Source: http://ir.rightscorp.com/annual-reports/content/0001493152-17-003872/form10-k.htm
Timestamp: 2017-07-22 12:45:37
Document Index: 560069018

Matched Legal Cases: ['§ 227', '§ 1692', '§ 1788', '§ 101', '§ 2201', '§ 227', '§ 1692', '§ 1788', '§ 101', '§ 2201']

D. C. 20549
the fiscal year ended December 31, 2016
751-7510
registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2016,
the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $9.7 million
based upon the last sales price of the common stock as of such date. Solely for purposes of this disclosure, shares of common
stock held by executive officers, directors and beneficial holders of 10% or more of the outstanding common stock of the registrant
as of such date have been excluded because such persons may be deemed to be affiliates.
As of March 28, 2017, there are 132,463,171
Exhibits, Financial Statement Schedules and Signatures
Annual Report on Form 10-K contains forward-looking statements that involve assumptions, and describe our future plans, strategies,
and expectations. Such statements are generally identifiable by use of the words “may,” “will,” “should,”
or the negative of these words of other variations on these words or comparable terminology. These statements are expressed in
good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved
or accomplished.
forward-looking statements include statements regarding, among other things, (a) the potential markets for our products, our potential
profitability, and cash flows (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans
and (e) our anticipated needs for working capital. This information may involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance,
or achievements expressed or implied by any forward-looking statements. These statements may be found under “Item 1. Business”
and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well
as in this Annual Report on Form 10-K generally. Actual events or results may differ materially from those discussed in forward-looking
statements as a result of various factors as described in this Annual Report on Form 10-K generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements contained in this Annual Report on Form 10-K will
in fact occur.
forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, forward-looking
statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause
actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place
undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We assume
no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the
date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and
consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to
advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and
cash flows. Our actual results may vary materially from those expected or projected.
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.
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, in exchange for all of the issued and outstanding shares of common stock of Rightscorp Delaware, (b) outstanding
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.
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.
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).
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.
to Netnames, 22% of all internet traffic is used for peer-to-peer filesharing, the great majority of which infringes on copyrights,
while according to Sandivine, 27% of all US internet upload traffic is peer-to-peer filesharing, the majority of which infringes
on copyrights. We believe that this means that every creator of music, movies, TV shows, books and software is faced with the
reality that their work, their property and their content may end up being distributed on the internet against their wishes, to
their economic detriment and without receiving compensation. 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
infringements and collect settlement payments from Internet users who have infringed on their copyrights. With Rightscorp, content
creators have the opportunity to get compensated for copyright infringement and enforce their rights.
piracy continues to thrive and expand even as content creators face significant reductions in business and income. The
amount of internet traffic used by peer-to-peer filesharing grew 18% from 674 Petabytes a month to 802 Petabytes a month from
2010 to 2013 (Sources: Cisco Visual Networking Index: Forecast and Methodology, 2010-2015; Cisco VNI: Forecast and Methodology,
2013 - 2018). One petabyte (PB) equals 1 million gigabytes (GB), which is the equivalent of 1.6 million CDs. Eight hundred Petabytes
per month is the equivalent of 1.3 billion CDs per month. In 2013, Netnames found that the majority of peer-to-peer filesharing
infringes on copyright, from 78.1% for music to 92.9% for television. Cisco forecasts that file sharing will grow 42% to 999
Petabytes per month by 2018. Rightscorp is tracking millions of US internet subscribers on the ISPs that do not forward Rightscorp
notices. These millions of subscribers are repeatedly illegally distributing Rightscorp’s clients’ copyrights to users
around the globe even after their ISPs have been sent millions of notices.
we receive 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.
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 180,000 individual cases of copyright infringement. To date, we have closed infringements and received settlement
payments from subscribers on more than 233 ISPs including five of the top 10 US ISPs: Comcast, Charter, CenturyLink, Mediacom
and Suddenlink. We believe ISPs that participate with us and our clients by forwarding notices of infringement achieve compliance
with their obligations under Digital Millennium Copyright Act (or DMCA), as discussed below. Conversely, we believe that ISPs
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 year ended December 31, 2015, our contract with BMG Rights Management accounted for approximately 76% of our sales, and our
contract with Warner Bros. Entertainment accounted for 13% of our sales. For the year ended December 31, 2016, our contract with
Recording Industry Association of America accounted for approximately 44% of our sales, and our contract with BMG Rights Management
accounted for 23% of our sales. Our standard contracts with customers are for initial terms which vary in length, typically between
three months and one year, and renewals are at the discretion of the parties, or in some cases renew automatically in one month
increments, subject to the right of either party to terminate upon 30 days’ notice.
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.
have found businesses that have been involved in contributing to copyright infringement liable for damages. In Fonovisa v. Cherry
provided by the swap meet, including the provision of space, utilities, parking, advertising, plumbing and customer service”.
512(i) of the DMCA provides a conditional safe harbor protection from such third party liability. It states as follows:
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
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.
September 2013, Netnames, a market research and consultancy firm, reported that P2P traffic that infringes on copyrights had become
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.”
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.
the same three regions, infringing use of BitTorrent in January 2013 accounted for:
million unique internet users, an increase of 23.6% from November 2011; and
billion page views, an increase of 30.6% from November 2011.
to the Global Internet Phenomena Report in Sandvine, 1H 2014, P2P file sharing accounted for approximately 27% of all North
American upstream Internet traffic.
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. By February 2012, most of the 30,000 cases settled out of court for between $3,000 and
$5,000, and two cases were 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.
In the P2P world, essentially, everyone is an uploader. On BitTorrent, once the “downloader” has obtained enough of
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.”
list. We believe P2P continues for several reasons, including that:
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.
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.
they can enter a credit card and they can settle the matter between them and the copyright owner for $30 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.
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.
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.
“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.
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.
industry conferences. Christopher Sabec, our president, has been a successful entertainment executive and artist manager.
In the music space, previously we have attended 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 2015 and 2016, we identified the top 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
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:
We believe that attempts to get search engines to block links and sites will have no effect on piracy.
have several “touch points” in our revenue model where we seek to increase revenues.
increasing response rates (the number of subscribers who have received notices and agree to settle). We may seek to do this
educational and motivational aspects of the notice, web site and payment process and by having ISPs terminate repeat infringers
until they settle;
protecting our Client’s copyrights outside the USA from P2P infringement. We expect to initiate coverage in Germany
by Q2 2016.
We have 2 patents granted in Australia and Israel and 26 patent applications 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 January 12, 2016. The 26 patent applications include 5 U.S. patent applications, with each such patent application’s
respective status before the U.S. Patent & Trademark Office (USPTO) detailed below, and 21 patent applications in countries
such as Australia, Brazil, Canada, China, India, Israel, Japan, and the European Union. Should the European Patent Office grant
a patent on one or more of the European patent applications, then the patent may be validated in one or more of the 27 European
Union member states. The 5 US patent applications include patent applications 13/485,178, 14/945,551, 13/594,596 and 14/993,902,
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. In addition, the 5 U.S. patent applications
also include U.S. Patent application 13/103,795 which includes methods for using peer-to-peer infringement data to sell legitimate
products to infringers. The Australian patent, no. 2012236069, and Israeli patent, no. 229661, also contain a method 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 Australian P2P space. The Australian patent expires on April 2, 2032, and the Israeli patent expires
on May 31, 2032.
