UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549s
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 SEPTEMBER 30, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER ________________________________
DIGICORP, INC.
(Exact name of small business issuer in its charter)
Delaware 87-0398271
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4143 Glencoe Avenue, Marina Del Rey, CA 90292
----------------------------------------------
(Address of principal executive offices)
Issuer's telephone Number: (310) 728-1450
--------------
DIGICORP
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
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 December 4, 2006, the issuer
had 37,239,002 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 (Unaudited)................................ 1
Item 2. Management's Discussion and Analysis or Plan of Operation.......12
Item 3. Controls and Procedures.........................................21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....21
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
================================================================================
Consolidated Balance Sheets (Unaudited)
--------------------------------------------------------------------------------
September 30, December 31,
2006 2005
---------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,732 $ 54,518
Accounts receivable, net 46,893 64,408
Inventories 76,672 130,168
Other current assets 51,339 253,633
------------------- ------------------
TOTAL CURRENT ASSETS 193,636 502,727
Other long term assets -- 48,922
Property and equipment, net 257,974 83,016
Intangible assets, net 863,391 796,256
------------------- ------------------
TOTAL ASSETS $ 1,315,001 $ 1,430,921
=================== ==================
--------------------------------------------------------------------------------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 310,932 $ 189,095
Accrued liabilities 244,583 128,145
Revolving credit line - related party 50,000 --
Note payable - related party 293,000 73,000
Deferred revenue 72,432 80,211
------------------- ------------------
TOTAL CURRENT LIABILITIES 970,947 470,451
LONG TERM LIABILITIES
Convertible note payable - related party 556,307 556,307
Debt discount - beneficial conversion feature (164,639) (193,694)
------------------- ------------------
TOTAL LONG TERM LIABILITIES 391,668 362,613
TOTAL LIABILITIES 1,362,615 833,064
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value: 50,000,000 shares authorized;
37,239,002 shares issued and outstanding as of September 30, 2006;
36,737,184 shares issued and outstanding at December 31, 2005 37,239 36,737
Paid-in capital 3,981,435 958,982
Accumulated deficit (4,066,288) (397,862)
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (47,614) 597,857
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,315,001 $ 1,430,921
=================== ==================
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
1
DIGICORP
================================================================================
Consolidated Statements of Operations (Unaudited)
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
----------------- ------------ --------------- --------------
REVENUE
Sales $ 88,043 $ 52,046 $ 755,791 $ 55,128
Licensing fees 7,779 4,218 7,779 85,205
----------------- ---------- --------------- ------------
Total revenue 95,822 56,264 763,570 140,333
OPERATING EXPENSES
Cost of sales 65,526 31,433 484,659 43,465
Selling, general and administrative expenses 1,325,138 118,495 3,946,537 247,054
----------------- ------------ --------------- --------------
Total operating expenses 1,390,664 149,928 4,431,196 290,519
----------------- ------------ --------------- --------------
LOSS BEFORE INCOME TAXES (1,294,842) (93,664) (3,667,626) (150,186)
PROVISION FOR INCOME TAXES -- -- 800 800
----------------- ------------ --------------- --------------
NET LOSS $ (1,294,842) $ (93,664) $ (3,668,426) $ (150,986)
================= ============ =============== ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.03) $ (0.01) $ (0.10) $ (0.01)
================= ============ =============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 37,239,002 15,530,104 37,118,319 15,530,104
================= ============ =============== ==============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
2
DIGICORP
================================================================================
Consolidated Statements of Cash Flows (Unaudited)
--------------------------------------------------------------------------------
Nine Months Ended
September 30, September 30,
2006 2005
---------------- --------------
Cash flows from operating activities:
Net loss $ (3,668,426) $ (150,986)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 4,660 577
Amortization of licenses 72,465 86,825
Amortization of debt discount 29,054 --
Stock-based compensation to employees and directors 2,429,313 --
Stock-based compensation to consultants 8,242 --
Changes in operating assets and liabilities:
Accounts receivable 17,515 (27,290)
Inventories 53,496 (36,243)
Other current assets 202,294 (10,568)
Other long term assets 48,922 --
Accounts payable and accrued liabilities 238,275 9,686
Deferred revenue (7,779) (87,560)
---------------- --------------
Net cash used in operating activities (571,969) (215,559)
---------------- --------------
Cash flows from investing activities:
