10-K 1 r10k1231.txt 10-K FOR DECEMBER 31 2008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 000-16534 DIGITAL FUEL, INC. ----------------- (Exact Name of Registrant as specified in its charter) Delaware 45-0375367 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) I.D. Number) 6601 E. Grant Road, Suite 101, Tucson, Arizona 85715 ---------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (520) 886-5354 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $.01 Par Value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [ X ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] No [ X ] -1- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ X ] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] State the aggregate market value of the voting common stock held by non- affiliates of the registrant computed by reference to the price at which the stock was sold, or the average bid and ask prices of such stock as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.): Since the Common Stock of the Company is not currently traded and there is no market for the Company's Common Stock, the aggregate market value of the voting stock held by non-affiliates is nominal. State the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: As of February 20, 2009, 4,343,262 shares of Common Stock, par value $.01 per share, were outstanding. Documents incorporated by reference: Schedule 14F1 Information Statement filed on July 16, 1999 and Schedule 14C Definitive Information Statement filed on May 9, 2000. -2- DIGITAL FUEL, INC. FORM 10-K PART I CAUTIONARY NOTES REGARDING THE FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are based on our current expectations, assumptions, beliefs, estimates and projections about our company, our industry and other related industries. The forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those described in the forward- looking statements. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "should" and variations of such words or similar expressions. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including those discussed under Item 1A, "Risk Factors." We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward- looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. ITEM 1. BUSINESS. General Overview Readers of this report should note that our business materially changed after August 31, 1999 and again on January 1, 2004. Except as otherwise described in this report, the information in this report is current through December 31, 2008. As described in the Schedule 14F1 Information Statement, as filed with the Securities and Exchange Commission on July 16, 1999 and incorporated herein by reference, there was a change in control of Digital Fuel, Inc. Mr. Farley and the Metz Trust purchased a majority of the outstanding Common Stock, par value, $.01 per share ("Common Stock") and began the process of bringing the filings with the Securities and Exchange Commission current. It is not our intention to conduct our business in a manner that would subject us to the Investment Company Act of 1940. When used in this annual report on Form 10-K, the terms the "Company," "we," "us," "our," and "Digital Fuel" refer to Digital Fuel, Inc., a Delaware corporation. Deucalion Research, Inc. ("Deucalion"), a North Dakota company, was organized on May 3, 1983 and is the predecessor to Digital Fuel. In a stock purchase transaction (the "Transaction") made pursuant to a stock purchase agreement, dated July 29, 1999, Deucalion was purchased by Michael -3- R. Farley and Forrest L. Metz (the "Stock Purchase Agreement"). Effective August 31, 1999, former management completed the Transaction whereby approximately 95% of the post transaction voting Common Stock (2,002,226 shares) was sold for an aggregate purchase price of $110,000. Also, effective August 31, 1999, the former directors and officers of Deucalion resigned and the purchasers were elected as our new directors and officers. Pursuant to the terms of the Transaction, the purchasers paid in August 1999, $100,000 of the purchase price in exchange for 147,766 shares of our Common Stock. After the reincorporation, recapitalization and merger, the purchasers were issued 1,855,460 additional shares of our Common Stock in exchange for $10,000 in debt due to them, which resulted in the purchasers owning 95% of Digital Fuel. Per the terms of the Stock Purchase Agreement, certain liabilities of Deucalion were settled including $38,836 owed for legal fees and $93,412 owed for management service fees. These liabilities were settled through the issuance of Common Stock equal to 0.5% or 10,538 shares and 1% or 21,076 shares, respectively, after completion of the reincorporation, recapitalization and merger. As a result of a special meeting of the Stockholders on June 1, 2000, and effective June 22, 2000, the domicile of the predecessor company was changed from the state of North Dakota to the state of Delaware by merging Deucalion with and into its recently formed and wholly owned Delaware subsidiary Digital Fuel. The merger also effected the following additional objectives: a 1-for-6,800 reverse stock split, with fractional shares being rounded up to the nearest whole share; a reduction in the authorized common stock from 1,500,000,000 shares to 20,000,000; an increase in the par value of common stock from $.000l to $.01 per share; and the authorization of the Board of Directors to issue up to 10,000,000 shares of blank check Preferred Stock. On January 1, 2004, the Company ceased all principal operations previously undertaken and reverted to the development stage. Management's current focus is to find a suitable candidate and enter into a reverse merger agreement. In February 2006, Mr. Metz resigned his positions as Director and President (see "Employees" below). Investment in Preferred Stock Shares of SiteScape Effective September 1, 1999, the new management completed an agreement with Farley & Associates, Inc., an Arizona corporation ("F&A"), wholly owned by Michael R. Farley who is also chief executive officer, a director and a majority stockholder of Digital Fuel, whereby Digital Fuel acquired from F&A an option to purchase 516,667 shares of Series A Preferred Stock of SiteScape, Inc. ("SiteScape"). SiteScape is a provider of open collaboration software, including teaming plus conferencing products and they acquired AltaVista FORUM from Compaq Computer in April 1999. AltaVista FORUM is collaboration software that provides ways to communicate, share resources and collaborate with groups of people within a company or across organizations. -4- We acquired this option to purchase shares of SiteScape in exchange for a $200,000 draw on a multiple advance promissory note extended to us by F&A of up to $800,000, bearing interest at 9% and due on demand (the "F&A Note"). The option to purchase the SiteScape Series A Convertible Preferred Stock was originally agreed to through negotiations between F&A and SiteScape and allows F&A (or its designee) to purchase 516,667 shares of SiteScape Preferred Stock at an exercise price of $1.9354 per share. Prior to September 1999, F&A provided $400,000 to SiteScape as a deposit on the option to purchase the Series A Convertible Preferred Stock. On September 1, 1999, we acquired F&A's rights to this deposit in exchange for a $400,000 draw on the F&A Note. Effective November 5, 1999, we exercised one-half of the SiteScape option shares and purchased 258,334 shares of Series A Convertible Preferred Stock at a total cost of $500,000. We paid $100,000 cash directly to SiteScape and applied the $400,000 SiteScape deposit described above. In February 2000, we exercised the remaining one-half of the SiteScape option shares and purchased 258,333 shares of Series A Convertible Preferred Stock for $500,000. At that point, we owned approximately 20% of the voting stock of SiteScape. On June 30, 2001, SiteScape issued to us options to purchase 103,338 shares of its common stock at $1.93 per share. Based on the SAIC Venture Capital Corporation ("SAIC") investment described below, the common shares of SiteScape had a value substantially less than the option price. In October of 2001, SiteScape received a term sheet from SAIC to purchase up to $2.5 million of its Series B Convertible Preferred Stock. On March 12, 2002 the first transaction was closed. The Series B Convertible Preferred Stock sold to the new investors will be senior to our Series A Convertible Preferred Stock in both payment of dividends and distribution. Each share