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 September 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 November 12, 2009.
-1-
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Statement of Net Assets in Liquidation (unaudited)
at September 30, 2009 (liquidation basis). . . . . . . . . . . . 5
Condensed Statement of Changes in Net Assets in Liquidation
(unaudited) for the nine months ended September 30, 2009
(liquidation basis). . . . . . . . . . . . . . . . . . . . . . . 6
Balance Sheet at December 31, 2008 (going concern basis) . . . . 8
Condensed Statement of Operations (unaudited) for the nine month
period ended September 30, 2008 (going concern basis). . . . . . 9
Condensed Statement of Cash Flows (unaudited) for the nine
month period ended September 30, 2008 (going concern basis). . . 10
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk . . . 22
ITEM 4 Controls and Procedures. . . . . . . . . . . . . . . . . . . . . 22
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds. . . 23
ITEM 3 Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . 24
ITEM 4 Submission of Matters to a Vote of Security Holders. . . . . . . 24
ITEM 5 Other Information. . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-2-
FORWARD-LOOKING STATEMENTS
Some of the statements under "Business," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in
this Quarterly Report on Form 10-Q constitute forward-looking statements.
These statements relate to future events or our strategy, future operations,
future financial position, future revenues, projected costs, prospects, and
the plans and objectives of management and involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed, implied or inferred by these forward-looking
statements. Such factors include, among other things, those listed under "Risk
Factors" and elsewhere in this Quarterly Report. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "would," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," predicts," "potential" or "continue" or the negative
of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we do not know whether we can achieve
projected future results, levels of activity, performance or goals. Actual
events or results may differ materially. We undertake no obligation to update
any of the forward-looking statements after the date of this Quarterly Report
to conform those statements to reflect the occurrence of unanticipated events,
except as required by applicable law.
-3-
DIGITAL FUEL, INC.
Financial Statements for the Nine Months Ended September 30, 2009
on a Liquidation Basis of Accounting
The following statements have been prepared on the liquidation basis of
accounting for the nine month period ended September 30, 2009 (all of which
are unaudited):
- Condensed Statement of Net Assets in Liquidation (Liquidation Basis)
- Condensed Statement of Changes in Net Assets in Liquidation (Liquidation
Basis)
-4-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL FUEL, INC.
CONDENSED STATEMENT OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
September 30,
2009
(Unaudited)
---------
ASSETS
Cash and cash equivalents $ 89,070
Prepaid expenses 33,280
--------
Total assets 122,350
--------
LIABILITIES
Notes payable (Notes 2 and 3) 67,840
Accrued expenses and other liabilities 3,463
Reserve for estimated costs during liquidation period 51,047
--------
Total liabilities 122,350
--------
Net assets in liquidation $ --
========
The accompanying notes are an integral part
of these unaudited condensed financial statements.
-5-
DIGITAL FUEL, INC.
CONDENSED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
Nine Months Ended
September 30,
2009
(Unaudited)
---------
Net assets (liabilities) in liquidation-January 1, 2009 $(3,722,412)
Operating loss excluding impairment charges (226,511)
Estimated net costs during liquidation (51,047)
Adjust assets to net realizable value (cash and prepaids) --
Adjust liabilities to estimated fair value 3,999,970
---------
Net assets in liquidation - September 30, 2009 $ --
=========
The accompanying notes are an integral part
of these unaudited condensed financial statements.
-6-
DIGITAL FUEL, INC.
