UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003
[ ] 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 [ ]
Number of shares of common stock outstanding: 4,343,262 Shares of Common
Stock, par value $.01 per share, were outstanding as of May 9, 2003.
DIGITAL FUEL, INC.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Digital Fuel, Inc.
We have reviewed the accompanying condensed balance sheet of Digital Fuel,
Inc. as of March 31, 2003, and the related condensed statements of operations
and statement of cash flows for the three-month period then ended. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
WATSON & WATSON CPAs, P.C.
Tempe, Arizona
May 8, 2003
F-2
DIGITAL FUEL, INC.
CONDENSED BALANCE SHEET
MARCH 31, 2003
(Unaudited)
ASSETS
Current assets:
Cash $119
---
Total current assets 119
---
Investments (Note 4):
Preferred Stock, SiteScape -0-
---
Total Assets $119
===
LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Notes payable:
Related parties (Note 2) $1,216,941
Other (Note 3) 250,000
Accounts payable:
Related parties 51,113
Other 180,739
Accrued management fees (Note 7) 256,667
Accrued interest expense, related parties (Note 2) 345,941
-------
Total current liabilities 2,301,401
---------
Shareholders' equity deficiency:
Preferred stock, $.01 par value;
authorized 10,000,000 shares;
issued -0- shares
Common stock, $.01 par value;
authorized 20,000,000 shares;
issued 4,343,262 shares 43,433
Capital in excess of par value 2,370,312
Accumulated deficit (4,715,027)
Total shareholders' equity deficiency (2,301,282)
---------
Total Liabilities and Shareholders' Equity Deficiency $119
===
See Notes to Condensed Financial Statements
F-3
DIGITAL FUEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
---- ----
Expenses:
General and administrative $ 1,561 $ 2,076
----- -----
Operating loss (1,561) (2,076)
----- -----
Interest expense:
Related parties (Note 2) 27,022 26,608
Other (Note 3) 6,051 5,625
----- -----
Total interest expense 33,073 32,233
------ ------
Net loss $(34,634) $(34,309)
====== ======
Basic and diluted loss per common share: $* $*
Weighted average number of shares outstanding 4,343,262 4,343,262
*less than $.01 per share
See Notes To Condensed Financial Statements
F-4
DIGITAL FUEL, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net loss $(34,634) $(34,309)
------ ------
Adjustments to reconcile net loss
to net cash used in operations:
Change in operating liabilities:
Decrease in accounts payable, related parties (3,144) (5,544)
Decrease in accounts payable (1,035) (492)
Increase in accrued interest 6,051 5,625
Increase in accrued interest, related parties 27,022 26,608
------ ------
Total adjustments 28,894 26,197
------ ------
Net cash used in operating activities (5,740) (8,112)
----- -----
Cash flows from financing activities:
Proceeds from notes payable-related parties (Note 2) 5,750 8,000
----- -----
Net cash provided by financing activities 5,750 8,000
----- -----
Increase (decrease) in cash 10 (112)
Cash, beginning 109 171
--- ---
Cash, ending $119 $59
==== ===
During the three months ended March 31, 2003, $426.78 was paid for interest.
F-5
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. Basis of presentation:
The financial statements of Digital Fuel, Inc. (The "Company") included
in this Form 10-QSB 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
thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002.
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 periods ended March 31, 2003 and 2002 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.
On June 1, 2000, Deucalion held a Special Meeting of its stockholders to
consider and vote upon the reincorporation, recapitalization, and merger
of Deucalion with and into its wholly owned Delaware subsidiary, Digital
Fuel, Inc., as described in the Schedule 14C Information Statement filed
with the Securities and Exchange Commission on May 9, 2000 and
incorporated herein by reference. The effect of the transaction approved
at the Special Meeting includes: changing the name of the Company from
Deucalion Research, Inc. to Digital Fuel, Inc., effecting a one-for-6,800
reverse stock split, reducing the authorized capital of the Company from
1,500,000,000 shares to 30,000,000 shares, increasing the par value of
the Company's common stock from $.0001 to $.01 per share, and authorizing
the Board of Directors to issue up to 10,000,000 shares of blank check
preferred stock. All share and per share amounts in the accompanying
financial statements reflect the reverse stock split.
There has not been any change in the significant accounting policies of
the Company for the periods presented.
