-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mzwa8gkpVyrww6W03xrzM6FxK79ZwnmedCI6hj9lTZtrmoinSu3gUv2LtcaAiyLs S5lM1j1MSPrmB2VJ39/QXw== 0001157523-05-007364.txt : 20050811 0001157523-05-007364.hdr.sgml : 20050811 20050811163537 ACCESSION NUMBER: 0001157523-05-007364 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050811 DATE AS OF CHANGE: 20050811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL FUSION INC/NJ/ CENTRAL INDEX KEY: 0001057257 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 133817344 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24073 FILM NUMBER: 051017557 BUSINESS ADDRESS: STREET 1: 4940-A CORPORATE DRIVE CITY: HUNTSVILLE STATE: AL ZIP: 35805 BUSINESS PHONE: 2568372620 MAIL ADDRESS: STREET 1: 4940-A CORPORATE DRIVE CITY: HUNTSVILLE STATE: AL ZIP: 35805 FORMER COMPANY: FORMER CONFORMED NAME: IBS INTERACTIVE INC DATE OF NAME CHANGE: 19980306 10QSB 1 a4951293.txt DIGITAL FUSION, INC. 10QSB ================================================================================ 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 June 30, 2005. (Second quarter of fiscal 2005) 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) 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 August 1, 2005, 11,049,052 shares of the issuer's common stock, par value $.01 per share, were outstanding. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| ================================================================================
DIGITAL FUSION, INC. INDEX ----- PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004........................................................................... 1 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004 (unaudited)................................................. 2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (unaudited) 3 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Controls and Procedures............................................................. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................... 17 Item 2. Changes in Securities.............................................................. 17 Item 3. Defaults Upon Senior Securities.................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders................................ 17 Item 5. Other Information.................................................................. 18 Item 6. Exhibits........................................................................... 18 SIGNATURES.................................................................................. 19 Section 302 Certification by Chief Executive Officer Section 906 Certification by Chief Executive Officer
PART I FINANCIAL INFORMATION Item 1. Financial Statements. DIGITAL FUSION, INC. Condensed Consolidated Balance Sheets (In thousands) June 30, 2005 December 31, (Unaudited) 2004 ------------ ----------- ASSETS Current Assets: Cash and cash equivalents $ 1 $ 252 Accounts receivable (net of allowance for doubtful accounts of $29 and $54 for 2005 and 2004, respectively) 2,923 1,050 Unbilled receivables 625 - Prepaid expenses and other current assets 90 27 ------------ -------- Total current assets 3,639 1,329 Property and equipment, net of accumulated depreciation of $1,029 for 2005 and $952 for 2004 496 417 Prepaid acquisition costs and acquisition deposit - 285 Goodwill 5,919 3,347 Purchased intangible assets, net 1,843 - Other assets 16 13 ------------ -------- Total assets $ 11,913 $ 5,391 ============ ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 1,071 $ 647 Accounts payable 914 609 Deferred revenue 373 21 Accrued compensation and related expenses 774 97 Other current liabilities 107 266 ------------ -------- Total current liabilities 3,239 1,640 Long-term debt, less current maturities 2,877 81 Pension obligation 302 302 ------------ -------- Total liabilities 6,418 2,023 ------------ -------- Stockholders' Equity: Preferred Stock - $.01 par value; authorized 1,000 shares, no shares issued and outstanding - - Common Stock - $.01 par value; authorized 30,000 shares; 11,045 and 9,721 shares issued and outstanding at June 30, 2005 and December 31,2004,respectively 110 97 Additional paid in capital 44,057 42,050 Accumulated deficit (38,672) (38,779) ------------ -------- Total stockholders' equity 5,495 3,368 ------------ -------- Total liabilities and stockholders' equity $ 11,913 $ 5,391 ============ ======== See Accompanying Notes to Condensed Consolidated Financial Statements.
