UNITED STATES
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, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE
TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER_________________________
DIGICORP
(Exact name of small business issuer in its charter)
UTAH 87-0398271
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4143 Glencoe Avenue, Marina Del Rey, CA 90292
----------------------------------------------
(Address of principal executive offices)
Issuer's telephone Number: (310) 728-1450
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 [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 10, 2006, the issuer had
37,100,820 outstanding shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................... 1
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 12
Item 3. Controls and Procedures............................................ 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 20
Item 3. Defaults Upon Senior Securities.................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................ 21
Item 5. Other Information.................................................. 21
Item 6. Exhibits........................................................... 21
SIGNATURES................................................................... 22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DIGICORP
=================================================================================================
Condensed Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------------------------------
March 31, December 31,
2006 2005
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 42,553 $ 54,518
Accounts receivable, net 212,555 64,408
Inventories 118,374 130,168
Other current assets 295,012 253,633
----------- -----------
TOTAL CURRENT ASSETS 668,494 502,727
Other long term assets -- 48,922
Property and equipment, net 96,743 83,016
Intangible assets, net 1,027,087 796,256
----------- -----------
TOTAL ASSETS $ 1,792,324 $ 1,430,921
=========== ===========
-------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 268,923 $ 189,095
Accrued liabilities 254,621 128,145
Due to related party 73,000 73,000
Deferred revenue 80,211 80,211
----------- -----------
TOTAL CURRENT LIABILITIES 676,755 470,451
LONG TERM LIABILITIES
Convertible note payable - related party 556,307 556,307
Debt discount - beneficial conversion feature (184,009) (193,694)
----------- -----------
TOTAL LONG TERM LIABILITIES 372,298 362,613
TOTAL LIABILITIES 1,049,053 833,064
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value: 50,000,000 shares authorized;
37,050,820 shares issued and outstanding as of March 31, 2006;
36,737,184 shares issued and outstanding at December 31, 2005 37,051 36,737
Paid-in capital 2,232,007 958,982
Accumulated deficit (1,525,787) (397,862)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 743,271 597,857
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,792,324 $ 1,430,921
=========== ===========
-------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
DIGICORP
================================================================================
Condensed Consolidated Statements of Operations (Unaudited)
--------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2006 2005
------------ ------------
REVENUE
Sales $ 443,518 $ 2,043
Licensing fees -- 39,040
------------ ------------
Total revenue 443,518 41,083
OPERATING EXPENSES
Cost of sales 261,288 4,473
Selling, general and administrative expenses 1,309,355 60,160
------------ ------------
Total operating expenses 1,570,643 64,633
------------ ------------
LOSS BEFORE INCOME TAXES (1,127,125) (23,550)
PROVISION FOR INCOME TAXES 800 800
------------ ------------
NET LOSS $ (1,127,925) $ (24,350)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.00)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 36,918,800 15,530,104
============ ============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
DIGICORP
================================================================================================================
Condensed Consolidated Statements of Cash Flows (Unaudited)
----------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2006 2005
------------ ------------
Cash flows from operating activities:
Net loss $ (1,127,925) $ (24,350)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,541 8
Amortization of licenses 36,669 25,746
Amortization of debt discount 9,685 --
Stock-based compensation to employees and directors 894,939 --
Changes in operating assets and liabilities:
Accounts receivable (148,147) (1,815)
Inventories 11,794 (1,907)
Other current assets (41,379) (1,492)
Other long term assets 48,922 --
Accounts payable and accrued liabilities 206,304 (6,684)
Deferred revenue -- (39,040)
------------ ------------
Net cash used in operating activities (107,597) (49,534)
------------ ------------
Cash flows from investing activities:
Purchases of licenses (107,500) (299,500)
Purchases of property and equipment (15,268) (499)
------------ ------------
Net cash used in investing activities (122,768) (299,999)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 218,400 --
Proceeds from related party note -- 341,677
------------ ------------
Net cash provided by financing activities 218,400 341,677
------------ ------------
Net decrease in cash and cash equivalents (11,965) (7,856)
Cash and cash equivalents at beginning of period 54,518 7,856
------------ ------------
Cash and cash equivalents at end of period $ 42,553 $ --
============ ============
Supplemental disclosures of cash flow information:
Income taxes $ 1,200 $ --
Interest paid $ -- $ --
Non-cash investing and financing activity:
Acquisition of intangible assets for common stock $ 160,000 $ --
----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
DIGICORP
Notes to Condensed Consolidated Financial Statements - Unaudited
March 31, 2006
1. DESCRIPTION OF BUSINESS
Digicorp ("the Company") was organized under the laws of the State of Utah on
July 19, 1983. On July 1, 1995, the Company became a development stage
enterprise as defined in Statements of Financial Accounting Standards ("SFAS")
No. 7 when it sold its assets and changed its business plan. On December 29,
2005, the Company ceased being a development stage enterprise when it acquired
all of the issued and outstanding capital stock of Rebel Crew Films, Inc., a
California corporation ("Rebel Crew Films"), pursuant to a reverse merger
transaction (see note 4).
Rebel Crew Films operates as a wholly-owned operating subsidiary of the Company.
Rebel Crew Films was organized under the laws of the State of California on
August 7, 2002 to distribute Latino home entertainment products. Rebel Crew
Films distributes Spanish language films and serves wholesale, retail, catalog,
and e-commerce accounts. Rebel Crew Film's titles can be found at major retail
outlets and independent video outlets across the United States of America and
Canada.
The Company, including its operating subsidiary, generated revenue through the
direct sales of licensed content and licensing agreements with third parties
that distributed the Company's licensed content. The Company is expanding its
sales force to focus on direct sales of its licensed content and intends to
significantly reduce or eliminate future licensing agreements with third
parties.
The Company is organized in a single operating segment. All of the Company's
revenues are generated in the United States, and the Company has no long-lived
assets outside the United States.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements do not include all
the information and disclosures required by accounting principles generally
accepted in the United States of America. The preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. The actual
results may differ from management's estimates.
