As filed with the Securities and Exchange
Commission on January 14, 2015
No. 333-199991
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM
S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
RIGHTSCORP,
INC.
(Exact name of registrant as specified
in its charter)
| Nevada |
|
7380 |
|
33-1219445 |
| (State of incorporation) |
|
(Primary Standard Industrial
Classification Code Number) |
|
(I.R.S. Employer
Identification Number) |
3100 Donald Douglas Loop North
Santa Monica, CA 90405
(310) 751-7510
(Address, including
zip code, and telephone number of registrant’s principal executive offices)
Christopher Sabec
Chief Executive Officer
3100 Donald Douglas Loop North
Santa Monica, CA 90405
(310) 751-7510
(Name, address,
including zip code, and telephone number of agent for service)
With Copies to:
Gregory Sichenzia, Esq.
Henry Nisser, Esq.
Sichenzia Ross Ference Friedman LLP
61 Broadway, 32nd Floor
New York, NY 10006
(212) 930-9700
Approximate date
of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
If any of the securities
being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [X]
If this Form is
filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
[ ]
If this Form is
a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is
a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
| Large accelerated filer |
[ ] |
|
Accelerated filer |
[ ] |
| Non-accelerated filer |
[ ] |
(Do not check if a smaller reporting company) |
Smaller reporting company |
[X] |
| CALCULATION
OF REGISTRATION FEE | |
| | |
Title
of Each Class Of
Securities To Be Registered | |
Amount
To Be
Registered (1) | | |
Proposed
Maximum
Offering Price Per
Security (2) | | |
Proposed
Maximum
Aggregate
Offering Price | | |
Amount
Of
Registration Fee | |
| Common Stock, $0.001
par value | |
| 10,928,000 | | |
$ | 0.20 | | |
$ | 2,185,600 | | |
$ | 253.97 | |
| Common Stock, $0.001 par value
issuable upon exercise of warrants exercisable at $0.25 per share | |
| 16,392,000 | | |
$ | 0.25 | | |
$ | 4,098,000 | | |
$ | 476.19 | |
| Total | |
| 27,320,000 | | |
$ | | | |
$ | 6,283,600 | | |
$ | 730.16 | (3) |
| (1) |
Includes shares of our common stock, par value $0.001 per share, which may be offered pursuant to this registration statement, which shares are issuable upon exercise of warrants held by the selling stockholders. In addition to the shares set forth in the table, the amount to be registered includes an indeterminate number of shares issuable upon exercise of the warrants, as such number may be adjusted as a result of stock splits, stock dividends and similar transactions in accordance with Rule 416. The number of shares of common stock registered hereunder represents a good faith estimate by us of the number of shares of common stock issuable upon exercise of the warrants. |
| |
|
| (2) |
Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933, using the average of the high and low price as reported on the OTC QB on November 3, 2014, which was $0.20 per share and the warrant exercise price, which is $0.25 per share. |
| |
|
| (3) |
Previously paid. |
The
registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities under
this prospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is not a solicitation of an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED JANUARY 14, 2015
PROSPECTUS
Up
to 27,320,000 Shares of Common Stock
This prospectus relates
to the offering by the selling stockholders of Rightscorp, Inc. of up to 27,320,000 shares of common stock, par value $0.001 per
share. All of the shares of common stock offered by this prospectus are being sold by the selling stockholders. These shares include
10,928,000 issued and outstanding shares of common stock and 16,392,000 shares of common stock underlying unexercised warrants
to purchase common stock, each issued to the selling stockholders in connection with a private placement offering completed as
of September 30, 2014, or the September 2014 private placement. Each of the shares offered by the selling stockholders has been
issued or is issuable to the selling stockholders upon the exercise of warrants to purchase our common stock at an exercise price
of $0.25 per share.
The selling stockholders
have advised us that they will sell the shares of common stock from time to time in the open market, on the OTC QB maintained by
the OTC Markets Group, Inc., in privately negotiated transactions or a combination of these methods, at market prices prevailing
at the time of sale or at prices related to the prevailing market prices or at negotiated prices.
The selling stockholders
may sell the common shares to or through underwriters, brokers or dealers or directly to purchasers. Underwriters, brokers or dealers
may receive discounts, commissions or concessions from the selling stockholders, purchasers in connection with sales of the common
shares, or both. Additional information relating to the distribution of the common shares by the selling stockholders can be found
in this prospectus under the heading “Plan of Distribution.” If underwriters or dealers are involved in the sale of
any securities offered by this prospectus, their names, and any applicable purchase price, fee, commission or discount arrangement
between or among them, will be set forth, or will be calculable from the information set forth, in a supplement to this prospectus.
We will not receive
any proceeds from the sale of common stock by the selling stockholders. We will receive proceeds from the selling stockholders
from any exercise of their warrants, on a cash basis.
Our common stock
is traded on the OTC QB under the symbol “RIHT.” On January 6, 2015, the closing price of our common stock was $0.15
per share.
Investing
in our common stock involves a high degree of risk. Before making any investment in our common stock, you should read and carefully
consider the risks described in this prospectus under “Risk Factors” beginning on page 4 of this prospectus.
You
should rely only on the information contained in this prospectus or any prospectus supplement or amendment thereto. We have not
authorized anyone to provide you with different information.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus
is dated , 2015
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
This summary highlights information
contained throughout this prospectus and is qualified in its entirety to the more detailed information and financial statements
included elsewhere in this prospectus. This summary does not contain all of the information that should be considered before investing
in our common stock. Investors should read the entire prospectus carefully, including the more detailed information regarding our
business, the risks of purchasing our common stock discussed in this prospectus under “Risk Factors” beginning on page
4 of this prospectus and our financial statements and the accompanying notes beginning on page F-1 of this prospectus.
Background
Rightscorp, Inc., a Nevada corporation,
was incorporated in Nevada on April 9, 2010. Since the closing of the Reverse Acquisition on October 25, 2013 (discussed below),
we have been the parent company of Rightscorp, Inc., a Delaware corporation.
On October 25, 2013 (the “Merger
Closing Date”), we 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 ours (the “Subsidiary”) and Rightscorp,
Inc., a Delaware corporation (“Rightscorp Delaware”). Pursuant to the Merger Agreement, (i) the Subsidiary merged into
Rightscorp Delaware, such that Rightscorp Delaware became a wholly-owned subsidiary of our company, (ii) we issued (a) 45,347,102
shares (the “Acquisition Shares”), of our common stock to the shareholders of Rightscorp Delaware representing approximately
65.9% of our 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 our common stock, and (iii) 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 our common stock at a conversion price of $0.1276.
In connection with the Merger Agreement
and the Financing (defined below), as of the Merger Closing Date we 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 Merger Closing Date, 21,000,000 shares of common stock were returned to us for cancellation (the “Share Cancellation”). |
| |
|
|
| |
(ii) |
Effective on the Merger Closing Date, the following individuals were appointed as executive officers and directors of our company: |
| Name |
|
Title |
| Christopher Sabec |
|
Chief
Executive Officer, and Director |
| |
|
|
| Robert Steele |
|
President, Chief
Financial Officer, Chief Operating Officer and Director |
| |
|
|
| Brett Johnson |
|
Chairman
of the Board of Directors |
| |
(iii) |
Effective July 15, 2013, we amended our articles of incorporation to change our name from “Stevia Agritech Corp.” (“Stevia”) to “Rightscorp, Inc.” |
| |
|
|
| |
(iv) |
On June 18, 2013, we 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 Merger Closing Date we closed on $475,000 of the Financing (which amounts were advanced by us to Rightscorp Delaware prior to the Merger Closing Date) and Hartford, directly or through its associates, agreed to purchase an additional $1,575,000 in common stock and warrants from us within 14 months from the Closing Date. As of the date of this prospectus, we have yet to receive $375,000 of the $1,575,000, which includes a $21,000 increase to the total amount agreed to be purchased. |
Effective on the Merger Closing Date,
pursuant to the Merger Agreement, Rightscorp Delaware became our wholly owned subsidiary. The acquisition of Rightscorp Delaware
is treated as a reverse acquisition (the “Reverse Acquisition”), and the business of Rightscorp Delaware became our
business. At the time of the Reverse Acquisition, Stevia was not engaged in any significant active business.
Rightscorp Delaware is a
Delaware corporation formed on January 20, 2011.
We are a technology company and have
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.
Overview
We protect copyright holders’
rights by seeking to assure they get paid for their copyrighted intellectual property (or 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 (or 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 ISPs 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. Current customers include, but are not limited to BMG Rights Management, Round Hill
Music, Shapiro/Bernstein and The Orchard. We have successfully obtained settlement payments more than 130,000 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 ISPs 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.
The Offering
This prospectus relates to the resale
from time to time by the selling stockholders identified in this prospectus of up to 27,320,000 shares of our common stock. The
shares of common stock being offered have been or will be issued to the selling stockholders upon the exercise of certain warrants
received by the selling stockholders in the September 2014 private placement. No shares are being offered for sale by us.
| Common stock outstanding prior to offering |
|
89,896,421 (1) |
| |
|
| Common stock offered by the selling stockholders |
|
27,320,000 (2) |
| |
|
| Common stock to be outstanding after the offering |
|
106,288,421 (3) |
| |
|
| Use of Proceeds |
|
We will not receive any proceeds from the sale of common stock offered by the selling stockholders under this prospectus. However, we will receive up to $4,473,000 in the aggregate from the selling stockholders if they exercise in full, on a cash basis, all of their warrants to purchase 16,392,000 shares of common stock issued to the selling stockholders in connection with the September 2014 private placement. We will use such proceeds from the exercise of the warrants for working capital and other corporate purposes. |
| |
|
| OTC QB Symbol |
|
“RIHT” |
| (1) |
As of January 6, 2015. |
| |
|
| (2) |
Includes 10,928,000 shares of common
stock offered by the selling stockholders that are currently issued and outstanding and 16,392,000 shares of common stock offered
by the selling stockholders that are issuable upon exercise of warrants.
|
| (3) |
Includes 16,392,000 shares of common stock which remain subject to unexercised warrants as of the date of this prospectus and assumes that all other outstanding warrants and options are not exercised. Only the 16,392,000 shares receivable upon exercise and the 10,928,000 shares issued and outstanding warrants are being offered by the selling stockholders under this prospectus. |
Background of September 2014 Private
Placement of Units
Pursuant to the terms of the Unit Subscription
Agreement which was entered into with the subscribers for units (the “Subscribers”), we received approximately $2,982,000
in gross proceeds from the issuance of 10,928,000 shares of our common stock forming part of the units sold in the September 2014
private placement. Each unit consisted of 10,000 shares of our common stock and warrants to purchase 15,000 such shares. An aggregate
of 1,192.8 units (including 16,392,000 warrants) were sold in the September 2014 private placement. Assuming the full exercise
of the warrants for cash, we would receive additional proceeds of $4,098,000, for an aggregate of $6,830,000 in proceeds from the
purchase of the units in the private placement and the exercise of the warrants.
The warrants entitle the Subscribers
to purchase up to an aggregate of 16,392,000 shares of our common stock for a period of five years from the date of issuance at
an initial exercise price of $0.25 per share, subject to adjustments, with a cashless exercise provision. None of such warrants
been exercised. The warrants issued to the Subscribers have anti-dilution protection in the event we subsequently issue shares
of common stock, or securities convertible into shares of common stock, for a price of less than $0.25 per share. The warrants
are immediately exercisable.
The issuances of securities described
above were issued in a transaction exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2)
and Rule 506 of Regulation D thereof.
Pursuant to the Unit Subscription Agreement,
we agreed, within 45 days of the closing of the private placement, to file a registration statement to register up to a certain
number of shares of common stock issued or issuable under the warrants issued in the September 2014 private placement, on a pro
rata basis among participating Subscribers. We have also agreed to file additional registration statements, of which this prospectus
forms a part, subject to certain time periods between these filings and limitations on the number of shares underlying warrants
required to be registered by us in any single registration statement, until all of the shares issued or issuable under the warrants
have been registered. We are required to keep these registration statements effective until the second anniversary of the closing
of the private placement, subject to, under limited circumstances, this obligation being terminated earlier.
Plan of Distribution
This offering is not being underwritten.
The selling stockholders will sell their shares of our common stock at prevailing market prices or privately negotiated prices.
The selling stockholders themselves directly, or through their agents, or through their brokers or dealers, may sell their shares
from time to time, in (i) privately negotiated transactions, (ii) in one or more transactions, including block transactions or
(iii) otherwise in accordance with the section of this prospectus entitled “Plan of Distribution.” To the extent required,
the specific shares to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices,
the names of any agent, broker or dealer and any applicable commission or discounts with respect to a particular offer will be
described in an accompanying prospectus supplement. In addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus.
For additional information on the methods
of sale, you should refer to the section of this prospectus entitled “Plan of Distribution,” beginning on page XX.
About this Prospectus
You should read this prospectus together
with additional information described under the headings “Where You Can Find More Information.” If there is any inconsistency
between the information in this prospectus and the documents incorporated by reference herein, you should rely on the information
in this prospectus.
You should rely only on the information
contained in this prospectus or incorporated by reference herein. We have not authorized any person to provide you with different
or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither
we nor the selling stockholders are making an offer to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus is accurate only as of their respective dates. Rightscorp’s
business, financial condition, results of operations and prospects may have changed since such dates.
Unless otherwise indicated or unless
the context requires otherwise, all references in this prospectus to “Rightscorp,” the “Company,” “we,”
“us” and “our” refer collectively to Rightscorp, Inc., the Nevada corporation and its wholly owned subsidiary,
Rightscorp, Inc., a Delaware corporation.
RISK FACTORS
Investing in our common stock involves
a high degree of risk. Potential investors should consider carefully the risks and uncertainties described below together with
all other information contained in this prospectus before making investment decisions with respect to our common stock. If any
of the following risks actually occur, our business, financial condition, results of operations and our future growth prospects
would be materially and adversely affected. Under these circumstances, the trading price and value of our common stock could decline
resulting in a loss of all or part of your investment. The risks and uncertainties described in this prospectus are not the only
ones facing our Company. Additional risks and uncertainties of which we are not presently aware, or that we currently consider
immaterial, may also affect our business operations.
This prospectus contains forward-looking
statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking
statements by terminology such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,”
“believes,” “estimates,” “predicts,” “potential” or “continue” or the
negative of these terms or other similar words. These statements are only predictions. The outcome of the events described in these
forward-looking statements is subject to known and unknown risks, uncertainties and other factors that may cause our customers’
or our industry’s actual results, levels of activity, performance or achievements expressed or implied by these forward-looking
statements, to differ. “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Business,” as well as other sections in this prospectus, discuss the important factors
that could contribute to these differences.
The forward-looking statements made
in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events.
This prospectus also contains market
data related to our business and industry. This market data includes projections that are based on a number of assumptions. If
these assumptions turn out to be incorrect, actual results may differ from the projections based on these assumptions. As a result,
our markets may not grow at the rates projected by these data, or at all. The failure of these markets to grow at these projected
rates may have a material adverse effect on our business, results of operations, financial condition and the market price of our
common stock.
Risks Related to our Company and our Business
We have a limited operating
history and are subject to the risks encountered by early-stage companies.
Rightscorp Delaware was formed on January
20, 2011. Because we have a limited operating history, our operating prospects should be considered in light of the risks and uncertainties
frequently encountered by early-stage companies in rapidly evolving markets. These risks include:
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● |
risks that we may not have sufficient capital to achieve our growth strategy; |
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|
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● |
risks that we may not develop our product and service offerings in a manner that enables us to be profitable and meet our customers’ requirements; |
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|
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● |
risks that our growth strategy may not be successful; and |
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|
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● |
risks that fluctuations in our operating results will be significant relative to our revenues. |
These risks are described in more detail
below. Our future growth will depend substantially on our 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 operating
losses and we may need additional financing to meet our future long term capital requirements.
We have a history of losses and may
continue to incur operating and net losses for the foreseeable future. As of September 30, 2014, we had a working capital deficit
of $721,827, and stockholders’ deficit of $594,377. We incurred a net loss of approximately $2,299,522 for the nine months
ended September 30, 2014 and a net loss of approximately $2,042,779 for the year ended December 31, 2013. As of September 30, 2014,
our accumulated deficit was approximately $6,540,194. We have not achieved profitability on an annual basis. We may not be able
to reach a level of revenue to achieve profitability. If our revenues grow slower than anticipated, or if operating expenses exceed
expectations, then we may not be able to achieve profitability in the near future or at all, which may depress our stock price.
While we anticipate that our current
cash, cash equivalents and cash generated from operations, and the capital raised subsequent to the nine months ended September
30, 2014 will be sufficient to meet our projected operating plans for a period of at least 12 months from the date of this prospectus,
we may require additional funds, either through additional equity or debt financings or collaborative agreements or from other
sources. We have no commitments to obtain such additional financing, and we may not be able to obtain any such additional financing
on terms favorable to us, or at all. In the event that we are unable to obtain additional financing, we may be unable to implement
our business plan. Even with such financing, we have a history of operating losses and there can be no assurance that we will ever
become profitable.
We may need significant additional
capital, which we may be unable to obtain.
We may need to obtain additional financing
over time to fund operations. Our management cannot predict the extent to which we 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 common shareholders, and any future issuance of equity
could result in the dilution of our common shareholders’ proportionate equity interests in our company. Failure to obtain
financing or an inability to obtain financing on unattractive terms could have a material adverse effect on our 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 will need to increase the size
of our organization, and we may be unable to manage rapid growth effectively.
Our failure to manage growth effectively
could have a material and adverse effect on our business, results of operations and financial condition. We anticipate that a period
of significant expansion will be required to address possible acquisitions of business, products, or rights, and potential internal
growth to handle licensing and research activities. This expansion will place a significant strain on management, operational and
financial resources. To manage the expected growth of our operations and personnel, we must both improve our existing operational
and financial systems, procedures and controls and implement new systems, procedures and controls. We must also expand our finance,
administrative, and operations staff. Our current personnel, systems, procedures and controls may not adequately support future
operations. Management may be unable to hire, train, retain, motivate and manage necessary personnel or to identify, manage and
exploit existing and potential strategic relationships and market opportunities.
We are dependent on the continued
services and performance of our senior management, the loss of any of whom could adversely affect our 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.
Our ability to protect our intellectual
property and proprietary technology through patents and other means is uncertain and may be inadequate, which would have a material
and adverse effect on us.
Our success depends significantly on
our ability to protect our proprietary rights to the technologies used in our products. In particular, we have twenty-nine patents
pending worldwide for our system of identifying and collecting settlement payments for repeat copyright infringements. Even if
our pending patents are granted, we cannot assure you that we will be able to control all of the rights for all of our intellectual
property. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure,
confidentiality and other contractual restrictions to protect our proprietary technology, including our licensed technology. However,
these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive
advantage. For example, our pending United States and foreign patent applications may not issue as patents in a form that will
be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. Both the patent application
process and the process of managing patent disputes can be time-consuming and expensive. Competitors may be able to design around
our patents or develop products which provide outcomes which are comparable or even superior to ours. Steps that we have taken
to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual
property assignment agreements with some of our officers, employees, consultants and advisors, may not provide meaningful protection
for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the
agreements. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as do
the laws of the United States.
In the event a competitor infringes
upon our licensed or pending patent or other intellectual property rights, enforcing those rights may be costly, uncertain, difficult
and time consuming. Even if successful, litigation to enforce our intellectual property rights or to defend our patents against
challenge could be expensive and time consuming and could divert our management’s attention. We may not have sufficient resources
to enforce our intellectual property rights or to defend our patents rights against a challenge. The failure to obtain patents
and/or protect our intellectual property rights could have a material and adverse effect on our business, results of operations
and financial condition.
Our patent applications and licenses
may be subject to challenge on validity grounds, and our patent applications may be rejected.
We rely on our patent applications,
licenses and other intellectual property rights to give us a competitive advantage. Whether a patent application should be granted,
and if granted whether it would be valid, is a complex matter of science and law, and therefore we cannot be certain that, if challenged,
our patents (should any be granted), patent applications and/or other intellectual property rights would be upheld. If one or more
of these intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive
advantage we might otherwise have had.
We may become subject to claims
of infringement or misappropriation of the intellectual property rights of others, which could prohibit us from developing our
products, require us to obtain licenses from third parties or to develop non-infringing alternatives and subject us to substantial
monetary damages.
Third parties could, in the future,
assert infringement or misappropriation claims against us with respect to products we develop. Whether a product infringes a patent
or misappropriates other intellectual property involves complex legal and factual issues, the determination of which is often uncertain.
Therefore, we cannot be certain that we have not infringed the intellectual property rights of others. Our potential competitors
may assert that some aspect of our product infringes their patents. Because patent applications may take years to issue, there
also may be applications now pending of which we are unaware that may later result in issued patents upon which our products could
infringe. There also may be existing patents or pending patent applications of which we are unaware upon which our products may
inadvertently infringe.
Any infringement or misappropriation
claim could cause us to incur significant costs, place significant strain on our financial resources, divert management’s
attention from our business and harm our reputation. If the relevant patents in such claim were upheld as valid and enforceable
and we were found to infringe them, we could be prohibited from selling any product that is found to infringe unless we could obtain
licenses to use the technology covered by the patent or are able to design around the patent. We may be unable to obtain such a
license on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement. A court could
also order us to pay compensatory damages for such infringement, plus prejudgment interest and could, in addition, treble the compensatory
damages and award attorney fees. These damages could be substantial and could harm our reputation, business, financial condition
and operating results. A court also could enter orders that temporarily, preliminarily or permanently enjoin us and our customers
from making, using, or selling products, and could enter an order mandating that we undertake certain remedial activities. Depending
on the nature of the relief ordered by the court, we could become liable for additional damages to third parties.
The prosecution and enforcement
of patents licensed to us by third parties are not within our control. Without these technologies, our product may not be successful
and our business would be harmed if the patents were infringed or misappropriated without action by such third parties.
We have obtained licenses from third
parties for patents and patent application rights related to the products we are developing, allowing us to use intellectual property
rights owned by or licensed to these third parties. We do not control the maintenance, prosecution, enforcement or strategy for
many of these patents or patent application rights and as such are dependent in part on the owners of the intellectual property
rights to maintain their viability. Without access to these technologies or suitable design-around or alternative technology options,
our ability to conduct our business could be impaired significantly.
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 use 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. |
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 involving 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, we cannot assure you that any of our services will be accepted or with
respect to 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.
To our knowledge, 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 revenues
from contracts with two customers. We derived approximately 77% of our revenues from a contract with one customer during the nine
months ended September 30, 2014. For the nine months ended September 30, 2014, we derived approximately 90% of our revenues from
contracts with two customers. Our standard contract, which is entitled a Representation Agreement, 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. |
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.
Litigation may harm our business.
Substantial, complex or extended litigation
could cause us to incur significant costs and distract our management. For example, lawsuits by employees, stockholders, collaborators,
distributors, customers, competitors or others could be very costly and substantially disrupt our business. Disputes from time
to time with such companies, organizations or individuals are not uncommon, and we cannot assure you that we will always be able
to resolve such disputes or on terms favorable to us. Unexpected results could cause us to have financial exposure in these matters
in excess of recorded reserves and insurance coverage, requiring us to provide additional reserves to address these liabilities,
therefore impacting profits.
