**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

** **

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

** **

**COMMISSION FILE NUMBER   0-21202**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

 

 

| **7372**                |   | **GEORGIA**               |   | **58-1588291**     |
|-------------------------|--------|---------------------------|--------|--------------------|
| (Primary  Std. Ind.     |   | (State  of incorporation) |   | (IRS  Employer     |
| Classification  Code #) |   |                      |   | Identification  #) |

 

| **2859 Paces Ferry Road, Suite 1000**     |
|-------------------------------------------|
| **Atlanta, Georgia   30339**         |
| (Address  of principal executive offices) |
|                                      |
| **(770-431-1200)**                        |
| (Telephone  number of registrant)         |

 

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months(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.

 

 
| YES |   | ý |   | NO |   | o |
|-----|--------|--------|--------|----|--------|---|

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

                                              Outstanding asof  August 9, 2002

 

                                              Common Stock,no par value                                                    2,212,045Shares

 

 

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** **

**FIRSTWAVE TECHNOLOGIES, INC.**

 

**FORM 10-Q**

 

**For the quarter ended June 30, 2002**

 

 

**Index**

** **
| Part  I.    Financial Information                                                                 |   |
|------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                             |   |
| Item 1.   Financial Statements                                                                         |   |
|                                                                                                             |   |
| Consolidated Balance Sheet —  December 31, 2001 and June 30, 2002                                           |   |
|                                                                                                             |   |
| Consolidated  Statement of Operations — For the Three and Six Months Ended June 30, 2001  and June 30, 2002 |   |
|                                                                                                             |   |
| Consolidated  Statement of Changes in Shareholders’ Equity — For the Six Months Ended June  30, 2002   |   |
|                                                                                                             |   |
| Consolidated  Statement of Cash Flows — For the Six Months Ended June 30, 2001 and June 30,  2002           |   |
|                                                                                                             |   |
| Notes to  Consolidated Financial Statements                                                                      |   |
|                                                                                                             |   |
| Item  2.   Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|                                                                                                             |   |
| Part II.   Other Information                                                                           |   |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Balance Sheet**

**(inthousands)**

                                                                                                                                                                                                        
|                                                                                    |   | **Dec 31,** |   | **June 30,**    |   |
|-----------------------------------------------------------------------------------------|--------|-------------|--------|-----------------|--------|
|                                                                                    |   | **2001**    |   | **2002**        |   |
|                                                                                    |   |        |   | **(unaudited)** |   |
| **ASSETS**                                                                              |   |        |   |            |   |
|                                                                                    |   |        |   |            |   |
| Current assets:                                                                         |   |        |   |            |   |
| Cash and cash  equivalents                                                              |   | $           | 1,860  |            | $      | 4,748 |   |
| Accounts  receivable, less allowance fordoubtful accounts of $90 and $56,  respectively |   | 1,333       |   | 957             |   |
| Prepaid expenses  and other assets                                                      |   | 474         |   | 411             |   |
| Total current  assets                                                                   |   | 3,667       |   | 6,116           |   |
|                                                                                    |   |        |   |            |   |
| Property and  equipment, net                                                            |   | 421         |   | 287             |   |
| Software  development costs, net                                                        |   | 1,762       |   | 1,285           |   |
| Goodwill                                                                                |   | 166         |   | 170             |   |
|                                                                                    |   | $           | 6,016  |            | $      | 7,858 |   |
|                                                                                    |   |        |   |            |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                          |   |        |   |            |   |
|                                                                                    |   |        |   |            |   |
| Current  liabilities:                                                                   |   |        |   |            |   |
| Accounts payable                                                                        |   | $           | 575    |            | $      | 580 |   |
| Deferred revenue                                                                        |   | 663         |   | 741             |   |
| Accrued employee  compensation and benefits                                             |   | 145         |   | 351             |   |
| Dividends  payable                                                                      |   | 223         |   | 60              |   |
| Other accrued  liabilities                                                              |   | 453         |   | 375             |   |
| Total current  liabilities                                                              |   | 2,059       |   | 2,107           |   |
|                                                                                    |   |        |   |            |   |
| Shareholders’  equity                                                              |   | 3,957       |   | 5,751           |   |
|                                                                                    |   | $           | 6,016  |            | $      | 7,858 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

