================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 2003 (First quarter of
fiscal 2003)
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from_____________ to
Commission File No. 0-24073
DIGITAL FUSION, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3817344
(State or Other Jurisdiction (I.R.S. Employer I.D. No.)
of Incorporation or Organization)
4940-A Corporate Drive
Huntsville, AL 35805
(Address of Principal Executive Offices)
(256) 837-2620
(Issuer's Telephone Number, Including Area Code)
400 N. Ashley Dr, Suite 2600
Tampa, FL 33602
(Former Name, Former Address and Former Fiscal
Year, if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of April 30, 2003, 7,167,671 shares of the issuer's common stock, par
value $.01 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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DIGITAL FUSION, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002.................................................... 1
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 (unaudited)..................................... 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 (unaudited)..................................... 3
Notes to Condensed Consolidated Financial Statements................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 7
Item 3. Controls and Procedures............................................................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 12
Item 2. Changes in Securities.................................................................. 12
Item 3. Defaults Upon Senior Securities........................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.................................... 12
Item 5. Other Information...................................................................... 12
Item 6. Exhibits and Reports on Form 8-K....................................................... 12
SIGNATURES..................................................................................... 13
Certification by Chief Executive Officer....................................................... 14
Certification by Chief Financial Officer....................................................... 15
Exhibits....................................................................................... 16
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
---------------------
DIGITAL FUSION, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
March 31, December 31,
2003 2002
ASSETS unaudited
--------- -----------
Cash and cash equivalents $ 178 $ 653
Accounts receivable (net of allowance for doubtful
accounts of $310 in 2003 and $325 in 2002) 1,024 978
Other current assets 63 87
---------------- ----------------
Total current assets 1,265 1,718
Property and equipment, net 113 185
Intangible assets, net 3,347 3,347
Other assets 21 28
---------------- ----------------
Total assets $ 4,746 $ 5,278
================ ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 904 $ 930
Current maturities of long-term debt 501 808
Deferred revenue 21 21
---------------- ----------------
Total current liabilities 1,426 1,759
Interest payable - long term 4 86
Long-term debt, less current maturities 766 517
Pension obligation 280 280
---------------- ----------------
Total liabilities 2,476 2,642
---------------- ----------------
Stockholders' equity:
Common stock, $.01 par value, authorized 16,000,000 shares,
7,167,671 shares issued and outstanding 72 72
Additional paid in capital 39,904 39,904
Accumulated deficit (37,706) (37,340)
---------------- ----------------
Total stockholders' equity 2,270 2,636
---------------- ----------------
Total liabilities and stockholders' equity $ 4,746 $ 5,278
================ ================
See Accompanying Notes to Condensed Consolidated Financial Statements.
1
DIGITAL FUSION, INC.
Condensed Consolidated Statements of Operations
For the three months ended March 31, 2003 and 2002
(unaudited, in thousands, except per share amounts)
2003 2002
------------ ------------
Revenues $ 1,612 $ 2,809
Cost of services 1,334 2,181
-------------- --------------
Gross profit 278 628
-------------- --------------
Operating expenses:
Selling, general and administrative 592 830
Severance and restructuring - (120)
Gain on forgiveness of debt - (1,539)
-------------- --------------
Total operating expenses 592 (829)
-------------- --------------
Operating income (loss) (314) 1,457
Interest expense, net 52 10
-------------- --------------
Income (loss) before income taxes (366) 1,447
Income tax benefit - -
-------------- --------------
Net income (loss) $ (366) $ 1,447
============== ==============
Loss per share:
Basic $ (0.05) $ 0.20
Diluted (0.05) 0.19
Weighted average common stock outstanding:
Basic 7,168 7,164
Diluted 7,168 7,624
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
DIGITAL FUSION, INC.