1
DIGITAL FUSION, INC. Condensed Consolidated Statements of Operations For the three and six months ended June 30, 2005 and 2004 (Unaudited) (In thousands, except per share amounts) Three months Six months ended ended June 30, June 30, ------------- ------------- 2005 2004 2005 2004 ------ ------ ------ ------ Revenues Services and fees $3,587 $1,023 $7,082 $2,176 Reimbursed costs 635 142 1,144 270 Product 327 471 764 676 ------ ------ ------ ------ Total Revenues 4,549 1,636 8,990 3,122 ------ ------ ------ ------ Cost of services and goods sold Services 2,779 851 5,442 1,682 Reimbursed costs 600 108 1,076 220 Product 309 444 731 633 Total cost of services and goods sold 3,688 1,403 7,249 2,535 ------ ------ ------ ------ Gross profit 861 233 1,741 587 Selling, general and administrative 609 427 1,247 837 ------ ------ ------ ------ Operating income (loss) 252 (194) 494 (250) Other income (expenses): Interest expense, net (36) (39) (83) (73) Other income 20 - 20 - Amortization of intangible assets (100) - (100) - Amortization of discount on debt and intrinsic value of convertible debt (122) - (224) - ------ ------ ------ ------ Total other expenses (238) (39) (387) (73) ------ ------ ------ ------ Net income (loss) before income taxes 14 (233) 107 (323) Income tax benefit - - - - ------ ------ ------ ------ Net income (loss) $ 14 $ (233)$ 107 $ (323) ====== ====== ====== ====== Basic earnings (loss) per share $ 0.00 $(0.03)$ 0.01 $(0.04) ======= ====== ======= ====== Basic weighted average common shares outstanding 10,873 7,985 10,661 7,985 ======= ====== ======= ====== Dilute earnings (loss) per share $ 0.00 $(0.03)$ 0.01 $(0.04) ======= ====== ======= ====== Diluted weighted average common shares outstanding 12,938 7,985 12,764 7,985 ======= ====== ======= ====== See Accompanying Notes to Condensed Consolidated Statements.
2
DIGITAL FUSION, INC. Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2005 and 2004 (Unaudited) (In thousands) 2005 2004 ------- ----- Cash flows provided by (used in) operating activities: Net income (loss) $ 107 $(323) Adjustments to reconcile net loss to net cash used in operating activities, net of effect of acquisition: Depreciation and amortization 77 36 Amortization of intangible assets 100 - Amortization of beneficial interest 161 - Amortization of discount on debt 63 - Changes in assets and liabilities (217) (131) ------- ----- Net cash provided by (used in) operating activities 291 (418) ------- ----- Cash flows used in investing activities: Capital expenditures - property and equipment (98) (4) Acquisition of Summit (1,118) - ------- ----- Net cash used in investing activities (1,216) (4) ------- ----- Cash flows provided by (used in) financing activities: Proceeds from exercise of options and warrants 676 - Repayments of notes payable (423) (6) Net proceeds from equity sale 453 Net proceeds from line of credit 421 - ------- ----- Net cash provided by financing activities 674 447 ------- ----- Net increase (decrease in) cash and cash equivalents (251) 25 Cash and cash equivalents, beginning of periods 252 419 ------- ----- Cash and cash equivalents, end of periods $ 1 $ 444 ======= ===== See Accompanying Notes to Condensed Consolidated Financial Statements.
3 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The condensed consolidated interim financial statements of Digital Fusion, Inc. ("Digital Fusion", "DFI", or the "Company") 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, 2004 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) necessary for a fair presentation of the information shown herein have been included. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results of operations expected for the full year. 2. Earnings per Share and Stock-Based Compensation The Company accounts for stock-based compensation issued to employees under the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under the intrinsic value based method, compensation cost is measured on the date of grant as the excess of the quoted market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the vesting periods of the options. During the three months ended June 30, 2005, 222,500 stock options were granted to employees and directors. During the six months ended June 30, 2005, 222,500 stock options were granted to employees and directors. The following table illustrates the effect on net loss and loss per share as if the fair value based method of accounting had been applied to stock-based employee compensation, as required by SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148 "Accounting for Stock-Based Compensation - transition and disclosure", an amendment of SFAS No. 123 for the three and six months ended June 30, 2005 and 2004, respectively. (in thousands, except per share data): 4
Three Months Ended June 30, Six Months Ended June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net income (loss), as reported $ (14) $ (233) $ 107 $ (323) Less: stock-based compensation expense, net of tax $ (210) $ (52) $ (242) $ (75) -------------- ------------- -------------- ------------- Net loss, pro forma (196) (285) (135) (398) ============== ============= ============== ============= Basic net income (loss) per share : As reported $ 0.00 $ (0.03) $ 0.01 $ (0.04) ============== ============= ============== ============= Pro forma $ (0.01) $ (0.04) $ (0.00) $ (0.05) ============== ============= ============== ============= Diluted net income (loss) per share: As reported $ 0.00 $ (0.03) $ 0.01 $ (0.04) ============== ============= ============== ============= Pro forma $ (0.01) $ (0.04) $ (0.00) $ (0.05) ============== ============= ============== =============
