| FIRSTWAVE TECHNOLOGIES INC Item 1A Risk Factors An investment in our common stock involves a significant degree of risk |
| Prospective investors should carefully consider the following factors that may affect our current and future operations and prospects |
| If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the trading price of our common stock could decline, and you may lose all or part of your investment |
| Negative cash flow and the difficulty of raising additional capital may adversely affect our operations and the price of our common stock |
| During 2004 and 2005, we experienced negative cash flows and may experience negative cash flow in the future |
| Prior to our outsourcing agreements, we required significant amounts of capital to fund our business operations and product development efforts |
| Our ability to maintain and develop our revenue sources will directly impact our ability to raise capital needed to grow our business |
| In the past, we have funded our operating losses and working capital needs through cash flow from operations and from the proceeds of equity offerings and debt financings |
| If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and, in light of our current market capitalization, our shareholders may experience substantial dilution |
| We are heavily dependent upon M1 Global’s key personnel, expertise in the CRM software market, and future business strategy; the loss of which could affect our ability to successfully grow or maintain our business; and if M1 Global changes its strategy to sell Firstwave products and services, our revenues may be materially harmed |
| We depend in large part upon the continued relationship with M1 Global and its ability to successfully market, sell, service and support Firstwave products |
| The loss of M1 Global key personnel or a change in its business strategy to sell Firstwave products and services would likely harm our operations significantly |
| Our revenues could suffer, and we may experience a material adverse impact on our business, operating results, and financial condition |
| We are reliant upon First Sports’ expertise in the CRM software market and with our UK customers; the loss of which could affect our ability to successfully support our UK customers and retain the maintenance revenues associated therewith |
| Outside of the discontinued operations associated with the sale of the UK Subsidiary to First Sports on June 3, 2005, we depend upon First Sports and its ability to successfully support and maintain our UK CRM customers |
| If First Sports were to no longer provide such local support, we would need to support these customers ourselves or contract with another third party to provide the support services, or our maintenance revenues from the UK CRM customers would suffer, and we may experience an adverse impact on our revenues, operating results, and financial condition |
| 6 _________________________________________________________________ We have in the past and may in the future experience significant fluctuations in our operating results and rate of growth, and the price of our common stock may be adversely affected by these fluctuations |
| Our quarterly operating results have in the past and may in the future vary or decrease significantly depending on factors such as: · the effect of past and future acquisitions, · the dependence on the efforts of others, such as M1 Global and First Sports, · changes in operating expenses, · changes in our strategy, · key personnel departures, · the size and timing of significant orders, · the impact of estimates of our future operating results published by third parties, · the timing of revenue from software sales and professional services, · the timing of new product and service announcements, · changes in pricing policies by us and our competitors, · market acceptance of new and enhanced versions of our products, · the introduction of alternative technologies, and · general economic factors |
| We have limited or no control over many of these factors |
| Investors are cautioned that as a matter of policy we do not provide earnings projections or guidance to any financial analysts or other publishers of financial reports |
| If we change this policy, which we do not anticipate, we will make a public announcement regarding such change |
| Until such time, if it occurs, you should not rely upon any such information, reports, statements, estimates or projections of financial analysts, publishers of financial reports or others as having been provided or endorsed by us |
| We expressly do not adopt or endorse, and expressly disclaim, any and all such independent third party information, reports, statements, estimates and projections |
| We believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance |
| Due to all these factors, it is likely that in some future quarter our operating results will be below the expectations of investors |
| In that event, the price of our common stock will likely be adversely affected |
| Our stock price has been and may continue to be highly volatile |
| The trading price of our common stock fluctuates significantly |
| Trading prices of our common stock may fluctuate in response to a number of events and factors such as: · general economic conditions, · conditions or trends in the CRM industry, · fluctuations in the stock market in general, and · quarterly variations in operating results |
| Decreases or delays in our target customers’ information technology spending and other circumstances that result from poor economic conditions may harm our revenues; if general economic conditions do not improve or if they worsen, our revenues may be materially harmed |
