   |   |
| Basic and diluted weighted average shares outstanding |   | 2,096                          |   | 2,100                         |   | 1,980 |   | 2,099 |   |
|                                                            |        |                                |        |                               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these financialstatements.

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Changes inShareholders' Equity**

**(In thousands, except share data)**

**(unaudited)**

 

**For the Nine Months Ended September 30, 2001**

 

** **

 

 
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |
|-------------------------------------------------------|--------|------------------|--------|---------------------|--------|-----------------------------------------------|--------|----------------------------------|--------|--------|------------------------------|--------|--------|---------------------------------------------------------|--------|
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   | **Accumulated**

**Other**

**comprehensive**

**loss** |   |   |   |   |   |
|                                                  |   | **Common Stock** |   | **Preferred Stock** |   | **Add'l**

** ****paid-in**

**capital** |   | **Compre-****h****ensive  loss** |   |   | **Accumulated**

**Deficit** |   |   |                                                    |
|                                                  |   |             |
|                                                  |   | **Shares**       |   | **Amount**          |   | **Shares**                                    |   | **Amount**                       |   |   |                         |   |   | **Total**                                               |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Balance at  December 31, 2000 (1)                     |   | 2,096,157        |   | $                   | 12     |                                          | 0      |                             | $      | 0      |                         | $      | 22,587 |                                                    | $      | 0 |   | $ | (28 | ) | $ | (20,045 | ) | $ | 2,526 |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Exercise of  common stock options (1)                 |   | 567              |   | 0                   |   |                                          |   |                             |   | 3      |                         |   |   |                                                    |   |   |   | 3 |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Employee  stock purchases (1)                         |   | 3,556            |   |                |   |                                          |   |                             |   | 9      |                         |   |   |                                                    |   |   |   | 9 |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Shares  issued at reverse stock split due to rounding |   | 71               |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Series A  Convertible Preferred Stock (2)             |   |             |   |                |   | 10,000                                        |   | 1,000                            |   |   |                         |   |   |                                                    |   |   |   | 1,000 |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Series B  Convertible Preferred Stock (2)             |   |             |   |                |   | 7,020                                         |   | 702                              |   |   |                         |   |   |                                                    |   |   |   | 702 |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Series C  Convertible Preferred Stock (3)             |   |             |   |                |   | 16,667                                        |   | 1,131                            |   |   |                         |   |   |                                                    |   |   |   | 1,131 |   |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Dividends                                             |   |             |   |                |   |                                          |   |                             |   | (7     | )                            |   |   |                                                    |   |   |   | (7 | ) |
|                                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Comprehensive  loss:                                  |   |             |   |                |   |                                          |   |                             |   |   |                         |   |   |                                                    |   |   |   |   |   |
| Net loss                                              |   |             |   |                |   |                                          |   |                             |   |   |                         | (1,596 | )      |                                                    |   | (1,596 | ) | (1,596 | ) |
| Foreign  currency translation adjustment              |   |             |   |                |   |                                          |   |                             |   |   |                         | 6      |   | 6                                                       |   |   |   | 6 |   |
| Accumulated  comprehensive loss                       |   |             |   |                |   |                                          |   |                             |   |   |                         | (1,590 | )      |                                                    |   |   |   |   |   |
| Balance at  September 30, 2001                        |   | 2,100,351        |   | $                   | 12     |                                          | 33,687 |                             | $      | 2,833  |                         | $      | 22,592 |                                                    |   |   | $ | (22 | ) | $ | (21,641 | ) | $ | 3,774 |   |
|                                                       |        |                  |        |                     |        |                                               |        |                                  |        |        |                              |        |        |                                                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

| (1) |   | Represents  share values after 1 for 3 reverse stock split effective 9/12/01.                                                                                                            |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Represents  amounts reclassified from redeemable securities to permanent equity per an  amendment to the Company's Articles of Incorporation and shareholder approval  effective 9/7/01. |
| (3) |   | Represents  shares issued upon shareholder approval establishing Series C Preferred Stock  and conversion of debt as described in Note C                                                 |

 

The accompanying notes are an integral part of these financialstatements.