Financial Statements Presented for Comparison Purposes
on a Going Concern Basis of Accounting
The following statements have been prepared on the going concern basis of
accounting:
- Balance Sheet at December 31, 2008
- Condensed Statement of Operations for the nine months ended
September 30, 2008 (unaudited)
- Condensed Statement of Cash Flows for the nine months ended
September 30, 2008 (unaudited)
-7-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEET (GOING CONCERN BASIS)
December 31,
2008
----
ASSETS
Current assets
Cash and cash equivalents $ 119,938
---------
Total current assets 119,938
Investments (Note 4) --
---------
Total assets $ 119,938
=========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current liabilities
Accounts payable - related parties $ --
Accounts payable 651
Accrued expenses --
Notes payable, related parties (Note 3) 3,205,587
Notes payable, other (Note 4) 636,112
---------
Total current liabilities 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 December 31, 2008 43,433
Additional paid-in capital 2,378,981
(Deficit) accumulated prior to the development stage (5,142,516)
(Deficit) accumulated during the development stage (1,002,310)
---------
Total stockholders' (deficiency) (3,722,412)
---------
Total liabilities and stockholders' (deficiency) $ 119,938
=========
The accompanying notes are an integral part
of these condensed financial statements.
-8-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF OPERATIONS (GOING CONCERN BASIS)
(Unaudited)
Nine Months Cumulative Period
Ended January 1, 2004
September 30, to
2008 September 30, 2008
---- ------------------
Revenue $ -- $ --
------- ---------
Operating expenses
Rent 947 5,995
Accounting 21,882 25,647
Management fees 23,428 78,832
General and administrative 42,056 45,029
------- ---------
Total operating expenses 88,313 155,503
------- ---------
Income (loss) from operations (88,313) (155,503)
------- ---------
Other income (expense), net
Interest (expense) - related party (279,089) (1,397,726)
Interest (expense) - other (50,028) (272,965)
Gain on forgiveness of liabilities 20,235 20,235
Gain on sale of investment 941,693 941,693
------- ---------
Total other income (expense), net 632,811 (708,763)
------- ---------
Income (loss) before taxes 544,498 (864,266)
Provision for income taxes -- --
------- ---------
Net income (loss) $544,498 $(864,266)
======= =========
Net income (loss) per share,
basic and diluted $.13
===
Weighted average number of common
shares outstanding, basic and
diluted 4,343,262
=========
The accompanying notes are an integral part
of these condensed financial statements.
-9-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENT OF CASH FLOWS (GOING CONCERN BASIS)
(Unaudited)
Nine Months Cumulative Period
Ended January 1, 2004
September 30, to
2008 September 30, 2008
---- ------------------
Cash flows from operating activities:
Net income (loss) $544,498 $(864,266)
Adjustments to reconcile net income
(loss) to cash provided (used)
by operating activities:
Gain on sale of investment (941,693) (941,693)
Change in operating liabilities:
Decrease in accounts payable,
related parties (48,382) (47,635)
Decrease in accounts payable (112,699) (110,944)
Increase in accrued interest 334,448 1,673,813
Decrease in accrued expenses (294,077) (263,678)
------- -------
Net cash (used) by operating
activities (517,905) (554,403)
------- -------
Cash flows from investing activities:
Proceeds from sale of investment 941,693 941,693
------- -------
Net cash provided by investing
activities 941,693 941,693
------- -------
Cash flows from financing activities:
Proceeds from notes payable-related
parties -- 36,450
Repayments to notes payable-related
parties (229,765) (229,765)
Repayments to notes payable-other (45,235) (45,235)
------- -------
Net cash (used) by financing
activities (275,000) (238,550)
------- -------
Net increase in cash 148,788 148,740
Cash, beginning of period 70 118
------- -------
Cash, end of period $148,858 $148,858
======= =======
Supplemental disclosure of non-cash
Investing and financing activities:
Interest paid $(--) $2,209
== =====
The accompanying notes are an integral part
of these condensed financial statements.
-10-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Plan of Liquidation
As a result of the Board of Directors adoption of a plan of liquidation
and dissolution of the Company (the "Plan") on November 12, 2009, the
Company changed its basis of accounting to the liquidation basis
effective July 1, 2009. Adoption and execution of the Plan is contingent
upon shareholder approval. Under the liquidation basis of accounting,
assets are stated at their estimated net realizable values and
liabilities are stated at their estimated settlement amounts.
The financial statements 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.
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.
Plan of Liquidation
On November 12, 2009, the Company's Board of Directors approved, subject
to stockholder approval, the Plan. The Plan calls for the sale of all or
substantially all of the Company's remaining assets in connection
therewith. The Company is seeking stockholder approval for such plan of
liquidation.
