SECURITIES AND
EXCHANGE COMMISSION
 Washington,
DC 20549
 
 FORM
10-Q
 
 
 
 QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES
EXCHANGE ACT OF 1934
 
 FOR THE QUARTER
ENDED MARCH 31, 2005
 
 
 
 COMMISSION FILE
NUMBER 0-21202
 
 **FIRSTWAVE
TECHNOLOGIES, INC.**
 (Exact name of
Registrant as specified in its charter)
 
 
 
 **Georgia**
    **58-1588291**(State of
      incorporation)
    (IRS Employer
      ID #)
 
 
 
 **2859 Paces
Ferry Road, Suite 1000**
 **Atlanta, GA
30339**
 (Address of
principal executive offices)
 
 
 **770-431-1200**
 (Telephone number
of registrant)
 
 
 
 Indicate by check
mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
 Yes **X** No __
 
 
 Indicate by check
mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
 Yes__ No **X**
 
 Indicate the number
of shares outstanding of each of the issuer’s classes of common stock, as of the
latest practicable date.
 
 Outstanding as
of May 12, 2005:
 
 Common Stock, no
par value 2,707,458
shares
 
 
  
  **FIRSTWAVE
TECHNOLOGIES, INC.**
 
 **FORM
10-Q**
 
 **For the
quarter ended March 31, 2005**
 
 
 **Index**
 
 
 Page
      No.**Part
      I. Financial Information**Item 1. Financial StatementsConsolidated Balance Sheet - December 31, 2004
      and
      March 31, 2005
    3Consolidated Statement of Operations - For the Three Months
      Ended March 31, 2004 and March 31,
    2005
    4Consolidated Statement of Changes in Shareholders' Equity
      -
      For the Three Months Ended March 31,
      2005
    5Consolidated Statement of Cash Flows - For the Three
      Months
      Ended March 31, 2004 and March 31,
      2005
    5Notes to Consolidated Financial
    Statements
    7Item
      2.  Management's Discussion and Analysis of
    14Financial Condition and Results of
    OperationsItem 3. Quantitative and Qualitative Disclosures About Market
      Risk
    16Item 4. Controls and Procedures
    16**Part
      II. Other Information**
    16
 
  2
 Index
  **Part I. FINANCIALINFORMATION**
 
 **Item 1. FinancialStatements**
 
  **FIRSTWAVE
      TECHNOLOGIES, INC.****Consolidated
      BalanceSheet****(in
      thousands)****(Unaudited)****Dec
      31,**
    
    **Mar
      31,****2004**
    
    **2005****ASSETS****Current
      assets****Cash
      and cash equivalents**
    
    $
    1,286
    
    $
    842**Accounts
      receivable, less allowance for****doubtful
      accounts of $98 and $81, respectively**
    
    
    605
    
    
    504**Other
      prepaid expenses**
    
    
    565
    
    
    546**Total
      current assets**
    
    
    2,456
    
    
    1,892**Property
      and equipment, net**
    
    
    264
    
    
    208**Software
      development costs, net**
    
    
    1,095
    
    
    904**Intangible
      assets**
    
    
    800
    
    
    743**Goodwill**
    
    
    1,658
    
    
    1,639**Total
      assets**
    
    $
    6,273
    
    $
    5,386**LIABILITIES
      AND SHAREHOLDERS' EQUITY****Current
      liabilities****Accounts
      payable**
    
    $
    581
    
    $
    585**Deferred
      revenue**
    
    
    1,351
    
    
    1,308**Accrued
      employee compensation and benefits**
    
    
    156
    
    
    154**Dividends
      payable**
    
    
    46
    
    
    46**Other
      accrued liabilities**
    
    
    290
    
    
    120**Total
      current liabilities**
    
    
    2,424
    
    
    2,212**Shareholders'
      equity**
    
    
    3,849
    
    
    3,174**Total
      liabilities and shareholders' equity**
    
    $
    6,273
    
    $
    5,386**The
      accompanying notes are an integral part of these financial
      statements.**
 3
 Index
  
 **FIRSTWAVE
      TECHNOLOGIES, INC.****Consolidated
      Statementof Operations****(in
      thousands, except per share amounts)****(unaudited)****For
      the Three Months Ended****Mar
      31,**
    
    **Mar
      31,****2004**
    
    **2005****Net
      Revenues****Software**
    
    $
    341
    
    $
    82**Services**
    
    
    622
    
    
    412**Maintenance**
    
    
    664
    
    
    654**Other**
    
    
    34
    
    
    221,661
    
    
    1,170**Cost
      and Expenses****Cost
      of revenues****Software**
    
    
    371
    
    
    204**Services**
    
    
    620
    
    
    504**Maintenance**
    
    
    141
    
    
    102**Other**
    
    
    27
    
    
    22**Sales
      and marketing**
    
    
    774
    
    
    321**Product
      development**
    
    
    360
    
    
    194**General
      and administrative**
    
    
    626
    
    
    475**Foreign
      currency exchange (Gain)/Loss**
    
    
    (127
    )
    
    1582,792
    
    
    1,980**Operating
      loss**
    
    
    (1,131
    )
    
    (810
    )**Interest
      income/(expense),net**
    
    
    (1
    )
    
    60**Loss
      before income taxes**
    
    
    (1,132
    )
    
    (750
    )**Income
      taxes**
    
    
    0
    
    
    0**Net
      loss**
    
    $
    (1,132
    )
    $
    (750
    )**Dividends
      on preferred stock**
    
    
    (55
    )
    