System and Method for Determining Copyright
Infringement and Collecting Royalties Therefor
currently stands rejected by the USPTO. Applicant will submit a response to the USPTO’s rejection. .
System to Identify Multiple Copyright Infringements
and Collecting Royalties
currently stands rejected by the USPTO. Applicant will submit a response to the USPTO .
currently stands rejected by the USPTO. The rejection is a Final Rejection*. Applicant wills submit a response with a Request
for Continued Examination to the Final Rejection* in an attempt to overcome the USPTO’s rejections.
14/945,551
System to Identify a Computer on a Network
provisional application 62/082,789 was converted to a nonprovisional application and filed to secure an effective filing date
of November 21, 2014 for the subject matter disclosed by the patent application.
14/993,902
System and Method to Verify Predetermined
Actions by a Computer on a Network
provisional application 62/102,354 was converted to a nonprovisional application and filed to secure an effective filing date
of January 12, 2015 for the subject matter disclosed by the patent application.
10 *Final
Rejection – a USPTO office action made by the examiner where the applicant is entitled to file an appeal to the PTAB or
make a request for continued examination with, or without, amendment for consideration by the examiner.
**Non-Final
Rejection – a USPTO Office action made by the examiner where the applicant is entitled to reply and request reconsideration,
with or without making an amendment.
have registered trademarks for Rightscorp (U.S. Trademark Registration Nos. 4681891 and 4681885) and plan to register a trademark
for Scalable Copyright.
patent applications listed in the table above, the US versions of the applications filed on May 31, 2012, November 19, 2015 and
January 12, 2016, are of greater importance to us than the others. We believe that the patent applications were rejected by the
USPTO on invalid grounds and that the responses currently being prepared will ultimately succeed. However, we cannot assure you
that we will in fact be proven correct in our belief. If these three applications are not successfully granted into patents, our
business could be materially and adversely affected, as more fully described under the risk factor appearing under the heading
“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” above.
has collected in excess of $1.5 billion annually.
believe other competitors use more aggressive litigation that drives settlement through threats of costly lawsuits, which we believe
is not a scalable model. One competitor is located in Los Angeles, CA. 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. We do not send notices related to pornographic
are seeking to build and maintain our competitive advantage in the following four ways:
shows to develop greater awareness of the ISPs’ liability and our no-cost solution to help them mitigate that liability.
we have filed 28 full and provisional patents;
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.
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.
Consumer File-Sharing Traffic, 2010-2018
File Sharing, 2013-2018
2013 2014 2015 2016 2017 2018 CAGR 2013-2018 By Network (PB per Month) Fixed 6,044 6,492 6,729 6,783 6,744 6,652 2%
Mobile 41 56 74 92 112 131 26%
By Subsegment (PB per Month) P2P file transfer 5,081 5,254 5,205 4,946 4,559 4,088 -4%
Other file transfer 1,004 1,294 1,598 1,929 2,297 2,696 22%
By Geography (PB per Month) Asia Pacific 2,560 2,794 2,935 3,009 3,041 3,020 3%
North America 802 878 951 1,018 1,073 1,124 7%
Western Europe 1,184 1,181 1,145 1,130 1,115 1,086 -2%
Central and Eastern Europe 872 951 992 956 923 891 0%
Latin America 567 634 673 672 649 608 1%
Middle East and Africa 100 110 107 90 55 54 -12 Total (PB per Month) Consumer file sharing 6,085 6,548 6,803 6,875 6,856 6,784 2%
of March 22, 2017, we had 11 employees, 8 of whom are full time.
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 report before making investment decisions with respect to
Related to our Company and our Business
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
that we may not have sufficient capital to achieve our growth strategy;
that we may not develop our product and service offerings in a manner that enables us to be profitable and meet our customers’
that our growth strategy may not be successful; and
that fluctuations in our operating results will be significant relative to our revenues.
If we do not successfully
address these risks, our business would be significantly harmed.
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.
have a history of losses and may continue to incur operating and net losses for the foreseeable future. For the year ended December
31, 2016, we incurred a net loss of $1,355,747 and used cash in operating activities of $807,530, and at December 31, 2016, we
had a stockholders’ deficiency of $2,092,060. These factors raise substantial doubt about our ability to continue as a going
concern within one year after the date that financial statements are issued. As a result, our independent registered public accounting
firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2016
with respect to this uncertainty. This going concern opinion could materially limit our ability to raise additional funds through
the issuance of new debt or equity securities or otherwise, and future reports on our financial statements may also include an
explanatory paragraph with respect to our 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 borrowings
and the sale of common stock. No assurance can be given that any future financing will be available or, if available, that it
will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain
undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case
or equity financing.
will need significant additional capital, which we may be unable to obtain.
expect that we will 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.
will need to increase the size of our organization, and we may be unable to manage rapid growth effectively.
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.
our business, operating results and financial condition.
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, Rightscorp Delaware’s founder, and Cecil Kyte, our chief executive officer, 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
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-six patent applications 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.
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.
patent applications and licenses may be subject to challenge on validity grounds, and our patent applications may be rejected.
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.
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.
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.
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.
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.
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.
business strategy involves having copyright owners agree to use our service. Our ability to implement this business strategy is
dependent on our ability to:
is typically the case involving service offerings, anticipation of demand and market acceptance are subject to a high level of
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.
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.
derived approximately 77% of our revenues from a contract with one customer during the year ended December 31, 2015. For the year
ended December 31, 2015, we derived approximately 90% of our revenues from contracts with two customers. We derived approximately
44% of our revenues from a contract with one customer during the year ended December 31, 2016. For the year ended December 31,
2016, we derived approximately 67% of our revenues from contracts with two customers. Our standard contract, which is entitled
a Representation Agreement, with customers are for initial terms which vary in length, typically between three months and one
year, and renewals are at the discretion of the parties, or in some cases renew automatically in one month increments, subject
to the right of either party to terminate upon 30 days’ notice. If any of our major customers were to terminate their business
relationships with us, our operating results would be materially harmed.
and services and adversely affect our business and operating results.
may harm our business.
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.
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.
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.
Related to the Securities Markets and Ownership of our Equity Securities
common stock is thinly traded, so shareholders may be unable to sell at or near ask prices or at all.
common stock has historically been sporadically traded on the OTCQB, 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 can provide no 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.
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
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. 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 are 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 significant revenue or profit to date. 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. Our
common stock is considered a “penny stock” and 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.
we became public by means of a reverse acquisition, we may not be able to attract the attention of brokerage firms.
issuance of common stock upon exercise of warrants may depress the price of our common stock.
of March 14, 2017, there were outstanding presently exercisable warrants entitling the holders to purchase 45,310,140 shares of
common stock at a weighted average exercise price of $0.09 per share. The issuance of shares of common stock upon exercise
of outstanding warrants, could result in substantial dilution to our stockholders, which may have a negative effect on the price
issuance of additional shares of common stock, or options or warrants to purchase those shares, would dilute your proportionate
ownership and voting rights.
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 March 28, 2017, 132,463,171 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. Such issuances would result in dilution to our stockholders, which may have a negative
effect on the price of our common stock.