If we experience a significant
disruption in our information technology systems or if we fail to implement new systems and software successfully, our business
could be adversely affected.
We depend on information systems throughout
our company to control our manufacturing processes, process orders, manage inventory, process and bill shipments and collect cash
from our customers, respond to customer inquiries, contribute to our overall internal control processes, maintain records of our
property, plant and equipment, and record and pay amounts due vendors and other creditors. If we were to experience a prolonged
disruption in our information systems that involve interactions with customers and suppliers, it could result in the loss of sales
and customers and/or increased costs, which could adversely affect our overall business operation.
Risks Related to the Securities
Markets and Ownership of our Equity Securities
The Common Stock is thinly traded,
so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire
to liquidate your shares.
The Common Stock has historically been
sporadically traded on the OTC QB, meaning that the number of persons interested in purchasing our shares at or near ask prices
at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the
fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others
in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons,
they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase
of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or
more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give
you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that
current trading levels will be sustained.
The market price for the common
stock is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float, limited
operating history and lack of revenue, which could lead to wide fluctuations in our share price. The price at which you purchase
our shares may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common shares
at or above your purchase price, which may result in substantial losses to you.
The market for our shares of common
stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future. In fact, during the 52-week period ended January
6, 2015, the high and low closing sale prices of a share of common stock were $0.32 and $0.10, respectively. The volatility in
our share price is attributable to a number of factors. First, as noted above, our shares are sporadically traded. As a consequence
of this lack of liquidity, the trading of relatively small quantities of shares may disproportionately influence the price of those
shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number
of our shares is sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those
sales without adverse impact on its share price. Secondly, we are a speculative investment due to, among other matters, our limited
operating history and lack of revenue or profit to date, and the uncertainty of future market acceptance for our potential products.
As a consequence of this enhanced risk, more risk-averse investors may, under the fear of losing all or most of their investment
in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater
discounts than would be the case with the securities of a seasoned issuer. The following factors may add to the volatility in the
price of our shares: actual or anticipated variations in our quarterly or annual operating results; acceptance of our inventory
of games; government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures; our capital
commitments and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the
market price of our shares regardless of our operating performance. We cannot make any predictions or projections as to what the
prevailing market price for our shares will be at any time, including as to whether our shares will sustain their current market
prices, or as to what effect the sale of shares or the availability of shares for sale at any time will have on the prevailing
market price.
Shareholders should be aware that, according
to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns
include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
(2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler
room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive
and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse
of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the
penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of practical limitations to prevent the described patterns
from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility
of our share price.
The market price of our common
stock may be volatile and adversely affected by several factors.
The market price of our common stock
could fluctuate significantly in response to various factors and events, including, but not limited to:
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our
ability to integrate operations, technology, products and services; |
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ability to execute our business plan; |
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operating
results below expectations; |
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our
issuance of additional securities, including debt or equity or a combination thereof; |
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announcements
of technological innovations or new products by us or our competitors; |
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loss
of any strategic relationship; |
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industry
developments, including, without limitation, changes in healthcare policies or practices; |
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economic
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period-to-period
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whether
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In addition, the securities markets
have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of
particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Our officers and directors beneficially
own approximately 24.6% of our outstanding shares of common stock as of the date of this prospectus.
Our officers and directors beneficially
own approximately 24.6 % of our outstanding shares of common stock as of the date of this prospectus. These individuals will have
the ability to substantially influence all matters submitted to our shareholders for approval and to control our management and
affairs, including extraordinary transactions such as mergers and other changes of corporate control, including going private transactions.
Because we became 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.
A large number of shares are issuable
upon exercise of outstanding warrants and convertible notes. The exercise or conversion of these securities could result in the
substantial dilution of your investment in terms of your percentage ownership in our company. The sale of a large amount of common
shares received upon exercise of these warrants on the public market, or the perception that such sales could occur, could substantially
depress the prevailing market prices for our shares.
As of the date of this prospectus, there
were outstanding presently exercisable warrants entitling the holders to purchase 24,149,961shares of common stock at a weighted
average exercise price of $0.26 per share. As of the date of this prospectus, there were 78,370 shares of common stock underlying
promissory notes convertible into common stock at a conversion price of $0.1276. The exercise or conversion price for all of the
aforesaid securities may be less than your cost to acquire our shares. In the event of the exercise or conversion of these securities,
you could suffer substantial dilution of your investment in terms of your percentage ownership in our company. In addition, the
holders of the warrants may sell shares in tandem with their exercise of those warrants to finance that exercise, which could further
depress the market price of the common stock.
Our issuance of additional shares
of Common Stock, or options or warrants to purchase those shares, would dilute your proportionate ownership and voting rights.
We are entitled under our articles of
incorporation to issue up to 250,000,000 shares of common stock. We have issued and outstanding, as of the date of this prospectus,
89,896,421 shares of common stock. In addition, we are entitled under our articles of incorporation to issue up to 10,000,000 shares
of “blank check” preferred stock, none of which is presently issued or outstanding. Our board may generally issue shares
of common stock, preferred stock or options or warrants to purchase those shares, without further approval by our shareholders
based upon such factors as our board of directors may deem relevant at that time. It is likely that we will be required to issue
a large amount of additional securities to raise capital to further our development. It is also likely that we will issue a large
amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their
services, both in the form of stand-alone grants or under our stock plans. We cannot give you any assurance that we will not issue
additional shares of common stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate
at the time.
The elimination of monetary liability
against our directors, officers and employees under our Articles of Incorporation and the existence of indemnification rights to
our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against
our directors, officers and employees.
Our Articles of Incorporation contains
provisions that eliminate the liability of our directors for monetary damages to our company and shareholders. Our bylaws also
require us to indemnify our officers and directors. We may also have contractual indemnification obligations under our agreements
with our directors, officers and employees. The foregoing indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors, officers and employees that we may be unable to
recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers
and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and
shareholders.
Anti-takeover provisions may impede
the acquisition of our company.
Certain provisions of the Nevada Revised
Statutes have anti-takeover effects and may inhibit a non-negotiated merger or other business combination. These provisions are
intended to encourage any person interested in acquiring us to negotiate with, and to obtain the approval of, our board of directors
in connection with such a transaction. However, certain of these provisions may discourage a future acquisition of us, including
an acquisition in which the shareholders might otherwise receive a premium for their shares. As a result, shareholders who might
desire to participate in such a transaction may not have the opportunity to do so.
Shares of our common stock that
have not been registered under the Securities Act 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 (or 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 our 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 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 is currently planned), which could cause the value of our securities, if any, to decline in value or become worthless.
Investor relations activities,
nominal “float” and supply and demand factors may affect the price of our stock.
We expect to utilize various techniques
such as non-deal road shows and investor relations campaigns in order to create investor awareness for our company. These campaigns
may include personal, video and telephone conferences with investors and prospective investors in which our business practices
are described. We may provide compensation to investor relations firms and pay for newsletters, websites, mailings and email campaigns
that are produced by third-parties based upon publicly-available information concerning our company. We will not be responsible
for the content of analyst reports and other writings and communications by investor relations firms not authored by us or from
publicly available information. We do not intend to review or approve the content of such analysts’ reports or other materials
based upon analysts’ own research or methods. Investor relations firms should generally disclose when they are compensated
for their efforts, but whether such disclosure is made or complete is not under our control. In addition, investors in our company
may be willing, from time to time, to encourage investor awareness through similar activities. Investor awareness activities may
also be suspended or discontinued which may impact the trading market our common stock.
The SEC and FINRA enforce various statutes
and regulations intended to prevent manipulative or deceptive devices in connection with the purchase or sale of any security and
carefully scrutinize trading patterns and company news and other communications for false or misleading information, particularly
in cases where the hallmarks of “pump and dump” activities may exist, such as rapid share price increases or decreases.
We, and our shareholders may be subjected to enhanced regulatory scrutiny due to the small number of holders who initially will
own the registered shares of our common stock publicly available for resale, and the limited trading markets in which such shares
may be offered or sold which have often been associated with improper activities concerning penny-stocks, such as the OTC QB Marketplace
(Pink OTC) or pink sheets. Until such time as our restricted shares are registered or available for resale under Rule 144, there
will continue to be a relatively small percentage of shares held by a small number of investors that will constitute the entire
available trading market. The Supreme Court has stated that manipulative action is a term of art connoting intentional or willful
conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities. Oftentimes,
manipulation is associated by regulators with forces that upset the supply and demand factors that would normally determine trading
prices. Since a small percentage of our outstanding common stock will initially be available for trading, held by a small number
of individuals or entities, the supply of our common stock for sale will be extremely limited for an indeterminate amount of time,
which could result in higher bids, asks or sales prices than would otherwise exist. Securities regulators have often cited thinly-traded
markets, small numbers of holders, and awareness campaigns as components of their claims of price manipulation and other violations
of law when combined with manipulative trading, such as wash sales, matched orders or other manipulative trading timed to coincide
with false or touting press releases. There can be no assurance that our or third-parties’ activities, or the small number
of potential sellers or small percentage of stock in the “float,” or determinations by purchasers or holders as to
when or under what circumstances or at what prices they may be willing to buy or sell stock will not artificially impact (or would
be claimed by regulators to have affected) the normal supply and demand factors that determine the price of the stock.
If we fail to comply with Section
404 of the Sarbanes-Oxley Act of 2002 our business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of our internal control over financial reporting. Accordingly,
we are subject to the rules requiring an annual assessment of our internal controls. The standards that must be met for management
to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing
and possible remediation to meet the detailed standards. In addition, in the event we are no longer a smaller reporting company,
the independent registered public accounting firm auditing our financial statements would be required to attest to the effectiveness
of our internal controls over financial reporting. Such attestation requirement by our independent registered public accounting
firm would not be applicable to us until the report for the year ended December 31, 2015 at the earliest, if at all. If we are
unable to conclude that we have effective internal control over financial reporting or if our independent registered public accounting
firm is required to, but is unable to provide us with a report as to the effectiveness of our internal controls over financial
reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in
the value of our securities.
We may become involved in securities
class action litigation that could divert management’s attention and harm our business.
The stock market in general, and the
shares of early stage companies in particular, have experienced extreme price and volume fluctuations. These fluctuations have
often been unrelated or disproportionate to the operating performance of the companies involved. If these fluctuations occur in
the future, the market price of our shares could fall regardless of our operating performance. In the past, following periods of
volatility in the market price of a particular company’s securities, securities class action litigation has often been brought
against that company. If the market price or volume of our shares suffers extreme fluctuations, then we may become involved in
this type of litigation, which would be expensive and divert management’s attention and resources from managing our business.
As a public company, we may also from
time to time make forward-looking statements about future operating results and provide some financial guidance to the public markets.
Our management has limited experience as a management team in a public company and as a result projections may not be made timely
or set at expected performance levels and could materially affect the price of our shares. Any failure to meet published forward-looking
statements that adversely affect the stock price could result in losses to investors, stockholder lawsuits or other litigation,
sanctions or restrictions issued by the SEC.
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 our 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 us.
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, we 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 us contained a material misstatement of fact
or was misleading in any material respect because of our failure to include any statements necessary to make the statements not
misleading. Such an action could hurt our financial condition.
Securities analysts may elect
not to report on our common stock or may issue negative reports that adversely affect the stock price.
At this time, no securities analysts
provide research coverage of our common stock, and securities analysts may not elect not to provide such coverage in the future.
It may remain difficult for our company, with its small market capitalization, to attract independent financial analysts that will
cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect
the stock’s actual and potential market price. The trading market for our common stock may be affected in part by the research
and reports that industry or financial analysts publish about our business. If one or more analysts elect to cover our company
and then downgrade the stock, the stock price would likely decline rapidly. If one or more of these analysts cease coverage of
our company, we could lose visibility in the market, which, in turn, could cause our stock price to decline. This could have a
negative effect on the market price of our common stock.
We have not paid cash dividends
in the past and do not expect to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value
of our common stock.
We have never paid cash dividends on
our capital stock and do not anticipate paying cash dividends on our capital stock in the foreseeable future. The payment of dividends
on our capital stock will depend on our earnings, financial condition and other business and economic factors affecting us at such
time as the board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because
a return on your investment will only occur if the common stock price appreciates.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act
of 1934, or Exchange Act. Forward-looking statements reflect the current view about future events. When used in this prospectus,
the words “anticipate,” “believe,” “estimate,” “expect,” “future,”
“intend,” “plan,” or the negative of these terms and similar expressions, as they relate to us or our management,
identify forward-looking statements. Such statements, include, but are not limited to, statements contained in this prospectus
relating to our business strategy, our future operating results and liquidity and capital resources outlook. Forward-looking statements
are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because
forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances
that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements.
They are neither statements of historical fact nor guarantees of assurance of future performance. We caution you therefore against
relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, without limitation, a continued decline in general economic conditions nationally
and internationally; decreased demand for our products and services; market acceptance of our products and services; our ability
to protect our intellectual property rights; the impact of any infringement actions or other litigation brought against us; competition
from other providers and products; our ability to develop and commercialize new and improved products and services; our ability
to raise capital to fund continuing operations; changes in government regulation; our ability to complete customer transactions
and capital raising transactions; and other factors relating to our industry, our operations and results of operations and any
businesses that may be acquired by us (including the risks contained in the section of this prospectus entitled “Risk Factors”).
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results
may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Factors or events that could cause our
actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. 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.
USE
OF PROCEEDS
We will not receive any proceeds from
the sale of common stock offered by the selling stockholders under this prospectus. However, we will receive up to $4,098,000 in
the aggregate from the selling stockholders if they exercise in full, on a cash basis, all of their warrants to purchase 16,392,000
shares of common stock issued to the selling stockholders in connection with the September 2014 private placement. Since the closing
of the September 2014 private placement, and as of the date of this prospectus, no investor has exercised any of the warrants we
issued in the September 2014 private placement. In the event that any investor in the September 2014 private placement elects to
exercise its warrants, we presently expect to use the proceeds from the exercise of the warrants for working capital and other
corporate purposes.
The warrant holders may exercise their
warrants at any time until their expiration, as further described under “Description of Capital Stock.” Because the
warrant holders may exercise the warrants in their own discretion, if at all, we cannot plan on specific uses of proceeds beyond
application of proceeds to general corporate purposes. We have agreed to bear the expenses (other than any underwriting discounts
or commissions or agent’s commissions) in connection with the registration of the common stock being offered hereby by the
selling stockholders.
MARKET
PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED MATTERS
Trading Information
Our common stock is currently quoted on the
OTC QB under the symbol “RIHT.” There has been limited reported trading to date in our common stock. The following
table sets forth, for the periods indicated, the range of high and low intraday closing bid information per share of our common
stock. Our shares began trading on July 17, 2013. These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
| Fiscal
Year 2013 | |
| | |
| |
| | |
High | | |
Low | |
| Third Quarter | |
$ | 1.50 | | |
$ | 0.21 | |
| Fourth Quarter | |
$ | 0.82 | | |
$ | 0.50 | |
| Fiscal Year 2014 | |
| | | |
| | |
| | |
| High | | |
| Low | |
| First Quarter | |
$ | 0.89 | | |
$ | 0.60 | |
| Second Quarter | |
$ | 0.60 | | |
$ | 0.40 | |
| Third Quarter | |
$ | 0.48 | | |
$ | 0.32 | |
| Fourth Quarter | |
$ | 0.32 | | |
$ | 0.10 | |
| Fiscal Year 2015 | |
| | | |
| | |
| | |
| High | | |
| Low | |
| First Quarter to date | |
$ | 0.15 | | |
$ | 0.14 | |
Our common stock is thinly traded and
any reported sale prices may not be a true market-based valuation of our common stock. On January 6, 2015, the closing sale price
of our common stock, as reported on the OTC QB was $0.15 per share.
As of January 6, 2015, we had approximately
166 holders of record of our common stock.
Dividend Policy
We have not declared or paid any dividends
on our common stock. We intend to retain earnings for use in our operations and to finance our business. Any change in our dividend
policy is within the discretion of our board of directors and will depend, among other things, on our earnings, debt service and
capital requirements, restrictions in financing agreements, if any, business conditions, legal restrictions and other factors that
our board of directors deems relevant.
Purchases of Equity Securities by
the Issuer and Affiliated Purchasers
None.
Securities Authorized for Issuance under
Equity Compensation Plans
None.
BUSINESS
Background
Rightscorp, Inc., a Nevada corporation,
was incorporated in Nevada on April 9, 2010. Since the closing of the Reverse Acquisition on October 25, 2013 (discussed below),
we have been the parent company of Rightscorp, Inc., a Delaware corporation.
On October 25, 2013 (the “Merger
Closing Date”), we 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 ours (the “Subsidiary”) and Rightscorp,
Inc., a Delaware corporation (“Rightscorp Delaware”). Pursuant to the Merger Agreement, (i) the Subsidiary merged into
Rightscorp Delaware, such that Rightscorp Delaware became a wholly-owned subsidiary of our company, (ii) we issued (a) 45,347,102
shares (the “Acquisition Shares”), of our common stock to the shareholders of Rightscorp Delaware representing approximately
65.9% of our 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 our common stock, and (iii) 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 our common stock at a conversion price of $0.1276.
In connection with the Merger Agreement
and the Financing (defined below), as of the Merger Closing Date we 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 Merger Closing Date, 21,000,000 shares of common stock were returned to us for cancellation (the “Share Cancellation”). |
| |
|
|
| |
(ii) |
Effective on the Merger Closing Date, the following individuals were appointed as executive officers and directors of our company: |
| Name |
|
Title |
| Christopher Sabec |
|
Chief Executive Officer and
Director |
| |
|
|
| Robert Steele |
|
President, Chief Financial Officer, Chief Operating Officer, and Director |
| |
|
|
| Brett Johnson |
|
Chairman of the Board of Directors |
| |
(iii) |
Effective July 15, 2013, we amended our articles of incorporation to change our name from “Stevia Agritech Corp.” (“Stevia”) to “Rightscorp, Inc.” |
| |
|
|
| |
(iv) |
On June 18, 2013, we 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 Merger Closing Date we closed on $475,000 of the Financing (which amounts were advanced by us to Rightscorp Delaware prior to the Merger Closing Date) and Hartford, directly or through its associates, agreed to purchase an additional $1,575,000 in common stock and warrants from us within 14 months from the Closing Date. As of the date of this prospectus, we have yet to receive $375,000 of the $1,575,000, which includes a $21,000 increase to the total amount agreed to be purchased. |
Effective on the Merger Closing Date,
pursuant to the Merger Agreement, Rightscorp Delaware became our wholly owned subsidiary. The acquisition of Rightscorp Delaware
is treated as a reverse acquisition (the “Reverse Acquisition”), and the business of Rightscorp Delaware became our
business. At the time of the Reverse Acquisition, Stevia was not engaged in any significant active business.
Rightscorp Delaware is a
Delaware corporation formed on January 20, 2011.
We are a technology company and have
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.
Overview
We protect copyright holders’
rights by seeking to assure they get paid for their copyrighted 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 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 ISPs 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. Current customers include, but are not limited to BMG Rights Management, Round Hill
Music, Shapiro/Bernstein and The Orchard. We have successfully obtained settlement payments from more than 130,000 individual cases
of copyright infringement. To date, we have closed infringements and received settlement payments from subscribers on more than
150 ISPs including five of the top 10 US ISPs. We believe ISPs 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. For
the nine months ended September 30, 2014, our contract with BMG Rights Management accounted for approximately 77% of our sales,
and our contract with Warner Brothers accounted for 12% 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 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 service”.
Section 512(i) of the DMCA provides
a conditional safe harbor protection from such third party liability. It states as follows:
| |
● |
(i)
Conditions for Eligibility |
| |
(1)
Accommodation of technology - The limitations on liability established by this section shall apply to a service provider
only if the service provider:
|
| |
(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 |
| |
|
| |
(B)
accommodates and does not interfere with standard technical measures. |
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, ISPs 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 ISPs.
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 was at the time made up of illegal
downloading and distribution of mainstream, high-quality movies, music, games, and software. The report 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; and
7.4 billion page views,
an increase of 30.6% from November 2011.
According to the Global Internet Phenomena
Report in Sandvine, 1H 2014, P2P file sharing accounted for approximately 27% 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 |
| |
|
|
| |
● |
Until
we developed our software, there had been no scalable technology capable of identifying repeat infringers, recording infringements
and sending notices of repeated infringement. |
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 P2P 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,
Blu-ray, 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.
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 P2P file sharing networks and sends via email to ISPs 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. |
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:
| |
● |
listening
to the P2P networks and finding infringements; |
| |
|
|
| |
● |
sending
the DMCA notices; and |
| |
|
|
| |
● |
receiving
payments. |
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 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 ISPs 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 a virus appears 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 P2P technologies appear. For example, when we launched
in 2011, Limewire, also known as Gnutella, was the dominant P2P 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 ISPs.
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.
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
and other copyrighted works 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 2014 and 2015, 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
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:
| |
● |
U.S.
ISPs have a safe harbor that is conditional on terminating repeat copyright infringers. |
| |
|
|
| |
● |
Rightscorp
has the technology to identify these repeat infringers. |
| |
|
|
| |
● |
ISPs
either need to work with copyright holders to reduce repeat infringers identified by Rightscorp or face significant liability. |
| |
|
|
| |
● |
Without
real sanctions, subscribers will largely ignore notices and continue to violate copyright law. |
| |
● |
Graduated-response
style interdiction is too costly to scale to any significant portion of total infringements and yields little or no results. |
| |
|
|
| |
● |
Due
to the structure of the Internet, copyright cannot be enforced without participation of the ISPs. |
| |
|
|
| |
● |
ISPs
have no incentive to participate in any meaningful way without copyright holders sending them notices. |
| |
|
|
| |
● |
The
cost to send a meaningful amount of notices is prohibitive without our system. |
| |
|
|
| |
● |
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. |
| |
|
|
| |
● |
Our
system provides due process through warnings with escalating sanctions that can resolve large numbers of copyright violations. |
| |
|
|
| |
● |
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. |
Growth
Strategy
We
have several “touch points” in our revenue model where we seek to increase revenues.
| 1. |
By
adding more copyrights we seek to detect infringements of, which increases the number of notices we send; |
| |
|
| 2. |
By
increasing the number of ISPs who acknowledge our notices; |
| |
|
| 3. |
By
increasing the number of notices that each ISP confirms and forwards; |
| |
|
| 4. |
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; |
| |
|
| 5. |
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 ISPs terminate repeat infringers
until they settle; |
| |
|
| 6. |
By
sending non-compliant ISPs weekly termination demands to terminate service to non-responding repeat infringers pursuant to
17 USC 512 (i); and |
| |
|
| 7. |
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. |
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 29 patents pending worldwide for our proprietary system of detecting and seeking settlement payments for repeat copyright
infringers. The patent applications were filed between May 9, 2011 and July 11, 2014 and they are in process as detailed below.