The pro forma amounts reflected above are not representative of the effects on reported net income in future years because, in general, the options granted typically do not vest for several years and additional awards are made each year. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2005 2004 ------------- ------------- Risk-free interest rate 3.97% 4.43% Dividend yield 0% 0% Expected life - years 10 10 Volatility 57% 59%
5 3. Earnings (Loss) Per Share Data Common stock equivalents in the three and six months ended June 30, 2004, were anti-dilutive due to the net losses sustained by the Company during this period. Therefore, the diluted weighted average common stock shares outstanding in this period are the same as the basic weighted average common stock shares outstanding. Earnings per common share are computed in accordance with SFAS No. 128, "Earnings Per Share," which requires companies to present basic earnings per share and diluted earnings per share. Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive options outstanding during the year. The weighted average number of shares and the diluted weighted average number of shares was 7,984,904 and 8,636,445 for the three and six months ended June 30, 2004, respectively. 4. Income Taxes The income tax expense for the Company's income from operations generated during the six months of 2005 was offset by a reduction in the valuation allowance established against deferred tax assets arising from prior periods. For the six month period ended June 30, 2004, the Company did not recognize an income tax benefit for its operating losses generated in that period based on uncertainties concerning its ability to generate taxable income in future periods. The tax benefit for the three and six month period ended June 30, 2005 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. 5. Debt During April 2005, the Company paid a note holder $216,996 that was comprised of $183,946 of principal and the remaining amount was accrued interest on his note. Additionally, in April the Company refinanced two notes held by the Chief Executive Officer by executing a $374,304 convertible note. The convertible note bears an annual interest rate of prime and interest is payable monthly. The CEO can convert the note into the Company's common stock at a conversion price of $2.43 per share. The note matures on April 29, 2007. On May 26, 2005, Digital Fusion amended its secured revolving line of credit agreement with a local bank. The Amendment (i) extended the maturity date to May 20, 2006, (ii) stated the rate of interest at prime, payable monthly and (iii) secured the line of credit by the Company's receivables and certain guarantees. The line of credit is not to exceed the lower of 90% of eligible accounts receivable or $3.5 million. On July 1, 2005, the Company paid an installment payment as required by the Summit acquisition of $905,047 that was comprised of $877,195 of principal and the remaining amount was accrued interest. See Note 6 below for a discussion of the debt acquired during the first quarter of 2005 from the acquisition of Summit Research Corporation. 6 6. Commitments Government Contracting Payments to the Company on cost-plus-fee contracts are provisional and are subject to adjustment upon audit by the Defense Contract Audit Agency (DCAA). In the opinion of management, audit adjustments that may result from DCAA audits are not expected to have a material effect on the Company's financial position, results of operations, or cash flows. 7. Summit Acquisition On January 3, 2005, the Company closed on its acquisition of Summit Research Corporation ("Summit"). To purchase all of the outstanding capital stock of Summit, the Company (a) paid $1.6 million in cash (b) issued 575,000 shares of its common stock (c) entered into a six-month note for $898,692 (6% annual interest) and (d) executed a convertible promissory note for $2.7 million. The note holder may convert the principal portion of the convertible note into the Company's common stock at a conversion price of $2.25 per share. In the event the entire convertible note is converted, the note holder will receive a total of 1.2 million shares of the Company's common stock. The annual interest rate is 5%; however, no interest shall accrue for the first six months and during any calendar month in which the average closing price of the publicly traded Company's common stock is greater than $2.80 per share. The Company recorded imputed interest of $228,000. The estimates used to determine the imputed interest will be reviewed each quarter and adjusted as needed. The imputed interest amount of $228,000 will be amortized to interest expense over a four year period. The Company also estimated the intrinsic value of the embedded beneficial conversion options of the $2.7 million note at $769,000. The $769,000 will be amortized to interest expense over the life of the note. In conjunction with this acquisition, on January 3, 2005, the Company entered into employment agreements with two individuals with Summit. The annual salaries for these two individuals total $310,000 per year for two years or when the convertible note is paid off whichever is later. The Company included the results of Summit in its financial statements beginning January 1, 2005. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed. During the three months ended June 30, 2005, the Company finished its evaluation of the intangibles purchased and finalized the purchase price allocation. The $2.6 million of intangible assets represents $2.2 million allocated to customer base intangibles and $367,000 allocated to employment and non-compete agreements.