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.
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.
18 Anti-takeover
provisions may impede the acquisition of our company.
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.
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.
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. 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.
may become involved in securities class action litigation that could divert management’s attention and harm our business.
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.
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.
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.
does not apply to us .
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
to make the statements not misleading. Such an action could hurt our financial condition.
have not paid cash dividends in the past and do not expect to pay cash dividends in the foreseeable future.
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 a shareholder’s investment will only
occur if the common stock price appreciates.
a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the
information required by this Item.
are involved in the following legal proceeding.
Blaha v. Rightscorp, Inc., C.D. Cal. (Original Complaint Filed November 21, 2014; First Amended Complaint Filed March 9, 2015).
of Matter: This matter seeks relief for alleged violations of the Telephone Consumer Protection Act (47 U.S.C. § 227).
The action is brought on behalf of the individual named plaintiff as well as on behalf of a putative nationwide classes.
of Matter to Date: This matter was previously captioned with Karen J. Reif and Isaac Nesmith as lead plaintiffs. On March
9, 2015, plaintiff filed a First Amended Complaint replacing the lead plaintiffs, dropping their second and third causes of action
for Violations of the Fair Debt Collection Practices Act (15 U.S.C. § 1692, et seq.) and Violations of the Rosenthal Fair
Debt Collection Practices Act (Cal. Civ. Code § 1788 et seq.) (and dropping associated putative class claims), and naming
BMG Rights Management (US) LLC and Warner Bros. Entertainment Inc. as additional defendants.
First Amended Complaint also contained a cause of action for Abuse of Process. In response to the Abuse of Process claim, defendants
brought a special motion to strike the claim under California’s anti-SLAPP statute. Defendants’ anti-SLAPP motion
was granted on May 8, 2015. Pursuant to the Court’s May 8, 2015 Order, the Abuse of Process claim (and associated putative
class claim) was stricken from the case and plaintiff was ordered to pay defendants’ attorney’s fees incurred in bringing
the anti-SLAPP motion.
the dismissal of Plaintiff’s Abuse of Process claim, the parties agreed to mediate the dispute and reached a settlement
in principal. On June 24, 2016, the Court issued an order granting plaintiff’s motion for preliminary approval of class
action settlement. On August 1, 2016, notice was sent to the class. A hearing regarding final approval of the settlement was
held November 14, 2016 and the settlement was approved. The Company recorded a reserve for the estimated settlement
of $200,000 related to this, which is net of expected insurance proceeds of $250,000. On January 7, 2017, BMG Rights Management
(US) LLC advanced us $200,000, which was used to pay off the settlement.
SERVICES, LLC Plaintiff V. BMG RIGHTS MANAGEMENT (US) LLC, et al. Defendant, S.D. NY. (Original Complaint Filed June 27, 2016).
of Matter: This matter was a Civil action seeking declaratory relief under 17 U.S.C. §§ 101, et seq. and
28 U.S.C. §§ 2201, et seq. Rightscorp was named as an additional Defendant in this matter. Plaintiff sought
declaratory relief that it is not liable for the copyright infringements of its customers.
of Matter to Date: Company waived service of process on July 6, 2016. Evaluation:
common stock is quoted on the OTCQB 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 bid price 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.
common stock is thinly traded and any reported sale prices may not be a true market-based valuation of our common stock.
High Low Fiscal Year 2015 First Quarter $0.18 $0.07 Second Quarter $0.23 $0.05 Third Quarter $0.23 $0.09 Fourth Quarter $0.13 $0.07 Fiscal Year 2016 First Quarter $0.09 $0.06 Second Quarter $0.08 $0.03 Third Quarter $0.06 $0.04 Fourth Quarter $0.05 $0.02 As
of March 28, 2017, we had approximately 107 holders of record of our common stock.
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.
Sales of Unregistered Securities During
the three months ended December 31, 2016, the Company issued 276,218 shares of common stock upon exercise of warrants for gross
proceeds of $3,763.
the three months ended December 31, 2016, the Company issued 3,291,639 shares of common stock for services rendered in amount
31, 2016, the Company issued warrants to purchase 500,000 shares of common stock with an exercise price of $0.02 as additional
consideration to the purchaser of a promissory note in the amount of $50,000. These warrants have a term of one year.
connection with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities
following table sets forth the aggregate information of our equity compensation plans in effect as of December 31, 2016:
Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 0 0 0 Equity compensation plans not approved by security holders 579,988 0.27 170,012 Total 579,988 0.27 170,012 ITEM
following discussion is an overview of the important factors that management focuses on in evaluating our business; financial
condition and operating performance should be read in conjunction with the financial statements included in this Annual Report
on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ
materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set
forth in this Annual Report on Form 10-K. Given the uncertainties that surround such statements, you are
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, Inc. a Delaware corporation formed on January 20, 2011 (“Rightscorp Delaware”).
The acquisition of Rightscorp Delaware was treated as a reverse acquisition, and the business of Rightscorp Delaware became the
business of our company.
have developed products and intellectual property rights relating to providing data and analytics regarding 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 gathering and analyzing infringement data and for solving copyright infringement by collecting payments
from illegal downloaders via notifications sent to their ISPs. Rightscorp has closed more than 230,000 cases of copyright infringement
ended December 31, 2016 compared to year ended December 31, 2015
We generated copyright
settlement revenues of $392,971 during the year ended December 31, 2016, a decrease of $439,244 or 53% as compared to $832,215
for the year ended December 31, 2015. Management believes that the decrease in revenues was due to: a) changes in the filesharing
software intended to defeat detection of copyrights being illegally distributed, b) reduced forwarding of our notices
by ISPs and c) termination of certain filesharing network infrastructure.
the year ended December 31, 2016, we generated revenues of $385,244 from consulting services rendered under service arrangements
with prominent trade organizations. Under the agreements, the Company is providing certain data and consultation regarding
copyright infringements on their respective owned properties. During the year ended December 31, 2015, we had no
consulting services revenue.
Holder Fees
return for the right to pursue copyright infringers, we pay the copyright holders a percentage of the revenue we collect, in accordance
with our representation agreements with our clients entered into prior to our notices being sent to infringers. For the year ended
December 31, 2016 we accrued $214,653 due to copyright holders. For the year ended December 31, 2015 we accrued $439,724 to copyright
and marketing expenses consist primarily of advertising and marketing and consulting expenses. Sales and marketing costs were
$3,376 for the year ended December 31, 2016 compared to $216,274 for the year ended December 31, 2015, a decrease
of $212,898. This decrease was primarily due to 1,700,000 warrants with a fair value of $130,562 issued for sales and
marketing services during the year ended December 31, 2015.
and administrative expenses consist primarily of salaries and related expenses for our management and personnel, and professional
fees, such as accounting, consulting and legal. Legal fees related to various matters as discussed further in Part II, Item 1,
Legal Proceedings totaled $319,405 for the year ended December 31, 2016, compared to $939,303 for the year ended December 31,
2015. Consulting expenses for the year ended December 31, 2016, were $3,979, compared to $499,375 for the year ended December
31, 2015, a decrease of $495,396. Total wage and related expenses for the year ended December 31, 2016 were $1,403,663, of which
$443,846 were non-cash charges related to the issuance and vesting of options and warrants issued for services. The total decrease
in general and administrative expenses was $2,075,270 over the year ended December 31, 2015. Our total general and administrative
expenses for the year ended December 31, 2016 were $2,423,249.
ended December 31, 2015 the Company recorded a reserve for the estimated settlement of $200,000 related to this, which is net
of expected insurance proceeds of $250,000. The Company had no such settlement for the year ended December 31, 2016.
and amortization expenses were $88,407 during the year ended December 31, 2016, a decrease of $26,245, as compared to $114,652
expense totaled $31,637 during the year ended December 31, 2016, compared to $6,270 in the year ended December 31, 2015.
in fair value of Derivative
had a change in the fair value of derivative liabilities income of $627,360 during the year ended December 31, 2016, compared
to $1,208,657 for the year ended December 31, 2015.
a result of the foregoing, during the year ended December 31, 2016, we recorded a net loss of ($1,355,747) compared to a net loss
of ($3,434,567) for the year ended December 31, 2015.
Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
As reflected in the consolidated financial statements, during the year ended December 31, 2016, the Company incurred a net loss
of $1,355,747, used cash in operations of $807,530, and at December 31, 2016, the Company had a stockholders’ deficit
of $2,092,060. These factors raise substantial doubt about the Company’s ability to continue as a going concern within
one year after the date that financial statements are issued. In addition, the Company’s independent registered public accounting
firm, in its report on the Company’s December 31, 2016 financial statements, has expressed substantial doubt about the Company’s
ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
At December 31, 2016, the Company had cash of $5,047. Management believes that the Company will need at least another $500,000
to $1,000,000 in 2017 to fund operations based on our current operating plans. Management’s plans to continue as a going
concern include raising additional capital through borrowings and/or the sale of common stock. No assurance can be given that
any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if
the Company is able to obtain additional financing, it may contain restrictions on our operations, in the case of debt financing,
or cause substantial dilution for our stockholders, in case of an equity financing.
the year ended December 31, 2016, we used $807,530 of cash in operating activities. Non-cash adjustments included $88,407 related
to depreciation and amortization, $443,846 for stock based compensation, $627,360 related to change in fair value of derivative
liabilities, and net changes in operating assets and liabilities of $543,324.
the year ended December 31, 2015, we used $2,495,900 of cash in operating activities. Non-cash adjustments included $114,652 related
to depreciation and amortization, $759,560 for stock based compensation, $1,208,657 related to change in fair value of derivative
liabilities, and net changes in operating assets and liabilities of $889,413.
the year ended December 31, 2016, we received $619,563 of cash from financing activities, including $500,000 in proceeds
from issuance of common stock, $50,000 in proceeds from issuance of note payable, and $69,563 in proceeds from exercise of warrants
the year ended December 31, 2015, we received $1,022,000 of cash from financing activities. We received $1,032,000 in proceeds
from issuance of common stock. We used $10,000 to repay convertible notes.
Company prepared its condensed consolidated financial statements in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the reporting period. Management periodically evaluates
the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors
that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different
following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s
Company provides 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 Company collects a fee from
an infringer which acts as a settlement of the infringement liability. Generally, the Company has agreed to remit 50% of such
collections to the copyright holder. The Company also provides services to copyright holders. Service fee revenue is recognized
when the service has been provided.
is recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed
or determinable and collectability is reasonably assured.
Company periodically grants stock options and warrants to employees and non-employees in non-capital raising transactions as compensation
for services rendered. The Company accounts for stock option and stock warrant grants to employees based on the authoritative
guidance provided by the Financial Accounting Standards Board where the value of the award is measured on the date of grant and
recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance
with the authoritative guidance of the Financial Accounting Standards Board where the value of the stock compensation is determined
based upon the measurement date at either a) the date at which a performance commitment is reached, or b) at the date at which
the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally
requirements by the non-employee, option or warrant grants are immediately vested and the total stock-based compensation charge
is recorded in the period of the measurement date.
fair value of the Company’s common stock option and warrant grants is estimated using a Black-Scholes option pricing model,
which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model,
and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation
expense recorded in future periods.
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the statements of operations. The Company uses a probability weighted average Black-Scholes-Merton model to value the derivative
instruments. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within
12 months of the balance sheet date.
Footnote 2 of the consolidated financial statements for a discussion of recently issued accounting standards.
Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements for the years ended December 31, 2016 and 2015
have audited the accompanying consolidated balance sheets of Rightscorp, Inc. (the “Company”) and Subsidiary as
of December 31, 2016 and 2015, and the related consolidated statements of operations, change’s in 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
standards require that we plan and perform the audits 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 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
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Rightscorp, Inc. and Subsidiary as of December 31, 2016 and 2015, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from
operations and has used cash to fund operating activities since inception, and has a stockholders’ deficit as of
December 31, 2016. These conditions raise 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 consolidated financial statements. The consolidated financial statements do not include any
& COMPANY, P.A.
F-1 Rightscorp,
December 31, 2016 December 31, 2015 Assets Assets Cash $5,047 $193,014 Prepaid expenses 65,073 100,230 Total Current Assets 70,120 293,244 Other Assets Fixed assets, net 54,113 142,520 Total Assets $124,233 $435,764 Liabilities and Stockholders’ Deficit Current Liabilities Accounts payable and accrued liabilities $1,885,977 $1,407,864 Note payable 50,000 - Derivative liabilities 280,316 1,210,430 Total Current Liabilities 2,216,293 2,618,294 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; 127,463,171 and 107,215,314 shares issued and outstanding, respectively 127,463 107,215 Additional paid in capital 9,664,168 8,238,199 Accumulated deficit (11,883,691) (10,527,944)
Total stockholders’ deficit (2,092,060) (2,182,530)
Total Liabilities and Stockholders’ Deficit $124,233 $435,764 See
F-2 Rightscorp,
Year Ended Year Ended December 31, 2016 December 31, 2015 Revenue Copyright settlement revenue $392,971 $832,215 Consulting revenue 385,244 - Total revenue 778,215 832,215 Operating expenses: Copyright holder fees 214,653 439,724 Sales and marketing 3,376 216,274 General and administrative 2,423,249 4,498,519 Loss on settlements - 200,000 Depreciation and amortization 88,407 114,652 Total operating expenses 2,729,685 5,469,169 Loss from operations (1,951,470) (4,636,954)
Other income (expenses): Interest expense (31,637) (6,270)
Change in fair value of derivative liabilities 627,360 1,208,657 Total other income (expenses) 595,723 1,202,387 Net loss $(1,355,747) $(3,434,567)
Net loss per share – basic and diluted $(0.01) $(0.04)
Weighted average common shares – basic and diluted 120,430,719 94,120,902 See
F-3 Rightscorp,
Common stock Stock to be Additional Paid in Accumulated Total Stockholders’ Stock Amount issued Capital Deficit Deficit Balance at January 1, 2015 89,896,421 $89,896 $50,000 $6,030,259 $(7,093,377) $(923,222)
Fair value of stock-based compensation - - - 433,699 - 433,699 Fair value of shares issued for services 6,450,000 6,450 - 753,110 - 759,560 Shares issued for cash 10,320,000 10,320 - 1,021,680 - 1,032,000 Shares issued upon exercise of warrants 548,893 549 - (549) - - Cancellation of Common stock to be issued - - (50,000) - - (50,000)
Net loss - - - - (3,434,567) (3,434,567)
Balance at December 31, 2015 107,215,314 107,215 - 8,238,199 (10,527,944) (2,182,530)
Fair value of stock-based compensation - - - 443,846 - 443,846 Fair value of shares issued for services 3,291,639 3,292 - 96,708 - 100,000 Shares issued for cash 10,000,000 10,000 490,000 - 500,000 Shares issued upon exercise of warrants 6,956,218 6,956 - 62,607 - 69,563 Fair value of warrants issued with convertible note payable - - - 30,054 - 30,054 Extinguishment of derivative liability - - - 302,754 - 302,754 Net loss - - - - (1,355,747) (1,440,613)
Balance at December 31, 2016 127,463,171 $127,463 $- $9,664,168 $(11,883,691) $(2,092,060)
