10-Q 1 r10q0630.txt 10-Q FOR JUNE 30, 2009 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2009 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to_________ Commission File No. 000-16534 Digital Fuel, Inc. ----------------- (Exact Name of Registrant as Specified in its Charter) Delaware 45-0375367 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6601 East Grant Road, Suite 101, Tucson, Arizona 85715 --------------------------------------------------------- (Address of principal executive offices) (Zip code) (520) 886-5354 -------------- (Registrant's telephone number including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes [ ] No [ X ] Number of shares of common stock outstanding: 4,343,262 Shares of Common Stock, par value $.01 per share, were outstanding as of August 14, 2009. -1- PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (UNAUDITED) DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED BALANCE SHEETS June 30, 2009 December 31, (Unaudited) 2008 --------- ---- ASSETS Current assets Cash $ 12,375 $ 119,938 Prepaid expenses 36,850 -- --------- --------- Total current assets 49,225 119,938 Investments (Note 4) -- -- --------- --------- Total assets $ 49,225 $ 119,938 ========= ========= LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) Current liabilities Accounts payable - related parties $ 315 $ -- Accounts payable 674 651 Accrued expenses 2,894 -- Notes payable, related parties (Note 2) 3,294,471 3,205,587 Notes payable, other (Note 3) 653,914 636,112 --------- --------- Total current liabilities 3,952,268 3,842,350 --------- --------- 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 June 30, 2009 and December 31, 2008 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 (1,182,941) (1,002,310) --------- --------- Total stockholders' (deficiency) (3,903,043) (3,722,412) --------- --------- Total liabilities and stockholders' (deficiency) $ 49,225 $ 119,938 ========= ========= The accompanying notes are an integral part of these condensed financial statements. -2- DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

The accompanying notes are an integral part of these condensed financial statements. -3- DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) STATEMENT OF STOCKHOLDERS' (DEFICIENCY) Period from January 1, 2004 to June 30, 2009 (Unaudited)