Purchases of licenses and developed content (119,600) (327,000)
Proceeds from disposal of licenses 140,000 --
Purchases of property and equipment (27,617) (14,214)
---------------- --------------
Net cash used in investing activities (7,217) (341,214)
---------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 273,400 --
Proceeds from revolving credit line - related party 50,000 --
Proceeds from related party note 220,000 552,321
---------------- --------------
Net cash provided by financing activities 543,400 552,321
---------------- --------------
Net decrease in cash and cash equivalents (35,786) (4,452)
Cash and cash equivalents at beginning of period 54,518 7,856
---------------- --------------
Cash and cash equivalents at end of period $ 18,732 $ 3,404
================ ==============
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 $ --
Acquisition of fixed assets for common stock $ 152,000 $ --
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
3
DIGICORP
Notes to Consolidated Financial Statements - Unaudited
September 30, 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 recapitalization
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 are sold via the internet and
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 has reduced its
sales force to reflect a shift in its emphasis from smaller retailers, which
require a much larger infrastructure to support, in favor of what we expect to
be the more profitable large wholesalers and retailers. Further, the Company
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 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 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 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 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 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 Consolidated Financial Statements - Unaudited (continued)
September 30, 2006
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. At
September 30, 2006, the Company has an accumulated deficit of approximately $4.1
million and a working capital deficit of $777,000, which includes a deferred
revenue balance of $72,000, as discussed below. During the nine months ended
September 30, 2006, the Company incurred a loss of approximately $3.7 million.
During the nine months ended September 30, 2006, the Company primarily relied
upon revenues generated from the direct sales of its Latino home entertainment
content and on debt and equity investments to fund its operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management is currently seeking additional financing and
believes, however no assurances can be made, that these avenues will continue to
be available to the Company to fund its operations. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation Number 48 ("FIN 48"), Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109. The interpretation contains
a two step approach to recognizing and measuring uncertain tax positions
accounted for in accordance with SFAS No. 109. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest amount which is
more than 50% likely of being realized upon ultimate settlement. Effective for
the Company beginning January 1, 2007, FIN 48 is not expected to have any impact
on the Company's financial position, results of operations or cash flows.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements ("SFAS No. 157"). The purpose of SFAS No. 157 is to define fair
value, establish a framework for measuring fair value and enhance disclosures
about fair value measurements. The measurement and disclosure requirements are
effective for the Company beginning in the first quarter of fiscal 2008. The
Company is currently evaluating the impact of adopting SFAS No. 157 on its
financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--An Amendment of FASB
Statements No. 87, 88, 106, and 132R ("SFAS No. 158"). SFAS No. 158 requires
that the funded status of defined benefit postretirement plans be recognized on
the company's balance sheet, and changes in the funded status be reflected in
comprehensive income. SFAS No. 158 also requires the measurement date of the
plan's funded status to be the same as the company's fiscal year-end. Effective
for the Company beginning January 1, 2007, SFAS No. 158 is not expected to 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 September 30, 2006 and December 31, 2005 are presented
net of an allowance for doubtful accounts of $10,000 and $15,000, respectively.
5
DIGICORP
Notes to Consolidated Financial Statements - Unaudited (continued)
September 30, 2006
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.
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 had an agreement with Sichenzia Ross Friedman Ference LLP
("Sichenzia") for legal representation that extended 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 $325,000 and was being amortized
over the term of the agreement. On September 15, 2006, Sichenzia terminated the
agreement. As a result of Sichenzia's termination of the agreement, the Company
recognized an expense of $147,000, during the three months ended September 30,
2006, in connection with the write-off of the unamortized prepaid expense
balance. The remaining balance recorded in other current assets relates to an
amount due the Company for reimbursable expenses from a related party of
$11,000, security deposits of $31,000, and other items which amount to $9,000.
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.