The pending applications include 24 patent applications in countries such as Australia, Brazil, Canada, China, India, Israel,
Japan and the European Union, as well 5 US patent applications. The 5 US patent applications include patent applications 13/437,756
and 13/485,178, which contain the methods for identifying repeat infringers that we believe will create a significant barrier
to entry for anyone attempting to market a scalable copyright monetization system in the peer-to-peer (P2P) space. U.S. patent
application 13/103,795 includes using peer-to-peer infringement data to sell legitimate product to infringers.
| Country |
|
Status |
|
Application Number |
|
Filing
Date |
|
Title |
| |
|
|
|
|
|
|
|
|
| US |
|
Pending |
|
13/103,795 |
|
May
9, 2011 |
|
System
and Method for Determining Copyright Infringement and Collecting Royalties Therefor |
| |
|
|
|
|
|
|
|
|
| US |
|
Pending |
|
61/774,107 |
|
March
7, 2013 |
|
Print
Anti-Piracy Campaign |
| |
|
|
|
|
|
|
|
|
| US |
|
Published |
|
13/437,756 |
|
April
2, 2012 |
|
System
to Identify Multiple Copyright Infringements |
| |
|
|
|
|
|
|
|
|
| US |
|
Published |
|
13/485,178 |
|
May
31, 2012 |
|
System
to Identify Multiple Copyright Infringements and Collecting Royalties |
| |
|
|
|
|
|
|
|
|
| WO |
|
Published |
|
PCT/US12/31894 |
|
April
2, 2012 |
|
System
to Identify Multiple Copyright Infringements |
| |
|
|
|
|
|
|
|
|
| WO |
|
Published |
|
US12/40234 |
|
May
31, 2012 |
|
System
to Identify Multiple Copyright Infringements and Collecting Royalties |
| |
|
|
|
|
|
|
|
|
| US |
|
Published |
|
13/594,596 |
|
August
24, 2012 |
|
System
to Identify Multiple Copyright Infringements |
| |
|
|
|
|
|
|
|
|
| WO |
|
Published |
|
US12/52325 |
|
August
24, 2012 |
|
System
to Identify Multiple Copyright Infringements |
We
are not aware of when, if at all, any of the above referenced applications will be granted.
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 $1.5 billion 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, started sending expensive but automated settlement notices in
January 2012. We are the only company that we are aware of that uses proprietary technology to detect repeat infringers and therefore
we believe that we are 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 us. We do not send notices related to pornographic content.
We
are seeking to build and maintain our competitive advantage in four ways:
| |
● |
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; |
| |
|
|
| |
● |
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 ISPs’ 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; |
| |
|
|
| |
● |
Third,
we have filed 29 full and provisional patents; and |
| |
|
|
| |
● |
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. |
Additionally,
we send correspondence to the ISPs from time to time and as necessary to advise them that certain infringements have not ceased
and that they should adopt, reasonably implement, and inform their subscribers and account holders of a policy that provides for
the termination in appropriate circumstances of subscribers and account holders of their system or networks who are repeat infringers.
In addition, we advise these ISP’s of certain liabilities that they may incur should they not change their practices.
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.
We
have not had any discussions regarding streaming service affecting our business. Data traffic used for filesharing in North America
grew from 674 PB a month in 2010 to 801 PB a month 2013 and is forecast to grow between now and 2018 as shown in the table below.
Table
11. Global Consumer File-Sharing Traffic, 2010-2015
| | |
2010 | | |
2011 | | |
2012 | |
| By Network (PB per Month) | |
| | | |
| | | |
| | |
| Fixed | |
| 4,943 | | |
| 5,967 | | |
| 7,188 | |
| Mobile | |
| 25 | | |
| 49 | | |
| 88 | |
| By Sub-Segment (PB per Month) | |
| | | |
| | | |
| | |
| P2P file transfer | |
| 4,051 | | |
| 4,659 | | |
| 5,315 | |
| Other file transfer | |
| 917 | | |
| 1,357 | | |
| 1,961 | |
| By Geography (PB per Month) | |
| | | |
| | | |
| | |
| North America | |
| 674 | | |
| 785 | | |
| 919 | |
| Western Europe | |
| 1,424 | | |
| 1,609 | | |
| 1,814 | |
| Asia Pacific | |
| 2,206 | | |
| 2,764 | | |
| 3,448 | |
| Japan | |
| 201 | | |
| 235 | | |
| 275 | |
| Latin America | |
| 162 | | |
| 210 | | |
| 261 | |
| Central and Eastern Europe | |
| 264 | | |
| 363 | | |
| 495 | |
| Middle East and Africa | |
| 38 | | |
| 49 | | |
| 64 | |
| Total (PB per Month) | |
| | | |
| | | |
| | |
| Consumer file sharing | |
| 4,968 | | |
| 6,017 | | |
| 7,277 | |
Source: Cisco VNI, 2011
http://tmfassociates.com/blog/wp-content/uploads/2013/02/Cisco-mobile-VNI-Feb-2011.pdf
http://www.ciscovni.com/forecast-widget/advanced.html
Employees
As
of the date of this prospectus, we had 15 employees, 14 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, or from the period beginning
January 1, 2014 to September 30, 2014.
DESCRIPTION
OF PROPERTY
We are headquartered
in Santa Monica, CA, and maintain a 1,500 sq. ft. office in Los Angeles, CA. We lease our facilities month-to-month basis at a
fixed rate of $2,600 per month.
LEGAL
PROCEEDINGS
We
are not involved in any legal proceedings that management believes may have a material adverse effect on our business, financial
condition, operations, cash flows, or prospects.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the results of operations and financial condition of Rightscorp, Inc. (the “Company”,
“we”, “us” or “our”) for the nine months ended September 30, 2014 and 2013 and for the fiscal
year ended December 31, 2013, should be read in conjunction with our financial statements and the notes to those financial statements
that are included elsewhere in this prospectus. This discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing
of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors,
including those set forth under the Risk Factors and Business sections. Words such as “anticipate,” “estimate,”
“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions
are used to identify forward-looking statements.
Overview
Our
company was organized under the laws of the State of Nevada on April 9, 2010, and our fiscal year end is December 31. Our company
is the parent company of Rightscorp Delaware, a corporation formed on January 20, 2011. The acquisition of Rightscorp Delaware
was treated as a reverse acquisition, and the business of Rightscorp Delaware became the business of our company.
We
have developed products and intellectual property rights relating to policing copyright infringement on the Internet. We are dedicated
to the vision that digital creative works should be protected economically so that the next generation of great music, movies,
video games and software can be made and their creators can prosper. We have a patent-pending, proprietary method for solving
copyright infringement by collecting payments from illegal downloaders via notifications sent to their ISPs.
Results
of Operations
Three
Months ended September 30, 2014 Compared to the Three Months ended September 30, 2013
We
generated revenues of $248,387 during the three months ended September 30, 2014, an increase of $183,438 or 282% as compared
to $64,949 for the three months ended September 30, 2013. This increase in revenue was driven by an increase in the number of
copyrights ingested into our system for which we have contracts to detect infringements of, from approximately 21,000 on
September 30, 2013 to approximately 100,000 on September 30, 2014.
We
incurred operating expenses of $1,069,168 during the three months ended September 30, 2014, an increase of $557,940 as compared
to $511,228 for the three months ended September 30, 2013. We pay copyright holders a percentage of the revenue we collect. This
increase was due to increased payroll expenses and fees paid to copyright holders in the period. General and administrative expenses
were $913,151 for the three months ended September 30, 2014, compared to $445,502 for the three months ended September 30, 2013,
an increase of $467,649 due to increased wages expenses, professional and investment banking fees, and travel and other expenses
related to securing financing. Sales and marketing costs were $16,872 for the three months ended September 30, 2014 compared to
$25,242 for the three months ended September 30, 2013, a decrease of $8,370. Depreciation and amortization expenses were $14,951
during the three months ended September 30, 2014, an increase of $6,941, as compared to $8,010 for the three months ended September
30, 2013.
Interest
expense totaled $5,009 during the three months ended September 30, 2014, a decrease of $67,510 from the three months ended September
30, 2013, due to decreased interest owed on convertible notes used to finance our operations. We had a loss on derivative liability
of $238,401 during the three months ended September 30, 2014. We also had a gain on settlement of $169,950 during the three months
ended September 30, 2014.
As
a result of the foregoing, during the three months ended September 30, 2014, we recorded a net loss of $894,241 compared to $518,798
for the three months ended September 30, 2013.
Nine
months ended September 30, 2014 Compared to the Nine months ended September 30, 2013
We
generated revenues of $688,801 during the nine months ended September 30, 2014, an increase of $521,926 or 313% as compared to
$166,875 for the nine months ended September 30, 2013. This increase in revenue was driven by an increase in the number of copyrights
ingested into our system for which we have contracts to detect infringements of, from approximately 21,000 on September 30, 2013
to approximately 100,000 on September 30, 2014.
We
incurred operating expenses of $2,893,637 during the nine months ended September 30, 2014, an increase of $1,625,325, as compared
to $1,268,312 for the nine months ended September 30, 2013. We pay copyright holders a percentage of the revenue we collect. This
increase was due to increased payroll expenses and fees paid to copyright holders in the period. General and administrative expenses
were $2,437,500 for the nine months ended September 30, 2014, compared to $1,093,363 for the nine months ended September 30, 2013,
an increase of $1,344,137 due to increased wages expenses, professional and investment banking fees, and travel and other expenses
related to securing financing. Sales and marketing costs were $344,401 for the nine months ended September 30, 2014 compared to
$83,437 for the nine months ended September 30, 2013, an increase of $260,966 due to increased presence at industry conferences
to meet potential clients. Depreciation and amortization expenses were $39,308 during the nine months ended September 30, 2014,
an increase of $15,756, as compared to $23,552 for the nine months ended September 30, 2013.
Interest
expense totaled $26,235 during the nine months ended September 30, 2014, a decrease of $186,421 from the nine months ended
September 30, 2013, due to decreased interest owed on convertible notes used to finance our operations. We had a loss on
derivative liability of $238,401 during the nine months ended September 30, 2014. We also had a gain on settlement of
$169,950 during the nine months ended September 30, 2014.
As
a result of the foregoing, during the nine months ended September 30, 2014, we recorded a net loss of $2,299,522 compared to $1,314,093
for the nine months ended September 30, 2013.
Year
ended December 31, 2013 Compared to the Year ended December 31, 2012
We
generated revenues of $324,016 during the year ended December 31, 2013, an increase of $227,451 or 236% as compared to $96,565
for the year ended December 31, 2012. This increase in revenue was driven by an increase in the number of copyrights for which
we have contracts to detect infringements of, from approximately 12,000 on December 31, 2012 to approximately 30,000 on December
31, 2013.
We
incurred operating expenses of $2,134,843 during the year ended December 31, 2013, an increase of $963,121, as compared to $1,171,722
for the year ended December 31, 2012. We pay copyright holders a percentage of the revenue we collect. This increase was due to
increased fees paid to copyright holders in the period. General and administrative expenses were $1,663,921 for the period ended
December 31, 2013, compared to $1,028,438 for the year ended December 31, 2012, an increase of $635,483 due to increased patent
costs and travel and other expenses related to securing financing. Sales and marketing costs were $275,616 for the period ended
December 31, 2013 compared to $69,614 for the year ended December 31, 2012, an increase of $206,002 due to increased presence
at industry conferences to meet potential clients. Depreciation and amortization expenses were $33,438 during the year ended December
31, 2013, an increase of $8,791, as compared to $24,647 for the year ended December 31, 2012.
Other
expense totaled $231,952 during the year ended December 31, 2013, an increase of $107,786 from the year ended December 31, 2012,
due to interest owed on convertible notes used to finance our operations.
As
a result of the foregoing, during the year ended December 31, 2013, we recorded a net loss of $2,042,779 compared to $1,199,323
for the year ended December 31, 2012.
Liquidity
and Capital Resources
As
of September 30, 2014 we had cash and equivalents of $2,646,388, which we estimate will be sufficient to sustain our operations
for four months. We expect that we will require an additional $1,800,000 to operate the Company over the next 12 months. We anticipate
that $375,000 in needed capital will come from the remaining $375,000 available from the $2.0 million financing transaction entered
into with Hartford Equity, Inc. Our revenues continue to increase, which generate cash flow reducing the need for financing. It
is possible that the Company could become cash flow positive from operations in 2014 no longer requiring financing to offset negative
cash flows.
Our
current cash requirements are significant based upon our plan to develop our intellectual property and grow our business. Beyond
the financing transactions entered into with Hartford Equity Inc. and Seaside 88, we may in the future use debt and equity financing
to fund operations, as we look to expand and fund development of our products and services and changes in our operating plans,
increased expenses, acquisitions, or other events, may cause us to seek additional financing sooner than anticipated. There are
no assurances that we will be able to raise such required working capital on favorable terms, or that such working capital will
be available on any terms when needed. The terms of such additional financing may result in substantial dilution to existing shareholders.
Any failure to secure additional financing may force the Company to modify its business plan. In addition, we cannot be assured
of profitability in the future.
We
had cash and equivalents of $2,646,388 and $36,331 at September 30, 2014 and December 31, 2013, respectively.
Operating
Activities
During
the nine months ended September 30, 2014, we used $1,909,825 of cash in operating activities. Non-cash adjustments included $39,308
related to the depreciation and amortization, $374,246 for common stock issued for services, $3,446 for warrants and options issued
to employees, $10,891 related to amortization of discount on convertible debt, and net changes in operating assets and liabilities
of $213,067.
During
the nine months ended September 30, 2013, we used $633,485 of cash in operating activities. Non-cash adjustments included $23,552
related to the depreciation and amortization, $74,324 for common stock issued for services, $91,947 warrants issued for services,
$150,034 related to amortization of discount on convertible debt, and net changes in operating assets and liabilities of $340,751.
Investing
Activities
During
the nine months ended September 30, 2014, we acquired equipment in the aggregate amount of $76,505 related to office operations.
During the nine months ended September 30, 2013, we acquired equipment in the aggregate amount of $8,699 related to office operations.
Financing
Activities
Financing
activities provided $4,592,941 to us during the nine months ended September 30, 2014. We received $1,961,573 in proceeds from
common stock issued for cash, and $27,813 in proceeds from warrant conversion. During the nine months ended September 30, 2013,
financing activities provided $754,980. We received $150,000 in proceeds from notes payable, $484,980 in proceeds from convertible
notes, and $200,000 in proceeds from related party debt. We also used $80,000 to repay convertible notes.
Critical
Accounting Policies and Estimates
Basis
of Presentation
The
financial statements included in this prospectus have been prepared using the basis of accounting generally accepted in the United
States of America. The financial statements as of December 31, 2012 and for December 31, 2013, reflect all adjustments, which,
in the opinion of management, are necessary to fairly state our company’s financial position and the results of our operations
for the periods presented in accordance with the accounting principles generally accepted in the United States of America. All
adjustments are of a normal recurring nature.
Use
of Estimates
The
preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Fair
Value of Financial Instruments
We
do not currently have any instruments requiring fair value accounting disclosures. Our financial instruments comprise the note
payable, in which the carrying value approximates fair value due to their current maturities.
Cash
and Cash Equivalents
We
consider all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-
liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
Revenue
Recognition
We
generate revenue from the sale of 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. Revenue is recognized when an ISPs’ subscriber
pays the fee.
Income
Taxes
We
utilize FASB ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not” that a
deferred tax asset will not be realized.
We
generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been established
due to the uncertainty of our realization of the net operating loss carry forward prior to its expiration.
Interest
and penalties on tax deficiencies recognized in accordance with ACS accounting standards are classified as income taxes in accordance
with ASC Topic 740-10-50-19.
Recent
Accounting Pronouncements
There
are no recently issued accounting pronouncements that we have yet to adopt that are expected to have a material effect on our
financial position, results of operations, or cash flows.
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
Our directors
and executive officers, their ages, positions held, and duration of such, are as follows:
| |
Name |
|
Age |
|
Title |
| |
Christopher
Sabec |
|
49 |
|
Chief
Executive Officer and Director |
| |
Robert
Steele |
|
48 |
|
President,
Chief Financial Officer, Chief Operating Officer, and Director |
| |
Brett
Johnson |
|
43 |
|
Chairman
of the Board of Directors |
On
August 18, 2014, Christopher Sabec resigned as President and Robert Steele was appointed President of our company. On August 18,
2014, Brett Johnson was elected as Chairman of our board of directors.
Business
Experience
The
following is a brief account of the education and business experience of each director and executive officer during at least the
past five years, indicating each person’s principal occupation during the period, and the name and principal business of
the organization by which he was employed.
Christopher
Sabec
Mr.
Sabec is a cofounder of Rightscorp Delaware and has served as its Chief Executive Officer since January 2011 (inception). From
November of 2009 through December 2010, he served as a consultant for Pay Artists. From February to August of 2009, Mr. Sabec
was the CEO of Plushy Feely Corp. In addition, he managed multiplatinum Hanson, helped launch Dave Matthews Band and licensed
major label catalogues for online distribution. Mr. Sabec’s experience as Rightscorp Delaware’s founder and chief
executive officer qualifies him to serve on our board of directors. Mr. Sabec is an experienced entertainment industry executive,
entrepreneur and attorney with more than 25 years of business management experience, 21 years of global entertainment industry
experience, and 15 years digital media experience.
Mr.
Sabec has lectured at Stanford University and UC Berkeley Law Schools. Mr. Sabec has participated in 7 South by Southwest Music
Conferences, 10 MIDEM Publishing Conferences, 3 Sundance Film Festivals, and 2 Cannes Film Festivals. In 1992, he received a Juris
Doctor (cum laude) from University of Georgia School of Law and in 1988, received a Bachelor of Science in Foreign Service from
Georgetown University School of Foreign Service. Mr. Sabec is a member of the California Bar Association.
Robert
Steele
Mr.
Steele is a cofounder of Rightscorp Delaware and has served as our Chief Financial Officer, and Chief Technology Officer since
January 2011 (inception) and as our President since August 18, 2014. Mr. Steele has more than twenty years of experience as a
technology entrepreneur. He designed and managed the development of our technology. He has seven years of experience as the CEO
of two technology companies in the mobile and digital imaging space. From March 2007 to December 2010, Mr. Steele was President
and CEO of Steele Consulting where he provided consulting services to various public and private companies in the media, entertainment,
business process outsourcing and green technology space.
Mr.
Steele received a Bachelor of Science in Electronic and Computer Engineering from George Mason University in 1988. Mr. Steele’s
experience as our cofounder, President, Chief Financial Officer, Chief Operating Officer and Chief Technology Officer qualifies
him to serve on our board of directors.
Brett
Johnson
Brett
Johnson was elected Director of Rightscorp Delaware in February 2013 and as the Chairman of our board of directors on August 18,
2014. Mr. Johnson is the CEO of Benevolent Capital Partners and Advisors (www.benevolentcapital.com), a private equity and consulting
company with investments in real estate, manufacturing and consumer brands, including Octagon Partners, Enzymatics, TerraCycle,
and ClearPlex. Since April 2013, Mr. Johnson has been the President and Chief Relationship Officer for Greenwood Hall (OTC: ELRN)
an emerging cloud-based education management solutions provider that delivers end-to-end services for the entire student lifecycle
(www.greenwoodhall.com). From 2010 to August 2012, Mr. Johnson was the CEO and President of Forward Industries (NASDAQ:
FORD).
Mr.
Johnson is a member of the board of directors of Blyth Inc. (NYSE: BTH). Blyth is a $1 billion direct to consumer sales company
and leading designer and marketer of accessories for the home and health & wellness products. Mr. Johnson is a member of the
Young Presidents Organization (YPO) and earned a bachelor’s degree from Brown University and an Executive Masters of Business
Administration (EMBA) from Pepperdine University. Mr. Johnson is a member of the Board of Trustees for Choate Rosemary Hall and
is a Senior Fellow in Entrepreneurship and a member of the Board of Visitors for the Graziadio School of Business at Pepperdine
University. Mr. Johnson’s business experience qualifies him to serve on our board of directors.
Board
Leadership Structure and Role in Risk Oversight
Our
board of directors is primarily responsible for overseeing our risk management processes. The board of directors receives and
reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s
assessment of risks. The board of directors focuses on the most significant risks facing our company and our company’s general
risk management strategy, and also ensures that risks undertaken by our company are consistent with the board’s appetite
for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management
processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company
and that our board leadership structure supports this approach.
Terms
of Office
Our
directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until
removed from office in accordance with our bylaws and the provisions of the Nevada Revised Statutes. Our directors hold office
after the expiration of his or her term until his or her successor is elected and qualified, or until he or she resigns or is
removed in accordance with our bylaws and the provisions of the Nevada Revised Statutes.
Our
officers are appointed by our board of directors and serve at its pleasure.
Involvement
in Certain Legal Proceedings
Our
directors and executive officers have not been involved in any of the following events during the past ten years:
| |
1. |
any
bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that time; |
| |
|
|
| |
2. |
any conviction
in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| |
|
|
| |
3. |
being subject
to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or
banking activities or to be associated with any person practicing in banking or securities activities; |
| |
|
|
| |
4. |
being found by
a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated
a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| |
|
|
| |
5. |
being
subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or
regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity; or |
| |
|
|
| |
6. |
being
subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization,
any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over
its members or persons associated with a member. |
Board
Committees
The
board of directors acts as the Audit Committee and has no separate committees. We do not have an audit committee financial expert
at this time because we have not been able to hire a qualified candidate.
Nominations
to the Board of Directors
Our
directors take a critical role in guiding our strategic direction and oversee the management of our company. Board candidates
are considered based upon various criteria, such as their broad-based business and professional skills and experiences, a global
business and social perspective, concern for the long-term interests of the shareholders, diversity, and personal integrity and
judgment.
In
addition, directors must have time available to devote to Board activities and to enhance their knowledge of our business. Accordingly,
we seek to attract and retain highly qualified directors who have sufficient time to attend to their substantial duties and responsibilities
to our company.
EXECUTIVE
COMPENSATION
The
following table sets forth all compensation paid in respect of our principal executive officer and principal financial officer
for the years ended December 31, 2014 and 2013. No other officer of Rightscorp Delaware received compensation in excess of $100,000
for either of Rightscorp Delaware’s last two completed fiscal years.
| Name & Position | |
Fiscal Year | | |
Salary
($) |
| |
Bonus
($) | | |
Stock Awards
($) | | |
Option Awards
($) | | |
Non-Equity Incentive Plan Compensation
($) | | |
Change in Pension Value and Nonqualified
Deferred Compensation Earnings
($) | | |
All Other Compensation
($) | | |
Total
($) | |
| | |
| | |
|
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Christopher Sabec | |
| 2014 | | |
| 261,875 |
(1) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 261,875 | |
| Chief Executive Officer | |
| 2013 | | |
| 151,366 |
| |
| 60,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 211,366 | |
| | |
| | | |
| |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Robert Steele | |
| 2014 | | |
| 242,500 |
(2) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 242,500 | |
| Chief Financial Officer | |
| 2013 | | |
| 159,983 |
| |
| 60,000 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 219,983 | |
(1) Includes
annual salary of $150,000, repayment of accrued salary of $43,125, and advance for 2015 of $68,750.
(2) Includes
annual salary of $150,000, repayment of accrued salary of $30,000, and advance for 2015 of $62,500.