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2003 and 2002
(unaudited, in thousands)
2003 2002
---- ----
Cash flows used in operating activities
Net income (loss) $ (366) $ 1,447
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 72 81
Gain on forgiveness of debt - (1,539)
Changes in assets and liabilities (22) (601)
-------------- ------------
Net cash used in operating activities (316) (612)
Cash flows used in investing activities:
Capital expenditures - property and equipment - (10)
-------------- ------------
Net cash used in investing activities - (10)
Cash flows used in financing activities:
Repayments of notes payable (159) (116)
-------------- ------------
Net cash used in financing activities (159) (116)
-------------- ------------
Net decrease in cash and cash equivalents (475) (738)
Cash and cash equivalents, beginning of periods 653 1,350
-------------- ------------
Cash and cash equivalents, end of periods $ 178 $ 612
============== ============
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The condensed consolidated interim financial statements of Digital Fusion,
Inc. ("DFI," the "Company," "we," or "us") have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission with respect to Form 10-QSB. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures made herein are adequate to make the information contained
herein not misleading. These condensed consolidated interim financial statements
should be read in conjunction with the Company's audited financial statements
for the year ended December 31, 2002 and the notes thereto included in the
Company's Annual Report on Form 10-KSB. In the Company's opinion, all
adjustments (consisting only of normal recurring adjustments and reclasses)
necessary for a fair presentation of the information shown herein have been
included.
The results of operations and cash flows for the three months ended March
31, 2003 are not necessarily indicative of the results of operations and cash
flows expected for the year ending December 31, 2003.
The accompanying financial statements have been prepared on the assumption
that the Company will continue as a going concern. The Company has incurred
losses of $403,000 and $11,412,000 for the years ended 2002 and 2001,
respectively and cash flow deficiencies from operations of $1,026,000 and
$513,000 during 2002 and 2001, respectively. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. The
ability of the Company to continue as a going concern is dependent upon
attaining positive cash flow from operations. The financial statements do not
include any adjustments that may result from the outcome of this uncertainty. On
April 29th, 2003, the Company restructured its outstanding note with Laurus. The
Company borrowed an additional $267,000 to increase the loan amount to $800,000
and the principal payments would be paid over 22 months beginning at the end of
July 2003.
The Company believes that, as a result of the actions it has taken during
prior years to restructure and streamline the Company, the restructuring of its
debt outstanding to Laurus by extending the payment terms and if it can attain
positive cash flow from operations, it currently has sufficient cash to meet its
funding requirements over the next year; however, the Company has experienced
negative cash flows from operations and incurred large net losses in the past.
The Company's current growth has been funded through internally generated
funds and through a convertible note issued in July 2002 and restructured in
April 2003. In order for the Company to support substantial growth, the Company
may need to fund this growth through externally generated funds. The Company is
reviewing its options, which include a line of credit secured by receivables, an
equity raise or a combination of both. There can be no assurance as to the
availability or terms upon which such financing and capital might be available.
4
2. Loss Per Share Data
-------------------
Common stock equivalents in the three-month period ended March 31, 2003,
were anti-dilutive due to the net losses sustained by the Company during this
period, thus the diluted weighted average common shares outstanding in this
period is the same as the basic weighted average common shares outstanding.
3. Income Taxes
------------
The Company has not recognized an income tax benefit for its operating
losses generated in the three-month period ended March 31, 2003 based on
uncertainties concerning its ability to generate taxable income in future
periods. The tax benefit for the three-month period ended March 31, 2003 is
offset by a valuation allowance established against deferred tax assets arising
from operating losses and other temporary differences, the realization of which
could not be considered more likely than not. In future periods, tax benefits
and related deferred tax assets will be recognized when management considers
realization of such amounts to be more likely than not.
The Company recognized an income tax expense for its operating income
generated in the three-month period ended March 31, 2002. This income tax
expense was offset by a reduction in the valuation allowance that had previously
been recorded as a result of prior operating losses.
4. Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued the
Statement of Financial Accounting Standards (SFAS) No. 143 Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial measurement
of the liability, (3) allocation of asset retirement cost to expense, (4)
subsequent measurement of the liability and (5) financial statement disclosures.