Note 2. Summary of Significant Accounting Policies
Liquidation Basis of Accounting
Whenever an entity is to be liquidated, its historical costs are no
longer relevant and a new basis of accounting applies. In these
circumstances, the liquidation basis of accounting is considered to
constitute "Generally Accepted Accounting Principles" ("GAAP").
Accordingly the financial statements should present assets at their
estimated net realizable values and liabilities at their estimated
settlement amounts. However, a company in liquidation (or whose
liquidation is imminent) may not be able to estimate and reflect the
realizable values of all of its assets and the settlement amounts of all
of its liabilities. In such cases, the statements should reflect the
assets and liabilities not "revalued" at going-concern amounts and
identify them.
-11-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The liquidation basis of accounting described should be used for
companies: (a) whose survival is not probable, (b) who are in the
process of liquidation, or (c) who are not in financial difficulty but
that have adopted a plan of liquidation. A conclusion that an entity's
survival is not probable should generally be caused by a discrete event
that makes liquidation imminent, such as the company being placed in
receivership for the purpose of liquidation or the board of directors
passing a resolution to liquidate the company.
The conversion from the going concern to liquidation basis of accounting
required management to make significant estimates and judgments in order
to record assets at estimated net realizable value and liabilities at
estimated settlement amounts under the liquidation basis of accounting.
The Company has adopted a liquidation basis of accounting due to the
Company's Board of Directors approval, subject to stockholder approval,
of the Plan.
The Company's net assets in liquidation at September 30, 2009 were:
September 30,
2009
----
Net assets in liquidation $--
Common stock outstanding 4,343,262
Net assets in liquidation per share outstanding $--
The reported amounts for net assets in liquidation present all or
substantially all of our assets at estimated net realizable value on an
undiscounted basis. The amount also includes reserves for future
estimated general and administrative expenses and other costs. There can
be no assurance that these estimated values will be realized or that
future expenses and other costs will not be greater than recorded
estimated amounts.
The sum of available cash plus the anticipated maximum amount that the
Company could receive from the sale of its remaining assets is
substantially less than the amount of its current and future
liabilities. As a result, the Company's stockholders will not receive
any interim or final liquidating distributions. All available cash and
proceeds from the liquidation of the Company's assets will be used for
Company expenses and to pay creditors.
A Statement of Net Assets in Liquidation and a Statement of Changes in
Net Assets in Liquidation are the principal financial statements
presented under the liquidation basis of accounting. The valuation of
assets at their net realizable value and liabilities at their
anticipated settlement amounts represent estimates, based on present
facts and circumstances, of the net realizable values of assets and the
costs associated with carrying out the plan of liquidation (the "Plan")
-12-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
based on the assumptions set forth below. The actual values and costs
associated with carrying out the Plan are expected to differ from the
amounts shown herein because of the inherent uncertainty and will be
greater than or less than the amounts recorded. Such differences may be
material. However, in all events, the total amount of Company
liabilities and liquidation costs will exceed the net realizable value
of the Company's assets. To the extent that actual proceeds from sale of
Company assets exceed the estimate of net assets in liquidation
presented in the accompanying Statements of Net Assets in Liquidation,
any proceeds received in excess of these estimates will be payable to
Company creditors. As a result, the Company's stockholders will not
receive any liquidating distributions.
Net Assets in Liquidation
Cash and cash equivalents and prepaid expenses are presented at face
value. The assets that have been valued on this basis include all or
substantially all of our assets.
Notes payable, accrued expenses and other liabilities are stated at
estimated settlement amounts. There are no obligations of the Company
that are collateralized by any assets of the Company.
Reserve for Estimated Costs During the Liquidation Period
Under the liquidation basis of accounting, the Company is required to
estimate and accrue the costs associated with implementing and
completing the Plan. There can be no assurance that future expenses and
other costs will not be greater than recorded estimated amounts.