 

3

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** **

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Operations**

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

**(unaudited)**

** **
|                                                |   | **For the  Three Months Ended** |   | **For the  Six Months Ended** |   |
|-----------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                |   | **June 30,**                    |   | **June 30,**                  |   | **June 30,** |   | **June 30,** |   |
|                                                |   | **2001**                        |   | **2002**                      |   | **2001** |   | **2002** |   |
|                                                |   |                            |   |                          |   |   |   |   |   |
| Net Revenues                                        |   |                            |   |                          |   |   |   |   |   |
| Software                                            |   | $                               | 333    |                          | $      | 651 |   | $ | 465 |   | $ | 1,379 |   |
| Services                                            |   | 796                             |   | 2,540                         |   | 1,546 |   | 5,415 |   |
| Maintenance                                         |   | 581                             |   | 403                           |   | 1,284 |   | 851 |   |
| Other                                               |   | 35                              |   | 7                             |   | 63 |   | 12 |   |
|                                                |   | 1,745                           |   | 3,601                         |   | 3,358 |   | 7,657 |   |
| Cost and  Expenses                                  |   |                            |   |                          |   |   |   |   |   |
| Cost of revenues                                    |   |                            |   |                          |   |   |   |   |   |
| Software                                            |   | 329                             |   | 324                           |   | 613 |   | 647 |   |
| Services                                            |   | 492                             |   | 912                           |   | 961 |   | 1,706 |   |
| Maintenance                                         |   | 172                             |   | 117                           |   | 444 |   | 280 |   |
| Other                                               |   | 24                              |   | 7                             |   | 42 |   | 12 |   |
| Sales and  marketing                                |   | 539                             |   | 864                           |   | 1,330 |   | 1,644 |   |
| Product  development                                |   | 147                             |   | 167                           |   | 342 |   | 267 |   |
| General and  administrative                         |   | 601                             |   | 300                           |   | 1,264 |   | 1,163 |   |
|                                                |   | 2,304                           |   | 2,691                         |   | 4,996 |   | 5,719 |   |
|                                                |   |                            |   |                          |   |   |   |   |   |
| Operating  income/(loss)                            |   | (559                            | )      | 910                           |   | (1,638 | ) | 1,938 |   |
|                                                |   |                            |   |                          |   |   |   |   |   |
| Interest  income/(expense)                          |   | (14                             | )      | 20                            |   | (44 | ) | 24 |   |
| Other income,  net                                  |   | 92                              |   | 0                             |   | 80 |   | 0 |   |
| Income/(loss)  before income taxes                  |   | (481                            | )      | 930                           |   | (1,602 | ) | 1,962 |   |
| Income taxes                                        |   | (1                              | )      | 0                             |   | (1 | ) | 0 |   |
| Net  income/(loss)                                  |   | ($482                           | )      | $                             | 930    |   | ($1,603 | ) | $ | 1,962 |   |
|                                                |   |                            |   |                          |   |   |   |   |   |
| Dividends on  preferred stock                       |   | (38                             | )      | (64                           | )      | (76 | ) | (130 | ) |
|                                                |   |                            |   |                          |   |   |   |   |   |
| Net  income/(loss) applicable tocommon shareholders |   | ($520                           | )      | $                             | 866    |   | ($1,679 | ) | $ | 1,832 |   |
|                                                |   |                            |   |                          |   |   |   |   |   |
| Basic:                                              |   |                            |   |                          |   |   |   |   |   |
| Earnings/(loss)  per share                          |   | ($0.25                          | )      | $                             | 0.41   |   | ($0.80 | ) | $ | 0.87 |   |
| Weighted average  shares                            |   | 2,100                           |   | 2,138                         |   | 2,098 |   | 2,110 |   |
|                                                |   |                            |   |                          |   |   |   |   |   |
| Diluted:                                            |   |                            |   |                          |   |   |   |   |   |
| Earnings/(loss)  per share                          |   | ($0.25                          | )      | $                             | 0.29   |   | ($0.80 | ) | $ | 0.63 |   |
| Weighted average  shares                            |   | 2,100                           |   | 3,172                         |   | 2,098 |   | 3,130 |   |
|                                                     |        |                                 |        |                               |        |  |  |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these financial statements.

