-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtRBrJhZSQdBuA9jxQv4/Vcpkvwjem+7SMA51Q8lbOCbklcdCVaR5d80ICFJP6Pz r9Ltl2yD2LS9PdSQ6mNJ8g== 0000930413-03-003377.txt : 20031118 0000930413-03-003377.hdr.sgml : 20031118 20031118155834 ACCESSION NUMBER: 0000930413-03-003377 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONT PORCH DIGITAL INC CENTRAL INDEX KEY: 0001025707 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 860793960 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-32913 FILM NUMBER: 031010634 BUSINESS ADDRESS: STREET 1: 1810 CHAPEL AVE W STREET 2: SUITE 130 CITY: CHERRY HILL STATE: NJ ZIP: 08002 BUSINESS PHONE: 8566333500 MAIL ADDRESS: STREET 1: 1810 CHAPEL AVE W STREET 2: SUITE 130 CITY: CHERRY HILL STATE: NJ ZIP: 08002 FORMER COMPANY: FORMER CONFORMED NAME: EMPIRE COMMUNICATIONS CORP DATE OF NAME CHANGE: 19980327 FORMER COMPANY: FORMER CONFORMED NAME: LITIGATION ECONOMICS INC DATE OF NAME CHANGE: 19961022 10QSB 1 c29775_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 2003 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______. Commission File Number 333-16031 FRONT PORCH DIGITAL, INC. ------------------------- (Name of small business issuer as specified in its charter) Nevada 86-0793960 ------ ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 20000 Horizon Way, Suite 120 Mt. Laurel, New Jersey 08054 ---------------------------------------- (Address of principal executive offices) (856) 439-9950 -------------- (Issuer's telephone number) Check whether the issuer (1) 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 [ ] As of November 13, 2003, 41,615,648 shares of the issuer's common stock, par value $.001, were outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] PART I. FINANCIAL INFORMATION FRONT PORCH DIGITAL, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) September 30, 2003 ASSETS Current assets: Cash and cash equivalents $ 414,576 Restricted cash 90,533 Accounts receivable - trade & other, net of allowance of $30,200 Non-affiliates 1,058,041 Affiliates 52,637 Other current assets 254,076 ------------ Total current assets 1,869,863 Property and equipment, net 558,346 Software development costs, net 346,901 Software and intellectual property, net of accumulated amortization of $886,625 950,172 Excess cost over fair value of net assets acquired, net of accumulated amortization of $949,778 1,182,289 Other assets 57,025 ------------ Total assets $ 4,964,596 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes payable $ 574,476 Current portion of other long-term liability 100,000 Current portion of capitalized lease obligation 38,132 Accounts payable 987,567 Accrued expenses 941,719 Accrued expenses - employees 680,088 Deferred revenue 104,413 ------------ Total current liabilities 3,426,395 Notes payable, net of current portion 573,963 Other long-term liability, net of current portion 397,318 Capitalized lease obligation, net of current portion 51,630 ------------ Total liabilities 4,449,306 ------------ Stockholders' equity: Preferred stock, nonvoting, $.001 par value, 5,000,000 shares authorized, none issued or outstanding -- Common stock, $.001 par value, 50,000,000 shares authorized, 41,615,648 shares issued and outstanding 41,616 Additional paid-in capital 25,367,404 Accumulated other comprehensive income 32,959 Accumulated deficit (24,926,689) ------------ Total stockholders' equity 515,290 ------------ Total liabilities and stockholders' equity $ 4,964,596 ============ See accompanying notes to condensed consolidated financial statements. 2 FRONT PORCH DIGITAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------- 2003 2002 2003 2002 ---------------------------------------------------------------- Revenues: Products $ 537,817 $ 550,781 $ 1,468,089 $ 757,237 Services 539,939 521,730 2,241,889 1,345,622 Services - affiliate -- -- 1,660,214 -- ------------ ------------ ------------ ------------ Total revenue 1,077,756 1,072,511 5,370,192 2,102,859 Cost of revenue: Products 55,014 220,019 155,198 300,228 Services 355,168 151,609 1,251,358 400,785 ------------ ------------ ------------ ------------ Total cost of revenue 410,182 371,628 1,406,556 701,013 ------------ ------------ ------------ ------------ Gross margin 667,574 700,883 3,963,636 1,401,846 Selling, general and administrative 1,191,276 1,057,774 3,348,678 2,719,259 Research and development 84,760 129,114 134,923 347,891 Depreciation 203,693 278,569 606,469 584,761 Amortization 121,112 60,073 413,184 177,931 Loss on impairment of goodwill and intellectual property -- -- 3,335,848 -- ------------ ------------ ------------ ------------ Total operating expenses 1,600,841 1,525,530 7,839,102 3,829,842 Operating loss (933,267) (824,647) (3,875,466) (2,427,996) Other income (expense): Interest income 603 1,297 1,400 2,697 Interest expense (205,371) (144,049) (571,235) (161,987) Other expense (98,200) -- (88,328) -- Foreign currency transaction loss 4,899 -- 1,662 -- ------------ ------------ ------------ ------------ Total other expense (298,069) (142,752) (656,501) (159,290) Loss from continuing operations (1,231,336) (967,399) (4,531,967) (2,587,286) Loss on operations of discontinued operation (229,279) (220,949) (980,575) (220,949) Gain on sale of discontinued operation -- -- 586,955 -- ------------ ------------ ------------ ------------ Loss from discontinued operations 229,279 220,949 393,620 220,949 ------------ ------------ ------------ ------------ Net loss $ (1,460,615) $ (1,188,348) $ (4,925,587) $ (2,808,235) ============ ============ ============ ============ Weighted average shares outstanding - basic and diluted 41,615,648 29,886,714 37,806,128 27,565,231 Earnings per share - basic and diluted: Loss from continuing operations $ (0.03) $ (0.03) $ (0.12) $ (0.09) Loss from discontinued operations $ (0.01) $ (0.01) $ (0.01) $ (0.01) ------------ ------------ ------------ ------------ Net loss $ (0.04) $ (0.04) $ (0.13) $ (0.10) ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 3 FRONT PORCH DIGITAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 ---------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (4,925,587) $ (2,808,235) Loss from discontinued operations 980,575 220,949 Gain on sale of discontinued operations (586,955) -- ------------- ------------- Loss from continuing operations (4,531,967) (2,587,286) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation & amortization 1,019,653 762,692 Non-cash interest expense 506,794 125,000 Loss on impairment of goodwill and intellectual property 3,335,848 -- Non-cash issuance of common stock to employees and consultants -- 392,387 Stock option compensation cost 9,259 131,486 Gain on sale of fixed assets (9,951) -- Changes in operating assets and liabilities: Decrease in accounts receivable - affiliate 273,186 -- Decrease in accounts receivable 14,062 68,912 Decrease in deferred costs 88,527 -- Decrease in other current assets 340,557 471,868 Decrease in other assets 32,945 -- Decrease in accounts payable (658,087) (24,665) (Decrease) increase in accrued expenses (242,721) 303,226 Increase (decrease) in accrued expenses - employees 160,049 (179,993) Decrease in deferred revenue (1,226,247) (327,730) Other changes in operating activities -- 86,257 ------------- ------------- Net cash used in operating activities from continuing operations (888,093) (777,846) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (56,249) (206,569) Cash received from sale of discontinued operations 850,000 -- Net cash acquired from ManagedStorage -- 859,706 Software development costs (214,073) (59,917) Proceeds from sale of fixed assets 154,850 -- Other investing activities -- (14,988) ------------- ------------- Net cash provided by investing activities from continuing operations 734,528 578,232 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 645,000 600,000 Repayment of note payable and capital lease (133,081) -- Proceeds from issuance of common stock -- 50,000 ------------- ------------- Net cash provided by financing activities from continuing operations 511,919 650,000 ------------- ------------- Net cash used in discontinued operations (616,967) (220,949) ------------- ------------- Effect of exchange rate fluctuations on cash and cash equivalents (44,442) -- ------------- ------------- Net (decrease) increase in cash and cash equivalents (303,055) 229,437 Cash and cash equivalents, beginning of period 717,631 393,439 ------------- ------------- Cash and cash equivalents, end of period $ 414,576 $ 622,876 ============= ============= SUPPLEMENTAL NONCASH DISCLOSURES Non Cash financing activities Conversion of convertible senior notes to shares of common stock 250,000 Conversion of convertible senior notes into new unsecured convertible notes 250,000 Conversion of liabilities into new unsecured convertible notes 95,000 ------------- $ 595,000 =============
