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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 quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.
Commission File Number 33-16031
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FRONT PORCH DIGITAL INC.
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(Name of small business issuer as specified in its charter)
Nevada 86-0793960
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1810 Chapel Avenue West, Suite 130
Cherry Hill, NJ 08002
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(Address of principal executive offices)
856-663-3500
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 June 30, 2000, 16,027,500 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one); Yes [ X ] No [ ]
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FRONT PORCH DIGITAL INC.
FORM 10-QSB
INDEX
PAGE
PART I. Financial Information 3
Item 1. Financial Statements:
Balance Sheets - June 30, 2000 and December 31, 1999 3
Statements of Operations - Three and Six Months ended June 30, 2000
and 1999 4
Statement of Stockholders' Equity - December 31, 1999 and June 30,
2000 5
Statements of Cash Flows - Six months ended June 30, 2000 and 1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
PART II. Other Information: 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters To A Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Front Porch Digital Inc.
Balance Sheet
(Unaudited)
[Predecessor
[Unaudited] Company]
------------- -------------
June 30, 2000 Dec. 31, 1999
------------- -------------
Assets
Current Assets
Cash $ 252,638 $ 14,483
Accounts Receivable - Trade 1,591 0
Inventory 3,076 0
------------- -------------
Total Current Assets $ 257,305 $ 14,483
Property & Equipment Net 165,242 0
Investment in Visionary Systems, at cost 300,000 0
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Total Assets $ 722,547 $ 14,483
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Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Note Payable - Bridge Loans $ 800,000 $ 0
Accounts Payable 98,716 5,075
Payroll-Related Liabilities 0 0
Sales Taxes Payable 0 0
Accrued Expenses 543,718 0
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Total Current Liabilities $ 1,442,434 $ 5,075
Stockholders' Equity (Deficit)
Preferred Stock, non-voting, $.001 par value
5,000,000 shares authorized, none issues or
outstanding
Common Stock, $.001 par value, 50,000,000 shares
authorized
16,028,000 shares issued and outstanding for 2000
23,200,000 shares issues and outstanding for 1999 16,028 23,200
Additional Paid-in Capital $ 411,732 $ 102,800
Subscriptions Receivable (7,000) 0
Accumulated Deficit (1,140,647) (116,592)
Total Stockholders' Equity (Deficit) (719,887) 9,408
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Total Liabilities and Stockholders'
Equity (Deficit) $ 722,547 $ 14,483
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Front Porch Digital Inc.
Statement of Operations
(Unaudited)
[Predecessor Company]
-----------------------
For the For the For the For the
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
--------- --------- --------- ---------
6/30/2000 6/30/2000 6/30/1999 6/30/1999
--------- --------- --------- ---------
Revenues $ 33,076 $ 53,457 $ 0 $ 0
Cost of Revenue 22,518 25,008 0 0
--------- --------- --------- ---------
$ 10,558 $ 28,449 0 0
--------- --------- --------- ---------
Operating Expenses
Sales & Marketing 38,016 56,446 0 0
General & Admin 443,500 1,094,275 3,537 7,353
--------- ---------- --------- ---------
$ 481,516 $1,150,721 $ 3,537 $ 7,353
--------- --------- --------- ---------
Loss from Operations (470,958) (1,122,272) (3,537) (7,353)
Interest expense (16,125) (18,375) 0 0
--------- ----------- --------- ---------
Net Loss $(487,083) $(1,140,647) $ (3,537) $ (7,353)
--------- ----------- --------- ---------
Provision for Income
Taxes 0 0 0 0
Net Income (Loss) After --------- ----------- --------- ---------
Taxes $(487,083) $(1,140,647) $ (3,537) $ (7,353)
--------- ----------- --------- ---------
Weighted Average Number
of Common Shares
Outstanding
-Basic and diluted 15,892,335 15,874,263 23,200,000 23,200,000
Loss per Common Share
-Basic and diluted $ (0.03) $ (0.07) $ (0.00) $ (0.00)
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Front Porch Digital Inc.
Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Total
Common Stock Additional Subscrip- Share-
--------------------- Paid-in tion Accumulated holders'
Shares Amount Capital Receivable Deficit Equity
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance
12/31/99 46,400,000 $ 23,200 $ 102,800 $(116,592) $ 9,408
Stock Option
Compensation
Costs $ 36,920 $ 36,920
Recapitalization
of Front
Porch
Digital
Inc. (40,000,000) $(16,800) $(102,800) $ 116,592 $ (3,008)
Issue shares to
Front Porch
Digital Share-
holders for
Merger 9,440,000 $ 9,440 $ (9,240) $ 200
Common stock
Issued for
cash at
$2.00 per
share 187,500 $ 188 $ 374,812 $ 375,000
Stock Subscrip-
tions paid $ 2,240 $ 2,240
Net loss (1,140,647) $(973,980)
---------- ---------- ---------- ----------- ----------- -----------
Balance ---------- ---------- ---------- ----------- ----------- -----------
6/30/2000 16,027,500 $ 16,028 $ 411,732 $ (7,000) $(1,140,647) $(553,220)
---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
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Front Porch Digital, Inc.
Statements of Cash Flows
For the Six Months Ended
(Unaudited)
June 30, 2000 June 30, 1999
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Cash flows from operating activities
Net loss $ (1,140,647) $ (7,353)
Depreciation 8,662 0
Stock Option Compensation Cost 36,920 0
Adjustments to reconcile net
loss to net cash used in
operating activities
Changes in operating assets and liabilities
Increase in accounts receivable (1,591) (1,235)
Increase in inventory (3,076) 0
Increase in accounts payable 93,641 3,290
Increase in accrued expenses 543,718 0
Other (3,008) 0
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Net cash used in operating activities $ (465,381) $ (5,298)
Cash flows from investing activities
Capital expenditures (173,904) 0
Investment in Visionary Systems (300,000) 0
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Net cash used in investing activities $ (473,904) $ 0
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Cash flows from financing activities
Bridge loan proceeds 800,000 0
Proceeds from issuance of common stock 377,440 20,000
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Net cash provided by financing activities $1,177,440 $ 0
----------- -----------
Net increase in cash 238,155 14,702
Cash, beginning of period 14,483 0
----------- -----------
Cash, end of period $ 252,638 $ 14,702
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FRONT PORCH DIGITAL INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1 - The Business
Front Porch Digital Inc., formerly Empire Communications, Inc. (the
"Company"), is a broadband digital media solutions provider that offers services
that facilitate the distribution of digital content over a variety of delivery
mechanisms, including Internet streaming, digital cable, Digital Versatile Disc
(DVD) and digital television. The Company's proprietary production process
automates the pre-mastering and programming of broadband video and audio
content. Using a software-based production model that decouples the processes of
capture, compression, archiving and streaming, the Company is able to offer
adaptable yet cost-effective, full-featured digital media services.
Note 2 - Basis of Presentation
The Company and its current subsidiary, Front Porch Digital, Inc., a
Delaware corporation ("Front Porch"), executed an Agreement and Plan of
Reorganization (the "Plan"), whereby the Company acquired 100% of the
outstanding equity securities of Front Porch from its stockholders (the "Front
Porch Stockholders"). The Plan provided for the acquisition of 100% of the
outstanding equity securities of Front Porch; the issuance and exchange of
9,400,000 shares of the Company's common stock for the outstanding common stock
of Front Porch, which shares of common stock of the Company were "restricted
securities" under the Securities Act of 1933, as amended; the contribution of
40,000,000 shares of common stock of the Company owned by Susan M. Grant to the
treasury of the Company; and the issuance and exchange of warrants to acquire
7,400,000 shares of the common stock of the Company for the then-outstanding
warrants to acquire 7,400,000 shares of the common stock of Front Porch.
Prior to the completion of the Plan, there were 46,400,000 outstanding
shares of common stock of the Company. Giving effect to the issuance of the
shares outlined above and the cancellation of 40,000,000 shares of common stock
of the Company as required by the Plan, there were 15,840,000 issued and
outstanding shares of common stock of the Company immediately following
consummation of the Plan.