 

4

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** **

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Changes in Shareholders’Equity**

**(Inthousands, except share data)**

**(unaudited)**

 

**Forthe Six Months Ended June 30, 2002**

 

 

 

 
|                                                   |   |              |   |                 |   |           |   |        |   |        |   |        |   | **Accumulated**   |   |            |   |      |     |
|--------------------------------------------------------|--------|-------------------|--------|----------------------|--------|----------------|--------|-------------|--------|-------------|--------|-------------|--------|-------------------|--------|-----------------|--------|-----------|----------|
|                                                   |   | **Common  Stock** |   | **Preferred  Stock** |   | **Add’l** |   | **Compre-** |   | **Other**   |   |        |   |              |   |
|                                                   |   |              |   |                 |   |           |   |        |   | **paid-in** |   | **hensive** |   | **comprehensive** |   | **Accumulated** |   |      |     |
|                                                   |   | **Shares**        |   | **Amount**           |   | **Shares**     |   | **Amount**  |   | **capital** |   | **income**  |   | **income/(loss)** |   | **Deficit**     |   | **Total** |     |
|                                                   |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   |            |   |      |     |
| Balance at December 31, 2001                           |   | 2,100,351         |   | $                    | 12     |           | 33,687 |        | $      | 2,833       |   | $           | 22,403 |              | $      | 0               |   | ($26      | )        | ($21,265 | ) | $ | 3,957 |   |
|                                                   |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   |            |   |      |     |
| Exercise of common stock options                       |   | 544               |   |                 |   |           |   |        |   | 2           |   |        |   |              |   |            |   | 2         |     |
|                                                   |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   |            |   |      |     |
| Conversion of Series C PreferredStock to  Common Stock |   | 111,125           |   |                 |   | (2,667         | )      | (200        | )      | 200         |   |        |   |              |   |            |   | 0         |     |
|                                                   |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   |            |   |      |     |
| Dividends                                              |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   | (130            | )      | (130      | )   |
|                                                   |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   |            |   |      |     |
| Comprehensive income:                                  |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   |            |   |      |     |
| Net income                                             |   |              |   |                 |   |           |   |        |   |        |   | 1,962       |   |              |   | 1,962           |   | 1,962     |     |
| Foreign currency translation adjustment                |   |              |   |                 |   |           |   |        |   |        |   | (40         | )      | (40               | )      |            |   | (40       | )        |
| Accumulated comprehensive income                       |   |              |   |                 |   |           |   |        |   |        |   | 1,922       |   |              |   |            |   |      |     |
|                                                   |   |              |   |                 |   |           |   |        |   |        |   |        |   |              |   |            |   |      |     |
| Balance at June 30, 2002                               |   | 2,212,020         |   | $                    | 12     |           | 31,020 |        | $      | 2,633       |   | $           | 22,605 |              |   |            | ($66   | )         | ($19,433 | ) | $ | 5,751 |   |
|                                                        |        |                   |        |                      |        |                |        |             |        |             |        |             |        |                   |        |                 |        |           |          |  |  |  |  |  |

 

 

The accompanyingnotes are an integral part of these financial statements.

 

 