See accompanying notes to condensed consolidated financial statements. 4 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION Front Porch Digital, Inc. and its subsidiaries (the "Company") enables the conversion, preservation and management of analog and digital content, including text, images, audio, graphics, video and rich media. The Company develops proprietary software products and performs services that convert content into digital formats for subsequent storage and on-demand delivery in the same or other formats or digital platforms. The software, which is based on proprietary and patent-pending technology, enables a new paradigm in the way broadcasters, content owners and education and law enforcement personnel manage their workflow - - a shift from tape-oriented warehousing to a fully-digital, instant access automated archive. The Company's customers are located in the United States, Canada, Europe and Asia. The condensed consolidated financial statements of the Company have been prepared on a going-concern basis, which contemplates the realization of assets and liabilities in the normal course of business. Accordingly, the consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue in existence. The Company has incurred losses since commencement of operations in its current line of business. Although the Company's operating results have continued to improve in the first nine months of 2003, excluding the $3.3 million loss on impairment of goodwill and intellectual property, and the Company has improved its working capital position and liquidity during that period, there can be no assurance that the Company will not continue to sustain operating losses. For the nine months ended September 30, 2003, the Company generated a net loss of $4.9 million. Excluding a charge of $3.3 million for the impairment of goodwill and intellectual property related to the Company's media services business and net losses from discontinued operations of $394,000, the net loss for the nine months ended September 30, 2003 was $1.2 million (as compared to a loss of $2.6 million in the prior year period, excluding net losses from discontinued operations of $221,000). Included in net loss for the period was a non-recurring gain on the sale of discontinued operations of $587,000 related to the sale of the Company's DIVArchive Medical business to Eastman Kodak Company ("Kodak"). For the nine months ended September 30, 2003, the Company generated negative cash flow from operating activities of continuing operations of $888,000. For the three months ended September 30, 2003, the Company generated a net loss of $1.5 million. Excluding the net loss from discontinued operations of $229,000, the Company generated a net loss from continuing operations for the three months ended September 30, 2003 of $1.2 million (as compared to a loss of $1.0 million in the prior year period excluding net losses from discontinued operations of 221,000). The Company generated positive cash flow from operating activities of continuing operations for the three months ended September 30, 2003 5 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) of $44,000. In addition, at September 30, 2003, the Company had a working capital deficit of $1,557,000. These factors raise substantial doubt about the Company's ability to continue as a going concern. During the third quarter of 2003, management continued implementing a restructuring of the operations of the Company that included reorganizing the personnel of the Company, reducing headcount, reducing non-essential operating costs and refocusing the Company's business strategy, products and services. As of November 13, 2003, this restructuring and refocusing has been completed, and management believes the Company's current operating cost levels are adequate and appropriate to support its operations and working capital needs. The Company is continuing to focus on the expansion of its DIVArchive and transcoding broadcast operations in the United States and has hired 11 additional personnel in its New Jersey and Colorado operations and sales facilities. In addition, the Company is continuing to develop its DIVArchive business through its Toulouse, France operations. As a result, operating costs have increased in these areas and offset the cost reductions achieved by the Company in exiting the DIVArchive Medical business and in other areas. Overall, operating costs are at approximately the same levels as in the second quarter of 2003 and slightly lower than the comparable quarter of 2002, excluding the charge for the impairment of goodwill and intellectual property recorded in the second quarter. In addition, during the third quarter of 2003, the Company incurred certain non-recurring operating costs related to legal services (which were approximately twice the typical level) and recruiting/advertising fees for the staffing additions described above (which were largely completed during the third quarter). The Company believes that at its current staffing levels it is adequately staffed to deploy its DIVArchive and transcoding products in its target markets and that its current cost levels can support a sustained level of revenue to support its business operations in the future. However, there can be no assurance that the Company will be successful in continuing to generate new revenues and cash flows to support these costs or to continue as a going concern. In April and May 2003, the Company secured additional capital through the sale of convertible notes, restructured certain liabilities and sold its DIVArchive Medical operations to Kodak for $850,000 in cash and the transfer of certain liabilities and operations. The sale of the DIVArchive Medical operations to Kodak and the operations of that business have been accounted for as discontinued operations. As a result, the operating results of the DIVArchive Medical operations are excluded from operating loss and loss from continuing operations and are reported as separate line item components for the three and nine months ended September 30, 2003 and 2002. 6 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Management of the Company believes the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal and recurring nature. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the operating results to be expected for the year ending December 31, 2003. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Front Porch Digital, Inc. and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation. REVENUE RECOGNITION The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery and acceptance has occurred, the fee is fixed or determinable, and collection is reasonably assured. The Company licenses software under license agreements and provides professional services, including training, installation, consulting and maintenance. License fee revenues are recognized when a license agreement has been signed, the software product has been shipped, the fees are fixed and determinable, collection is considered probable and no significant vendor obligations remain. The Company allocates revenue to each component of a contract based on objective evidence of its fair value, as established by management. Because licensing of the software generally is not dependent on the professional services portions of the contract, the software revenue is recognized upon delivery. Fees for maintenance agreements are recognized ratably over the term of the agreement. Maintenance is generally billed in advance, which results in deferred revenues. The Company provides software-related professional services. Services are generally provided on a time and materials basis and revenue is recognized as the services are provided. 7 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Revenue under service contracts is recognized when services have been performed and accepted, or on the proportional-performance method of accounting, depending on the nature of the project. The extent of progress toward completion under the proportional-performance method of accounting is measured by using the number of sites and/or units under the contract that have been completed and the progress toward completion of batches in progress at period end. STOCK-BASED COMPENSATION The Company has elected to follow the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options. The effect of applying the fair value method pursuant to Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based Compensation" to the Company's stock-based awards is disclosed in the table below. Pro forma results of operations may not be representative of the effects on reported or pro forma results of operations for future periods.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 2003 2002 PRO FORMA NET LOSS: Net loss, as reported $(1,460,615) $(1,188,348) $(4,925,587) $(2,808,235) Add: Stock based employee compensation expense included in net loss - 63,000 10,000 194,000 Deduct: Total stock based employee compensation expense determined under fair value based method for all awards (112,785) (256,949) (338,354) (770,848) ----------- ----------- ----------- ----------- Pro forma net loss $(1,573,400) $(1,382,297) $(5,253,941) $(3,385,083) =========== =========== =========== =========== PRO FORMA LOSS PER SHARE: Loss per share - basic and diluted, as reported $ (0.04) $ (0.04) $ (0.13) $ (0.10) ----------- ----------- ----------- ----------- Pro forma loss per share - basic and diluted $ (0.04) $ (0.05) $ (0.14) $ (0.12) ----------- ----------- ----------- ----------- Weighted average shares outstanding - basic and diluted 41,615,648 29,886,714 37,806,128 27,565,231
The Company accounts for equity instruments issued to non-employees in exchange for goods or services using the fair value method and records expense based on the values determined. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. The Company conducts business in various countries outside the United States in which the functional currency of the country is not the U.S. dollar. As a result, the Company has foreign currency exchange translation exposure as the results of these foreign operations are translated into U.S. dollars in its consolidated financial statements. The effect of changes in value of the U.S. dollar compared to other currencies, primarily the euro, has been to increase reported revenues and operating profit when the U.S. dollar weakens and reduce these amounts when the dollar strengthens. While the Company looks for opportunities to reduce its exposure to foreign currency fluctuations against the U.S. dollar, at this point the Company has not had adequate financial resources to pursue hedging opportunities generally. At September 30, 2003, the Company reported a translation gain of $32,959 as a component of Comprehensive Income. The Company is also subject to foreign exchange transaction exposure when its subsidiaries transact business in a currency other than its own functional currency. These transactions are infrequent and have not had a significant effect on the consolidated financial statements. For the three and nine months ended September 30, 2003 and 2002, the Company reported the following components of comprehensive loss:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2003 2002 2003 2002 Net loss $(1,460,615) $(1,188,348) $(4,925,587) $(2,808,235) Change in cumulative foreign currency translation adjustment 664 - 35,746 - ----------- ----------- ----------- ----------- Comprehensive loss $(1,459,951) $(1,188,348) $(4,889,841) $(2,808,235) =========== =========== =========== ===========
USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior period amounts and balances to conform to the 2003 presentation. 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure - -- an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based 8 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has not adopted SFAS No. 148 in its accounting for stock-based compensation. However, the Company has updated its disclosures to conform to the pronouncement. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". This interpretation addresses consolidation by business enterprises of variable interest entities. The interpretation is not expected to have a material effect on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material effect on the Company's financial condition or results of operations. 3. NOTES PAYABLE At September 30, 2003, notes payable consisted of: $93,333 of an unsecured note payable that bears interest at 9% per annum. In September 2002, the Company recapitalized the outstanding balance and accrued interest of an existing unsecured note payable. The new principal amount of $246,500 included the original principal balance of $200,000 plus accrued interest of $46,500. The note was payable in an initial payment of $45,000, and equal monthly installments of $25,000 through June 1, 2003, with a final payment of $8,647 on July 1, 2003. At December 31, 2002, the remaining principal balance on this note was $150,000. Effective April 30, 2003, the Company restructured the $150,000 remaining principal balance on the note payable and accrued interest that was due in full on July 1, 2003 into a new note that is payable over 12 months and matures on May 1, 2004. The note is payable in equal monthly installments that began on May 1, 2003 and carries an annual interest rate of 9% per annum. Accrued interest is payable at maturity. In connection with this agreement, the Company issued to the noteholder warrants to purchase up to 100,000 shares of common stock at a price per share of $0.10. The fair value of these warrants amounted to $10,000 and was recorded as a discount to the note and is being amortized to interest expense over the note term of one year. $744,000 of an unsecured non-interest bearing note payable to an employee. This note is payable based on a percentage of revenue of certain operations of the Company, ranging between 2% and 3% per year, to be payable in full no later than December 31, 2004. In the event the Company exits the media conversion business prior to December 31, 2004, the remaining balance of this note is payable on demand. The Company has estimated that $170,000 will be payable on this note in the next 12 months; and 9 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) $990,000 aggregate principal amount of unsecured convertible notes that were issued in April 2003. The notes contain a beneficial conversion feature as the notes include certain anti-dilution protection and rights, and are convertible into Company Common Stock at a price significantly below the then current market price. The Company allocated $990,000 of the value received to this beneficial conversion feature, which has been recorded as a debt discount and is being amortized to interest expense over the term of the debt. The Company recorded non-cash interest expense related to debt discount of $311,000 during the nine months ended September 30, 2003. Proceeds from the issuance of these notes included: $645,000 cash proceeds received by the Company; retirement of $250,000 principal balance of the former secured convertible notes that matured on March 31, 2003 (the remaining $250,000 principal and accrued interest was converted into Company Common Stock in accordance with the terms of the convertible secured note); and the conversion of $95,000 in current liabilities. The convertible notes bear interest at the rate of 8% per annum and mature on September 30, 2004. Principal and accrued interest are payable at maturity. The convertible notes are convertible at any time at the option of the note holders into shares of Company Common Stock at a conversion price of $.042 per share, subject to certain anti-dilution adjustments. The convertible notes may be prepaid by the Company at any time without penalty. In the event of a prepayment by the Company, or upon payment of principal and interest at maturity, the Company will be required to issue to the holders of such notes five-year common stock purchase warrants to purchase a number of shares of Company Common Stock equal to 5,500 shares for each $1,000 of principal balance repaid, at a purchase price of $0.10 per share, subject to certain anti-dilution adjustments. The purchase agreement relating to the convertible notes contains restrictions that, among others, prohibit the Company from issuing new debt, making capital expenditures in excess of specified amounts, paying dividends on common stock or granting security interests in assets without the consent of note holders owning a majority in principal amount of the outstanding convertible notes. In April 2003, the holders of $500,000 aggregate principal amount of convertible secured notes converted the remaining $250,000 of the outstanding principal ($250,000 of principal was converted into the unsecured convertible notes described above) and 100% of the accrued interest into 6,785,715 shares of Company Common Stock pursuant to the conversion terms of the convertible secured notes. In connection with this conversion, the Company recorded $39,000 in non-cash interest expense related to the value of the induced conversion of the debt. 4. SALE OF DIVARCHIVE MEDICAL OPERATIONS On April 23, 2003, the Company sold to Kodak the Company's intellectual property rights relating to the DIVArchive product applications for the medical imaging and information management market. In connection with 10 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) such sale, Kodak paid the Company $850,000, employed substantially all of the Company's personnel associated with the transferred assets and assumed certain software support obligations to the Company's existing DIVArchive customers in the medical industry. The Company recorded a gain on the sale of $587,000. Subsequent to the sale, Kodak and the Company entered into certain other arrangements that resulted in Kodak assuming much of the operating facility space and equipment located in Toulouse, France. These actions and certain other costs incurred in the third quarter related to the closure of this operation have been classified as a loss from discontinued operations. The loss from operations of discontinued operations was $229,000 and $981,000 for the three and nine months ended September 30, 2003, respectively. The DIVArchive Medical component is accounted for as a discontinued operation in the accompanying condensed consolidated financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The results of operations and cash flows of the DIVArchive Medical operations have been removed from the Company's results of continuing operations for all periods presented. All related disclosures have also been adjusted to reflect the discontinued operation. Summarized selected financial information from discontinued operations for the three and nine months ended September 30, 2003 (excluding the net gain) is as follows: RESULTS OF OPERATIONS - DIVARCHIVE MEDICAL OPERATIONS:
SEPTEMBER 30, 2003 ------------------- THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- Revenues $ 3,000 $ 243,000 =========== =========== Gross margin $ 18,000 $ 65,000 Operating costs (247,000) (1,046,000) ----------- ----------- Loss from DIVArchive Medical operations $ (229,000) $ (981,000) =========== ===========