The interim condensed consolidated financial information is unaudited, but
reflects all normal adjustments that are, in the opinion of management,
necessary to provide a fair statement of results for the interim periods
presented. The condensed consolidated balance sheet as of December 31, 2005, was
derived from the Company's audited financial statements. Operating results for
the interim periods presented are not necessarily indicative of the results to
be expected for the fiscal year ending December 31, 2006. The condensed interim
consolidated financial statements should be read in connection with the
Company's audited financial statements for the year ended December 31, 2005.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, Rebel Crew Films. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
4
DIGICORP
Notes to Condensed Consoldiated Financial Statements - Unaudited (continued)
Liquidity
The accompanying financial statements are prepared assuming the Company is a
going concern which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has a working capital
deficit of $8,261 at March 31, 2006, which includes deferred revenue balance of
$80,211, as discussed below. During the three months ended March 31, 2006, the
Company primarily relied upon revenues generated from the direct sales of its
Latino home entertainment content and on equity investments to fund its
operations. Management believes that future revenues combined with either loans
or direct equity investments into the Company will be sufficient to fund the
Company's operations for the 12 months subsequent to March 31, 2006.
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB") released
Statement No. 155, Accounting for Certain Hybrid Financial Instruments, ("SFAS
No. 155"). SFAS No.155 is an amendment of Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 155 establishes, among other items, the accounting for
certain derivative instruments embedded within other types of financial
instruments; and, eliminates a restriction on the passive derivative instruments
that a qualifying special-purpose entity may hold. Effective for the Company
beginning January 1, 2007, SFAS No. 155 is not expected to have any impact on
the Company's financial position, results of operations or cash flows.
In March 2006, the FASB released Statement No. 156, Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140, ("SFAS No. 156"). SFAS
No. 156 amends SFAS No. 140 to require that all separately recognized servicing
assets and liabilities in accordance with SFAS No. 140 be initially measured at
fair value, if practicable. Furthermore, this standard permits, but does not
require, fair value measurement for separately recognized servicing assets and
liabilities in subsequent reporting periods. SFAS No. 156 is also effective for
the Company beginning January 1, 2007; however, the standard is not expected to
have any impact on the Company's financial position, results of operation or
cash flows.
In the first quarter of 2006, the Company adopted Statement No. 154, Accounting
for Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB
Statement No. 3, ("SFAS No. 154") which changed the requirements for the
accounting for and reporting of a voluntary change in accounting principle. The
Company also adopted Statement No. 151, Inventory Costs--an amendment of ARB No.
43, Chapter 4 ("SFAS No. 151") which, among other changes, requires certain
abnormal expenditures to be recognized as expenses in the current period versus
capitalized as a component of inventory. The adoption of SFAS No. 154 did not
impact the results presented and the impact on any future periods will depend on
the nature and significance of any future accounting changes subject to the
provisions of the statement. The adoption of SFAS No. 151 did not have any
impact on the Company's financial position, results of operations or cash flows.
3. ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the invoice amount and do not bear interest.
Accounts receivable at March 31, 2006 and December 31, 2005 are presented net of
an allowance for doubtful accounts of approximately $25,000 and $15,000,
respectively.
4. RECAPITALIZATION
On December 29, 2005, the Company completed the acquisition of Rebel Crew Films.
Pursuant to the stock purchase agreement, the Company acquired all of the
outstanding equity stock of Rebel Crew Films from the Rebel Crew Films
Shareholders. As consideration for the acquisition the Company agreed to issue
21,207,080 shares of the Company's common stock (the "Purchase Price") to the
shareholders of Rebel Crew Films.
5
DIGICORP
Notes to Condensed Consoldiated Financial Statements - Unaudited (continued)
Following completion of the acquisition the Company's previous shareholders
owned 15,530,104 common shares and Rebel Crew Films shareholders owned
21,207,080, or approximately 57.7% of the outstanding shares of the Company's
common stock. For accounting purposes the transaction is considered to be a
recapitalization where Digicorp is the surviving legal entity, and Rebel Crew
Films is considered to be the accounting acquirer. Accordingly, the historical
financial statements prior to December 29, 2005 are those of Rebel Crew Films.
Following the acquisition, Digicorp changed its fiscal year end from June 30 to
December 31.
5. OTHER CURRENT ASSETS
The Company has an agreement with Sichenzia Ross Friedman Ference LLP
("Sichenzia") for legal representation that extends through March 31, 2007. In
consideration for Sichenzia's services, the Company agreed to a fixed fee of
$50,000 and to issue Sichenzia 500,000 shares of the Company's common stock. The
common stock issued to Sichenzia was valued at approximately $325,000 and is
being amortized over the term of the agreement. At March 31, 2006, the
unamortized balance is $195,652 and is included in other current assets. The
remaining balance recorded in other current assets relates to an amount due the
Company for reimbursable expenses from a related party of $30,794, a security
deposit of $24,950, and other items which amount to $43,616.
6. INTANGIBLE ASSETS
Intangible assets consist of capitalized license fees for licensed content the
Company acquired from owners including producers, studios and distributors as
well as the Company's iCodemedia and Perreoradio suite of websites and internet
properties and all related intellectual property (the "iCodemedia Assets").
The Perreoradio suite of websites consists of the following Internet domain
names and all materials, intellectual property, goodwill and records in
connection therewith: Perreoradio.com, Radioperreo.com, Perreomobile.com,
Perreotv.com, Puroperreo.com, Puroreggaeton.com, Purosandungueo.com,
Sandungueoradio.com, Machetemusic.net, Machetemusic.org, Machetemusica.com and
Musicamachete.com. As consideration for the Perreoradio Assets, the Company
issued an aggregate of 100,000 shares of its common stock valued at $160,000.
6
DIGICORP
Notes to Condensed Consoldiated Financial Statements - Unaudited (continued)
The iCodemedia suite of websites consists of the websites www.icodemedia.com,
www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com and
www.tunespromo.com. The Company intends to use these websites to provide a suite
of applications and services to enable content creators to publish and deliver
content to existing and next generation devices. The iCodemedia Assets are
presently under development. As consideration for the iCodemedia Assets, the
Company issued 1,000,000 shares of its common stock valued at $300,000.
The Perreoradio and iCodemedia Assets were determined to have an indefinite
useful life based primarily on the renewability of the proprietary domain names.
Intangible assets with an indefinite life are not subject to amortization, but
will be subject to periodic evaluation for impairment
Licensed content acquired is capitalized at the time of purchase. The term of
the licensed content agreements usually vary between one to five years (the
"Title Term"). At the end of the Title Term, the Company generally has the
option of discontinuing distribution of the title or extending the Title Term.
The Company amortizes the capitalized license fees, on a straight line basis
over the Title Term. During the three months ended March 31, 2006 and 2005,
amortization expense related to the licensed content was $36,669 and $25,746,
respectively.
