<PAGE> 1
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, 1999
COMMISSION FILE NUMBER 0-21202
FIRSTWAVE TECHNOLOGIES, INC.
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<S> <C> <C>
7372 GEORGIA 58-1588291
(Primary Std. Ind. (State of incorporation) (IRS Employer
Classification Code #) Identification #)
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2859 PACES FERRY ROAD, SUITE 1000
ATLANTA, GEORGIA 30339
(Address of principal executive offices)
(770-431-1200)
(Telephone number of registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of August 10, 1999:
Common Stock, no par value 5,674,968 Shares
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FIRSTWAVE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - December 31, 1998 and June 30, 1999 3
Consolidated Statement of Operations - For the Three and Six Months ended
June 30, 1998 and June 30, 1999 4
Consolidated Statement of Changes in Shareholders' Equity -
For the Six Months Ended June 30, 1999 5
Consolidated Statement of Cash Flows - For the Six Months Ended
June 30, 1998 and June 30, 1999 6
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Part II Other Information 12
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2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
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<CAPTION>
DEC 31, JUN 30,
1998 1999
------- -----------
(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 2,245 $ 3,435
Accounts receivable, less allowance for
doubtful accounts of $425 and $662, respectively 3,146 1,600
Other assets 395 440
------- -------
Total current assets 5,786 5,475
Property and equipment, net 1,501 1,044
Deferred income tax benefit 2,621 2,621
Software development costs, net 770 1,305
Intangible asset 644 549
------- -------
$11,322 $10,994
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,354 $ 972
Deferred revenue 1,581 1,109
Accrued employee compensation
and benefits 284 214
Other accrued liabilities 343 205
------- -------
Total current liabilities 3,562 2,500
Shareholders' equity 7,760 8,494
------- -------
$11,322 $10,994
======= =======
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The accompanying notes are an integral part of these financial statements.
3
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FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
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<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues
Software $ 868 $ 365 $ 2,187 $ 1,536
Services 1,376 950 2,265 1,909
Maintenance 1,301 1,288 2,604 2,521
Other 193 97 292 196
------- ------- ------- -------
3,738 2,700 7,348 6,162
------- ------- ------- -------
Cost and Expenses
Cost of revenues
Software 173 191 340 396
Services 1,001 599 1,720 1,232
Maintenance 431 353 827 654
Other 181 84 280 179
Sales and marketing 1,322 821 3,021 2,200
Product development 564 392 1,089 1,016
General and administrative 791 657 1,406 1,736
------- ------- ------- -------
4,463 3,097 8,683 7,413
------- ------- ------- -------
Operating loss (725) (397) (1,335) (1,251)
Interest income 61 27 115 45
------- ------- ------- -------
Loss before income taxes (664) (370) (1,220) (1,206)
Income tax (53) (26) (70) (30)
------- ------- ------- -------
Net loss $( 717) $( 396) $(1,290) $(1,236)
======= ======= ======= =======
Dividends on preferred stock 0 (30) 0 (30)
------- ------- ------- -------
Net loss applicable to common
shareholders $( 717) $( 426) $(1,290) $(1,266)
======= ======= ======= =======
Basic and diluted
net loss per share $( 0.14) $( 0.08) $( 0.25) $( 0.24)
======= ======= ======= =======
Weighted average number of common
and common share equivalents 5,129 5,160 5,110 5,160
======= ======= ======= =======
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The accompanying notes are an integral part of these financial statements.
4
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FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(unaudited)
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<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
COMMON STOCK PREFERRED STOCK
----------------------------------------------------- ADD'L COMPRE-
PAID-IN HENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS
----------- ---------- ----------- ----------- ---------- ----------
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Balance at December 31, 1998 5,151,322 $ 10 0 $ 0 $19,813 $ 0
Series A convertible preferred stock 20,000 2,000
Issuance of stock 9
Employee stock plan purchases 3,497 7
Comprehensive loss:
Net loss (1,236)
Foreign currency translation adjustment (46)
--------
Accumulated comprehensive loss (1,282)
--------
---------- ----------------------- ---------- -------
Balance at June 30, 1999 5,154,819 $ 10 20,000 $ 2,000 $19,829
========== ========= ========== ========== =======
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ACCUMULATED
OTHER
COMPREHENSIVE ACCUMULATED
INCOME/(LOSS) DEFICIT TOTAL
----------------- ----------- -------------
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Balance at December 31, 1998 $ 34 $(12,097) $ 7,760
Series A convertible preferred stock 2,000
Issuance of stock 9
Employee stock plan purchases 7
Comprehensive loss:
Net loss (1,236) (1,236)
Foreign currency translation adjustment (46) (46)
Accumulated comprehensive loss
---------- ---------- ----------
Balance at June 30, 1999 $ (12) $ (13,333) $ 8,494
========== ========== ===========
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The accompanying notes are an integral part of these financial statements.