The following is a summary of the "Reserve for Estimated Costs During
the Liquidation Period" (the "Reserve"):
December 31 Adjustments and September 30,
2008 Payments 2009
---- -------- ----
Professional fees $-- $42,280 $42,280
General and administrative -- 8,767 8,767
--- ------ ------
Total $-- $51,047 $51,047
=== ====== ======
Going Concern Basis Accounting
For all periods prior to January 1, 2009, the Company's financial
statements are presented on the going concern basis of accounting. Such
financial statements reflect the historical basis of assets and
liabilities and the historical results of operations related to the
Company's assets and liabilities for the period from January 1, 2008 to
December 31, 2008.
-13-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 3. Notes Payable, Related Parties
As of December 31, 2008, the Company has the following Notes Payable
arrangements with related parties:
December 31,
2008
----
Farley Family Partnership, 12%, unsecured,
due 12/31/2000, in default $ 163,812
Forrest L. Metz, 12%, unsecured,
due 12/31/2000, in default 122,859
Metz Trust multiple advance promissory note,
maximum borrowings of $150,000, 12%, unsecured,
due 12/31/2000, in default 147,656
Grant Papanikolas multiple advance promissory note,
maximum borrowings of $100,000, 12%, unsecured,
due 12/31/2000, in default 69,620
Michael Farley multiple advance promissory note,
maximum borrowings of $100,000, 12%, unsecured,
due 12/31/2000, in default 53,772
Farley & Associates multiple advance promissory
note, maximum borrowings of $800,000, 12%,
unsecured, due 12/31/2000, in default 482,361
Interest accrued to note balances 2,165,507
---------
$3,205,587
During the nine months ended September 30, 2008, the Company accrued and
charged to interest expense $279,089. During the nine months ended
September 30, 2008, loan repayments were made under the notes totaling
$229,765.
On November 12, 2009, the Company's Board of Directors approved, subject
to stockholder approval, a plan of liquidation. Pursuant to this Plan,
the notes payable to related parties described above as of December 31,
2008 have been reduced to fair value in the attached Condensed Statement
of Net Assets in Liquidation as of September 30, 2009.
-14-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 4. Notes Payable, Other
As of December 31, 2008, the Company has the following Notes Payable,
other:
December 31,
2008
----
Townsdin, 12%, unsecured, due 12/31/2000, in default $163,812
Torrance, 12%, unsecured, due 12/31/2000, in default 40,953
Interest Accrued to note balances 431,347
-------
$636,112
During the nine months ended September 30, 2008, the Company accrued and
charged to interest expense $50,028. During the nine months ended
September 30, 2008, loan repayments were made under the notes totaling
$45,235.
On November 12, 2009, the Company's Board of Directors approved, subject
to stockholder approval, a Plan of Liquidation. Pursuant to this Plan,
the notes payable, other described above as of December 31, 2008 have
been reduced to fair value in the attached Condensed Statement of Net
Assets in Liquidation as of September 30, 2009.
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 in February 2008, which is
included in other income (expense). A portion of the purchase price,
$181,142, was placed in an escrow account to be released to the Company
in increments within eighteen months (18) after the closing of the
SiteScape Merger in the event that Novell did 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, the second escrow payment was received in March 2009 in the
amount of $84,829, and the third and final escrow payment was received
in September 2009 in the amount of $85,052. All escrow payments that
were received are included in other income (expense).
-15-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 6. Related Party Activity
During the nine months ended September 30, 2008, the Company accrued and
charged to interest expense for the notes payable to related parties
$279,089. During the nine months ended September 30, 2008, loan
repayments were made under the notes totaling $229,765. The notes
payable to related parties and accrued interest balances at December 31,
2008 were $3,205,587.
Note 7. Results from Operations for the Nine Months ended September 30, 2009
The table below provides the unaudited going concern basis statement of
operations for the nine months ended September 30, 2009. This statement
does not include all adjustments, charges and reserves necessary to be
comparable with the Condensed Statement of Changes of Net Assets in
Liquidation for the nine months ended September 30, 2009.