(in thousands) Accounts receivable $ 2,354 Fixed assets 57 Other assets 313 Goodwill 1,921 Intangible assets 2,594 -------------------------- Total assets acquired 7,236 -------------------------- Notes payable (300) Accounts payable and accrued liabilities (1,225) -------------------------- Total liabilities assumed (1,525) -------------------------- Total purchase price $ 5,714 ==========================
7 8. Unaudited Pro Forma Financial information for Acquisition The following unaudited pro forma financial information presents the combined results of operations of the Company as if the Summit acquisition had occurred on January 1, 2004. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations of the Company that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations of the Company. Summarized unaudited pro forma results were as follows for the three and six months ended June 30, 2004:
(in thousands) Three months ended June 30, Six months ended June 30, 2004 2004 Revenues $ 3,886 $ 7,276 Net (loss) income $ (10) $ 30 Basic earnings per share $ (0.00) $ 0.00 Weighted average common stock shares outstanding 8,560 8,560
9. Stockholders' Equity A summary of the changes in stockholders' equity for the six months ended June 30, 2005 is as follows:
Stockholders' Equity -------------------- Balance, December 31, 2004 $3,368 Net income 107 Shares issued in Summit purchase 575 Exercise of stock options and warrants 676 Beneficial interest Summit acquisition 769 Balance, June 30, 2005 $5,495 ======
On January 3, 2005, as part of the acquisition of Summit Research Corporation, the Company issued 575,000 shares of its common stock. Effective March 17, 2005, Madison Run, LLC exercised warrants to purchase 354,054 shares of the Company's common stock. The Company received $333,108 from the exercise of these warrants. On June 6, 2005, Madison Run, LLC exercised warrants to purchase 212,839 shares of the Company's common stock. The Company received $200,069 from the exercise of these warrants. 8 In addition to the Madison Run, LLC and Summit acquisition transactions above, the Company issued 181,915 shares of common stock to fulfill stock option and stock warrant exercises during the six months ended June 30, 2005. The stock options and stock warrants had exercise prices ranging from $0.33 to $1.01. The Company received proceeds totaling $143,210 from the exercise of these stock options and stock warrants during the six months ended June 30, 2005. The Board of Directors has approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock the Company is authorized to issue from Sixteen Million (16,000,000) shares to Thirty Million (30,000,000) shares. The Company's authorized Preferred Stock of One Million (1,000,000) shares will remain unchanged. At the Company's Annual Meeting of stockholders held on June 28, 2005, stockholders approved the proposal to amend the Restated Certificate of Incorporation to increase the number of authorized shares of common stock. 10. Stock Option Plans At the Company's Annual Meeting of stockholders held on June 28, 2005, the Digital Fusion, Inc. 2005 Stock Option Plan (the "2005 Stock Option Plan") was approved. The 2005 Stock Option Plan, an incentive and non-qualified stock option plan which authorizes the issuance of up to 750,000 shares of our common stock was approved by the Board of Directors subject to stockholder approval. The 750,000 shares of common stock authorized will be used to grant non-qualified stock options to our employees, directors, officers and consultants and incentive stock options to our employees. The Company does not have any current definitive plans for the grant of options. With respect to incentive stock options, the 2005 Stock Option Plan provides that the exercise price of each such option must be at least equal to 100% of the fair market value of our common stock on the date of grant (110% in the case of stockholders who, at the time the option is granted, own more than 10% of the outstanding common stock), and requires that all such options have an expiration date not later than that date which is one day before the tenth anniversary of the date of the grant (or the fifth anniversary of the date of grant in the case of 10% stockholders). Pursuant to the provisions of the 2005 Stock Option Plan, the aggregate fair market value, determined as of the date(s) of grant, for which incentive stock options are first exercisable by an option holder during any one calendar year cannot exceed $100,000. With respect to non-qualified stock options, the 2005 Stock Option Plan requires that the exercise price of all such options be at least equal to 100% of the fair market value of our common stock on the date such option is granted and requires that all such options have an expiration date not later than that date which is one day before the tenth anniversary of the date of the grant of such option. 10. Reclassifications The Company has reclassed certain amounts for the three and six months ending June 30, 2004 to conform to the 2005 presentation on its Condensed Consolidated Statements of Operation. 9 11. Subsequent Events On July 1, 2005, the Company paid an installment payment as required by the Summit acquisition of $905,047 that was $877,195 in principal and the remaining amount in accrued interest. 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, the Company or its 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, readers are cautioned 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 the Company's control, include, but are not limited to, those set forth in the Company's Form 10-KSB for 2004 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 Digital Fusion is an information technology and engineering services company that helps its customers make the most of technology to meet their business needs. The Company's IT Services provides solutions to both government and commercial customers, focused in the following areas: Business process Automation, Application Development and Data Management, Application Security, Web Portals and Digital Dashboards, System Integration and IT Support. Digital Fusion's engineering services supports a variety of customers with state-of-the art solutions that include Computational Aerodynamics/CFD, Optical Systems Design, Development and Test, Thermo/structural Dynamics, Models and Simulations, and