This annual
report contains forward-looking statements. These statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”,
“plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”
or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk
Factors” and the risks set out below, any of which may cause our or our industry’s actual results, levels of activity,
performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. These risks include, by way of example and not in limitation:
This list
is not an exhaustive list of the factors that may affect any of our forward-looking statements. These and other factors should
be considered carefully and readers should not place undue reliance on our forward-looking statements.
Forward looking
statements are made based on management’s beliefs, estimates and opinions on the date the statements are made and we undertake
no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws
of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial
statements are stated in United States dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting
Principles.
ITEM 1.
BUSINESS
Background
Rightscorp,
Inc., a Nevada corporation (the “Company”), was incorporated in Nevada on April 9, 2010. Since the closing of the
Reverse Acquisition on October 25, 2013 (discussed below), the Company has been the parent company of Rightscorp, Inc., a Delaware
corporation.
On October
25, 2013 (the “Closing Date”), the Company entered into and closed an Agreement and Plan of Merger (the “Merger
Agreement”), with Rightscorp Merger Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company
(the “Subsidiary”) and Rightscorp, Inc., a Delaware corporation (“Rightscorp Delaware” or “Rightscorp”).
Pursuant to the Merger Agreement, (i) the Subsidiary merged into Rightscorp Delaware, such that Rightscorp Delaware became a wholly-owned
subsidiary of the Company, (ii) the Company issued (a) 45,347,102 shares (the “Acquisition Shares”), of the Company’s
common stock to the shareholders of Rightscorp Delaware representing approximately 65.9% of the Company’s aggregate issued
and outstanding common stock following the closing of the Merger Agreement (following the Share Cancellation and the Private Placement,
each as defined below), in exchange for all of the issued and outstanding shares of common stock of Rightscorp Delaware, (b) outstanding
warrants to purchase 1,831,969 shares of common stock of Rightscorp Delaware were converted into outstanding warrants to purchase
5,312,703 shares of common stock of the Company, and (iv) outstanding convertible notes in the aggregate amount of $233,844 (including
outstanding principal and accrued interest thereon) of Rightscorp Delaware were amended to be convertible into shares of common
stock of the Company at a conversion price of $0.1276.
In connection
with the Merger Agreement and the Financing (defined below), as of the Closing Date the Company issued and sold an aggregate of
950,000 units (the “Private Placement”), for a purchase price of $0.50 per unit, with each unit consisting of one
share of common stock and an eighteen month warrant to purchase one share of common stock with an exercise price of $0.75 (the
“Private Placement Warrants”).
In connection
with the Merger Agreement and the Private Placement, in addition to the foregoing:
(i) Effective
on the Closing Date, 21,000,000 shares of common stock were returned to the Company for cancellation (the “Share Cancellation”).
(ii) Effective
on the Closing Date, the following individuals were appointed as executive officers and directors of the Company:
Name
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Title
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Christopher
Sabec
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Chief Executive
Officer, President, and Chairman of the Board of Directors
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Robert Steele
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Chief Financial
Officer, Chief Operating Officer, Chief Technology Officer, and Director
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Brett Johnson
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Director
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(iii) Effective
July 15, 2013, the Company amended its articles of incorporation to change its name from “Stevia Agritech Corp.” to
“Rightscorp, Inc.
(iv) On June
18, 2013, the Company entered into a financing agreement (the “Financing Agreement”) with Hartford Equity Inc. (“Hartford”),
under which Hartford agreed to purchase, directly or through its associates an aggregate of $2,050,000 of common stock and warrants
(the “Financing”). The Private Placement described above will be deemed part of the Financing such that as of the
Closing Date the Company closed on $475,000 of the Financing (which amounts were advanced by the Company to Rightscorp Delaware
prior to the Closing Date) and Hartford, directly or through its associates, agreed to purchase an additional $1,575,000 in common
stock and warrants from the Company within 14 months from the Closing Date.
Effective
on the Closing Date, pursuant to the Merger Agreement, Rightscorp Delaware became a wholly owned subsidiary of the Company. The
acquisition of Rightscorp Delaware is treated as a reverse acquisition (the “Reverse Acquisition”), and the business
of Rightscorp Delaware became the business of the Company. At the time of the Reverse Acquisition, Stevia was not engaged in any
significant active business.
References
to “we”, “us”, “our” and similar words refer to the Company and its wholly-owned subsidiary,
Rightscorp Delaware, unless the context otherwise requires, and prior to the effectiveness of the Reverse Acquisition, these terms
refer to Rightscorp Delaware. References to “Stevia” refer to the Company and its business prior to the Reverse Acquisition.
Rightscorp
Delaware is a Delaware corporation formed on January 20, 2011.
The Company
is a technology company that has a patent-pending, proprietary method for collecting payments from illegal downloaders of copyrighted
content via notifications sent to their internet service providers (ISPs).
Our principal
office is located at 3100 Donald Douglas Loop North, Santa Monica, CA 90405. Our telephone number is (310) 751-7510. Our website
address is www.rightscorp.com.
Business Summary
We protect
copyright holders’ rights by seeking to assure they get paid for their copyrighted intellectual property (“IP”).
We offer and sell a service to copyright owners under which copyright owners retain us to identify and collect settlement payments
from Internet users who have infringed on their copyrights. After we have received an order from a client, our software monitors
the global Peer-to-Peer (P2P) file sharing networks to detect illegally distributed digital media. The technology sends automated
notices of the infringing activity to ISPs and the ISP forwards these notices, which contain settlement offers, to their infringing
customers. The notice to ISPs and settlement offers identify the date, time, title of copyrighted intellectual property and other
specific technology identifiers to confirm the infringement by the ISP’s customer. Infringers who accept our settlement
offers then remit payment to us for the copyright infringement and we share the payments with the copyright owners.