Nine Months Ended
September 30,
2009
----
Revenue $ --
Operating expenses
Rent 947
Accounting 17,627
Management fees 8,282
General and administrative 18,425
------
Total operating expenses 45,281
------
Income (loss) from operations (45,281)
------
Other income (expense), net
Interest (expense) - related party (292,969)
Interest (expense) - other (58,142)
Gain on forgiveness of liabilities --
Gain on sale of investment 169,881
-------
Total other income (expense), net (181,230)
-------
Income (loss) before taxes (226,511)
Provision for income taxes --
-------
Net income (loss) $(226,511)
=======
Net income (loss) per share, basic and diluted $(.05)
===
Weighted average number of common shares
Outstanding, basic and diluted 4,343,262
=========
-16-
DIGITAL FUEL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
In addition to the net loss above, the Company recorded the estimated
costs associated with implementing and completing the Plan and adjusted
liabilities to their settlement values. These items in conjunction with
the operating loss contributed to the Changes in Net Assets in
Liquidation financial statement provided.
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.
Plan of Liquidation and Dissolution
On November 12, 2009, our Board of Directors approved, subject to shareholder
approval, a plan for the liquidation and dissolution of the Company (the
"Plan").
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
-17-
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.
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.
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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 to be
released to the Company in increments within eighteen months (18) after the
closing of the SiteScape Merger in the event that Novell did 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, the second escrow payment was received in March 2009 in the amount of
$84,829, and the third and final escrow payment was received in September 2009
in the amount of $85,052. All escrow payments that were received are included
in other income (expense).
Liquidation Basis of Accounting
Whenever an entity is to be liquidated, its historical costs are no longer
relevant and a new basis of accounting applies. In these circumstances, the
liquidation basis of accounting is considered to constitute "Generally
Accepted Accounting Principles" ("GAAP"). Accordingly the financial statements
should present assets at their estimated net realizable values and liabilities
at their estimated settlement amounts. However, a company in liquidation (or
whose liquidation is imminent) may not be able to estimate and reflect the
realizable values of all of its assets and the settlement amounts of all of
its liabilities. In such cases, the statements should reflect the assets and
liabilities not "revalued" at going-concern amounts and identify them.
The liquidation basis of accounting described should be used for companies:
(a) whose survival is not probable, (b) who are in the process of liquidation,
or (c) who are not in financial difficulty but that have adopted a plan of
liquidation. A conclusion that an entity's survival is not probable should
generally be caused by a discrete event that makes liquidation imminent, such
as the company being placed in receivership for the purpose of liquidation or
the board of directors passing a resolution to liquidate the company. The
conversion from the going concern to liquidation basis of accounting required
management to make significant estimates and judgments in order to record
assets at estimated net realizable value and liabilities at estimated
settlement amounts under the liquidation basis of accounting.
Our net assets in liquidation at September 30, 2009 were:
September 30,
2009
----
Net assets in liquidation $--
Common stock outstanding 4,343,262
Net assets in liquidation per share outstanding $--
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The reported amounts for net assets in liquidation present all or
substantially all of our assets at estimated net realizable value on an
undiscounted basis. The amount also includes reserves for future estimated
general and administrative expenses and other costs. There can be no assurance
that these estimated values will be realized or that future expenses and other
costs will not be greater than recorded estimated amounts. We have recorded
these estimates at the low end of the range of possible outcomes.
The sum of available cash plus the anticipated maximum amount that the Company
could receive from the sale of its remaining assets is substantially less than
the amount of its current and future liabilities. As a result, the Company's
stockholders will not receive any interim or final liquidating distributions.
All available cash and proceeds from the liquidation of the Company's assets
will be used for Company expenses and to pay creditors.