F-6
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
2. Notes payable, related parties:
Short-term:
Farley Family Partnership, 9%, unsecured,
due on demand $ 200,000
Multiple advance promissory note, Metz Trust,
maximum borrowings of $150,000, 9%, unsecured,
due on demand 134,775
Multiple advance promissory note, Grant Papanikolas,
maximum borrowings of $100,000, 9%, unsecured,
due on demand 85,000
Multiple advance promissory note, Michael R. Farley,
maximum borrowings of $100,000, 9%, unsecured,
due on demand 58,246
Multiple advance promissory note Farley &
Associates, Inc., maximum borrowings of $800,000,
9%, unsecured, due on demand 738,920
-------
$1,216,941
=========
Under the terms of the short-term notes, upon completion of the
recapitalization, the Company issued to Farley & Associates 100,000
shares, Farley Family Partnership 200,000 shares and Metz Trust 100,000
shares at par value of the Company's post recapitalization common stock.
Management believes that these shares have nominal market value based on
various factors including the Company's financial position and the fact
that there is no current market for the Company's stock.
The Farley Family Partnership note, entered into on September 30, 1999,
provided the Company with working capital. The Farley & Associates, Inc.
(F&A) note was entered into in connection with the Company's investment
activities. Farley Family Partnership and F&A are entities controlled by
Michael R. Farley, who is also an officer, director and major shareholder
of the Company. The Metz Trust note, entered into on October 28, 1999,
provided the Company working capital. The Metz Trust is an entity
controlled by Forrest L. Metz, who is also a member of the Board of
Directors and a major shareholder of the Company. The Papanikolas note,
entered into on February 22, 2000, provided the company with working
capital. Papanikolas is an officer of the Company. The Farley note,
entered into on April 28, 2000, provided the company with working
capital. Farley is an officer of the Company.
F-7
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
3. Notes payable, other:
Short-term:
Townsdin, 9%, unsecured, due on demand $200,000
Torrance, 9%, unsecured, due on demand 50,000
-------
$250,000
=======
The short-term notes were entered into during the three months ended
March 31, 2000, and provided the Company with working capital.
Under the terms of the short-term notes, upon completion of the
recapitalization, the Company issued to Torrance 50,000 shares at par
value of the Company's post recapitalization common stock. Management
believes that these shares have nominal market value based on various
factors including the Company's financial position and the fact that
there is no current market for the Company's stock. Additionally,
Townsdin and Torrance had the option to convert through December 31,
2000, all or part of any outstanding principal to post recapitalization
Units at the rate of $1.00 per Unit. Each Unit consists of one share of
common stock and one share of 8% preferred stock.
4. Option to purchase shares of SiteScape:
In February 2000, the Company exercised the remaining one-half of its
SiteScape option shares and purchased 258,333 shares of Preferred Stock
for $500,000. At the completion of the above-described transactions, the
Company owned 516,667 shares of SiteScape, Inc.'s Series A Convertible
Preferred Stock (the "Preferred Stock"), which represents approximately
20% of the voting stock of SiteScape.
The Preferred Stock has, among other rights, the right to vote on general
matters, the ability of a 1:1 conversion into Class A Voting Common Stock
of SiteScape, dividend participation with common shares, and the right to
elect two members to the Board of Directors of SiteScape. The Preferred
Stock is to be automatically converted to common stock if SiteScape
completes an initial public offering and realizes at least $20,000,000.
F-8
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
4. Option to purchase shares of SiteScape (continued):
The Preferred stock is also 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 declared by the
Board of Directors and the tangible net worth of SiteScape exceeds $25
million. SiteScape is an Internet based start up company that acquired
AltaVista FORUM from Compaq Computer in April 1999. FORUM is a
collaboration software, which provides ways to communicate, share
resources, and collaborate with groups of people within a company or
across organizations. SiteScape is currently engaged in research and
development and marketing and advertising efforts to expand and grow
their customer base. The Company has and will continue to regularly
review the assumptions underlying the operation performance and cash flow
forecasts of SiteScape to assess the investment's recoverability.
Although SiteScape has revenues, it has operated at a loss. There are no
assurances that SiteScape will achieve profitability or that its existing
cash balances and cash flows from future operations will be sufficient to
meet its working capital requirements. SiteScape continues to consume
cash as it executes its business plan. During the second quarter of
2000, these circumstances had indicated that the Company should charge a
portion of SiteScape's research and development and marketing and
advertising expenses against the carrying value of its investment.
Therefore, during the three-month period ended June 30, 2000, the Company
recorded a charge of $57,420 for research and development expenses and a
charge of $203,580 for marketing and advertising expenses. Relating to
the six months ended June 30, 2000, the Company recorded a charge of
$94,050 for research and development expenses and a charge of $610,950
for marketing and advertising expenses. As of June 30, 2000, these
charges reduced the carry value of the Company's investment to zero.