    (71
    )**Net
      loss applicable to****common
      shareholders**
    
    $
    (1,187
    )
    $
    (821
    )**Basic:****Loss
      per share**
    
    $
    (0.44
    )
    $
    (0.30
    )**Weighted
      average shares**
    
    
    2,674
    
    
    2,694**Diluted:****Loss
      per share**
    
    $
    (0.44
    )
    $
    (0.30
    )**Weighted
      average shares**
    
    
    2,674
    
    
    2,694**The
      accompanying notes are an integral part of these financial
      statements.**
 
 
  4
 Index
  **FIRSTWAVE
      TECHNOLOGIES, INC.****Consolidated
      Statement of Changesin Shareholders'
      Equity****(In
      thousands, except share data)****(unaudited)****For
      the Three Months Ended March 31, 2005****Accumulated****Other****Common
      Stock**
    
    **Preferred
      Stock**
    
    **Additional**
    
    **Compre-**
    
    **compre-****paid-in**
    
    **hensive**
    
    **hensive**
    
    **Accumulated****Shares**
    
    **Amount**
    
    **Shares**
    
    **Amount**
    
    **capital**
    
    **loss**
    
    **loss**
    
    **Deficit**
    
    **Total****Balance
      at December 31, 2004**
    
    
    2,693,993
    
    $
    13
    
    
    34,020
    
    $
    3,011
    
    $
    25,485
    
    
    
    
    
    ($754
    )
    $
    (23,906
    )
    $
    3,849**Exercise
      of common stock options**
    
    
    666
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1**Issuance
      of common stock**
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1**Dividends**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    
    
    
    
    
    
    
    
    (71
    )**Comprehensive
      loss****Net
      loss**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ($750
    )
    
    
    
    
    (750
    )
    
    (750
    )**Foreign
      currency translation adjustment**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144
    
    
    144
    
    
    
    
    
    144**Comprehensive
      loss**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ($606
    )**Balance
      at March 31, 2005**
    
    
    2,695,177
    
    $
    13
    
    
    34,020
    
    $
    3,011
    
    $
    25,416
    
    
    
    
    
    ($610
    )
    $
    (24,656
    )
    $
    3,174**The
      accompanying notes are an integral part of these financial
      statements.**
 
 5
 Index
  **FIRSTWAVE
      TECHNOLOGIES, INC.****Consolidated
      Statement of CashFlows****(in
      thousands)****(unaudited)****For
      the Three Months Ended****March
      31, 2004**
    
    **March
      31, 2005****Cash
      flows provided by/(used in) operating activities**
    
    $
    (686
    )
    $
    (529
    )**Cash
      flows from investing activities****Software
      development costs**
    
    
    (74
    )
    
    0**Purchases
      of property and equipment, net**
    
    
    (85
    )
    
    (10
    )**Acquisition
      of Connect-Care**
    
    
    0
    
    
    16**Net
      cash provided by/(used in) investing activities**
    
    
    (159
    )
    
    6**Cash
      flows from financing activities****Proceeds
      from issuance of preferred stock**
    
    
    0
    
    
    0**Proceeds
      from issuance of common stock**
    
    
    4
    
    
    2**Payment
      of dividends on preferred stock**
    
    
    (55
    )
    
    (71
    )**Net
      cash used in financing activities**
    
    
    (51
    )
    
    (69
    )**Foreign
      currency translation adjustment**
    
    
    (97
    )
    
    148**Decrease
      in cash and cash equivalents**
    
    
    (993
    )
    
    (444
    )**Cash
      and cash equivalents, beginning of period**
    
    
    2,704
    
    
    1,286**Cash
      and cash equivalents, end of period**
    
    $
    1,711
    
    $
    842**Supplemental
      disclosure of cash flow information****Cash
      paid for income taxes**
    
    $
    0
    
    $
    0**Cash
      paid for interest**
    
    $
    6
    
    $
    0**The
      accompanying notes are an integral part of these financial
      statements.**
     6
 Index
  **FIRSTWAVE
TECHNOLOGIES, INC.**
 **Notesto Consolidated Financial Statements**
 **March 31,
2005**
 
 
 **1.**  **Description of Business and Basis of Presentation**
 
 ***Description
of the Company***
 Headquartered in
Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies,
Inc. (“Firstwave” or “the Company”) is a global provider
of strategic CRM solutions specifically designed for the High Technology and
Sports industries. Firstwave’s solutions provide companies with fit-to-purpose
features that are designed to optimize how companies win, maintain and grow
customer and organizational relationships while improving the overall customer
experience. Firstwave’s corporate and product mission reflects
our customer-first commitment: To develop and integrate the best software
solutions to manage customer interactions and information. Firstwave supports
several product lines: Firstwave CRM (includes eCRM and v.10 products),
Firstwave Sports, Firstwave Technology and TakeControl.
 
 ***Basis
of Presentation***
 The accompanying
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, the consolidated financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements and
should be read in conjunction with the consolidated financial statements
contained in the Company’s Form 10-K for the period ended December 31, 2004. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of the consolidated
financial statements have been included.
 
 The consolidated
balance sheet at December 31, 2004 has been derived from the audited
consolidated financial statements for the Company at that date, but does not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements.
 
 The consolidated
financial statements include the accounts of Firstwave Technologies, Inc. and
its wholly owned subsidiaries, Connect-Care, Inc. and Firstwave Technologies UK,
Ltd. All intercompany transactions and balances have been eliminated in
consolidation.
 