A Statement of Net Assets in Liquidation and a Statement of Changes in Net
Assets in Liquidation are the principal financial statements presented under
the liquidation basis of accounting. The valuation of assets at their net
realizable value and liabilities at their anticipated settlement amounts
represent estimates, based on present facts and circumstances, of the net
realizable values of assets and the costs associated with carrying out the
Plan based on the assumptions set forth below. The actual values and costs
associated with carrying out the Plan are expected to differ from the amounts
shown herein because of the inherent uncertainty and will be greater than or
less than the amounts recorded. We have recorded these estimates at the low
end of the range of possible outcomes. Such differences may be material.
However, in all events, the total amount of Company liabilities and
liquidation costs will exceed the net realizable value of the Company's
assets. To the extent that actual proceeds from sale of Company assets exceed
the estimate of net assets in liquidation presented in the accompanying
Statements of Net Assets in Liquidation, any proceeds received in excess of
these estimates will be payable to Company creditors. As a result, the
Company's stockholders will not receive any liquidating distributions.
Net Assets in Liquidation
Cash and cash equivalents and prepaid expenses are presented at face value.
The assets that have been valued on this basis include all or substantially
all of our assets.
Notes payable, accrued expenses and other liabilities are stated at estimated
settlement amounts. There are no obligations of the Company that are
collateralized by any assets of the Company.
Reserve for Estimated Costs During the Liquidation Period
Under the liquidation basis of accounting, the Company is required to estimate
and accrue the costs associated with implementing and completing the Plan.
There can be no assurance that future expenses and other costs will not be
greater than recorded estimated amounts.
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The following is a summary of the "Reserve for Estimated Costs During the
Liquidation Period" (the "Reserve"):
December 31 Adjustments and September 30,
2008 Payments 2009
---- -------- ----
Professional fees $-- $42,280 $42,280
General and administrative -- 8,767 8,767
--- ------ -----
Total $-- $51,047 $51,047
=== ====== ======
Going Concern Basis Accounting
For all periods prior to January 1, 2009, our financial statements are
presented on the going concern basis of accounting. Such financial statements
reflect the historical basis of assets and liabilities and the historical
results of operations related to our assets and liabilities for the period
from January 1, 2008 to December 31, 2008.
Results of Operations
Analysis of three months ended September 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
September 30, 2009 and 2008, we incurred $11,506 and $24,783, respectively, in
total operating expenses. We incurred interest expense for the three months
ended September 30, 2009 and 2008 of $119,425 and $111,599, respectively, in
connection with our outstanding debt.
Analysis of nine months ended September 30, 2009 and 2008:
During the nine months ended September 30, 2009 and 2008, we incurred $45,281
and $88,313, respectively, in total operating expenses. We incurred interest
expense for the nine months ended September 30, 2009 and 2008 of $351,111 and
$329,117, respectively, in connection with our outstanding debt. As of
September 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 September 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 September 30, 2009, the Company had assets equal to $122,350, comprised
exclusively of cash and cash equivalents. Before reduction to liquidating
value, the Company's current liabilities as of September 30, 2009 totaled
$4,071,272 comprised of $315 of accounts payable to related parties, $653 of
accounts payable, $2,494 of accrued expenses, $3,394,117 of notes payable and
accrued interest due to related parties, and $673,693 of other notes payable
and accrued interest.
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The following is a summary of the Company's cash flows provided by (used in)
operating, investing and financing activities:
Cumulative
Nine Months Period From
Ended January 1, 2004 to
September 30, September 30,
2009 2009
---- ----
Net cash (used) by operating activities $(75,750) $(672,136)
Net cash provided by investing activities $169,881 $1,124,637
Net cash (used) by financing activities $(125,000) $(363,550)
Net increase (decrease) in cash $(30,869) $88,951
Cumulative
Nine Months Period From
Ended January 1, 2004 to
September 30, September 30,
2008 2008
---- ----
Net cash (used) by operating activities $(517,905) $(554,403)
Net cash provided by investing activities $941,693 $941,693
Net cash (used) by financing activities $(275,000) $(238,550)
Net increase in cash $148,788 $148,740
The Company has nominal assets and has generated no revenues since re-entering
the development stage on January 1, 2004.
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.
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
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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 September 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 September 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.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
None
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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: November 16, 2009
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