| Some of our customers and prospective customers have indicated that they have reduced their budgets available for spending on outsourced technology applications or have delayed purchase decisions for information technology products like ours due, in part, to difficult economic conditions |
| If the economy does not improve or if it worsens, our customers may continue to delay or reduce their spending on CRM software and customization |
| When economic conditions weaken, sales cycles for sales of software products tend to lengthen and companies’ information technology budgets tend to be reduced |
| Accordingly, our business has suffered and could continue to suffer |
| The impact of these reduced budgets and delays in purchase decisions is not possible to measure or quantify |
| 7 _________________________________________________________________ The market for our CRM software and services is subject to rapid change stemming from customer requirements and changes in related technologies, including hardware, operating systems and telecommunications; if we fail to improve our products in response to these changes, our sales may decline |
| The market for our CRM software and services is subject to rapid change, including technological advances, changes in customer requirements and frequent new product introductions and enhancements |
| Our future success depends upon our ability to enhance our current products and continue to develop and market new products that address the increasingly sophisticated needs of customers and achieve market acceptance |
| In particular, we believe that we must continue to respond quickly to customer needs for additional functionality and to ongoing advances in hardware, operating systems and telecommunications |
| Any failure by us to anticipate or respond rapidly to technological advances, new products and enhancements and changes in customer requirements could have a material adverse effect on our competitive position or render some of our products obsolete or less desirable than available alternatives |
| With the release of any new product release, we are subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in development and implementation, and failure of products to perform as expected |
| In order to introduce and market new or enhanced products successfully with minimal disruption in customer purchasing patterns, we must manage the transition from existing products |
| There can be no assurance that we will be successful in developing and marketing, on a timely basis, product enhancements or products that respond to technological advances by others, that our new products will adequately address the changing needs of the market or that we will successfully manage product transitions |
| Further, failure to generate sufficient cash from operations or financing activities to develop or obtain improved products and technologies could have a material adverse effect on our results of operations and financial condition |
| To grow our business, we may acquire additional companies, including by issuing shares of our stock, which may subject us to additional risks and may dilute your ownership |
| To initiate our growth strategies, we acquired Connect-Care, Inc |
| in March 2003, and we may acquire other businesses |
| An inability to identify, acquire and integrate businesses, products or services that complement our business may negatively affect our ability to grow |
| We cannot guarantee that we will be able to identify and acquire suitable candidates on acceptable terms |
| We also cannot provide any assurance that we will be able to arrange adequate financing, complete additional transactions or successfully integrate the acquired businesses |
| As in the case of the Connect-Care merger, we may issue shares of stock in future acquisitions or in financing transactions, which would dilute the ownership percentages of our existing shareholders |
| Acquisitions and stock offerings may also distract management and result in the incurrence of debt, expenses related to goodwill and other intangible assets and unforeseen liabilities, all of which could have a material adverse effect on our business and financial condition |
| In addition, we may not be able to successfully compete with other companies for acquisition candidates |
| In order for any acquisition to be successful, we would have to successfully and quickly integrate the new business with our business, including: · cross-market and sell our services and products to the new business’ customers; · minimize duplicative managerial, sales and marketing efforts and eliminate redundant costs of our operations; and · make the new business’ personnel operate together with our personnel in a cost-effective manner |
| If we do not integrate our operations successfully, we may fail to achieve our business goals |
| This would likely cause a slow-down in our growth rate that may result in a decrease in the value of your investment |
| Our CRM software products, like most software products of a complex nature, may contain undetected errors; as a result, we could experience delays, additional expenses or lost revenues |
| Software products as complex as those we offer may contain undetected errors |
| We could experience delays or lost revenues during the period required to correct those errors |
| There can be no assurance that, despite testing by us and by current and potential customers, errors will not be found in our software |