Summarized components of the gain on the sale of the DIVArchive Medical component were as follows: Cash received $ 850,000 Liabilities transferred 138,000 Intellectual property and goodwill sold (401,000) ----------- Gain on sale of DIVArchive Medical component $ 587,000 =========== 11 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) As a result of the sale of the DIVArchive Medical component, in April 2003, the Company performed an impairment analysis of the remaining DIVArchive goodwill and intellectual property that was not sold in the transaction and determined that no charge for impairment of the assets was warranted. 5. LOSS ON IMPAIRMENT OF GOODWILL AND INTELLECTUAL PROPERTY - MEDIA SERVICES SEGMENT As a result of changes in the business environment, at June 30, 2003, the Company recorded a loss of $3.3 million on the impairment of goodwill and intellectual property related to the Company's media services segment to reflect the fair value of the business based upon a valuation analysis using discounted future cash flows. This amount is included in operating income and loss from continuing operations in the statement of operations for the nine months ended September 30, 2003. Included in the loss is: Impairment of intellectual property $ 362,000 Impairment of goodwill 2,974,000 ------------ Total impairment recorded $ 3,336,000 ============ 6. CONCENTRATION OF CREDIT RISK The Company sells its products and services throughout the United States, Canada, Europe and Asia. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management's expectations. For the nine months ended September 30, 2003, revenues from two customers, each exceeding 10% of total revenue, aggregated 31% and 21%, respectively. At September 30, 2003, accounts receivable from the largest customer was $53,000, or 8% of total trade receivables. This customer is also a stockholder of the Company. The Company was a subcontractor for this customer/stockholder during 2002 and 2003, which beneficially owned approximately 13.5% of the Company's outstanding common stock as of November 13, 2003. In addition, accounts receivable from two other customers aggregated 21% and 11% of accounts receivable at September 30, 2003. For the nine months ended September 30, 2002, revenues from one customer exceeded 10% of total revenue, aggregating 41% of total revenue. 7. PER SHARE DATA The Company reports its earnings (loss) per share in accordance with the SFAS No. 128, "Accounting for Earnings Per Share". Basic loss per share is calculated using the net loss divided by the weighted average common shares outstanding. For the three and nine months ended September 30, 2003 and 2002, shares from the assumed 12 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) conversion of outstanding convertible notes, warrants and options are omitted from the computations of diluted earnings per share because the effect would be anti-dilutive. However, if the company was not in a loss position, 23,896,429 share equivalents from warrants, options and convertible notes would be considered dilutive shares. 8. SEGMENT INFORMATION SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," established standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's operations are segregated into two segments: media conversion services and software and related services. The Company operates these lines of business across the geographic areas of the United States, Europe, Canada and Asia-Pacific. Offices and facilities are located in Mount Laurel, New Jersey, Boulder, Colorado, Houston, Texas and Toulouse, France. The Company's lines of business are not completely integrated into all locations and therefore the Company does not currently offer all solutions in all markets in which it is present. Current efforts are underway to integrate products and services across all markets served. The software and related services business segment offers an integrated suite of digital media solutions that facilitate the capture, management and distribution of digital content. Components of these offerings include a desktop encoding system, automated video indexing and a real-time format transcoder. In addition, the Company offers a distributed storage and archive management solution for the entertainment industry that simplifies the process of preserving, managing and accessing digital content. The media conversion business segment offers a comprehensive, integrated suite of enterprise data media solutions ("EDMS") that can help customers ensure information preservation, reduce costs and improve productivity without compromising the security and integrity of their stored information. The Company's EDMS group has performed professional services for over 600 customers worldwide in industries that include banking and finance, power utility, petroleum, pharmaceutical and government. All services offered by the EDMS group are performed offline utilizing the Company's proprietary software and stand-alone hardware devices, at either the customer site or one of the Company's secure delivery facilities. These services can be performed for any applicable optical and/or tape media type and format. Components of the currently available offerings include tape copy and conversion, tape volume management, tape data assurance, and archive generation and conversion. 13 FRONT PORCH DIGITAL, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Revenues, margins and operating expenses of the Company's lines of business are evaluated by management. The Company does not measure assets by lines of business as assets generally are not distinctive to a particular line of business and are not fundamental in assessing segment performance. Capital expenditures are managed by segment, but only for purposes of budgeting and cash flow management. General overhead expenses are included completely in the software and services business segment as the media conversion segment has been and continues to be an easily definable, separate, stand-alone business - no allocations of such costs are made as allocated indirect costs are not considered in the management of the business segments. All direct and indirect costs associated with a segment are reported within that segment. Summarized operations of each of the Company's operating segments in the aggregate for the three and nine months ended September 30, 2003 and 2002, are as follows:
MEDIA CONVERSION SOFTWARE AND SERVICES ---------------- --------------------- Three Months Ended September 30, Three Months Ended September 30, -------------------------------- -------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Revenues $362,000 $546,000 $716,000 $527,000 Gross margin 224,000 253,000 444,000 448,000 Gross margin % 62% 46% 62% 85% Operating income (loss) 45,000 27,000 (978,000) (852,000)
MEDIA CONVERSION SOFTWARE AND SERVICES ---------------- --------------------- Nine Months Ended September 30, Nine Months Ended September 30, ------------------------------- ------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Revenues $3,418,000 $1,361,000 $1,952,000 $742,000 Gross margin 2,677,000 767,000 1,287,000 635,000 Gross margin % 78% 56% 66% 86% Operating loss (1,169,000) (27,000) (2,706,000) (2,401,000)
At June 30, 2003, the Company recorded a loss of $3.3 million on the impairment of goodwill and intellectual property related to the media services segment to reflect the decrease in the fair value of the goodwill. The impairment charge is included in operating income (loss) above and included in loss from continuing operations in the statement of operations for the nine months ended September 30, 2003. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS GENERAL When used in this discussion, the words "believes", "anticipates", "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. The Company's business and results of operations are affected by a wide variety of factors that could materially and adversely affect the Company and its actual results, including, but not limited to: (1) the availability of additional funds to enable the Company to successfully pursue its business plan; (2) the uncertainties related to the effectiveness of the Company's technologies and the development of its products and services; (3) the Company's ability to maintain, attract and integrate management personnel; (4) the ability of the Company to complete the development and continued enhancement of its products in a timely manner; (5) the Company's ability to effectively market and sell its products and services to current and new customers; (6) the Company's ability to negotiate and maintain suitable strategic partnerships and corporate relationships; (7) the intensity of competition; and (8) general economic conditions. As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, operating results and stock price. Any forward-looking statements herein speak only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW The Company enables the conversion, preservation and management of analog and digital content, including text, images, audio, graphics, video and rich media. The Company develops proprietary software products and performs services that convert content into digital formats for subsequent storage and on-demand delivery in the same or other formats or digital platforms. The software, which is based on proprietary and patent-pending technology, enables a new paradigm in the way broadcasters, content owners and education and law enforcement personnel manage their workflow - a shift from tape-oriented warehousing to a fully-digital, instant access automated archive. With additional expertise in providing onsite, offline data management services for tape and optical assets, the Company believes it is uniquely positioned to enable clients to preserve, protect and manage information assets. The Company's customers are located in the United States, Canada, Europe and Asia. The Company is in the early stages of executing its business strategy and anticipates generating revenues from the sale of its software products and services targeted toward the broadcast, media and entertainment industry during the next 12 months. This expansion is contingent upon several factors, including the availability of adequate 15 cash resources, the price of its products and services relative to those of its competitors, and general economic and business conditions, among other factors. During the third quarter of 2003, management continued implementing a restructuring of the operations of the Company that included reorganizing the personnel of the Company, reducing headcount, reducing non-essential operating costs and refocusing the Company's business strategy, products and services. As of November 13, 2003, this restructuring and refocusing has been completed, and management believes the Company's operating cost