5
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FIRSTWAVE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
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<CAPTION>
FOR THE SIX MONTHS ENDED
---------------------------------------------
JUNE 30, 1998 JUNE 30, 1999
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Cash flows provided by/(used in) operating activities $ (861) $ 104
Cash flows from investing activities
Acquisition of Co-cam UK (246) 0
Software development costs 0 (820)
Purchases of property and equipment (356) (64)
--------------- ---------------
Net cash used in investing activities (602) (884)
--------------- ---------------
Cash flows from financing activities
Proceeds from employee stock purchase plan 11 7
Proceeds from issuance of preferred stock 0 2,000
Issuance of stock warrants 0 9
Exercise of common stock options 110 0
--------------- ---------------
Net cash provided by financing activities 121 2,016
--------------- ---------------
--------------- ---------------
Foreign currency translation adjustment 21 (46)
--------------- ---------------
Increase/(decrease) in cash (1,321) 1,190
Cash and cash equivalents, beginning of period 4,969 2,245
--------------- ---------------
Cash and cash equivalents, end of period $ 3,648 $ 3,435
=============== ===============
Supplemental disclosure of cash flow information
--------------- ---------------
Cash paid during the period for income taxes $ 58 $ 26
=============== ===============
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The accompanying notes are an integral part of these financial statements.
6
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FIRSTWAVE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
occurring accruals) considered necessary for a fair presentation have
been included.
B. ACCOUNTING POLICIES
BASIC AND DILUTED NET LOSS PER COMMON SHARE
Basic net loss per common share is based on the weighted average
number of shares of common stock outstanding during the period. Stock
options and convertible preferred stock would have been included in
the diluted earnings per share calculation had they not been
antidilutive.
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies are translated
at the exchange rate on the balance sheet date and the effects of
foreign currency translation adjustments are included as a component
of shareholders' equity.
C. PREFERRED STOCK
The Company issued 20,000 shares of Preferred Stock during the second
quarter of 1999 to two officers for an aggregate of $2 million. There
are no shares that are authorized but unissued. The Preferred Stock
accumulate dividends at a rate of 9% that are payable annually when
declared by the Board of Directors. The Preferred Stock is convertible
(after a period of one year from issue) into common stock at the
option of the holder based on a 20% premium over the weighted average
of the closing prices for the Common Stock for the last 20 trading
days prior to the subscription for Preferred Stock.
7
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ITEM 2.
FIRSTWAVE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Firstwave Technologies, Inc. (the "Company") is a provider of web-based
Customer Relationship Management (eCRM) applications. The Company has evolved
from a single solution, independent Internet technologies company to a provider
of integrated web-based solutions utilizing a partnership model prevalent in
today's technology industry. On June 30, 1999 the Company released Netgain(TM)
Sales 3.0 which included the Netgain Internet Business Center(TM) (IBC), new
customization tools, the ability to automatically upgrade customizations to
subsequent releases, and integration with Microsoft(R) Outlook. During the
quarter the Company also introduced the Netgain Customer Interaction Center
(CIC), a web-based customer contact management application including
telemarketing, marketing and customer support modules. Netgain CIC is scheduled
for general release later in the year. The Company continues to sell, service
and support its client/server products, TakeControl(R), TakeControl Today, and
Firstwave for Unix, which include Sales, Marketing, and Customer Support
modules.
RESULTS OF OPERATIONS
Total revenues decreased 27.8% from $3,738,000 in the second quarter of 1998 to
$2,700,000 in the second quarter of 1999 and year to date total revenues
decreased 16.1% from $7,348,000 in 1998 to $6,162,000 in 1999 primarily due to
decreases in license fees and professional services. Software revenues
decreased 57.9% from $868,000 in the second quarter of 1998 to $365,000 in the
second quarter of 1999, and year to date decreased 29.8% from $2,187,000 in
1998 to $1,536,000 in 1999. The lower license revenues are attributed to the
slower than expected ramp-up of revenues from the first component of the new
product line suite, Netgain Sales, and lower revenues from the TakeControl
product line. The Company's quarter-to-quarter revenues are also significantly
dependent upon the timing of the closing of license agreements.
Revenues from international license revenues decreased 55.5% from $550,000 in
the second quarter of 1998 to $245,000 in the corresponding quarter of 1999.
Year to date, revenues from international licenses decreased 41.9% from
$1,760,000 in 1998 to $1,023,000 in 1999. As a percentage of total revenues,
international license revenues decreased from 14.7% in the second quarter of
1998 to 9.1% in second quarter of 1999, and year to date decreased as a
percentage of total revenues from 24.0% in 1998 to 16.6% in 1999. These
decreases are the result of lower sales by international distributors. During
the second quarter of 1999 total revenues generated from sales in the United
Kingdom were 40.3% of total revenue.