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Cash Flows**

**(in thousands)**

**(unaudited)**

 

 
|                                                   |   | **For the Nine Months Ended** |   |
|--------------------------------------------------------|--------|-------------------------------|--------|
|                                                   |   | **Sept 30, 2000**             |   | **Sept 30, 2001** |   |
|                                                   |   |                          |   |   |   |
| Cash flows used in operating activities                |   | $                             | (1,338 | ) | $ | (106 | ) |
|                                                   |   |                          |   |   |   |
| Cash flows from investing activities                   |   |                          |   |   |   |
| Software development costs                             |   | (1,235                        | )      | (373 | ) |
| Purchases of property and equipment                    |   | (221                          | )      | (49 | ) |
| 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    |   | 197                           |   | (422 | ) |
|                                                   |   |                          |   |   |   |
| Cash flows from financing activities                   |   |                          |   |   |   |
| Proceeds from borrowings                               |   | 2,200                         |   | 750 |   |
| Purchase of investments used to secure borrowings      |   | (2,200                        | )      | 0 |   |
| Proceeds from restricted cash used to secure borrowing |   | 0                             |   | 2,200 |   |
| Repayment of borrowings                                |   | 0                             |   | (3,586 | ) |
| Proceeds from issuance of preferred stock              |   | 0                             |   | 1,131 |   |
| Proceeds from issuance of common stock                 |   | 201                           |   | 12 |   |
| Payment of dividends on preferred stock                |   | (123                          | )      | (45 | ) |
| Net cash provided by financing activities              |   | 78                            |   | 462 |   |
|                                                   |   |                          |   |   |   |
| Effect of exchange rate changes on cash                |   | 19                            |   | 16 |   |
|                                                   |   |                          |   |   |   |
| Increase/(decrease) in cash and cash equivalents       |   | (1,044                        | )      | (50 | ) |
| Cash and cash equivalents, beginning of period         |   | 2,029                         |   | 1,281 |   |
| Cash and cash equivalents, end of period               |   | $                             | 985    |   | $ | 1,231 |   |
|                                                   |   |                          |   |   |   |
| Supplemental disclosure of cash flow information       |   |                          |   |   |   |
| Cash paid for income taxes                             |   | $                             | 30     |   | $ | 6 |   |
|                                                   |   |                          |   |   |   |
| Cash paid for interest                                 |   | $                             | 25     |   | $ | 86 |   |
|                                                        |        |                               |        |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these financial statements.

 

 

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Notes to Consolidated Financial Statements**

**September 30, 2001**

 

 

**A.            Basisof Presentation**

** **

Firstwave Technologies,Inc. (the "Company") is a provider of Internet customer relationshipmanagement solutions.  The FirstwaveeCRM (Internet-based Customer Relationship Management) Suite is an integrated,Internet-based suite of applications created to fulfill and manage thee-business relationship needs of a company in the areas of sales, marketing,and support.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the consolidated financialstatements do not include all of the information and footnotes required bygenerally accepted accounting principles and should be read in conjunction withthe consolidated financial statements contained in the Company’s Form 10-K forthe period ended December 31, 2000.  Inthe opinion of management, all adjustments (consisting only of normal recurringadjustments) considered necessary for a fair presentation of the consolidatedfinancial statements 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.            AccountingPolicies**

** **

**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 significantobligations remain 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 as maintenancerevenues, with the amount retained by distributors shown as a cost ofmaintenance revenue.

 

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

 

Advancedbillings for services and maintenance contracts are recorded as deferredrevenue on the Company's balance sheet, with revenue recognized as the servicesare performed and on a pro-rata basis for maintenance.