SFAS No. 143 requires that an asset retirement cost should be capitalized as
part of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. The Company adopted SFAS No. 143
effective January 1, 2003 and it did not have a material effect on the Company's
financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which is effective for the Company for exit
or disposal activities that are initiated after December 31, 2002. This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3 a liability for an exit cost as defined, was recognized at the
date of an entity's commitment to an exit plan. The Company adopted SFAS 146 on
January 1, 2003. There were no exit or disposal activities initiated during the
three-month period ended March 31, 2003.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
5
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted SFAS 148 on January 1, 2003. The
Company continues to use the intrinsic value method of accounting under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", to account for its
stock-based employee compensation. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share for the three months ending March 31, 2003 and 2002,
if the Company had applied the fair value recognition provisions of FASB No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation:
2003 2002
---- ----
Net income (loss), as reported $ (366,000) $ 1,447,000
Deduct: Fair value of stock-based employee compensation costs (79,000) (256,000)
-------------- ---------------
Pro forma net income (loss) $ (445,000) $ 1,191,000
============== ===============
Earnings (loss) per share:
Basic - as reported $ (0.05) $ 0.20
============== ===============
Basic - pro forma $ (0.06) $ 0.17
============== ===============
Diluted - as reported $ (0.05) $ 0.19
============== ===============
Diluted - proforma $ (0.06) $ 0.16
============== ===============
The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following assumptions
for the three months ending March 31, 2003 and 2002:
2003 2002
---- ----
Dividend yield 0% 0%
Expected volatility 61% 60%
Risk-free interest rate 3.78% 4.52%
Expected life - years 10 10
Weighted average fair value of options granted $0.27 $0.51
5. Subsequent event
----------------
As approved by the Board of Directors, the Company's headquarters were
relocated to Huntsville, Alabama from Tampa, Florida during April 2003.
On October 28, 2002, the Company was notified by The Nasdaq Stock Market,
Inc. that its common stock had failed to maintain a minimum bid price of $1.00
over the 30 consecutive trading days as required by The Nasdaq SmallCap Market
listing requirements. The Company had 180 days to regain compliance. The Company
was not able to regain compliance and on April 30, 2003, the Company was
notified its securities would be delisted. On May 9, 2003 its securities were
delisted. Effective May 9, 2003, the Company's securities trade on the
Over-the-Counter (OTC) Bulletin Board.
6
On April 29, 2003, the Company closed on a $266,667 10% convertible note
collateralized by the Company's accounts receivable with Laurus Master Fund, LTD
(Laurus). After sixty days, the Company pays principal on a monthly basis and
pays interest immediately at each monthly anniversary. This note matures on
April 30, 2005. At Laurus' election, this note can be converted into DFI common
stock at $0.35 a share after the DFI common stock price is at or above $0.4375 a
share for ten consecutive days. Additionally, a seven-year warrant to purchase
25,000 shares of DFI common stock at $0.4375 per share was issued. The Company
paid a management fee of $16,000 to Laurus, which will be amortized to interest
expense over the 24-month life of the note. The initial note issued by Laurus
dated July 26, 2002, which has $533,333 remaining at April 30, 2003, was
renegotiated and the remaining principal is due equally over 22 months beginning
July 30, 2003 and ending April 30, 2005. The conversion feature of this July 26,
2002 note was repriced and can be converted into DFI common stock at $0.35 a
share after the DFI common stock price is at or above $0.4375 a share for ten
consecutive days. The five-year warrant issued on July 26, 2002, was also
repriced to $0.4375.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In addition, from time to time, we or our representatives have made or
may make other forward-looking statements orally or in writing. Such statements
may include, without being limited to, statements concerning anticipated
financial performance, future revenues or earnings, business prospects,
projected ventures, new products, anticipated market performance and similar
matters. The words "plan," "budget, "intend," "anticipate," "project,"
"estimate," "expect," "may," "might," "believe," "potential," "could," "should,"
"would" and similar statements are intended to be among the statements that are
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, we caution our readers that, because such
statements reflect the reality of risk and uncertainty that is inherent in doing
business, actual results may differ materially from those expressed or implied
by such forward-looking statements. These risks and uncertainties, many of which
are beyond our control, include, but are not limited to, those set forth in the
Company's Form 10-KSB for 2002 in the Management's Discussion and Analysis of
Financial Condition and Results of Operations under the heading "Certain Factors
Which May Affect the Company's Future Performance" which are incorporated herein
by reference. Readers are cautioned not to place undue reliance on these
forward-looking statements, which are made as of the date of this report. Except
as otherwise required to be disclosed in periodic reports required to be filed
by companies registered under the Exchange Act by the rules of the SEC, the
Company has no duty and undertakes no obligation to update such statements.