F-4 Rightscorp,
31, 2015 Cash
Flows from Operating Activities Net
loss $(1,355,747) $(3,434,567)
to reconcile net loss to net cash used in operating activities: Depreciation
and Amortization 88,407 114,652 Fair value of shares
issued for services 100,000 759,560 Fair value of stock-based
compensation 443,846 433,699 Fair
value of warrants issued with convertible note payable 30,054 - Change in fair value
of derivative liabilities (627,360) (1,208,657)
of common stock to be issued - (50,000)
expense 35,157 90,116 Accounts
payable and accrued liabilities 478,113 799,297 Net
cash used in operating activities (807,530) (2,495,900)
Flows from Financing Activities Repayment
of convertible notes - (10,000)
from issuance of common stock 500,000 1,032,000 Proceeds
from issuance of convertible note payable 50,000 - Proceeds
from the exercise of warrants 69,563 - Net
cash provided by financing activities 619,563 1,022,000 Net decrease in cash (187,967) (1,473,900)
of period 193,014 1,666,914 Cash,
end of period $5,047 $193,014 Non-cash
Investing and financing activities: Extinguishment
of derivative liability recorded as capital contribution $302,754 - See
F-5 Rightscorp,
the years ended December 31, 2016 and 2015
Inc., a Nevada corporation (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”). On October 25, 2013, the Company acquired Rightscorp Delaware in a transaction treated
as a reverse acquisition, and the business of Rightscorp Delaware became the business of the Company.
Company has developed products and intellectual property rights relating to providing data and analytics regarding 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 gathering and analyzing infringement data and for solving copyright infringement by collecting
payments from illegal downloaders via notifications sent to their ISP’s.
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which
contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As
reflected in the accompanying consolidated financial statements, during the year ended December 31, 2016, the Company incurred
a net loss of $1,355,747, and used cash in operations of $807,530, and at December 31, 2016, the Company had a stockholders’
deficit of $2,092,060. These factors raise substantial doubt about the Company’s ability to continue as a going concern
within one year after the date that financial statements are issued. The Company’s financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as a going concern.
December 31, 2016, the Company had cash of $5,047. Management believes that the Company will need at least another $500,000 to
$1,000,000 in 2017 to fund operations based on our current operating plans. Management’s plans to continue as a going concern
include raising additional capital through borrowings and/or the sale of common stock. No assurance can be given that any future
financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company
is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or
cause substantial dilution for our stock holders, in case of an equity financing.
financial statements include the accounts of Rightscorp Inc., and its wholly-owned subsidiary Rightscorp Delaware. Intercompany
liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant
estimates include accounting for potential liabilities, and the assumptions made in valuing share-based instruments issued for
services, and derivative liabilities. Actual results could differ from those estimates.
Company considers all cash, certificates of deposit and other highly-liquid investments with original maturities of three months
or less, when purchased, to be cash and cash equivalents. As of December 31, 2016 and 2015 the Company had no cash equivalents.
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of three
years. Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized.
Gains and losses on disposals are included in the consolidated statements of operations.
assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to
result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset,
an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2016 and
2015, the Company did not recognize any impairments for its property and equipment.
F-6 Revenues
Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible
temporary differences, 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 be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
F-7 Fair
current accounting guidance, fair value is defined as the price at which an asset could be exchanged or a liability transferred
in a transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability.
Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where
observable prices or parameters are not available, valuation models are applied. A fair value hierarchy prioritizes the inputs
used in measuring fair value into three broad levels as follows:
1 – Quoted prices in active markets for identical assets or liabilities.
2 – Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
3 – Unobservable inputs based on the Company’s assumptions.
Company is required to use observable market data if such data is available without undue cost and effort. As of December 31,
2016, the amounts reported for cash, accrued liabilities and accrued interest approximated fair value because of their short-term
liabilities of $280,316 and $1,210,430 were valued using Level 2 inputs as of December 31, 2016 and 2015, respectively.
and diluted loss per share
loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding
common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders
by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding
if all dilutive potential common shares had been issued. Potential common shares are excluded from the computation when their
December 31, 2016 and 2015, the dilutive impact of outstanding stock options for 900,000 and 970,000 shares, respectively, and
outstanding warrants for 46,958,072 and 35,310,140 shares, respectively, have been excluded because their impact on the loss per
share is anti-dilutive.
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition
guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. Under ASU
2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that
reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU 2016-20 all of which clarify certain
implementation guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15,
2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods
therein. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application
(the cumulative catch-up transition method). The Company is currently in the process of analyzing the information necessary to
determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows. The Company
will adopt the provisions of this statement in the first quarter of fiscal 2018. NOTE: Add a description of the method the registrant
expects to use (i.e. full retrospective or modified retrospective) if determined.
February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding
lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim
and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
period presented in the financial statements. The Company is currently evaluating the expected impact that the standard could
have on its financial statements and related disclosures.
March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized
in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee’s
shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election
to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual
period. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
F-8 Note
3 – Fixed Assets
of December 31, 2016 and December 31, 2015, fixed assets consisted of the following:
December 31, 2016 December 31, 2015 Computer equipment and fixtures $312,756 $312,756 Accumulated depreciation (258,643) (170,236)
Fixed assets, net $54,113 $142,520 Depreciation
and amortization expense for the year ended December 31, 2016 and December 31, 2015 was $88,407 and $114,652, respectively.
of December 31, 2016 and December 31, 2015, accounts payable and accrued liabilities consisted of the following:
December 31, 2016 December 31, 2015 Accounts payable $862,860 $683,488 Due to copyright holders 601,421 414,688 Accrued settlement 200,000 200,000 Accrued payroll 180,894 62,908 Insurance premium financing payable 40,802 46,780 Total $1,885,977 $1,407,864 In
November 2014, the Company was named as defendant in a class action complaint (see John Blaha v. Rightscorp, Inc in Note
10). In August 2015 the Company reached a preliminary settlement in the matter and at December 31, 2015 and 2016, has accrued
a settlement of $200,000 related to this, which is net of expected insurance proceeds of $250,000. The $200,000 settlement was
paid on January 7, 2017, and the insurance company paid $250,000 on January 7, 2017 (see Note 11).