The accompanying notes are an integral part of these condensed financial statements. -4- DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of these condensed financial statements. -5- DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1. Basis of Presentation The financial statements of Digital Fuel, Inc. (the "Company") included in this Form 10-Q have been prepared without audit in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying financial statements should be read in conjunction with the audited financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. In the opinion of management, all adjustments, including normal recurring adjustments, necessary for a fair presentation of the results of operations for the three-month and six-month periods ended June 30, 2009 and 2008 have been included. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. There has not been any change in the significant accounting policies of the Company for the periods presented. Recent Accounting Pronouncements We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations. Going Concern Considerations The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net operating losses in 2009 and 2008, and has a working capital deficiency of $3,903,043 and a stockholders' deficiency of $3,903,043 at June 30, 2009. 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 2). b. Seeking additional working capital through debt and/or equity offerings, which will be used to further market and develop its licensing agreements and/or other potential investment opportunities. -6- DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS Note 2. Notes Payable, Related Parties As of June 30, 2009 and December 31, 2008, the Company has the following Notes Payable arrangements with related parties: June 30, December 31, 2009 2008 ---- ---- Farley Family Partnership, 12%, unsecured, due 12/31/2000, in default $ 147,363 $ 163,812 Forrest L. Metz, 12%, unsecured, due 12/31/2000, in default 110,522 122,859 Metz Trust multiple advance promissory note, maximum borrowings of $150,000, 12%, unsecured, due 12/31/2000, in default 132,829 147,656 Grant Papanikolas multiple advance promissory note, maximum borrowings of $100,000, 12%, unsecured, due 12/31/2000, in default 62,629 69,620 Michael Farley multiple advance promissory note, maximum borrowings of $100,000, 12%, unsecured, due 12/31/2000, in default 48,372 53,772 Farley & Associates multiple advance promissory note, maximum borrowings of $800,000, 12%, unsecured, due 12/31/2000, in default 433,926 482,361 Interest accrued to note balances 2,358,830 2,165,507 --------- --------- $3,294,471 $3,205,587 ========= ========= During the three months ended June 30, 2009 and 2008, the Company accrued and charged to interest expense $98,472 and $94,354, respectively. Loan repayments totaling $104,438 were made under the notes during the three months ended June 30, 2009. There were no advances or repayments under the notes during the three months ended June 30, 2008. During the six months ended June 30, 2009 and 2008, the Company accrued and charged to interest expense $193,322 and $185,967, respectively. Loan repayments totaling $104,438 were made under the notes during the six months ended June 30, 2009. There were no advances or repayments under the notes during the six months ended June 30, 2008. -7- DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS Note 3. Notes Payable, Other As of June 30, 2009 and December 31, 2008, the Company has the following Notes Payable, other: June 30, December 31, 2009 2008 ---- ---- Townsdin, 12%, unsecured, due 12/31/2000, in default $147,363 $163,812 Torrance, 12%, unsecured, due 12/31/2000, in default 36,841 40,953 Interest Accrued to note balances 469,710 431,347 ------- ------- $653,914 $636,112 ======= ======= During the three months ended June 30, 2009 and 2008, the Company accrued and charged to interest expense $19,542 and $13,015, respectively. Loan repayments totaling $20,561 were made under the notes during the three months ended June 30, 2009. There were no advances or repayments under the notes during the three months ended June 30, 2008. During the six months ended June 30, 2009 and 2008, the Company accrued and charged to interest expense $38,364 and $31,551, respectively. Loan repayments totaling $20,561 were made under the notes during the six months ended June 30, 2009. There were no advances or repayments under the notes during the six months ended June 30, 2008. Note 4. 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 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 and the second escrow payment was received in March 2009 in the amount of $84,829, which are included in other income (expense). The recognition of future remaining payments held in escrow of $83,250 will occur as payments are received. -8- DIGITAL FUEL, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONDENSED FINANCIAL STATEMENTS Note 5. Related Party Activity During the three months ended June 30, 2009 and 2008, the Company accrued and charged to interest expense $98,472 and $94,354, respectively. Loan repayments totaling $104,438 were made under the notes during the three months ended June 30, 2009. There were no advances or repayments under the notes during the three months ended June 30, 2008. During the six months ended June 30, 2009 and 2008, the Company accrued and charged to interest expense $193,322 and $185,967, respectively. Loan repayments totaling $104,438 were made under the notes during the six months ended June 30, 2009. There were no advances or repayments under the notes during the six months ended June 30, 2008. The notes payable to related parties and accrued interest balances at June 30, 2009 and December 31, 2008 were $3,294,471 and $3,205,587, respectively. As of June 30, 2009, the Company owed $2,894 to officers of the Company for unpaid management fees. Additionally, the Company owed $315 to officers of the Company for expenses incurred on the Company's behalf at June 30, 2009. -9- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Effecting a Business Combination 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. Investment in Preferred Stock Shares of SiteScape, Inc. 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. -10- 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 was 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 then owned 2,583,335 shares of Series A Convertible Preferred Stock which had, 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 then owned approximately 6.5% of SiteScape on a fully diluted basis. In addition, both the Series A and Series B Convertible Preferred Stock were 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 were due only if the tangible net worth of SiteScape exceeded $25 million and if declared by the Board of Directors of SiteScape. No dividends were declared by SiteScape. -11- SiteScape Acquisition by Novell, Inc. 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 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 and the second escrow payment was received in March 2009 in the amount of $84,829, which are included in other income (expense). The recognition of future remaining payments held in escrow of $83,250 will occur as payments are received. Results of Operations Analysis of three months ended June 30, 2009 and 2008: We have neither engaged in any operation nor generated any revenue since reverting to 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 three months ended June 30, 2009 and 2008, we incurred $11,661 and $44,398, respectively, in total operating expenses. We incurred interest expense for the three months ended June 30, 2009 and 2008 of $118,014 and $107,369, respectively, in connection with our outstanding debt. Analysis of six months ended June 30, 2009 and 2008: During the six months ended June 30, 2009 and 2008, we incurred $33,774 and $63,529, respectively, in total operating expenses. We incurred interest expense for the six months ended June 30, 2009 and 2008 of $231,686 and $217,518, respectively, in connection with our outstanding debt. As of June 30, 2009, entities controlled by Mr. Farley and Mr. Farley personally have loans outstanding to us totaling $629,661 for certain investment transactions and our ongoing cash needs. As of June 30, 2009, an entity controlled by Mr. Metz and Mr. Metz personally have loans outstanding to us totaling $243,351 for certain investment transactions and our ongoing cash needs. Liquidity and Capital Resources As of June 30, 2009, the Company had assets equal to $49,225, comprised exclusively of cash and cash equivalents. The Company's current liabilities as of June 30, 2009 totaled $3,952,268 comprised of $315 of accounts payable to related parties, $674 of accounts payable, $2,894 of accrued expenses, $3,294,471 of notes payable and accrued interest due to related parties, and $653,914 of other notes payable and accrued interest. -12- The following is a summary of the Company's cash flows provided by (used in) operating, investing and financing activities: Cumulative Six Months Period From Ended January 1, 2004 to June 30, 2009 June 30, 2009 ------------- ------------- Net cash provided (used) by operating activities $(67,393) $(663,779) Net cash provided by investing activities $84,829 $1,039,585 Net cash provided (used) by financing activities $(124,999) $(363,549) Net increase (decrease) in cash $(107,563) $12,257 Cumulative Six Months Period From Ended January 1, 2004 to June 30, 2008 June 30, 2008 ------------- ------------- Net cash provided (used) by operating activities $(481,001) $(517,499) Net cash provided by investing activities $941,693 $941,693 Net cash provided by financing activities -- $36,450 Net increase in cash $460,692 $460,644 The Company has nominal assets and has generated no revenues since re-entering the development stage on January 1, 2004. 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted by the Company under the Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to the Company's management, including its officers, as appropriate, to allow timely decisions regarding required disclosure. -13- The Company carried out an evaluation, under the supervision and with the participation of its officers, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon and as of the date of that evaluation, the Company's officers concluded that the Company's disclosure controls and procedures are not effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Management's 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. The Company is not in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, and as of June 30, 2009 cannot state whether or not our internal controls over financial reporting are effective as we did not document such controls nor test such controls. (c) 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 three months ended June 30, 2009, that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS In August 2002, we entered into an agreement with Gelfond Hochstadt Pangburn, PC, a company that previously provided accounting services to us. We were required in the terms of the agreement to make monthly payments to Gelfond Hochstadt Pangburn to pay down the outstanding bills. In July 2005, we were unable to continue such payments, and as a result, a judgment was filed with the District Court in Denver County, Colorado against Digital Fuel, Inc. in the amount of $19,592.74. We were required to pay that balance plus 8% in interest from June 30, 2006 until such time as the obligation has been paid in full. On April 7, 2008 we agreed to settle all outstanding obligations with Gelfond Hochstadt Pangburn for $15,000. Item 1A. RISK FACTORS There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. -14- Item 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS (a) Exhibit Description: 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. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL FUEL, INC. By: /s/ Michael R. Farley ------------------------- Michael R. Farley Chief Executive Officer Date: August 14, 2009 -15-

DIGITAL FUEL INC 10-Q