Intangible assets and accumulated amortization consisted of the following:
Years Ended
March 31, December 31,
2006 2005
iCodemedia Assets $ 300,000 $ 300,000
Perreoradio Assets 160,000 --
Licensed content 793,500 686,000
Less: accumulated amortization (226,413) (189,744)
------------ ------------
Intangible assets, net $ 1,027,087 $ 796,256
============ ============
7. INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is based on the weighted average number of common
shares outstanding. The Company complies with SFAS No. 128, "Earnings Per
Share," which requires dual presentation of basic and diluted earnings per share
on the face of the statements of operations. Basic per share earnings or loss
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted per share earnings or loss reflects the potential dilution that could
occur if convertible preferred stock or debentures, options and warrants were to
be exercised or converted or otherwise resulted in the issuance of common stock
that then shared in the earnings of the entity
Options and warrants issued pursuant to our Stock Option Plan and warrants that
were issued outside our Stock Option Plan which were outstanding as of March 31,
2006 to purchase 8,712,500 and 550,000 shares of common stock, respectively, and
500,000 shares issuable upon conversion of an outstanding convertible note were
not included in the computation of diluted net loss per common share for the
three months ended March 31, 2006, as their inclusion would have been
antidilutive. At March 31, 2005 there were no outstanding options, warrants or
convertible notes.
7
DIGICORP
Notes to Condensed Consoldiated Financial Statements - Unaudited (continued)
8. ACCRUED LIABILITIES
Accrued liabilities at March 31, 2006 and December 31, 2005 are comprised of the
following:
March 31, December 31,
2006 2005
------------ ------------
Obligations on license agreements $ 132,000 $ 58,500
Accrued salaries 75,000 37,500
Accrued professional fees 29,000 29,000
Income taxes payable -- 800
Other 18,621 2,345
------------ ------------
$ 254,621 $ 128,145
============ ============
9. CONVERTIBLE NOTE PAYABLE - RELATED PARTY
In connection with the acquisition of Rebel Crew Films on December 29, 2005, the
Company entered into a Securities Purchase Agreement with one of the
shareholders of Rebel Crew Films, Rebel Holdings, LLC, a California limited
liability company ("Rebel Holdings"), pursuant to which the Company purchased a
$556,307 principal amount loan receivable owed by Rebel Crew Films to Rebel
Holdings, LLC in exchange for the issuance of a $556,307 principal amount
secured convertible note to Rebel Holdings, LLC. The secured convertible note
accrues simple interest at the rate of 4.5%, matures on December 29, 2010 and is
secured by all of the Company's assets now owned or hereafter acquired. The
secured convertible note is convertible into 500,000 shares of the Company's
common stock at the rate of $1.112614 per share. Jay Rifkin, the Company's Chief
Executive Officer and a director, is the sole managing member of Rebel Holdings,
LLC.
As the effective conversion price of the note on the date of issuance was below
the fair market value of the underlying common stock, the Company recorded debt
discount in the amount of $193,694 based on the intrinsic value of the
beneficial conversion feature of the note. The debt discount recorded as a
result of the beneficial conversion feature will be amortized as non-cash
interest expense over the term of the debt. During the three months ended March
31, 2006, interest expense of $9,685 has been recorded from the debt discount
amortization, and as of March 31, 2006, the remaining debt discount balance
attributable to the beneficial conversion feature was $184,009.
10. COMMITMENT AND CONTINGENCIES
Revolving Line of Credit Agreement
Effective March 23, 2006 the Company entered into a Revolving Line of Credit
Agreement (the "Revolving Line of Credit") with Ault Glazer Bodnar Acquisition
Fund, LLC ("AGB Acquisition Fund"). The Revolving Line of Credit allows the
Company to request advances totaling an aggregate of up to $150,000 from AGB
Acquisition Fund. The initial term of the Revolving Line of Credit is for a
period of six months and may be extended for one or more additional six-month
periods upon mutual agreement of the parties. At March 31, 2006, the Company had
not borrowed against the Revolving Line of Credit. The Company's Chief Financial
Officer is also the Chief Financial Officer of AGB Acquisition Fund.
8
DIGICORP
Notes to Condensed Consoldiated Financial Statements - Unaudited (continued)
11. STOCK BASED COMPENSATION
Effective July 20, 2005, the Board of Directors of the Company approved the 2005
Stock Option and Restricted Stock Plan (the "2005 SOP"). The Plan reserves
15,000,000 shares of common stock for grants of incentive stock options,
nonqualified stock options, warrants and restricted stock awards to employees,
non-employee directors and consultants performing services for the Company.
Options and warrants granted under the Plan have an exercise price equal to or
greater than the fair market value of the underlying common stock at the date of
grant and become exercisable based on a vesting schedule determined at the date
of grant. The options expire 10 years from the date of grant whereas warrants
generally expire 5 years from the date of grant. Restricted stock awards granted
under the Plan are subject to a vesting period determined at the date of grant.
The Company accounts for stock-based compensation awards in accordance with the
provisions of SFAS No. 123(R), Share-Based Payment, which addresses the
accounting for employee stock options. SFAS 123(R) requires that the cost of all
employee stock options, as well as other equity-based compensation arrangements,
be reflected in the financial statements over the vesting period based on the
estimated fair value of the awards. The Company adopted SFAS 123(R) as of
January 1, 2005. Prior to the adoption date, there were no stock options or
other equity-based compensation awards outstanding.
A summary of stock option activity for the three months ended March 31, 2006 is
presented below:
Outstanding Options
Weighted
Average
Weighted Remaining
Shares Average Contractual
Available for Number of Exercise Life
Grant Shares Price (years)
---------------- ------------ -------------- -----------------
December 31, 2005 6,687,500 8,312,500 $ 0.75 8.64
Grants (400,000) 400,000 $ 1.60 9.85
March 31, 2006 6,287,500 8,712,500 $ 0.79 8.45
Options exercisable at:
December 31, 2005 2,137,500 $ 0.25 5.34
March 31, 2006 2,137,500 $ 0.25 5.09
All outstanding stock-based compensation awards were granted by the Company at
the per share fair market value on the grant date. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model. For options granted during the quarter ended March 31, 2006, the
following assumptions were used: volatility 155%; expected life 5 years;
risk-free interest rate 3.75%; dividend yield 0%.