5 - Notes Payable
the year ended December 31, 2016, a third-party shareholder loaned the Company $50,000 for working capital purposes. The $50,000
is due on demand, unsecured, and interest is at 4% per year. In addition, the note holder received warrants to purchase
500,000 shares of common stock. The warrants are exercisable at $0.02 per share, have a term of three years, and were 100% vested
upon issuance. As a result, the Company recorded a note discount of $16,691 to account for the relative fair value of the warrants.
As the note payable is due on demand, the note discount was expensed immediately.
the year ended December 31, 2016, the Company issued additional warrants to purchase 500,000 shares of common stock to the note
holder. The warrants are exercisable at $0.02 per share, have a term of one year, and were 100% vested upon issuance. The Company
determined that the fair value of the warrants was $13,363 which was expensed immediately.
6 – Derivative Liabilities
September 2014, the Company issued warrants exercisable into 17,892,000 shares of common stock in relation to the sale of 11,928,000
shares of its common stock. The warrants had a term of five years and an exercise price of $0.25 per share, subject to adjustment,
as defined, if the Company issues securities at a price lower than the exercise price of these warrants in the future (see Note
7). At December 31, 2015, 15,792,000 of these warrants were outstanding. During the year ended December 31, 2016, 6,580,000 of
these warrants were exercised, and at December 31, 2016, 9,212,000 of these warrants were outstanding.
to FASB authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own
stock, instruments, which do not have fixed settlement provisions, are deemed to be derivative instruments. The exercise price
of the warrants issued in September 2014 did not have fixed settlement provisions because their exercise prices could be lowered
if the Company issues securities at lower prices in the future. In accordance with the FASB authoritative guidance, the Company
determined that the exercise feature of the warrants was not considered to be indexed to the Company’s own stock, and bifurcated
the exercise feature of the warrants and recorded a derivative liability. The derivative liability is re-measured at the end of
every reporting period with the change in fair value reported in the statement of operations.
December 31, 2015, the fair value of the derivative liabilities was $1,210,430. During the year ended December 31, 2016, 6,580,000
warrants accounted for as derivative liabilities were exercised and as such their corresponding fair value at the exercise date
of $302,754 was extinguished from the derivative liabilities balance. During the year ended December 31, 2016, the fair value
of the derivative liabilities decreased by $627,360, and at December 31, 2016, the fair value of the derivative liabilities was
$280,316.
F-9 At
December 31, 2016 and 2015, the fair value of the derivative liabilities were determined through use of a probability-weighted
Black-Scholes-Merton valuation model based on the following assumptions:
December 31, 2016 December 31, 2015 Expected volatility 172% 274%
Risk-free interest rate 1.47% 1.0%
Expected life 2.7 years 4.5 years To
estimate the expected volatility, the Company used historical volatility calculated using daily closing prices for its common
stock over periods that match the expected term of the warrants. The risk-free interest rate was based on rates established by
the Federal Reserve Bank. The expected life of the exercise feature of the warrants was based on the remaining term of the warrants.
The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not
expect to pay dividends in the future.
7 – Common Stock
the year ended December 31, 2016, the Company sold units to accredited investors for an aggregate of 10,000,000 shares of its
common stock at $0.05 per share and warrants to purchase 10,000,000 shares of its common stock for total gross proceeds of $500,000.
The warrants have a term of three years and an exercise price of $0.10 per share.
the year ended December 31, 2016, the Company issued 6,956,218 shares of its common stock upon the exercise of 6,680,000 warrants
issued in connection with the sale of common stock in 2014, and the exercise of 276,218 warrants issued for services in 2012 and
2013. The total proceeds from the exercise of the warrants was $69,563.
the year ended December 31, 2015, the Company entered into securities purchase agreements with 11 accredited investors pursuant
to which the Company sold an aggregate of 10,320,000 shares of common stock for $0.10 per share and warrants to purchase 10,320,000
shares of common stock for total proceeds of $1,032,000. The warrants have an exercise price of $0.15 per share and have a term
the year ended December 31, 2015, the Company issued 6,450,000 shares of its common stock with a fair value of $759,560 to employees
and consultants for services rendered. The shares were valued at market prices, which ranged from $0.09 per share to $0.15 per
share, on the date the shares were granted.
the year ended December 31, 2015, the Company granted options to purchase 970,000 shares of common stock with exercise prices
ranging from $0.15 to $0.25 per share to employees of the Company. The stock options generally vest between two and three years.
The fair value of these options was determined to be $194,201 using the Black-Scholes-Merton option-pricing model based on the
following assumptions: (i) volatility rate ranging from 180% to 207%, (ii) discount rate ranging from 1.5% to 1.71%, (iii) zero
expected dividend yield, and (iv) expected life of 5 to 10 years.
the years ended December 31, 2016 and 2015, the Company recorded compensation costs of $38,614 and $84,589, respectively, relating
to the vesting of stock options. As of December 31, 2016, the aggregate value of unvested options was $3,303, which will be amortized
through June, 2017.
stock option activity for the year ended December 31, 2016 and 2015 is as follows:
Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Balance outstanding, January 1, 2015 360,000 $0.38 9.64 Granted 970,000 0.17 5.99 Exercised - - - Forfeited/expired (360,000) 0.28 8.88 Balance outstanding, December 31, 2015 970,000 0.17 6.71 Granted - - - Exercised - - - Forfeited/expired (70,000) 0.25 - Balance outstanding, December 31, 2016 900,000 $0.17 4.67 Exercisable, December 31, 2016 106,664 $0.25 8.13 At
December 31, 2016, the Company’s outstanding and exercisable options had no intrinsic value. On January 4, 2017, 750,000
of the options outstanding at December 31, 2016 were cancelled.
F-10 Warrants
the year ended December 31, 2016, the Company issued warrants exercisable into 19,000,000 shares of common stock. Warrants exercisable
into 10,000,000 shares of common stock were issued with 10,000,000 shares of common stock (see Note 7) and warrants exercisable
into 1,000,000 shares of common stock were issued to a note holder (see Note 5).
addition, the Company issued warrants for services to purchase 8,000,000 shares of common stock, exercisable at $0.15 per share,
with a term of three years, and 100% vested upon issuance. The Company determined that the award is a certainty and the service
performance and its future benefit were not assured, and so the fair value of the 8,000,000 warrants calculated to be $330,210
was expensed immediately.
the year ended December 31, 2016, the Company recorded compensation costs of $75,022 relating to the vesting of other stock warrants.
the year ended December 31, 2015, the Company granted warrants to purchase 4,850,000 shares of common stock with exercise prices
ranging from $0.15 to $0.25 per share to employees of the Company and consultants. In September 2015, in conjunction with the
issuance of shares of the Company’s common stock to accredited investors, the Company issued warrants exercisable into 10,320,000
shares of common stock. The warrants have a term of three years and an exercise price of $0.15 per share. During the year ended
December 31, 2015, the Company recorded compensation costs of $349,110 relating to the vesting of other stock warrants
the years ending December 31, 2016 and 2015, the fair value of warrant awards was estimated using the Black-Scholes-Merton option-pricing
December 31, 2016 December 31, 2015 Expected volatility 121% 134% to 144%
Risk-free interest rate 1.08% 1.2% to 1.5%
Expected life 3 years 3 to 5 years To
of December 31, 2016, the aggregate value of unvested warrants was $10,191, which will be amortized through June, 2017.
summary of the Company’s warrant activity during the year ended December 31, 2016 and 2015 is presented below:
Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Term Balance outstanding, January 1, 2015 22,450,140 $0.26 4.03 Granted 15,170,000 0.17 3.07 Exercised (600,000) 0.01 - Forfeited/expired (1,710,000) 0.75 - Balance outstanding, December 31, 2015 35,310,140 0.09 3.21 Granted 19,000,000 0.12 2.12 Exercised (6,956,218) 0.01 2,65 Forfeited/expired (395,850) 0.09 - Balance outstanding, December 31, 2016 46,958,072 $0.11 2.13 Exercisable, December 31, 2016 46,458,072 $0.11 4,25 At
December 31, 2016, the Company’s outstanding and exercisable warrants had an intrinsic value of $225,897.