Employment
Agreements
We
are not party to any employment agreements.
Potential
Payments upon Termination or Change-in-Control
SEC
regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits
to our executive officers in connection with any termination of employment or change in control of our company. We currently have
no employment agreements nor any compensatory plans or arrangements with any of our executive officers that may result from the
resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change
in any executive officer’s responsibilities following a change-in-control.
Outstanding
Equity Awards at Fiscal Year-End
We
had no outstanding equity awards as of December 31, 2014.
Director
Compensation
Other
than the five-year warrants to purchase 25,000 shares of common stock on February 4, 2013, with an exercise price of $0.25, issued
to Mr. Johnson, none of our directors received any compensation for services as director during the year ended December 31, 2013.
For services during the period January 1, 2014 to December 31, 2014 he received approximately $6,000 in cash.
Risk
Management
We
do not believe risks arising from our compensation policies and practices for our employees are reasonably likely to have a material
adverse effect on us.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information concerning the number of shares of our common stock beneficially owned based on
89,896,421 issued and outstanding shares of common stock as of the date of this prospectus by: (i) each of our directors; (ii)
each of our named executive officers; and (iii) each person or group known by us to beneficially own more than 5% of our outstanding
shares of common stock.
Beneficial
ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities.
Other than as described in the notes to the table, we believe that all persons named in the table have sole voting and investment
power with respect to shares beneficially owned by them. All share ownership figures include shares issuable upon exercise of
options or warrants exercisable within 60 days of the date of this prospectus, which are deemed outstanding and beneficially owned
by such person for purposes of computing his or her percentage ownership, but not for purposes of computing the percentage ownership
of any other person. Unless otherwise indicated below, beneficial ownership is calculated based on the 89,896,421 shares of common
stock issued and outstanding stock as of the date of this prospectus.
| Name and address | |
Shares of
Common Stock | | |
Percentage of
Common Stock | |
| Directors and Officers (1): | |
| | | |
| | |
| Christopher Sabec (2) | |
| 10,875,000 | | |
| 12.1 | % |
| Robert Steele | |
| 10,875,000 | | |
| 12.1 | % |
| Brett Johnson (3) | |
| 362,500 | | |
| * | |
| All Officers and Directors as a Group (3 persons) | |
| 22,112,500 | | |
| 24.6 | % |
| | |
| | | |
| | |
| 5% or Greater Beneficial Owners | |
| | | |
| | |
| AIGH Investment Partners, L. P. (4) | |
| 7,181,214 | | |
| 7.68 | % |
| Orin Hirschman (4)(5) | |
| 8,681,214 | | |
| 9.23 | % |
*
Less than one percent.
(1) The
address for each of the officer and directors is c/o Rightscorp, Inc., at 3100 Donald Douglas Loop North, Santa Monica, CA 90405.
(2)
Represents shares held by Christopher Sabec Revocable Trust dated February 17, 2011.
(3)
Represents 72,500 shares issuable upon exercise of warrants and 290,000 shares owned by BMJ
Enterprises, which is owned by Mr. Johnson.
(4) As set forth in a Schedule 13G filed September 30, 2014, includes 3,581,214 shares of our
common stock currently issuable upon the exercise of warrants. Excludes 1,818,786 shares issuable pursuant to warrants which are
not currently exercisable. Mr. Orin Hirschman is the Managing Member of AIGH Investment Partners, L. P.
(5) As
set forth in a Schedule 13G filed September 30, 2014, includes (a) shares owned beneficially by AIGH Investment Partners, L.P.
and (b) 1,500,000 shares owned beneficially by AIGH Investment Partners, LLC (but excludes 2,250,000 shares issuable pursuant
to warrants which are not currently exercisable), both of which are controlled by Mr. Hirschman.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain
Relationships and Related Transactions
Pursuant
to the Merger Agreement, on the Merger Closing Date, we issued an aggregate of 22,040,000 shares of common stock to our officers
and directors (or affiliates thereof), including 10,875,000 shares to Christopher Sabec, our Chief Executive Officer, 10,875,000
shares to Robert Steele our President, Chief Financial Officer, Chief Operating Officer, Chief Technology Officer and Director,
and 290,000 to BMJ Enterprises, which is owned by Brett Johnson, one of our Directors, in exchange for the cancellation of their
shares of common stock of Rightscorp Delaware.
Rightscorp
Delaware issued to Brett Johnson, a director, five-year warrants to purchase 25,000 shares of common stock on February 4, 2013,
with an exercise price of $0.25, exercisable on a cashless basis, for services as director.
Review,
Approval or Ratification of Transactions with Related Persons
As
we have not adopted a Code of Ethics, we rely on our board to review related party transactions on an ongoing basis to prevent
conflicts of interest. Our board reviews a transaction in light of the affiliations of the director, officer or employee and the
affiliations of such person’s immediate family. Transactions are presented to our board for approval before they are entered
into or, if this is not possible, for ratification after the transaction has occurred. If our board finds that a conflict of interest
exists, then it will determine the appropriate remedial action, if any. Our board approves or ratifies a transaction if it determines
that the transaction is consistent with our best interests.
Family
Relationships
There
are no family relationships between any of our former directors or executive officers and new directors or new executive officers.
None of the new directors and executive officers were directors or executive officers of our company prior to the closing of the
Reverse Acquisition, nor did any hold any position with us prior to the closing of the Reverse Acquisition, nor have been involved
in any material proceeding adverse to us or any transactions with us or any of our directors, executive officers, affiliates or
associates that are required to be disclosed pursuant to the rules and regulations of the SEC.
Director
Independence
Brett
Johnson is an independent director. We evaluate independence by the standards for director independence established by Marketplace
Rule 5605(a)(2) of the NASDAQ Stock Market, Inc.
Subject
to some exceptions, this standard generally provides that a director will not be independent if (a) the director is, or in the
past three years has been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three
years has been, an executive officer of ours; (c) the director or a member of the director’s immediate family has received
more than $120,000 per year in direct compensation from us other than for service as a director (or for a family member, as a
non-executive employee); (d) the director or a member of the director’s immediate family is, or in the past three years
has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity
on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed
as an executive officer of a company where one of our executive officers serves on the compensation committee; or (f) the director
or a member of the director’s immediate family is an executive officer of a company that makes payments to, or receives
payments from, us in an amount which, in any twelve-month period during the past three years, exceeds the greater of $1,000,000
or two percent of that other company’s consolidated gross revenues.
DESCRIPTION
OF CAPITAL STOCK
The
following is a brief description of our capital stock. This summary does not purport to be complete in all respects. This description
is subject to and qualified entirely by the terms of our articles of incorporation, or our certificate of incorporation, and our
bylaws, copies of which have been filed with the SEC and are also available upon request from us, and by the Nevada Revised Statutes.
Authorized
Capitalization
The
authorized capital stock of our company consists of 260,000,000 shares of capital stock, consisting of 250,000,000 shares of common
stock and 10,000,000 shares of preferred stock, none of which has been designated or issued.
Common
Stock
As
of the date of this prospectus, there were issued and outstanding 89,896,421 shares of common stock. Holders of our common stock
are entitled to such dividends as may be declared by our board of directors out of funds legally available therefor, subject to
any preferential dividend rights of any then outstanding preferred stock. The shares of common stock are neither redeemable or
convertible. Holders of common stock have no preemptive or subscription rights to purchase any of our securities. Each holder
of our common stock is entitled to one vote for each such share outstanding in the holder’s name.
In
the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive our assets on
a pro rata basis which are legally available for distribution, after payments of all debts and other liabilities and subject to
the prior rights of any holders of preferred stock then outstanding. All of the issued and outstanding shares of our common stock
are fully paid and non-assessable. The shares of common stock offered by this prospectus will also be fully paid and non-assessable.
Our
common stock is traded on the OTC QB under the symbol “RIHT.”
Warrants
We
may issue warrants for the purchase of our common stock. We may issue warrants independently or together with shares of our common
stock.
As
of the date of this prospectus, there were issued and outstanding warrants to purchase 22,450,140 shares of common stock with
a weighted average exercise price of $0.26 per share, including (i) warrants to purchase 16,392,000 shares issued to the subscribers
in the September 2014 private placement at an exercise price of $0.25 per share and (ii) warrants to purchase an aggregate of
6,058,140 shares issued at exercise prices ranging from between $0.0862 and $0.75 per share.
Each
warrant will entitle the holder to purchase for cash the principal amount of shares of our common stock at the applicable exercise
price. Warrants may be exercised at any time up to the close of business on their expiration date. After the close of business
on the expiration date, unexercised warrants will become void.
Indemnification
of Directors and Officers
Pursuant
to our Articles of Incorporation and bylaws, we may indemnify an officer or director who is made a party to any proceeding, including
a lawsuit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest.
In certain cases, we may advance expenses incurred in defending any such proceeding. To the extent that the officer or director
is successful on the merits in any such proceeding as to which such person is to be indemnified, we must indemnify him against
all expenses incurred, including attorney’s fees. With respect to a derivative action, indemnity may be made only for expenses
actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court
order. The indemnification is intended to be to the fullest extent permitted by the laws of the State of Nevada.
In
the event that a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid
by one of our directors, officers, or controlling persons in the successful defense of any action, suit or proceeding, is asserted
by one of our directors, officers, or controlling person in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification is against public policy as expressed in the Securities Act, and we will be governed
by the final adjudication of such issue.
Insofar
as indemnification for liabilities arising under the Securities Act, may be permitted to our directors, officers and persons controlling
us, we have been advised that it is the SEC’s opinion that such indemnification is against public policy as expressed in
the Securities Act, and is, therefore, unenforceable.
SELLING
STOCKHOLDERS
This
prospectus covers the resale from time to time by the selling stockholders identified in the table below of:
| |
● |
Up
to 10,928,000 shares of our common stock sold in the September 2014 private placement; and |
| |
|
|
| |
● |
Up
to 16,392,000 shares of our common stock subject to exercise of warrants issued to investors in the September 2014 private
placement. |
Pursuant
to the Unit Subscription Agreement executed in connection with the September 2014 private placement, we are filing with the SEC
this registration statement on Form S-1 under the Securities Act to register the resale of shares of common stock and such shares
underlying the warrants by the selling stockholders. Pursuant to the Unit Subscription Agreement, we agreed to file additional
registration statements, of which this prospectus forms a part, subject to certain time periods between these filings and limitations
on the number of shares underlying warrants required to be registered by us in any single registration statement, until all of
the shares issued or issuable under the warrants have been registered.
The
selling stockholders identified in the table below may from time to time offer and sell under this prospectus any or all of the
shares of common stock described under the column “Shares of Common Stock Being Offered in the Offering” in the table
below.
The
table below has been prepared based upon the information furnished to us by the selling stockholders. The selling stockholders
identified below may have sold, transferred or otherwise disposed of some or all of their shares since the date on which the information
in the following table is presented in transactions exempt from, or not subject to, the registration requirements of the Securities
Act. Information concerning the selling stockholders may change from time to time and, if necessary, we will amend or supplement
this prospectus accordingly. We cannot provide an estimate as to the number of shares of common stock that will be held by the
selling stockholders upon termination of the offering covered by this prospectus because the selling stockholders may offer some
or all of their shares of common stock under this prospectus. The selling stockholders may also sell, transfer or otherwise dispose
of all or a portion of their shares in transactions exempt from the registration requirements of the Securities Act or pursuant
to another effective registration statement covering those shares.
We
have been advised, as noted in the footnotes in the table below, that certain of the selling stockholders are affiliates of a
broker-dealer and/or underwriter. We have been advised that each of these selling stockholders acquired our common stock and the
warrants issued in the September 2014 private placement in the ordinary course of business, not for resale, and that none of these
selling stockholders had, at the time of purchase, any agreements or understandings, directly or indirectly, with any person to
distribute the related common stock.
The
registration statement of which this prospectus forms a part includes the shares of common stock underlying the warrants held
by certain persons who are employees or affiliates of a broker-dealer. The SEC has indicated that it is its position that any
broker-dealer firm which is a selling stockholder is deemed an underwriter and therefore these firms and such associated persons
may be deemed an underwriter with respect to the securities being sold by them.
The
following table sets forth, based on information provided to us by the selling stockholders or known to us, the name of each selling
stockholder, the nature of any position, office or other material relationship, if any, which the selling stockholder has had,
within the past three years, with us or with any of our predecessors or affiliates, and the number of shares of our common stock
beneficially owned by the stockholder before this offering. The number of shares owned are those beneficially owned, as determined
under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares of common stock as to which a person has sole or shared voting power or
investment power and any shares of common stock which the person has the right to acquire within 60 days through the exercise
of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney
or revocation of a trust, discretionary account or similar arrangement.
We
have assumed all shares of common stock reflected on the table will be sold from time to time in the offering covered by this
prospectus. Because the selling stockholders may offer all or any portions of the shares of common stock listed in the table below,
no estimate can be given as to the amount of those shares of common stock covered by this prospectus that will be held by the
selling stockholders upon the termination of the offering. The selling stockholders have agreed to certain restrictions on the
transfer of their respective subscribed shares of common stock and additional shares underlying warrants purchased pursuant to
the Subscription Agreement. These restrictions do not apply to any sales by the selling stockholder pursuant to this Registration
Statement or any other effective registration statement. For more information on these restrictions on the selling stockholders,
see “Plan of Distribution” in this prospectus.
Beneficial
ownership is determined in accordance with the rules of the SEC. Each selling stockholder’s percentage of ownership of our
outstanding shares in the table below, calculated as of the date of this prospectus, is based upon 89,896,421 shares of common
stock issued and outstanding and as further adjusted to give effect to the offering as noted in the footnotes in the table below.
| Selling Stockholder | |
Shares of Common Stock Owned Before this Offering | | |
Shares of Common Stock Underlying Warrants Owned Before this Offering (1) | | |
Shares of Common Stock Being Offered in this Offering | | |
Shares of Common Owned Upon Completion of this Offering (2) | | |
Percentage of Common Stock Outstanding Upon Completion of this Offering (3) | |
| Aaron Martin | |
| 100,000 | | |
| 150,000 | | |
| 250,000 | | |
| - | | |
| - | |
| AIGH Investment Partners, LLC. (4) | |
| 1,500,000 | | |
| 2,250,000 | | |
| 3,750,000 | | |
| - | | |
| - | |
| AIGH Investment Partners, L.P. (5) | |
| 3,600,000 | | |
| 5,400,000 | | |
| 9,000,000 | | |
| - | | |
| - | |
| Akiva Wagschal | |
| 200,000 | | |
| 300,000 | | |
| 500,000 | | |
| - | | |
| - | |
| Alvin Hess | |
| 100,000 | | |
| 150,000 | | |
| 250,000 | | |
| - | | |
| - | |
| AME Capital Group, LLC. (6) | |
| 100,000 | | |
| 150,000 | | |
| 250,000 | | |
| - | | |
| - | |
| Andrew Milstein | |
| 300,000 | | |
| 450,000 | | |
| 750,000 | | |
| - | | |
| - | |
| Cam, Co (7) | |
| 400,000 | | |
| 600,000 | | |
| 1,000,000 | | |
| - | | |
| - | |
| Globis Capital Partners, L.P. (8) | |
| 760,000 | | |
| 1,140,000 | | |
| 1,900,000 | | |
| - | | |
| - | |
| Globis Overseas Funds, Ltd. (9) | |
| 240,000 | | |
| 360,000 | | |
| 600,000 | | |
| - | | |
| - | |
| Hershel Berkowitz | |
| 300,000 | | |
| 450,000 | | |
| 750,000 | | |
| - | | |
| - | |
| John Evans | |
| 730,112 | | |
| 150,000 | | |
| 250,000 | | |
| 631,112 | | |
| * | |
| Joshua Hirsch | |
| 200,000 | | |
| 300,000 | | |
| 500,000 | | |
| - | | |
| - | |
| Kerry Propper (10) | |
| 100,000 | | |
| 150,000 | | |
| 250,000 | | |
| - | | |
| - | |
| Leonard Sokolow (11) | |
| 200,000 | | |
| 150,000 | | |
| 250,000 | | |
| 100,000 | | |
| * | |
| Margus Ehatamm | |
| 120,000 | | |
| 180,000 | | |
| 300,000 | | |
| - | | |
| - | |
| Mazel D&K, Inc. (12) | |
| 200,000 | | |
| 300,000 | | |
| 500,000 | | |
| - | | |
| - | |
| Mel Mac Alt, LLC. (13) | |
| 100,000 | | |
| 150,000 | | |
| 250,000 | | |
| - | | |
| - | |
| MGS Inc. (14) | |
| 200,000 | | |
| 300,000 | | |
| 500,000 | | |
| - | | |
| - | |
| Naresh Nayak | |
| 108,000 | | |
| 132,000 | | |
| 220,000 | | |
| 20,000 | | |
| * | |
| Neha Nayak | |
| 100,000 | | |
| 150,000 | | |
| 250,000 | | |
| - | | |
| - | |
| Richard Grossman | |
| 400,000 | | |
| 600,000 | | |
| 1,000,000 | | |
| - | | |
| - | |
| Robert Hess | |
| 100,000 | | |
| 150,000 | | |
| 250,000 | | |
| - | | |
| - | |
| Samuel Nebenzahl | |
| 600,000 | | |
| 900,000 | | |
| 1,500,000 | | |
| - | | |
| - | |
| Shanteri Nayak | |
| 180,000 | | |
| 270,000 | | |
| 450,000 | | |
| - | | |
| - | |
| The Hewlett Fund | |
| 400,000 | | |
| 600,000 | | |
| 1,000,000 | | |
| - | | |
| - | |
| The Special Equities Group, LLC. (15) | |
| 300,000 | | |
| 450,000 | | |
| 750,000 | | |
| - | | |
| - | |
| Yitzchak Jacobovitz | |
| 40,000 | | |
| 60,000 | | |
| 100,000 | | |
| - | | |
| - | |
| Total | |
| 11,679,112 | | |
| 16,392,000 | | |
| 27,320,000 | | |
| 751,112 | | |
| * | |
* Represents
less than 1%.
| (1) |
Represents
shares of our common stock remaining issuable under warrants issued in the September 2014 private placement. Except for 1,818,786
warrants held by AIGH Investment Partners, L.P., and 2,250,000 warrants held by AIGH Investment Partners, LLC, which are not
currently exercisable, the
warrants are immediately exercisable. |
| |
|
| (2) |
Assumes
that (i) all of the shares of common stock to be registered on the registration statement of which this prospectus is a part,
including all shares of common stock underlying warrants held by the selling stockholders, are sold in the offering and (ii)
that no other shares of common stock are acquired or sold by the selling stockholder prior to the completion of the offering.
The selling stockholders may sell all, some or none of the shares offered pursuant to this prospectus and may sell other shares
of our common stock that they may own pursuant to an exemption from the registration provisions of the Securities Act, including
under Rule 144. To our knowledge, except pursuant to the Unit Subscription Agreement, there are currently no agreements, arrangements
or understanding with respect to the sale of any of the shares that may be held by the selling stockholders after completion
of this offering or otherwise. |
| |
|
| (3) |
Applicable
percentage ownership is based on the sum of (i) 89,896,421 shares of common stock outstanding as of the date of this prospectus,
and (ii) 16,392,000 shares of common stock as of the date of this prospectus issuable upon exercise of all of the outstanding
warrants to purchase common stock issued in the September 2014 private placement held by the selling stockholders. |
| |
|
| (4) |
Orin
Hirschman has voting rights and investment power over the securities owned by AIGH Investment Partners, LLC, as president.
Includes 2,250,000 warrants which are not currently exercisable. |
| |
|
| (5) |
Orin
Hirschman has voting rights and investment power over the securities owned by AIGH Investment Partners, L.P., as general partner.
Includes 1,818,786 warrants which are not currently exercisable. |
| |
|
| (6) |
Avi
Schron has voting rights and investment power over the securities owned by AME Capital Group, LLC, as managing member. |
| |
|
| (7) |
Charles
Alpot has voting rights and investment power over the securities owned by Cam, Co., as general partner. |
| |
|
| (8) |
Paul
Packer has voting rights and investment power over the securities owned by Globis Capital Partners, L.P., as managing member. |
| |
|
| (9) |
Paul
Packer has voting rights and investment power over the securities owned by Globis Overseas Fund, Ltd., as director. |
| |
|
| (10) |
Kerry
Propper is an affiliate of Chardan Capital Markets LLC, a broker-dealer. We have been advised that the shares of common stock
and warrant purchased by Mr. Propper were purchased in the ordinary course of business and, at the time of purchase, there
were no agreements or understandings, directly or indirectly, with any person to distribute such securities. |
| |
|
| (11) |
Leonard
Sokolow is a registered representative with National Securities Corporation, a broker-dealer. We have been advised that the
shares of common stock and warrant purchased by Mr. Propper were purchased in the ordinary course of business and, at the
time of purchase, there were no agreements or understandings, directly or indirectly, with any person to distribute such securities. |
| |
|
| (12) |
Reuven
Dessler has voting rights and investment power over the securities owned by Mazel D&K, Inc., as managing member. |
| |
|
| (13) |
Avi
Schron has voting rights and investment power over the securities owned by Mel Mac Alt., LLC, as managing member. |
| |
|
| (14) |
Moske
Spero has voting rights and investment power over the securities owned by MGS, Inc., as managing member. |
| |
|
| (15) |
Jon
Schechter has voting rights and investment power over the securities owned by the Special Equities Group, LLC, as managing
member. Mr. Schechter is an affiliate of Chardan Capital Markets LLC, a broker-dealer. We have been advised that the shares
of common stock and warrant purchased by Mr. Schechter were purchased in the ordinary course of business and, at the time
of purchase, there were no agreements or understandings, directly or indirectly, with any person to distribute such securities. |
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time,
sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded
or in private transactions. This prospectus may also be used by transferees of the selling stockholders, including broker-dealers
or other transferees who borrow or purchase the shares to settle or close out short sales of shares of common stock. Selling stockholders
will act independently of us in making decisions with respect to the timing, manner and size of each sale or other transfer. We
will not receive any of the proceeds from sales or transfers by the selling stockholders or any of their transferees.
We
expect that the selling stockholders will sell their shares primarily through sales on the OTC QB or any other stock exchange,
market or trading facility on which our shares are traded or in private transactions. Sales may be made at fixed or negotiated
prices, and may be effected by means of one or more of the following transactions, which may involve cross or block transactions:
| |
● |
ordinary
brokerage transactions and transactions in which the broker-dealer solicits investors; |
| |
|
|
| |
● |
block
trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction; |
| |
|
|
| |
● |
purchases
by a broker-dealer as principal and resale by the broker-dealer for its account; |
| |
|
|
| |
● |
an
exchange distribution in accordance with the rules of the applicable exchange; |
| |
|
|
| |
● |
privately
negotiated transactions; |
| |
|
|
| |
● |
settlement
of short sales made after the date that this registration statement is declared effective by the SEC; |
| |
|
|
| |
● |
transactions
in which broker-dealers may agree with one or more of the selling stockholders to sell a specified number of such shares at
a stipulated price per share; |
| |
|
|
| |
● |
through
the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
| |
|
|
| |
● |
through
the distribution of common stock by any selling stockholder to its partners, members or stockholders; |
| |
|
|
| |
● |
any
other method permitted pursuant to applicable law; and |
| |
|
|
| |
● |
a
combination of any such methods of sale. |
The
selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
The selling stockholders will have the sole discretion not to accept any purchase offer or make any sale of their shares if they
deem the purchase price to be unsatisfactory at a particular time. To the extent required, we may amend or supplement this prospectus
from time to time to describe a specific plan of distribution.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from
the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what
is customary in the types of transactions involved.