 **2.**  **Use of
Estimates and Critical Accounting Policies**
 
 ***Use of
Estimates***
 The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Examples of estimates that require management’s judgment include revenue
recognition, accounts receivable reserve, valuation of long-lived assets and
intangible assets, and goodwill. Management bases its estimates on historical
experience and on other various factors that are believed to be reasonable under
the circumstances. All accounting estimates and the basis for these estimates
are discussed among the Company’s senior management and members of the Audit
Committee. Actual results could differ from those estimates.
 
 ***Critical
Accounting Policies***
 The Company
believes that the following accounting policies are critical to understanding
the consolidated financial statements:
 ·  Revenue
Recognition
 ·  Capitalization of
Software Development Costs
 ·  Intangible Assets
 
 **3.**  **Summary
of Significant Accounting Policies**
 
 ***Revenue
recognition***
 The Company
recognizes revenue in accordance with Statement of Position (SOP) 97-2,
“Software Revenue Recognition,” as amended by SOP 98-9, and related
interpretations.
  7
 Index
  Revenue from
software product sales (other than ticketing and fan memberships described
below) is recognized upon shipment of the product when the Company has a signed
contract, the fees are fixed and determinable, no significant obligations remain
and collection of the resulting receivable is probable. The Company accrues for
estimated warranty costs at the time it recognizes revenue.
 
 The Company’s
products are licensed on a per-user model, except for hosting services. In
accordance with Paragraph 8 of SOP 97-2, license revenues under the per-user
model are recognized under the Company’s revenue recognition polices when
revenue recognition criteria are met. Hosting services are priced as a monthly
or yearly fixed amount based upon number of users, and are recognized ratably by
month over the period of service. Hosting services revenues are consolidated
into services revenues on the Company’s financial statements.
 
 The Company has
agreements with customers, whereby it will recognize revenue at a future date.
This type of agreement is mostly found in the Company’s Sports business, where
the Company recognizes revenue based on a per-ticket or per-fan membership basis
after the actual event has occurred. The amount the Company will receive per
ticket or membership is variable, but is pre-determined in the terms of the
agreements. Although tickets may be sold in advance of the event, the Company
will recognize these revenues after the event occurs. Ticketing revenue is
consolidated into software revenues on the Company’s financial statements.
 
 Services revenue is
recognized as services are performed. Our software product is able to function
independently in a customer’s environment without additional services. Our
training, implementation, and customization services are optional services to
our customers and are not necessary for the functioning of the software product.
Our software is offered as a stand-alone product. It can be implemented with
minimal services. The essential functionality of the software, such as database
support and maintenance, preparation of marketing campaigns, and standard
workflow, is functional and can be utilized by the customer upon installation as
intended by the customer. At a customer’s request, the software can also be
implemented with additional services, such as data conversion and workflow
modifications, which are not significant to the functionality of the software,
but rather tailor features to most effectively function in the customer’s
environment.
 
 The revenue for the
customization or implementation services is recognized as the services are
provided and earned. Revenue is allocated to software and services based on
vendor specific objective evidence of fair values. Because the software is a
stand-alone product that can be used for the customer’s purpose upon
installation, and because any services performed have insignificant effect on
the functionality of the software, services revenues are accounted for
separately from Software Revenues in accordance with Paragraph 69 of SOP
97-2.
 
 The Company has not
recorded any unbilled receivables related to implementation and customization
service revenues, and the Company has accounted for any implementation and
customization service revenues that have been billed as the services were
performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.
 
 The Company has
arrangements with customers that provide for the delivery of multiple elements,
including software licenses and services. The Company allocates and recognizes
revenue related to each of the multiple elements based on vendor specific
objective evidence of the fair value of each element and when there are no
undelivered elements essential to the functionality of the delivered element.
Vendor specific objective evidence is based on standard pricing for each of the
elements in our multiple element arrangements. Revenue associated with the
various elements of multiple element arrangements is based on such vendor
specific objective evidence as the price charged for each element is the same as
when the element would be sold separately from any other element. Standard
pricing does not vary by customer or by duration, or by requirements of the
arrangement.
 
 International
revenues are primarily generated by Firstwave UK and independent distributors
who offer licenses of the Company's products in specific geographic areas. Under
the terms of the Company's international distributor agreements, international
distributors collect license fees and maintenance revenues on behalf of the
Company, and remit 50% to 60% of standard license fees and maintenance revenues
they produce. Pursuant to EITF 99-19, the Company recognizes these distributor
sales at the gross license amount because the Company retains title to the
products, holds the risk and rewards of ownership, such as risk of loss for
collection, and responsibility for providing the product to the customer. The
Company is responsible for establishing and maintaining the pricing of the
product and performs any source code changes to the product. The independent
distributors are considered agents of the Company and work on a commission
basis. The commissions paid are reflected as a selling expense in the Company’s
financial statements. The maintenance fees generated by distributor revenues are
reflected as maintenance revenues, with the amount retained by distributors
shown as a cost of maintenance revenue. Revenues from
non-monetary exchanges are recorded at the fair value of the products and
services provided or received, whichever is more clearly evident. There were no
non-monetary transactions in the first quarter of 2005.
 
 Maintenance revenue is recognized on
a****pro rata basis over
the term of the maintenance agreements.
  8
 Index
  
 Advanced billings
for services and maintenance contracts are recorded as deferred revenue on the
Company's balance sheet, with revenue recognized as the services are performed
and on a pro-rata basis over the term of the maintenance agreements.
 