levels are adequate and appropriate to support its operations and working capital needs. The Company is continuing to focus on the expansion of its DIVArchive and transcoding broadcast operations in the United States and has hired 11 additional personnel in its New Jersey and Colorado operations and sales facilities. These personnel are organized in the following areas: software development and operations (seven) (including one transfer from Toulouse, France office), sales and business development (one) (located in Los Angeles, CA), operations management (two) and one in administration. The Company is continuing to develop its business through its Toulouse, France operations as well. As a result, operating costs have increased in these areas and offset the cost reductions achieved by the Company in exiting the DIVA Medical business and in other areas. Overall, operating costs are approximately at the same levels as in the second quarter of 2003 and slightly lower than the comparable quarter of 2002, excluding the charge for the impairment of goodwill and intellectual property recorded in the second quarter. In addition, during the third quarter of 2003, the Company incurred certain non-recurring operating costs related to legal services (which were approximately twice the typical level) and recruiting/advertising fees for the staffing additions described above (which were largely completed during the third quarter). The Company believes that at its current staffing levels it is adequately staffed to deploy its DIVArchive and transcoding products in its target markets and that its current cost levels can support a sustained level of revenue to support the business operations in the future. However, there can be no assurance that the Company will be successful in continuing to generate new revenues and cash flows to support these costs and to continue as a going concern. During the nine months ended September 30, 2003, the following significant events occurred: o On April 23, 2003, the Company sold to Eastman Kodak Company ("Kodak") the Company's intellectual property rights relating to its DIVArchive product applications for the medical imaging and information management market. In connection with such sale, Kodak paid the Company $850,000 and has employed substantially all of the Company's personnel associated with the transferred assets and assumed certain software support obligations to the Company's existing DIVArchive customers in the medical industry. The Company recorded a $587,000 gain on the sale in the nine months ended September 30, 2003. The operations of the DIVArchive Medical component have been accounted for as discontinued operations in the accompanying financial statements. Subsequent to the sale, Kodak and the Company entered into certain other arrangements that included Kodak assuming much of the operating facility space and equipment located in Toulouse, France. These actions and certain other costs incurred in the third quarter of 2003 related to closing of this operation have been classified as loss from operations of discontinued 16 operations. The results of operations and cash flows for the DIVArchive Medical operations have been excluded from the Company's results of continuing operations for all periods presented. For the three and nine months ended September 30, 2003, the loss from operations for the DIVArchive Medical component was $229,000 and $981,000, respectively. o In April 2003, the Company issued $990,000 aggregate principal amount of unsecured convertible notes. Payment for these notes included the following: $645,000 cash proceeds received by the Company; $250,000 principal balance of the former secured convertible notes which matured on March 31, 2003; and the conversion of $95,000 in current liabilities. The convertible notes bear interest at the rate of 8% per annum and mature on September 30, 2004. Principal and accrued interest are payable at maturity. The convertible notes are convertible at any time at the option of the note holders into shares of common stock of the Company at a conversion price of $.042 per share, subject to certain anti-dilution adjustments. The convertible notes may be prepaid by the Company at any time without penalty. In the event of a prepayment by the Company, or upon payment of principal and interest at maturity, the Company will be required to issue to the holders of such notes five-year common stock purchase warrants pursuant to which the holders of the warrants will have the right to purchase a number of shares of common stock of the Company equal to 5,500 shares for each $1,000 of principal balance repaid, at a purchase price of $0.10 per share, subject to certain anti-dilution adjustments. The purchase agreement relating to the convertible notes contains restrictions that, among others, prohibit the Company from issuing new debt, making capital expenditures in excess of specified amounts, paying dividends on the common stock or granting security interests in assets without the consent of note holders owning a majority in principal amount of the outstanding notes. o In April 2003, the holders of the $500,000 aggregate principal amount of convertible secured notes converted the remaining $250,000 of the outstanding principal ($250,000 of principal was converted into the unsecured convertible notes described above) and 100% of the accrued interest into 6,785,715 shares of common stock of the Company pursuant to the conversion terms of the convertible secured notes. In connection with this conversion, the Company recorded $39,000 in non-cash interest expense related to the value of the induced conversion of the debt. o During the nine months ended September 30, 2003, the Company successfully restructured the following: (i) $530,000 of current liabilities to a single vendor to be payable over a five-year period, with interest at the rate of 5% per annum. Principal payments under the agreement are fixed for the first year at $100,000. Remaining payments are subject to certain acceleration clauses based upon working capital levels and capital raised. In connection with this agreement, the Company will issue to the vendor warrants to purchase up to 500,000 shares of common stock at a price per share of $0.10 and (ii) a $150,000 note payable and accrued interest which was due in full on July 1, 2003 into a new note that is payable over 12 months and matures on May 1, 2004. The note is payable 17 in equal monthly installments which began on May 1, 2003 and carries an annual interest rate of 9% per annum. Accrued interest is payable at maturity. In connection with this agreement, the Company issued to the noteholder warrants to purchase up to 100,000 shares of common stock at a price per share of $0.10. The fair value of these warrants amounted to $10,000 and was recorded as a discount to the note and is being amortized to interest expense over the note term of one year. o At June 30, 2003, the Company recorded a non-recurring charge of $3.3 million for the impairment of goodwill and intellectual property related to the media services business segment. The items described above demonstrate the Company's efforts to refocus its business on the broadcast space and specifically in the sale of the DIVArchive and transcoding products. The sale of the DIVArchive Medical business in the second quarter of 2003 and the loss on the impairment of the goodwill and intellectual property of the media services business segment are indicative of these efforts. The impairment of goodwill and intellectual property recorded in the media services business segment brought the intangible asset balances to a level that management believes properly reflects the fair value of the business segment. The sale of the DIVArchive Medical business component generated a gain for the Company and significantly reduced the operating costs in France to a more appropriate level relative to broadcast revenues. At November 13, 2003, the Company had completed the restructuring and reorganization of its business and cost structure and the Company currently is transitioning its focus to the sale of software and services to the broadcast, media and entertainment industry. The Company has financed this restructuring and transition through the sale of the DIVA Medical business, cash proceeds of $645,000 from the issuance of a convertible note, cash flow from operations, and other financial restructuring activities. These items are more fully discussed below. The Company has secured significant new customer contracts for the delivery of software and services in the broadcast space that are expected to generate significant revenue at the end of 2003 and into 2004. These additional contracts, combined with its current cash and cash equivalents and aggressive cash management strategies, are expected to provide adequate working capital to enable the Company to sustain its business. The Company is also pursuing certain working capital arrangements to smooth the fluctuations in its cash flow resulting from the size of its customers and individual billing/collection amounts, as well as evaluating the availability of capital for more rapid expansion into the broadcast industry. However, there can be no assurance that the Company will be able to deliver the software required to generate the revenue and cash flow required to sustain the business and continue as a going concern, and there can be no assurance that additional capital will be available to the Company for continued expansion or to continue as a going concern. The following discussion and analysis of financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the 18 United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. RESULTS OF CONTINUING OPERATIONS - Three Months Ended September 30, 2003 Compared to the Three Months Ended September 30, 2002 REVENUE. Total revenue for the three months ended September 30, 2003 remained constant at $1.1 million, compared to the three months ended September 30, 2002. This constant level of revenue was attributable to a decline in revenue from the media conversion business segment offset, in part, by the continued ramp up of revenue from software sales to the broadcast industry. Excluded from revenues for the three months ended September 30, 2003 and 2002 are revenues for the former DIVArchieve Medical business of $3,000 and $144,000, respectively. Revenues from the media conversion business segment decreased $184,000, or (34%), to $362,000 for the three months ended September 30, 2003 as compared to $546,000 for the prior year period. Revenues from the software and services business segment increased $189,000, or 36%, to $716,000 for the three months ended September 30, 2003 as compared to $527,000 for the prior year period. Service revenues totaled $540,000, or 50% of total revenues, for the three months ended September 30, 2003 as compared to $522,000, or 49% of total revenues, for the three months ended September 30, 2002. For the three months ended September 30, 2003, $538,000, or 50% of total revenue, was attributable to product revenues as compared to $551,000, or 51% of total revenue, for the three months ended September 30, 2002. GROSS MARGIN. Total gross margin was $668,000, or 62% of total revenue, for the three months ended September 30, 2003 compared to $701,000, or 65% of total revenue, for the three months ended September 30, 2002. This decrease was attributable to decreased revenues for the period and additional operating costs as a result of the additional staffing in the software and services business required to develop and deliver software and services related to new sales contracts. For the three months ended September 30, 2003, sales of software and related services to the broadcast industry resulted in gross margins of 62% and the provision of data and media conversion services resulted in gross margins of 62%. For the three months ended September 30, 2002, sales of software and related products resulted in gross margins of 85% and the provision of data and media conversion services resulted in gross margins of 46%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended September 30, 2003 were $1.2 million, as compared to $1.1 million for the 19 three months ended September 30, 2002. The slight increase in expenses reflected a significant decrease in operating costs in certain business areas that was offset by cost increases, primarily related to additional staffing, in the software and services business segment. Selling, general and administrative expenses for the three months ended September 30, 2003 consisted primarily of $603,000 for salaries and related benefits for employees not directly related to the production of revenue, $259,000 in professional and consulting fees, $88,000 for travel, $87,000 of facilities costs, ($44,000) for bad debt expense (recovery), and $198,000 for general office expenses. Selling, general and administrative expenses for the three months ended September 30, 2002 consisted primarily of $612,000 for salaries and related benefits for employees not directly related to the production of revenue, $160,000 in professional fees, $60,000 for travel, $91,000 of facilities costs, and $135,000 for general office expenses. RESEARCH AND DEVELOPMENT. The Company maintains a software development staff that designs and develops the Company's new products and services. The Company believes that by performing most of its own software development, it can more quickly and cost-effectively introduce new and innovative technologies and services. In addition, the Company believes it will be better equipped to incorporate customer preferences into its development plans. The Company continues to devote more resources to the development of its solutions that convert analog content to multiple digital formats, manage and reformat digital content on demand and archiving technologies and software tools and products that facilitate the conversion and migration of data from legacy media to current technology. Research and development expenses for the three months ended September 30, 2003 were $85,000 compared to $129,000 for the three months ended September 30, 2002. The decrease in expense in 2003 was directly related to a lower overall staffing level than in the prior period and an increase in projects that are expected to provide future benefit to the Company and have passed the point of technological feasibility. As a result, a larger percentage of the Company's research and development costs are being capitalized as software development costs and amortized to expense over a three-year period. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $325,000 for the three months ended September 30, 2003 compared to $339,000 for the three months ended September 30, 2002. Amortization expense primarily consisted of amortization of intangible assets. Depreciation expense consisted of depreciation of furniture, equipment, software and improvements. OPERATING LOSS. For the three months ended September 30, 2003, the Company incurred an operating loss of $0.9 million as compared to an operating loss of $0.8 million for the three months ended September 30, 2002. The increase in operating loss was due to lower revenues for the period from its media conversion business segment, partially offset by lower operating costs in the period and increased revenues from the sale of archival and transcoding software and services to the broadcast industry. INTEREST EXPENSE. Interest expense was $205,000 for the three months ended September 30, 2003 compared to $144,000 for the three months ended 20 September 30, 2002. Interest expense for the three months ended September 30, 2003 included non-cash interest charges aggregating $179,000, including a non-cash interest charge of $170,000 related to the amortization of debt discount on the Company's unsecured convertible notes and $9,000 related to amortization of non-cash financing costs. LOSS FROM CONTINUING OPERATIONS. For the three months ended September 30, 2003, the Company reported a loss from continuing operations of $1.2 million compared to a loss from continuing operations of $1.0 million for the three months ended September 30, 2002. LOSS FROM DISCONTINUED OPERATIONS. For the three months ended September 30, 2003 and 2002, the Company reported a $229,000 and $221,000 loss from the discontinued operations of its former DIVArchive Medical component, respectively. NET LOSS. For the three months ended September 30, 2003, the Company reported a net loss of $1.5 million, or ($.04) per share, compared to a net loss of $1.2 million, or ($.04) per share, for the three months ended September 30, 2002. RESULTS OF CONTINUING OPERATIONS - Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September 30, 2002 REVENUE. Total revenue for the nine months ended September 30, 2003 increased $3.3 million, or 155%, to $5.4 million, compared to total revenue of $2.1 million for the nine months ended September 30, 2002. This increase in revenue was attributable to significantly higher revenue generated from the media conversion business segment ($3.4 million in segment revenue for the nine months ended September 30, 2003 as compared to $1.4 million for the prior year period) and significantly higher revenue generated in the software and related services business segment from DIVArchive and Transcoding broadcast sales, totaling $2.0 million for the nine months ended September 30, 2003, as compared to $0.7 million for the nine months ended September 30, 2002 (the DIVArchive revenues excluded DIVArchive Medical revenue of $243,000 and $144,000 for the nine months ended September 30, 2003 and 2002, respectively, which has been accounted for as a discontinued operation). Revenue generated in the software and related services business segment in the United States increased approximately $0.3 million for the nine months ended September 30, 2003. Service revenues totaled $3.9 million, or 73% of total revenues, for the nine months ended September 30, 2003 as compared to $1.3 million, or 64% of total revenues, for the nine months ended September 30, 2002. For the nine months ended September 30, 2003, $1.5 million, or 27% of total revenue, was attributable to sales of software and related products as compared to $0.8 million, or 36% of total revenue, for the nine months ended September 30, 2002. GROSS MARGIN. Total gross margin was $4.0 million, or 74% of total revenue, for the nine months ended September 30, 2003 compared to $1.4 million, or 67% of total revenue, for the nine months ended 21 September 30, 2002. This increase was attributable to the increased revenues discussed above and the timely delivery of services to customers, and was adversely impacted by the lower gross margin for the three months ended September 30, 2003 discussed above. For the nine months ended September 30, 2003, sales of software and related services to the broadcast industry resulted in gross margins of 66% and the provision of data and media conversion services resulted in gross margins of 78%. For the nine months ended September 30, 2002, sales of software and related products resulted in gross margins of 86% and the provision of data and media conversion services resulted in gross margins of 56%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the nine months ended September 30, 2003 were $3.3 million, as compared to $2.7 million for the nine months ended September 30, 2002. The increase in expenses was primarily due to operating