5

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** **

**FIRSTWAVE TECHNOLOGIES, INC.**

**Consolidated Statement of Cash Flows**

**(inthousands)**

**(unaudited)**

 
|                                                     |   | **For the  Six Months Ended** |   |
|----------------------------------------------------------|--------|-------------------------------|--------|
|                                                     |   | **June 30,  2001**            |   | **June 30,  2002** |   |
|                                                     |   |                          |   |   |   |
| Cash flows (used  in)/provided by operating activities   |   | ($315                         | )      | $ | 3,484 |   |
|                                                     |   |                          |   |   |   |
| Cash flows from  investing activities                    |   |                          |   |   |   |
| Software  development costs                              |   | (307                          | )      | (164 | ) |
| Purchases of  property and equipment                     |   | (28                           | )      | (93 | ) |
| Purchase of  investment securities                       |   | (711                          | )      | 0 |   |
| Proceeds from  sale/maturity of investment securities    |   | 691                           |   | 0 |   |
| Loss on  investment securities                           |   | 20                            |   | 0 |   |
| Net cash used in  investing activities                   |   | (335                          | )      | (257 | ) |
|                                                     |   |                          |   |   |   |
| Cash flows from  financing activities                    |   |                          |   |   |   |
| Proceeds from  borrowings                                |   | 750                           |   | 0 |   |
| Repayment of  borrowings                                 |   | (2,836                        | )      | 0 |   |
| Proceeds from  restricted cash used to secure borrowings |   | 2,200                         |   | 0 |   |
| Proceeds from  issuance of common stock                  |   | 12                            |   | 2 |   |
| Payment of  dividends on preferred stock                 |   | (31                           | )      | (293 | ) |
| Net cash  provided by/(used in) financing activities     |   | 95                            |   | (291 | ) |
|                                                     |   |                          |   |   |   |
| Foreign currency  translation adjustment                 |   | 12                            |   | (48 | ) |
|                                                     |   |                          |   |   |   |
| Increase/(decrease)  in cash and cash equivalents        |   | (543                          | )      | 2,888 |   |
| Cash and cash  equivalents, beginning of period          |   | 1,281                         |   | 1,860 |   |
| Cash and cash  equivalents, end of period                |   | $                             | 738    |   | $ | 4,748 |   |
|                                                     |   |                          |   |   |   |
| Supplemental  disclosure of cash flow information        |   |                          |   |   |   |
| Cash paid for  income taxes                              |   | $                             | 1      |   | $ | 0 |   |
|                                                     |   |                          |   |   |   |
| Cash paid for  interest                                  |   | $                             | 79     |   | $ | 0 |   |

 

 

The accompanyingnotes are an integral part of these financial statements.

 

6

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**FIRSTWAVE TECHNOLOGIES, INC.**

**Notes to Consolidated FinancialStatements**

**June 30, 2002**

 

 

**A.            Basisof Presentation**

 

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

 

The accompanying 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 byaccounting principles generally accepted in the United States and should beread in conjunction with the consolidated financial statements contained in theCompany’s Form 10-K for the period ended December 31, 2001.  In the opinion of management, alladjustments (consisting only of normal recurring adjustments) considerednecessary for a fair presentation of the consolidated financial statements havebeen included.

 

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

 

 

**B.            AccountingPolicies**

 

**Concentration of revenue**

During the first andsecond quarters of 2002, the Company had a substantial majority of software andservices revenue derived from its partnership with a leading global servicescompany.

 

**Revenue recognition**

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.

 

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

 

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

                                                Basic netincome or net loss per common share is based on the weighted average number ofshares of common stock outstanding during the period.  Stock options and convertible preferred stock have been includedin the diluted earnings per share calculation when they are notantidilutive.  Net income or lossapplicable to common shareholders includes a charge for dividends related tothe Company’s outstanding preferred stock.

 

7

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**Foreign currency translation**

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

 

                                                **Use of estimates**

**                                               **Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from 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.

 

**Segmentreporting**

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 that managementuses to make operating decisions and assess performance.

 

**Recent accounting pronouncements**

In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 133, Accounting for DerivativeInstruments and Hedging Activities (“SFAS 133”).  SFAS 133 establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts and for hedging activities. The Company adopted SFAS 133 effective January 1, 2001 and it did not havea material impact on the consolidated financial statements.

 

In September 2000, the FASBissued SFAS No. 140, “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.” This statement replaces SFAS No. 125 and is effective for transfers andservicing occurring after June 30, 2001 and, for certain provisions, fiscalyears ending after December 15, 2000. The Company accounts for activity under its Accounts Receivable PurchaseAgreement pursuant to SFAS No. 140.  Asof June 30, 2002 the Company has not borrowed against this Agreement.