The
selling stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock owned
by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell
shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling stockholders to include the pledgee, transferee
or other successors-in-interest as selling stockholders under this prospectus.
In
connection with sales of common stock or interests therein, selling stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions
they assume. Selling stockholders may also engage in short sales, puts and calls or other transactions in our securities or derivatives
of our securities and may sell and deliver shares in connection with these transactions. We have advised each selling stockholder
that it may not use shares registered on this Registration Statement to cover short sales of common stock made prior to the date
on which this Registration Statement is declared effective by the SEC.
The
selling stockholders also may transfer the shares of common stock in other circumstances, in which case the donees, assignees,
transferees, pledgees or other successors-in-interest will be the selling beneficial owners for purposes of this prospectus and
may sell the shares of common stock from time to time under this prospectus after we have filed any necessary supplements to this
prospectus under Rule 424(b), or other applicable provisions of the Securities Act, supplementing or amending the list of selling
stockholders to include such donee, assignee, transferee, pledgee, or other successor-in-interest as a selling stockholder under
this prospectus.
Selling
stockholders and broker-dealers or agents involved in an arrangement to sell any of the offered shares may, under certain circumstances,
be deemed to be “underwriters” within the meaning of the Securities Act. Any profit on such sales and any discount,
commission, concession or other compensation received by any such underwriter, broker-dealer or agent may be deemed an underwriting
discount and commission under the Exchange Act. No selling stockholder has informed us that it has an agreement or understanding,
directly or indirectly, with any person to distribute the common stock. If a selling stockholder should notify us that they have
a material arrangement with a broker-dealer for the resale of their shares, we would be required to amend the registration statement
of which this prospectus is a part, and file a prospectus supplement to describe the agreement between the selling stockholder
and broker-dealer or agent, provide required information regarding the plan of distribution, and otherwise revise the disclosure
in this prospectus as needed. We would also file the agreement between the selling stockholder and the broker-dealer as an exhibit
to the post-effective amendment to the registration statement. The selling stockholder and/or purchasers will pay all discounts,
concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of the shares of common stock.
If
a selling stockholder uses this prospectus for any sale of the common stock, it will be subject to the prospectus delivery requirements
of the Securities Act. The selling stockholders will be responsible for complying with the applicable provisions of the Securities
Act, and the rules and regulations promulgated thereunder, as applicable to such selling stockholders in connection with resales
of their respective shares under this Registration Statement. These provisions and regulations may limit the timing of purchases
and sales of common stock by them and the marketability of such securities. To comply with the securities laws of certain jurisdictions,
if applicable, the common stock will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers.
The
Exchange Act and the rules and regulations thereunder, including without limitation Regulation M, will apply to selling stockholders
and other persons participating in the sale or distribution of the shares offered hereby. With certain exceptions, Regulation
M restricts certain activities of, and limits the timing of purchases and sales of any of the shares by, selling stockholders,
affiliated purchasers and any broker-dealer or other person who participates in the sale or distribution. Regulation M precludes
these persons from bidding for or purchasing, or attempting to induce any person to bid for or purchase, any security subject
to the distribution until the distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize
the price of a security in connection with the distribution of that security. All of these limitations may affect the marketability
of the shares offered by this prospectus. To our knowledge, no selling stockholder is a broker-dealer or an affiliate of a broker-dealer
except to the extent listed in the footnotes to the table contained in the “Selling Stockholders” section beginning
on page __ of this prospectus.
We
have agreed with the selling stockholders to keep this Registration Statement effective until the earlier of (1) the date that
all of the shares covered by this Registration Statement have been sold, or may be sold in one transaction without volume limitations
pursuant to Rule 144 promulgated under the Securities Act or (2) September 24, 2015
We
have agreed to pay all fees and expenses incident to the registration of the shares. Each selling stockholder will be responsible
for all costs and expenses in connection with the sale of their shares, including brokerage commissions or dealer discounts. We
will not receive any proceeds from the sale of the common stock. However, we will receive proceeds from the selling stockholders
if they exercise their warrants on a cash basis.
We
have agreed to will indemnify the selling stockholders against certain losses, claims, damages and liabilities, including some
liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling stockholders will
be entitled to contribution. We may be indemnified by the selling stockholders against civil liabilities, including liabilities
under the Securities Act that may arise from any written information furnished to us by the selling stockholders specifically
for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.
LEGAL
MATTERS
The
validity of the common stock being offered hereby has been passed upon by Sichenzia Ross Friedman Ference LLP.
EXPERTS
The
consolidated financial statements appearing in this prospectus and in the registration statement have been audited by HJ Associates
& Consultants, LLP, an independent registered public accounting firm, as stated in their report appearing elsewhere herein,
and are included in reliance upon such report and upon the authority of such firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
file annual reports, quarterly reports, current reports, proxy statements and other information with the SEC. You may read or
obtain a copy of these reports at the Securities and Exchange Commission, or SEC, public reference room at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain information
on the operation of the public reference room and its copy charges by calling the SEC at 1-800-SEC-0330. The SEC maintains a website
that contains registration statements, reports, proxy information statements and other information regarding registrants that
file electronically with the SEC. The address of the website is www.sec.gov.
We
have filed with the SEC a Registration Statement on Form S-1 under the Securities Act with respect to the shares of common stock
being offered by this prospectus. This prospectus is part of that registration statement. This prospectus does not contain all
of the information set forth in the registration statement or the exhibits to the registration statement. For further information
with respect to us and the shares offered by the selling stockholders pursuant to this prospectus, you should refer to the registration
statement and its exhibits. Statements contained in this prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and you should refer to the copy of that contract or other documents filed as an exhibit
to the registration statement. You may read or obtain a copy of the registration statement at the SEC’s public reference
room and website referred to above.
You
may request a copy of any of the documents referred to above, other than an exhibit to a filing unless the exhibit is specifically
incorporated by reference into that filing, at no cost, by contacting us in writing or by telephone at:
Investor
Relations
Rightscorp,
Inc.
3100
Donald Douglas Loop North
Santa
Monica, CA 90405
(310)
751-7510
You
can also find the above-referenced filings on our website at www.rightscorp.com. Except as provided above, no other information,
including information on our website, is incorporated by reference in this prospectus.
FINANCIAL
STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
RIGHTSCORP, INC.
December 31, 2013
RIGHTSCORP, INC.
September 31, 2014
Report of Independent Registered Public Accounting
Firm
To the Board of Directors
Rightscorp, Inc.
Santa Monica, California
We have audited the accompanying consolidated
balance sheets of Rightscorp, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, stockholders’
deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Rightscorp, Inc.
as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in the Note 2 to the consolidated financial
statements, the Company does not generate sufficient revenue to sustain operations and has negative cash flows from operations.
This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 2 to the financial statements. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
| /S/ HJ Associates &
Consultants, LLP |
|
| Salt Lake City, Utah |
|
| March 25, 2014 |
|
Rightscorp, Inc.
Consolidated Balance Sheets
| | |
December 31, 2013 | | |
December 31, 2012 | |
| Assets | |
| | | |
| | |
| Assets | |
| | | |
| | |
| Cash | |
$ | 36,331 | | |
$ | 10,049 | |
| Prepaid expenses | |
| 19,639 | | |
| 28,883 | |
| Other current asset | |
| - | | |
| 5,698 | |
| Total Current Assets | |
| 55,970 | | |
| 44,630 | |
| Other Assets | |
| | | |
| | |
| Fixed assets, net | |
| 56,453 | | |
| 28,851 | |
| Intangible assets, net | |
| 33,800 | | |
| 50,700 | |
| Total Assets | |
$ | 146,223 | | |
$ | 124,181 | |
| | |
| | | |
| | |
| Liabilities and Stockholders’ Deficit | |
| | | |
| | |
| Current Liabilities: | |
| | | |
| | |
| Accounts payable and accrued liabilities | |
$ | 928,304 | | |
$ | 514,874 | |
| Convertible notes payable, net of discount of $10,891 and $101,551 | |
| 202,609 | | |
| 518,975 | |
| Total Current Liabilities | |
| 1,130,913 | | |
| 1,033,849 | |
| Total Liabilities | |
| 1,130,913 | | |
| 1,033,849 | |
| | |
| | | |
| | |
| Stockholders’ Deficit: | |
| | | |
| | |
| Preferred stock, $.001 par value; 10,000,000 shares authorized; null shares and 3,220,000 shares issued and outstanding, respectively | |
| - | | |
| 3,220 | |
| Common stock, $.001 par value; 250,000,000 shares authorized; 68,797,102 and 28,014,392 shares issued and outstanding, respectively | |
| 68,797 | | |
| 28,014 | |
| Common stock to be issued | |
| 380,000 | | |
| | |
| Additional paid in capital | |
| 2,807,185 | | |
| 1,256,991 | |
| Accumulated deficit | |
| (4,240,672 | ) | |
| (2,197,893 | ) |
| Total stockholders’ deficit | |
| (984,690 | ) | |
| (909,668 | ) |
| Total Liabilities and Stockholders’ Deficit | |
$ | 146,223 | | |
$ | 124,181 | |
See accompanying notes to financial statements
Rightscorp, Inc.
Consolidated Statements of Operations
| | |
Year Ended | | |
Year Ended | |
| | |
December 31, 2013 | | |
December 31, 2012 | |
| | |
| | |
| |
| Revenue | |
$ | 324,016 | | |
$ | 96,565 | |
| | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | |
| Copyright holder fees | |
| 161,868 | | |
| 49,023 | |
| General and administrative | |
| 1,663,921 | | |
| 1,028,438 | |
| Sales and marketing | |
| 275,616 | | |
| 69,614 | |
| Depreciation and amortization | |
| 33,438 | | |
| 24,647 | |
| Total operating expenses | |
| 2,134,843 | | |
| 1,171,722 | |
| | |
| | | |
| | |
| Loss from operations | |
| (1,810,827 | ) | |
| (1,075,157 | ) |
| | |
| | | |
| | |
| Other income (expenses): | |
| | | |
| | |
| Interest expense | |
| (298,077 | ) | |
| (124,166 | ) |
| Debt default | |
| (185 | ) | |
| - | |
| Debt forgiveness | |
| 66,310 | | |
| - | |
| Total non-operating expenses | |
| (231,952 | ) | |
| (124,166 | ) |
| | |
| | | |
| | |
| Loss from operations before income taxes | |
| (2,042,779 | ) | |
| (1,199,323 | ) |
| | |
| | | |
| | |
| Provision for income taxes | |
| - | | |
| - | |
| | |
| | | |
| | |
| Net loss | |
$ | (2,042,779 | ) | |
$ | (1,199,323 | ) |
| | |
| | | |
| | |
| Net loss per share – basic and diluted | |
$ | (0.05 | ) | |
$ | (0.13 | ) |
| | |
| | | |
| | |
| Weighted average common shares – basic and diluted | |
| 38,191,898 | | |
| 9,558,321 | |
See accompanying notes to financial statements
Rightscorp, Inc.
Consolidated Statement of Stockholders’
Deficit
| | |
Preferred
stock | | |
Common
stock | | |
Stock
to
be | | |
Additional
Paid in | | |
Accumulated | | |
Total
Stockholders’ | |
| | |
Stock | | |
Amount | | |
Stock | | |
Amount | | |
Issued | | |
Capital | | |
Deficit | | |
Deficit | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance at December 31, 2011 | |
| 3,020,000 | | |
$ | 3,020 | | |
| 27,622,500 | | |
$ | 27,622 | | |
$ | - | | |
$ | 841,463 | | |
$ | (998,570 | ) | |
$ | (126,465 | ) |
| Common stock issued for service | |
| - | | |
| - | | |
| 391,892 | | |
| 392 | | |
| - | | |
| 33,392 | | |
| - | | |
| 33,784 | |
| Preferred stock issued for cash | |
| 200,000 | | |
| 200 | | |
| - | | |
| - | | |
| - | | |
| 79,800 | | |
| - | | |
| 80,000 | |
| Warrants issued for service | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 76,415 | | |
| - | | |
| 76,415 | |
| Warrants issued for compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 26,645 | | |
| - | | |
| 26,645 | |
| Warrants issued pursuant to financing | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 199,276 | | |
| - | | |
| 199,276 | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,199,323 | ) | |
| (1,199,323 | ) |
| Balance at December 31, 2012 | |
| 3,220,000 | | |
| 3,220 | | |
| 28,014,392 | | |
| 28,014 | | |
| - | | |
| 1,256,991 | | |
| (2,197,893 | ) | |
| (909,668 | ) |
| Common stock issued for service | |
| - | | |
| - | | |
| 862,162 | | |
| 862 | | |
| | | |
| 73,462 | | |
| - | | |
| 74,324 | |
| Common stock issued for cash | |
| | | |
| | | |
| 250,000 | | |
| 250 | | |
| - | | |
| 124,750 | | |
| - | | |
| 125,000 | |
| Preferred stock converted to common stock | |
| (3,220,000 | ) | |
| (3,220 | ) | |
| 9,338,000 | | |
| 9,338 | | |
| - | | |
| (6,118 | ) | |
| - | | |
| - | |
| Warrants issued for service | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 91,947 | | |
| - | | |
| 91,947 | |
| Warrants issued pursuant to financing | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 145,538 | | |
| - | | |
| 145,538 | |
| Note conversion | |
| - | | |
| - | | |
| 7,832,548 | | |
| 7,833 | | |
| | | |
| 1,252,182 | | |
| - | | |
| 1,260,015 | |
| Reverse merger with Stevia | |
| - | | |
| - | | |
| 22,500,000 | | |
| 22,500 | | |
| 80,000 | | |
| (131,567 | ) | |
| - | | |
| (29,067 | ) |
| Common stock to be issued for cash | |
| - | | |
| - | | |
| - | | |
| - | | |
| 300,000 | | |
| - | | |
| - | | |
| 300,000 | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,042,779 | ) | |
| (2,042,779 | ) |
| Balance at December 31, 2013 | |
| - | | |
$ | - | | |
| 68,797,102 | | |
$ | 68,797 | | |
$ | 380,000 | | |
$ | 2,807,185 | | |
$ | (4,240,672 | ) | |
$ | (984,690 | ) |
See accompanying notes to financial statements
Rightscorp, Inc.
Consolidated Statements of Cash Flows
| | |
Year Ended | | |
Year Ended | |
| | |
December 31, 2013 | | |
December 31, 2012 | |
| | |
| | |
| |
| Cash Flows from Operating Activities | |
| | | |
| | |
| Net loss | |
$ | (2,042,779 | ) | |
$ | (1,199,323 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
| Depreciation and Amortization | |
| 33,438 | | |
| 24,647 | |
| Common stock issued for service | |
| 74,324 | | |
| 33,784 | |
| Warrants issued for service & compensation | |
| 91,947 | | |
| 103,060 | |
| Amortization of discount on convertible debt | |
| 236,199 | | |
| 97,725 | |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| (Increase)/Decrease in prepaid expense | |
| 9,244 | | |
| (23,683 | ) |
| (Increase)/Decrease in other current asset | |
| 5,698 | | |
| (5,698 | ) |
| Increase in accounts payable and accrued liabilities | |
| 435,372 | | |
| 340,602 | |
| Net cash used in operating activities | |
| (1,156,557 | ) | |
| (628,886 | ) |
| | |
| | | |
| | |
| Cash Flows from Investing Activities: | |
| | | |
| | |
| Purchases of equipment and furniture | |
| (44,141 | ) | |
| (31,516 | ) |
| Net cash used in investing activities | |
| (44,141 | ) | |
| (31,516 | ) |
| | |
| | | |
| | |
| Cash Flows from Financing Activities | |
| | | |
| | |
| Proceeds from convertible notes | |
| 534,980 | | |
| 720,526 | |
| Repayment of convertible notes | |
| (83,000 | ) | |
| (100,000 | ) |
| Proceeds from notes payable | |
| 150,000 | | |
| - | |
| Preferred stock issued for cash | |
| - | | |
| 80,000 | |
| Common stock issued for cash | |
| 125,000 | | |
| - | |
| Common stock to be issued for cash | |
| 300,000 | | |
| - | |
| Proceeds from related party debt | |
| 200,000 | | |
| - | |
| Payments on related party debt | |
| - | | |
| (29,520 | ) |
| Change in bank overdraft | |
| - | | |
| (555 | ) |
| Net cash provided by financing activities | |
| 1,226,980 | | |
| 670,451 | |
| | |
| | | |
| | |
| Net increase (decrease) in cash | |
| 26,282 | | |
| 10,049 | |
| | |
| | | |
| | |
| Cash, beginning of period | |
| 10,049 | | |
| - | |
| | |
| | | |
| | |
| Cash, end of period | |
$ | 36,331 | | |
$ | 10,049 | |
| | |
| | | |
| | |
| Supplemental disclosures of cash flow information: | |
| | | |
| | |
| Cash paid during the period for interest | |
$ | - | | |
$ | 7,508 | |
| Cash paid during the period for income taxes | |
$ | - | | |
$ | - | |
| Non-Cash Investing & Financing Disclosure | |
| | | |
| | |
| Warrants issued as discount on convertible debt | |
$ | 145,538 | | |
$ | 199,276 | |
| Stock issued for conventional debt | |
$ | 350,000 | | |
$ | - | |
| Stock issued for convertible debt: accrued interest | |
$ | 910,014 | | |
$ | - | |
See accompanying notes to financial statements
RIGHTSCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years ended December 31, 2013 and 2012
Note 1 - Nature of the
Business
The Company was organized under the laws of
the State of Nevada on April 9, 2010, and its fiscal year end is December 31. The Company is the parent company of Rightscorp,
Inc., a Delaware corporation formed on January 20, 2011. See Note 4.
The Company has developed products and intellectual
property rights relating to policing copyright infringement on the Internet. The Company is dedicated to the vision that digital
creative works should be protected economically so that the next generation of great music, movies, video games and software can
be made and their creators can prosper. The Company has a patent-pending, proprietary method for solving copyright infringement
by collecting payments from illegal downloaders via notifications sent to their ISP’s.
Note 2 - Summary of Significant
Accounting Policies
Basis of Presentation
These financial statements have been prepared
using the basis of accounting generally accepted in the United States of America. The financial statements as of December 31, 2013
and December 31, 2012 reflect all adjustments which, in the opinion of management, are necessary to fairly state the Company’s
financial position and the results of its operations for the periods presented in accordance with the accounting principles generally
accepted in the United States of America. All adjustments are of a normal recurring nature.
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company does not currently have any instruments
requiring fair-value accounting disclosures.
Cash and Cash Equivalents
The Company considers all cash on hand and
in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities
of three months or less, when purchased, to be cash and cash equivalents. As of December 31, 2013 and December 31, 2012 the Company
had no cash equivalents.
Advertising
The Company expenses advertising costs as incurred.
For the year ended December 31, 2013 and December 31, 2012, advertising expenses were $21,639 and $574, respectively.
Capitalization of Fixed Assets
The Company capitalizes expenditures related
to property and equipment, subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased;
(2) existing assets that are replaced, improved or the useful lives have been extended; or (3) all land, regardless of cost. Acquisitions
of new assets, additions, replacements and improvements (other than land) costing less than the minimum rule in addition to maintenance
and repair costs, including any planned major maintenance activities, are expensed as incurred.
Capitalization of Intangible Assets
The Company records the purchase on intangible
assets not purchased in a business combination in accordance with the ASC Topic 350.
Concentrations of Risk
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.
The Company’s bank accounts are deposited
in insured institutions. At December 31, 2013 and December 31, 2012, the Company’s bank deposits did not exceed the insured
amounts.
Impairment of Long-Lived Assets
The Company reviews and evaluates long-lived
assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
The assets are subject to impairment consideration under FASB ASC 360-10-35-17, if events or circumstances indicate that their
carrying amount might not be recoverable. When the Company determines that an impairment analysis should be done, the analysis
will be performed using the rules of FASB ASC 930-360-35, Asset Impairment, and 360-10 through 15-5, Impairment or Disposal of
Long-Lived Assets.
Revenue Recognition
The Company generates revenue from the sale
of a service to copyright owners under which copyright owners retain the Company to identify and collect settlement payments from
Internet users who have infringed on their copyrights. Revenue is recognized when the ISP responds to a notice provided by the
Company, and pays the fee which acts as a wavier to the infringement against the copyright owner.
Income Taxes
The Company utilizes FASB ASC 740, “Income
Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based
on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.
The Company generated a deferred tax asset
through net operating loss carry-forward. However, a valuation allowance of 100% has been established due to the uncertainty of
the Company’s realization of the net operating loss carry forward prior to its expiration.
Interest and penalties on tax deficiencies
recognized in accordance with ACS accounting standards are classified as income taxes in accordance with ASC Topic 740-10-50-19.
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements
that the Company has yet to adopt that are expected to have a material effect on its financial position, results of operations,
or cash flows.
Going Concern
The Company’s financial statements are
prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of business. The Company had a cumulative net loss
from inception (January 20, 2011) to December 31, 2013 of $4,240,672. The Company has not yet established an ongoing source of
revenues sufficient to cover its operating costs and to allow it to continue as a going concern. The ability of the Company to
continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it establishes
a revenue stream and becomes profitable. If the Company is unable to obtain adequate capital it could be forced to cease development
of operations.
In order to continue as a going concern, develop
a reliable source of revenues, and achieve a profitable level of operations the Company will need, among other things, additional
capital resources. Management’s plans to continue as a going concern include raising additional capital through borrowing
and sales of common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing
any of its plans.
The ability of the Company to continue as a
going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually
secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Note 3 - Income Taxes
Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax liabilities consist of the
following components as of December 31, 2013 and 2012:
| | |
2013 | | |
2012 | |
| Deferred tax assets: | |
| | | |
| | |
| NOL Carryover | |
$ | 1,201,400 | | |
$ | 694,300 | |
| Accrued Payroll | |
| 148,200 | | |
| 48,800 | |
| Depreciation | |
| 11,600 | | |
| 4,100 | |
| Deferred tax liabilities: | |
| - | | |
| - | |
| | |
| | | |
| | |
| Valuation allowance | |
| (1,361,200 | ) | |
| (747,200 | ) |
| Net deferred tax asset | |
$ | - | | |
$ | - | |
The income tax provision differs from the amount
of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years
ended December 31, 2013 and 2012 due to the following:
| | |
2013 | | |
2012 | |
| Book Income | |
$ | (875,100 | ) | |
$ | (513,800 | ) |
| Meals and Entertainment | |
| 2,200 | | |
| 3,000 | |
| Non-Deductible Expenses | |
| 136,500 | | |
| 144,000 | |
| Accrued Payroll | |
| 99,100 | | |
| 25,700 | |
| Deprecation | |
| 7,500 | | |
| (900 | ) |
| Other | |
| 300 | | |
| 300 | |
| Valuation allowance | |
| 629,500 | | |
| 341,700 | |
| | |
$ | - | | |
$ | - | |
At December 31, 2013, the Company had net operating
loss carryforwards of approximately $2,804,000 that may be offset against future taxable income from the year 2014 through 2033.