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
6
DIGICORP
Notes to Consolidated Financial Statements - Unaudited (continued)
September 30, 2006
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 nine months ended September 30, 2006 and 2005,
amortization expense related to the licensed content was $72,000 and $87,000,
respectively.
Intangible assets and accumulated amortization at September 30, 2006 and
December 31, 2005 are comprised of the following:
September 30, December 31,
2006 2005
----------- -----------
iCodemedia Assets $ 300,000 $ 300,000
Perreoradio Assets 160,000 --
Licensed and developed content 665,599 686,000
Less: accumulated amortization (262,208) (189,744)
----------- -----------
Intangible assets, net $ 863,391 $ 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 September
30, 2006 to purchase 8,762,500 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 and nine months ended September 30, 2006, as their inclusion would
have been antidilutive. At September 30, 2005 there were no outstanding options,
warrants or convertible notes.
7
DIGICORP
Notes to Consolidated Financial Statements - Unaudited (continued)
September 30, 2006
8. ACCRUED LIABILITIES
Accrued liabilities at September 30, 2006 and December 31, 2005 are comprised of
the following:
September 30, December 31,
2006 2005
------------ ------------
Obligations on license agreements $ 58,100 $ 58,500
Accrued salaries 150,000 37,500
Accrued professional fees -- 29,000
Accrued interest 27,844 --
Income taxes payable -- 800
Other 8,639 2,345
------------ ------------
$ 244,583 $ 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
$556,000 principal amount loan receivable owed by Rebel Crew Films to Rebel
Holdings, LLC in exchange for the issuance of a $556,000 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 $194,000 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 and nine months
ended September 30, 2006, interest expense of $29,000 and $10,000, respectively,
has been recorded from the debt discount amortization, and as of September 30,
2006, the remaining debt discount balance attributable to the beneficial
conversion feature was $165,000.
10. REVOLVING LINE OF CREDIT AGREEMENT - RELATED PARTY
Revolving Line of Credit Agreement
During the period March 23, 2006 through September 28, 2006, the Company was a
party to 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 allowed the Company to request advances totaling an
aggregate of up to $150,000 from AGB Acquisition Fund. At September 30, 2006,
the Company had borrowed $50,000 against the Revolving Line of Credit and
incurred interest expense of $1,600. Amounts borrowed against the Revolving Line
of Credit are evidenced by Convertible Secured Promissory Notes (the
"Convertible Notes") which allow for the conversion of all or any part of the
outstanding principal balance of the Convertible Notes including any accrued
interest thereon, to shares of the Company's common stock at a price equal to
the lesser of the closing price of the Company's common stock on March 23, 2006
or the share price of the Company's common stock offered in the Company's next
round of financing in a private placement offering completed while the principal
balance of the Convertible Notes are outstanding. The Company's Chief Financial
Officer is also the Chief Financial Officer of AGB Acquisition Fund.
8
DIGICORP
Notes to Consolidated Financial Statements - Unaudited (continued)
September 30, 2006
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 Plan"). 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 nine months ended September 30, 2006
is presented below:
Outstanding Options
-------------------------------------------------------------
Weighted
Weighted Average
Average Remaining
Shares Available Exercise Contractual
for Grant Number of Shares Price Life (years)
------------------ ------------------ -------------- -----------------
December 31, 2005 6,687,500 8,312,500 $ 0.75 8.64
Grants (450,000) 450,000 $ 1.54 8.83
Cancellations 41,667 (41,667) $ 1.10 4.67
------------------- -------------------
September 30, 2006 6,279,167 8,720,833 $ 0.79 7.96
Options exercisable at:
December 31, 2005 2,137,500 $ 0.25 5.34
September 30, 2006 2,145,833 $ 0.25 4.59
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 nine months ended September 30, 2006, the
following assumptions were used: volatility 143% to 155%; expected life 5 years;
risk-free interest rate 3.75%; dividend yield 0%.
During the three and nine months ended September 30, 2006 stock-based
compensation totaling $764,000 and $2,438,000, respectively, was recorded by the
Company. As of September 30, 2006, total unrecognized compensation cost related
to unvested stock options was $2,833,000.