This transaction is commonly referred to as a "reverse acquisition" where
100% of Front Porch's stock was effectively exchanged for a controlling interest
in a publicly-held "shell" corporation, the Company (which concurrently changed
its name to Front Porch Digital, Inc.). For financial accounting purposes, this
transaction will be treated as the issuance of stock for the net monetary assets
of the Company, accompanied by a recapitalization of Front Porch, with no
goodwill or other intangible assets recorded.
Front Porch was formed on February 1, 2000, and therefore the historical
operating results prior to that date are those of Empire Communications, Inc.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles 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 that the disclosures
are adequate to make the information presented not misleading. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended June 30, 2000 are not necessarily indicative
of the operating results expected for the year ending December 31, 2000.
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Note 3 - Going Concern Uncertainty
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern that contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. However, the Company commenced operations in its current line of
business on May 2, 2000, and has not had significant revenues. To date, the
Company has been able to cover operating costs with existing financial resources
from bridge loans and proceeds from the sale of its common stock.
Note 4 - Related Party Transactions
The Company leases computer equipment and office space on a month-to-month
basis from an entity under common control. Rent expense on these leases was
$113,740 during the six months ended June 30, 2000.
Note 5 - Bridge Loans
The Company has entered into $800,000 of unsecured notes payable. These
notes bear interest at 9% and are due no later than December 31, 2000.
Note 6 - Warrants
In connection with the issuance of the notes payable (see Note 5), the
Company issued warrants that enable the holders to purchase an aggregate of
800,000 shares of common stock of the Company for a purchase price of $1 per
share. These warrants expire on December 31, 2005.
In connection with the Plan (Note 2), on May 2, 2000, the Company issued
warrants in exchange for identical fully-vested outstanding warrants of Front
Porch, which enable the holders to:
o purchase an aggregate of 6,000,000 shares of common stock of the Company
at an exercise price of $0.50 per share. These warrants expire May 2, 2005
and become exercisable on February 1, 2001;
o purchase an aggregate of 920,000 shares of common stock of the Company at
an exercise price of $0.50 per share. These warrants become exercisable in
three equal annual installments commencing on the February 1, 2001 and
ending on February 1, 2005.
Note 7 - Subsequent Events
On August 3, 2000, the Company announced the acquisition by Equity Pier
LLC, of an aggregate of 4,756,907 shares of common stock of the Company.
The total purchase price of $9,513,814 for the acquired shares will be
paid in part by past consulting services rendered by Equity Pier to the Company
and in part by a promissory note that will be payable over forty-two months. Of
the shares purchased, 3,792,545 shares will be subject to a put option by Equity
Pier and a call option by the Company under certain circumstances.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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, the ability of the Company to
provide services and to complete the development of its products in a timely
manner, the demand for and the timing of demand for such services and products,
competition from other products and companies, the Company's sales and marketing
capabilities, the Company's ability to sell its services and products
profitably, availability of adequate debt and equity financing, and general
business and 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.
These forward-looking statements 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.
Reverse Acquisition
The Company and Front Porch executed an Agreement and Plan of
Reorganization (the "Plan"), whereby the Company acquired 100% of the
outstanding equity securities of Front Porch from the Front Porch Stockholders.
The Plan provided for the acquisition of 100% of the outstanding equity
securities of Front Porch; the issuance and exchange of 9,440,000 shares of the
Company's common stock for the outstanding common stock of Front Porch, which
shares of common stock of the Company were "restricted securities" under the
Securities Act of 1933, as amended; the contribution of 40,000,000 shares of
common stock of the Company owned by Susan M. Grant to the treasury of the
Company; and the issuance and exchange of warrants to acquire 7,400,000 shares
of the common stock of the Company for the then-outstanding warrants to acquire
7,400,000 shares of the common stock of Front Porch.
Prior to the completion of the Plan, there were 46,400,000 outstanding
shares of common stock of the Company. Giving effect to the issuance of the
shares outlined above and the cancellation of 40,000,000 shares of common stock
of the Company as required by the Plan, there are 15,840,000 issued and
outstanding shares of common stock of the Company.