No tax benefit has been reported in the December 31, 2012 financial statements since the potential tax benefit is offset by a valuation
allowance of the same amount.
Due to the change in ownership provisions of
the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations.
Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.
Note 4 - Acquisition of Rightscorp
Deleware
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”). 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 a five-year
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) As a result of the reverse merger, The
Company issued 22,500,000 shares with $(29,067) in value, which represented the excess liabilities over assets.
(iii) Effective on the Closing Date, Lester
Martinez resigned as officer and director of the Company, and the following individuals were appointed as executive officers and
directors of the Company:
| Name |
|
Title |
| Christopher Sabec |
|
Chief Executive Officer, President and Chairman |
| Robert Steele |
|
Chief Financial Officer, Chief Operating Officer, Chief Technology Officer, Director |
| Brett Johnson |
|
Director |
(iv) Effective July 15, 2013, the Company amended
its articles of incorporation to change its name from “Stevia Agritech Corp.” to “Rightscorp, Inc.”
(v) 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 has closed
on $475,000 of the Financing (which amounts were advanced by the Company to Rightscorp Delaware prior to the Closing Date and cancelled
as intercompany loans on the Closing Date) and Hartford, directly or through its associates, has 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, and the business of Rightscorp Delaware became the business of the Company.
The accounting rules for reverse acquisitions
require that beginning October 25, 2013, the date of the reverse acquisition, our balance sheet includes the consolidated assets
and liabilities of Rightscorp Delaware and our equity accounts were recapitalized to reflect the net equity of Rightscorp Delaware.
The financial condition and results of operations for periods prior to October 25, 2013 reflect the financial condition and operating
results of Rightscorp Delaware.
Note 5 - Fixed Assets and Intangible
Assets
As of December 31, 2013 and December 31, 2012,
fixed assets and intangible assets consisted of the following:
| | |
December 31, 2013 | | |
December 31, 2012 | |
| Furniture and equipment | |
$ | 82,349 | | |
$ | 38,209 | |
| Less accumulated depreciation | |
| (25,896 | ) | |
| (9,358 | ) |
| Fixed assets, net | |
$ | 56,453 | | |
$ | 28,851 | |
| | |
December 31, 2013 | | |
December 31, 2012 | |
| Intangible assets | |
$ | 84,500 | | |
$ | 84,500 | |
| Less accumulated depreciation | |
| (50,700 | ) | |
| (33,800 | ) |
| Intangible assets, net | |
$ | 33,800 | | |
$ | 50,700 | |
Depreciation and amortization expense for the
periods ended December 31, 2013 and December 31, 2012 was $33,438 and $24,648, respectively. Annual amortization expense will be
$16,900 per year through 2015.
Note 6 - Accounts Payable and Accrued
Liabilities
As of December 31, 2013 and December 31, 2012,
accounts payable and accrued liabilities consisted of the following:
| | |
December 31, 2013 | | |
December 31, 2012 | |
| Payroll | |
$ | 495,428 | | |
$ | 280,668 | |
| Legal fees | |
| 239,015 | | |
| 107,218 | |
| Interest | |
| 16,515 | | |
| 18,933 | |
| Other | |
| 177,346 | | |
| 108,055 | |
| Total | |
$ | 928,304 | | |
$ | 514,874 | |
Note 7 - Notes Payable
Pursuant to the Financing (see Note 3), on
June 18, 2013, Rightscorp Delaware issued a promissory note (the “Note”) to the Company, in accordance with a letter
of intent (LOI), in which the Company agreed to advance $200,000 in immediately available funds to Rightscorp Delaware (the “LOI
Advance”) pursuant to the terms of a promissory note. Upon the closing of the Merger Agreement, the Note was cancelled as
an intercompany loan.
On July 23, September 10, 2013, and November
1, 2013, Rightscorp Delaware issued additional promissory notes in the amounts of $100,000, $50,000, and $100,000 to the Company
in connection with the Financing (see Note 3). Upon the closing of the Merger Agreement, these notes were cancelled as intercompany
loans.
Note 8 - Convertible Notes
Payable
Between January 3, 2013 and October 2, 2013,
the Company borrowed an aggregate of $534,980 under convertible notes from external parties for use as operating capital. The parties
entered into convertible notes payable agreements, which make the Company liable for repayment of the principal and 10% annual
interest by the agreements’ expiration dates ranging between October 2, 2013 and July 2, 2014. The notes are secured and
mature nine months from the issuance date. Until the maturity date, the holders may elect to convert the note in whole or in part
into preferred shares at the price of $0.37. During the year ended December 31, 2013, pursuant to a Note exchange an aggregate
of $859,006 of principal and $50,748 of interest was converted to 7,832,548 shares of restricted common stock. During the year
ended December 31, 2013, an aggregate of $80,000 of principal and $6,847 of interest was repaid to the holders.
Attached to these notes the Company issued
warrants that were recorded as a debt discount at an initial aggregate value of $131,927. The value of these warrants, along with
the value of previously issued warrants, was amortized during the year ended December 31, 2013, resulting in a final debt discount
balance of $10,891 as of December 31, 2013.
The Company evaluated these convertible notes
for derivatives and determined that they do not qualify for derivative treatment.
As of December 31, 2013 and 2012 outstanding
convertible notes payable consisted of the following:
| | |
2013 | | |
2012 | |
Convertible Note Issued on 8/6/12
Original Principal: $100,000.00
Interest Rate: 10%
Maturity Date: 5/6/13, extended on a monthly basis per verbal contract
Conversion price amended to $0.1276 on 10/4/13 | |
$ | 100,000 | | |
$ | 100,000 | |
| | |
| | | |
| | |
Convertible Note Issued on 10/25/12
Original Principal: $50,000.00
Interest Rate: 10%
Maturity Date: 7/25/13, extended on a monthly basis per verbal contract
Conversion price amended to $0.1276 on 10/4/13 | |
| 50,000 | | |
| 50,000 | |
| | |
| | | |
| | |
Convertible Note Issued on 11/29/12
Original Principal: $6,500
Interest Rate: 10%
Maturity Date: 8/29/13, extended on a monthly basis per verbal contract
Conversion price amended to $0.1276 on 10/4/13 | |
| 3,500 | | |
| 6,500 | |
| | |
| | | |
| | |
Convertible Note Issued on 9/26/13
Original Principal: $10,000.00
Interest Rate: 10%
Maturity Date: 6/26/14
Conversion price amended to $0.1276 on 10/4/13 | |
| 10,000 | | |
| - | |
| | |
| | | |
| | |
Convertible Note Issued on 10/2/13
Original Principal: $50,000.00
Interest Rate: 10%
Maturity Date: 7/2/14
Conversion price amended to $0.1276 on 10/4/13 | |
| 50,000 | | |
| - | |
| | |
| | | |
| | |
Other Convertible Notes Issued in 2012
Interest Rate: 10%
Maturity Date: 9 months after issuance date
Converted in October 2013 | |
| - | | |
| 464,026 | |
| | |
| | | |
| | |
| Total Outstanding Convertible Notes Payable | |
| 213,500 | | |
| 620,526 | |
| Less Debt Discount | |
| 10,891 | | |
| 101,551 | |
| | |
| | | |
| | |
| | |
$ | 202,609 | | |
$ | 518,975 | |
As of December 31, 2013, the annual maturities
of outstanding convertible notes were $213,500 for the year ending December 31, 2014.
Note 9 - Capital Stock
The total number of shares of all classes of
capital stock, which the Company is authorized to issue, is 250,000,000 shares, consisting of 10,000,000 shares of common stock,
par value $.001 per share (the “Common Stock”), and 10,000,000 shares of preferred stock, par value $.001 per share
(the “Preferred Stock”). The Board of Directors of the Company is authorized to provide for the issuance of shares
of Preferred Stock in one or more series and to establish from time to time the number of shares to be included in each series
and to fix the designation, powers, preferences and relative, participating, optional or other special rights, if any, if each
series and the qualifications, limitations and restrictions thereof. During the year ended December 31, 2013 the Company issued
7,832,548 shares of restricted common stock to note holders pursuant to a Note exchange at $0.37 per share, 250,000 shares of restricted
common stock under Financing Agreement at $0.50 per share, 9,338,000 shares of common stock pursuant to conversion of 3,220,000
shares of preferred stock, and 862,162 shares of common stock for services valued at $74,324. As of the year ended December 31,
2013 there are 68,797,102 shares of common stock outstanding and no shares of Series A Preferred Stock outstanding.
Note 10 - Stock Warrants
During the year ended December 31, 2013, the
Company issued warrants to purchase 3,763,068 shares of its common stock. Warrants to purchase 1,257,920 shares of restricted common
stock at an exercise price of $0.25 per share were issued to note holders pursuant to notes, warrants to purchase 1,710,000 shares
of restricted common stock at an exercise price of $0.75 per share were issued pursuant to common stock purchase, and warrants
to purchase 795,149 shares at an exercise price of $0.25 per share were issued for services.
Using the Black-Scholes method, warrants issued
during the year ended December 31, 2013 were valued at $237,485. The following weighted-average assumptions were used in the Black-Scholes
calculation:
| | |
December 31, 2013 | |
|
December 31, 2012 | |
| Expected term (years) | |
| 1.5-5 | |
|
| 5 | |
| Expected volatility | |
| 140 | % |
|
| 140 | % |
| Risk-free interest rate | |
| 0.21-1.62 | % |
|
| 0.83-2.24 | % |
| Dividend yield | |
| 0 | % |
|
| 0 | % |
A summary of the Company’s warrant activity
during the year ended December 31, 2013 is presented below:
| | |
Number of
Warrants | | |
Weighted
Average
Exercise
Price | | |
Weighted
Average
Remaining
Contractual
Term | |
| Balance outstanding, December 31, 2012 | |
| 3,259,635 | | |
$ | 0.25 | | |
| 4.38 | |
| Granted | |
| 3,763,068 | | |
| 0.48 | | |
| 3.04 | |
| Exercised | |
| - | | |
| - | | |
| - | |
| Forfeited | |
| - | | |
| - | | |
| - | |
| Expired | |
| - | | |
| - | | |
| - | |
| Balance outstanding, December 31, 2013 | |
| 7,022,703 | | |
$ | 0.65 | | |
| 4.80 | |
| Exercisable, December 31, 2013 | |
| 4,887,081 | | |
$ | 0.42 | | |
| 3.12 | |
Note 11 - Commitments &
Contingencies
Since May 31, 2012 the Company leases their
office space on a month-to-month basis at a fixed rate of $2,600 per month.
Note 12 - Subsequent Events
Subsequent to the end of the period we issued
warrants to purchase 50,000 shares of common stock. The shares were issued to an employee at $0.61 per share.
Subsequent to the end of the period we entered
into a securities purchase agreement (the “Purchase Agreement”) with Seaside 88, LP (the “Investor”), pursuant
to which we agreed to sell, and the Investor agreed to purchase, up to 7,000,000 shares of common stock, in closings to be held
monthly over a one-year period, subject to certain conditions. The initial closing under the Purchase Agreement, pursuant to which
we sold to the Investor 835,530 shares of common stock at a purchase price of $0.374 per share for total proceeds of $312,488,
occurred on March 7, 2014.
Subsequent closings will occur on a monthly
basis, subject to certain conditions. At each subsequent closing, we intend to sell to the Investor 10% of the total number of
shares of our common stock traded during the 20 trading days immediately preceding such closing, at a purchase price per share
equal to the lower of (a) the average of the high and low trading prices of the common stock for the 5 consecutive trading days
immediately prior to a closing date, multiplied by 0.50 and (b) the average of the high and low trading prices of the common stock
for the trading day immediately prior to a closing date, multiplied by 0.55, provided that, no monthly closing will occur if the
purchase price for such closing would be lower than $0.25 per share (the “Floor”). The failure to have a subsequent
closing due to failure to meet the Floor will not impact any other subsequent closing. The Investor agreed not to engage in any
short sales of our common stock while it holds any shares purchased under the Purchase Agreement.
The Company has the right to terminate the
Purchase Agreement at any time by providing written notice to the Investor.
Subsequent to the end of the period we entered
into Consulting Agreement with John Carris Investments, LLC. We agreed to issue up to 300,000 shares of common stock in exchange
for services per the Consulting Agreement. Upon execution of the agreement, we issued 75,000 shares of common stock for services
at $0.73 per share.
Subsequent to the end of the period we issued
63,939 shares of common stock to a note holder in a cashless conversion at $0.0862 per share. At time of conversion, the note was
valued at $6,250 for outstanding principal and interest owed.
Subsequent to the end of the period we issued
33,135 shares of common stock to a note holder in a note conversion at $0.1276 per share. At time of conversion, the note was valued
at $4,228 for outstanding principal and interest owed.
Subsequent to the end of the period, we received
$450,000 in funding from Hartford Equity per their financing agreement with the Company. We have reserved 900,000 shares of our
common stock to be issued to Hartford.
Subsequent to the end of the period, we had
a balance of $380,000 of common stock to be issued to Hartford Equity. $300,000 was received from Hartford Equity in 2013 in exchange
for 600,000 shares of common stock per the financing agreement. $80,000 of debt related to the merger was assumed by Hartford Equity
in exchange for 160,000 shares of common stock per the Subscription Agreement dated October 28, 2013. As of March 25, 2014, these
shares have not been issued.
Rightscorp,
Inc.
Consolidated
Balance Sheets
| | |
September 30, 2014 | | |
December 31, 2013 | |
| | |
(Unaudited) | | |
| |
| Assets | |
| | | |
| | |
| Assets | |
| | | |
| | |
| Cash | |
$ | 2,646,388 | | |
$ | 36,331 | |
| Prepaid expenses | |
| 355,316 | | |
| 19,639 | |
| Total Current Assets | |
| 3,001,704 | | |
| 55,970 | |
| Other Assets | |
| | | |
| | |
| Fixed assets, net | |
| 106,325 | | |
| 56,453 | |
| Intangible assets, net | |
| 21,125 | | |
| 33,800 | |
| Total Assets | |
$ | 3,129,154 | | |
$ | 146,223 | |
| | |
| | | |
| | |
| Liabilities and Stockholders’ Deficit | |
| | | |
| | |
| Current Liabilities | |
| | | |
| | |
| Accounts payable and accrued liabilities | |
$ | 455,058 | | |
$ | 928,304 | |
| Convertible notes payable, net of discount of $0 and $10,891 | |
| 60,000 | | |
| 202,609 | |
| Derivative liabilities | |
| 3,208,473 | | |
| - | |
| Total Current Liabilities | |
| 3,723,531 | | |
| 1,130,913 | |
| Total Liabilities | |
| 3,723,531 | | |
| 1,130,913 | |
| | |
| | | |
| | |
| Stockholders’ Deficit | |
| | | |
| | |
| Preferred stock, $.001 par value; 10,000,000 shares authorized; no shares issued and outstanding | |
| - | | |
| - | |
| Common stock, $.001 par value; 250,000,000 shares authorized; 90,171,469 and 68,797,102 shares issued and outstanding, respectively | |
| 90,171 | | |
| 68,797 | |
| Common stock to be issued | |
| - | | |
| 380,000 | |
| Stock subscription payable | |
| (250,000 | ) | |
| - | |
| Additional paid in capital | |
| 6,105,646 | | |
| 2,807,185 | |
| Accumulated deficit | |
| (6,540,194 | ) | |
| (4,240,672 | ) |
| Total stockholders’ deficit | |
| (594,377 | ) | |
| (984,690 | ) |
| Total Liabilities and Stockholders’ Deficit | |
$ | 3,129,154 | | |
$ | 146,223 | |
See
accompanying notes to consolidated financial statements
Rightscorp,
Inc.
Consolidated
Statements of Operations
(Unaudited)
| | |
Three Months Ended | | |
Three Months Ended | | |
Nine Months Ended | | |
Nine Months Ended | |
| | |
September 30, 2014 | | |
September 30, 2013 | | |
September 30, 2014 | | |
September 30, 2013 | |
| Revenue | |
$ | 248,387 | | |
$ | 64,949 | | |
$ | 688,801 | | |
$ | 166,875 | |
| | |
| | | |
| | | |
| | | |
| | |
| Operating expenses: | |
| | | |
| | | |
| | | |
| | |
| Copyright holder fees | |
| 124,194 | | |
| 32,474 | | |
| 344,401 | | |
| 83,437 | |
| General and administrative | |
| 913,151 | | |
| 445,502 | | |
| 2,437,500 | | |
| 1,093,363 | |
| Sales and marketing | |
| 16,872 | | |
| 25,242 | | |
| 72,428 | | |
| 67,960 | |
| Depreciation and amortization | |
| 14,951 | | |
| 8,010 | | |
| 39,308 | | |
| 23,552 | |
| Total operating expenses | |
| 1,069,168 | | |
| 511,228 | | |
| 2,893,637 | | |
| 1,268,312 | |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations | |
| (820,781 | ) | |
| (446,279 | ) | |
| (2,204,836 | ) | |
| (1,101,437 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other expenses: | |
| | | |
| | | |
| | | |
| | |
| Interest expense | |
| (5,009 | ) | |
| (72,519 | ) | |
| (26,235 | ) | |
| (212,656 | ) |
| Gain on Settlements | |
| 169,950 | | |
| - | | |
| 169,950 | | |
| - | |
| Loss on derivative liability | |
| (238,401 | ) | |
| - | | |
| (238,401 | ) | |
| - | |
| Total other expenses | |
| (73,460 | ) | |
| (72,519 | ) | |
| (94,686 | ) | |
| (212,656 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Loss from operations before income taxes | |
| (894,241 | ) | |
| (518,798 | ) | |
| (2,299,522 | ) | |
| (1,314,093 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Provision for income taxes | |
| - | | |
| - | | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
$ | (894,241 | ) | |
$ | (518,798 | ) | |
$ | (2,299,522 | ) | |
$ | (1,314,093 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Net loss per share – basic and diluted | |
| (0.01 | ) | |
$ | (0.01 | ) | |
| (0.03 | ) | |
| (0.02 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Weighted average common shares – basic and diluted | |
| 77,246,760 | | |
| 60,513,010 | | |
| 72,792,882 | | |
| 60,284,914 | |
See
accompanying notes to consolidated financial statements
Rightscorp,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
| | |
Nine Months Ended | | |
Nine Months Ended | |
| | |
September 30, 2014 | | |
September 30, 2013 | |
| Cash Flows from Operating Activities | |
| | | |
| | |
| Net loss | |
$ | (2,299,522 | ) | |
$ | (1,314,093 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
| Depreciation and Amortization | |
| 39,308 | | |
| 23,552 | |
| Common stock issued for service | |
| 374,246 | | |
| 74,324 | |
| Stock compensation expense | |
| 40,205 | | |
| - | |
| Warrants issued for service & compensation | |
| - | | |
| 91,947 | |
| Loss on derivative liabilities | |
| 238,401 | | |
| - | |
| Gain on settlement | |
| (169,950 | ) | |
| - | |
| Amortization of discount on convertible debt | |
| 10,891 | | |
| 150,034 | |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| (Increase)/Decrease in prepaid expense | |
| 9,764 | | |
| 3,893 | |
| Decrease in other current asset | |
| - | | |
| 5,698 | |
| Increase in accounts payable and accrued liabilities | |
| (52,881 | ) | |
| 331,160 | |
| Accrued Interest | |
| (100,287 | ) | |
| - | |
| Net cash used in operating activities | |
| (1,909,825 | ) | |
| (633,485 | ) |
| | |
| | | |
| | |
| Cash Flows from Investing Activities: | |
| | | |
| | |
| Purchases of equipment and furniture | |
| (76,505 | ) | |
| (8,699 | ) |
| Net cash used in investing activities | |
| (76,505 | ) | |
| (8,699 | ) |
| | |
| | | |
| | |
| Cash Flows from Financing Activities | |
| | | |
| | |
| Proceeds from convertible notes | |
| - | | |
| 484,980 | |
| Repayment of convertible notes | |
| (100,000 | ) | |
| (80,000 | ) |
| Proceeds from notes payable | |
| - | | |
| 150,000 | |
| Common stock issued for cash | |
| 1,961,573 | | |
| - | |
| Proceeds from sale of common stock and warrants | |
| 2,707,001 | | |
| - | |
| Warrant conversion | |
| 27,813 | | |
| - | |
| Proceeds from related party debt | |
| - | | |
| 200,000 | |
| Net cash provided by financing activities | |
| 4,596,387 | | |
| 754,980 | |
| | |
| | | |
| | |
| Net increase in cash | |
| 2,610,057 | | |
| 112,796 | |
| | |
| | | |
| | |
| Cash, beginning of period | |
| 36,331 | | |
| 10,049 | |
| | |
| | | |
| | |
| Cash, end of period | |
$ | 2,646,388 | | |
$ | 122,845 | |
| | |
| | | |
| | |
| Supplemental disclosures of cash flow information: | |
| | | |
| | |
| Cash paid during the period for interest | |
$ | - | | |
$ | - | |
| Cash paid during the period for income taxes | |
$ | - | | |
$ | - | |
| Non-Cash Investing & Financing Disclosure | |
| | | |
| | |
| Stock issued for conventional debt | |
$ | 53,500 | | |
$ | - | |
| Stock issued for convertible debt: accrued interest | |
$ | 729 | | |
| | |
| Stock issued for subscription payable | |
$ | 250,000 | | |
$ | - | |
| Warrants issued as discount on convertible debt | |
$ | - | | |
$ | 131,927 | |
| Cashless exercise of warrant | |
$ | 335 | | |
$ | - | |
| Stock issued for prepaid expense | |
$ | 585,177 | | |
$ | - | |
| Extinguishment of related party debt | |
$ | 149,400 | | |
$ | - | |
| Stock issued for common stock payable | |
$ | 380,000 | | |
$ | - | |
See
accompanying notes to consolidated financial statements
Rightscorp,
Inc.
Notes
to Consolidated Financial Statements
Note
1 – Nature of the Business
The
Company was organized under the laws of the State of Nevada on April 9, 2010, and its fiscal year end is December 31. The Company
is the parent company of Rightscorp, Inc., a Delaware corporation formed on January 20, 2011 (“Rightscorp Delaware”).
The acquisition of Rightscorp Delaware (completed on October 25, 2013) is treated as a reverse acquisition, and the business of
Rightscorp Delaware became the business of the Company.
The
Company has developed products and intellectual property rights relating to policing copyright infringement on the Internet. The
Company is dedicated to the vision that digital creative works should be protected economically so that the next generation of
great music, movies, video games and software can be made and their creators can prosper. The Company has a patent-pending, proprietary
method for solving copyright infringement by collecting payments from illegal downloaders via notifications sent to their ISP’s.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
financial statements as of September 30, 2014 reflect all adjustments which, in the opinion of management, are necessary to fairly
state the Company’s financial position and the results of its operations for the periods presented in accordance with the
accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts
have been reclassified from prior periods to properly reflect the nature of the accounts.