9
DIGICORP
Notes to Consolidated Financial Statements - Unaudited (continued)
September 30, 2006
12. WARRANTS
During 2005, the Company issued a total of 550,000 warrants, outside of its 2005
Plan, to purchase shares of common stock at prices ranging from $0.145 to $0.65
per share to consultants. No warrants, other than warrants that were issued
pursuant to the 2005 Plan, were issued by the Company during the nine months
ended September 30, 2006.
The following table summarizes information about common stock warrants
outstanding at September 30, 2006:
Outstanding Exercisable
------------------------------------------------------------------------- ----------------------------------
Weighted
Average
Remaining Weighted
Contractual Average Weighted Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
------------------- ----------------- ---------------- ----------------- ----------------- ----------------
$ 0.10 - 0.25 250,000 4.25 $ 0.145 250,000 $ 0.145
$ 0.50 - 0.75 300,000 4.00 0.65 300,000 0.65
------------------- ----------------- ---------------- ----------------- ----------------- ----------------
$ 0.10 - 0.75 550,000 4.11 $ 0.42 550,000 $ 0.42
=================== ================= ================ ================= ================= ================
13. RELATED PARTY TRANSACTIONS
At September 30, 2006 and December 31, 2005 the Company has a liability of
$73,000 due to the sole member of 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 September 30, 2006. 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 was due on
June 30, 2006 with 5.0% simple interest.
On July 13, 2006, William Horne, the Company's Chief Financial Officer, loaned
the Company $5,000. As consideration for the loan, the Company issued Mr. Horne
a demand promissory note at a rate equal to the prime rate published in The Wall
Street Journal from time to time, and currently 8.25%, to the date of payment in
full.
From July 14, 2006 through September 27, 2006, Jay Rifkin, the Company's
Chairman and Chief Executive Officer, loaned the Company a total of $215,000. As
consideration for the loans, the Company issued Mr. Rifkin demand promissory
notes at a rate equal to the prime rate published in The Wall Street Journal
from time to time to the date of payment in full.
Other current assets at September 30, 2006 includes $11,000 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.
10
14. SUBSEQUENT EVENTS
From October 13, 2006 through November 17, 2006, Mr. Rifkin loaned the Company
an additional $95,000. As consideration for the loans, the Company issued Mr.
Rifkin demand promissory notes at a rate equal to the prime rate published in
The Wall Street Journal from time to time to the date of payment in full.
Pursuant to shareholder approval, which was obtained at our annual meeting of
stockholders held July 14, 2006, on October 6, 2006, the Board of Directors of
the Company approved and authorized the Company to enter into an Agreement and
Plan of Merger by and between the Company and Digicorp, Inc., a Delaware
corporation and newly formed wholly-owned subsidiary of the Company that was
incorporated under the Delaware General Corporation Law for the purpose of
effecting a change of domicile. Upon the Company's change in domicile from Utah
to Delaware, which was declared effective on October 15, 2006, the name of the
surviving corporation became Digicorp, Inc.
The Company was a party to a Production Services Agreement (the "Services
Agreement") between RC3 Cine, Arte & Entretenimiento S.A. de C.V. ("Producer")
and Rebel Crew Films, with an effective date of May 18, 2006. Pursuant to the
terms of the Agreement, the Company was obligated to pay the Producer a series
of payments totaling $120,000 of which the Company had made payments of $12,000.
On November 1, 2006, due to the Company's current financial condition and its
inability to fund the additional $108,000 financial obligation the Company's
Board of Directors approved and authorized the Company to assign to Jay Rifkin
its rights in the Services Agreement and write-off the previously capitalized
payments of $12,000.
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
From June 30, 1995, when we sold our assets, until September 19, 2005
Digicorp, Inc., a Delaware corporation, (referred to herein as the "Company,"
"we," "us," and "our") was a development stage enterprise. 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 to
purchase 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, Inc., a California corporation ("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. 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.