During the three months ended March 31, 2006 stock-based compensation totaling
approximately $895,000 was recorded by the Company. As of March 31, 2006, total
unrecognized compensation cost related to unvested stock options was $4,420,353.
9
DIGICORP
Notes to Condensed Consoldiated Financial Statements - Unaudited (continued)
12. EQUTY TRANSACTIONS
During February 2006, the Company entered into a Subscription Agreement with
several accredited investors, relating to the issuance and sale by the Company
of shares of its common stock (the "Shares"). The Company received gross
proceeds of $235,000 from the issuance of 213,636 Shares at a price of $1.10 per
share.
13. WARRANTS
During 2005, the Company issued a total of 550,000 warrants to purchase shares
of common stock at prices ranging from $0.145 to $0.65 per share to consultants.
No warrants were issued by the Company during the quarter ended March 31, 2006.
The following table summarizes information about common stock warrants
outstanding at March 31, 2006:
Outstanding Exercisable
------------------------------------------------------------------------- ----------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
------------------- ----------------- ---------------- ----------------- ----------------- ----------------
$ 0.10 - 0.25 250,000 5.00 $ 0.145 250,000 $ 0.145
$ 0.50 - 0.75 300,000 4.75 0.65 300,000 0.65
------------------- ----------------- ---------------- ----------------- ----------------- ----------------
$ 0.10 - 0.75 550,000 4.86 $ 0.42 550,000 $ 0.42
=================== ================= ================ ================= ================= ================
14. RELATED PARTY TRANSACTIONS
At March 31, 2006 and December 31, 2005, the Company has a liability of $556,307
due to Rebel Holdings, LLC, a California limited liability company ("Rebel
Holdings"), an entity whose sole managing member is the Company's Chief
Executive Officer that owned approximately 52% of the outstanding shares of the
Company's common stock at March 31, 2006. In connection with the borrowings, the
Company issued a convertible note in the amount of $556,307 to Rebel Holdings
(the "Rebel Note") on December 29, 2005. The monies loaned by Rebel Holdings to
the Company were utilized to pay for certain capitalized license agreements and
operating expenses of the Company. The Rebel Note has a term of five years from
closing, bears 4.5% simple interest and is convertible into shares of the
Company's common stock at a conversion price of $1.112614 per share (see note
9).
Additionally, at March 31, 2006 and December 31, 2005 the Company has a
liability of $73,000 due to the sole member of Rebel Holdings. In connection
with the borrowings, the Company issued a promissory note in the amount of
$73,000 to the member (the "Note") on December 29, 2005. The monies loaned by
the member to the Company were utilized to pay for certain capitalized license
agreements and operating expenses of the Company. The Note has a term of
approximately six months and bears 5.0% simple interest.
10
DIGICORP
Notes to Condensed Consoldiated Financial Statements - Unaudited (continued)
Other current assets at March 31, 2006 includes $30,794 owed to the Company by
Ault Glazer Bodnar & Company, Inc. ("AGB & Company") based on an agreement to
reimburse the Company for salaries paid in connection with the recapitalization
of the Company. The Company's Chief Financial Officer is also the Chief
Financial Officer of AGB & Company.
15. SUBSEQUENT EVENTS
Subscription Agreement
During April 2006, the Company entered into a Subscription Agreement with its
Chief Financial Officer relating to the issuance and sale by the Company of
shares of its common stock. The Company received gross proceeds of $55,000 from
the issuance of 50,000 Shares at a price of $1.10 per share.
11
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and the related notes thereto contained elsewhere in this Form
10-QSB. This discussion contains forward-looking statements that involve risks
and uncertainties. All statements regarding future events, our future financial
performance and operating results, our business strategy and our financing plans
are forward-looking statements. In many cases, you can identify forward-looking
statements by terminology, such as "may," "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential," or
"continue" or the negative of such terms and other comparable terminology. These
statements are only predictions. Known and unknown risks, uncertainties and
other factors could cause our actual results to differ materially from those
projected in any forward-looking statements. In evaluating these statements, you
should specifically consider various factors, including, but not limited to,
those set forth under "Risk Factors" appearing at the end of this Management's
Discussion and Analysis ("MD&A").
The following "Overview" section is a brief summary of the significant
issues addressed in this MD&A. Investors should read the relevant sections of
the MD&A for a complete discussion of the issues summarized below. The entire
MD&A should be read in conjunction with Item 1. Financial Statements.
OVERVIEW
On June 30, 1995, Digicorp, a Utah corporation, (referred to herein as the
"Company," "we," "us," and "our") became a development stage enterprise when we
sold our assets. Until September 19, 2005 we had no operations other than
issuing shares of common stock for financing the preparation of financial
statements and for preparing filings for the SEC.
On September 19, 2005, we entered into an asset purchase agreement with
Philip Gatch, our Chief Technology Officer, and thereby completed the purchase
of certain assets from Mr. Gatch consisting of the iCodemedia suite of websites
and internet properties and all related intellectual property (the "iCodemedia
Assets"). The iCodemedia suite of websites consists of the websites
www.icodemedia.com, www.iplaylist.com, www.tunecast.com, www.tunebucks.com,
www.podpresskit.com and www.tunespromo.com.
On December 29, 2005, we acquired all of the issued and outstanding
capital stock of Rebel Crew Films in consideration for the issuance of
21,207,080 shares of common stock to the shareholders of Rebel Crew Films. Rebel
Crew Films was organized under the laws of the State of California on August 7,
2002 to distribute Latino home entertainment products. Rebel Crew Films
currently maintains approximately 300 Spanish language films and plans to serve
the nation's largest wholesale, retail, catalog, and e-commerce accounts.
On February 7, 2006, we entered into an asset purchase agreement pursuant
to which we purchased the following Internet domain names and all materials,
intellectual property, goodwill and records in connection therewith (the
"Perreoradio Assets"): Perreoradio.com, Radioperreo.com, Perreomobile.com,
Perreotv.com, Puroperreo.com, Puroreggaeton.com, Purosandungueo.com,
Sandungueoradio.com, Machetemusic.net, Machetemusic.org, Machetemusica.com and
Musicamachete.com.
We are primarily engaged in the business of developing, marketing and
distributing programming content, multi-media technologies, and advertising via
the internet. We expect that we will expand our advertising to video and
music-on-demand ("VOD"), and other alternative music and video programming
formats in the United States and internationally. We will focus a significant
amount of our available resources to obtain the exclusive distribution rights
for additional content through development, acquisition or licensing
arrangements.