We generate
revenues by retaining a portion of the settlement payments we receive from copyright infringers. Our customers, the copyright
holders, benefit from our service as we share a portion of the settlement with them. This helps them recapture the revenues they
lost when their copyrighted material was illegally copied and distributed. We currently represent the holders of more than 1 million
copyrights. Current customers include, but are not limited to BMG Rights Management, Round Hill Music, Shapiro/Bernsteind and
The Orchard. These firms represent some of the biggest names in music. Additionally, we are in discussions with some of the largest
owners of copyrighted intellectual property. We have successfully obtained settlement payments for tens of thousands of individual
cases of copyright infringement. To date, we have closed infringements and received settlement payments from subscribers on more
than 50 ISPs including five of the top 10 US ISPs. We believe ISP’s that participate with us and our clients by forwarding
notices of infringement achieve compliance with the Digital Millennium Copyright Act (or DMCA), as discussed below. Conversely,
we believe that companies that do not participate and do not have a policy for terminating repeat infringers fail to comply with
the DMCA, which may result in liability for them.
Dependence on Major Customers
In 2012, our
contract with BMG Rights Management accounted for approximately 36% of our sales. For the twelve months ended December 31, 2013,
our contract with BMG Rights Management accounted for approximately 25% of our sales, and our contract with Warner Brothers accounted
for 7% of our sales. Our standard contract with customers is for an initial one-year term, which renews automatically for successive
one month terms, unless either party terminates upon 30 days’ written notice to the other party.
Legal Framework
The challenge
for copyright owners is that the legal framework now in place requires the copyright owner to monitor and notice and document
each individual act of infringement against the copyright owner in order to protect its rights,. We believe the content business
views this as an insurmountable and costly task. As described above, our Rightscorp software provides a solution by monitoring
the global Peer-to- Peer (P2P) file sharing networks to detect illegally distributed digital media.
ISP Safe
Harbor
Courts have
found businesses that have been involved in contributing to copyright infringement liable for damages. In Fonovisa vs. Cherry
Auction, a swap meet run by Cherry Auction was held liable to Fonovisa (the copyright owner) for damages. As the Court observed,
“it would be difficult for the infringing activity to take place in the massive quantities alleged without the support services
provided by the swap meet,” including the provision of space, utilities, parking, advertising, plumbing and customer…”
Section 512(i)
of the DMCA provides a conditional safe harbor protection from such third party liability. It states as follows:
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(i) Conditions
for Eligibility
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(1)
Accommodation of technology — The limitations on liability established by this section shall apply to a service provider
only if the service provider:
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(A)
has adopted and reasonably implemented, and informs subscribers and account holders of the service provider’s system
or network of, a policy that provides for the termination in appropriate circumstances of subscribers and account holders
of the service provider’s system or network who are repeat infringers; and
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(B)
accommodates and does not interfere with standard technical measures.
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Thus, under
Federal Law, ISPs are only eligible for “Safe Harbor” protection from vicarious liability from their subscribers’
copyright infringements if they have “
reasonably implemented … a policy that provides for the termination …
of subscribers … who are repeat infringers
.” Thus, we believe that ISPs have no liability for their role in copyright
infringement on P2P networks until the copyright owner sends them a notice of a repeat infringer. In accordance with the DMCA,
we have developed a technology and a process for identifying repeat infringers, documenting infringements and sending ISPs notice
of repeat infringement and monitoring the termination, or lack thereof, of repeat infringers. As there is no case law regarding
this “Safe Harbor” provision, ISPs’ interpretations of their responsibilities vary. We have utilized this Safe
Harbor provision to obtain various levels of cooperation from ISPs, which in many cases include the forwarding of our notices
and the termination of repeat infringers who do not accept our settlement offers. To qualify for the “Safe Harbor”
protection, ISP’s have an incentive to forward our notices and terminate repeat infringers, and infringers in turn have
an incentive to accept our settlement offers, so as to avoid termination of services from the ISP’s.
Digital Copyrights & Piracy
Background
In 1999, Shawn
Fanning, an 18 year old college student, changed the music industry with his creation of a digital file sharing program called
Napster, a software program that allowed computer users to share and swap files, specifically music, through a centralized file
server. By the spring of 2000, Napster had several hundred thousand users and by February 2001 had grown to over 50 million users.
In September
2013, Netnames, a market research and consultancy firm reported that P2P traffic that infringes on copyrights had become 24% of
all internet traffic (not including traffic that infringes on pornographic copyrights). In other words, 24% of all Internet traffic
is the illegal downloading and distribution of mainstream, high-quality movies, music, games, and software. The reports states
that “worldwide, 432 million unique internet users explicitly sought infringing content during January 2013. . . . Despite
some discrete instances of success in limiting infringement, the piracy universe not only persists in attracting more users year
on year but hungrily consumes increasing amounts of bandwidth.
In three key
regions (North America, Europe, and Asia-Pacific), the absolute amount of bandwidth consumed by the infringing use of Bittorrent
comprised 6,692 petabytes of data in 2013, an increase of 244.9% from 2011.
In the same
three regions, infringing use of bittorrent in January 2013 accounted for:
178.7 million
unique internet users, an increase of 23.6% from November 2011
7.4 billion
page views, an increase of 30.6% from November 2011”
According
to the Global Internet Phenomena Report in Sandvine,
2H 2013,
P2P file sharing accounted for approximately 8.9% of all
North American Internet traffic and 42% of all North American upstream Internet traffic.
Enacted in
1997, The Digital Millennium Copyright Act (or DMCA) heightened the penalties for copyright infringement on the Internet and established
the eligibility for Safe Harbor from liability of the providers of on-line services for copyright infringement by their users.