F-11 Note
9 - Income Taxes
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets
as of December 31, 2016 and 2015 are summarized below.
2016 2015 Net operating loss carryforward $3,837,00 $3,300,000 Stock-based compensation 216,000 417,000 Total deferred tax assets 4,053,000 3,717,000 Valuation allowance (4,053,000) (3,717,000)
Net deferred tax asset $- $- In
assessing the potential realization of deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon
the Company attaining future taxable income during the periods in which those temporary differences become deductible. As of December
31, 2016 and 2015, management was unable to determine if it is more likely than not that the Company’s deferred tax assets
will be realized, and has therefore recorded an appropriate valuation allowance against deferred tax assets at such dates.
federal tax provision has been provided for the years ended December 31, 2016 and 2015 due to the losses incurred during such
periods. Reconciled below is the difference between the income tax rate computed by applying the U.S. federal statutory rate and
the effective tax rate for the years ended December 31, 2016 and 2015.
2016 2015 U.S federal statutory income tax (34.00)% (34.00)%
State tax, net of federal tax benefit (5.80)% (5.80)%
Change in valuation allowance 39.8% 39.8%
Effective tax rate —% —%
December 31, 2016, the Company has available net operating loss carryforwards for federal and state income tax purposes of approximately
$8.8 million and $8.3 million, respectively, which, if not utilized earlier, expire through 2036.
10 – Commitments & Contingencies
Blaha v. Rightscorp, Inc , C.D. Cal. (Original Complaint Filed November 21, 2014; First Amended Complaint Filed March 9, 2015).
of Matter: This matter seeks relief for alleged violations of the Telephone Consumer Protection Act (47 U.S.C. § 227). The
action is brought on behalf of the individual named plaintiff as well as on behalf of a putative nationwide classes.
of Matter to Date: This matter was previously captioned with Karen J. Reif and Isaac Nesmith as lead plaintiffs. On March 9, 2015,
plaintiff filed a First Amended Complaint replacing the lead plaintiffs, dropping their second and third causes of action for
Violations of the Fair Debt Collection Practices Act (15 U.S.C. § 1692, et seq.) and Violations of the Rosenthal Fair Debt
Collection Practices Act (Cal. Civ. Code § 1788 et seq.) (and dropping associated putative class claims), and naming BMG
Rights Management (US) LLC and Warner Bros. Entertainment Inc. as additional defendants.
held November 14, 2016 and the settlement was approved. The Company has recorded a reserve for the estimated settlement
of $200,000 related to this, which is net of expected insurance proceeds of $250,000.
of Matter: This matter is a Civil action seeking declaratory relief under 17 U.S.C. §§ 101, et seq. and 28 U.S.C.
§§ 2201, et seq. Rightscorp was named as an additional Defendant in this matter. Plaintiff is seeking declaratory relief
that it is not liable for the copyright infringements of its customers.
of Matter to Date: Company waived service of process on July 6, 2016. A pre-trial conference has yet to be scheduled. The
Company believes the case is without merit. This matter has been settled.
January 7, 2017, BMG Rights Management (US) LLC advanced us $200,000, which was used to pay off the settlement (see John Blaha
v. Rightscorp, Inc in Note 10).
March 18, 2017, the Company entered into an employment agreement with Cecil Kyte, the Company’s chief executive officer.
Upon execution of the employment agreement, the Company issued 5,000,000 shares of common stock, and 10-year options to purchase
5,000,000 shares of common stock at an exercise price of $0.05, 1,000,000 of which will vest immediately, and the remaining 4,000,000
of which will vest monthly in 48 equal monthly installments (each of 83,333 options) commencing on February 14, 2018.
F-12 ITEM
are required to maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K,
our Chief Executive Officer and our Chief Financial Officer, have concluded that our disclosure controls and procedures were not
effective to ensure that the information relating to our company, required to be disclosed in our Securities and Exchange Commission
reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii)
is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure as a result of material weaknesses in our internal control over financial reporting.
Report on Internal Control over Financial Reporting .
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes
those policies and procedures that:
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets
of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework (2013). Management’s assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our
management has concluded that as of December 31, 2016, our internal control over financial reporting was not effective to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles as a result of material weaknesses.
have identified the following factors that have led management to determine that material weaknesses exist in our internal control
over financial reporting as of December 31, 2016:
do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls
over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our
failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls
and procedures and has concluded that the control deficiency that resulted represented a material weakness.
do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size
and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However,
to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be
performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment
of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material
do not have sufficient procedures in place to ensure that accounts are reconciled correctly in a timely manner. This includes
the consideration of complex accounting issues such as derivative valuations. Management has evaluated the impact of our failure
to have the accounts reconciled correctly and has concluded that this represents a material weakness.
factors represent material weaknesses in our internal controls over financial reporting. Although we believe the possibility of
errors in our financial statements is remote, and expect to continue to use a third party accountant to address shortfalls in
staffing and to assist us with accounting and financial reporting responsibilities in an effort to mitigate the lack of segregation
of duties, until such time as we hire a full time principal financial officer and expand our staff with qualified personnel, we
expect to continue to report material weaknesses in our internal control over financial reporting.
have been no changes in our internal control over financial reporting during the three months ended December 31, 2016
that has materially affected, or is reasonably likely to materially affect, our internal control over financial
Our directors and executive officers, their
ages, positions held, and duration of such, are as follows:
Chief Executive Officer (1), Chairman of the Board of Directors,
President (1) and Director
(1)On February 14, 2017 Cecil Bond Kyte was appointed as our
Chief Executive Officer, and Christopher Sabec, formerly our Chief Executive Officer, became
Bond Kyte
Kyte has served as the Company’s Chief Financial Officer since October 2016 and Chairman of the Company’s board of
directors since December 2015. On February 14, 2017, he was appointed as our Chief Executive Officer. From 2007 to 2013, Mr. Kyte
served as CEO and Chairman of Save The World Air, Inc., a California based publicly traded energy technology company. Under his
stewardship, that company grew from roughly $10 million in market capitalization in 2007 to an excess of $350 million by 2013
and accessed roughly $40 million in equity based capital. Additionally, having been a pilot for 30 years Mr. Kyte has served as
an airline captain and flight instructor whom is recognized and included in the prestigious FAA Airmen Certification database.
This database recognizes pilots who have met or exceeded the high educational, licensing and medical standards established by
the Federal Aviation Administration. Mr. Kyte also holds a Bachelor of Science Degree in Business Administration with emphasis
in Accounting from CSULB.