Ground/Flight Planning, Execution, and Data Analysis. Based in Huntsville, Alabama, Digital Fusion also has an office in New Jersey and a satellite office in Florida. Revenues are derived primarily from fees earned in connection with the performance of services provided to customers. The Company typically invoices on a time and materials basis. The majority of costs are associated with personnel. Attracting and retaining billable employees is vital for the Company to move forward. Quarterly operating results are affected by the number of billable days in the quarter, holiday seasons, and vacations. Demand for the Company's services has historically been lower during the fourth quarter because of holidays and vacations. Currently, the majority of the Track-It! product sales are to governmental entities where margins are lower. During the third quarter 2004, Digital Fusion began selling the SPI Dynamics Information Assurance product line WebInspect. Digital Fusion is a Value Added Reseller (VAR) for SPI Dynamics. WebInspect audits web based applications and determines security vulnerabilities. Digital Fusion markets these products along with remediation services to commercial and government customers. 10 With the addition of engineering services during the third quarter of 2004 and the acquisition of Summit on January 3, 2005, Digital Fusion greatly expanded its services offerings and past performance with governmental customers and federal prime contracts. Engineering services include the design, development and integration of advanced sensing systems as well as aerodynamic analysis and thermal-structural analysis. The engineering services provided by the Summit acquisition include modeling & simulation, hardware-in-the-loop testing, mechanical design & prototype fabrication, information technology and information management systems, program analysis, and associated technology transfer into production automation processes. These new services give the Company the ability to capitalize on the increased spending by the governmental sector due to increased military and homeland security spending. With the addition of engineering services and the acquisition of Summit, the Company believes it has taken the necessary steps to attain positive cash flow from continuing operations during 2005. The Company will continue to focus on consistent collections of accounts receivable and continued improvements in its operational performance. Company management believes that, as a result of these actions and assuming it can grow its client base in the private and federal sectors, it currently has sufficient cash to meet its funding requirements over the next year, although the Company has experienced negative cash flows from operations and incurred large net losses in the past. Results of Operations THREE AND SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 REVENUES. Service revenue increased approximately $2.6 million from $1.0 million for the three months ended June 30, 2004 to $3.6 million for the three months ended June 30, 2005. Service revenue increased approximately $4.9 million from $2.2 million for the six months ended June 30, 2004 to $7.1 million for the six months ended June 30, 2005. Reimbursed costs revenue increased approximately $493,000 from $142,000 for the three months ended June 30, 2004 to $635,000 for the three months ended June 30, 2005. Reimbursed costs revenue increased approximately $874,000 from $270,000 for the six months ended June 30, 2004 to $1,144,000 for the six months ended June 30, 2005. The increase in service revenue and reimbursed costs revenue was primarily related to the Summit acquisition and growth in the engineering services. The Summit acquisition accounted for $2.2 million and $4.4 million of increased revenue, and the newly formed engineering services division accounted for $848,000 and $1.9 of revenues during the three and six months ended June 30, 2005, respectively. The increases in revenue related to the Summit acquisition and growth in the engineering services, are partially offset by decreases in IT services revenue. The Company expects its revenues to increase during the remainder of 2005 as compared to 2004 due to the addition of engineering services and the Summit acquisition. 11 Product revenues decreased $144,000 from $471,000 in the three months ended June 30, 2004 to $327,000 in the three months ended June 30, 2005. Product revenues increased $88,000 from $676,000 in the six months ended June 30, 2004 to $764,000 in the six months ended June 30, 2005. During the third quarter of 2004, Digital Fusion began selling the SPI Dynamics Information Assurance product line WebInspect and is the sole source through which Intuit can sell to governmental entities. As the relationship between DFI and Intuit has solidified, Intuit developed its own federal team that concentrates on governmental agencies exclusively. COST OF SERVICES AND GOODS SOLD. Cost of services includes labor, or the salaries and wages of our employees, plus fringe benefit; and other direct costs. Cost of services increased by $1,928,000 to $2,779,000 for the three months ended June 30, 2005. Cost of services increased by $3,760,000 to $5,442,000 for the six months ended June 30, 2005. The increase in cost of services for the three and six months ended June 30, 2005 compared to the three and six months ended June 30, 2004 is due to the increase in revenues as a result of the Summit acquisition and the addition of engineering services. Reimbursed costs consist primarily of third-party materials, such as hardware and software that we purchase for customer solutions resold to customers and also include the costs of subcontracted labor and travel related expenses that are reimbursed. The increase in the reimbursed costs from $108,000 for the three months ended June 30, 2004 to $600,000 for the three months ended June 30, 2005 and the increase in the reimbursed costs from $220,000 for the six months ended June 30, 2004 to $1,076,000 for the six months ended June 30, 2005 is primarily due to the materials that are resold to the Summit customers. Product cost of goods sold decreased by $135,000 to $309,000 for the three months ended June 30, 2005 and increased by $98,000 to $731,000 for the six months ended June 30, 2005. The changes in cost of goods sold are primarily related to the changes in sales of