Overview
DFI is an information technology (IT) consulting company helping our
customers make the most of technology to access business information, enhance
the performance of their human resources, and meet their business needs. Our
success is based on a total approach, providing the people, processes, and
technology needed to translate business needs into sound IT strategies. We
7
provide our services to businesses, organizations and public sector institutions
in the Eastern United States. We are a Delaware corporation and our main
administrative office is located in Huntsville, Alabama along with regional
offices in Florida, New Jersey and Virginia.
Our revenues are derived principally from fees earned in connection with
the performance of services provided to customers. We typically bill on a time
and materials basis. The majority of our costs are associated with personnel.
Attracting and retaining billable personnel will be important for our Company
going forward. Our quarterly operating results are affected by the number of
billable days in the quarter, holiday seasons and vacations.
In June 2001, the Financial Accounting Standards Board (FASB) issued the
Statement of Financial Accounting Standards (SFAS) No. 143 Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial measurement
of the liability, (3) allocation of asset retirement cost to expense, (4)
subsequent measurement of the liability and (5) financial statement disclosures.
SFAS No. 143 requires that an asset retirement cost should be capitalized as
part of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. The Company adopted SFAS No. 143
effective January 1, 2003 and it did not have a material effect on the Company's
financial position, results of operations, or cash flows.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which is effective for the Company for exit
or disposal activities that are initiated after December 31, 2002. This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3 a liability for an exit cost as defined, was recognized at the
date of an entity's commitment to an exit plan. The Company adopted SFAS 146 on
January 1, 2003. There were no exit or disposal activities initiated during the
three-month period ended March 31, 2003.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted SFAS 148 on January 1, 2003. The
Company continues to use the intrinsic value method of accounting under APB
Opinion No. 25, "Accounting for Stock Issued to Employees", to account for its
stock-based employee compensation. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
There are no new litigation issues.
8
Results of Operations
---------------------
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002
REVENUES. Revenues decreased by $1,197,000 to $1,612,000 for the three
months ended March 31, 2003. The decrease in revenues during the three months
ended 2003 compared to the same period in the prior year was primarily due to
the softening of the IT consulting market over the last year. Revenue from our
largest professional services customer was responsible for 28% of our revenue in
2003 as compared to 22% in 2002.
COST OF SERVICES. Cost of services consists primarily of salaries and
expenses of programming and technical personnel, expenses relating to
applications sold to customers and fees paid to outside consultants engaged for
customer projects. Cost of services decreased by $847,000 for the three months
ended March 31, 2003 compared to the prior year. As our revenues decreased due
to the softening of the IT consulting market over the last year, we reduced our
services headcount, which reduced our cost of services.
GROSS PROFIT. Our gross profit for the first quarter of 2003 was $278,000,
or 17% of revenues as compared to $628,000, or 22% of revenues for the first
quarter of 2002. This decrease in gross profit as a percent of revenues is due
to the lower utilization rate of the billable consultants for 2003 compared to
the same period in 2002.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
(SG&A) expenses consist primarily of salaries and expenses associated with
marketing literature, advertising, direct mailings, and accounting, finance,
sales and administrative personnel, as well as professional fees and other costs
associated with being a public company and the administration of the Company.