To combat
online copyright infringement, the media industry and their partners have spent extraordinary amounts of money and resources searching
for a technology breakthrough to protect copyrighted works. These technologies have often referred to as Digital Rights Management
(or DRM). DRM technologies attempt to prevent digital music player technology from allowing reproduction. DRM suffers from the
inherent problem that if a reasonably technologically savvy person can listen to a music file, he can find a way to make a copy
that does not have the DRM technology. These efforts failed to stem the tide of illegal downloading, and the industry turned to
aggressive litigation tactics. Notwithstanding the continued efforts of the media industry, including the use of DRM technologies,
many popular TV and film properties are available in high quality online soon after release and in some cases prior to release.
Thus, we do not believe that DRM technologies will be able to prevent widespread unauthorized use of copyrighted content.
Beginning
in 2002, the Recording Industry Association of America (or RIAA), the trade group that represents the U.S Music Industry, filed
the first lawsuits against individuals who were suspected of illegally downloading music. By October 2008, RIAA had filed 30,000
lawsuits against individual downloaders. (As of February 2012, most of the 30,000 cases settled out of court for between $3,000
and $5,000, two cases have been tried. Jamie Thomas received a judgment for $1.5m for distributing 24 songs and Joel Tenenbaum
received a judgment for $675,000 for downloading and distributing 31 songs.)
Even with
30,000 lawsuits filed and millions of dollars collected, P2P traffic had still grown worldwide to represent more than 40% of all
consumer Internet traffic in 2008. Then in December 2008, the RIAA announced that it would stop suing individual infringers.
The P2P Landscape
The P2P landscape
has several distinct areas: protocols, networks, access tools, software businesses, open source developers, indexing and search
sites and dark businesses.
The most popular
access tool is BitTorrent in the U.S. (uTorrent, Vuze, Frostwire).
We believe
the reason P2P is such a persistent and a prominent feature of the Internet is that it requires only a relatively small number
of individual, voluntary users anywhere in the world for its existence. It requires no financing or fixed infrastructure to exist.
The protocols are open specifications that any computer programmer can obtain and read to develop software for interacting with
the different P2P networks. There are free access tools available for all networks. The networks are simply a collection of users
who have downloaded and installed one of the many free access tools. There are operating companies like BitTorrent, Inc. that
market and sell the BitTorrent software.
A user downloads
BitTorrent software or any number of other free BitTorrent clients, installs it on his computer, and searches for content on Google.
The user simply types any artists’ name or the name of any movie or software followed by the word “torrent”
into Google. For instance after entering “Adele Torrent” into Google, millions of web pages offering her music for
free will be listed. The user selects the version they want from the web page link.
Once a file
has been requested and starts to download, the downloading computer also starts to upload pieces of the file to the network. In
the P2P world, essentially, everyone is an uploader. On BitTorrent, once the ‘downloader” has obtained enough of the
file, the computer becomes an uploader.
Then, the
BitTorrent website explains what happens next, including the encouragement to assist in distributing content:
“When
BitTorrent finishes downloading a file, the bar becomes solid green and the newly downloaded file becomes a new “seed”--a
complete version of the file…It will continue to seed the file to other interested users until you tell it not to by pausing
it or removing the torrent from your queue. The more clients that seed the file, the easier it is for everyone to download it.
So, if you can, please continue to seed the file for others by keeping it in your queue for a while at least.”
Additionally,
BitTorrent Private host/tracker sites such as Demonoid operate like public ones except that they restrict access to registered
users and keep track of the amount of data each user uploads and downloads, in an attempt to reduce leeching.
BitTorrent
search engines allow the discovery of torrent files that are hosted and tracked on other sites; examples include Kick Ass Torrents,
Torrentz, The Pirate Bay, Eztorrent and isoHunt. These sites allow the user to ask for content meeting specific criteria (such
as containing a given word or phrase) and retrieve a list of links to torrent files matching those criteria.
In 2008, it
was revealed that just one BitTorrent hosting/tracker site was making $4 million a year on advertising. The USC-Annenberg Innovation
Lab released a study in January 2012 that found many Internet ad networks profiting from piracy with Google #2 in the list
We believe
P2P continues for several reasons:
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It
does not require any central organization that can be threatened or stopped;
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What
centralization does exist can be located in offshore domiciles that do not respect international intellectual property;
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In
the U.S., ISPs cannot monitor (and hence interrupt) specific portions of their customers’ traffic without a warrant;
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In
the U.S., ISPs have no liability for failing to suspend or terminate subscribers who are repeatedly distributing copyrighted
content unless the copyright owner has sent them notice of repeated infringement; and
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Until
we developed our software, there had been no scalable technology capable of identifying repeat infringers, recording infringements
and sending notices of repeated infringement.
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While this
extraordinary proliferation of the use of the Internet has facilitated the ease of illegally sharing all digitized content, the
exchange of music files via peer-to-peer sharing sites vastly exceeds all other areas of the entertainment consumption on a per-unit
basis. Accordingly, we believe an expectation has been interwoven into the current generation of Internet users, which content
is and should be free.
Industry Losses Due To Piracy
The US home
video industry generated approximately $18.2B in sales in 2013, down from $25B in 2006. This includes Netflix, Amazon, BluRay,
DVD, PPV and VOD. Recorded music sales were $7B in 2013 down from $12B in 2000, including streaming revenues as well as iTunes
and CDs. From 2012 to 2013, US sales of digital music tracks declined 6% and sales of CDs and digital albums declined 8% year
over year. According to the US Bureau of Labor Statistics, people marking their occupation as musician decreased 22% from 53,940
in 2002 to 42,100 in 2012. Labor statistics data has not been released for 2013.
Our Service & How it Works
We have developed
a technology that we sell as a service to copyright owners to collect settlement payments from consumers who have illegally downloaded
copyrighted content. We are selling our services into the untapped market for monetizing billions of copyright violations worldwide.