Pursuant to shareholder approval, which was obtained at our annual
meeting of stockholders held July 14, 2006, on October 6, 2006, the Board of
Directors of the Company approved and authorized the Company to enter into an
Agreement and Plan of Merger by and between the Company and Digicorp, Inc., a
Delaware corporation and newly formed wholly-owned subsidiary of the Company
that was incorporated under the Delaware General Corporation Law for the purpose
of effecting a change of domicile. Upon the Company's change in domicile from
Utah to Delaware, which was declared effective on October 15, 2006, the name of
the surviving corporation became Digicorp, Inc.
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. Our titles can be found at Wal-Mart, Best Buy, Blockbuster,
K-Mart, as well as 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.
12
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 are currently expanding our advertising to video and
music-on-demand ("VOD"), and other alternative music and video programming
formats in the United States and internationally. We continue to focus a
significant amount of our available resources on the development of our
intellectual property, specifically, on further development of ViraCast.
ViraCast is our proprietary, patent pending technology which melds a wide range
of media assets to deliver interactive, full motion video with advanced
features.
We currently generate the majority of our revenue through direct sales
of our film content. However, we have reduced our sales force to reflect a shift
in our emphasis from smaller retailers, which require a much larger
infrastructure to support, in favor of what we expect to be the more profitable
large wholesalers and retailers.
Our primary operations are conducted through our wholly owned
subsidiary: Rebel Crew Films. In addition, we have focused and will continue to
focus development efforts of our intellectual property, such as the Perreoradio
and iCodemedia Assets.
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 primarily 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.
13
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.
The Company has concluded that both its iCodemedia and Perreoradio
Assets have indefinite useful lives. The iCodemedia Assets are currently under
development with development focused upon commercializing the software to allow
for a more intuitive experience by the user, greater stability and scalability
of the platform, as well as other improvements. However, a time frame for when
final development of the iCodemedia Assets will be completed is subject to our
raising a significant amount of additional capital. Although we believe we will
be successful in completing an equity financing, until such time as the equity
financing is completed we cannot predict when final development of the
iCodemedia Assets will be completed. Since we have not yet fully developed the
iCodemedia Assets we have not yet begun to recognize any related revenue. In the
event that we become aware of commercially deployed software solutions that
offer similar services as our iCodemedia Assets we will perform an impairment
analysis reflecting these competing solutions. Currently, we are in the process
of establishing an infrastructure, to monetize the Perreoradio Assets primarily
using an advertising business model. Although we are still creating much of the
infrastructure, we believe that future anticipated cash flows justify the
indefinite useful life treatment of the Perreoradio Assets. At present we have
not identified any legal, regulatory, contractual, competitive, economic, or
other factors that would limit the useful life of the iCodemedia or Perreoradio
Assets.
LIQUIDITY AND CAPITAL RESOURCES
Our total assets were $1,315,000 at September 30, 2006 versus
$1,431,000 at December 31, 2005. The change in total assets is attributable to
decreases in current assets of $309,000 and other long term assets of $49,000
which is partially offset by increases in property and equipment of $175,000 and
intangible assets of $67,000.
The decrease in current assets and other long term assets is primarily
due to the write-off of prepaid legal fees. At December 31, 2005, pursuant to
the terms of the May 5, 2005 legal retainer agreement, as amended, with
Sichenzia Ross Friedman Ference LLP ("Sichenzia"), prepaid legal fees of
$245,000 were reflected in our financial statements. During the nine months
ended September 30, 2006, we recorded $98,000 related to the amortization of
prepaid legal fees. The term of the legal retainer agreement was through March
31, 2007, however, on September 15, 2006, Sichenzia terminated the agreement. As
a result of Sichenzia's termination of the agreement, the Company recognized an
expense of $147,000 due to the write-off of the unamortized balance of the
prepaid expense. The remaining decrease of $115,000 is primarily attributed to a
decrease in accounts receivable and inventories stemming from an overall
decrease in sales of our Spanish language films.