This transaction is commonly referred to as a "reverse acquisition" where
100% of Front Porch's stock was effectively exchanged for a controlling interest
in a publicly held "shell" corporation, the Company (which concurrently changed
its name to Front Porch Digital, Inc.). For financial accounting purposes, this
transaction will be treated as the issuance of stock for the net monetary assets
of the Company, accompanied by a recapitalization of Front Porch, with no
goodwill or other intangible assets recorded.
Plan of Operation
The Company's plan of operation for the next 12 months is to establish
itself as a leading service provider for broadband digital media solutions,
primarily in the areas of entertainment, business services, education and
training. The Company also intends to further develop automated broadband
solutions to attract new customers. The Company plans to expand the features of
its automated solutions while also developing new, innovative solutions.
The Company believes its proprietary software-based solution offers
significant advantages over alternatives in the marketplace. Traditional
production models are heavily dependent on hardware and do not scale easily,
requiring a higher level of capital investment and people resources. Traditional
production models also require multiple captures of analog source material to
convert digital content to multiple end-user formats. In addition, most
production facilities have little or no software support, which results in
limitations in user service
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offerings and dependence on third-party software vendors. Through its service
bureau, the Company currently provides content owners with flexible,
cost-effective services and automated tools that facilitate the distribution of
digital content for business, education and entertainment.
The Company maintains a research and development staff to develop
intellectual property and software products aimed at broadband content
processing, manipulation and transmission. This custom software development is
also aimed at continually optimizing the production process with the goal of
obtaining the highest quality of service. The Company is also an authorized
reseller of DVD authoring software tools developed by Daikin U.S. Comtec
Laboratories. The Company expects to enter into additional reseller arrangements
for other leading broadband content processing hardware and software.
RESULTS OF OPERATIONS
Prior to the consummation of the Plan, the Company conducted no
significant business operations. As a result, the Company believes a comparison
of results of operations for the three- and six-month periods ended June 30,
2000 to the comparable periods of fiscal 1999 is not meaningful. The following
information includes the results of operations of Front Porch for all periods
prior to May 2, 2000.
For the Three and Six Months Ended June 30, 2000
Revenues. Total revenues increased by approximately 65% for the three
months ended June 30, 2000 as compared to the first quarter of 2000. The
increase in revenues is a result of an increased market awareness of the
Company's services and products.
Cost of Revenues. Cost of revenues consists primarily of consumables
directly related to the generation of revenue, but does not include the cost of
salaries, facilities or equipment. Total cost of revenues increased by
approximately 1,050% for the three months ended June 30, 2000 as compared to the
first quarter of fiscal 2000. This increase was due to an increase in operations
personnel. The Company plans to significantly increase its revenue-generating
capacity and therefore expects expenses in this category to continue to
increase.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries, commissions, travel, trade show expenses, advertising and
the production of marketing collateral. Sales and marketing expenses increased
by approximately 111% for the three months ended June 30, 2000 as compared to
the first quarter of fiscal 2000. The increase was primarily due to growth in
the sales staff and attendance at trade shows. The Company plans to
significantly increase its sales and marketing efforts and therefore expects
expenses in this category to increase.
General & Administrative. General & Administrative expenses consist
primarily of all other salaries, employee benefits, insurance, voice and data
communications, equipment leases, non-sales travel and entertainment,
accounting, legal, shareholder relations, and office supplies. All overhead
expenses are currently reported under this category. General & Administrative
expenses decreased by approximately 32% for the three months ended June 30, 2000
as compared to the first quarter of fiscal 2000. The decrease in the second
quarter was primarily attributable to the accrual of a signing bonus (in the
amount of $500,000 for the Chief Executive Officer) that was recorded in the
first quarter.
For the Three and Six Months Ended June 30, 1999
For the six-month period ended June 30, 1999, the Company incurred nominal
general and administrative expenses totaling $7,353 for shareholder costs, and
legal and accounting fees.