 

**Basic and diluted net loss per commonshare**

                Basic net loss per common share is based on theweighted average number of shares of common stock outstanding during theperiod.  Stock options and convertiblepreferred stock would have been included in the diluted earnings per sharecalculation had they not been antidilutive. Net loss applicable to common shareholders includes a charge fordividends related to the Company’s outstanding preferred stock.  Net loss applicable to common shareholdersfor the three and nine months ending September 30, 2001  includes a one-time non-cash charge incurredduring the third quarter applicable to a beneficial conversion featureassociated with the issuance by the Company of Series C Convertible PreferredStock.  The Series C ConvertiblePreferred Stock is convertible into common stock of the Company pursuant to aformula that was based upon 75% of the average trading price of the Company’scommon stock over the twenty trading days prior to shareholder approval toestablish this class of preferred stock. Because the conversion price determined by this formula was less thanthe trading price of the common stock on the commitment date, currentaccounting standards require the Company to determine the value of thisbeneficial conversion feature and to record that amount as a dividend onpreferred stock, resulting in a charge to net income available to commonshareholders.

 

**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, which are included in the results of operations, are insignificant forall periods presented.  Net exchangegains or losses resulting from the translation of assets and liabilities areincluded as a component of accumulated other comprehensive income inshareholders' equity.

 

                **Use of estimates**

 **              **Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  Actual results could differfrom those estimates.

 

#### **                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 andreporting standards for derivative instruments, including certain derivative instrumentsembedded in other contracts and for hedging activities.  The Company adopted SFAS 133 effectiveJanuary 1, 2001 and it did not have a material impact on the consolidatedfinancial statements.

 

In September 2000, the FASBissued SFAS No. 140, "Accounting for Transfers  and Servicing of Financial Assets and Extinguishments ofLiabilities."  This statementreplaces SFAS No. 125 and is effective for transfers and servicing occurringafter June 30, 2001 and, for certain provisions, fiscal years ending afterDecember 15, 2000.  The Company willaccount for activity under its Accounts Receivable Purchase Agreement(discussed in Note C) pursuant to SFAS No. 140.

 

In July 2001, the FASBissued SFAS No. 141, "Business Combinations," and SFAS No. 142,"Goodwill and Other Intangible Assets."  Under these new standards, the FASB eliminated accounting forcertain mergers and acquisitions as pooling of interests, eliminatedamortization of goodwill and indefinite life intangible assets and establishednew impairment measurement procedures for goodwill.  For calendar year reporting  companies, the standards become effective for all acquisitions completedon or after June 30, 2001, except with regard to business combinationsinitiated prior to July 1, 2001. Changes in financial statement treatment for goodwill and intangibleassets arising from mergers and acquisitions completed prior to June 30, 2001become 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. The Company is assessing the impact ofimplementing SFAS 142, and currently believes the implementation and effects ofthis statement will not have a material impact on the consolidated financialstatements.

 

 

**C.            Borrowings**

In second quarter 2001,  the Company signed an Accounts Receivable Purchase Agreement witha commercial bank whereby the Company may sell up to $500,000 of its eligibleaccounts receivable, as defined in the agreement.  Said agreement will expire one year from execution, bear interestat 1.85% per month on amounts outstanding, and be secured by the assets of theCompany.  As of September 30, 2001,there were no outstanding borrowings under this agreement.

 

On September 7, 2001, with shareholder approval, a$500,025 promissory note that the Company issued on July 18, 2001 at 9%interest held by Mercury Fund II. Ltd, was converted into 6,667 shares of theCompany’s Series C Convertible Preferred Stock.  Also, as required by the terms of the Mercury agreement andapproved by the Company’s shareholders, the Company also issued 10,000 sharesof Series C Convertible Preferred Stock to Richard Brock, President and CEO ofthe Company, on September 7, 2001, in exchange for the promissory note of theCompany in the principal amount of $750,000 held by Mr. Brock.

 

As of September 30, 2001, the Company has no outstanding long-term debt.