 

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

 

 

**C.            Borrowings**

 

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

 

The Company has no outstanding long-term debt.

 

 

 

8

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**Item 2.**

 

**FIRSTWAVE TECHNOLOGIES, INC.**

**Management’s Discussion andAnalysis of**

**FinancialCondition and Results of Operations**

 

 

**Overview**

 

FirstwaveTechnologies Inc. (NASDAQ:FSTW) is a web-based, Customer RelationshipManagement (CRM) software innovator that providesInternet-based customer relationship management (eCRM) solutions that automateand optimize the way companies win and keep customers.  Headquarteredin Atlanta, Georgia with an office in Surrey, England, we enable businesses toimprove customer relations by streamlining sales, marketing and serviceprocesses.  We support threeproduct lines: a web-based CRM solution, Firstwave eCRM; a client-serversolution, Takecontrol®; and Firstwave for Unix.

 

 

**Results of Operations**

 

During the second quarter of 2002 our financial results reflectsignificant quarter over comparable quarter improvement. Total revenuesincreased 106.4% from $1,745,000 in the second quarter of 2001 to $3,601,000 inthe second quarter of 2002 primarily due to increased software and servicesrevenue.  Year to date total revenuesincreased 128.0% from $3,358,000 in 2001 to $7,657,000 in 2002.  Software revenues increased 95.5% from$333,000 in the second quarter of 2001 to $651,000 in the second quarter of2002.  Year to date software revenuesincreased 196.6% from $465,000 in 2001 to $1,379,000 in 2002.  Our software revenues are significantlydependent upon the timing of closing of license agreements.  Services revenues increased 219.1% from$796,000 in the second quarter of 2001 to $2,540,000 in the second quarter of2002, and year to date increased 250.3% from $1,546,000 in 2001 to $5,415,000in 2002.

 

The quarterly and year to date increases insoftware and services revenues are primarily due to revenues generated throughour partnership with a leading global services company.  This partnership has accounted for asubstantial majority of our total revenue for both first and second quarter2002.  We expect that the revenues from thispartnership will remain at high levels for the next two quarters based uponprojects already in process.  If this partner decreases itspurchasing of our software and services, our revenues would be subject tosignificant decrease if not replaced with other significant accounts.

 

Maintenance revenues decreased 30.6% from$581,000 in the second quarter of 2001 to $403,000 in the second quarter of2002 and year to date decreased 33.7% from $1,284,000 in 2001 to $851,000 in2002.  These decreases are primarily dueto cancellations of maintenance agreements of customers who were using theTakecontrol and Firstwave for Unix product lines.  Maintenance revenues are the result of renewal agreements fromprevious software license sales as well as new license agreements.  While we anticipate increases in maintenancerevenues related to the eCRM product, which will be relative to new softwarelicense sales, we anticipate a continued decrease in maintenance revenue fromthe Takecontrol and Unix product lines based on the age and life cycle of thoseproducts.  During 2002, we expect anoverall decrease of maintenance revenues as compared to 2001 due to anexpectation that the decrease in maintenance revenues related to Takecontrolcancellations will exceed the increase in revenues related to new eCRMmaintenance agreements.  As our eCRMlicense revenues increase during 2002, we would expect an improvement in thistrend.

 

Cost of software revenues remainedconsistent at $324,000 in the second quarter of 2002 compared to $329,000 inthe second quarter of 2001.  Year todate cost of software revenues increased 5.6% from $613,000 in 2001 to $647,000in 2002.  The increase is primarily aresult of the amortization of capitalized software additions of the FirstwaveeCRM product line.  Cost of softwarerevenues include costs of third party software, amortization of capitalizedsoftware costs and media costs.