 The Company
provides an allowance for doubtful accounts based on management’s estimate of
receivables that will be uncollectible. The estimate is based on historical
charge-off activity and current account status. Accounts Receivable are stated
at invoiced amounts.
 
 The Company’s US
accounting management oversees reporting procedures in the United Kingdom and
monitors their transactions on a timely basis. The US management reviews
transactions and sales contracts as such transactions and sales are occurring to
ensure that revenues are recognized under the Company’s revenue recognition
policy and that expenses and other transactions are reported in accordance with
accounting principles generally accepted in the United States. Management of the
UK subsidiary report directly to US management, with US management substantially
involved in all aspects of UK operations. As such, US management has established
procedures to insure that international revenues are recognized properly and on
a timely basis.
 
 **Software
development costs**
 Capitalized
software development costs consist principally of salaries, contract services,
and certain other expenses related to development and modifications of software
products capitalized in accordance with the provisions of SFAS 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”
Capitalization of such costs begins only upon establishment of technological
feasibility as defined in SFAS 86 and ends when the resulting product is
available for sale. The Company evaluates the establishment of technological
feasibility based on the existence of a working model of the software product.
Capitalized costs may include costs related to product enhancements resulting in
new features and increased functionality as well as writing the code in a new
programming language. In this case, as the version enhancements are built on an
already detailed design under an existing source code, technological feasibility
is established early for each version. All costs incurred to establish the
technological feasibility of software products are classified as research and
development and are expensed as incurred.
 
 The Company
evaluates the realizability of unamortized capitalized software costs at each
balance sheet date. Software development costs which are capitalized are
subsequently reported at the lower of unamortized cost or net realizable value.
If the unamortized capitalized software cost exceeds the net realizable value of
the asset, the amount would be written off accordingly. The net realizable value
of the capitalized software development costs is the estimated future gross
revenues of the software product reduced by the estimated future costs of
completing and disposing of that product. Amortization of capitalized software
costs is provided at the greater of the ratio of current product revenue to the
total of current and anticipated product revenue or on a straight-line basis
over the estimated economic life of the software, which is not more than three
years. It is possible that those estimates of anticipated product revenues, the
remaining estimated economic life of the product, or both could be reduced due
to changing technologies. The amortization of software development costs is
presented as a cost of software revenue in the Company’s financial
statements.
 
 **Goodwill
and other intangibles**
 In
accordance with SFAS 142 “Goodwill and Other Intangible Assets,” intangible
assets with indefinite useful lives must be tested periodically for impairment.
Examples of matters requiring management’s judgment regarding the existence of
impairment of an intangible asset, and the resulting fair value, would include
management’s assessment of adverse changes in legal factors, market conditions,
or loss of key personnel. If the fair value of the intangible asset is
determined to be less than the carrying value, the Company would record an
impairment loss. SFAS 142 prescribes a two-phase approach for impairment testing
of goodwill. The first phase screens for impairment, while the second phase (if
necessary) measures the impairment. Goodwill was evaluated for impairment at the
end of the first quarter of 2005 in accordance with SFAS 142 “Goodwill and Other
Intangible Assets,” and it was determined there was no instance of impairment of
recorded Goodwill.
 
 **Concentration
of credit risk**
 The Company is
subject to credit risk primarily due to its trade receivables. The Company has
credit risk due to the high concentration of trade receivables through certain
customers. The Company has three customers, two in its Technology business and
one in its Sports business, which individually accounted for more than ten
percent of the Company’s total accounts receivable at December 31, 2004 and at
March 31, 2005. The customer accounts receivable that represented more than 10%
of total accounts receivable are shown below.
  9
 Index
  
 **Dec
      31,**
    
    **Mar
      31,****2004**
    
    **2005**Argos,
      Ltd
    
    
    13.8
    %
    
    0.0
    %British Canoe
      Union
    
    
    10.7
    %
    
    3.6
    %CapGemini
      UK
    
    
    12.6
    %
    
    0.0
    %Sungard HTE,
      Inc.
    
    
    15.0
    %
    
    5.2
    %Manhattan
      Associates
    
    
    1.6
    %
    
    20.8
    %
 
 **Significant
Customers**
 The table below
identifies customers who contributed more than 10% of total revenue for each
period shown.
 
 **For
      the Three Months Ended****Mar
      31,**
    
    **Mar
      31,****2004**
    
    **2005**Electronic
      Data Systems, Ltd.
    
    
    22.5
    %
    
    6.2
    %Sports Coach
      UK
    
    
    13.6
    %
    
    2.9
    %
 
 For a more detailed
description of the information presented in the table above, see the discussion
under the heading “Results of Operations” in Item 2 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
 
 **Stock-based
compensation**
 Effective for 2002,
the Company adopted SFAS 148, “Accounting for Stock-Based Compensation -
Transition and Disclosure,” which did not have a material impact on the
consolidated financial statements. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations and to elect the disclosure option of
SFAS 123, "Accounting for Stock-Based Compensation.” Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
 
 The Company has
adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based
Compensation." The following table illustrates the effect on net loss and net
loss per share if the Company had applied the fair value recognition provisions
of SFAS 123 to stock-based employee awards (in thousands, except per share
data):
 