 

 

**D.            NASDAQListing**

** **

On August 3, 2001,Nasdaq notified the Company that its securities would continue to be listed onthe Nasdaq SmallCap Market with a temporary exception from the Net TangibleAsset and Minimum Bid Price requirements. The exception required the Company to report net tangible assets inexcess of $3.5 million by September 12, 2001, and for the Company’s commonstock to demonstrate a closing bid price at or above $1.00 per share on orbefore September 12, 2001 and immediately thereafter a closing bid price at orabove $1.00 for at least 10 consecutive trading days.  The Company’s plan to satisfy these conditions required that theCompany’s shareholders approve the following transactions as outlined in theCompany’s August 17, 2001 Proxy Statement:

 

1.     The sale and issuance of (i)6,667 shares of Series C Preferred Stock upon the conversion of the promissorynote in the original principal amount of $500,025 previously issued to MercuryFund II, Ltd. and (ii) contingent warrants to acquire up to 125,006 (on apre-reverse split basis) shares of common stock.

 

2.     The sale and issuance of10,000 shares of Series C Preferred Stock to Richard T. Brock, President andCEO of the Company, in exchange for the promissory note of the Company in theaggregate principal amount of $750,000 held by Mr. Brock.

 

3.     An amendment to theCompany’s Articles of Incorporation to eliminate certain provisions of theCompany’s Series A Convertible Preferred Stock and Series B ConvertiblePreferred Stock that require the Company to present and account for the SeriesA and B as “redeemable securities” rather than permanent equity in theCompany’s consolidated balance sheet.

 

4.     An amendment to the Company’s Articles ofIncorporation to effect a reverse stock split of all issued and outstandingshares of the Company’s common stock at a ratio not to exceed one-for-three.

 

On September 7, 2001,Shareholders approved the proposals outlined above and the Company’s Board ofDirectors voted to effect a one-for-three reverse stock split of the Company’scommon stock, effective September 12, 2001. The Form 8-K filed by the Company with the Securities and ExchangeCommission on September 12, 2001, evidenced net tangible assets in excess ofNasdaq’s requirement of $3.5 million and the Company’s stock price traded abovethe $1 minimum bid price for the requisite ten day period after trading resumedon a post-split basis effective September 18, 2001.  Nasdaq subsequently announced that it has temporarily suspendedenforcement of the $1.00 minimum bid price requirement for the remainder of2001.

 

The approval of proposalnumber 3 listed above resulted in the reclassification of $1,702,000 inPreferred Stock from temporary equity to permanent equity on the Company’sconsolidated Balance Sheet.

 

The reverse stock splitreduced the number of shares issued and outstanding from 6,300,841 to2,100,351. The Company did not issue fractional shares.

 

On September 28, 2001, Nasdaq notified the Company that it had compliedwith the requirements necessary for continued listing on the Nasdaq SmallCapMarket.

 

 

**E.            ****SubsequentEvents**

 

On October 1, 2001, the Audit Committee of the Board of Directors of theCompany approved the engagement of Cherry, Bekaert & Holland L.L.P. as theCompany’s independent accountants for the fiscal year ending December 31, 2001,and dismissed PricewaterhouseCoopers L.L.P.

 

 

 

**Item 2.**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Management’s Discussion and Analysis of**

**Financial Condition and Results ofOperations**

 

**Overview**

 

Firstwave Technologies, Inc. provides Internet-basedcustomer relationship management (eCRM) solutions.  The Company is based in Atlanta, Georgia with an office locatedin London, England.  Firstwave offerspowerful applications that optimize the sales, marketing and customer servicefunctions through a series of solutions. The Company supports threeproduct lines: Firstwave eCRM, Takecontrol®, and Firstwave for Unix.

 

**Resultsof Operations**

 

Total revenues increased5.1% from $2,177,000 in the third quarter of 2000 to $2,288,000 in the thirdquarter of 2001 primarily due to increased services revenue.  Year to date total revenues decreased 24.3%from $7,456,000 in 2000 to $5,646,000 in 2001. The year to date decrease isprimarily due to decreased software sales and decreased maintenance revenuesdue to nonrenewal of maintenance agreements by Takecontrol software customers.  Software revenues decreased 41.0% from$551,000 in the third quarter of 2000 to $325,000 in the third quarter of2001.  Year to date software revenuesdecreased 65.0% from $2,255,000 in 2000 to $790,000 in 2001.  The Company’s software revenues aresignificantly dependent upon the timing of closing of license agreements.