The
information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2013 filed with the U.S. Securities and Exchange Commission on March 25, 2014.
Use
of Estimates
The
preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Fair
Value of Financial Instruments
Disclosures
about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in our consolidated
balance sheet, where it is practicable to estimate that value. As of September 30, 2014, the amounts reported for cash, accrued
liabilities and accrued interest approximated fair value because of their short maturities.
In
accordance with ASC Topic 820, “Fair Value Measurements and Disclosures,” we measure certain financial instruments
at fair value on a recurring basis. ASC Topic 820 defines fair value, established a framework for measuring fair value in accordance
with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
| |
● |
Level
1, defined as observable inputs such as quoted prices for identical instruments in active markets; |
| |
|
|
| |
● |
Level
2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as
quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active; and |
| |
|
|
| |
● |
Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable. |
Recent
Accounting Pronouncements
There
are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect
on its financial position, results of operations, or cash flows.
Going
Concern
The
Company’s financial statements are prepared using accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company had a cumulative net loss from inception (January 20, 2011) to September 30, 2014 of $6,540,194. The
Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue
as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital
to fund operating losses until it establishes a revenue stream and becomes profitable. If the Company is unable to obtain adequate
capital it could be forced to cease operations. Accordingly, these factors raise substantial doubt as to the Company’s ability
to continue as a going concern.
In
order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the
Company will need, among other things, additional capital resources. Management’s plans to continue as a going concern include
raising additional capital through borrowing and sales of common stock. However, management cannot provide any assurances that
the Company will be successful in accomplishing any of its plans.
The
accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern.
Note
3 – Fixed Assets and Intangible Assets
As
of September 30, 2014 and December 31, 2013, fixed assets and intangible assets consisted of the following:
| | |
September 30, 2014 | | |
December 31, 2013 | |
| Furniture and equipment | |
$ | 158,854 | | |
$ | 82,349 | |
| Less accumulated depreciation | |
| (52,529 | ) | |
| (25,896 | ) |
| Fixed assets, net | |
$ | 106,325 | | |
$ | 56,453 | |
| | |
September 30, 2014 | | |
December 31, 2013 | |
| Intangible assets | |
| 84,500 | | |
| 84,500 | |
| Less accumulated depreciation | |
| (63,375 | ) | |
| (50,700 | ) |
| Intangible assets, net | |
$ | 21,125 | | |
$ | 33,800 | |
Depreciation
and amortization expense for the nine months ended September 30, 2014 and September 30, 2013 was $39,308 and $23,552, respectively.
Annual amortization expense will be $16,900 per year through 2015.
Note
4 – Accounts Payable and Accrued Liabilities
As
of September 30, 2014 and December 31, 2013, accounts payable and accrued liabilities consisted of the following:
| | |
September 30, 2014 | | |
December 31, 2013 | |
| Accrued payroll | |
| 221,821 | | |
$ | 495,428 | |
| Accrued legal fees | |
| 47,754 | | |
| 239,015 | |
| Accrued interest | |
| 5,912 | | |
| 16,515 | |
| Other | |
| 179,571 | | |
| 177,346 | |
| Total | |
| 455,058 | | |
$ | 928,304 | |
Note
5 – Convertible Notes Payable
Between
January 3, 2013 and October 2, 2013, the Company entered into convertible notes with external parties for use as operating capital.
The convertible notes payable agreements require the Company to repay the principal, together with 10% annual interest by the
maturity date of the notes ranging between October 2, 2013 and July 2, 2014. The notes are secured and mature nine months from
the issuance date. Until the maturity date, the holders may elect to convert the note in whole or in part into shares of common
stock at a conversion price of $0.1276 per share. During the nine months ended September 30, 2014, an aggregate of $100,000 of
principal and $25,219 of interest was repaid, and an aggregate of $53,500 of principal and $728 of interest was converted to 425,008
shares of restricted common stock.
In
connection with the issuance of these notes, the Company issued warrants that were recorded as a debt discount at an initial aggregate
value of $131,927. The value of these warrants, along with the value of previously issued warrants, was fully amortized during
the nine months ended September 30, 2014, resulting in a final debt discount balance of $0 as of September 30, 2014.
The
Company evaluated these convertible notes for derivatives and determined that they do not qualify for derivative treatment.
As
of September 30, 2014 and December 31, 2013 outstanding convertible notes payable consisted of the following:
| | |
September 30, 2014 | | |
December 31, 2013 | |
| Convertible Note Issued on 8/6/12 | |
| | | |
| | |
| Original Principal: $100,000 | |
| | | |
| | |
| Interest Rate: 10% | |
| | | |
| | |
| Maturity Date: 5/6/13, extended on a monthly basis per verbal contract | |
| | | |
| | |
| Conversion price amended to $0.1276 on 10/4/13 | |
$ | 0 | | |
$ | 100,000 | |
| | |
| | | |
| | |
| Convertible Note Issued on 10/25/12 | |
| | | |
| | |
| Original Principal: $50,000 | |
| | | |
| | |
| Interest Rate: 10% | |
| | | |
| | |
| Maturity Date: 7/25/13, extended on a monthly basis per verbal contract | |
| | | |
| | |
| Conversion price amended to $0.1276 on 10/4/13 | |
| 0 | | |
| 50,000 | |
| | |
| | | |
| | |
| Convertible Note Issued on 11/29/12 | |
| | | |
| | |
| Original Principal: $6,500 | |
| | | |
| | |
| Interest Rate: 10% | |
| | | |
| | |
| Maturity Date: 8/29/13, extended on a monthly basis per verbal contract | |
| | | |
| | |
| Conversion price amended to $0.1276 on 10/4/13 | |
| 0 | | |
| 3,500 | |
| | |
| | | |
| | |
| Convertible Note Issued on 9/26/13 | |
| | | |
| | |
| Original Principal: $10,000 | |
| | | |
| | |
| Interest Rate: 10% | |
| | | |
| | |
| Maturity Date: 6/26/14 | |
| | | |
| | |
| Conversion price amended to $0.1276 on 10/4/13 | |
| 10,000 | | |
| 10,000 | |
| | |
| | | |
| | |
| Convertible Note Issued on 10/2/13 | |
| | | |
| | |
| Original Principal: $50,000 | |
| | | |
| | |
| Interest Rate: 10% | |
| | | |
| | |
| Maturity Date: 7/2/14 | |
| | | |
| | |
| Conversion price amended to $0.1276 on 10/4/13 | |
| 50,000 | | |
| 50,000 | |
| | |
| | | |
| | |
| Total Outstanding Convertible Notes Payable | |
| 60,000 | | |
| 213,500 | |
| Less Debt Discount | |
| 0 | | |
| 10,891 | |
| | |
$ | 60,000 | | |
$ | 202,609 | |
As
of September 30, 2014, the annual maturities of outstanding convertible notes were $60,000 for the year ending December 31, 2014.
Note
6 – Derivative Liability
The
Company adopted ASC 815 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s
own stock. The exercise price of the newly issued and outstanding warrants are subject to “reset” provisions in the
event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise
price or conversion price lower than exercise price of these warrants. If these provisions are triggered, the exercise price of
the warrant will be reduced. As a result, the Company has determined that the exercise feature is not considered to be solely
indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company
has bifurcated the exercise feature of the warrants and recorded a derivative liability.
ASC
815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize
any change in the fair market value as another income or expense item. The Company’s only asset or liability measured at
fair value on a recurring basis is its derivative liability associated with warrants.
At
origination, the Company valued the conversion features using the following assumptions: stock price of $0.315 and annualized
volatility of 121%. The Company determined that at origination the liability related to the warrants issued was $3,192,314 that
was $222,242 greater than the transaction value and was expensed at the time of orginination.
At
September 30, 2014, the Company revalued the conversion features using the following assumptions: stock price of $0.32 and annualized
volatility of 120%, and determined that, during the nine months ended September 30, 2014, the Company’s derivative liability
increased by $16,159 to $3,208,473. The Company recognized a corresponding loss on derivative liability in conjunction with this
revaluation during the three and nine months period.
Note
7 – Capital Stock
The
total number of shares of all classes of capital stock, which the Company is authorized to issue, is 260,000,000 shares, consisting
of 250,000,000 shares of common stock, par value $.001 per share (the “Common Stock”), and 10,000,000 shares of preferred
stock, par value $.001 per share (the “Preferred Stock”). The Board of Directors of the Company is authorized to provide
for the issuance of shares of Preferred Stock in one or more series and to establish from time to time the number of shares to
be included in each series and to fix the designation, powers, preferences and relative, participating, optional or other special
rights, if any, if each series and the qualifications, limitations and restrictions thereof.
During
the nine months ended September 30, 2014, we entered into a securities purchase agreement (the “March 2014 Purchase Agreement”)
with Seaside 88, LP (“Seaside”), pursuant to which we agreed to sell, and Seaside agreed to purchase, up to 7,000,000
shares of common stock, in closings to be held monthly over a one-year period, subject to certain conditions. The initial closing
under the March 2014 Purchase Agreement, pursuant to which we sold to Seaside 835,530 shares of common stock at a purchase price
of $0.374 per share for total proceeds of $312,488, occurred on March 7, 2014.
The
parties agreed that subsequent closings under the March 2014 Purchase Agreement will occur on a monthly basis over a one-year
period, subject to certain conditions. We agreed to sell to Seaside, at each subsequent closing, 10% of the total number of shares
of our common stock traded during the 20 trading days immediately preceding such closing, at a purchase price per share equal
to the lower of (a) the average of the high and low trading prices of the common stock for the 5 consecutive trading days immediately
prior to a closing date, multiplied by 0.50 and (b) the average of the high and low trading prices of the common stock for the
trading day immediately prior to a closing date, multiplied by 0.55, provided that, no monthly closing will occur if the purchase
price for such closing would be lower than $0.25 per share (the “Floor”). The failure to have a subsequent closing
due to failure to meet the Floor will not impact any other subsequent closing. Seaside agreed not to engage in any short sales
of our common stock while it holds any shares purchased under the March 2014 Purchase Agreement. The Company has the right to
terminate the March 2014 Purchase Agreement at any time by providing written notice to Seaside. Pursuant to two subsequent closings
since the initial closing, we issued 1,145,740 shares of common stock to Seaside for total proceeds of $333,135.
During
the nine months ended September 30, 2014, we entered into a consulting agreement with an investment bank. We agreed to issue up
to 300,000 shares of common stock in exchange for services per the consulting agreement. Upon execution of the agreement, we issued
75,000 shares of common stock for prepaid services at $0.73 per share. The agreement was cancelled on May 1, 2014. We are not
obligated to issue any more shares under the consulting agreement.
During
the nine months ended September 30, 2014, we entered into a unit subscription agreement with certain accredited investors for
the sale of Units (the “Unit Offering”), with each Unit consisting of ten thousand shares of common stock and warrants
to purchase fifteen thousand shares of Common Stock. The purchase price was $2,500 per Unit with a minimum investment of ten units.
The Company initially sold an aggregate of 1,060.8 Units in this offering and received aggregate gross proceeds of $2,652,000.
The warrants are exercisable commencing on the closing date of September 24, 2014, carry an exercise price of $0.25 per share
and are exercisable for a period of five years. Subsequent to September 24, 2014, an additional investment by two other investors
was made, in which the Company received gross proceeds of $55,000 and issued an additional twenty-two Units. As of September 30,
2014, the Company had received a fully executed subscription agreement for an additional $275,000 from two additional investors
for the purchase of an additional 110 Units. Following receipt of the funds therefor, the aggregate gross proceeds received by
the Company was $2,982,000 in consideration for the issuance of an aggregate of 1,192.8 Units. The Company also granted to the
investors, in the event that it issues any shares of common stock or securities exercisable for, or convertible into, shares of
common stock within eighteen months after the closing date, the right to participate in up to an amount of the subsequent financing
such that such investor’s beneficial ownership of the Company on a fully diluted basis immediately following such subsequent
financing would not be less than its beneficial ownership of the Company solely based on such investor’s investment in the
Unit Offering on the same terms, conditions and price provided for in the subsequent financing.
During
the nine months ended September 30, 2014, we issued 656,802 shares of common stock upon exercise for warrants at an exercise price
of $0.0862 per share for total proceeds of $27,766.
During
the nine months ended September 30, 2014, we issued 425,008 shares of common stock to note holders in note conversions at $0.1276
per share. At the time of conversion, the notes were valued at $54,228 for outstanding principal and interest owed.
During
the nine months ended September 30, 2014, we issued 1,530,000 shares of common stock to multiple investors at $0.25 per share
for total proceeds of $382,500.
During
the nine months ended September 30, 2014, we issued 2,442,000 shares of our common stock to Hartford Equity at $0.50 per share
for total proceeds of $1,221,000.
In
connection with the reverse acquisition completed on October 25, 2013, $80,000 of debt was assumed by Hartford Equity in exchange
for 160,000 shares of common stock. As of September 30, 2014, all of the 160,000 shares have been issued.
Note
8 – Stock Options and Warrants
Stock Options
On
August 18, 2014, the Company granted 359,988 options with an exercise price of $0.38 per share under the 2014 Incentive Stock
Plan.
Stock-based
compensation expense related to vested options was $24,367 during nine months ended September 30, 2014. The company determined
the value of share-based compensation using the Black-Scholes fair value option-pricing model using the following weighted average
assumptions for options granted during the nine months ended September 30, 2014:
| | |
September 30, 2014 | |
| Expected term (years) | |
| 9.89 | |
| Expected volatility | |
| 98 | % |
| Risk-free interest rate | |
| 0 | |
| Dividend yield | |
| 0 | % |
The stock
option activity for the nine months ended September 30, 2014 is as follows:
| | | |
Options
of Warrants | | |
Weighted
Average Exercise
Price | | |
Weighted
Average Remaining Contractual
Term | |
| Balance outstanding, December 31, 2013 | | |
| - | | |
$ | - | | |
| - | |
| Granted | | |
| 359,988 | | |
| 0.38 | | |
| 9.89 | |
| Exercised | | |
| - | | |
| - | | |
| - | |
| Forfeited | | |
| - | | |
| - | | |
| - | |
| Expired | | |
| - | | |
| - | | |
| - | |
| Balance outstanding,
September 30, 2014 | | |
| 359,988 | | |
$ | 0.38 | | |
| 9.89 | |
| Exercisable, September
30, 2014 | | |
| 64,999 | | |
$ | 0.38 | | |
| 9.89 | |
Warrants
During
the nine months ended September 30, 2014, we issued warrants to purchase 17,942,000 shares of common stock, including 50,000 warrants
issued to an employee with an exercise price of $0.61 per share and 17,892,000 warrants to multiple investors with an exercise
price of $0.25 per share.
Using
the Black-Scholes method, warrants issued during the nine months ended September 30, 2014 were valued at $4,356,245. The following
weighted-average assumptions were used in the Black-Scholes calculation:
| | |
September 30, 2014 | |
| Expected term (years) | |
| 5 | |
| Expected volatility | |
| 98-140 | % |
| Risk-free interest rate | |
| 1.66-1.82 | % |
| Dividend yield | |
| 0 | % |
A
summary of the Company’s warrant activity during the nine months ended September 30, 2014 is presented below:
| | |
Number of Warrants | | |
Weighted
Average Exercise Price | | |
Weighted Average Remaining Contractual Term | |
| Balance outstanding, December 31, 2013 | |
| 7,022,703 | | |
$ | 0.65 | | |
| 4.80 | |
| Granted | |
| 17,942,000 | | |
| 0.25 | | |
| 4.98 | |
| Exercised | |
| (720,645 | ) | |
| 0.09 | | |
| 2.85 | |
| Forfeited | |
| - | | |
| - | | |
| - | |
| Expired | |
| - | | |
| - | | |
| - | |
| Balance outstanding, September 30, 2014 | |
| 24,244,058 | | |
$ | 0.25 | | |
| 4.31 | |
| Exercisable, September 30, 2014 | |
| 24,244,058 | | |
$ | 0.25 | | |
| 4.31 | |
During
the nine months ended September 30, 2014, we recognized stock compensation of $15,838.
Note
9 – Commitments & Contingencies
Since
May 31, 2012 the Company leases its office space on a month-to-month basis at a fixed rate of $2,600 per month.
Note
10 – Fair Value Measurements
Liabilities
measured at fair value on a recurring basis are as follows at September 30, 2014:
| | |
| | |
Fair Value Measurements Using | |
| | |
Total Fair | | |
Quoted prices in | |
Significant other | |
Significant | |
| | |
Value at | | |
active markets | |
observable inputs | |
Unobservable inputs | |
| Description | |
June 30, 2014 | | |
(Level 1) | |
(Level 2) | |
(Level 3) | |
| | |
| | | |
|
| |
|
| |
| | |
| Derivative liability (1) | |
$ | (3,208,473 | ) | |
$ |
- | |
$ |
- | |
$ | (3,208,473 | ) |
(1)
The derivative is calculated using the multinomial lattice and scenario model.
Note
11 – Subsequent Events
Subsequent
to the end of the period we issued 431,034 shares of common stock shares to a note holder in note conversions at $0.1276 per share.
At the time of conversion, the note was valued at $55,000 for outstanding principal and interest owed.
Rightscorp, Inc.
PROSPECTUS
Up
to 27,320,000 shares of
Common
Stock, par value $0.001 per share
,
2015
Dealer
Prospectus Delivery Obligation
Until
[*], 2015, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
You
should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information
different from that which is set forth in this prospectus. We are offering to sell shares of our common stock and seeking offers
to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale
of these securities. Our business, financial condition, results of operation and prospects may have changed after the date of
this prospectus.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
| Item
13. |
Other
Expenses of Issuance and Distribution. |
Set
forth below is an estimate of the approximate amount of the fees and expenses payable by us in connection with the issuance and
distribution of the shares of common stock.
| EXPENSE | |
AMOUNT | |
| Registration Fees | |
$ | 730.16 | |
| Legal Fees | |
| 80,000.00 | |
| Accounting Fees | |
| 15,000.00 | |
| Miscellaneous Fees and Expenses | |
| 5,000.00 | |
| Total | |
$ | 100,730.16 | |
| Item
14. |
Indemnification
of Directors and Officers. |
Our
bylaws, as amended, provide to the fullest extent permitted by Nevada law, that each of our directors or officers shall not be
personally liable to us or our shareholders for damages for breach of such director’s or officer’s fiduciary duty.
The effect of this provision of our bylaws, as amended, is to eliminate our right and our shareholders (through shareholders’
derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of
care as a director or officer, except under certain situations defined by statute. We believe that the indemnification provisions
in our bylaws, as amended, are necessary to attract and retain qualified persons as directors and officers.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
| Item
15. |
Recent
Sales of Unregistered Securities. |
On
June 18, 2013, pursuant to a binding letter of intent, Rightscorp Delaware issued us a 5% promissory note in exchange for a $200,000
advance (the “Rightscorp Note”). On October 23, 2013, the Rightscorp Note was cancelled as an intercompany loan pursuant
to the terms of the Rightscorp Note. These securities were sold in a private placement in reliance on the exemption from registration
provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions
include, among other factors, the representations by the investors to the Company as to their status as “accredited investors.”
Also
on June 18, 2013, we entered into a financing agreement with Hartford Equity Inc. (“Hartford”), under which Hartford
agreed to purchase, directly or through its associates: (i) $200,000 of our common stock at a price of $0.50 per share; and (ii)
an additional $1,650,000 of our common stock at a price of $0.50 per share in monthly increments of at least $150,000 over the
14 months following the closing of the transaction contemplated by the financing agreement with Hartford. Under the terms of said
financing agreement, for each dollar invested, the investor(s) making such investment would be issued two (2) shares of our common
stock and a warrant to purchase two (2) shares of our common stock with an exercise price of $0.75 per share and a term of eighteen
(18) months. These securities were sold in a private placement in reliance on the exemption from registration provided by Section
4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among other
factors, the representations by the investors to the Company as to their status as “accredited investors.”
In
connection with the financing agreement with Hartford, we also sold 400,000 shares of our common stock at $0.50 per share for
aggregate proceeds of $200,000, which was used to fund the advance provided to Rightscorp Delaware in exchange for the Rightscorp
Note issued to us on June 18, 2013. The 400,000 shares were issued in reliance upon Regulation S of the Securities Act, to investors
who are “accredited investors,” as such term is defined in Rule 501(a) under the Securities Act, or in offshore transactions
(as defined in Rule 902 under Regulation S of the Securities Act), based upon representations made by such investors.
Between
February 4, 2013, and September 17, 2013, we issued warrants to purchase a total of 274,189 shares of our restricted common stock.
Warrants to purchase 25,000 shares were issued to a director pursuant to a director agreement at $0.25 per share. Warrants to
purchase 239,189 shares were issued to consultants at $0.25 per share. Warrants to purchase 10,000 shares were issued to an employee
pursuant to an Employee agreement at $0.25 per share. These securities were issued in a private placement in reliance on the exemption
from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming
such exemptions include, among other factors, the representations by the investors to the Company as to their status as “accredited
investors.”
Between
March 3, 2013 and September 17, 2013, we issued 297,297 shares of restricted common stock. The shares were issued to consultants
pursuant to an investor relations contract at $0.25 per share. These securities were issued in a private placement in reliance
on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The
bases for claiming such exemptions include, among other factors, the representations by the investors to the Company as to their
status as “accredited investors.”
Between
January 3, 2013 and September 26, 2013, we borrowed an aggregate of $549,955 by issuing 10% convertible notes to external third
parties for use as operating capital. The notes were secured and matured nine months from the issuance date. Until the maturity
date, the holders had the option to convert their note in whole or in part into our preferred shares at a conversion price of
$0.37 per share. These securities were sold in a private placement in reliance on the exemption from registration provided by
Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among
other factors, the representations by the investors to the Company as to their status as “accredited investors.”
Between
January 3, 2013, and October 2, 2013, we issued warrants to purchase 433,768 shares of our restricted common stock. The shares
were issued to note holders pursuant to notes at $0.25 per share. These securities were sold in a private placement in reliance
on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The
bases for claiming such exemptions include, among other factors, the representations by the investors to the Company as to their
status as “accredited investors.”
On
October 2, 2013, we borrowed an aggregate of $50,000 under a convertible note from an external third party for use as operating
capital. The party entered into a convertible note payable agreement, which makes the Company liable for repayment of the principal
and 10% annual interest by the agreements’ expiration date on July 2, 2014. The note was secured and matured nine months
from the issuance date. Until the maturity date, the holder may elect to convert the note in whole or in part into preferred shares
at the price of $0.37, a price which was subsequently amended to $0.1276 per share. These securities were sold in a private placement
in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.
The bases for claiming such exemptions include, among other factors, the representations by the investors to the Company as to
their status as “accredited investors.”
On
October 2, 2013, we issued warrants to purchase 40,541 shares of our restricted common stock. The shares were issued to a note
holder pursuant to note at $0.25 per share. These securities were sold in a private placement in reliance on the exemption from
registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such
exemptions include, among other factors, the representations by the investors to the Company as to their status as “accredited
investors.”