Selling, general and administrative expenses decreased by $238,000, or 29%, for
the three-month period ended March 31, 2003 compared to the same period during
2002. The decrease in SG&A is primarily due to the reduction of administrative
personnel and other costs to reduce our cash outflow on SG&A costs since
revenues were lower in 2003 compared to 2002.
SEVERANCE AND RESTRUCTURING. During the quarter ended March 31, 2002, we
reduced our Severance and Restructuring liability by $120,000 based upon the
estimates at that time of our remaining liabilities associated with our prior
restructurings.
GAIN ON FORGIVENESS OF DEBT. During the quarter ended March 31, 2002, the
Company reached settlement agreements on some debts associated with offices that
were closed, business units that were sold and services not used, which resulted
in forgiveness of debt of $1,539,000.
INTEREST EXPENSE (INCOME), NET. Interest expense increased by $42,000 in
the first quarter 2003 compared to the same period in 2002 due to the additional
interest expense from the Laurus note that was entered into in July 2002.
INCOME TAX BENEFIT. The Company has not recognized an income tax benefit
for its operating losses generated in the three-month period ended March 31,
2003 based on uncertainties concerning its ability to generate taxable income in
future periods. The tax benefit for the three-month period ended March 31, 2003
is offset by a valuation allowance established against deferred tax assets
arising from operating losses and other temporary differences, the realization
of which could not be considered more likely than not. In future periods, tax
benefits and related deferred tax assets will be recognized when management
considers realization of such amounts to be more likely than not.
9
The Company recognized an income tax expense for its operating income
generated in the three-month period ended March 31, 2002. This income tax
expense was offset by a reduction in the valuation allowance that had previously
been recorded as a result of prior operating losses.
NET INCOME (LOSS). The Company incurred a net loss of $366,000 for the
three months ended March 31, 2003 due to the Company's expenses exceeding its
revenues. The Company recorded net income of $1,447,000 for the three months
ended March 31, 2002. The net income for the first quarter for 2002 included
$1,539,000 of gain on forgiveness of debt and a $120,000 reduction of severance
and restructuring expense.
Liquidity and Capital Resources
The net cash used in operating activities was $316,000 in 2003. This is
primarily due to the Company's expenses exceeding its revenue for the first
quarter of 2003.
The Company did not make any equipment purchases during the first quarter
of 2003 and the Company does not expect to have significant equipment purchases
during the remainder of 2003.
The net cash used in financing activities was $159,000 during the first
quarter of 2003 to service the Laurus debt.
Our working capital at March 31, 2003 is $(161,000). Our net accounts
receivable balance outstanding at March 31, 2003 is $1,024,000. Our cash and
cash equivalents is $178,000. Currently the Company is funding its cash needs
through consistent collections of accounts receivable and current operations. On
April 29, 2003, the Company completed a $267,000 secured convertible debt
financing, which resulted in net proceeds of $245,000 after certain fees and
costs were deducted.
The accompanying financial statements have been prepared on the assumption
that the Company will continue as a going concern. The Company has incurred
losses of $403,000 and $11,412,000 for the year ended 2002 and 2001,
respectively and cash flow deficiencies from operations of $1,026,000 and
$513,000 during 2002 and 2001, respectively. These factors raise substantial
doubt about the ability of the Company to continue as a going concern. The
ability of the Company to continue as a going concern is dependent upon
attaining positive cash flow from operations. The financial statements do not
include any adjustments that may result from the outcome of this uncertainty. On
April 29th, the Company restructured its outstanding note with Laurus. The
Company borrowed an additional $267,000 to increase the loan amount to $800,000
and the principal payments will be made over 22 months beginning at the end of
July 2003.