 

Services revenues increased 57.0% from $770,000 in the third quarter of2000 to $1,209,000 in the third quarter of 2001, and year to date increased26.2% from $2,183,000 in 2000 to $2,755,000 in 2001.  The increases are primarily due to increases in servicesengagements with existing customers.

 

Maintenance revenues decreased 8.7% from $814,000 in the third quarterof 2000 to $743,000 in the third quarter of 2001, and year to date, decreased28.2% from $2,824,000 for the first nine months of 2000 compared to $2,027,000for the first nine months of 2001.  Maintenance revenues are the result of renewal agreements from previoussoftware license sales.  The decreasesare primarily due to decreases in the Company’s Takecontrol installed base ofsystems covered under maintenance agreements.

 

Cost of software revenues increased 39.6% from $240,000 in the thirdquarter of 2000 to $335,000 in the third quarter of 2001.  Year to date, cost of software revenuesincreased 24.9% from $759,000 in 2000 to $948,000 in 2001.  The increases are primarily a result of theamortization of capitalized software additions of the Firstwave eCRM productline.  Cost of software revenues includecosts of third party software, amortization of capitalized software costs,media costs, and documentation materials.

 

Cost of revenues for services decreased 13.2% from $544,000 in thethird quarter of 2000 to $472,000 in the third quarter of 2001 due to decreasedpayroll and related costs.  Cost ofrevenues for maintenance decreased 34.0% from $377,000 in the third quarter of2000 to $249,000 in the third quarter of 2001 primarily due to decreasedpayroll and related costs.

 

Sales and marketingexpense decreased 39.8% from $907,000 in the third quarter of 2000 to $546,000in the third quarter of 2001 and year to date decreased 39.5% from $3,103,000in 2000 to $1,876,000 in 2001. The decreases are related to changes in theCompany’s marketing strategy which resulted in expense reductions for advertising,direct mail and e-mail campaigns, as well as, lower payroll costs associatedwith reduced staffing, and lower commission expense consistent with lowersoftware revenue.

 

The Company’s product innovation and development expenditures, whichincludes amounts capitalized, decreased 68.2% from $541,000 in the thirdquarter of 2000 to $172,000 in the third quarter of 2001.  Year to date, product innovation anddevelopment expenditures decreased 58.0% from $1,953,000 in 2000 to $820,000 in2001.  The decreases are primarilyrelated to decreased use of outside development contractors and thereallocation of some development resources to the services organization duringthird quarter 2001.  Softwaredevelopment costs capitalized during the three months and nine months endedSeptember 30, 2000 and September 30, 2001 were $360,000 and $1,235,000 and$67,000 and $373,000 respectively.

 

General and administrative expenses decreased 11.1% from $619,000 inthe third quarter of 2000 to $550,000 in the third quarter of 2001, and year todate decreased 11.2% from $2,042,000 in 2000 to $1,814,000 in 2001, primarilydue to decreases in personnel and personnel related costs.

 

Net interest income decreased 850.0% from $2,000 net interest income inthe third quarter of 2000 to $15,000 net interest expense in the third quarterof 2001 due to the decrease in invested cash balances and changes in the levelof borrowings during the period.

 

Year to date other income results from a settlement agreement relatedto the cancellation by a third party of a sublease of office space from theCompany, offset by losses related to the Company’s securities investments.

 

Dividends on preferred stock for third quarter 2001 include a one-timenon-cash charge of $417,000 applicable to a beneficial conversion featureassociated with the issuance of Series C Convertible Preferred Stock.  The Series C Convertible Preferred Stock,which was approved by the shareholders of the Company at the September 7, 2001 specialmeeting, is convertible into common stock at a price calculated pursuant to aformula that was based upon 75% of the average trading price of the commonstock over the twenty trading days prior to the shareholder meeting.  Because the conversion price determined bythis formula was less than the trading price of the common stock on thecommitment date, current accounting standards require the Company to determinethe value of the “beneficial conversion feature” and to record that amount as adividend on preferred stock, resulting in a charge to net income available tocommon shareholders as of the date any contingencies related to the issuanceare resolved, which was the date of shareholder approval, or September 7, 2001.