| If our products are found to contain errors, the result to us could be: · a loss of or delay in market acceptance, · additional and unexpected expenses to fund further product development, · additional and unexpected expenses to add programming personnel to complete a development project, · loss of revenue because of the inability to sell the new product on a timely basis, and · loss of revenue due to adverse effect on our reputation, any one or more of which could have a material adverse effect on us |
| 8 _________________________________________________________________ Like most providers of complex software, our most valuable asset is an intangible, intellectual property; protection of our proprietary rights can be difficult, complex and expensive; if we are unable to protect our proprietary rights, then our competitive position could be weakened, which may reduce our revenues |
| We derive a significant portion of our revenues from license, service and maintenance fees generated from our software |
| We do not have any patents on our software; rather we rely on a combination of trade secrets, copyright and trademark laws, non-disclosure and other contractual provisions and technical measures to protect our proprietary rights |
| We may be required to spend significant resources to monitor and police our proprietary rights |
| There can be no assurance that these protections will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies |
| Other software providers could copy or otherwise obtain and use our products or technology without authorization |
| We may not be able to detect infringement and may lose a competitive position in the market before we do so |
| In addition, competitors may design around our technology or develop competing technologies |
| The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States |
| If we fail to successfully enforce our proprietary rights, our competitive position may be harmed |
| Because it is not difficult to enter our industry, we expect increased competition from the introduction of superior products or by pricing pressure from competitors, all of which could harm our business |
| The market for our products is characterized by significant price competition, and we expect that we will face increasing pricing pressures from our current competitors |
| In addition, some of our competitors may have significant advantages including the ability to adapt quickly to new technologies and changes in customer demands, and substantially greater resources and market presence |
| Moreover, because there are low barriers to entry into the software market, we believe that competition will increase in the future |
| Accordingly, there can be no assurance that we will be able to provide products that compare favorably with the products of our competitors or that competitive pressures will not require us to reduce our prices |
| Any material reduction in the price of our products would negatively affect gross margins as a percentage of new revenue and would require us to increase software unit sales in order to maintain net revenues |
| The terms of our preferred stock include preferences over our common stock and the issuance of additional shares of preferred stock may have a material adverse effect on the market value of our common stock |
| Our board of directors has the authority to issue up to 1cmam000cmam000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by our shareholders |
| At December 31, 2005 shares of outstanding preferred stock were as follows: · 10cmam000 shares of Series A Convertible Preferred Stock · 7cmam020 shares of Series B Convertible Preferred Stock · 10cmam000 shares of Series C Convertible Preferred Stock · 7cmam000 shares of Series D Convertible Preferred Stock The rights of the holders of the common stock are subject to, and may be adversely affected by, the rights of the holders of Series A, Series B, Series C and Series D Convertible Preferred Stock and any other preferred stock that may be issued in the future |
| The issuance of the Series A, Series B, Series C and Series D Convertible Preferred Stock and any future issuances of other classes of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control of our company |
| Furthermore, the Series A, Series B, Series C and Series D Convertible Preferred Stock have other rights, including economic rights, senior to the common stock and, as a result, the existence of our preferred stock may have a material adverse effect on the market value of our common stock |
| Any future issuances of other classes of preferred stock may have other rights, including economic rights, senior to the common stock, and as a result, the issuance of new preferred stock could have a material adverse effect on the market value of our common stock |
| We may, in the future, adopt other measures that may have the effect of delaying, deferring or preventing a change in control of our company |
| Some of these measures may be adopted without any further vote or action by our shareholders |
| 9 _________________________________________________________________ We are reliant upon certain key personnel for expertise in the CRM software market and in the technical aspects of the CRM software product; the loss of such key personnel could affect our ability to successfully grow our business |
| We depend in large part upon the continued service of our chief executive officer and key engineering and technical staff with expertise in our industry and products |
| The loss of the services of our executive officer and key personnel could harm our operations |
| Currently, none of our personnel are bound by an employment agreement, and we do not maintain key person insurance on any of our employees |