During the three months ending March 31, 2003, SiteScape has continued to
operate at a loss.
5. Stock Purchase Agreement:
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 1/2% or 10,538 shares and 1% or
21,076 shares, respectively, after completion of the reincorporation,
recapitalization, and merger. Effective August 31, 1999, the Stock
Purchase Agreement between the Company and Michael Farley and Forrest
Metz was closed. Under the agreement, Farley and Metz purchased
2,002,226 shares of common stock for $110,000. Effective August 31,
1999, the Company issued 147,766 shares in exchange for $100,000 and
after the reincorporation, recapitalization, and merger, the purchasers
were issued 1,855,460 additional shares of the Company's common stock in
exchange for the $10,000 in debt due to them.
F-9
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
6. Extraordinary Income:
From 1992 until July 1999 the Company was inactive. The current
management has embarked on settling certain outstanding payables that
were on the books in 1999. During the three months ended March 31, 2000
and the three months ended September 30, 2000, the company settled
accounts payable with a carrying value of $42,370 for $6,500, resulting
in extraordinary income from the extinguishment of debt of $35,870. The
Company's net tax loss carryforward was reduced by this $35,870 gain.
In December 2000, the Company entered into an agreement with the original
license holders from whom we purchased the license agreements in late
1999. Because the Company was unable to successfully use this
technology, the licenses were returned to the original owners and the
$45,000 financed by the original owners was forgiven. In addition, the
$205,000 due to the licensor, M2Direct, Inc., for services that were
never provided but charged on the Company's books as an expense in 1999,
was reversed resulting in recognition of $205,000 of income in 2000. The
$45,000 due the original licensees was also recorded as income in 2000.
The Company has an agreement with the current licensees that should the
legal problems surrounding the licenses ever be resolved, the Company
would have the option to re-purchase the licenses under new terms and
conditions.
7. Accrued salaries:
For the year ended December 31, 2000, $165,000.00 of salary was accrued
for Mr. Farley and $91,666.63 of salary was accrued for Mr. Papanikolas.
8. Income taxes:
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $4,115,000, which is available to offset future taxable
income, if any, through 2021. Based on statutory rates, the Company's
expected tax benefit arising from the net operating loss carryforward is
approximately $1,399,000. A valuation allowance has been provided to
reduce the deferred tax asset, as realization of the asset is not
assured. In addition, the Company's net operating loss carryforwards may
be subject to annual limitations which could reduce or defer the
utilization of the losses due to the Company's ownership changes that
occurred in 1999.
F-10
PART I. FINANCIAL INFORMATION (Continued)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
This report may contain certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases,
which represent our expectations or beliefs, including but not limited to,
statements concerning our operations, economic performance, financial
condition, growth and acquisition strategies, investments, and future
operational plans. For this purpose, any statements contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," "believe," "anticipate," "intent,"
"could," "estimate," "might," or "continue" or the negative or other
variations thereof or comparable terminology are intended to identify
forward-looking statements. 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 uncertainty related to the registrant's operations,
mergers or acquisitions, governmental regulations, the value of the
registrant's assets and any other factors discussed in this and other
registrant filings with the Securities and Exchange commission.
Management's Discussion and Analysis and Plan of Operation.
Plan of Operation
Management will actively seek to acquire companies involved in the software
development business and/or Internet business. Because of the difficulty in
raising working capital, management believes there are a number of small
companies seeking an opportunity to expand their ability to raise capital by
becoming part of Digital Fuel. The Company plans to work with several
investment banking firms that can help us actively seek companies that fit
Digital Fuel's requirement.
SiteScape, Inc. Investment
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 shareholder 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"). Digital Fuel acquired this option in
exchange for a $200,000 draw on a multiple advance promissory note extended
to the Company by F & A of up to $800,000, bearing interest at 9% and due on
11
demand (the "F & A Note"). The option to purchase the SiteScape 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. The
$200,000 represents reimbursement of travel and other direct expenses
incurred by F & A in connection with their negotiations with SiteScape and
also a fee for F & A's services. The $200,000 has been recorded as general
and administrative expense in the accompanying statement of operations.
SiteScape is an internet based start up company that acquired AltaVista FORUM
from Compaq Computer in April 1999. FORUM is collaboration software that
provides ways to communicate, share resources, and collaborate with groups of
people within a company or across organizations.