 **For
      the Three Months Ended****March
      31, 2004**
    
    **March
      31, 2005**Net loss
      applicable to commonshareholders,
      as reported
    
    $
    (1,187
    )
    $
    (821
    )Stock based
      employee compensation, net of relatedtax effects
      under the fair value based method
    
    
    172
    
    
    21Net loss
      applicable to commonshareholders,
      as adjusted
    
    $
    (1,359
    )
    $
    (842
    )Loss per
      share:Basic - as
      reported
    
    $
    (0.44
    )
    $
    (0.30
    )Basic - as
      adjusted
    
    $
    (0.51
    )
    $
    (0.31
    )Diluted - as
      reported
    
    $
    (0.44
    )
    $
    (0.30
    )Diluted - as
      adjusted
    
    $
    (0.51
    )
    $
    (0.31
    )
 
  10
 Index
  
 The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
the quarters ended March 31, 2004 and March 31, 2005, respectively: dividend
yield of 0% for both quarters; expected volatility of 133% and 127%, and
risk-free interest rate of 2.99% and 3.88%.
 
 There were no new
options granted during the first quarter of 2005. The reduction in stock based
employee compensation from $172,000 to $21,000 is a result of a large number of
cancellations of stock options during the quarter due to staff resignations of
certain long-term employees.
 
 There is no tax
benefit included in the stock-based employee compensation expense determined
under the fair-value-based method for the three month periods ended March 31,
2004 and March 31, 2005, as the Company established a full valuation allowance
for its net deferred tax assets.
 ****
 **Basic and
diluted net loss per common share**
 Basic net loss per
common share is based on the weighted average number of shares of common stock
outstanding during the period. Stock options and convertible preferred stock are
included in the diluted earnings per share calculation when they are not
antidilutive. Net loss applicable to common shareholders includes a charge for
dividends related to the Company’s outstanding preferred stock.
 
 Shown below is a
reconciliation of the numerators and denominators of the basic and diluted loss
per share computations. (in thousands, except per share data):
 
 **For
      the Three Months Ended**
    
    **For
      the Three Months Ended****March
      31, 2004**
    
    **March
      31, 2005**Income
    
    Shares
    
    Per
      Share
    
    Income
    
    Shares
    
    Per
      Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountNet
      loss
    
    $
    (1,132
    )
    
    
    
    
    
    
    $
    (750
    )Less:
      Preferred Stock Dividends
    
    
    (55
    )
    
    
    
    
    
    
    
    (71
    )**Basic
      EPS**Loss
      applicable to common shareholders
    
    $
    (1,187
    )
    
    2,674
    
    $
    (0.44
    )
    $
    (821
    )
    
    2,694
    
    $
    (0.30
    )**Effect
      of Dilutive Securities** (1)Warrants
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    19Convertible
      Preferred Stock
    
    
    55
    
    
    665
    
    
    
    
    
    71
    
    
    898Stock
      Options
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    455
    
    
    706
    
    
    
    
    
    71
    
    
    921**Diluted
      EPS**Loss
      applicable to common shareholders
    
    $
    (1,187
    )
    
    2,674
    
    $
    (0.44
    )
    $
    (821
    )
    
    2,694
    
    $
    (0.30
    )(1)
      Not included because anti-dilutive
 ****
 **Foreign
currency translation**
 The financial
statements of the Company's international subsidiary are translated into U.S.
dollars at current exchange rates, except for revenues and expenses, which are
translated at average exchange rates during each reporting period. Currency
transaction gains or losses are included in the results of operations as general
and administrative expenses in the Company’s financial statements. Net exchange
gains or losses resulting from the translation of assets and liabilities are
included as a component of accumulated other comprehensive loss in shareholders'
equity.
 ****
 **Impairment
of long-lived assets**
 The Company
evaluates impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If the sum of the expected future undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss would be recognized.
Measurement of an impairment loss for long-lived assets would be based on the
fair value of the asset.
  11
 Index
  
 **Segment
reporting**
 Management believes
that the Company has only a single segment consisting of software sales with
related services and support. The information presented in the consolidated
statement of operations reflects the revenues and costs associated with this
segment that management uses to make operating decisions and assess performance.
 
 **4.**  **Goodwill
and Intangibles**
 
 The Company has
$743,000 of Intangible Assets and $1,639,000 of Goodwill as a result of
acquisitions in 1998 and 2003.
 
 In
accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
assets with indefinite useful lives must be tested periodically for impairment.
Examples of Management’s judgment regarding the existence of impairment of an
intangible asset and the resulting fair value, would include management’s
estimates of future net cash flows and assessment of adverse changes in legal
factors, market conditions, or loss of key personnel. If the fair value of the
intangible asset is determined to be less than the carrying value, the Company
would record an impairment loss. SFAS No. 142 prescribes a two-phase approach
for impairment testing of goodwill. The first phase screens for impairment,
while the second phase (if necessary) measures the impairment. During year-end
2004 Goodwill was evaluated for impairment in accordance with SFAS No. 142. As a
result of the review, it was determined that there was an impairment of
goodwill, and the second phase was required. The second phase resulted in the
Company recording a non-cash impairment charge of $750,000 to write-off a
portion of the carrying value of goodwill at December 31, 2004. Goodwill was
again evaluated for impairment during the first quarter of 2005 and it was
determined there was no further impairment of recorded goodwill.
  The weighted
average amortization period for the intangible assets with definite lives is six
years. There are no significant residual values in the intangible assets. The
Company began amortization of the above mentioned intangible assets relating to
the acquisitions effective April 1, 2003, recording $57,000 in amortization
expense in the first quarter of 2005.
 