of Series B Convertible Preferred Stock was sold for $.4164 per share and will be redeemed for $0.6246 per share or 1.5 times the original investment. As part of the investment agreement, the domicile of SiteScape was changed to Delaware and the Series A Convertible Preferred Stock was split 5 for 1. We now own 2,583,335 shares of Series A Convertible Preferred Stock which has, among other rights, the right to vote on general matters and the election of one member to the seven member Board of Directors of SiteScape, the ability of a one for one conversion into the common stock of SiteScape and dividend participation with common shares. We now own approximately 6.5% of SiteScape on a fully diluted basis. In addition, both the Series A and Series B Convertible Preferred Stock shall also be entitled to receive dividends if and when declared by SiteScape's Board of Directors at the cumulative rate of 8% per year compounded annually. Dividends are due only if the tangible net worth of SiteScape exceeds $25 million and if declared by the Board of Directors of SiteScape. As of December 31, 2007, no dividends have been declared by SiteScape. The Series A dividends are junior to the Series B Convertible Preferred Stock dividends, but senior to the common stock dividends. -5- Pursuant to an Agreement and Plan of Merger dated February 13, 2008, Novell, Inc. acquired SiteScape, for approximately $18.5 million in cash and SiteScape became a fully owned subsidiary of Novell (the "SiteScape Merger"). As a result of the acquisition, all holders of outstanding shares of SiteScape were given the right to receive a cash payment in exchange for their stock. As a holder of 6.5% of SiteScape's stock, on a fully diluted basis, we received a cash payment and a portion of the purchase price was placed in an escrow account which will be released to us eighteen months (18) after the closing of the SiteScape Merger, in the event that Novell does not seek indemnification for inaccuracies contained in the representations and warranties of SiteScape in the merger agreement. We received a portion of the escrow in October 2008 and the remainder continues to be held on our behalf as of December 31, 2008. Effecting a Business Combination We are not presently engaged in, and we will not engage in, any substantive commercial business for an indefinite period of time. We intend to work towards effecting a business combination. Accordingly, there is no current basis for shareholders to evaluate the specific merits or risks of any one or more business combinations. A business combination may involve the acquisition of, or merger with, a company which does not need substantial additional capital but which desires to establish a public trading market for its shares, while avoiding what it may deem to be adverse consequences of undertaking a public offering itself. These include time delays, significant expense, loss of voting control and compliance with various federal and state securities laws. We are currently in the process of identifying and evaluating targets for an initial transaction. We have not entered into any definitive business combination agreements. We have virtually unrestricted flexibility in identifying and selecting a prospective acquisition candidate. Accordingly, there is no basis for investors to evaluate the possible merits or risks of the target business with which we may ultimately complete a business combination. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors. Competition The Company will face vast competition from other shell companies with the same objectives as described above. The Company will be in a highly competitive market for a small number of business opportunities which could reduce the likelihood of consummating a successful business combination. A large number of established and well-financed entities, including small public companies and venture capital firms, are active in mergers and acquisitions of companies that may be desirable target candidates for us. Nearly all of these entities have significantly greater financial resources, technical expertise and managerial capabilities than we do; consequently, we will be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. These competitive factors may reduce the likelihood of our identifying and consummating a successful business combination. -6- ITEM 1A. RISK FACTORS We are a development stage company with no operating history and, accordingly, you will not have any basis on which to evaluate our ability to achieve our business objective. We are a development stage company with no operating results to date. Since we do not have an operating history, you have no basis upon which to evaluate our ability to achieve our business objective, which is to acquire an operating business. We are currently in the process of identifying and evaluating prospective target businesses, however, we may be unable to complete a business acquisition. As described in this Annual Report on Form 10-K, we will not generate any operating revenues until, at the earliest, after the consummation of a business combination. We cannot assure you that a business combination will occur. Because of the significant competition for business combination opportunities, we may not be able to consummate an attractive business combination within the required time frame. We expect to encounter intense competition from entities other than blank check companies having a business objective similar to ours, including leveraged buyout funds, hedge funds and operating businesses competing for acquisitions. Many of these entities are well established and have extensive experience in identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than we do. Further, the obligation we have to seek stockholder approval of a business combination may delay the consummation of a transaction, and our obligation to convert into cash the shares of common stock held by public stockholders in certain instances may reduce the resources available for a business combination. Any of these obligations may place us at a competitive disadvantage in successfully negotiating a business combination. We may be unable to obtain additional financing, if required, to complete a business combination or to fund the operations and growth of the target business, which could compel us to restructure the transaction or abandon a particular business combination. We cannot assure you that additional financing would be available on acceptable terms, if at all. To the extent that additional financing proves to be unavailable when needed to consummate a particular business combination, we would be compelled to restructure the transaction or abandon that particular business combination and seek an alternative target business candidate. In addition, if we consummate a business combination, we may require additional financing to fund the operations or growth of the target business. The failure to secure additional financing could significantly curtail the continued development or growth of the target business, thereby limiting its ability to effectively compete in the marketplace. None of our officers, directors or stockholders is required to provide any financing to us in connection with or after a business combination. -7- Since we have not yet selected a target business with which to complete a business combination, we are unable to currently ascertain the particular merits or risks of the business in which we may ultimately operate. There is no current basis for you to evaluate the possible merits or risks of the particular target business which we may ultimately acquire. To the extent we complete a business combination with a financially unstable company or an entity in its development stage, we may be affected by numerous risks inherent in the business operations of those entities. Although our management will endeavor to evaluate the risks in a particular target business, we cannot assure you that we will properly ascertain or assess all of the significant risk factors. There is a possibility that the amounts placed in escrow on our behalf will not be relieved from Novell, Inc. should Novell seek indemnification for items contained in the SiteScape Merger Agreement. We cannot assure you we will eventually receive the portion of the purchase price of the SiteScape stock which remains in escrow, $168,079, on our behalf as of December 31, 2008. Resources could be wasted in researching acquisitions that are not consummated. It is anticipated that the