Our technology
system monitors the global Peer-to-Peer (P2P) file sharing networks and sends via email to ISP’s notifications of copyright
infringement by the ISPs’ customers with date, time, copyright title and other specific technology identifiers. Each notice
also includes a settlement offer. We pay the copyright owner a percentage of these settlements. By accepting our settlement offers,
infringers avoid potential legal action by the copyright holders. Our service provides ISPs a no-cost compliance tool for reducing
repeat infringement on their network.
Under our
business model, the copyright owner signs a simple agreement authorizing us to monitor the P2P networks and collect settlement
payments on its behalf. With respect to music, every mp3 file that is downloaded has at least two copyrights, a sound recording
copyright and a publishing copyright. The publishing copyright is the right to use the song and is separate from the sound recording
copyright which includes the right to place the song in a movie, re-record the song, or print the lyrics and melody on sheet music.
Under U.S. copyright law, each copyright owner has the exclusive right to copy and distribute their respective copyrights. If
someone uses “file sharing” software to “share” a specific song, they are violating the copyright owner’s
exclusive right of copying and distribution, and they have incurred a potential civil liability.
Our technology
monitors the Internet all of the time looking for infringements. When it detects an infringement, we receive the following data:
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Date and Time
of infringement;
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Filename;
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ISP Name;
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IP Address;
and
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Additional
information related to our trade secrets.
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We send this
data to the ISP in an automated computer format. The ISP is expected to send our communication to their subscriber. This notice
is sent to the customer by its ISP, so it is clearly not “spam”.
We have written,
designed and we own the technology for:
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listening to
the P2P networks and finding infringements;
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sending the
DMCA notices; and
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receiving payments.
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The user who
receives the notice reads that they could be liable for $150,000 in damages, but if they click on the link supplied, they can
enter a credit card and they can will settle the matter between them and the copyright owner for $20 per music infringement. Repeat
infringers are put on a list sent weekly to ISPs demanding that their service be terminated pursuant to 17 USC 512 (i). Once the
user makes the settlement payment, they are removed from the list. If subscribers have had their service terminated, and have
since settled their open infringement cases with us, their ISP is notified immediately so service can be restored.
Once we receive
the settlement amount, we split the payment half/half with the copyright owner, less certain costs. Most infringers receive and
settle multiple infringement notices.
Our current
technology can send tens of millions of notices per month. We can quickly scale this system to send hundreds of millions notices
per month.
We provide
a free compliance solution to ISPs to reduce their third-party liability for repeat copyright infringements occurring on their
network. Every U.S. ISP has a Rightscorp web page “dashboard” that they can log into and in real-time see each subscriber
account that is infringing copyright by copyright. The dashboard also displays the history of the repeat infringers on their network
and gives them immediate feedback on those that have settled their cases with the copyright holder.
We provide
a free solution to every copyright holder. Every copyright holder who has retained us has a Rightscorp web page “dashboard”
that they can log into and in real-time see each ISP subscriber account that is infringing copyright by copyright. The dashboard
also displays the history of the repeat infringers on each ISP’s network and gives them immediate feedback on infringers
who have settled their cases with the copyright holder and those that continue to infringe after their ISP having received notice.
Similar to
an anti-virus software company, where new virus appear and an anti-virus software has to investigate the new virus and update
their software to address the new virus, we must update our software when new peer-to-peer technologies appear. For example, when
we launched in 2011, Limewire also known as Gnutella was the dominant peer-to-peer platform for music piracy. In less than twelve
months the dominant platform for music piracy shifted to BitTorrent. As a result, to maintain the efficacy of our software, we
were required to write new software. We will seek to stay abreast of similar future changes. We cannot be certain of the cost
and time that will be required to adapt to new peer-to-peer technologies.
Product Roadmap
Our “next
generation” technology is called Scalable Copyright™. Its implementation will require the agreement of the ISP’s.
We have had discussions with multiple ISPs about implementing Scalable Copyright, and intend to intensify those efforts. In the
Scalable Copyright system, subscribers receive each notice directly in their browser. Single notices can be read and bypassed
similar to the way a software license agreement works. Once the internet account receives a certain number of notices over a certain
time period, the screen cannot be bypassed until the settlement payment is received. ISPs have the technology to display our notices
in subscribers’ browsers in this manner. We provide the data at no charge to the ISPs. With Scalable Copyright, ISPs will
be able to greatly reduce their third-party liability and the music and home video industries will be able to return to growth
along with the internet advertising and broadband subscriber industries.
We estimate
that we will need approximately $100,000 to $150,000 in additional financing for software development and business development
costs to complete the launch of Scalable Copyright™. We expect that these funds will come from the $2 million financing
transaction we have entered into with Hartford (see page
of this report). We
expect an ISP will be using Scalable Copyright in the second half of 2014.
Sales and Marketing
Our sales
process involves seeking to acquire more rights to monitor and collect settlements for infringements on specific copyrights. As
we acquire more rights and incorporate them into our system, our revenues increase. For example, there are 26 million songs on
Apple iTunes, all of which are rights that can potentially generate revenue for our company. We are approaching copyright holders
in the music publishing, recorded music, motion picture, television, eBook publishing, video game, software and mobile application
industries. We have the greatest penetration within the music publishing space where we are in significant discussions with the
majority of major copyright holders.
We are penetrating
the music, motion picture, and software industry through our extensive personal contacts, referral partners and industry conferences.
Christopher Sabec, our CEO, has been a successful entertainment executive and artist manager. In the music space, we attend conferences
such as MIDEM, Musexpo, and the National Music Publishing Association’s Annual Meeting where we have an opportunity to meet
with industry decision makers. For 2013 and 2014, we have identified the top 100 key decision makers and gatekeepers in the music
publishing, recorded music, motion picture, eBook publishing industries. We reach out to these decision makers directly or through
referral partners who make introductions. In some cases these referral partners may receive some compensation.
We have briefed
key gatekeepers in the music and motion picture industry and have a process for keeping them up-to-date on our developments. We
are in discussions with multiple industry-wide trade groups in the music and eBook space. Our goal is to get industry-wide adoption
through these trade groups.