| We would also be harmed if one or more of our key employees decided to join a competitor or otherwise compete with us |
| The market for CRM software has fluctuated over the past several years, and we are uncertain as to its future; if the market for CRM software does not grow, our revenues may be reduced |
| The CRM software market is fluctuating, and our success depends on its growth |
| If the market for CRM software does not grow as quickly or become as large as anticipated, our revenues may be reduced |
| Our potential customers may: · not understand or see the benefits of using these products, · not achieve favorable results using these products, · experience technical difficulty in implementing or using these products, or · use alternative methods to solve the same business problems |
| Our products can have long sales cycles which make it difficult to plan expenses and forecast results |
| It takes between three and six months to complete the majority of our sales, and some sales take longer to complete |
| Therefore, it is difficult to predict the quarter in which a particular sale will occur and to plan expenditures accordingly |
| The length of the period between initial contact with a potential customer and their purchase of products and services is due to several factors, including: · the complex nature of our products, · our need to educate potential customers about the uses and benefits of our products, · the purchase of our products may require a significant investment of resources by a customer, · customer budget cycles which affect the timing of purchases, · uncertainty regarding future economic conditions, · customer requirements for competitive evaluation and internal approval before purchasing our products, · customer delay of purchases due to announcements or planned introductions of new products by us or our competitors, and · large customer purchasing procedures, which may require a longer time to make decisions |
| The delay or failure to complete sales in a particular quarter could reduce our revenues in that quarter, as well as subsequent quarters over which revenues for the sale would likely be recognized |
| If our sales cycle unexpectedly lengthens in general or for one or more large orders, it would adversely affect the timing of our revenues |
| Because our business involves the electronic transmission and storage of data, privacy and security concerns, particularly related to the use of our software on the internet, may limit the effectiveness of and reduce the demand for our products |
| The effectiveness of our software products relies on the storage and use of customer data collected from various sources, including information collected on web sites, as well as other data derived from customer registrations, billings, purchase transactions and surveys |
| Our collection and use of that data for customer profiling may raise privacy and security concerns |
| Our customers generally have implemented security measures to protect customer data from disclosure or interception by third parties |
| However, these security measures may not be effective against all potential security threats |
| If a well-publicized breach of customer data security were to occur, our software products may be perceived as less desirable, impacting our future sales and profitability |
| In addition, due to privacy concerns, some internet commentators, consumer advocates, and governmental or legislative bodies have suggested legislation to limit the use of customer profiling technologies |
| The European Union and some European countries have already adopted some restrictions on the use of customer profiling data |
| In addition, internet users can, if they choose, configure their web browsers to limit the collection of user data for customer profiling |
| Should many internet users choose to limit the use of customer profiling technologies, or if major countries or regions adopt legislation or other restrictions on the use of customer profiling data, our software would be less useful to customers, our sales could decrease and our results of operations could be materially adversely affected |
| 10 _________________________________________________________________ The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 require that we undertake an evaluation of our internal controls that may identify internal control weaknesses |
| The Sarbanes-Oxley Act of 2002 imposes new duties on us and our executives, directors, attorneys and independent registered public accounting firm |
| In order to comply with the Sarbanes-Oxley Act, we are evaluating our internal controls systems to allow management to report on, and our independent auditors to attest to, our internal controls |
| We have initiated establishing the procedures for performing the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act |
| As the Securities and Exchange Commission has extended the deadline for non-accelerated filers, such as Firstwave, until December 31, 2007, we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion |
| If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our auditors may not be able to render the required attestation concerning our assessment and the effectiveness of the internal controls over financial reporting, we may be subject to investigation and/or sanctions by regulatory authorities, such as the Securities and Exchange Commission or The NASDAQ Stock Market, and our reputation may be harmed |
| Any such action could adversely affect our financial results and the market price of our common stock |