We currently generate the majority our revenue through direct sales of our
film content. In the past we generated the majority of our revenue from
licensing agreements which consisted of three to five-year contracts that
carried a 15% - 50% royalty on gross sales of licensed product. We are currently
expanding our sales force to focus on direct sales of our licensed content and
expect to see a significant shift in revenues, which have historically been
predominately from licensing agreements, to direct sales.
12
Our primary operations are conducted through our wholly owned subsidiary:
Rebel Crew Films, Inc. In addition, we have focused and will continue to focus
development efforts in our Perreoradio and iCodemedia Assets.
Our goal is to become a leading distributor of Latino home entertainment
products. Our products are developed to target Spanish speaking consumers who
increasingly demand new Latino content and classic Spanish language movies. We
offer producers and content-providers a flexible option to the larger Hollywood
studio distributors and have emerged as a company that attracts premiere home
entertainment products.
We currently maintain and distribute approximately 300 Spanish language
films. Our titles can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and
hundreds of independent video outlets across the United States of America and
Canada. Our diverse programming includes: new releases, classic Mexican cinema,
animation, cult, sports, martial arts, family entertainment, and more.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The below discussion and analysis of our financial condition and results
of operations is based upon the accompanying financial statements. 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 affect the amounts reported in the financial
statements. Critical accounting policies are those that are both important to
the presentation of our financial condition and results of operations and
require management's most difficult, complex, or subjective judgments. Our most
critical accounting policies relate to the determination of stock based
compensation, revenue recognition and the assessment of impairment of our
intangible assets.
Stock-Based Compensation
The Company accounts for stock-based compensation awards in accordance with the
provisions of SFAS No. 123(R), Share-Based Payment, which addresses the
accounting for employee stock options. SFAS 123(R) revises the disclosure
provisions of SFAS 123 and supercedes APB Opinion No. 25. SFAS 123(R) requires
that the cost of all employee stock options, as well as other equity-based
compensation arrangements, be reflected in the financial statements over the
vesting period based on the estimated fair value of the awards. This statement
is effective for the Company as of the beginning of the first annual reporting
period that begins after June 15, 2005. The Company adopted SFAS 123(R) as of
January 1, 2005.
Revenue Recognition
The Company generates revenue through either the direct sales of licensed
content or through licensing agreements whereby the Company receives advance
payments as consideration for rights granted to third parties that distribute
the Company's licensed content. Revenues from direct sales are recorded upon
shipment. Advance payments received under licensing agreements are initially
recorded as deferred revenue. The Company recognizes revenue under its licensing
agreements as royalties are earned upon shipment of licensed content to
customers by the sub-licensor. The Company may be entitled to receive additional
royalty payments under the licensing agreements, but only to the extent that
royalties calculated under the terms of the licensing agreements exceed the
amount of the advance payments.
Intangible Assets
The Company accounts for intangible assets in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", which provides accounting and reporting
standards for acquired intangible assets. Under SFAS No. 142, goodwill and other
intangible assets with indefinite useful lives are no longer amortized but
tested for impairment at least annually. The Company will perform an impairment
test on all intangible assets, in accordance with the guidance provided by SFAS
No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets", at
least annually, unless events and circumstances indicate that such assets might
be impaired.
13
LIQUIDITY AND CAPITAL RESOURCES
Our total assets were $1,792,324 at March 31, 2006 versus $1,430,921 at
December 31, 2005. The change in total assets is primarily attributable to
increases in accounts receivable of $148,147 and intangible assets of $230,831.
The increase in accounts receivable was caused from an increase in sales
of $247,297 during the three months ended March 31, 2006 over the preceding
quarter ended December 31, 2005. Sales during the three months ended March 31,
2006 and December 31, 2005 were $443,518 and $196,221, respectively.
The increase in intangible assets is due to both the acquisition of
additional licensed content as well as our acquisition of the Perreoradio suite
of websites. During the three months ended March 31, 2006, we acquired
additional licensed content for $107,500. This increase was partially offset by
the amortization of our licensed content in the amount of $36,669. As
consideration for assets acquired in the acquisition of the Perreoradio suite of
websites, we issued an aggregate of 100,000 shares of our common stock valued at
$160,000. The Perreoradio assets were determined to have an indefinite useful
life based primarily on the renewability of the proprietary domain names.
Intangible assets with an indefinite life are not subject to amortization, but
will be subject to periodic evaluation for impairment
We had a working capital deficit of approximately $8,261 at March 31, 2006
and we continue to have recurring losses. In the past we have primarily relied
upon loans from related parties to fund our operations and, to a lesser extent,
revenues generated from licensing our film content, on a non-exclusive basis, to
other distributors of Latino home entertainment content. We believe that future
revenues combined with either loans or direct equity investments into the
Company will be sufficient to fund our operations for the 12 months subsequent
to March 31, 2006. We expect to undertake additional debt and equity financings
to better enable us to grow and meet our future operating and capital
requirements, however, there is no assurance that we will be successful in
obtaining the necessary level of funding. During the three months ended March
31, 2006 we entered into subscription agreements with unrelated accredited
investors, pursuant to which we sold a total of 213,636 shares of our common
stock at a price of $1.10 per share. We received gross proceeds of $235,000 from
the sale of the stock. Additionally, on March 23, 2006, we entered into a
Revolving Line of Credit Agreement (the "Revolving Line of Credit") with Ault
Glazer Bodnar Acquisition Fund, LLC ("AGB Acquisition Fund"). The Revolving Line
of Credit allows us to request advances totaling an aggregate of up to $150,000
from AGB Acquisition Fund. The initial term of the Revolving Line of Credit is
for a period of six months and may be extended for one or more additional
six-month periods upon mutual agreement of the parties. At March 31, 2006, we
had not borrowed against the Revolving Line of Credit. In April 2006, we entered
into a Subscription Agreement with our Chief Financial Officer relating to the
issuance and sale of our common stock. We received gross proceeds of $55,000
from the issuance of 50,000 shares at a price of $1.10 per share.
Operating activities used $107,597 of cash during the three months ended
March 31, 2006, compared to using $49,534 during the three months ended March
31, 2005.
Cash used in investing activities for the three months ended March 31,
2006 and 2005 of $122,768, and $299,999, respectively, resulted almost
exclusively from the purchases of licensed Spanish language film content that
was capitalized.