 

Cost of revenues for services increased85.4% from $492,000 in the second quarter of 2001 to $912,000 in the second quarterof 2002, and year to date increased 77.5% from $961,000 in 2001 to $1,706,000in 2002.  The increases are a result ofincreases in payroll, outside consultants, and travel consistent with theincrease in services revenue.  Cost ofrevenues for services as a percentage of services revenues decreased from 61.8%in the second quarter of 2001 to 35.9% in the second quarter of 2002 due tohigher utilization rates of service personnel. Cost of revenues for maintenance decreased 32.0% from $172,000 in the secondquarter of 2001 to $117,000 in the second quarter of 2002, and year to datedecreased 36.9% from $444,000 in 2001 to $280,000 in 2002 primarily due todecreased payroll and related costs and lower royalty costs consistent withdecreased maintenance revenues generated by international distributors.

 

Sales and marketing expense increased 60.3% from $539,000 in the secondquarter of 2001 to $864,000 in the second quarter of 2002.  Year to date sales and marketing expenseincreased 23.6% from $1,330,000 in 2001 to $1,644,000 in 2002.  The increases are attributed to increases inpayroll costs due to the expansion of the sales team as well as increases inadvertising, marketing materials, tradeshows, and public relations.  During the remainder of 2002, we anticipatecontinued increases in sales and marketing expenses as we continue to engage ina full range of marketing programs focused on creating awareness and generatingqualified leads.

 

The Company’s product developmentexpenditures, which includes amounts capitalized, increased 31.7% from $230,000in the second quarter of 2001 to $303,000 in the second quarter of 2002primarily due to increased payroll costs related to an increase in developmentpersonnel.  Year to date, productdevelopment expenditures decreased 33.6% from $649,000 in 2001 to $431,000 in2002 due to decreased use of outside development consultants and thereallocation of some 

 

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development resources to billable servicesprojects during the first quarter of 2002. Software development costs capitalized during the three and six monthsended June 30, 2001 were $83,000 and $307,000, and for the three and six monthsended June 30, 2002, were $136,000 and $164,000 respectively.  On June 30, 2002 we released the latestversion of our eCRM product, Version 8.0, which delivers a new interfaceallowing for faster and easier navigation. We believe development expenditures will increase for the balance of2002 as we continue further enhancements to the product to respond to the needsof existing and prospective customers.

 

General and administrative expensesdecreased 50.1% from $601,000 in the second quarter of 2001 to $300,000 in thesecond quarter of 2002 primarily due to a favorable change in the foreigncurrency translation rate during the quarter. Year to date general and administrative expenses decreased slightly from$1,264,000 in 2001 to $1,163,000 in 2002. The year to date decrease is the net effect of the favorable foreigncurrency rate offset by the write off in the first quarter of 2002 of a thirdparty software asset related to a change in the technology used for ourinternal web-site development and increased incentives in 2002 related toemployee incentive plans.

 

Net interest income/expense decreased 242.9%from $14,000 net interest expense in the second quarter of 2001 to $20,000 netinterest income in the second quarter of 2002. We eliminated interest expense effective September 2001 with theelimination of long-term debt.  Other incomeof $92,000 in the second quarter of 2001 was primarily related to a settlementagreement pursuant to the cancellation by a third party of a sublease of officespace.

 

Dividends on preferred stock increased 68.4%from $38,000 in the second quarter of 2001 to $64,000 in the second quarter of2002 due to the issuance of Series C Convertible Preferred Stock in September2001.

 

The above factors combined to result in a266.5% increase in net income available to common shareholders from a net lossof $520,000 in the second quarter of 2001 to a net income of  $866,000 in the second quarter of 2002, anda net loss per basic and diluted share of $0.25 for the second quarter of 2001compared to a net income per basic share of $0.41 and net income per diluted share of $0.29 for the second quarterof 2002.   Year to date, net incomeavailable to common shareholders increased 209.1% from a net loss of $1,679,000in 2001 to a net income of  $1,832,000in 2002, and a net loss per basic and diluted share of $0.80 in 2001 comparedto a net income per basic share of $0.87 and net income per diluted share of $0.63 for 2002.