the Intuit product Track-It! and the newly introduced SPI Dynamics Information Assurance product line WebInspect. GROSS PROFIT. Gross profit for services during the three months ended June 30, 2005 is $808,000 or 22.5% of services revenues as compared to $172,000, or 16.8% of services revenues for the three months ended June 30, 2004. Gross profit for services during the six months ended June 30, 2005 is $1,640,000 or 23.2% of services revenues as compared to $494,000, or 22.7% of services revenues for the six months ended June 30, 2004. The increase in services gross profit as a percent of services revenues is primarily due to a change in business mix resulting from the Summit acquisition and the addition of engineering services. Gross profit for the reimbursed costs during the three months ended June 30, 2005 is $35,000 or 5.5% of reimbursed costs revenue as compared to $34,000 and 23.9% of reimbursed costs revenue for the three months ended June 30, 2004. Gross profit for the reimbursed costs during the six months ended June 30, 2005 is $68,000 or 5.9% of reimbursed costs revenue as compared to $50,000 or 18.5% of reimbursed costs revenue for the six months ended June 30, 2004. The decrease in gross profit as a percentage of reimbursed costs revenue is primarily related to the lower mark-up on material purchases for Summit and engineering services customers. Generally, there is very low margin on this type of revenue. Gross profit for product was $18,000 or 5.5% for the three months ended June 30, 2005 and $27,000 or 5.7% for the three months ended June 30, 2004. Gross profit for product was $33,000 or 4.3% for the six months ended June 30, 2005 and $43,000 or 6.3% for the six months ended June 30, 2004. The decrease in profit margin on product sales is primarily attributable to an increase in pricing pressure. 12 SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expenses consist primarily of salaries and expenses associated with marketing, accounting, finance, sales, and administrative personnel, as well as professional fees and other corporate costs related to the administration of the company. SG&A expenses increased $182,000 for the three month ended June 30, 2005 compared to the three month ended June 30, 2004 and increased $410,000 for the six month ended June 30, 2005 compared to the six month ended June 30, 2004. The increase in SG&A is primarily related to the addition of engineering services and the acquisition of Summit, partially offset by a $20,000 reduction in our allowance for doubtful accounts. SG&A as a percent of revenue was 13.4% and 26.1% for the three months ending June 30, 2005 and 2004, respectively. SG&A as a percent of revenue was 13.9% and 26.8% for the six months ending June 30, 2005 and 2004, respectively. The Company expects its SG&A will continue to decrease as a percent of revenue for the remainder of 2005; however, the Company expects its SG&A actual dollars to continue to increase for the remainder of 2005 compared to the same periods in 2004 due to the addition of engineering services and the acquisition of Summit. INTEREST EXPENSE, NET. Interest expense decreased from $39,000 in the three months ended June 30, 2004 to $36,000 for the three months ended June 30, 2005 and increased from $73,000 in the six months ended June 30, 2004 to $83,000 for the six months ended June 30, 2005. The charges are primarily related to the additional debt issued to the former Summit shareholder for the acquisition of Summit, partially offset by strong cash collections that reduced borrowings in the three months ended June 30, 2005. OTHER INCOME. The $20,000 of other income recorded in the three months ended June 30, 2005 is related to the reversal of deferred revenue recorded in prior years for obligations that no longer exist and for services the company no longer provides. AMORTIZATION OF INTANGIBLE ASSETS. The $100,000 amortization of intangible assets is related to the Summit acquisition. The Company allocated $1,668,833 to the customer base intangible assets and allocated $274,677 to employment agreements acquired in the Summit acquisition. The Company is amortizing the customer base and employment agreements over five and four years, respectively. There was no such expense during 2004. AMORTIZATION OF DISCOUNT ON DEBT AND INTRINSIC VALUE OF CONVERTIBLE DEBT. The $122,000 and $224,000 amortization of debt discount and intrinsic value of the convertible debt in the three and six months ended June 30, 2005 are related to the convertible debt issued to the former Summit shareholder. The Company expects this expense to continue throughout 2005. There was no such expense during 2004. INCOME TAX BENEFIT. The income tax expense for the Company's income from operations generated during the six months ended June 30, 2005 was offset by a reduction in the valuation allowance established against deferred tax assets arising from prior periods. The Company has not recognized an income tax benefit for its operating losses generated in the three months and six months ended June 30, 2004 based on uncertainties concerning its ability to generate taxable income in future periods. The tax benefit for the three and six months ended June 30, 2004 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. 13 NET (LOSS) INCOME. As a result of the above factors, net income increased $247,000 from a net loss of $233,000 for the three months ended June 30, 2004 to net income of $14,000 for the three months ended June 30, 2005 and net income increased $430,000 from a net loss of $323,000 for the six months ended June 30, 2004 to net income of $107,000 for the six months ended June 30, 2005. The increase in net income for the six months ended June 30, 2005 compared to the same period during 2004 is primarily the result of the addition of engineering services and the Summit acquisition. Liquidity and Capital Resources Net cash provided by operating activities was $291,000 during the six months ended June 30, 2005. The largest cost of sales is personnel costs and this cost must be paid timely and cannot be delayed; thus as the Company's revenues grow this will cause a use of cash in the interim period until the revenue can be collected. The Company is able to borrow on its line of credit up to 90% of its eligible accounts receivable to a maximum borrowing of $3.5 million. This borrowing capability helps