RESULTS OF OPERATIONS
REVENUES
We generated revenues of $443,518 and $41,083 for the three months ended
March 31, 2006 and 2005, respectively. During the three months ended March 31,
2005 almost all of our revenues were generated through licensing agreements. The
licensing agreements provide for us to receive advance payments as consideration
for rights granted to third parties that distribute our licensed content. The
advance payments are initially recorded as deferred revenue and subsequently
recognized in income as royalties are earned upon shipment of licensed content
to customers by the sub-licensor. Deferred revenue balances of $80,211 at March
31, 2006 and December 31, 2005 represent advance royalty payments that are
expected to be earned over the subsequent twelve month periods.
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During the three months ended March 31, 2006, we did not recognize any
licensing revenue. All of our $443,518 in revenue represents revenue generated
through the direct sales of our licensed content. We expect that direct sales,
as a percentage of total revenue, will comprise the majority of revenues over
the next year as we continue to focus our efforts on expanding our sales force.
Further, we anticipate that licensing revenues will significantly be reduced or
eliminated in future years as we shift our focus away from licensing agreements
with third parties.
EXPENSES
Operating expenses were $1,570,643 and $64,633 during the three months
ended March 31, 2006 and 2005, respectively. A significant component of
operating expenses during the three months ended March 31, 2006, related to cost
of sales of $261,288, stock based compensation expense from grants of
nonqualified stock options to our employees and non-employee directors of
$894,939 and an increase in salaries and employee benefits of approximately
$179,645. These costs, which were insignificant or non-existent during the three
months ended March 31, 2005, reflect a shift in our revenue mix from revenue
generated primarily through licensing agreements which do not have any costs of
sales to that of direct sales which not only have cost of sales but also the
need of a sales force. The remaining operating expenses consisted of
professional fees, rent expense, amortization expense and general and
administrative expenses.
Professional fees were approximately $83,049 higher during the three
months ended March 31, 2006 compared to the three months ended March 31, 2005
due to significant increases in amounts paid for legal, consulting and
accounting fees. Legal fees comprised the majority of this increase,
representing an increase of $71,348. Of this increase, approximately $47,000
related to the amortization of prepaid legal fees to Sichenzia Ross Friedman
Ference LLP ("Sichenzia") pursuant to the terms of the May 5, 2005 legal
retainer agreement, as amended. We entered into this legal retainer agreement in
anticipation of an increased level of legal work required by a public operating
company. Under the terms of the amended agreement, Sichenzia agreed to represent
us in connection with our continuing reporting requirements, as well as our
general corporate matters. The term of the agreement is from May 1, 2005 through
March 31, 2007. The remaining increase is attributed to work performed on
content licensing agreements and acquisition related work that was outside the
scope of our agreement with Sichenzia.
Amounts paid to consultants increased by approximately $11,701 related to
an ongoing royalty audit that we initiated during the quarter ended March 31,
2006 combined with amounts paid to primarily two consultants. Amounts paid to
the two consultants related to services in generating direct sales at a large
retailer and operational services.
Rent expense increased by approximately $15,308 during the three months
ended March 31, 2006 compared to the three months ended March 31, 2005 due in
part to our relocation into commercial office space in August 2005, with base
rent of $5,890 per month combined with periods of low rates of rent during the
three months ended March 31, 2005.
Amortization expense increased by approximately $10,905 during the three
months ended March 31, 2006 compared to the three months ended March 31, 2005
due to an increased number of license agreements.
General and administrative expense increased by approximately $64,471
during the three months ended March 31, 2006 compared to the three months ended
March 31, 2005 and is attributed to the overall expansion of the business during
the year ended December 31, 2005 combined with the financial constraints placed
on us as a result of limited amounts of available working capital during the
three months ended March 31, 2005.
15
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
RISK FACTORS
Our business involves a high degree of risk. Potential investors should
carefully consider the risks and uncertainties described below and the other
information in this report before deciding whether to invest in shares of our
common stock. Each of the following risks may materially and adversely affect
our business, results of operations and financial condition. These risks may
cause the market price of our common stock to decline, which may cause you to
lose all or a part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE AND WHICH MAY NEGATIVELY IMPACT
OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES AND OUR FINANCIAL RESULTS.
For the three-month periods ended March 31, 2006 and 2005, we generated
revenues of $443,518 and $41,083, respectively, and incurred net losses of
$1,127,925 and $24,350, respectively. At March 31, 2006, we had a working
capital deficit of $8,261 and an accumulated deficit of $1,525,787. Our failure
to increase our revenues significantly or improve our gross margins will harm
our business. Even if we do achieve profitability, we may not be able to sustain
or increase profitability on a quarterly or annual basis in the future. If our
revenues grow more slowly than we anticipate, our gross margins fail to improve,
or our operating expenses exceed our expectations, our operating results will
suffer. If we are unable to sell or license our products at acceptable prices
relative to our costs, or if we fail to develop and introduce on a timely basis
new products from which we can derive additional revenues, our financial results
will suffer.
OUR LICENSE REVENUES ARE DEPENDENT UPON THE REVENUES OF OUR CUSTOMERS. IF THE
CONTENT WHICH WE LICENSE TO CUSTOMERS IS NOT USED IN VIDEOS WHICH BECOME POPULAR
AMONG THE VIEWING PUBLIC, OUR REVENUES MAY DECLINE.
We generate revenue through either licensing agreements with third parties
that distribute our licensed content or through direct sales. Our typical
licensing agreement consists of a three to five-year contract that carries a 15%
- 50% royalty on gross sales of licensed product. If the content which we
license to customers is not used in videos which become popular among the
viewing public, our revenues may decline.
OUR OPERATING SUBSIDIARY REBEL CREW FILMS HAS A LIMITED OPERATING HISTORY AND
THEREFORE WE CANNOT ENSURE THE LONG-TERM SUCCESSFUL OPERATION OF OUR BUSINESS OR
THE EXECUTION OF OUR BUSINESS PLAN.
Our operating subsidiary Rebel Crew Films was organized under the laws of
the State of California on August 7, 2002. Because Rebel Crew Films has a
limited operating history, our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by growing companies in
evolving markets, such as the Latino home video distribution market in which we
operate. While to date we have not experienced these problems, we must meet many
challenges including:
o Establishing and maintaining broad market acceptance of our
products and converting that acceptance into direct and
indirect sources of revenue;
16
o Establishing and maintaining our brand name;
o Timely and successfully developing new content and films;
o Developing content that results in high popularity among the
viewing public;
o Developing and maintaining strategic relationships to enhance
the distribution and features of our video content.