We believe
our value proposition is unique and attractive -- rather than asking copyright holders to pay us, we pay copyright holders. The
decision-maker is faced with a large amount of conflicting information surrounding the topic of peer-to-peer piracy. Our sales
cycle is about communicating the following information to the decision-makers within a rights holding organization:
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U.S.
ISPs have a safe harbor that is conditional on terminating repeat copyright infringers.
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Rightscorp
has the technology to identify these repeat infringers.
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ISPs
either need to work with copyright holders to reduce repeat infringers identified by Rightscorp or face significant liability.
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Without
real sanctions, subscribers will largely ignore notices and continue to violate copyright law.
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Graduated-response
style interdiction is too costly to scale to any significant portion of total infringements and yields little or no results.
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Due
to the structure of the Internet, copyright cannot be enforced without participation of the ISPs.
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ISPs
have no incentive to participate in any meaningful way without copyright holders sending them notices.
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The
cost to send a meaningful amount of notices is prohibitive without our system.
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Rightscorp,
Inc. pays copyright holders while educating infringers that peer-to-peer file-sharing of their products is a violation of
U.S. Federal law.
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Our
system provides due process through warnings with escalating sanctions that can resolve large numbers of copyright violations.
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Peer-to-peer
networks do not require search engines. A small percentage of requests for content originate from Google or Bing searches.
We believe that attempts to get search engines to block links and sites will have no effect on piracy.
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Growth Strategy
We have several
“touch points” in our revenue model where we are seeking to grow revenues.
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1.
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By
adding more copyrights we seek to detect infringements of, which increases the number of notices we send;
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2.
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By
increasing the number of ISPs who acknowledge our notices;
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3.
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By
increasing the number of notices that each ISP confirms and forwards;
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4.
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By
compelling the ISP to improve “throughput” processes. This may involve ISPs calling subscribers. Our goal is to
get ISPs to deploy “re-direct” screens similar to the screen a hotel guest sees when he first uses the Internet
in a hotel room. A repeat infringer would be redirected to the Rightscorp payment page and would be unable to browse the Internet
until they have settled;
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5.
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By
increasing response rates (the number of subscribers who have received notices and agree to settle.) We may seek to do this
through public relations, through examples in the press of infringers who were sued by copyright owners, by improving the
educational and motivational aspects of the notice, web site and payment process and by having ISP’s terminate repeat
infringers until they settle;
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6.
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By
sending non-compliant ISPs weekly termination demands to terminate service to non-responding repeat infringers pursuant to
17 USC 512 (i); and
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7.
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By
giving copyright holders who wish to litigate the highest quality litigation support data that includes the history of the
subscriber’s ISP being sent notices while they continue to violate copyright law.
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We believe
that if we are successful in our combined use of these strategies our revenues and margins could potentially increase exponentially.
Intellectual Property
We have 5
patents pending for our proprietary system of detecting and seeking settlement payments for repeat copyright infringers. The patent
applications were filed between May 9, 2011 and August 24, 2012 and they are in process as detailed below. Patent applications
13/437,756 and 13/485,178 contain the methods for identifying repeat infringers which we believe will create a significant barrier
to entry for anyone attempting to market a scalable copyright monetization system in the peer-to-peer space. Patent application
13/103,795 includes using peer-to-peer infringement data to sell legitimate product to infringers. Comcast announced they may
do this in August 2013.
Ctry
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Status
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Application
Number
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Filing
Date
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Title
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Action
Status
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US
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Pending
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13/103,795
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May 9, 2011
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System and
Method for Determining Copyright Infringement and Collecting Royalties Therefor
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In Appeals
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US
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Pending
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61/871,411
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August 29,
2013
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Cyberlocker
Enforcement System and Method
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Assignment
unfiled
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US
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Pending
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61/774,107
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March 7, 2013
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Print Anti-Piracy
Campaign
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Assignment
unfiled
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US
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Published
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13/437,756
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April 2, 2012
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System to Identify
Multiple Copyright Infringements
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NFOR* (Restr/Elect)
mailed 3-Jul-13
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US
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Published
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13/485,178
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May 31, 2012
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System to Identify
Multiple Copyright Infringements and Collecting Royalties
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NFOA** mailed
17-Jun-13
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WO
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Published
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PCT/US12/31894
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April 2, 2012
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System to Identify
Multiple Copyright Infringements
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30-Mo National
Phase Stat 1-Oct-13
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WO
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Published
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US12/40234
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May 31, 2012
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System to Identify
Multiple Copyright Infringements and Collecting Royalties
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30-Mo National
Phase Stat 30-Nov-13
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US
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Published
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13/594,596
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August 24,
2012
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System to Identify
Multiple Copyright Infringements
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Reply to NFOA*
mailed 5-Mar-13 filed 5-Aug-13
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WO
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Published
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US12/52325
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August 24,
2012
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System to Identify
Mutliple Copyright Infringements
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30-Mo National
Phase Stat 24-Feb-14
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* Non-Final
Office Action (Rejection) – an Office action made by the examiner where the applicant is entitled to reply and request reconsideration
or further examination, with or without making an amendment.
** Non-Final
Office Action – an Office action letter that raises new issues and usually is the first phase of the examination process.
We plan to
register trademarks for Rightscorp™ and Scalable Copyright™.
Our software
is copyrighted and contains trade secrets.
Competition
We potentially
compete with companies in the copyright monetization space.
The copyright
monetization space is comprised of companies focused on new digital technologies, as well as existing established copyright monetization
companies and societies. Examples of other pure-play digital copyright monetization companies are Soundexchange and TuneSat.
TuneSat monitors
hundreds of TV channels and millions of websites around the world, helping copyright holders collect millions of dollars that
would otherwise have been lost. They are not focused on the peer-to-peer space.