On
October 2, 2013, we issued 2,459,498 shares of restricted common stock. The shares were issued to note holders pursuant to a note
exchange agreement at $0.37 per share. These securities were sold in a private placement in reliance on the exemption from registration
provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions
include, among other factors, the representations by the investors to the Company as to their status as “accredited investors.”
On
October 25, 2013, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) by and between us, Rightscorp
Delaware and Rightscorp Merger Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company, we
issued to Rightscorp Delaware’s stockholders: (i) 45,347,102 shares of our common stock; (ii) warrants to purchase 5,312,703
shares of our common stock; and (iii) convertible notes that are convertible into shares of our common stock at a conversion price
of $0.1276. These securities were sold in a private placement in reliance on the exemption from registration provided by Section
4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among other
factors, the representations by the investors to the Company as to their status as “accredited investors.”
In
connection with the Merger Agreement, we issued and sold an aggregate of 950,000 units, for a purchase price of $0.50 per unit,
with each unit consisting of one share of common stock and a five-year warrant to purchase one share of common stock with an exercise
price of $0.75. These securities were sold in a private placement in reliance on the exemption from registration provided by Section
4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among other
factors, the representations by the investors to the Company as to their status as “accredited investors.”
We
issued Hartford promissory notes for $6,630 and $5,000 to cover our expenses paid for by Hartford during the quarter ending September
30, 2013. These notes had an interest rate of 10% per annum. These securities were issued in reliance upon Regulation S of the
Securities Act, to investors who are “accredited investors,” as such term is defined in Rule 501(a) under the Securities
Act, or in offshore transactions (as defined in Rule 902 under Regulation S of the Securities Act), based upon representations
made by such investors.
On
November 1, 2013, we borrowed $150,000 from Rightscorp Delaware. Upon the closing of the Merger Agreement, the loan was cancelled
as an intercompany loan.
On
March 7, 2014, we entered into a securities purchase agreement (the “Seaside Agreement”) with Seaside 88, LP (“Seaside”),
pursuant to which we agreed to sell, and Seaside agreed to purchase, up to 7,000,000 shares of our common stock, in closings to
be held monthly over a one-year period, subject to certain conditions. The initial closing under the Seaside Agreement, pursuant
to which we sold to Seaside 835,530 shares of common stock at a purchase price of $0.374 per share, occurred on March 7, 2014.
Subsequent closings have occurred on a monthly basis, subject to certain conditions. At each subsequent closing, the we sell to
Seaside 10% of the total number of shares of common stock traded during the 20 trading days immediately preceding such closing
at a purchase price per share equal to the lower of (a) the average of the high and low trading prices of the common stock for
the 5 consecutive trading days immediately prior to a closing date, multiplied by 0.50 and (b) the average of the high and low
trading prices of the common stock for the trading day immediately prior to a closing date, multiplied by 0.55, provided that,
no monthly closing will occur if the purchase price for such closing would be lower than $0.25 per share (the “Floor”).
The failure to have a subsequent closing due to failure to meet the Floor will not impact any other subsequent closing. Seaside
agreed not to engage in any short sales of our common stock while it holds any shares purchased under the Seaside Agreement. We
terminated the Seaside Agreement on September 24, 2014. These securities were sold in a private placement in reliance on the exemption
from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming
such exemptions include, among other factors, the representations by the investors to the Company as to their status as “accredited
investors.”
Subsequent
to the end of 2013, we entered into a consulting agreement with an investment bank. We agreed to issue up to 300,000 shares of
common stock in exchange for services per the consulting agreement. Upon execution of the agreement, we issued 75,000 shares of
common stock for prepaid services at $0.73 per share. The agreement was cancelled on May 1, 2014. We are not obligated to issue
any more shares. These securities were sold in a private placement in reliance on the exemption from registration provided by
Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among
other factors, the representations by the investors to the Company as to their status as “accredited investors.”
Subsequent
to the end of 2013, we issued 656,802 shares of common stock upon exercise for warrants at an exercise price of $0.0862 per share
for total proceeds of $27,766. These securities were sold in a private placement in reliance on the exemption from registration
provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions
include, among other factors, the representations by the investors to the Company as to their status as “accredited investors.”
Subsequent
to the end of 2013, we 425,008 shares of common stock to note holders in note conversions at $0.1276 per share. At the time of
conversion, the notes were valued at $54,228 for outstanding principal and interest owed. These securities were sold in a private
placement in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated
thereunder. The bases for claiming such exemptions include, among other factors, the representations by the investors to the Company
as to their status as “accredited investors.”
Subsequent
to the end of 2013, we issued 2,442,000 shares of our common stock to Hartford Equity at $0.50 per share for total proceeds of
$1,221,000. These securities were sold in a private placement in reliance on the exemption from registration provided by Section
4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among other
factors, the representations by the investors to the Company as to their status as “accredited investors.”
$80,000
of debt related to the merger was assumed by Hartford Equity in exchange for 160,000 shares of common stock per the Subscription
Agreement dated October 28, 2013. Subsequent to the end of 2013, all of the 160,000 shares have been issued. These securities
were sold in a private placement in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities
Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among other factors, the representations
by the investors to the Company as to their status as “accredited investors.”
Subsequent
to the end of 2013, we issued warrants to purchase 50,000 shares of common stock with an exercise price of $0.61 to an employee
for services. These securities were sold in a private placement in reliance on the exemption from registration provided by Section
4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The bases for claiming such exemptions include, among other
factors, the representations by the investors to the Company as to their status as “accredited investors.”
Subsequent
to the end of 2013, we issued 2,176,287 shares of its common stock for services. These securities were sold in a private placement
in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.
The bases for claiming such exemptions include, among other factors, the representations by the investors to the Company as to
their status as “accredited investors.”
During
the three months ended June 30, 2014, we issued 1,530,000 shares of common stock to multiple investors at $0.25 per share for
total proceeds of $382,500. During the three months ended September 30, 2014, the Company issued 1,794,287 shares of common stock
for services. During the three months ended September 30, 2014, we issued 39,974 shares of common stock upon warrant exercises
at a price of $0.0862 per share for aggregate proceeds of $3,446. These securities were sold in a private placement in reliance
on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The
bases for claiming such exemptions include, among other factors, the representations by the investors to the Company as to their
status as “accredited investors.”
On
September 24, 2014, we entered into a Unit Subscription Agreement (the “Unit Agreement”) with certain accredited investors
(individually, a “Unit Investor” and collectively, the “Unit Investors”) for the sale of units (the “Units”),
with each Unit consisting of ten thousand (10,000) shares (the “Purchased Shares”) of our common stock, and warrants
to purchase fifteen thousand (15,000) shares of our common stock (the “Warrant Shares” and with the Purchased Shares,
the “Purchased Securities”). The Company initially sold an aggregate of 1,060.8 Units in this offering and received
aggregate gross proceeds of $2,652,000. The warrants included as part of the Units are exercisable commencing on the date of the
closing on the Unit Agreement, carry an exercise price of $0.25 per Warrant Share and are exercisable for a period of five (5)
years.
Subsequent
to the date of the closing on the Unit Agreement, an additional investment by three other Unit Investors was made, in which we
received gross proceeds of $80,000 and issued an additional thirty-two (32) Units. As a result, the aggregate gross proceeds raised
in this offering were $2,732,000 in consideration for the issuance of an aggregate of 1,092.8 Units.
The
Units and the other securities issued to the Investors pursuant to the Agreement were not registered under the Securities Act
in reliance upon the exemption from registration provided by Section 4(a)(2) of that Securities Act and Regulation D promulgated
thereunder, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or
sold in the United States absent registration or an applicable exemption from the registration requirements. Certificates representing
these securities contain a legend stating the same.
| Item
16. |
Exhibits
and Financial Statement Schedules |
Financial
Statement Schedules
All
financial statement schedules are omitted because they are not applicable or the required information is shown in the financial
statements or notes thereto.
Exhibits
The
following Exhibits are being filed with this Registration Statement on Form S-1.
| Exhibit
No. |
|
Description |
| 2.1 |
|
Agreement
and Plan of Merger, dated October 25, 2013, among Rightscorp, Inc., Rightscorp Merger Acquisition Sub, Inc. and Rightscorp
Delaware, Inc. (Incorporated by reference from the Annual Report on Form 10-K filed with the SEC on October 28, 2013) |
| 3.1 |
|
Amended and
Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K
filed on September 20, 2013) |
| 3.2 |
|
Bylaws of
the Company (incorporated by reference to the Company’s S-1 Registration Statement filed on December 30, 2010) |
| 4.1 |
|
Form of Stock
Certificate representing shares of Rightscorp, Inc.’s common stock (4) |
| 4.2 |
|
Form of Warrant
(Incorporated by reference from the Current Report on Form 8-K filed with the SEC on October 28, 2013) |
| 4.3 |
|
Form of Promissory
Note (Rightscorp Delaware) (Incorporated by reference from the Current Report on Form 8-K filed with the SEC on October 28,
2013) |
| 4.4 |
|
Form of Warrant
under the Unit Purchase Agreement dated September 24, 2014 (Incorporated by reference from Current Report on Form 8-K filed
with the SEC on September 30, 2014) |
| 5.1 |
|
Opinion of
Sichenzia Ross Friedman Ference LLP (Incorporated by reference from the Registration Statement on Form S-1 filed with the
SEC on November 7, 2014) |
| 10.1 |
|
Promissory
Note by and between the Company and Rightscorp Delaware, Inc., dated June 18, 2013 (Incorporated by reference from the Current
Report on Form 8-K filed with the SEC on July 2, 2013) |
| 10.2 |
|
Financing
Agreement by and between the Company and Hartford Equity Inc., a Delaware corporation, dated June 18, 2013 (Incorporated by
reference from the Current Report on Form 8-K filed with the SEC on July 2, 2013) |
| 10.3 |
|
Form of Note
Amendment (Incorporated by reference from the Current Report on Form 8-K filed with the SEC on October 28, 2013) |
| 10.4 |
|
Purchase
Agreement by and between the Company and Seaside 88, LP dated March 7, 2014 (Incorporated by reference from the Current Report
on Form 8-K filed with the SEC on March 10, 2014) |
| 10.5 |
|
Unit Purchase
Agreement dated September 24, 2014 (Incorporated by reference from Current Report on Form 8-K filed with the SEC on September
30, 2014) |
| 10.6 |
|
Form of Representation
Agreement*+ |
| 21.1 |
|
Subsidiaries
of Rightscorp, Inc. (Incorporated by reference from the Registration Statement on Form S-1 filed with the SEC on November
7, 2014) |
| 23.1 |
|
Consent of
HJ Associates & Consultants, LLP, Independent Registered Public Accounting Firm* |
| 23.2 |
|
Consent of
Sichenzia Ross Friedman Ference LLP (included in Exhibit 5.1) (Incorporated by reference from the Registration Statement on
Form S-1 filed with the SEC on November 7, 2014) |
| * |
Filed
herewith. |
| + |
Confidential
treatment is being sought for this agreement, which is being filed separately with the SEC. The confidential portions of this
Exhibit have been omitted and are marked by an asterisk. |
(a) To
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) To
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective registration statement, and
(iii) To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To
remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) For
determining liability of the undersigned registrant under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned undertakes that in a primary offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller
to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant
to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to
by the undersigned registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant
or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe
that the registrant meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Monica, State of California, on this
14th day of January, 2015.
| |
RIGHTSCORP, INC. |
| |
|
|
| Date: January
14, 2015 |
By: |
/s/ Christopher Sabec |
| |
|
Christopher
Sabec |
| |
|
Chief Executive
Officer (Principal Executive Officer) |
In
accordance with the requirements of the Securities Act, this Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
| Signature |
|
Title(s) |
|
Date |
| |
|
|
|
|
| /s/
Christopher Sabec |
|
Chief
Executive Officer and Director |
|
January
14, 2015 |
| Christopher
Sabec |
|
(Principal
Executive Officer) |
|
|
| |
|
|
|
|
| /s/
Robert Steele |
|
President,
Chief Financial Officer and Director |
|
January
14, 2015 |
| Robert
Steele |
|
(Principal
Financial and Accounting Officer) |
|
|
| |
|
|
|
|
| |
|
|
|
|
| /s/
Brett Johnson |
|
Chairman
of the Board of Directors |
|
January
14, 2015 |
| Brett
Johnson |
|
|
|
|
[***]
INDICATES CONFIDENTIAL PORTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION
REPRESENTATION
AGREEMENT
This
Representation Agreement (“Agreement”) is entered into as of _______________, 2014, by and between Rightscorp,
Inc., a Delaware corporation (“Rightscorp”) located at 3100 Donald Douglas Loop North, Santa Monica CA 90405 and
________________________ located at _______________________________________ (hereinafter,
“You” or “Your”).
Background
of Agreement
| |
A. |
Rightscorp
is in the business of identifying and monitoring illegal downloads of copyrighted content, forwarding Digital Millennium Copyright
Act (“DMCA”) notices, and providing a settlement collections model for copyright owners and administrators for
online peer-to-peer (“P2P”) infringements of their content. |
| |
|
|
| |
B. |
You
own or control copyrights in and to certain content and desire to appoint Rightscorp as Your exclusive representative and
agent within the Territory and during the Term to monitor infringements resulting from unauthorized downloads and uploads
by individual infringers (each an “Infringer”) on P2P networks (each an “Infringement”) via the internet
of Protected Copyrights (as defined below), to collect data regarding such infringements, to offer Settlements to Infringers
on Your behalf, and to collect all monies paid in settlement thereof. |
Agreement
| | NOW,
THEREFORE, in consideration of the mutual covenants and agreements contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows: |
| |
1. |
You
hereby appoint and authorize Rightscorp as your agent throughout the universe (the “Territory”) solely to monitor
the Internet for Infringements by Infringers of your owned and/or controlled copyrights in and to the copyrights set forth
on the attached Schedule A (“Protected Copyrights”) (which may be amended from time to time in Your sole discretion
via an addendum to Schedule A, to be sent by You to Rightscorp) and to do the following: |
| |
a. |
Collect
data as to Infringements of the Protected Copyrights; |
| |
|
|
| |
b. |
Send
notices (including, without limitation, DMCA notices and takedown letters in the form required by law, if appropriate) to
the Internet Service Providers (“ISPs”) of infringements by the Infringers, and to negotiate settlements on Your
behalf to each Infringer for each identified Infringement of the Protected Copyrights (each a “Settlement”); |
| |
|
|
| |
c. |
Collect
all amounts from Settlements; and |
| |
|
|
| |
d. |
Pay
You **** percent (*** %) of the Net Revenues collected by Rightscorp, payable pursuant to Paragraph 6, below. “Net Revenues”
shall mean the gross settlement Rightscorp actually receives from Infringers (“Gross Collection Amount”), less
fees actually paid to third parties for credit card processing transaction fees, but in no event less than ***. |
| |
|
|
| |
e. |
For
the avoidance of doubt, You reserve the exclusive right to settle, agree, collect or pursue infringements of Protected Copyrights
other than by individual infringers, including, without limitation, agreements with companies and other entities or groups
and class-action or industry-wide agreements or settlements with the understanding that no documentation or evidence supplied
by Rightscorp may be used in a legal proceeding unless and until You and Rightscorp, after good faith discussions, agree as
to a reasonable fixed fee or reasonable percentage split of any award. Both parties acknowledge that the copyright to infringement
data supplied by Rightscorp resides with Rightscorp. |
[***]
INDICATES CONFIDENTIAL PORTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION
| |
2. |
This
Agreement shall continue for a period of one (1) year and automatically renew in one (1) month increments, unless You exercise
the right to terminate for any reason upon thirty (30) days prior written notice (the “Term”). The parties agree
and acknowledge that no representations, warranties, estimates, or predictions have been made by or on behalf of Rightscorp
as to the success of the services provided herein or the extent that it will generate Settlements, if any. |
| |
|
|
| |
3. |
a.
You represent that You legally own, control and/or administer the share of the Protected Copyrights, as specified on Schedule
A. For the avoidance of doubt, Protected Copyrights shall refer specifically only to the share represented by You, and Rightscorp’
authorization hereunder shall apply solely to such share. |
| |
|
|
| |
|
b.
Rightscorp warrants and represents that it has not entered into and shall not enter into any agreement with a third party
that contains provisions materially more favorable to such third party than those applicable to You hereunder. In the event
that Rightscorp agrees to any such materially more favorable provisions in a third-party agreement, Rightscorp will make reasonable
efforts to notify You of such more favorable provisions and, at Your election, such materially more favorable provisions shall
be deemed incorporated into this agreement, prospectively from the date of that third-party agreement. |
| |
|
|
| |
4. |
You
may consent to adding additional Protected Copyrights to Schedule A or deleting Protected Copyrights from Schedule A in writing
(via facsimile, mail or e-mail) requesting such action, and Rightscorp shall timely confirm each modification to the Protected
Copyrights upon receipt of any such writing. |
| |
|
|
| |
5. |
Except
as set forth in this Agreement, during the Term Rightscorp shall have the exclusive right to collect settlements that Rightscorp
has successfully identified, negotiated and settled for Infringements of the Protected Copyrights on P2P Networks. It is contemplated
that Rightscorp shall collect Settlements of $*** for each Infringement, but Rightscorp may accept lower (or higher) amounts
in settlement if in the reasonable judgment of Rightscorp, accepting such lower (or higher) amount is a prudent business decision.
***. |
| |
|
|
| |
6. |
Rightscorp
shall send You *** reports setting forth the Gross Collection Amount for each Protected Copyright, the deductions therefrom
and the Net Revenues due You. Payments shall be made on a *** basis, with payment being made within *** days after the end
of each quarterly period. Rightscorp shall keep complete, detailed, and accurate books and records of all Gross Collection
Amounts and all deductions therefrom resulting in Net Revenues, during the Term, as well as any amounts received after the
Term. Rightscorp shall continue to make quarterly payments of Net Revenues to You on any amounts that are received pursuant
to this Agreement after the Term. You shall have the right to inspect, examine, and copy Rightscorp’s books and records
(an “Audit”), with respect to any statement received by you during the Term and for thirty-six (36) months thereafter,
(the “Audit Period”). You may conduct an Audit: (1) At any time within thirty-six (36) months following the receipt
by You of a statement from Rightscorp during the Audit Period; (2) only with reasonable, advance written notice to Rightscorp;
(3) only for the purpose of verifying the amounts collected and due to You hereunder; (4) only once with respect to each statement;
(5) during regular business hours at Rightscorp’ normal place of business; (6) at Your sole cost and expense provided,
however, that if any such audit reveals any underpayment of Net Revenues in connection with amounts owed of *** percent (***
%) or more, then Rightscorp shall pay all of Your reasonable auditing expenses. |
| |
|
|
| |
7. |
You
recognize that Rightscorp is providing the service described herein to You on a non-exclusive basis, and accordingly, Rightscorp
may perform for others services that are similar or identical to the service provided to You under this Agreement, and this
Agreement does not prevent Rightscorp from providing such services or developing materials that are competitive with those
developed or provided hereunder regardless of any similarity to the service provided herein. |
[***]
INDICATES CONFIDENTIAL PORTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION
| |
8. |
You
hereby represent, warrant and covenant that, with respect to this Agreement: (i) the execution, delivery, and performance
by You of this Agreement has been or as of the date of execution will have been, duly authorized by all necessary corporate
or other required action; (ii) the individual executing such documents on Your behalf was duly authorized to do so; (iii)
the Agreement constitutes a legal, valid, and binding agreement and is enforceable in accordance with its terms; and (iv)
the Protected Copyrights, to the best of Your knowledge, do not violate, misappropriate, or infringe upon the intellectual
property or other rights of any third party. |
| |
|
|
| |
9. |
This
Agreement has been entered into in the State of California, and the validity, interpretation, and legal effect of this Agreement
shall be governed by the laws of the State of California applicable to contracts entered into and performed entirely within
the State of California. The state courts of the State of California in Los Angeles County, and the federal courts for the
Central District of California, shall have sole and exclusive jurisdiction and venue of any and all controversies regarding
or arising from this Agreement (a “Related Action”). Any Related Action will be brought in those courts, and not
elsewhere. In connection with any Related Action, the parties hereto expressly consent to personal jurisdiction in the State
of California and hereby agree to waive any objections based upon lack of personal jurisdiction, lack of subject matter jurisdiction,
forum non conveniens or any similar grounds. |
| |
|
|
| |
10. |
This
Agreement contains the entire understanding and agreement between the parties hereto with respect to the subject matter and
supersedes any prior or contemporaneous written or oral agreements, representations, understandings, or warranties between
them. No change, modification, waiver, discharge, amendment, or addition to this Agreement shall be binding unless it is in
writing and signed by the parties hereto. |
| |
|
|
| |
11. |
The
invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. |
| |
|
|
| |
12. |
No
delay, forbearance, or neglect by either party in the enforcement of any of the conditions, rights or remedies provided for
in this Agreement shall constitute a waiver thereof in any instance or for the future. |
| |
|
|
| |
13. |
This
Agreement may be executed in any number of counterparts each of which shall be enforceable against the parties executing such
counterparts, and all of which together shall constitute a single document. Except as otherwise stated herein, in lieu of
the original documents, a facsimile transmission, copy or scan of the original documents shall be as effective and enforceable
as the original. |
| |
|
|
| |
14. |
Any
notice given under this Agreement shall be addressed to the parties at their respective addresses as first set forth hereinabove
and shall be sufficient if in writing and if personally delivered, or if sent registered or certified mail, return receipt
requested, or by reputable overnight courier with proof of delivery, to the following addresses (or at such other addresses
as the Parties may designate in writing), all notices shall be deemed given when sent except that a notice of change of address
shall only be effective upon its receipt. Copies of all notices sent hereunder shall be sent as follows, provided that a failure
to send any such copy shall not impair the effectiveness of the notice delivered: |
If
to You:
|
If
to Rightscorp:
|
| |
|
| As
first above written. |
As
first above written. |
| |
|
Rightscorp
and its personnel or agents, in performance of this Agreement, are acting as independent contractors and not as employees or agents
of You. Under no circumstance will either party have the right or authority to enter into any contracts or assume any obligations
for the other or to give any warranty to or make any representation on behalf of the other, except as expressly set forth herein. |
[***]
INDICATES CONFIDENTIAL PORTION HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY
WITH THE COMMISSION
IN
WITNESS WHEREOF, the parties have executed this Agreement in Los Angeles, California as of the date set forth above.
| ACCEPTED AND AGREED TO: |
ACCEPTED
AND AGREED TO: |
| |
|
Rightscorp,
Inc. |
| |
|
|
| By: |
|
|
By: |
|
| |
|
|
|
Christopher
Sabec |
| |
|
|
|
|
| Title: |
|
|
Title: |
CEO |
| |
|
|
|
|
| Date: |
|
|
Date: |
|
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent
to the use in this Registration Statement of the Pre-Effective Amendment No. 1 to Form S-1 of Rightscorp, Inc. of our report dated
March 25, 2014, relating to our audits of the consolidated financial statements, appearing in the Prospectus, which is part of
this Registration Statement.
We also
consent to the reference to our firm under the caption “Experts” in such Prospectus.
| /s/ HJ Associates & Consultants, LLP |
|
| HJ Associates
& Consultants, LLP |
|
| Salt Lake
City, Utah |
|
| January
14, 2015 |
|
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