8
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Services revenues decreased 31.0% from $1,376,000 in the second quarter of 1998
to $950,000 in the second quarter of 1999, and year to date decreased 15.7%
from $2,265,000 in 1998 to $1,909,000 in 1999. The decreases in services
revenues are consistent with the decreases in software license revenues as the
Company typically provides separate implementation and training services at the
time of software sales.
Maintenance revenues remained fairly consistent with $1,301,000 in the second
quarter of 1998 and $1,288,000 in the second quarter of 1999, and year to date,
at $2,604,000 for the first six months of 1998 compared to $2,521,000 for the
first six months of 1999. Maintenance revenues are the result of renewal
agreements from previous software license sales. These annual agreements
demonstrate the long term value of the Company's products.
Cost of software revenues increased 10.4% from $173,000 in the second quarter
of 1998 to $191,000 in the second quarter of 1999. Year to date, cost of
software revenues increased 16.5% from $340,000 in 1998 to $396,000 in 1999.
These increases are a result of an increase in third party software costs
associated with the Netgain Enterprise product line and an increase in
amortization of capitalized software associated with the development of Netgain
Enterprise. Cost of software revenues include costs of third party software,
amortization of capitalized software costs and costs of packaging and
documentation materials and related media costs.
Cost of revenues for services decreased 40.2% from $1,001,000 in the second
quarter of 1998 to $599,000 in the second quarter of 1999 and year to date,
decreased 28.4% from $1,720,000 in 1998 to $1,232,000 in 1999 due to decreases
in the number of service personnel and related costs. The decrease in personnel
and associated costs is due to changes implemented by management and reflect
the impact of lower services and license revenues. Cost of revenues for
maintenance decreased 18.1% from $431,000 in the second quarter of 1998 to
$353,000 in the second quarter of 1999. Year to date, cost of revenues for
maintenance decreased 20.9% from $827,000 in 1998 to $654,000 in 1999. These
decreases in cost of maintenance are primarily due to a decrease in
international maintenance costs from the acquisition of Firstwave UK.
Previously, while operating as a distributor, a portion of the maintenance
revenue was retained by the distributor and recorded as a cost of maintenance
by the Company. Now as a wholly owned subsidiary, the Company retains the full
amount of the maintenance revenue. There were also decreases in payroll and
related costs in this area.
Sales and marketing expense decreased 37.9% from $1,322,000 in the second
quarter of 1998 to $821,000 in the second quarter of 1999. Year to date, sales
and marketing expense decreased 27.2% from $3,021,000 in 1998 to $2,200,000 in
1999. The decreases were due to decreases in commissions associated with the
decrease in software license revenues, decreases in marketing expenses
associated with a more focused marketing plan, and decreases in payroll and
related costs.
The Company's product innovation and development expenditures increased 53.9%
from $564,000 in the second quarter of 1998 to $868,000 in the second quarter
of 1999.
9
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Year to date, product innovation and development expenditures increased 68.6%
from $1,089,000 in 1998 to $1,836,000 in 1999. These increases are related to
increased development efforts on the Netgain Enterprise and TakeControl Today
products. Software development costs capitalized during the three months and
six months ended June 30, 1999 were $476,000 and $820,000 respectively. No
capitalization occurred during the comparative periods of 1998.
General and administrative expenses decreased 16.9% from $791,000 in the second
quarter of 1998 to $657,000 in the second quarter of 1999. Year to date,
general and administrative expenses increased 23.5% from $1,406,000 in 1998 to
$1,736,000 in 1999. The quarterly decrease is due to decreases in bad debt
expense, lower administrative expenses related to overall reduced staff levels,
and a decrease in professional fees. The year to date increase is associated
with the April 30, 1998 acquisition of Co-cam UK (now Firstwave UK) and the
costs associated with maintaining the London office.
Interest income decreased 55.7% from $61,000 in the second quarter of 1998 to
$27,000 in the second quarter of 1999 and year to date decreased 60.9% from
$115,000 in 1998 to $45,000 in 1999. These decreases are due to fluctuations in
invested cash balances.
The above factors combined to result in a 44.8% decrease in the net loss from
$717,000 in the second quarter of 1998 to a net loss of $396,000 in the second
quarter of 1999, and a net loss per share of $.14 for the second quarter of
1998 compared to a net loss per share of $.08 for the second quarter of 1999.
Year to date, net loss decreased 4.2% from $1,290,000 in 1998 compared to
$1,236,000 in 1999. Year to date, net loss per share decreased 4.0% from $0.25
per share in 1998 compared to $0.24 per share in 1999. The net loss per share
amount for the quarter ended June 30, 1999 also includes dividends of $30,000
accrued on preferred stock.