 The following table
presents details of intangible assets with definite lives (in
thousands):
 
 **December
      31, 2004**
    
    **March
      31, 2005**Gross
      carrying
    
    Accumulated
    
    Gross
      carrying
    
    Accumulatedamount
    
    amortization
    
    amount
    
    amortizationAmortizable
      intangible assetsConnect-Care
      Technology
    
    $
    300
    
    $
    175
    
    $
    300
    
    $
    200Connect-Care
      Customer Relationships
    
    
    900
    
    
    225
    
    
    900
    
    
    257Total
    
    $
    1,200
    
    $
    400
    
    $
    1,200
    
    $
    457Aggregrate
      Amortization ExpenseFor the three
      months ended March 31, 2005
    
    $
    57Estimated
      Amortization ExpenseFor year
      ended December 31, 2005
    
    $
    229For year
      ended December 31, 2006
    
    $
    154For year
      ended December 31, 2007
    
    $
    129For year
      ended December 31, 2008
    
    $
    129For year
      ended December 31, 2009
    
    $
    129
 
 **5** .  **Borrowings**
 
 On
July 29, 2003, the Company signed a one-year “Revolving Credit Facility” loan
with RBC Centura whereby the Company may borrow up to $1,000,000. The Company
had borrowings of $500,000 against the line of credit as of March 31, 2004. The
Revolving Facility bears interest at a variable rate equal to the one month
London Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC Centura
Prime Rate” plus 0.50%, at our option. The weighted average interest rate for
the three months ended March 31, 2004 was 4.10%. The first $500,000 of the
Revolving Facility is available on a non-formula basis. Once advances under the
Revolving Facility exceed $500,000,
  12
 Index
  any advances are
based on a borrowing base of 75% of eligible accounts receivable as determined
by a certified borrowing base report. The loan is secured by the assets of the
Company. The Company must comply with certain financial covenants per the terms
of the agreement. As of March 31, 2004, the Company was in compliance with the
required covenants.
 
 The Company repaid
its $500,000 of borrowings under the line of credit in full on December 30, 2004
and, on March 1, 2005, cancelled the Revolving Credit Facility. The Company had
no borrowings at March 31, 2005. The Company paid $6,500 in interest expense in
the first quarter of 2004, and no interest expense was incurred during the first
quarter of 2005.
 
 **6.**  **Related
Party Transactions** ****
 
 The former
President and COO of the Company, who resigned from the Company on March 22,
2005, was paid dividends of $675 in the first quarter of 2005 related to his
$30,000 investment in Series D Convertible Preferred Stock from June of 2004.
The Chairman and CEO of the Company was paid $50,625 in the first quarter of
2005 for dividends related to his $2,250,000 investment in Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible
Preferred Stock.
 
 **7.**  **Impact
of Recently Issued Accounting Standards**
 
 In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) will require companies to measure
all employee stock-based compensation awards using a fair value method and
record such expense in its financial statements. In addition, the adoption of
SFAS No. 123(R) requires additional accounting and disclosure related to the
income tax and cash flow effects resulting from share-based payment
arrangements. SFAS No. 123(R) is effective as of the first annual reporting
period beginning after December 15, 2005. The Company is currently evaluating
the impact that the adoption of SFAS No. 123(R) will have on its financial
position, results of operations and cash flows. The cumulative effect of
adoption, if any, will be measured and recognized in the statement of operations
on the date of adoption.
 
 In
April 2005, the Securities and Exchange Commission’s Office of the Chief
Accountant and its Division of Corporation Finance has released Staff Accounting
Bulletin (SAB)_No. 107 to provide guidance regarding the application of FASB
Statement No. 123 (revised 2004), “Share-Based Payment”, Statement No. 123(R)
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SAB 107 provides interpretive
guidance related to the interaction between Statement No. 123(R) and certain SEC
rules and regulations, as well as the staff’s views regarding the valuation of
share-based payment arrangements for public companies. SAB 107 also reminds
public companies of the importance of including disclosures within filings made
with the SEC relating to the accounting for share-based payment transactions,
particularly during the transition to the Statement No. 123(R).
 
  13
 Index
  **Item 2. Management’sDiscussion and Analysis of Financial Condition and
Results of Operations**
 
 *The following
discussion should be read in conjunction with the Financial Statements and Notes
thereto of the Company presented in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2004. This Report contains forward-looking
statements that reflect management’s expectations, estimates, and projections
for future periods based on information (financial and otherwise) available to
management as of the end of the period covered by this Quarterly Report. These
statements may be identified by the use of forward-looking words such as “may”,
“will”, “believe”, “anticipate”, “estimate”, “expect”, “projects”, or “intends”.
Actual events and results may differ from the results anticipated by the
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those items discussed under the caption "Certain Factors
Affecting Forward-Looking Statements" presented in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2004 and other factors discussed in
the Company’s press releases and other Reports filed with the Securities and
Exchange Commission.*
 
 **Overview**
 Headquartered in
Atlanta, Georgia, with an office in Surrey, England, Firstwave Technologies,
Inc. (“Firstwave” or “the Company”) is a global provider
of strategic CRM solutions specifically designed for the High Tech and Sports
industries. Firstwave’s solutions provide companies with fit-to-purpose features
that are designed to optimize how companies win, maintain and grow customer and
organizational relationships while improving the overall customer experience.
Firstwave’s corporate and product mission reflects
our customer-first commitment: To develop and integrate the best software
solutions to manage customer interactions and information. Firstwave supports
several products: Firstwave CRM, Firstwave Technology, First Sports and
TakeControl.
 