investigation of each specific target business and the negotiation, drafting, and execution of relevant agreements, disclosure documents, and other instruments will require substantial time and attention and substantial costs for accountants, attorneys and others. In addition, we may opt to make down payments or pay exclusivity or similar fees in connection with structuring and negotiating a business combination. If a decision is made not to complete a specific business combination, the costs incurred up to that point in connection with the abandoned transaction, potentially including down payments or exclusivity or similar fees, would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target business, we may fail to consummate the transaction for any number of reasons, including those beyond our control. Any such event will result in a loss to us of the related costs incurred, which could adversely affect subsequent attempts to locate and acquire or merge with another business. Any such event will result in a loss to us of the related costs incurred which could significantly limit our ability to subsequently locate and acquire or merge with another business. We are heavily dependent on our management. Our success depends upon the personal efforts of our Chief Executive Officer, Michael R. Farley. The loss of the services of Mr. Farley could have a material adverse effect on our business and prospects. We do not have "key- person" life insurance on Mr. Farley. -8- Employees We currently have three contracted personnel, two of whom serve as our executive officers. Our founders are Michael R. Farley and Forrest L. Metz. Mr. Farley serves as our Chief Executive Officer and Mr. Metz formerly served as our President. However, Mr. Metz gave notice of his resignation as a Director and our President effective February 1, 2006. We do not intend to seek a replacement for the positions that Mr. Metz left vacant. Grant S. Papanikolas serves as our Chief Operating Officer and is a member of our Executive Committee along with Mr. Farley. In addition, we have a contracted administrative staff person. ITEM 1B. UNRESOLVED STAFF COMMENTS. Not applicable. ITEM 2. PROPERTIES. We lease our office space of approximately 800 square feet. Our office is located at 6601 E. Grant Road, Suite 101, Tucson, Arizona 85715 and is sufficient for our operations. ITEM 3. LEGAL PROCEEDINGS. There were no legal proceedings against the Company during 2008. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS No matters were submitted to the Stockholders during 2008. PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES. Common Stock Our Certificate of Incorporation authorizes the issuance of 20,000,000 shares of Common Stock. Our Common Stock is not listed on a publicly-traded market. As of December 31, 2008, there were 1,123 holders of record of our Common Stock. Preferred Stock Our Certificate of Incorporation authorizes the issuance of 10,000,000 shares of Preferred Stock. The Company has not yet issued any of the Preferred Stock. Dividend Policy The Company has not declared or paid any cash dividends on Common Stock and does not intend to declare or pay any cash dividend in the foreseeable future. The payment of dividends, if any, is within the discretion of the Board of Directors and will depend on the Company's earnings, if any, its capital requirements and financial condition and such other factors as the Board of Directors may consider. -9- Securities Authorized for Issuance Under Equity Compensation Plans None. Recent Sales of Unregistered Securities None. Redemption None. Registration Rights None. ITEM 6. SELECTED FINANCIAL DATA The following tables summarize the relevant financial data and should be read with our financial statements which are included in this report. Cumulative Period From January 1, 2004 Year Ended Year Ended to December 31, December 31, December 31, 2008 Income Statement Data: 2008 2007 (Unaudited) --------------------- ---- ---- --------- Operating loss $(126,633) $ (16,157) $ (193,823) Other income/expense $ 533,087 $(394,634) $ (808,487) Net income/loss $ 406,454 $(410,791) $(1,002,310) Basic and diluted net income/ loss per share $ .09 $ (.09) Basic and diluted weighted average shares outstanding 4,343,262 4,343,262 December 31, December 31, Balance Sheet Data: 2008 2007 ------------------ ---- --------- Total assets $ 119,938 $ 70 Total current liabilities $ 3,842,350 $ 4,128,936 Total stockholders' (deficiency) $(3,722,412) $(4,128,866) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations We have neither engaged in any operation nor generated any revenue since re-entering the development stage on January 1, 2004. Our entire activity since January 1, 2004 has been to identify and investigate targets for a potential business combination. We will not generate any operating revenue until consummation of a business combination. During the years ended December 31, 2008 and 2007, we incurred rent expense of $1,262 and $1,262, respectively, accounting expense of $48,583 and $475, respectively, -10- management fees of $25,923 and $13,851, respectively, and general and administrative expenses of $50,865 and $569, respectively, related to these activities with a total loss of $126,633 and $16,157, respectively, from operations. Accounting expenses increased in 2008 due to the hiring of auditors in order to comply with Section 102 of the Sarbanes-Oxley Act of 2002. Management fees increased in 2008 due to time required to complete filings to the SEC. General and administrative expenses increased in 2008 due to an increase in work by contracted personnel in order to complete filings to the SEC, re-hiring the stock transfer agent, setting up a website, and an increase in legal fees in order to stay in compliance with the Securities and Exchange Commission. We incurred interest expense for the years ended December 31, 2008 and 2007 of $441,904 and $394,634, respectively, in connection with our outstanding debt. Through December 31, 2008 and 2007, entities controlled by Mr. Farley and Mr. Farley personally have made loans to us totaling $699,945 and $854,570, respectively, for certain investment transactions and our ongoing cash needs. Through December 31, 2008 and 2007, an entity controlled by Mr. Metz and Mr. Metz personally have made loans to us totaling $270,515 and $330,275, respectively, for certain investment transactions and our ongoing cash needs. Liquidity and Capital Resources As of December 31, 2008, the Company had assets equal to $119,938, comprised exclusively of cash and cash equivalents. The Company's current liabilities as of December 31, 2008 totaled $3,842,350, comprised of $651 of accounts payable, $3,205,587 of notes payable and accrued interest due to related parties, and $636,112 of other notes payable and accrued interest. The following is a summary of the Company's cash flows provided by (used in) operating, investing and financing activities: Cumulative Period From January 1, 2004 Year Ended Year Ended to December 31, December 31, December 31, 2008 Income Statement Data: 2008 2007 (Unaudited) --------------------- ---- ---- --------- Net cash (used) in operating activities $(559,888) $(4,663) $(596,386) Net cash provided by investing activities $ 954,756 $ -- $ 954,756 Net cash provided (used) by financing activities $(275,000) $ 4,600 $(238,550) Net increase (decrease) in cash $ 119,868 $ (63) $ 119,820 Net cash used in operating activities increased in 2008 due to the hiring of auditors in order to comply with Section 102 of the Sarbanes-Oxley Act of 2002, payment of past due compensation, an increase in work by contracted personnel in order to complete filings to the SEC, re-hiring the stock transfer agent, setting up a website and an increase in legal fees in order to stay in compliance with the Securities and Exchange Commission. -11- The Company has nominal assets and has generated no operating revenues since re-entering the development stage. The Company is also dependent upon the receipt of capital investment or other financing to fund its ongoing operations and to execute its business plan of seeking a combination with a private operating company. In addition, the Company is dependent upon certain related parties to provide continued funding and capital resources. If continued funding and capital resources are unavailable at reasonable terms, the Company may not be able to implement its plan of operations. Critical Accounting Policies Accounting and Reporting by Development Stage Enterprises