BALANCE SHEET
Net accounts receivable decreased 49.1% from $3,146,000 at December 31, 1998 to
$1,600,000 at June 30, 1999 due to collection of outstanding receivables and
decreased revenues. Property and equipment decreased 30.4% from $1,501,000 at
December 31, 1998 to $1,044,000 at June 30, 1999, due to year to date
depreciation and write-offs of obsolete computer equipment. Capitalized
software increased 69.5% from $770,000 at December 31, 1998 to $1,305,000 at
June 30, 1999 due to additional capitalization of $820,000 in development costs
during the first six months of 1999 net of $285,000 of amortization. Accounts
payable decreased 28.2% from $1,354,000 at December 31, 1998 to $972,000 at
June 30, 1999 consistent with the decrease in operating expenses during the
first six months of 1999. Deferred revenue decreased 29.9% from $1,581,000 at
December 31, 1998 to $1,109,000 at June 30, 1999 primarily due to the
recognition of six months of maintenance revenues related to annual contracts
billed in advance at year end. Other accrued liabilities decreased 40.2% from
$343,000 at December 31, 1998 to $205,000 at June 30, 1999 due to lower sales
and VAT tax payable consistent with lower revenues during the first six months
of 1999.
10
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LIQUIDITY AND CAPITAL RESOURCES
The Company issued to two officers an aggregate of 20,000 shares of Series A
Preferred Stock for $2 million during the second quarter of 1999. As a result,
at June 30, 1999, the Company had cash and cash equivalents of $3,435,000
compared to $2,245,000 at December 31, 1998. Management believes that its
present liquidity position, recent equity infusions and the available line of
credit are sufficient to finance the Company's operations during 1999 and
beyond. The Company's primary non-operating use of cash during the six-month
period ending June 30, 1999 consisted of $820,000 for the continued development
of its software products. During the first quarter of 1999, the Company renewed
its $3,000,000 line of credit for another one-year term, which now expires
March 14, 2000. The line of credit bears interest at the prime rate and is
secured by the assets of the Company. As of June 30, 1999 there were no
borrowings against the line of credit.
YEAR 2000
The Company's current product lines are year 2000 compliant. However, some of
the Company's customers are running older product versions that are not year
2000 compliant. All of the Company's customers have been notified of the
availability of a year 2000 compliant version of the Company's product they are
running and the Company has been encouraging its customers to migrate to
current product versions. Although the Company has designed and tested the most
current versions of its products to be year 2000 compliant, there can be no
assurance that they do not contain undetected errors or other defects
associated with year 2000 date functions.
A year 2000 evaluation was completed during 1998 to assess the Company's year
2000 readiness related to its internal systems. As of June 30, 1999 all
critical systems are now compliant and the Company is 98% complete in bringing
the balance of internal systems into compliance. Although the cost associated
with completing year 2000 readiness for the Company's internal systems has been
determined to be immaterial, there can be no assurance that the Company will
not experience unanticipated consequences caused by undetected errors or
defects in the technology used in its internal systems, which are composed of
third party software and hardware. The Company is in the process of
implementing contingency plans and business resumption plans that will be
completed during the remainder of fiscal 1999.
SUBSEQUENT EVENT
On August 6, 1999 a venture capital firm invested $1,500,000 in a private
placement of 500,000 shares of unregistered common stock of the Company.
11
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
During the second quarter of 1999 the Company raised $2,000,000
through the sale of Series A Convertible Preferred Stock in a private
placement to accredited investors pursuant to Section 4(2) and Rule
506 under the Securities Act of 1933. The Company received $1,000,000
in March 1999 and $1,000,000 in April 1999 related to this offering.
The Preferred Stock is convertible into Common Stock of the Company at
anytime after April 26, 2000, at a conversion rate of $2.06 per share
of Common Stock.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on form 8-K
Exhibit 27 - Financial Data Schedule (for SEC purposes only)
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTWAVE TECHNOLOGIES, INC.
DATE: August 10, 1999 /s/ Judith A. Vitale
-------------------------------------------
Judith A. Vitale
Vice President of Finance and Administration
13
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q OF
FIRSTWAVE TECHNOLOGY FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,435
<SECURITIES> 0
<RECEIVABLES> 1,600<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,475
<PP&E> 1,044<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,994
<CURRENT-LIABILITIES> 2,500
<BONDS> 0
0
2,000
<COMMON> 10
<OTHER-SE> 6,484
<TOTAL-LIABILITY-AND-EQUITY> 10,994
<SALES> 1,536
<TOTAL-REVENUES> 6,162
<CGS> 396
<TOTAL-COSTS> 2,461
<OTHER-EXPENSES> 4,952
<LOSS-PROVISION> 114
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,206)
<INCOME-TAX> (30)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,236)
<EPS-BASIC> (.24)
<EPS-DILUTED> (.24)
<FN>
<F1>A/R AND PPE ASSET VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