 **Results of
Operations**
 Total revenues
decreased 29.6% from $1,661,000 in the first quarter of 2004 to $1,170,000 in
the first quarter of 2005 primarily due to decreased software and services
revenues. The primary cause of the decrease in total revenues is due to lower
revenues from our relationships with Electronic Data Systems, Ltd. and Sports
Coach, which contributed 22.5% and 13.6% respectively, of our total revenue
during the first quarter of 2004, compared to 6.2% and 2.9% respectively, of
total revenue during the first quarter of 2005. Although we successfully
completed implementation of the multi-year services project for Electronic Data
Systems, Ltd. during 2003, we continue to provide additional services and
support and maintenance to this customer.
 
 Software revenues
decreased 76.0% from $341,000 in the first quarter of 2004 to $82,000 in the
first quarter of 2005. This decrease is primarily due to lower-than-anticipated
software license revenues of our sports solution from companies expected to
replace prior revenues from Electronic Data Systems. Our software revenues
remain significantly dependent upon the size and timing of closing of license
agreements.
 
 Services revenues
decreased 33.8% from $622,000 in the first quarter of 2004 to $412,000 in the
first quarter of 2005. This decrease was primarily due to a decrease in services
engagements in the UK and the fact that we were unable to replace the large
services engagements in the UK in the past with new customer engagements. Our
services revenues are subject to fluctuations based on variations in the length
of and number of active service engagements in a given quarter.
 
 Maintenance
revenues decreased 1.5% from $664,000 during the first quarter of 2004 to
$654,000 in the first quarter of 2005. Maintenance revenues are the result of
renewal agreements from previous software license sales as well as new license
agreements.
 
 Cost of software
revenues decreased 45.0% from $371,000 in the first quarter of 2004 to $204,000
in the first quarter of 2005. Cost of software revenues includes amortization of
capitalized software costs, costs of third party software, media costs, and
documentation materials. The decrease is primarily due to a decrease in
amortization expense of $156,000 related to the write-off of two product lines
in the fourth quarter of 2004, resulting in lower amortization expense in 2005.
Cost of software as a percentage of software revenues increased from 108.8% in
the first quarter of 2004 to 248.8% in the first quarter of 2005, primarily due
to the decrease in software revenue.
 
 Cost of revenues
for services decreased 18.7% from $620,000 in the first quarter of 2004 to
$504,000 in the first quarter of 2005. The decrease is primarily due to
decreases in payroll, resulting from a reduction in the number of services
personnel, and payroll related costs, including travel expenses, consistent with
decreased services revenues. The cost of revenues for services as a percentage
of services revenues increased from 99.7% in the first quarter of 2004 to 122.3%
in the first quarter of 2005 primarily due to certain fixed personnel costs,
which at lower revenue levels result in a decrease in the services revenue
margin.
 
 Cost of revenues
for maintenance decreased 27.7% from $141,000 in the first quarter of 2004 to
$102,000 in the first quarter of 2005. This decrease is due to decreased payroll
costs associated with a reduction in the number of maintenance personnel. The
cost of revenues for maintenance as a percentage of maintenance revenue
decreased from 21.2% in the first quarter of 2004 to 15.6% in the first quarter
of 2005 due to these reductions in payroll and personnel.
  14
 Index
  
 
 Sales and marketing
expense decreased 58.5% from $774,000 in the first quarter of 2004 to $321,000
in the first quarter of 2005. The decreases are the result of decreases in
payroll and commission expenses associated with a reduction in the number of
sales and marketing personnel, telemarketing costs, trade show costs and travel
expenses.
 
 The Company’s
product innovation and development expenditures, which includes amounts
capitalized, decreased 46.1% from $360,000 in the first quarter of 2004 to
$194,000 in the first quarter of 2005. The decreases are primarily related to
decreases in payroll costs associated with staff reductions, and reductions
associated with fewer outside contractors. Software development costs
capitalized during the three months ended March 31, 2004 were $74,000. There
were no development costs capitalized during the first quarter of 2005. A net
realizable analysis was performed at March 31, 2005 in accordance with SFAS 86.
It was determined that the unamortized software development costs do not exceed
net realizable value; therefore, no impairment loss was recorded.
 
 General and
administrative expenses decreased 24.1% from $626,000 in the first quarter of
2004 to $475,000 in the first quarter of 2005. The decrease is primarily due to
reductions in rent expense and payroll costs associated with a reduction in
personnel, as well as a reduction in base salaries for certain executive
personnel.
 
 The Foreign
Currency exchange loss for the first quarter of 2005 was $158,000 compared to a
gain of $127,000 in the first quarter of 2004 due to a less favorable exchange
rate.
 
 Dividends on
preferred stock increased 29.1% from $55,000 in the first quarter of 2004 to
$71,000 in the first quarter of 2005 due to dividends related to the issuance of
shares of Series D Convertible Preferred Stock in June of 2004 for a purchase
price of $700,000.
 
 The above factors
combined to result in a net loss of $821,000 in the first quarter of 2005
compared to a net loss of $1,187,000 in the first quarter of 2004. Net loss per
basic and diluted share was $0.30 for the first quarter of 2005 compared to a
net loss of $0.44 per basic and diluted share for the first quarter of 2004. At
March 31, 2005, the number of basic weighted average shares outstanding was
2,694,000 compared to 2,674,000 at March 31, 2004.
 