 

The above factors combined to result in a 38.8% decrease in net lossavailable to common shareholders from a net loss of $743,000 in the thirdquarter of 2000 to a net loss of $455,000 in the third quarter of 2001, and a net loss per share of $0.35for the third quarter of 2000 compared to a net loss per share of  $0.22 for the third quarter of 2001.  Year to date, net loss available to commonshareholders decreased 11.8% from a net loss of $2,419,000 in 2000 compared toa net loss of $2,134,000 in 2001. Year to date, net loss per share decreased16.4% from $1.22 per share in 2000 compared to $1.02 per share in 2001.

 

 

**BalanceSheet**

 

Net accounts receivable decreased 47.1% from $1,774,000 at December 31,2000 to $939,000 at September 30, 2001 due to collection of outstandingreceivables.  Property and equipmentdecreased 35.3% from $717,000 at December 31, 2000 to $464,000 at September 30,2001, due to year to date depreciation offset by additional fixed assetpurchases.  Capitalized softwaredecreased 21.2% from $2,580,000 at December 31, 2000 to $2,034,000 at September30, 2001 due to year to date amortization offset by additional capitalizationof development costs.   Accounts payabledecreased 6.3% from $679,000 to $636,000 due to vendor payments and decreasedexpenses.  Deferred revenue decreased53.7% from $1,047,000 at December 31, 2000 to $485,000 at September 30, 2001primarily due to the recognition of nine months of maintenance revenues relatedto annual contracts billed in advance at year end 2000.  Accrued employee compensation and benefitsdecreased 48.6% from $216,000 at December 31, 2000 to $111,000 at September 30,2001 due to decreased accruals related to lower personnel counts and decreasedcommission accruals consistent with lower software revenues.  Borrowings decreased 100% from $2,836,000 atDecember 31, 2000 to no borrowings at September 30, 2001 due to repayment ofall outstanding debt.

 

**Liquidityand Capital Resources**

 

As of September 30, 2001, the balance ofcash and cash equivalents was $1,230,000 compared to $1,281,000 at December 31,2000.   Since December 31, 2000, theCompany has repaid all outstanding debt. The Company has implementedseveral measures in an effort to reduce the Company's expenses and to help theCompany preserve cash.  These measuresinclude reduced staff levels, decreased marketing expenses, and decreased useof outside development contractors.

 

The Company’s future capital requirementswill depend on many factors, including its ability to increase revenue levelsand reduce costs of operations to generate positive cash flows, as well as thetiming and extent of spending to support product development efforts andexpansion of sales and marketing, and market acceptance of the Company’sproducts.  Although the Company hashistorically been able to satisfy its cash requirements, there can be noassurance that efforts to obtain sufficient financing for operations will besuccessful in the future.  The Company’sfuture capital needs will be highly dependent upon the Company’s ability tocontrol expenses and generate additional software license revenues, and anyprojections of future cash needs and cash flows are subject to substantialuncertainty.  If the Company is not ableto generate the revenues it is projecting, it may need to raise additionalcapital.  If the Company is unable to obtainthe necessary additional capital, it may be required to reduce the scope ofplanned product development and sales and marketing efforts, as well as reducethe size of current staff, all of which could have a material adverse effect onits business and financial condition, as well as the Company’s ability toreduce losses or generate profits.

 

On July 19, 2001 the Company entered into aConvertible Note Purchase Agreement with an investor providing funds to theCompany in the amount of $500,025 in exchange for a secured promissory notebearing interest at 9%.  As previouslydescribed, during the third quarter 2001, this note was automatically convertedinto 6,667 shares of Series C Convertible Preferred Stock upon approval by theCompany’s shareholders.