The Company believes that, as a result of the actions it has taken during
prior years to restructure and streamline the Company, the restructuring of its
debt outstanding to Laurus by extending the payment terms and if it can attain
positive cash flow from operations, it currently has sufficient cash to meet its
funding requirements over the next year; however, the Company has experienced
negative cash flows from operations and incurred large net losses in the past.
10
The Company's current growth has been funded through internally generated
funds and through a convertible note issued in July 2002 and restructured on
April 29, 2003. In order for the Company to support substantial growth, the
Company may need to fund this growth through externally generated funds. The
Company is reviewing its options, which include a line of credit secured by
receivables, an equity raise or a combination of both. There can be no assurance
as to the availability or terms upon which such financing and capital might be
available.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that have a significant impact on
the results we report in our financial statements. Some of our accounting
policies require us to make difficult and subjective judgments, often as a
result of the need to make estimates of matters that are inherently uncertain.
Our most critical accounting policies include: accounts receivable reserves and
the valuation of goodwill. Actual results may differ from these estimates under
different assumptions or conditions. Below, we discuss these policies further,
as well as the estimates and judgments involved.
Accounts Receivable Reserve.
Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on a specific analysis of accounts in the receivable
portfolio and a general reserve based on the aging of receivables and historical
write-off experience. Management believes the allowance to be reasonable.
Valuation of Goodwill.
Goodwill is reviewed annually for impairment, or more frequently if
impairment indicators arise. We perform this annual impairment test in the first
quarter of each fiscal year. The goodwill impairment test requires a comparison
of the fair value of the Company to the amount of goodwill recorded. If this
comparison reflects impairment, then the loss would be measured as the excess of
recorded goodwill over its implied fair value. Although we believe that the
estimates and assumptions that we use are reasonable, actual results could
differ from those estimates and assumptions.
Item 3. Controls & Procedures
Within the 90 days prior to this report, the Company carried out an
evaluation, under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as defined in the Securities
Exchange Act Rule 15d-14(c). Based upon this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely enabling the Company to record,
process, summarize and report information required to be included in the
Company's periodic SEC filings. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
No legal proceedings against the Company are required to be disclosed
under this Item pursuant to the requirements of Form 10-QSB.
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) Exhibits
4.1 (10.1) Securities Purchase Agreement, dated April 29, 2003,
between the Company and Laurus Master Fund, Ltd.
4.2 (10.2) Convertible note, dated April 29, 2003, between the
Company and Laurus Master Fund, Ltd.
4.3 (10.3) Common Stock purchase Warrant, dated April 29, 2003,
between the Company and Laurus Master Fund, Ltd.
4.4 (10.4) Allonge dated April 29, 2003 to Convertible Note,
which was originally dated July 26, 2002 between the
Company and Laurus Master Fund, Ltd.
4.5 (10.5) Second Allonge dated April 30, 2003 to Convertible
Note, which was originally dated July 26, 2002
between the Company and Laurus Master Fund, Ltd.
4.6 (10.6) Allonge dated April 29, 2003 to Warrant which was
originally dated July 26, 2002 between the Company
and Laurus Master Fund, Ltd.
99.1 Written Statement of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Written Statement of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
12
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGITAL FUSION, INC.
Date: May 14, 2003
By: /s/ Roy E. Crippen, III
-----------------------------------------
Name: Roy E. Crippen, III
Title: Chief Executive Officer and President
(Principal Executive Officer)
Date: May 14, 2003
By: /s/ Karen L. Surplus
------------------------------------------
Name: Karen L. Surplus
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
13
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Roy E. Crippen, III certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Digital
Fusion, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Roy E. Crippen, III
------------------------------
Roy E. Crippen, III
Chief Executive Officer and President
14
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Karen L. Surplus certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Digital
Fusion, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 14, 2003 By: /s/ Karen L. Surplus
---------------------------
Karen L. Surplus
Chief Financial Officer