Prior to September 1999, F & A provided $400,000 to SiteScape as a deposit on
the option to purchase the preferred stock. On September 1, 1999, Digital
Fuel acquired F & A's rights to this deposit in exchange for a $400,000 draw
on the F & A Note.
Effective November 5, 1999, Digital Fuel exercised one-half of the SiteScape
option shares and purchased 258,334 shares of preferred stock at a total cost
of $500,000. Digital Fuel 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 preferred stock for $500,000. At that point, Digital Fuel
owned approximately 20% of the voting stock of SiteScape.
On June 30, 2001, SiteScape issued to Digital Fuel options to purchase
103,338 shares of its common stock at $1.93 per share. Based on the SAIC
investment described below, the common shares of SiteScape have a value
substantially less than the option price.
In October of 2001, SiteScape received a term sheet from SAIC Venture Capital
Corporation to purchase up to $2.5 million of its Series B Convertible
Preferred Stock. On March 18, 2002 the first transaction was closed. The
Series B stock sold to the new investors will be senior to Digital Fuel's
Series A Convertible Preferred Stock in both payment of dividends and
distribution. Each share of Series B 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.
Digital Fuel now owns 2,583,335 shares of Series A Preferred 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
1:1 conversion into the common stock of SiteScape and dividend participation
with common shares. Digital Fuel now owns approximately 7.9% of SiteScape on
a fully diluted basis.
12
In addition, both the Series B and Series A 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, 2001 no dividends have been declared by SiteScape. The Series A
dividends are junior to the Series B dividends but senior to the common stock
dividends.
Management's Discussion and Analysis for the three months ended
March 31, 2003
Results of Operations
From September 1992 until July 1999, the Company had no operations, and
activities primarily consisted of maintaining the corporation's status as a
corporation in good standing with the state of North Dakota and negotiating
the Asset Purchase Agreement. From July 29, 1999 through March 31, 2003,
activities primarily consisted of bringing the Company's filings under the
Securities and Exchange Act of 1934 current; closing the Asset Purchase
Agreement; effecting a reverse stock split, name change and reincorporation
into Delaware; seeking business opportunities in the software and Internet
businesses specifically the M2Direct licensing agreements and the SiteScape
investment; and accounting for these transactions. During the three months
ended March 31, 2003, the Company incurred general and administrative
expenses of $1,561 related to these activities.
SiteScape is currently engaged in research and development and marketing and
advertising efforts to expand and grow their customer base. The Company has
and will continue to regularly review the assumptions underlying the
operation performance and cash flow forecasts of SiteScape to assess the
investment's recoverability. Although SiteScape has revenues, it has
operated at a loss. There are no assurances that SiteScape will achieve
profitability or that its existing cash balances and cash flows from future
operations will be sufficient to meet its working capital requirements.
SiteScape continues to consume cash as it executes its business plan. During
the second quarter of 2000, the Company charged a portion of SiteScape's
research and development and marketing and advertising expenses against the
carrying value of its investment, which reduced the investment to zero on its
Balance Sheet. During the three months ended March 31, 2003, SiteScape
continued to operate at a loss.
The Company incurred interest expense for the three months ended March 31,
2003 of $33,073 in connection with the various loans as described in the
notes to the financial statements. Through March 31, 2003, entities
controlled by Mr. Farley and Mr. Farley himself have made loans to the
Company totaling $997,166 for certain investment transactions and the ongoing
cash needs of the Company. Through March 31, 2003, an entity controlled by
Mr. Metz has made loans to the Company totaling $134,775 for certain
investment transactions and the ongoing cash needs of the Company.
13
Liquidity and Capital Resources
The independent auditors' report on the Company's financial statements as of
December 31, 2002, and for each of the years in the two-year period ended
December 31, 2002, includes a "going concern" paragraph that describes
substantial doubt about the Company's ability to continue as a going concern.
As of March 31, 2003, the Company had a working capital deficiency of
$2,301,282.
The Company anticipates an increased need for working capital during
2003 as it continues to seek companies that are potential merger
candidates that have a requirement for additional capital. The Company
is seeking additional working capital through debt and/or equity
offerings, which will be used for the above-described purposes.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Description:
15 Letter on unaudited interim financial information.
(See Independent Accountants' Report included herein.)
(b) The Company filed no reports on Form 8-K during the quarter
covered by this report.
14
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.
(Registrant)
By: /s/Michael R. Farley By: /s/Forrest L. Metz
-------------------- ------------------
Michael R. Farley Forrest L. Metz,
Chief Executive Officer President and
Chief Financial Officer
Date: May 9, 2003
15