CAPITAL RESOURCES AND LIQUIDITY
As of June 30, 2000, the Company's principal commitments consisted
primarily of notes payable, totaling approximately $800,000. These notes bear
interest at 9% per annum and are unsecured. The principal
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and interest on these notes is payable on the earlier of (a) the consummation of
an offering of securities pursuant to Rule 506 under the Securities Act of 1993,
as amended, with gross proceeds of at least $3 million or (b) December 31, 2000.
Since consummation of the Plan, the Company has significantly increased
its operating expenses. The Company currently anticipates that it will continue
to experience significant growth in its operating expenses for the foreseeable
future and that its operating expenses will be a material use of its cash
resources.
On May 5, 2000, the Company authorized the offering of up to 140 Units,
at a purchase price of $50,000 per Unit, each Unit to consist of 25,000 shares
of the Company's common stock. This private placement has financed the recent
operations of the Company. Net cash used in operating activities was $465,381 in
the six-month period ended June 30, 2000.
The Company believes that proceeds from the sale of at least 80 Units,
in addition to our existing cash and cash equivalents, will be sufficient to
meet the Company's working capital and capital expenditure requirements for at
least the next 12 months. At August 1, 2000, the Company had accepted
subscriptions for 7.5 Units and had received subscriptions for another 18.7
Units that had not yet been accepted. Thereafter, the Company may find it
necessary to obtain additional equity or debt financing. In the event additional
financing is required, the Company may not be able to raise such capital on
acceptable terms or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a broadband digital media solutions provider that offers
services that facilitate the distribution of digital media over a variety of
delivery mechanisms. The Company does not use derivative instruments to hedge
its risks nor does it currently rely on interest income or short-term
investments. Therefore, the Company anticipates no material market risk
exposure. As a result, no quantitative tabular disclosures are presented.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 2, 2000, the Company issued an aggregate of 9,440,000 shares of
its common stock in connection with the consummation of the Plan to the 10
stockholders of Front Porch. Such transaction was effected pursuant to Section
4(2) of the Securities Act of 1933, as amended.
On June 13, 2000, concurrent with the first closing of the Company's
private placement, the Company sold to six accredited investors, an aggregate of
187,500 shares of the Company's unregistered common stock at $2.00 per share,
which sale generated cash proceeds of $375,000. The Company intends to use the
net proceeds from this private placement primarily for sales and marketing
expenses; research and development; the purchase of equipment; repayment of
bridge loan indebtedness; and working capital and general corporate purposes.
Such transaction was effected pursuant to Section 4(2) of the Securities Act of
1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective April 12, 2000, the holders of approximately 87% of the
outstanding capital stock of the Company approved by written consent a forward
split of outstanding voting securities on a basis of two-for-one,
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retaining the current authorized capital and par value. All fractional shares
were rounded up to the nearest whole share.
Effective May 1, 2000, the holders of approximately 87% of the
outstanding capital stock of the Company approved by written consent the change
of the name of the Company from Empire Communications, Inc. to Front Porch
Digital Inc.
ITEM 5. OTHER INFORMATION - None applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Exhibit Number Description
-------------- -----------
2 Certificate of Amendment to Articles of Incorporation
27 Financial Data Schedule
(b) The Company filed a current report on Form 8-K dated May 2, 2000
providing information with respect to the completion of the acquisition
by the Company of Front Porch. The following financial statements and
pro forma financial information were filed as part of this report:
(1) The following financial statements with respect to the Company:
Balance Sheet as of March 31, 2000 (unaudited)
Statement of Operations for the period from February 1, 2000
(Date of Inception) to March 31, 2000 (unaudited).
Notes to Financial Statements
(2) The following pro forma financial information with respect to the
Company:
Pro forma Combined Balance Sheet as of March 31, 2000 (unaudited)
Pro Forma Combined Statement of Operations for the period
ended March 31, 2000 (unaudited)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized on August 14, 2000.
FRONT PORCH DIGITAL INC.
By: /s/ Jay Yogeshwar
------------------------
Jay Yogeshwar
Chief Executive Officer
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