Soundexchange
helps artists and copyright holders get compensated when their work is broadcast by non-interactive digital radio. Soundexchange
has collected in excess of $1.5B annually.
Companies
in the multi-billion dollar legacy copyright monetization space include ASCAP, BMI, SESAC and the Harry Fox Agency.
There are
several companies in the anti-piracy space. Most of these companies specialize in litigation support. It would be a conflict of
interest for them to be in the litigation support and settlement business. MarkMonitor (formerly DtecNet) currently provide the
data to the RIAA that the RIAA uses for monitoring P2P activity on a fee for service business model. Irdeto also provides litigation
support on a fee for service business model.
Other competitors
use aggressive litigation that drives settlement through threats of costly lawsuits, which we believe is not a scalable model.
Our only direct competitor, Copyright Enforcement Group, has started sending expensive but automated settlement notices in January
2012. Rightscorp is the only company we are aware of that uses proprietary technology to detect repeat infringers and therefore
we believe is the only company to have legal leverage with ISPs, compelling the ISP to deliver settlement notices by leveraging
the DMCA. At this time we believe that Copyright Enforcement Group’s close ties with the pornography industry reduce their
competitive threat to Rightscorp, Inc. Rightscorp does not send notices related to pornographic content.
We are seeking
to build and maintain our competitive advantage in three ways.
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First,
we build and maintain competitive advantage by being first to market in the U.S. and by aggressively closing contracts to
represent copyrighted intellectual property;
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Second,
we will maintain our advantage by building on our relationships with the ISPs. We will attend and speak at strategic trade
shows to develop greater awareness of the ISP’s liability and our no-cost solution to help them mitigate that liability.
We will educate industry analysts who follow the ISPs that are public companies as to the significant liability that ISPs
have; and
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Third,
we have filed five full and provisional patents;
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Fourth,
by developing a reputation of being a quality solution provider with copyright holders, developers of copyrighted intellectual
property and ISPs we will develop and maintain a leadership position as a leading service provider.
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Additionally,
we utilize legal counsel to gently remind the ISPs that the millions of notices we are sending all individually represent $150,000
liabilities to them if they do not forward them and that we have existing contracts with the copyright owners.
Certain other
companies that may potentially compete with us, such as MarkMonitor and Irdeto (which provide certain “brand protection”
and similar services) have greater financial resources and longer operating histories than us. It is possible that they may develop
and offer services more directly competitive to ours, by developing and offering new methods of copyright monetization or anti-piracy
technology that could take market share from us.
Employees
As of the
date of the filing of this report, we have 10 employees, seven of whom are full time.
Research and Development
We did not
spend any funds on research and development during fiscal years ended December 31, 2013 or 2012.
ITEM 1A.
RISK FACTORS
Risks Related to our Business
We have a limited operating
history and are subject to the risks encountered by early-stage companies.
Rightscorp
Delaware was formed as a Delaware corporation on January 20, 2011. Because we have a limited operating history, its operating
prospects should be considered in light of the risks and uncertainties frequently encountered by early-stage companies in rapidly
evolving markets. For Rightscorp Delaware, these risks include:
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risks
that it may not have sufficient capital to achieve its growth strategy;
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risks
that it may not develop its product and service offerings in a manner that enables it to be profitable and meet its customers’
requirements;
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risks
that Rightscorp Delaware’s growth strategy may not be successful; and
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risks
that fluctuations in Rightscorp Delaware’s operating results will be significant relative to its revenues.
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These risks
are described in more detail below. Our future growth will depend substantially on its ability to address these and the other
risks described in this section. If we do not successfully address these risks, our business would be significantly harmed.
We have a history of losses
and can provide no assurance of its future operating results
We have experienced
net losses and negative cash flows from operating activities since inception and we expect such losses and negative cash flows
to continue in the foreseeable future. As of December 31, 2013, we had a working capital deficit of $1,074,943, and stockholders’
deficit of $984,690. For the years ended December 31, 2013 and 2012, we incurred net losses of $2,042,779 and $1,199,323, respectively.
As of December 31, 2013, we had an aggregate accumulated deficit of $4,240,672. The Company may never achieve profitability and
management expects to make significant future expenditures related to the development and expansion of its business and further
expects an increase in general and administrative expenses due to the additional operational and reporting costs associated with
being a public company. There can be no assurance that we will be profitable in the future. If we are not profitable and cannot
obtain sufficient capital we may have to cease our operations.
We may need significant
additional capital, which we may be unable to obtain.
The Company
may need to obtain additional financing over time to fund operations. Management cannot predict the extent to which it will require
additional financing, and can provide no assurance that additional financing will be available on favorable terms or at all. The
rights of the holders of any debt or equity that may be issued in the future could be senior to the rights of shareholders, and
any future issuance of equity could result in the dilution of shareholders’ proportionate equity interests in the Company.
Failure to obtain financing or obtaining of financing on unattractive terms could have a material adverse effect on the business,
prospects, results of operation and financial condition.
Our resources may not be
sufficient to manage our potential growth; failure to properly manage our potential growth would be detrimental to our business.
We may fail
to adequately manage our potential future growth. Any growth in our operations will place a significant strain on our administrative,
financial and operational resources, and increase demands on our management and on our operational and administrative systems,
controls and other resources. We cannot assure you 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 employee base, and maintain close coordination among our technical, accounting, finance, marketing
and sales 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. To the extent we acquire businesses, we will also need to integrate and assimilate
new operations, technologies and personnel. If we are unable to manage growth effectively, such as if our sales and marketing
efforts exceed our capacity to install, maintain and service our products or if new employees are unable to achieve performance
levels, our business, operating results and financial condition could be materially and adversely affected.
We depend on third parties
for supplying our services.