The increase in property and equipment is primarily attributed to our
April 24, 2006, purchase of a software application known as ITunesBucks and its
associated assets therewith (the "Assets") from EAI Technologies, LLC, ("EAI") a
Virginia corporation. As consideration for the Assets, we issued EAI an
aggregate of 138,182 shares of our common stock valued at $152,000. Such amount
represented both the cost to develop ITunesBucks as well as the April 24, 2006
closing price of our common stock, $1.10 per common share, as reported on OTC
Bulletin Board.
The increase in intangible assets is primarily due to both the
acquisition of additional licensed content as well as our acquisition of the
Perreoradio suite of websites. During the nine months ended September 30, 2006,
we acquired additional licensed content for $105,000 and produced our first
music video for $18,000. These increases were offset by the amortization of our
licensed content in the amount of $72,000 and the disposal of certain licenses
for an additional $140,000. 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
14
We had a working capital deficit of $777,000 at September 30, 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
expected 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 September 30, 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. The last equity financing that we
received was in April 2006 from our Chief Financial Officer. From July 13, 2006
through December 4, 2006, as a result of the absence of any recent funds being
received through debt or equity financings, a series of loans totaling $265,000
were made to us primarily from Jay Rifkin, our Chairman and Chief Executive
Officer. As consideration for the loans, we have issued demand promissory notes
at a rate equal to the prime rate published in The Wall Street Journal from time
to time to the date of payment in full. We cannot guarantee that Mr. Rifkin
would be willing to further invest in the Company and if we are unable to secure
additional sources of financing our operations would be negatively materially
impacted.
During the three months ended September 30, 2006 we did not raise any funds
through equity financings and during the three months ended June 30, 2006, the
only equity financing that we entered into was a Subscription Agreement with our
Chief Financial Officer in April 2006 relating to the issuance and sale of our
common stock. Pursuant to the Subscription Agreement, we received gross proceeds
of $55,000 from the issuance of 50,000 shares at a price of $1.10 per share.
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,
from March 23, 2006 through September 28, 2006, the Company was a party to 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 allowed us to request advances totaling an aggregate of up to $150,000
from AGB Acquisition Fund. At September 30, 2006, we had borrowed $50,000
against the Revolving Line of Credit, all of which is due January 31, 2006.
Amounts borrowed against the Revolving Line of Credit are evidenced by
Convertible Secured Promissory Notes (the "Convertible Notes") which allow for
the conversion of all or any part of the outstanding principal balance of the
Convertible Notes including any accrued interest thereon, into shares of our
common stock at a price equal to the lesser of the closing price of our common
stock on March 23, 2006 or the share price of our common stock offered in our
next round of financing in a private placement offering completed while the
principal balance of the Convertible Notes are outstanding.
Operating activities used $572,000 of cash during the nine months ended
September 30, 2006, compared to using $216,000 during the nine months ended
September 30, 2005.
Cash used in investing activities for the nine months ended September
30, 2006 and 2005 of $7,000, and $341,000, respectively, resulted primarily from
the purchases of licensed Spanish language film content that was capitalized.
During the nine months ended September 30, 2006, purchases of licensed Spanish
language film content was offset by proceeds of $140,000 from the disposal of
certain licenses.
RESULTS OF OPERATIONS
REVENUES
We generated revenues of $96,000 and $764,000 for the three and nine
months ended September 30, 2006, respectively, as compared with revenues of
$56,000 and $140,000 for the three and nine months ended September 30, 2005,
respectively. During the three and nine months ended September 30, 2005 a
significant amount 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
$72,000 and $80,000 at September 30, 2006 and December 31, 2005, respectively,
represent advance royalty payments that are expected to be earned over the
subsequent twelve month periods.
15
During the three and nine months ended September 30, 2006, we
recognized licensing revenue of $8,000. The remaining $88,000 and $756,000,
respectively, in revenue primarily represents revenue generated through the
direct sales of our licensed content. We expect that our continued efforts in
the development of our intellectual property will ultimately result in a large
component of our revenue being derived from advertising and that direct sales,
as a percentage of total revenue, may become insignificant to our business.