 **Balance
Sheet**
 
 Net accounts
receivable decreased 16.7% from $605,000 at December 31, 2004 to $504,000 at
March 31, 2005, primarily due to lower software license and services revenues
invoiced. Property and equipment decreased 21.2% from $264,000 at December 31,
2004 to $208,000 at March 31, 2005 as a result of year-to-date depreciation
partially offset by new asset purchases. Capitalized software development
decreased 17.4% from $1,095,000 at December 31, 2004 to $904,000 at March 31,
2005 due to year-to-date amortization expense of $191,000. Intangible assets
decreased 7.1% from $800,000 at December 31,2004 to $743,000 at March 31, 2005
due to $57,000 in year-to-date amortization expense.
 
 Deferred revenue
decreased 3.2% from $1,351,000 at December 31, 2004 to $1,308,000 at March 31,
2005 due to reductions in and the timing of billing for annual maintenance
renewals. Other accrued liabilities decreased 58.6% from $290,000 at December
31, 2004 to $120,000 at March 31, 2005 primarily due to a decrease in accrued
Value Added Tax in the UK and sales tax in the US consistent with lower
revenues.
 
 **Liquidity
and Capital Resources**
 
 As
of March 31, 2005, the balance of cash and cash equivalents was $842,000
compared to $1,286,000 at December 31, 2004.
 
 Our future capital
requirements will depend on many factors, including our ability to obtain
positive cash flows, market acceptance of our products, and the timing and
extent of spending to support product development efforts and expansion of sales
and marketing. Our future capital needs will be highly dependent upon our
ability to control expenses and generate additional software license revenues,
and any projections of future cash needs and cash flows are subject to
substantial uncertainty. If we are unable to fund expenses from operations or
obtain the necessary additional capital, we may be required to reduce the scope
of planned product development and sales and marketing efforts, as well as
further reduce the size of current staff, all of which could have a material
adverse effect on our business, financial condition, and ability to reduce
losses or generate profits.
  15
 Index
  
 We
have no material commitments for capital expenditures. We do not believe that
inflation has historically had a material effect on our Company's results of
operations.
 
 **Item 3. Quantitativeand Qualitative Disclosures About Market
Risk**
 
 The Company is
subject to market risk exposures of varying correlations and volatilities,
including interest rate risk and foreign exchange rate risk. Currently, the
Company maintains its cash position in money market funds and other bank
accounts. The Company does not currently engage in hedging activities or
otherwise use derivatives to alter the interest characteristics of its financial
assets. Although a decrease in interest rates could reduce our interest income,
at this time management does not believe a change in interest rates will
materially affect the Company's financial position or results of
operations.
 
 The results of
operations of Firstwave Technologies, UK Ltd, our wholly owned subsidiary
located in Surrey, England, are exposed to foreign exchange rate fluctuations as
the financial results of this subsidiary are translated from the local currency
to U.S. Dollars upon consolidation. As a result of this translation, as exchange
rates vary, net sales and other operating results, when translated, may differ
materially from our prior performance and our expectations. In addition, we
could also be significantly affected by weak economic conditions in foreign
markets that could reduce demand for our products and further negatively impact
the results of our operations in a material and adverse manner. As a result of
these market risks, the price of our stock could decline significantly and
rapidly.
 
 The Company does
not engage in any hedging activities. As foreign currency exchange rates vary,
the fluctuations in revenues and expenses may materially impact the financial
statements upon consolidation. A weaker US dollar would result in an increase to
revenues and expenses upon consolidation, and a stronger US dollar would result
in a decrease to revenues and expenses upon consolidation.
 
 The Company manages
the currency fluctuation risk by monitoring on a regular basis the foreign
currency exchange rates as they relate to our UK Subsidiary, and attempts to
take action if the foreign currency exchange rate would result in a material
impact to the Company’s financial statements upon translation from the local
currency, the British pound, to the US Dollar. The action taken in these
instances by the Company is to move the currency from the UK Subsidiary to the
Company’s headquarters when doing so would be beneficial for the
Company.
 
 **Item
4.**  **Controlsand Procedures**
 
 Based on their most
recent evaluation, which was completed in consultation with management as of the
end of the period covered by the filing of this Form 10-Q, the Company’s
Chairman and Chief Executive Officer and Chief Financial Officer believe the
design and operation of the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the
date of such evaluation in timely alerting the Company’s management to material
information required to be included in this Form 10-Q and other Exchange
Act filings.
 
 
 **PART II. OTHERINFORMATION**
 
 Item 1. LegalProceedings
 Not Applicable
 
 Item 2. Changesin Securities
 Not
Applicable
 
 Item 3. DefaultsUpon Senior Securities
 Not Applicable
 
 Item 4. Submissionof Matters to a Vote of Security
Holders
 Not
Applicable
 
 Item 5. OtherInformation
 Not
Applicable
 
  16
 Index
  Item 6. Exhibits
 Exhibit 31.1
Certification of Periodic Report by the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
 
 Exhibit 31.2
Certification of Periodic Report by the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
 
 Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
 
 
 
 
 
 
 
 
 **SIGNATURES**
 
 
 Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
 
 
 FIRSTWAVE TECHNOLOGIES,
      INC.DATE: May 13, 2005
    
    /s/  Judith A. VitaleJudith A.
      Vitale
      Chief
      Financial Officer
      (Principal
      Financial Officer)