We do not
own or operate the technology platforms providing our service. Therefore, we are, and in the future will continue to be, dependent
upon our suppliers to send accurate data on a timely basis. We also rely on our suppliers to comply with any applicable Federal,
state and local regulatory requirements, if any, at competitive prices. Should our current suppliers be unable or unwilling in
the future to meet our needs for any reason, we would have to find replacement service suppliers, and we cannot assure you that
we would be able to do so, in default of which we would lose sales and marketing credibility as well as our ability to generate
revenues.
If we are unable to effectively
manage our growth plan, we could be unable to implement our business strategy.
Our growth
plan requires significant management time and operational and financial resources. There is no assurance that we have the operational
and financial resources to manage our growth. In addition, rapid growth in our headcount and operations may place a significant
strain on management and administrative, operational and financial infrastructure. Failure to adequately manage growth could have
a material adverse effect on our business, prospects, financial condition or results of operations.
We are dependent on the
continued services and performance of our senior management, the loss of any of whom could adversely affect its business, operating
results and financial condition.
Our future
performance depends on the continued services and continuing contributions of our senior management to execute our business plan,
and to identify and pursue new opportunities and product innovations. The loss of services of senior management, particularly
Christopher Sabec and Robert Steele, Rightscorp Delaware’s founders, could significantly delay or prevent the achievement
of our strategic objectives. The loss of the services of senior management for any reason could adversely affect our business,
prospects, financial condition and results of operations.
We may be unable to protect
our intellectual property from infringement by third parties.
Our business
plan is significantly dependent upon exploiting our intellectual property. In particular, we have five patents pending for our
system of identifying and collecting settlement payments for repeat copyright infringements. Even if our pending patents are granted,
there can be no assurance that we will be able to control all of the rights for all of our intellectual property. We may not have
the resources or capital necessary to assert infringement claims against third parties who may infringe upon our intellectual
property rights. Litigation can be costly and time consuming and divert the attention and resources of management and key personnel.
We may not be successful
in the implementation of our business strategy or our business strategy may not be successful, either of which will impede our
development and growth.
Our business
strategy involves having copyright owners agree to our service. Our ability to implement this business strategy is dependent on
our ability to:
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predict copyright
owner’s concerns;
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identify and
engage copyright owners;
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convince ISPs
to accept our notices;
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establish brand
recognition and customer loyalty; and
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manage growth
in administrative overhead costs during the initiation of our business efforts.
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We do not
know whether we will be able to continue successfully implementing our business strategy or whether our business strategy will
ultimately be successful. In assessing our ability to meet these challenges, a potential investor should take into account our
limited operating history and brand recognition, our management’s relative inexperience, the competitive conditions existing
in our industry and general economic conditions. Our growth is largely dependent on our ability to successfully implement our
business strategy. Our revenues may be adversely affected if we fail to implement our business strategy or if we divert resources
to a business that ultimately proves unsuccessful.
We have limited existing
brand identity and customer loyalty; if we fail to market our brand to promote our service offerings, our business could suffer.
Because of
our limited operating history, we currently do not have strong brand identity or brand loyalty. We believe that establishing and
maintaining brand identity and brand loyalty is critical to attracting customers to our program. In order to attract copyright
holders to our program, we may be forced to spend substantial funds to create and maintain brand recognition among consumers.
We believe that the cost of our sales campaigns could increase substantially in the future. If our branding efforts are not successful,
our ability to earn revenues and sustain our operations will be harmed.
Promotion
and enhancement of our services will depend on our success in consistently providing high-quality services to our customers. Since
we rely on technology partners to provide portions of the service to our customers, if our suppliers do not send accurate and
timely data, or if our customers do not perceive the products we offer as superior, the value of the our brand could be harmed.
Any brand impairment or dilution could decrease the attractiveness of our services to one or more of these groups, which could
harm our business, results of operations and financial condition.
Our service offerings may
not be accepted.
As is typically
the case evolving service offerings, anticipation of demand and market acceptance are subject to a high level of uncertainty.
The success of our service offerings primarily depends on the interest of copyright holders in joining our service. In general,
achieving market acceptance for our services will require substantial marketing efforts and the expenditure of significant funds,
the availability of which we cannot be assured, to create awareness and demand among customers. We have limited financial, personnel
and other resources to undertake extensive marketing activities. Accordingly, no assurance can be given as to the acceptance of
any of our services or our ability to generate the revenues necessary to remain in business.
A competitor with a stronger
or more suitable financial position may enter our marketplace.
We believe
there is currently no other company offering a copyright settlement service for P2P infringers. The success of our service offerings
primarily depends on the interest of copyright holders in joining our service, as opposed to a similar service offered by a competitor.
If a direct competitor arrives in our market, achieving market acceptance for our services may require additional marketing efforts
and the expenditure of significant funds, the availability of which we cannot be assured, to create awareness and demand among
customers. We have limited financial, personnel and other resources to undertake additional marketing activities. Accordingly,
no assurance can be given that we will be able to win business from a stronger competitor.
A significant portion of
our revenue is dependent upon a small number of customers and the loss of any one of these customers would negatively impact our
revenues and our results of operations.
We derived
approximately 25% of our revenues from a contract with one customer in 2013. For the year ended December 31, 2013, we derived
approximately 32% of our sales from contracts with two customers. Our standard contract with customers is for an initial six month
term, and renews automatically for successive one month terms, unless either party terminates upon 30 days’ written notice
to the other party. If any of our major customers were to terminate their business relationships with us, our operating results
would be materially harmed.
Our
exposure to outside influences beyond our control, including new legislation or court rulings could adversely affect our enforcement
activities and results of operations.
Our
enforcement activities are subject to numerous risks from outside influences, including the following:
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Legal
precedents could change which could either make enforcement of our client’s copyright rights more difficult, or which
could make out-of-court settlements less attractive to either our clients or potential infringers.
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New
legislation, regulations or rules related to copyright enforcement could significantly increase our operating costs or decrease
our ability to effectively negotiate settlements.