Our business strategy may be unsuccessful and we may be unable to address
the risks we face in a cost-effective manner, if at all. If we are unable to
successfully address these risks our business will be harmed and we may
experience a decrease in revenues.
IF WE ARE UNABLE TO LICENSE OR ACQUIRE COMPELLING CONTENT AT REASONABLE COSTS OR
IF WE DO NOT DEVELOP COMPELLING CONTENT, THE NUMBER OF USERS OF OUR SERVICES MAY
NOT GROW AS ANTICIPATED, OR MAY DECLINE, WHICH COULD HARM OUR OPERATING RESULTS.
Our future success depends in part upon our ability to aggregate
compelling content and deliver that content through our online and other
multi-media properties and programming and delivery technologies. We distribute
some of the content that we license on our online properties, such as audio and
video content from third parties. We have been providing increasing amounts of
audio and video content to our users as reflected in the increase in direct
sales of our content and we believe that users will increasingly demand
high-quality audio and video content, such as music, film, and other special
events. Such content may require us to make substantial payments to third
parties from whom we license or acquire such content. For example, our
entertainment properties rely on film producers and distributors, and other
organizations for a large portion of the content available on our properties.
Our ability to maintain and build relationships with third-party content
providers will be critical to our success. In addition, as new methods for
accessing and delivering content through media formats becomes available,
including through alternative devices, we may need to enter into amended content
agreements with existing third-party content providers to cover the new devices.
We may be unable to enter into new, or preserve existing, relationships with the
third parties whose content we seek to obtain. In addition, as competition for
compelling content increases both domestically and internationally, our content
providers may increase the prices at which they offer their content to us, and
potential content providers may not offer their content on terms agreeable to
us. An increase in the prices charged to us by third-party content providers
could harm our operating results and financial condition. Further, some of our
content licenses with third parties may be non-exclusive. Accordingly, content
providers and other media sources such as radio or television may be able to
offer similar or identical content and technologies. This increases the
importance of our ability to deliver compelling content and media technologies
in order to differentiate from other businesses. If we are unable to license or
acquire compelling content at reasonable prices, if other companies acquire
develop and/or distribute content that is similar to or the same as that
provided by us, or if we do not develop compelling content or media
technologies, the number of users of our services may not grow as anticipated,
or may decline, which could harm our operating results.
WE MAY INCUR SUBSTANTIAL COSTS ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS AND
ANY DIFFICULTY WITH ENFORCING SUCH RIGHTS MAY CAUSE OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION TO SUFFER.
The decreasing cost of electronic and computer equipment and related
technology has made it easier to create unauthorized versions of audio and
audiovisual products such as compact discs, videotapes and DVDs. Similarly,
advances in Internet technology have increasingly made it possible for computer
users to share audio and audiovisual information without the permission of the
copyright owners and without paying royalties to holders of applicable
intellectual property or other rights. Unauthorized copies and piracy of these
products compete against legitimate sales of these products. Our revenues are
derived from our licensed video content that is potentially subject to
unauthorized copying and widespread, uncompensated dissemination on the
Internet. If our proprietary video content is copied and distributed without
authorization we may incur substantial costs enforcing our intellectual property
rights. If we fail to obtain appropriate relief or enforcement through the
judicial process, or if we fail to develop effective means of protecting our
intellectual property, our results of operations and financial condition may
suffer.
17
OUR CONTENT ASSETS MAY NOT BE COMMERCIALLY SUCCESSFUL WHICH WOULD CAUSE OUR
REVENUES TO DECLINE.
Our revenue comes from the production and distribution of video content
for use in Latino home video. The success of content offerings depends primarily
upon their acceptance by the public, which is difficult to predict. The market
for these products is highly competitive and competing products are often
released into the marketplace at the same time. The commercial success of a
video production depends on several variable factors, including the quality and
acceptance of competing offerings released into the marketplace at or near the
same time and the availability of alternative forms of entertainment and leisure
time activities. Our business is particularly dependent on the success of a
limited number of releases, and the commercial failure of just a few of these
releases can have a significant adverse impact on results. Our failure to obtain
broad consumer appeal in the Latino community could materially harm our
business, financial condition and prospects for growth.
FAILURE TO PROPERLY MANAGE OUR POTENTIAL GROWTH POTENTIAL WOULD BE DETRIMENTAL
TO HOLDERS OF OUR SECURITIES.
Since we have limited operating history and our total assets at March 31,
2006 consisted only of $42,553 in cash and total current assets of $668,494, any
significant growth will place considerable strain on our financial resources and
increase demands on our management and on our operational and administrative
systems, controls and other resources. There can be no assurance that our
existing personnel, systems, procedures or controls will be adequate to support
our operations in the future or that we will be able to successfully implement
appropriate measures consistent with our growth strategy. As part of this
growth, we may have to implement new operational and financial systems,
procedures and controls to expand, train and manage our employees and maintain
close coordination among our technical, accounting, finance, marketing, sales
and editorial staff. We cannot guarantee that we will be able to do so, or that
if we are able to do so, we will be able to effectively integrate them into our
existing staff and systems. We may fail to adequately manage our anticipated
future growth. We will also need to continue to attract, retain and integrate
personnel in all aspects of our operations. Failure to manage our growth
effectively could hurt our business.
IF WE DO NOT MAINTAIN THE CONTINUED SERVICE OF OUR EXECUTIVE OFFICERS, WE MAY
NEVER DEVELOP BUSINESS OPERATIONS.
Our success is dependent upon the continued service of our current
executive officers. To date, we have entered into a written employment agreement
with Jay Rifkin, our Chief Executive Officer, and Philip Gatch, our Chief
Technology Officer, and none of our other executive officers. We do not have key
man life insurance on any of our executive officers. While none of our executive
officers currently has any definitive plans to retire or leave our company in
the near future, any of such persons could decide to leave us at any time to
pursue other opportunities. The loss of services of any of our executive
management team could cause us to lose revenue.
RISKS RELATED TO OUR COMMON STOCK
OUR HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR
COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET
FOR OUR SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR
YOU TO SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR INVESTMENT.