costs of the Toulouse, France operations for a full three months in the current period and additional costs incurred related to the staffing additions in the software and services business segment. Selling, general and administrative expenses for the nine months ended September 30, 2003 consisted primarily of $1,588,000 for salaries and related benefits for employees not directly related to the production of revenue, $752,000 in professional and consulting fees, $245,000 for travel, $275,000 of facilities costs, $6,000 for bad debt expense, and $483,000 for general office expenses. Selling, general and administrative expenses for the nine months ended September 30, 2002 consisted primarily of $1,353,000 million for salaries and related benefits for employees not directly related to the production of revenue, $698,000 in professional fees, $133,000 for travel, $210,000 of facilities costs, and $325,000 for general office expenses. RESEARCH AND DEVELOPMENT. As discussed above, the Company maintains a software development staff that designs and develops the Company's new products and services. Research and development expenses for the nine months ended September 30, 2003 were $135,000 compared to $348,000 for the nine months ended September 30, 2002. The decrease in expense in 2003 was directly related to a lower overall staffing level than in the prior period and an increase in projects that are expected to provide future benefit to the Company and have passed the point of technological feasibility. As a result, a larger percentage of the Company's research and development costs are being capitalized as software development costs and amortized to expense over a three-year period. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $1.0 million for the nine months ended September 30, 2003 compared to $763,000 for the nine months ended September 30, 2002. The increase in depreciation and amortization expenses resulted from the additional amortization in 2003 of the intangible assets acquired as part of the Company's DIVArchive operations in Toulouse, France in August 2002. LOSS ON IMPAIRMENT OF GOODWILL. The Company performs an ongoing annual impairment test, as required under SFAS No. 142, "Goodwill and Other Intangible Assets" by the Financial Accounting Standards Board, on the first day of the fourth quarter of each year or as conditions warrant. As such, during the nine months 22 ended September 30, 2003: o as a result of changes in the media conversion business, the Company performed an impairment analysis of the recorded goodwill for that business segment, and, as a result, recorded a loss on the impairment of goodwill of $2,974,000 at June 30, 2003. o in April 2003, as a result of the sale of the DIVArchive Medical component, the Company performed an impairment analysis of the remaining DIVArchive goodwill and intellectual property and determined that no impairment of the assets was warranted. LOSS ON IMPAIRMENT OF INTELLECTUAL PROPERTY. As a result of changes in the media conversion business and in conjunction with the SFAS No. 142 analysis, the Company recorded an impairment charge of $362,000 on intellectual property consistent with SFAS No. 144. OPERATING LOSS. For the nine months ended September 30, 2003, operating loss totaled $3.9 million, which included a loss on the impairment of goodwill and intellectual property of $3.3 million recorded in the second quarter, as compared to an operating loss of $2.4 million for the nine months ended September 30, 2003. Excluding the impairment loss in 2003, the decrease in operating loss was primarily due to the increased revenues from the media conversion business segment and sales from the Company's DIVArchive broadcast solutions as described above. INTEREST EXPENSE. Interest expense was $571,000 for the nine months ended September 30, 2003 compared to $162,000 for the nine months ended September 30, 2002. Interest expense for the nine months ended September 30, 2003 included non-cash interest charges aggregating $506,000, including a non-cash interest charge of $436,000 related to the amortization of debt discount on the Company's convertible note instruments, $39,000 of non-cash interest expense related to the induced conversion of debt and non-cash interest expense of $31,000 related to amortization of non-cash financing costs. LOSS FROM CONTINUING OPERATIONS. For the nine months ended September 30, 2003, the Company reported a loss from continuing operations of $4.5 million as compared to a loss from operations of $2.6 million for the nine months ended September 30, 2002. Included in the loss for the nine months ended September 30, 2003 was a loss on the impairment of goodwill and intellectual property of $3.3 million, as discussed above. Excluded from the loss are losses from discontinued operations of $394,000 and $221,000 for the nine months ended September 30, 2003 and 2002, respectively. GAIN ON SALE OF DIVARCHIVE MEDICAL BUSINESS. For the nine months ended September 30, 2003, the Company reported a gain of $587,000 on the sale of its former DIVArchive Medical component. 23 NET LOSS. For the nine months ended September 30, 2003, the Company reported a net loss of $4.9 million, or ($.13) per share, compared to a net loss of $2.8 million, or ($.11) per share, for the nine months ended September 30, 2002. Included in the loss for the three months ended September 30, 2003 was a loss on the impairment of goodwill and intellectual property of $3.3 million. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. The Company conducts business in various countries outside the United States in which the functional currency of the country is not the U.S. dollar. As a result, the Company has foreign currency exchange translation exposure as the results of these foreign operations are translated into U.S. dollars in its consolidated financial statements. The effect of changes in value of the U.S. dollar compared to other currencies, primarily the euro, has been to increase reported revenues and operating profit when the U.S. dollar weakens and reduce these amounts when the dollar strengthens. While the Company looks for opportunities to reduce its exposure to foreign currency fluctuations against the U.S. dollar, at this point the Company has not had adequate financial resources to pursue hedging opportunities generally. At September 30, 2003, the Company reported a translation gain of $32,959 as a component of Comprehensive Income. The Company is also subject to foreign exchange transaction exposure when its subsidiaries transact business in a currency other than its own functional currency. These transactions are infrequent and have not had a significant effect on the consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES At November 13, 2003, the Company had completed the restructuring and reorganization of its business and cost structure and the Company currently is transitioning its focus to the sale of software and services to the broadcast, media and entertainment industry. The Company has financed its restructuring and transition through the sale of its DIVArchive Medical business, the cash proceeds of $645,000 from the issuance of convertible notes, cash flow from operations, and other financial restructuring activities. These items are more fully discussed below. The Company has secured new customer contracts for the delivery of software and services in the broadcast space that are expected to generate revenue at the end of 2003 and into 2004. These additional contracts, combined with its current cash and cash equivalents and aggressive cash management strategies, are expected to provide adequate working capital to sustain the business. The Company also is pursuing certain working capital arrangements to smooth the fluctuations in its cash flow resulting from the size of its customers and individual billing/collection amounts, and is evaluating the availability of capital for more rapid expansion into the broadcast industry. However, there can be no assurance that the Company will be able to deliver the software required to generate the revenue and cash flow required to sustain the business and continue as a going concern, and there can be no assurance that additional capital will be available to the Company for continued expansion or to continue as a going concern. 