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Changes
in consumer privacy laws could make internet service providers more reluctant to identify their end users or may otherwise
make identification of individual infringers more difficult.
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The occurrence of any one of the
foregoing could significantly damage our business and results of operations.
Software
defects or errors in our products could harm our reputation, result in significant costs to us and impair our ability to sell
our products, which would harm our operating results.
Our
products may contain undetected defects or errors when first introduced or as new versions are released, which could materially
and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products in the future.
The costs incurred in correcting any defects or errors may be substantial and could adversely affect our operating results.
Enforcement actions against
individuals may result in negative publicity which could deter customers from doing business with us.
In the past,
online trademark infringement cases have garnered significant press coverage. Coverage which is sympathetic to the infringing
parties or which otherwise portrays our Company in a negative light, whether or not warranted, may harm our reputation or cause
our clients to have concerns about being associated with us. Such negative publicity could decrease the demand for our products
and services and adversely affect our business and operating results.
Risks Related to the Company’s
Common Stock
There is a limited trading
market for the Company’s common stock.
The Company
files reports under the Securities Exchange Act of 1934, as amended, and its common stock is quoted on the OTCBB. However, there
has been limited reported trading to date in the Company’s common stock, and we cannot give an assurance that a more active
trading market will develop. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the
price of our securities. This severely limits the liquidity of the common stock, and may adversely affect the market price of
our common stock. A limited market may also impair our ability to raise capital by selling shares of capital stock and may impair
our ability to acquire other companies or assets by using common stock as consideration.
Our common stock is currently
deemed a “penny stock,” which makes it more difficult for our investors to sell their shares.
The SEC has
adopted Rule 15g-9 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, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny
stocks, and 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 obtain financial information and
investment experience objectives of the person, and 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 sets forth the basis on which the broker or dealer made the suitability determination,
and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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 the Company’s common stock if and when such shares are eligible for sale and
may cause a decline in the market value of its stock.
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
stock.
As an issuer of “penny
stock,” the protection provided by the federal securities laws relating to forward-looking statements does not apply to
the Company.
Although federal
securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal
securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit
of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained
a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any
statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
Our management has significant
voting power which limits the influence of other stockholders.
Our officers
and directors control, either directly or indirectly, a substantial portion of our voting securities. Therefore, our management
may significantly affect the outcome of all corporate actions and decisions for an indefinite period of time including election
of directors, amendment of charter documents and approval of mergers and other significant corporate transactions.
The Company has not paid
dividends in the past and does not expect to pay dividends in the foreseeable future. Any return on investment may be limited
to the value of the Company’s common stock.
No cash dividends
have been paid on the Company’s common stock. We expect that any income received from operations will be devoted to our
future operations and growth. The Company does not expect to pay cash dividends in the near future. Payment of dividends would
depend upon our profitability at the time, cash available for those dividends, and other factors as the Company’s board
of directors may consider relevant. If the Company does not pay dividends, the Company’s common stock may be less valuable
because a return on an investor’s investment will only occur if the Company’s stock price appreciates.
Because we became a public
by means of a reverse acquisition, we may not be able to attract the attention of brokerage firms.
Because we
became public through a “reverse acquisition”, securities analysts of brokerage firms may not provide coverage of
us since there is little incentive to brokerage firms to recommend the purchase of our common stock.
Our issuance of common stock
upon exercise of warrants and conversion of notes may depress the price of our common stock.
As of December
31, 2013, we have 68,797,102 shares of common stock, $236,129 in convertible notes (including outstanding principal and accrued
interest thereon) convertible into 1,850,541 shares of common stock, and warrants to purchase 6,862,703 shares of common stock,
issued and outstanding. The issuance of shares of common stock upon exercise of outstanding warrants and conversion of notes could
result in substantial dilution to our stockholders, which may have a negative effect on the price of our common stock.
Our articles of incorporation
allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely
affect the rights of the holders of our common stock.
Our Board
of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of Directors
has the authority to issue up to 10,000,000 shares of our preferred stock without further stockholder approval. As a result, our
Board of Directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right
to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common
stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In
addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than
our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock
or result in dilution to our existing stockholders. Although we have no present intention to issue any additional shares of preferred
stock or to create any additional series of preferred stock, we may issue such shares in the future.
Shares of our common stock
that have not been registered under the Securities Act of 1933, as amended, regardless of whether such shares are restricted or
unrestricted, are subject to resale restrictions imposed by Rule 144, including those set forth in Rule 144(i) which apply to
a “shell company.”
Pursuant to
Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell company” is defined as a company
that has no or nominal operations; and, either no or nominal assets; assets consisting solely of cash and cash equivalents; or
assets consisting of any amount of cash and cash equivalents and nominal other assets. As such, we may be deemed a “shell
company” pursuant to Rule 144 prior to the Reverse Acquisition, and as such, sales of our securities pursuant to Rule 144
are not able to be made until a period of at least twelve months has elapsed from the date on which the Company’s Current
Report on Form 8-K disclosing the Reverse Acquisition was filed with the SEC (which filing occurred on October 28, 2013). Therefore,
any restricted securities we sell in the future or issue to consultants or employees, in consideration for services rendered or
for any other purpose will have no liquidity until and unless such securities are registered with the SEC and/or until a year
after the date of the filing of the Current Report on Form 8-K disclosing the Reverse Acquisition and we have otherwise complied
with the other requirements of Rule 144. As a result, it may be harder for us to fund our operations and pay our employees and
consultants with our securities instead of cash. Furthermore, it will be harder for us to raise funding through the sale of debt
or equity securities unless we agree to register such securities with the SEC, which could cause us to expend additional resources
in the future. Our previous status as a “shell company” could prevent us from raising additional funds, engaging employees
and consultants, and using our securities to pay for any acquisitions (although none are currently planned), which could cause
the value of our securities, if any, to decline in value or become worthless.