the Company's cash flow until the accounts receivable are collected. During the six months ended June 30, 2005, the Company invested $98,000 primarily in computer equipment and furniture for engineering services. The Company does not expect to have significant equipment purchases during the remainder of 2005. On January 3, 2005, the Company closed on its acquisition of Summit. Under the terms of the Summit acquisition agreement, the Company (a) paid $1.6 million in cash (of which $500,000 was in escrow at December 31, 2004) (b) issued 575,000 shares of the Company's common stock, (c) executed a $898,692 six-month note and (d) executed a $2.7 million convertible promissory note. The convertible note requires a $600,000 principal payment on December 31, 2005. The principal portion of the convertible note may be converted at any time by the note holder into the Company's common stock at a conversion price of $2.25 per share. In the event the entire convertible note is converted, the Company would issue 1.2 million shares of the Company's common stock. No interest will accrue for the first six months and during any calendar month in which the average closing price of the Company's common stock is greater than $2.80 per share. Net cash provided by financing activities for the six months ended June 30, 2005 was $674,000. The Company received $676,000 of proceeds from the exercise of warrants and options and $421,000 from its line of credit. This was offset by the payment of $423,000 to certain note holders during the six months ended June 30, 2005. On April 29, 2005, the Company executed a $374,304 convertible note payable to its CEO to refinance two notes it had outstanding to the CEO. The interest on the convertible debt is payable monthly with the principal due on April 29, 2007. The CEO can convert the note into the Company's common stock at a conversion price of $2.43 per share. The Company's working capital, which consists of current assets less current liabilities, increased from a negative $311,000 as of December 31, 2004 to $400,000 as of June 30, 2005. During 2005, the Company has funded its cash needs through consistent collections of accounts receivable, through the exercise of warrants and options and by borrowing on its line of credit, which is secured by the Company's receivables and certain guarantees, at an interest rate of prime. 14 Federal services revenues are expected to increase with the employment of Gary Ryan as the Company's president during mid-2004, the addition of the Company's engineering services during late 2004 and the acquisition of Summit during January of this year. Digital Fusion's ability to grow substantially may be dependent upon obtaining cash flow from its operations and other external sources. The Company has taken numerous actions to restructure and streamline its operations. Most recently, the Company added engineering services during late 2004 and acquired Summit during early 2005. The Company has also obtained a line of credit secured with its receivables and certain guarantees. Because of these actions, management believes it has enough cash to meet its funding requirements over the next year. The Company's current growth has been funded through internally generated funds, the exercise of warrants and options and its line of credit. Future growth will be supported with revenue from continuing operations, which includes the Company's new engineering services and the acquisition of Summit, a high technology engineering firm. If the Company fails to meet its goals, seeks to expand its operations at a level above its current cash flow from operations, or does not collect its accounts receivable in a timely manner, it may require an infusion of working capital of which the availability and terms cannot be predicted. 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 reported in the financial statements. Some of the accounting policies require management to make difficult and subjective judgments, often because of the need to make estimates of matters that are inherently uncertain. Digital Fusion's most critical accounting policies include accounts receivable reserves and the valuation of goodwill. Actual results may differ from the estimates under different assumptions or conditions. These policies are discussed below, as are the estimates and judgments involved: Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, services have been rendered or good delivered, the contact price is fixed or determinable, and collectibility is reasonably assured. The majority of the Company's current contracts are with Federal Government Departments or Agencies, or subcontracts to companies whose prime contracts are with the Federal Government. Most of these contracts are Time and Material (T&M) or Firm Fixed Price Level of Effort (FFP LOE). The LOE clause requires the Company to have a certain number of labor hours and that these hours are worked by personnel qualified to perform under certain labor categories. Revenue on these contracts is recognized as time is expended and or materials are delivered. The price is based on effort expended, not results achieved. The revenue on these contracts is recognized by hours worked which serves as a proxy for output. Revenue on cost-plus-fee contracts is recognized to the extent of costs or hours actually incurred plus a proportional amount of the fee earned. We consider fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable cost actually incurred in performance of the contract. The Company's deferred revenue relates to payments we have received in advance of services (hours worked). 