 

On August 3, 2001, Nasdaqnotified the Company that its securities would continue to be listed on theNasdaq SmallCap Market with a temporary exception from the Net Tangible Assetand Minimum Bid Price requirements.  Theexception required the Company to report net tangible assets in excess of $3.5million by September 12, 2001, and for the Company’s common stock todemonstrate a closing bid price at or above $1.00 per share by September 12,2001 and immediately thereafter a closing bid price at or above $1.00 for atleast 10 consecutive trading days.  TheCompany’s plan to satisfy these conditions required that the Company’sshareholders approve various transactions at a special meeting ofshareholders.  On September 7, 2001, shareholders approvedthe transactions and the Company’s Board of Directors voted to effect aone-for-three reverse stock split of the Company’s common stock, effectiveSeptember 12, 2001.  The Form 8-K filedby the Company with the Securities and Exchange Commission on September 12,2001, evidenced net tangible assets in excess of  Nasdaq’s requirement of $3.5 million and the Company’s stockprice traded above the $1 minimum bid price for the requisite ten day periodafter the reverse stock split was effective on September 18, 2001.

 

The reverse stock split reduced the number of shares issued andoutstanding from 6,300,841 to 2,100,351. The Company did not issue fractional shares.

 

The approval of proposal number 3 (discussed in Note D) resulted in thereclassification of $1,702,000 in Preferred Stock from temporary equity topermanent equity on the Company’s consolidated Balance Sheet.

 

On September 28,2001, Nasdaq notified the Company that it had complied with the requirementsnecessary for continued listing on the Nasdaq SmallCap Market.

 

 

 

**PART II.  OTHER INFORMATION**

 

Item 1.  LegalProceedings

 

                Not Applicable

 

Item 2. Changes in Securities

 

(1)           On July 19, 2001, the Company issueda $500,025 convertible secured promissory note to Mercury Fund II, Ltd.(“Mercury”).  The promissory noteprovided for an annual interest rate of 9% and a maturity date of the earlierof October 31, 2001 or the date that the promissory note were to convert intoshares of the Company’s Series C Convertible Preferred Stock.   Pursuant to the terms of the promissorynote, upon shareholder approval of the issuance of the Series C Preferred Stockat a special shareholder meeting held on September 7, 2001, the promissory noteautomatically converted into 6,667 shares of Series C Preferred Stock.  The shares of Series C Preferred Stock arein turn convertible at any time at the holder’s option into an aggregate of277,792 shares of the Company’s common stock at a conversion price of $1.80(both on a post-reverse split basis).

 

In connection with theissuance of the convertible secured promissory note to Mercury, the Companyalso issued a warrant to Mercury for the purchase of up to 125,006 (on apre-reverse split basis) shares of the Company’s common stock.  The warrant provided that it would becomeexercisable in only two instances -- (1) if the shareholders failed to approvethe issuance of the Series C Preferred Stock to Mercury, the warrant wouldbecome exercisable with an exercise price of $1.00 per share; and (2) if theshareholders approved the issuance to Mercury but the average price for theCompany's common stock over the 20 consecutive trading days prior to thespecial shareholders meeting were less than $.667 per share, in which case theexercise price would equal such average price. The warrant terminated without becoming exercisable when the Company’sshareholders approved the issuance of the Series C Preferred Stock to Mercuryat the September 7, 2001 special meeting.

 

(2)           On September 7, 2001, the Companyissued 10,000 shares of its Series C Convertible Preferred Stock to Richard T.Brock, the Company’s President and Chief Executive Officer, upon conversion ofa $750,000 amended and restated convertible secured promissory note dated July18, 2001 held by Mr. Brock.  This noteautomatically converted into Series C Preferred Stock upon shareholder approvalof the conversion at the September 7, 2001 special shareholder meeting.  The 10,000 shares of Series C PreferredStock are in turn convertible at any time at the holder’s option into anaggregate of 416,667 shares of the Company’s common stock at a conversion priceof $1.80 (both on a post-reverse split basis).