24 As discussed in greater detail above, during the nine months ended September 30, 2003, the Company issued $990,000 aggregate principal amount of unsecured convertible notes, for which it received cash proceeds of $645,000 and the cancellation of $345,000 of matured or current indebtedness, and sold to Kodak its intellectual property rights relating to the DIVArchive product applications for the medical imaging and information management market, for which it received, among other consideration, cash proceeds of $850,000. As a result of the issuance of the convertible notes in April 2003, at September 30, 2003, on a diluted basis in accordance with accounting principles generally accepted in the United States of America, the Company had authorized the issuance of a number of shares of common stock that exceeded its authorized 50 million common shares. The Company expects to remedy this through a shareholder vote at its annual meeting of shareholders to be held during the second quarter of 2004. As of September 30, 2003, the Company had liquid assets (cash and cash equivalents and accounts receivable) of $1.6 million and current assets of $1.9 million. Current liabilities of $3.4 million at September 30, 2003 consisted of $988,000 of accounts payable; $942,000 of accrued expenses; $680,000 of accrued expenses to employees; $104,000 of deferred revenue, which consisted of progress payments received on engagements currently in progress; $674,000 of current portion of notes payable and other long-term liabilities and $38,000 of current lease liability. The Company's working capital deficit was $1.6 million as of September 30 2003 for the reasons described above. The Company used net cash of $888,000 in operating activities during the nine months ended September 30, 2003 and used net cash of $778,000 in operating activities during the nine months ended September 30, 2002, primarily as a result of the net losses incurred during periods. In 2003, cash used in operating activities was primarily driven by the loss for the period, adjusted for a $3.3 million non-cash charge on the impairment of goodwill and intellectual property, and offset by significant payments of liabilities not related to the ongoing operating expenses and a significant decrease in deferred revenues largely due to the recognition of revenues in 2003 which were deferred at December 31, 2002. The Company expects to fully collect the balance of accounts receivable at September 30, 2003. The Company used net cash of $617,000 and $221,000 in discontinued operations during the nine months ended September 30, 2003 and 2002, respectively. During the nine months ended September 30, 2003, the Company provided $735,000 from investing activities, of which $56,000 was used for capital expenditures and $214,000 was used for the development of the Company's suite of video software solutions, offset by proceeds of $850,000 from the sale of the DIVArchive Medical operations and proceeds of $155,000 from the sale of fixed assets. During the nine months ended September 30, 2002, excluding the cash acquired in the acquisition of its DIVArchive operations in Toulouse, France, the Company used $282,000 in investing activities, of which $207,000 was used for capital expenditures and $75,000 was used for the development of the Company's suite of video software solutions and other uses. 25 The Company provided $512,000 from financing activities during the nine months ended September 30, 2003, which consisted of $645,000 in proceeds from the issuance in April 2003 of notes payable, offset by principal repayments made on notes payable and capital leases of $133,000. During the nine months ended September 30, 2002, financing activities provided $650,000, which consisted of $600,000 of borrowings on notes payable and $50,000 of proceeds from the issuance of 400,000 shares of unregistered common stock to an individual investor. The Company expects capital expenditures to be approximately $0.5 million during the next twelve months. It is expected that the Company's principal uses of cash will be to provide working capital and to finance capital expenditures and for other general corporate purposes, including financing its sales and marketing strategy. The amount of spending in each respective area is dependent upon the total capital available to the Company. The Company expects that anticipated cash flow from operations combined with its cash and cash equivalents at November 13, 2003 will be sufficient to operate through at least September 30, 2004. However, continued operating losses and the early stage of the Company's business, as well as potential changes in the business and competitive environment, continue to present a significant risk to the Company's long-term success. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company's actual financial results may differ materially from the stated plan of operations. Factors which may cause a change from the Company's plan of operations vary, but include, without limitation, decisions of the Company's management and board of directors not to pursue the stated plan of operations based on its reassessment of the plan, and general economic conditions. Additionally, there can be no assurance that the Company's business will generate cash flows at or above current levels. Accordingly, the Company may choose to defer capital expenditure plans and extend vendor payments for additional cash flow flexibility. ITEM 3. CONTROLS AND PROCEDURES (a) Based upon an evaluation performed as of September 30, 2003, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have each concluded that our disclosure controls and procedures are effective to ensure that material information relating to our Company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our internal controls are effective to provide reasonable assurances that our financial condition, results of operations and cash flows are fairly presented in all material respects. (b) During the third quarter of 2003, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: On or about March 21, 2003, Giancarlo Gaggero, a former employee of the Company, and Data Strategies International, Inc., a company owned and controlled by Mr. Gaggero, filed a suit against the Company in the District Court of Harris County, Texas alleging breach by the Company of an asset purchase and related agreements between Data Strategies and the Company and breach by the Company of an employment agreement between Mr. Gaggero and the Company. Mr. Gaggero's employment with the Company was terminated on March 5, 2003. The plaintiffs seek monetary damages of approximately $253,000 plus interest and costs and a declaration that they are excused from performance under the agreements from and after January 2001. The Company responded to the complaint on April 17, 2003 and requested that the case be moved from state court to federal court jurisdiction. The Company believes certain of the claims are without merit, with respect to which the Company intends to defend the action vigorously, and is considering certain counterclaims against the plaintiffs in addition to the action taken by the Company described below. An outcome in this litigation that is adverse to the Company, costs associated with defending the lawsuit and the diversion of management's time and resources to defend the lawsuit could seriously harm the Company's business and its financial condition. On July 30, 2003, the Company filed suit in the District Court of Denton County, Texas against Mr. Gaggero and one of his associates seeking damages relating to claims of defamation and business disparagement, tortious interference with business relations, breach of fiduciary duty and breach of contract. As of November 13, 2003, the Company was attempting to negotiate an amicable settlement in this matter; however, there can be no assurance that the Company will be successful in that endeavor. In addition to the proceeding described above, the Company is involved in certain other disputes that arise in the ordinary course of business. The Company believes that no current dispute will have a material adverse effect on its financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: The following exhibits are filed herewith: (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 27 31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Current Reports on Form 8-K or 8-K/A On October 31, 2003, the Company filed a Current Report on Form 8-K reporting the engagement of J.H. Cohn LLP as its independent accountants as of October 24, 2003. 28 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 17, 2003 FRONT PORCH DIGITAL INC. By: /s/ MICHAEL KNAISCH ----------------------- Michael Knaisch Chief Executive Officer (principal executive officer) By: /s/ MATTHEW RICHMAN ----------------------- Matthew Richman Chief Financial Officer and Treasurer (principal financial and accounting officer) 29 EX-31.1 3 c29775_ex31-1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Pursuant to 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Michael Knaisch, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Front Porch Digital Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ MICHAEL KNAISCH ------------------------ Name: Michael Knaisch Title: Chief Executive Officer November 17, 2003 2 EX-31.2 4 c29775_ex31-2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Pursuant to 18 U.S.C. 1350 (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, Matthew Richman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Front Porch Digital Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ MATTHEW RICHMAN ----------------------- Name: Matthew Richman Title: Chief Financial Officer November 17, 2003 2 EX-32.1 5 c29775_ex32-1.txt Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to 18 U.S.C. 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, Michael Knaisch, Chief Financial Officer of Front Porch Digital Inc. (the "Registrant"), do hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2003 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ Michael Knaisch --------------------- Name: Michael Knaisch Title: Chief Executive Officer November 17, 2003 - ------------------------- This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to Front Porch Digital Inc. and will be retained by Front Porch Digital Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 c29775_ex32-2.txt Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to 18 U.S.C. 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, Matthew Richman, Chief Financial Officer of Front Porch Digital Inc. (the "Registrant"), do hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2003 of the Registrant, as filed with the Securities and Exchange Commission on the date hereof (the "Report"): (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ Matthew Richman ---------------------- Name: Matthew Richman Title: Chief Financial Officer November 17, 2003 - ------------------------- This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to Front Porch Digital Inc. and will be retained by Front Porch Digital Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----