Statement of Financial Accounting Standards No. 7 ("SFAS No. 7"), Accounting and Reporting by Development Stage Enterprises, requires that financial statements issued by a development stage enterprise shall present financial position, results of operations and cash flows in conformity with the generally accepted accounting principles that apply to established operating enterprises. The basic financial statements to be presented and the additional information required to be disclosed shall include the following: (a) a balance sheet, including any cumulative net losses reported with a descriptive caption such as "deficit accumulated during the development stage" in the stockholders' equity section; (b) an income statement, showing amounts of revenue and expenses for each period covered by the income statement and, in addition, cumulative amounts from the enterprise's inception; (c) a statement of cash flows, showing the cash inflows and cash outflows for each period for which an income statement is presented and, in addition, cumulative amounts from the enterprise's inception; and (d) a statement of stockholders' equity, showing from the enterprise's inception: (1) for each issuance, the date and number of shares of stock, warrants, rights or other equity securities issued for cash and for other consideration; (2) for each issuance, the dollar amounts (per share or other equity unit and in total) assigned to the consideration received for shares of stock, warrants, rights or other equity securities; and (3) for each issuance involving noncash consideration, the nature of the noncash consideration and the basis for assigning amounts. The financial statements shall also be identified as those of a development stage enterprise and shall include a description of the nature of the development stage activities in which the enterprise is engaged. The Company has adopted SFAS No. 7 and prepares its financial statements in conformity with generally accepted accounting principles. ITEM 8. FINANCIAL STATEMENTS. Our financial statements are included in this annual report on Form 10-K as pages F-1 through F-17. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On November 12, 2008, Gordon, Hughes & Banks, LLP ("GH&B") resigned as the Company's independent registered public accounting firm. GH&B entered into an agreement with Eide Bailly, LLP ("Eide Bailly"), pursuant to which Eide Bailly acquired the operations of GH&B and certain of the professional staff and shareholders of GH&B joined Eide Bailly either as employees or partners of Eide Bailly and continued to practice as members of Eide Bailly. Concurrent with the resignation of GH&B, the Company, through and with the approval of its officers, engaged Eide Bailly as its independent registered public accounting firm. -12- In connection with the audit for the past fiscal year and through November 12, 2008, there were no disagreements with GH&B on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of GH&B, would have caused GH&B to make reference to the subject matter of the disagreements in connection with its audit reports on the Company's financial statements. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures We designed our disclosure controls and procedures to provide reasonable assurance of achieving our desired disclosure control objectives. We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports we file pursuant to the Securities Act of 1934, as amended (the "Exchange Act"), are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our officers as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any control and procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Our officers conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this report. In conducting their evaluation, our two officers determined that our internal controls over financial reporting are effective. Although we are not required to segregate the principal executive officer and principal financial officer functions and we are not required to have an audit committee, our two officers serve in both of these functions and we do not have an audit committee as dispositive in providing its advice to our two officers. As a result of this material weakness in our internal controls, our two officers concluded further that the design and operation of our disclosure controls and procedures were not effective. (b) Management's Annual Report on Internal Control over Financial Reporting Our officers are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting refers to the process designed by, or under the supervision of, our officers, and affected by our Board of Directors, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. During 2008, the Company was not in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and as of December 31, 2008 cannot state whether or not our internal controls over financial reporting are effective as we did not document such controls nor test such controls. -13- (c) Attestation Report of the Registered Public Accounting Firm This annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal controls over financial reporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report. (d) Changes in Internal Control Over Financial Reporting There have been no significant changes in our internal controls over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act during the year ended December 31, 2008, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CORPORATE GOVERNANCE. (a) Directors and Executive Officers Our current directors and executive officers are as follows: Name Age Position(s) -------------------- --- ------------------------------------ Michael R. Farley 65 Chief Executive Officer and Director Grant S. Papanikolas 61 Chief Operating Officer We do not have a nominating committee, audit committee or other committees performing similar functions. Our officers are elected by and serve at the pleasure of the Board of Directors. We have not held a stockholders' meeting since the year ended December 31, 2000, which was for the purpose of merging Deucalion with Digital Fuel. The following is a brief summary of the business experience of our director and executive officers: Michael R. Farley. Mr. Farley is the current President of Farley and Associates, Inc., a company involved in the business of providing financing and strategic business plans for small and medium sized companies. From 1994 until 1996, Mr. Farley served as Chairman of the Board and CEO of Green Turf, International, Inc., a company involved in the golf course maintenance business. From 1988 to 1994, Mr. Farley was a member of the Board of Directors of Mid-Atlantic Paging Company, Inc. and New Era Communications, Inc. Both of these affiliated companies were involved in the communications industry and specialized in pager technology. From 1988 to 1994, Mr. Farley was also the managing General Partner of the Richmond/Tidewater System, which was also involved in the communications industry and specialized in pager -14- technology. In 1988, Mr. Farley served as Director of Communications for George Bush for President at the Republican National Convention. From 1985 to 1988 Mr. Farley served as Director, Chief Financial Officer and Vice President for Celutel, Inc., a company specializing in the development of cellular telephone systems. Mr. Farley has served in community organizations in the following capacity: member of the Board of Trustees for St. Joseph's Hospital in Tucson, Arizona; member of the Arizona State Board of Vocational/Technical Education; member of the Advisory Committee on the Arts for the John F. Kennedy Center for the Performing Arts; Chairman of the Policy Forum for the National Center for Research in Vocational Education; Director for the University of Arizona Foundation; Trustee for St. Gregory High School; President of the Parent-Teacher Group for Fort Lowell School; and Treasurer of the Parents for St. Michael's School. Grant S. "Skip" Papanikolas. Mr. Papanikolas has served as our Chief Operating Officer since August 1999. Mr. Papanikolas has over 30 years experience in the electronics and computer industry. He founded an electronics manufacturing company and operated it for 15 years prior to selling. His experience also includes 12 years of experience in the early development stages of the computer and electronics industry in California. Mr. Papanikolas serves as Secretary/Treasurer of MEM Holdings, Inc. since August 2006. Mr. Papanikolas also serves as Secretary/Treasurer of GSP Technical Sales, Inc. since September 2000. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires our officers, sole director and persons who own more than ten percent of a registered class of our securities (collectively, "reporting persons"), to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission ("SEC"). Reporting Persons are required by SEC regulation to furnish us with copies of all Forms 3, 4 and 5 filed. To the best knowledge and our belief, no Section 16(a) filings were made by our 10% beneficial owners and our director during 2008. ITEM 11. EXECUTIVE COMPENSATION. (a) Compensation Under Plans. We currently have no stock option plan, stock bonus plan, other compensatory plan or arrangement, or employee benefit plan for employees, consultants, officers or directors. (b) Other Executive Officer Compensation. Compensation was paid to Mr. Farley in the amount of $9,976 for 2008 and $9,976 for 2007. (c) Compensation of Directors. We do not pay our sole director for his services in that capacity. -15- (d) Termination of Employment and Change in Control. There are no compensatory plans or arrangements with respect to any executive officer which results from the resignation, retirement or any other termination of the individual's employment with us, or from a change of control of Digital Fuel, or from a change of the individual's responsibilities. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) Security Ownership of Certain Beneficial Owners. The following table sets forth information as of December 31, 2008 regarding the beneficial ownership of shares of our only outstanding class of securities, our Common Stock, by our sole director, by each named executive officer, and by each person who, to our knowledge at that date, was a beneficial owner of 5% or more of the outstanding shares of Common Stock. The table does not include information regarding shares of Common Stock held in the names of certain depositories/clearing agencies as nominee for various brokers and individuals. No such broker or individual is believed to hold greater than 5% of our Common Stock. Amount and Nature of Percent Name and Address of Beneficial of Title of Class Beneficial Owner Owner Class -------------- ------------------------ --------- ----- Common Stock Michael R. Farley, Chief 1,101,113 25.4% Executive Officer and Director 6601 E. Grant Rd, Suite 101 Tucson, Arizona 85715 Common Stock Forrest L. Metz (1) 1,101,113 25.4% 877 S. Alvernon Way Tucson, Arizona 85711 Common Stock Grant S. Papanikolas, Chief 1,185,000 27.3% Operating Officer 3968 E. Expedition Way Phoenix, Arizona 85050 Common Stock Officers and Directors as a Group 2,286,113 52.7% --------------- (1) Includes shares placed in the Metz Trust, of which Mr. Metz is the Trustee, for the benefit of D. Kim Metz, Forrest L. Metz, Jr. and Jenifer K. Metz. (b) Securities Authorized For Issuance Under Equity Compensation Plans. None. -16- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Advance Notes On September 1, 1999, Farley & Associates, Inc. ("F&A") extended a multiple advance promissory note to us for up to a maximum aggregate principle amount of $800,000, bearing interest at 9%, due December 31, 2000 with a default rate of 12% after the due date (the "F&A Note"). On October 28, 1999, the Metz Trust extended a multiple advance promissory note with identical terms to the F&A Note (the "Metz Note"; the F&A Note and the Metz Note are referred to collectively as the "Advance Notes") for up to $150,000. The Metz Trust is controlled by Forrest Metz who was a former officer and director, and is a majority stockholder of Digital Fuel. F&A is wholly owned by Michael R. Farley who is an officer, director and majority stockholder of Digital Fuel. Under the Advance Notes, F&A and the Metz Trust each received 100,000 shares of our post recapitalization Common Stock. Management believes that these shares have a nominal market value based on various factors including our financial position and the fact that there is no current market for our Common Stock. In January 2006 (but made effective September 1, 1999), F&A transferred $150,000 of the principal due under its note from the Company to Forrest L. Metz. Other Loans On September 30, 1999, the Farley Family Partnership extended to us $200,000 in return for a promissory note of $200,000, bearing interest at 9%, due December 31, 2000 with a default rate of 12% after the due date. The Farley Family Partnership is controlled by Michael R. Farley, our Chief Executive Officer and Director. The $200,000 was advanced for our immediate cash needs. On February 22, 2000, Grant Papanikolas extended a multiple advance promissory note to us for up to a maximum aggregate principle amount of $100,000, bearing interest at 9%, due December 31, 2000 with a default rate of 12% after the due date. Mr. Papanikolas is our Chief Operating Officer. The cash was advanced for our immediate cash needs. On April 28, 2000, Michael Farley extended a multiple advance promissory note to us for up to a maximum aggregate principle amount of $100,000, bearing interest at 9%, due December 31, 2000 with a default rate of 12% after the due date. Mr. Farley is our Chief Executive Officer. The cash was advanced for our immediate cash needs. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. Watson & Watson, CPAs, PC ("Watson & Watson") was the Company's independent registered public accounting firm from January 1, 2004 through March 9, 2005 when we received a notice from the Securities and Exchange Commission that stated Watson & Watson was not registered with the Public Company Accounting Oversight Board as required by Section 102 of the Sarbanes-Oxley Act of 2002. We filed unaudited reports with the Securities and Exchange Commission while we were searching for an independent registered public accounting firm registered with the Public Company Accounting Oversight Board. On May 12, 2008, the Company engaged Gordon, Hughes & Banks, LLP ("GH&B") as its new independent registered public accounting firm. On -17- November 12, 2008, GH&B resigned as the Company's independent registered public accounting firm. GH&B entered into an agreement with Eide Bailly, LLP ("Eide Bailly"), pursuant to which Eide Bailly acquired the operations of GH&B and certain of the professional staff and shareholders of GH&B joined Eide Bailly either as employees or partners of Eide Bailly and continued to practice as members of Eide Bailly. Concurrent with the resignation of GH&B, the Company, through and with the approval of its officers, engaged Eide Bailly as its independent registered public accounting firm. Audit Fees The aggregate fees billed by Gordon, Hughes & Banks and Eide Bailly for professional services rendered for the audit of our annual financial statements and review of financial statements included in our quarterly reports on Form 10-Q or services that are normally provided in connection with statutory and regulatory filings were $40,851 and $0 for the years ended December 31, 2008 and 2007, respectively. Audit-Related Fees There were no fees billed by Gordon, Hughes & Banks or Eide Bailly for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements for the years ended December 31, 2008 and 2007. Tax Fees There were no fees billed by Gordon, Hughes & Banks or Eide Bailly for professional services for tax compliance, tax advice and tax planning for the years ended December 31, 2008 and 2007. All Other Fees There were no fees billed by Gordon, Hughes & Banks or Eide Bailly for other services for the years ended December 31, 2008 and 2007. Audit Committee's Pre-Approval Process The Board of Directors acts as the audit committee of the Company, and accordingly, all services are approved by all members of the Board of Directors. -18- PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibits Exhibits required to be filed are listed below and, except where incorporated by reference, immediately follow the Financial Statements. Number Description --------- ----------------------------------------------------------------- 2 Agreement and Plan of Merger dated June 16, 2000 between Digital Fuel, Inc. and Deucalion Research, Inc., incorporated by reference to Exhibit 2 of the Company's Quarterly Report on Form 10-QSB for the period ended June 30, 2000. 3(i)(a) Articles of Incorporation, incorporated by reference to Exhibit (3) to the Company's Registration Statement on Form S-18 filed August 13, 1987, Registration No. 33-16535. 