15 From time to time, we may proceed with work based on customer direction prior to the completion and signing of formal contract documents. We have a formal review process for approving any such work. Revenue associated with such work is recognized only when it can be reliably estimated and realization is probable. We base our estimates on previous experiences with the client, communications with the client regarding funding status, and our knowledge of available funding for the contract or program. Allowance for Doubtful Accounts. The Company's accounts receivable are reduced by $29,000 for an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based 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. The Company's management believes the allowance to be reasonable. The Company does not accrue interest on past due accounts receivable. As a result of improved collections and a shift in business mix to government agencies, the Company has reduced its allowance for doubtful accounts by $20,000 in three months ended June 30, 2005. Valuation of Goodwill and Intangible Assets. Goodwill and intangible assets are reviewed annually for impairment or more frequently if impairment indicators arise. This annual impairment test is performed in the last 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 the Company's management believes that the estimates and assumptions used are reasonable, actual results could differ. Item 3. Controls and procedures. (a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures designed to ensure that material information related to us is recorded, processed, summarized and reported in accordance with SEC rules and forms. Our management, with the supervision of the Chairman and Chief Executive officer, Roy E. Crippen, III, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, Mr. Crippen has concluded that our disclosure controls and procedures are effective in causing material information to be recorded, processed, summarized and reported so as to ensure the quality and timeliness of our public disclosures in compliance with SEC rules and forms. (b) Changes in internal controls. There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting. 16 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. Issuance of Unregistered Securities- - ------------------------------------ On May 23, 2005, the Company issued 15,000 shares of its common stock at an exercise price of $1.01 for exercise of warrants. The Company received proceeds of $15,150 from the exercise of these warrants. On June 6, 2005, the Company issued 212,839 shares of its common stock at an exercise price of $0.94 for exercise of warrants. The Company received proceeds of $200,069 from the exercise of these warrants. These shares were issued to accredited investors. The company relied on Section 4(2) of the Securities Act of 1933 and Regulation D thereunder as the basis for an exemption from registration for this issuance. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders. The following matters were submitted to a vote of security holders during the Company's annual meeting of shareholders held on June 28, 2005:
Votes Authority Cast For Withheld -------------------- ------------------ 1. Election of Directors: Roy E. Crippen, III 8,919,444 1,210 Jay M. Garner 8,919,444 1,210 O.G. Greene 8,918,984 1,670 G. Stewart Hall 8,919,184 1,470 Frank Libutti 8,919,244 1,410 Charles F. Lofty 8,919,044 1,610 Gary S. Ryan 8,919,444 1,210
17
Broker For Against Abstentions Non-Votes 2. Approval of the amendment to the Restated Articles of Incorporation to increase the number of authorized shares of common stock 8,512,642 407,912 100 0 3. Approval of the Company's 2005 Stock Option Plan 5,479,315 399,116 6,260 3,035,963 4. Ratification of Pender Newkirk & Company as the independent auditors of the Company 8,899,964 20,240 450 0
Item 5. Other Information. None. Item 6. Exhibits. (a) Exhibits The following is a list of Exhibits filed as a part of this Report. Exhibit No. Description ----------- ----------- *10.1 Convertible Promissory Note dated April 29, 2005 for $374,303.52 between Roy E Crippen, III (CEO) and the Company is incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed May 5, 2005. *10.2 Registration Rights Agreement dated April 29, 2005 between Roy E. Crippen, III (CEO) and the Company is incorporated herein by reference to Exhibit 10.2 to the Form 8-K filed May 5, 2005. *10.3 Consultant agreement dated March 30, 2005 between Frank Libutti and the Company to provide business development. *10.4 Employment Agreement dated April 7, 2005 between Digital Fusion and Christopher Brunhoeber *10.5 Loan Agreement, Note and Security Agreement, each dated May 25, 2005, among First Commercial Bank of Huntsville and the Company, for a $3,500,000 revolving line of credit, is incorporated herein by reference to Exhibit 10.1 to the Form 8-K filed May 31, 2005. *31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 18 *32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) --------------- * Incorporated by reference. ** Filed herewith. + Management contract or compensatory plan or arrangement. 19 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: August 11, 2005 By: /s/ Christopher L. Brunhoeber ------------------------------------- Name: Christopher L. Brunhoeber Title: Vice President of Finance (Principal Accounting Officer) 20 EX-31.1 2 a4951293ex311.txt EXHIBIT 31.1 EXHIBIT 31.1 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as the end of the period covered by this report based on such evaluation; and c) disclosed in this any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2005 By: /s/ Roy E. Crippen, III -------------------------------- Roy E. Crippen, III Chief Executive Officer CERTIFICATION OF CHIEF ACCOUNTING OFFICER I, Christopher L. Brunhoeber, III certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Digital Fusion, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as the end of the period covered by this report based on such evaluation; and c) disclosed in this any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2005 By: /s/ Christopher L. Brunhoeber -------------------------------- Christopher L. Brunhoeber Chief Accounting Officer EX-32.1 3 a4951293ex321.txt EXHIBIT 32.1 EXHIBIT 32.1 WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned President and Chief Executive Officer of Digital Fusion, Inc. (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-QSB of the Company for the quarter ended June 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 11, 2005 By: /s/ Roy E. Crippen, III -------------------------------- Roy E. Crippen, III WRITTEN STATEMENT OF THE CHIEF ACCOUNTING OFFICER Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the undersigned Vice President and Chief Accounting Officer of Digital Fusion, Inc. (the "Company"), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-QSB of the Company for the quarter ended June 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 11, 2005 By: /s/ Christopher L. Brunhoeber -------------------------------- Christopher L. Brunhoeber -----END PRIVACY-ENHANCED MESSAGE-----