The public market for our common stock has historically been very
volatile. Over the past two fiscal years subsequent interim quarterly periods,
the market price for our common stock as quoted on the OTC Bulletin Board has
ranged from $0.06 to $2.05. The closing sale price for our common stock on May
4, 2006 was $1.00 per share. Any future market price for our shares is likely to
continue to be very volatile. This price volatility may make it more difficult
for you to sell shares when you want at prices you find attractive. We do not
know of any one particular factor that has caused volatility in our stock price.
However, the stock market in general has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies. Broad market factors and the investing public's
negative perception of our business may reduce our stock price, regardless of
our operating performance. Further, the market for our common stock is limited
and we cannot assure you that a larger market will ever be developed or
18
maintained. The average daily trading volume of our common stock has
historically been insignificant. Market fluctuations and volatility, as well as
general economic, market and political conditions, could reduce our market
price. As a result, this may make it difficult or impossible for you to sell our
common stock or to sell our common stock for a positive return on your
investment.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The SEC has adopted Rule 3a51-1 which establishes the definition of a
"penny stock," for the purposes relevant to us, as any equity security that has
a market price of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, Rule 15g-9 requires:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must:
o obtain financial information and investment experience
objectives of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has
sufficient knowledge and experience in financial matters to be
capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the SEC relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
Generally, brokers may be less willing to execute transactions in
securities subject to the "penny stock" rules. This may make it more difficult
for investors to dispose of our common stock and cause a decline in the market
value of our stock.
19
Item 3. Controls and Procedures.
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our chief
executive officer and chief financial officer of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
Act). Based upon this evaluation, our chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is: (1) accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure; and (2) recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms.
There was no change to our internal controls or in other factors that
could affect these controls during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. However, we are implementing more structured
procedures to improve our internal control over the financial reporting of our
subsidiary Rebel Crew Films, Inc., a privately held company that we acquired on
December 29, 2005, in order to ensure that its disclosure controls and
procedures continue to be effective in future periods. These initiatives may
result in changes to our internal control over financial reporting.
In designing and evaluating the internal controls over financial
reporting, management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
PART II
Item 1. Legal Proceedings.
We are not a party to any pending legal proceeding, nor is our property
the subject of a pending legal proceeding, that is not in the ordinary course of
business or otherwise material to the financial condition of our business. None
of our directors, officers or affiliates is involved in a proceeding adverse to
our business or has a material interest adverse to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On February 7, 2006, we purchased the following Internet domain names and
all materials, intellectual property, goodwill and records in connection
therewith (the "Assets") from Matthew D. Stuart: Perreoradio.com,
Radioperreo.com, Perreomobile.com, Perreotv.com, Puroperreo.com,
Puroreggaeton.com, Purosandungueo.com, Sandungueoradio.com, Machetemusic.net,
Machetemusic.org, Machetemusica.com and Musicamachete.com. As consideration for
the Assets, we issued Mr. Stuart and his nominees an aggregate of 100,000 shares
of common stock. All such shares of common stock are subject to lock up
agreements as follows; 25,000 shares are subject to a lock up agreement for one
year; 25,000 shares are subject to a lock up agreement for two years; and 50,000
shares are subject to a lock up agreement for three years. These securities were
issued pursuant to the exemption from registration requirements provided by
Section 4(2) of the Securities Act of 1933, as amended ("Securities Act").
On February 7, 2006, the Company entered a three year employment agreement
with Matthew D. Stuart and granted Mr. Stuart options to acquire 400,000 shares
of common stock at an exercise price of $1.60 per share. Such options expire on
February 7, 2016. The exercise of such options are subject to certain vesting
provisions. These securities were issued pursuant to the exemption from
registration requirements provided by Section 4(2) of the Securities Act.
During February 2006, the Company sold 213,636 shares of common stock to
several unaffiliated accredited investors at a price of $1.10 per share,
resulting in gross proceeds of $235,000. These securities were sold in reliance
upon the exemption provided by Section 4(2) of the Securities Act and the safe
harbor of Rule 506 under Regulation D promulgated under the Securities Act. No
advertising or general solicitation was employed in offering the securities, the
sales were made to a limited number of persons, all of whom represented to the
Company that they are accredited investors, and transfer of the securities is
restricted in accordance with the requirements of the Securities Act.
20
On April 3, 2006, the Company sold 50,000 shares of common stock to
William B. Horne, the Company's Chief Financial officer and current director, at
a price of $1.10 per share, resulting in gross proceeds of $55,000. These
securities were sold pursuant to Rule 506 promulgated under the Securities Act
of 1933, as amended. These securities were sold in reliance upon the exemption
provided by Section 4(2) of the Securities Act and the safe harbor of Rule 506
under Regulation D promulgated under the Securities Act. No advertising or
general solicitation was employed in offering the securities, the sales were
made to a limited number of persons, all of whom represented to the Company that
they are accredited investors, and transfer of the securities is restricted in
accordance with the requirements of the Securities Act.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibit
Number Description
--------------------------------------------------------------------------------
4.1 Secured Convertible Note due December 19, 2010 in the
principal amount of $556,306.53 issued to Rebel Crew
Holdings, LLC (Incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission
on January 5, 2006)
4.2 Promissory Note due June 30, 2006 in the principal amount of
$73,000 issued to Jay Rifkin (Incorporated by reference to
the Company's Form 8-K filed with the Securities and
Exchange Commission on January 5, 2006)
4.3 Revolving Line of Credit Agreement dated and effective as of
March 23, 2006 by and between Ault Glazer Bodnar Acquisition
Fund LLC and Digicorp (Incorporated by reference to the
Company's Form 8-K filed with the Securities and Exchange
Commission on April 10, 2006)
10.1 Asset Purchase Agreement made as of February 7, 2006 by and
between Digicorp and Matthew B. Stuart (Incorporated by
reference to the Company's Form 8-K filed with the
Securities and Exchange Commission on February 13, 2006)
31.1 Certification by Chief Executive Officer, required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2 Certification by Chief Financial Officer, required by Rule
13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1 Certification by Chief Executive Officer, required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code
32.2 Certification by Chief Financial Officer, required by Rule
13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section
1350 of Chapter 63 of Title 18 of the United States Code
21
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.
DIGICORP
Date: May 15, 2006 By:/s/ Jay Rifkin
-------------------------------------
Jay Rifkin
Chief Executive Officer
Date: May 15, 2006 By:/s/ William B. Horne
-------------------------------------
William B. Horne
Chief Financial Officer
22