3(i)(b) Amended Articles of Incorporation, incorporated by reference to Exhibit (3A) to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1987, Commission File No. 0-16534. 3(i)(c) Bylaws, incorporated by reference to Exhibit (3.1) to the Company's Registration Statement on Form S-18 filed August 13, 1987, Registration No. 33-16535. (10.1) Stock Purchase Agreement between the Company and Michael R. Farley and Forrest L. Metz, dated April 20, 1999, incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-KSB for the period ended December 31, 1998. 3(ii)(a) Certificate of Incorporation, incorporated by reference to Exhibit A of the Schedule 14C Information Statement filed on May 9, 2000. 3(ii)(b) Bylaws of Digital Fuel, Inc., incorporated by reference to Exhibit 3(ii) of the Company's Quarterly Report on Form 10-QSB for the period ended June 30, 2000. 31.1 Certification of Michael R. Farley pursuant to Exchange Act Rule 13a-14(a)/15d-14(a). 32.1 Certification of Michael R. Farley pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Financial Statement Schedules Page ---- Reports of Independent Registered Public Accounting Firms. . . . F-1 and F-2 Balance Sheets as of December 31, 2008 and 2007. . . . . . . . . . . . . F-3 Statements of Operations for the years ended December 31, 2008 and 2007 and for the cumulative period from January 1, 2004 to December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . . . F-4 Statement of Stockholders' (Deficiency) from January 1, 2004 to December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . . . F-5 Statements of Cash Flows for the years ended December 31, 2008 and 2007 and for the cumulative period from January 1, 2004 to December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . . . F-6 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-7 -19- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Sole Director Digital Fuel, Inc.(a development stage company) Tucson, Arizona We have audited the accompanying balance sheet of Digital Fuel, Inc.(a company in the development stage - the "Company") as of December 31, 2008, and the related statements of operations, stockholders' (deficiency), and cash flows for the year then ended and the cumulative period from January 1, 2004 to December 31, 2008. We did not audit the cumulative period from January 1, 2004 through December 31, 2007. Those amounts were audited by other auditors, whose report dated October 27, 2008 has been furnished to us, and our opinion, insofar as it relates to the cumulative period from January 1, 2004 through December 31, 2007, is based solely on the report of other auditors. Digital Fuel, Inc.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digital Fuel, Inc. (a development stage company) as of December 31, 2008, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Digital Fuel, Inc. will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of operations. As discussed in Note 2, certain factors indicate substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of these uncertainties. As discussed in Notes 3 and 7 the Company had numerous significant transactions with related parties. Eide Bailly, LLP Greenwood Village, Colorado March 27, 2009 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Sole Director Digital Fuel, Inc. (a development stage company) Tucson, Arizona We have audited the accompanying balance sheet of Digital Fuel, Inc. (a company in the development stage - the "Company") as of December 31, 2007 and the related statements of operations, stockholders' (deficiency), and cash flows for the year then ended. The financial statements for the period January 1, 2004 through December 31, 2006 include a net loss of $997,973 after reversion to the development stage which was not subject to our audit engagement and a net loss of $5,142,516 prior to reversion to the development stage which was not subject to our audit engagement. Our opinion does not extend to the statements of operations, stockholders' deficit and cash flows for the period from January 1, 2004 through December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digital Fuel, Inc. (a development stage company) as of December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Digital Fuel, Inc. will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of operations. As discussed in Note 1, certain factors indicate substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of these uncertainties. Gordon, Hughes & Banks, LLP Greenwood Village, Colorado October 27, 2008 F-2 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS December 31, December 31, 2008 2007 ---- ---- (Restated) ASSETS Current assets Cash $ 119,938 $ 70 --------- --------- Total current assets 119,938 70 Investments (Note 5) -- -- --------- --------- Total assets $ 119,938 $ 70 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable - related parties $ -- $ 50,202 Accounts payable 651 112,699 Accrued expenses -- 296,571 Notes payable, related parties (Note 3) 3,205,587 3,062,152 Notes payable, other (Note 4) 636,112 607,312 --------- --------- Total current liabilities 3,842,350 4,128,936 --------- --------- Stockholders' (deficiency) Preferred stock, $.01 par value, 10,000,000 shares authorized, 0 shares issued and outstanding -- -- Common stock, $.01 par value, 20,000,000 shares authorized, 4,343,262 shares issued and outstanding at December 31, 2008 and December 31, 2007 43,433 43,433 Additional paid-in capital 2,378,981 2,378,981 (Deficit) accumulated prior to the development stage (5,142,516) (5,142,516) (Deficit) accumulated during the development stage (1,002,310) (1,408,764) --------- --------- Total stockholders' (deficiency) (3,722,412) (4,128,866) --------- --------- Total liabilities and stockholders' (deficiency) $ 119,938 $ 70 ========= ========= The accompanying notes are an integral part of these financial statements. F-3 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements. F-4 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF STOCKHOLDERS' (DEFICIENCY) For the cumulative period from January 1, 2004 to December 31, 2008 (Unaudited)

The accompanying notes are an integral part of these financial statements. F-5 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these financial statements. F-6 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Note 1. Description of the Business and Summary of Significant Accounting Policies Description of the Business Prior to January 1, 2004, Digital Fuel, Inc. (the "Company") was involved in the business of technology. We invested in a company called SiteScape that owned collaboration software. We also entered into a license agreement for technology that was owned by a company in Atlanta, Georgia called M2Direct. M2Direct filed for bankruptcy in May 2000, and the judge in the bankruptcy court ruled that the licenses given to Digital Fuel were invalid thus eliminating any opportunity for us to move forward on our digital distribution business plan. Accordingly, on January 1, 2004, we re-entered the development stage. Since January 1, 2004, the Company has served as a vehicle to effect a merger capital stock exchange, asset acquisition or other similar business combinations with an operating business. Because our balance sheet has been overburdened with debt, we have been unable to successful attract any operating businesses. However, with the recent sale of our interest in SiteScape, Inc. in February 2008 (Note 5), management will actively pursue a business combination. We plan to work with several investment banking firms that can help us seek companies that are interested in a reverse merger or acquisition of a public shell. We have neither engaged in any operation nor generated any revenue since January 1, 2004. Our entire activity since January 1, 2004 has been to identify and investigate targets for a potential business combination. We will not generate any operating revenue until consummation of a business combination. Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates. F-7 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Consolidation of Variable Interest Entities The Financial Accounting Standards Board ("FASB") issued Interpretation 46 (revised 2003), "Consolidation of Variable Interest Entities," and requires the primary beneficiary of a variable interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity's expected losses, receives a majority of the entity's expected residual returns, or both, because of ownership, contractual or other financial interests in the entity. Management has performed its annual evaluation and determined that the Company does not have any variable interest entities that would require consolidation. Net Income (Loss) per Share of Common Stock The Company computes net income (loss) per common share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), Earnings per Share, and Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti- dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. As of December 31, 2008 and 2007, there were no outstanding equity instruments that would have a dilutive effect. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. At December 31, 2008 and 2007, the Company held no cash equivalents. Financial Instruments and Fair Value Measurements Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), Disclosures about Fair Value of Financial Instruments, requires the Company to disclose estimated fair values for its financial instruments, for which it is practicable to estimate. The fair value of the Company's notes and accounts payables to related parties are not practicable to estimate due to the related party nature of the underlying transactions. Management believes that the carrying amounts of the Company's other financial instruments approximates their fair values primarily because of the short-term maturity of these instruments. F-8 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Estimates are not necessarily indicative of the amounts which could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts. Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No. 157"), which provides a comprehensive framework for measuring fair value and expands disclosures which are required about fair value measurements. Specifically, SFAS No. 157 sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowers priority to unobservable value inputs. The adoption of this statement had no impact on the Company's financial statements. SFAS No. 157 defines the hierarchy as follows: Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed on the New York Stock Exchange. Level 2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs. Level 3 - Significant inputs into pricing that are unobservable as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models and forecasts used to determine the fair value of financial transmission rights. Stock-Based Compensation The Company accounts for its stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) ("SFAS No. 123R"), Share-Based Payment. Under the provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant date based on the award's fair-value as calculated by the Black-Scholes-Merton ("BSM") option-pricing model and is recognized as expense ratably on a straight-line basis over the requisite service period. The BSM model requires various judgmental assumptions including expected volatility, forfeiture rates and expected option life. If any of the assumptions used in the BSM model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. During the years ended December 31, 2008 and 2007 and for F-9 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 the cumulative period from January 1, 2004 to December 31, 2008, the Company did not issue, or have outstanding, any stock-based compensation awards. Income Taxes The Company accounts for deferred income taxes in accordance with the liability method as required by Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), Accounting for Income Taxes. Deferred income taxes are recognized for the tax consequences in future years for differences between the tax basis of assets and liabilities and their financial reporting amounts at the end of each period, based on enacted laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Any liability for actual taxes to taxing authorities is recorded as income tax liability. Effective January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), which requires a more-likely- than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions change, the change in estimate is recorded in the period in which the determination is made. Comprehensive Income Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), Reporting Comprehensive Income, requires the presentation and disclosure of all changes in equity from non-owner sources as comprehensive income. The Company has no items of comprehensive income from January 1, 2004 through December 31, 2008. Recent Accounting Pronouncements In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) ("SFAS No. 141R"), Business Combinations, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree in a business combination. SFAS No. 141R also establishes principles around how goodwill acquired in a business combination or a gain from a bargain purchase should be recognized and measured, as well as provides guidelines on the disclosure requirements on the nature and financial impact of the business combination. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the potential effect that the adoption of SFAS No. 141R will have on our financial statements. F-10 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159"), which allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. SFAS No. 159 became effective for us on October 1, 2008. We believe that the impact of SFAS No. 159 on our consolidated results of operations, cash flows or financial position is not material. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 ("SFAS No. 160"), Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is evaluating the potential effect that the adoption of SFAS No. 160 will have on our financial statements and does not expect that the adoption will have a material impact on the Company's financial statements. In January 2008, Staff Accounting Bulletin No. 110 ("SAB No. 110"), Share-Based Payment, was issued. Registrants may continue, under certain circumstances, to use the simplified method in developing estimates of the expected term of share options as initially allowed by SAB No. 107, Share-Based Payment. The Company has adopted SAB No. 110 and will use the simplified method for developing estimates of the expected term of share options for any future issuances due to the lack of historical information in regards to our stock. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 ("SFAS No. 157"), Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 does not change which assets and liabilities are required to be recorded at fair value, but the application of SFAS No. 157 could change practices in determining fair value. We adopted F-11 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 this guidance effective January 1, 2008. In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date for SFAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until our 2009 fiscal year. In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 ("SFAS No. 161"), Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133, which requires companies to provide additional disclosures about its objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and related interpretations, and how the derivative instruments and related hedged items affect the Company's financial statements. SFAS No. 161 also requires companies to disclose information about credit risk-related contingent features in their hedged positions. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is evaluating the potential effect that the adoption of SFAS No. 161 will have on our financial statements and does not expect that the adoption will have a material impact on the Company's financial statements. In May 2008, the FASB issued Statement No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162"). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards (SAS) No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SAS No. 69 has been criticized because it is directed to the auditor rather than the entity. SFAS No. 162 addresses these issues by establishing that GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. It is only effective for nongovernmental entities; therefore, GAAP hierarchy will remain in SAS No. 69 for state and local governmental entities and federal governmental entities. The adoption of SFAS No. 162 did not have a material impact on our financial statements. F-12 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Note 2. Basis of Presentation and Liquidity The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net gain of $406,454 in 2008 and a net loss of $410,791 in 2007. The Company has a working capital deficiency of $3,722,412 and a stockholders' deficiency of $3,722,412 at December 31, 2008. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of these uncertainties. Management's plans in regard to these matters include: a. Continued financing of certain operating transactions through the use of related party debt (Note 3). b. Seeking additional working capital through debt and/or equity offerings, which will be used for potential investment opportunities and seeking possible merger opportunities. Note 3. Notes Payable, Related Parties As of December 31, 2008 and 2007, the Company has the following Notes Payable arrangements with related parties: 2008 2007 ---- ---- Farley Family Partnership, 12%, unsecured, due 12/31/2000, in default $ 163,812 $ 200,000 Forrest L. Metz, 12%, unsecured, due 12/31/2000, in default 122,859 150,000 Metz Trust multiple advance promissory note maximum borrowings of $150,000, 12%, unsecured, due 12/31/2000, in default 147,656 180,275 Grant Papanikolas multiple advance promissory note, maximum borrowings of $100,000, 12%, unsecured, due 12/31/2000, in default 69,620 85,000 Michael Farley multiple advance promissory note, maximum borrowings of $100,000, 12%, unsecured, due 12/31/2000, in default 53,772 65,650 Farley & Associates multiple advance promissory note, maximum borrowings of $800,000, 12%, unsecured, due 12/31/2000, in default 482,361 588,920 Interest accrued to note balances 2,165,507 1,792,307 --------- --------- $3,205,587 $3,062,152 ========= ========= F-13 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 During the years ended December 31, 2008 and 2007, the Company accrued and charged to interest expense $373,200 and $328,094, respectively. There were no advances made under the notes during the year ended December 31, 2008. During the year ended December 31, 2007, the Company was advanced $4,600 by Michael Farley under his multiple advance promissory note. During the year ended December 31, 2008, loan repayments totaling $229,765 were made under the notes. There were no loan repayments made under the notes during the year ended December 31, 2007. For the cumulative period from January 1, 2004 to December 31, 2008, the Company accrued and charged to interest expense $1,491,837; was advanced $6,700 by Michael Farley under his multiple advance promissory note and $29,750 by the Metz Trust under its multiple advance promissory note; and loan repayments were made totaling $229,765. Note 4. Notes Payable, Other As of December 31, 2008 and 2007, the Company has the following Notes Payable, other: 2008 2007 ---- ---- Townsdin, 12%, unsecured, due 12/31/2000, in default $163,812 $200,000 Torrance, 12%, unsecured, due 12/31/2000, in default 40,953 50,000 Interest accrued to note balances 431,347 357,312 ------- ------- $636,112 $607,312 ======= ======= During the years ended December 31, 2008 and 2007, the Company accrued and charged to interest expense $68,704 and $66,540, respectively. For the cumulative period from January 1, 2004 to December 31, 2008, the Company accrued and charged to interest expense $291,641. There were no advances under the notes during the years ended December 31, 2008 and 2007 or for the cumulative period from January 1, 2004 to December 31, 2008. However, loan repayments totaling $45,235 were made under the notes during the year ended December 31, 2008. Note 5. Investments SiteScape was acquired by Novell pursuant to an Agreement and Plan of Merger dated February 13, 2008 for approximately $18.5 million in cash and SiteScape became a fully owned subsidiary of Novell. As a result of the acquisition, all holders of outstanding shares of SiteScape were given the right to receive a cash payment in exchange for their stock. As a holder of 6.5% of SiteScape's stock, on a fully diluted basis, the Company received a cash payment of $941,693 F-14 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 in February 2008, which is included in other income (expense). A portion of the purchase price, $181,142, was placed in an escrow account which will be released to the Company in increments within eighteen months (18) after the closing of the SiteScape Merger, in the event that Novell does not seek indemnification for inaccuracies contained in the representations and warranties of SiteScape in the merger agreement. The first escrow payment was received in October 2008 in the amount of $13,063, which is included in other income (expense). The recognition of future remaining payments held in escrow of $168,079 will occur as payments are received. Note 6. Income Taxes The Company is subject to U.S. federal income tax as well as income tax of the state jurisdiction of Arizona. With few exceptions, the Company is no longer subject to U. S. federal, state, and local income tax examinations by tax authorities for the years before 2003 for federal and 2004 for state returns. The Company did not record any provision for federal and state income taxes for the year ended December 31, 2008 or December 31, 2007. A reconciliation to the federal statutory rate is as follows: Year Year Ended Ended December 31, December 31, 2008 2007 ---- ---- Expected income tax benefit at the statutory rate (34%) (34%) Valuation allowance 34% 34% ---- ---- -- -- ==== ==== Deferred income tax assets result from federal and state operating loss carry forwards in the amounts of $4,873,726 Federal, $757,864 Arizona as of December 31, 2007 and $4,467,272 Federal, $351,410 Arizona for the year ended December 31, 2008. The current year taxable income of $406,454 is fully offset by the net operating loss carry forward resulting in no current tax liability. The loss carry forward has had a full valuation allowance in the current and prior years due to the uncertainty of future taxable income to apply the benefit. The loss carry forwards will begin to expire in 2021 for Federal purposes and $4,112,679 of Arizona's prior years' operating losses have expired after the 5 year carry forward periods. F-15 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Net deferred tax assets consist of the following as of: Year Year Ended Ended December 31, December 31, 2008 2007 ---- ---- Tax effect of net operating loss carry forwards $1,529,621 $1,678,280 Less valuation allowance (1,529,621) (1,678,280) --------- --------- Net deferred tax assets $ -- $ -- ========= ========= In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some or the entire deferred tax asset will not be realized. The Company believes that sufficient uncertainty exists regarding the realizability of the deferred tax assets such that valuation allowances equal to the entire balance of the deferred tax assets are necessary. In accordance with Sections 382 and 383 of the Internal Revenue Code, a change in ownership of greater than 50% of a corporation within a three-year period will place an annual limitation on our ability to utilize our existing tax loss and tax credit carry forwards. The Company experienced such a change in ownership in 1999. FASB Interpretation No. 48 Effective January 1, 2007 we adopted FIN 48 which prescribes a more- likely-than-not threshold for financial statement recognition and measurement to a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. We are subject to examination in the U.S. federal tax jurisdiction for the 2005-2008 tax years and 2004-2008 under Arizona tax jurisdiction. There are no current examinations of the Company's prior tax returns. There are no current or prior unrecognized tax benefits regarding tax positions for the Company. F-16 DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2008 AND 2007 Note 7. Related Party Activity Related party transactions associated with notes payable are described in Note 3. For the years ended December 31, 2008 and 2007 and for the period from January 1, 2004 to December 31, 2008, the Company expensed $25,923, $9,976 and $81,327, respectively for management services provided by two shareholders of the Company. In addition, the Company expensed $10,574, $3,875 and $23,449 for the years ended December 31, 2008 and 2007 and for the period from January 1, 2004 to December 31, 2008, respectively, for accounting services provided by a company owned by a shareholder. F-17 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIGITAL FUEL, INC. Date: March 27, 2009 By: /s/ Michael R. Farley ------------------------- Michael R. Farley Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date ----------- ------- ------ /s/ Michael R. Farley Director March 27, 2009 ------------------------- Michael R. Farley Chief Executive Officer and Director

DIGITAL FUEL INC 10-K