 

 

 

**Balance Sheet**

 

Net accounts receivable decreased 28.2% from$1,333,000 at December 31, 2001 to $957,000 at June 30, 2002 primarily due tothe collection of outstanding receivables related to annual maintenanceagreements billed in advance at year end.  Property and equipment decreased 31.8% from $421,000 at December 31,2001 to $287,000 at June 30, 2002, due to year to date depreciation and thewrite off of a third party software asset resulting from a change in technologyused in our internal web-site development offset by additional fixed assetpurchases.  Capitalized softwaredecreased 27.1% from $1,762,000 at December 31, 2001 to $1,285,000 at June 30,2002 due to additional capitalization of $164,000 in development costs net of$641,000 in amortization.  Deferredrevenue increased 11.8% from $663,000 at December 31, 2001 to $741,000 at June30, 2002 primarily due to annual maintenance billed in advance during first andsecond quarter 2002 offset by the recognition of three months of maintenancerevenue billed in advance at December 31, 2001.  Accrued employee compensation and benefits increased 142.1% from $145,000at December 31, 2001 to $351,000 at June 30, 2002 due to increased accrualsrelated to increased incentives and commissions consistent with increasedsoftware revenues and improved overall financial performance.  Some of these accrued incentives are notpayable until current year-end results are determined.  Dividends payable decreased 73.1% from$223,000 at December 31, 2001 to $60,000 at June 30, 2002 due to the payment ofdividends on preferred stock.  Otheraccrued liabilities decreased 17.2% from $453,000 at December 31, 2001 to $375,000at June 30, 2002 primarily due to the timing of payments of sales tax, VAT andpayroll taxes.

 

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**Liquidity and Capital Resources**

 

As of June 30, 2002, the balance of cash andcash equivalents was $4,748,000 compared to $1,860,000 at December 31, 2001,which is an increase of $2,888,000 resulting from increased cash flow fromoperations.  We have no outstandinglong-term debt.

 

During the firstsix months of 2002, a substantial majority of our total revenue has beenattributed to our partnership with a leading global services company.  While we expect that the revenues from thispartnership will remain at high levels for the next two quarters based uponprojects already in process, if this partner decreasesits purchasing of our software and services, our revenues and cash positionwould be subject to significant decrease if not replaced with other significantaccounts.

 

On July 30, 2002, Firstwave signed anagreement with ExtremeLogic, Microsoft’s Partner of the Year, to provide a..Net-based workflow and scripting engine and services to enhance our eCRMtechnology.  The investment of purchasedsoftware and services will be in the range of $900,000, payable in the thirdand fourth quarters of 2002.  By licensingthis proven technology, we feel the technology risk associated with newdevelopment is diminished, we gain a time-to-market advantage, and the cost todevelop is less than building the technology in-house.  We also believe that our current cash positionand cash received from operations will continue to satisfy our cashrequirements.

 

Our future capital requirements will dependon many factors, including our ability to maintain positive cash flows, as wellas the timing and extent of spending to support product development efforts andexpansion of sales and marketing, and market acceptance of our products.  Although we have historically been able tosatisfy our cash requirements, there can be no assurance that efforts tomaintain positive cash flows from operations will be successful in thefuture.  Our future capital needs willbe highly dependent upon our ability to control expenses and generate softwarelicense revenues, and any projections of future cash needs and cash flows aresubject to substantial uncertainty.  Ifwe are not able to generate sufficient cash from revenues, we may need to raiseadditional capital.

 

 

**PARTII.  OTHER INFORMATION**

 

Item 1.    Legal Proceedings

                NotApplicable

 

Item 2.    Changes in Securities

None

 

Item 3.    Defaults Upon Senior Securities

                Notapplicable

 

 

Item 4.    Submission of Matters to a Vote ofSecurity Holders

                None

 

 

Item 5.    Other Information

Not applicable

 

 

Item 6.    Exhibits and Reports on form 8-K

**               **Exhibit 99.1

 

 

**SIGNATURES**

 

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

 

                                                                FIRSTWAVETECHNOLOGIES, INC.

 

 
| DATE:   August 9, 2002 |   | /s/ Judith A. Vitale |                    |   |   |
|----------------------------------|--------|----------------------|-------------------------|--------|--------|
|                             |   |                 | Judith A. Vitale        |   |   |   |
|                             |   |                 | Chief Financial Officer |   |   |   |

 

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