 

The sales of the securitieslisted above were exempt from registration under the Securities Act in relianceon Section 4(2) of the Securities Act, or Regulation D promulgated thereunder

 

Item 3. Defaults Upon Senior Securities

 

                Not applicable

 

 

Item 4. Submission of Matters to a Vote of Security Holders

 

The Special Meeting ofShareholders was held on September 7, 2001, in Atlanta, Georgia, at which thefollowing matters were submitted to a vote of the shareholders:

 

(i)                   to approve the sale andissuance of a new series of preferred stock, designated as the Series CConvertible Preferred Stock (and the issuance of shares of the Company’s commonstock into which such shares may convert), including (1) 6,667 shares of SeriesC Convertible Preferred Stock to Mercury Fund II, Ltd. upon the conversion ofthe $500,025 principal amount of the secured, short-term note between theCompany and Mercury Fund II, Ltd. and (2) up to an additional 10,000 shares ofSeries C Convertible Preferred Stock from time to time on substantially similarterms;

(ii)                  the sale and issuance of10,000 shares of Series C Convertible Preferred Stock (and the issuance ofshares of the Company’s common stock into which such shares may convert) toRichard T. Brock, President and CEO of the Company, upon the conversion of the$750,000 principal amount of the secured note held by Mr. Brock;

(iii)                 to approve an amendment to theCompany’s Amended and Restated Articles of Incorporation to eliminate certainprovisions that require the Company to treat its Series A Convertible PreferredStock and its Series B Convertible Preferred Stock as “redeemable securities”rather than long-term equity on the Company’s financial statements, and tochange the timing of dividend payments from annual to monthly; and

(iv)                to approve an amendment to theCompany’s Amended and Restated Articles of Incorporation to effect a reversestock split of all the issued and outstanding shares of the Company’s commonstock at a ratio not to exceed one-for-three.

The primary purpose of the transactionsproposed was to help the Company achieve compliance with the applicablecontinued listing requirements of The Nasdaq Stock Market (“Nasdaq”) governingcompanies listed on the Nasdaq SmallCap Market.  As a result of the Special Meeting, the Company’s shareholdersapproved all proposals.  The votes castfor, against, or abstained were as follows:

 
|   |   | **Votes For:** |   | **Votes Against:** |   | **Votes Abstained:** |   |
|--------|--------|----------------|--------|--------------------|--------|----------------------|--------|
|   |   |           |   |               |   |                 |   |
| (i)    |   | 4,129,979      |   | 315,775            |   | 5,895                |   |
| (ii)   |   | 3,122,899      |   | 322,606            |   | 6,145                |   |
| (iii)  |   | 4,132,196      |   | 314,303            |   | 5,150                |   |
| (iv)   |   | 5,692,494      |   | 859,078            |   | 5,170                |   |

 

 

Item 5. Other Information

 

Not applicable

 

Item 6. Exhibits and Reports on Form 8-K

 

Form 8-K filed September 12, 2001 reporting the votingresults of the Special Meeting of Shareholders of September 7, 2001 and thepresentation of a Pro-Forma Consolidated Balance Sheet demonstrating compliancewith Nasdaq Net Tangible Asset requirement of at least $3.5 million.

 

Form 8-K filed October5, 2001 reporting appointment of Cherry,Bekaert & Holland L.L.P. as the Company’s independent accountants for thefiscal year ending December 31, 2001, and dismissal of PricewaterhouseCoopersL.L.P.

 

**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 theundersigned thereunto duly authorized.

 
|                          |   |   |   |   | FIRSTWAVE TECHNOLOGIES, INC. |
|-------------------------------|--------|--------|--------|--------|------------------------------|
|                          |   |   |   |   |                         |   |
|                          |   |   |   |   |                         |   |
|                          |   |   |   |   |                         |   |
| DATE:   November 9, 2001 |   |   |   |   |                         | /s/ Judith A. Vitale |
|                          |   |   |   |   |                         |   |
|                          |   |   |   |   |                         | Judith A. Vitale |
|                          |   |   |   |   |                         | Vice President of Finance and Administration |
|                          |   |   |   |   |                         |   |