EXPENSES
Operating expenses, which were $4,431,000 during the nine months ended
September 30, 2006 as compared with $291,000 during the nine months ended
September 30, 2005, reflected an increase of $4,141,000. A significant component
of the overall increase that occurred in operating expenses during the nine
months ended September 30, 2006, related to cost of sales of $485,000, an
increase in salaries and employee benefits of $584,000 and stock based
compensation expense from grants of nonqualified stock options to our employees
and non-employee directors of $2,429,000. All outstanding stock-based
compensation awards were granted by us 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 nine months ended September 30, 2006, the following assumptions were used:
volatility 143% to 155%; expected life 5 years; risk-free interest rate 3.75%;
dividend yield 0%. The costs associated with cost of sales, increases in
salaries and employee benefits, and stock based compensation, which were
insignificant or non-existent during the nine months ended September 30, 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 $410,000 higher during the nine months ended
September 30, 2006 compared to the nine months ended September 30, 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
$362,000. Of this increase, $98,000 related to the amortization of prepaid legal
fees to Sichenzia pursuant to the terms of the May 5, 2005 legal retainer
agreement, as amended, and $147,000 was caused by the write-off of the
unamortized balance of the prepaid expense related to stock issued to Sichenzia.
The remaining increase in legal fees of $119,000 is attributed to work performed
on content licensing agreements, an ongoing royalty audit, and acquisition
related work, all of which were outside the scope of our agreement with
Sichenzia.
Amounts paid to consultants increased by $10,000 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 $72,000 during the nine months ended
September 30, 2006 compared to the nine months ended September 30, 2005 due in
part to our relocation into commercial office space in August 2005, with base
rent of $6,000 per month combined with periods of low rates of rent during the
nine months ended September 30, 2005.
Amortization expense decreased by $14,000 during the nine months ended
September 30, 2006 compared to the nine months ended September 30, 2005 due to
an adjustment recorded by us in September 2006 related to the disposal of
certain licenses with a September 30, 2005 value of $140,000.
16
General and administrative expense increased by $219,000 during the
nine months ended September 30, 2006 compared to the nine months ended September
30, 2005 and is attributed to the overall expansion of the business throughout
2006 combined with the financial constraints placed on us as a result of limited
amounts of available working capital during the nine months ended September 30,
2005.
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 nine-month periods ended September 30, 2006 and 2005, we
generated revenues of $764,000 and $140,000, respectively, and incurred net
losses of $3,668,000 and $151,000, respectively. At September 30, 2006, we had a
working capital deficit of $777,000 and an accumulated deficit of $4,066,000.
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:
17
o Establishing and maintaining broad market acceptance of our products
and converting that acceptance into direct and indirect sources of
revenue;
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.
18
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
September 30, 2006 consisted only of $19,000 in cash and total current assets of
$194,000, 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.
19
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
December 4, 2006 was $0.10 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 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.
20
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 all 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
in 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.
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.
Not applicable.
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
------------------ ------------------------------------------------------------------------------------------------
3.1* Certificate of Incorporation of Digicorp, Inc.
3.2* State of Utah Articles of Merger of Digicorp, a Utah corporation, into Digicorp, Inc., a
Delaware corporation
3.3* State of Delaware Articles of Merger of Digicorp, a Utah corporation, into Digicorp, Inc., a
Delaware corporation
4.1* Demand Promissory Note in the principal amount of $5,000 issued September 15, 2006 to Jay
Rifkin
4.2* Demand Promissory Note in the principal amount of $75,000 issued September 27, 2006 to Jay
Rifkin
4.3* Demand Promissory Note in the principal amount of $10,000 issued October 13, 2006 to Jay Rifkin
4.4* Demand Promissory Note in the principal amount of $10,000 issued November 1, 2006 to Jay Rifkin
4.5* Demand Promissory Note in the principal amount of $25,000 issued November 8, 2006 to Jay Rifkin
4.6* Demand Promissory Note in the principal amount of $50,000 issued November 17, 2006 to Jay
Rifkin
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
* Filed herewith.
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, INC.
Date: December 13, 2006 By: /s/ Jay Rifkin
----------------------------------
Jay Rifkin
Chief Executive Officer
Date: December 13, 2006 By: /s/ William B. Horne
----------------------------------
William B. Horne
Chief Financial Officer
22