Sabec is a cofounder of Rightscorp Delaware and served as its Chief Executive Officer since January 2011 (inception) until
February 14, 2017, at which time he was named our President. He remains a member of our board of directors. 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 26 years of business management experience, 24 years of global entertainment industry experience, and
16 years digital media experience.
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
and that our board leadership structure supports this approach. We have not adopted a policy on whether the Chief Executive Officer
and Chairman positions should be separate. Currently, Mr. Kyte serves as our Chief Executive Officer and
as our Chairman.
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.
officers are appointed by our board of directors and serve at its pleasure.
27 Involvement
directors and executive officers have not been involved in any of the following events during the past ten years:
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.
directors take a critical role in guiding our strategic direction and oversee the management of our company. Board candidates
16(a) of the Exchange Act requires our executive officers and directors and person who own more than 10% of our common stock to
file reports regarding ownership of and any transactions in our securities with the Securities and Exchange Commission and to
provide us with copies of those filings. To our knowledge, based solely upon our review of the copies of such reports furnished
to us, during the fiscal year ended December 31, 2016, all Section 16(a) filing requirements applicable to our officers, directors
and greater than 10% beneficial owners were complied with.
following table sets forth all compensation paid in respect of our principal executive officer and principal financial officer
for the years ended December 31, 2016 and 2015. No other officer of the Company compensation
in excess of $100,000 for either of the Company’s last two completed fiscal years.
28 EXECUTIVE
Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-equity Incentive
Plan Compensation ($) All Other Compensation ($) Total ($) Christopher Sabec 2016 120,963 - - - - - 120,963 Chief Executive Officer 2015 156,250(1) - - - - - 156,250 Cecil Bond Kyte 2016 71,731 - - - - - 71,731 Chief Financial Officer 2015 49,053 2,040 236,000(4) 352,198(6) - - 639,291 Robert Michael Reveley 2016 27,108 - - - - - 27,108 Former Chief Financial Officer 2015 19,692 - 22,500(3) 63,791(5) - - 105,983 Robert Steele 2016 66,463 - - - - - 66,463 Former Chief Financial Officer 2015 157,140(2) - - - - - 157,140 (1)
annual salary of $150,000, repayment of accrued salary of $6,250.
annual salary of $150,000, repayment of accrued salary of $7,140.
250,000 shares of common stock granted on December 21, 2015.
2,000,000 shares of common stock granted on June 1, 2015.
750,000 options granted on December 21, 2015.
3,000,000 warrants granted on June 1, 2015.
Under the employment agreement, Mr. Kyte will serve as the Company’s chief executive officer for a term of three years (the
“Initial Term”) from Mr. Kyte’s appointment effective February 14, 2017 (the “Effective Date”),
which term will renew automatically for successive one-year terms (each, a “Renewal Term”) unless terminated in accordance
therewith. The Company will pay Mr. Kyte an annual base salary of $150,000, except that, (i) the base salary will increase from
$150,000 to $250,000, effective upon the Company’s achievement of $100,000 in gross monthly revenue for three consecutive
months, (ii) the base salary will increase to $350,000 upon the Company achieving $2,500,000 in gross revenue in any one year
period commencing on the Effective Date, and (iii) effective upon the Company’s receipt of an aggregate of $10,000,000 in
cumulative gross revenue, the base salary will increase to $500,000. The Company also agreed to pay Mr. Kyte a signing bonus of
$50,000 and to issue to Mr. Kyte, upon execution of the employment agreement, 5,000,000 shares of common stock, and 10-year options
to purchase 5,000,000 shares of common stock at an exercise price of $0.05, 1,000,000 of which will vest immediately, and the
remaining 4,000,000 of which will vest monthly in 48 equal monthly installments (each of 83,333 options) commencing on February
14, 2018. If the Company terminates the employment agreement without Cause (as defined in the employment agreement), Mr. Kyte
terminates the employment agreement for Good Reason (as defined in the employment agreement), or the Company fails to renew the
employment agreement, Mr. Kyte will be entitled to receive a payment equal to the greater of (i) six months of the base salary,
and (ii) (a) the base salary payable for the remainder of the Initial Term (in the event such termination occurs during the Initial
Term, or (b) the base salary payable for the remainder of the Renewal Term (in the event such termination occurs during a Renewal
to our executive officers in connection with any termination of employment or change in control of our company. Except for
our employment agreement with Cecil Kyte as described above, 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.
Mr. Kyte’s employment agreement, in the event his employment agreement his terminated by the Company without cause within
12 months following a change in control (as defined in the employment agreement), he will be entitled to payment equal to three
years of his base salary.
following table sets forth outstanding equity awards to our named executive officers as of December 31, 2016.
Name Number of securities underlying unexercised options (#) Exercisable Number of securities underlying unexercised options (#) Unexercisable Equity incentive plan awards: number of securities underlying unexercised unearned options (#) Option exercise price (US$) Option expiration date
Robert Michael Reveley 250,000 500,000 - 0.15 12/21/20
following table sets forth director compensation for the fiscal year ended December 31, 2016 (excluding compensation to the Company’s
executive officers set forth in the summary compensation table above) paid by the Company.
29 Name Fees Earned or Paid in Cash ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) Cecil Kyte - - - - - - - Risk
do not believe risks arising from our compensation policies and practices for our employees are reasonably likely to have a material
our 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. We may advance expenses
incurred in defending a proceeding. To the extent that the officer or director is successful on the merits in a proceeding as
to which he 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.
indemnification for liabilities arising under the Securities Act of 1933, which may be permitted to directors or officers under
Nevada law, we are informed that, in the opinion of the Securities and Exchange Commission, indemnification is against public
policy, as expressed in the Act and is, therefore, unenforceable.
The following table sets forth certain information
concerning the number of shares of our common stock beneficially owned based on 132,463,171 issued and outstanding shares
of common stock filing as of March 28, 2017 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.
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 March 28, 2017, 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 132,463,171 shares
of common stock issued and outstanding stock as March 28, 2017
and Officers (1):
Sabec (2)
Bond Kyte (3)
or Greater Beneficial Owners
Investment Partners, L. P. (4)
Hirschman (4)(5)
11,647,500
Private Investments LLC (6)
The address for each of the officer and directors is c/o Rightscorp, Inc., at 3100 Donald Douglas Loop North, Santa Monica, CA
90405.
Represents shares held by Christopher Sabec Revocable Trust dated February 17, 2011.
Includes 8,000,000 shares issuable upon exercise of warrants.
Based on Schedule 13G/A filed February 14, 2017. Mr. Orin Hirschman is the Managing Member of AIGH Investment Partners, L.
P.’s general partner.
Based on Schedule 13G/A filed February 14, 2017. Includes 8,300,000 shares of common stock held by AIGH Investment Partners, L.P.
and 2,097,500 shares of common stock and 1,250,000 shares of common stock underlying warrants held by AIGH investment Partners,
Includes 14,000,000 shares of common stock and 14,000,000 warrants to purchase common stock.
that the transaction is consistent with our best interests.
do not currently have any independent directors. We evaluate independence by the standards for director independence established
by Marketplace Rule 5605(a)(2) of the NASDAQ Stock Market, Inc.
to some exceptions, this standard generally provides that a director will not be independent if (a) the director is, or in the
14. Principal Accounting Fees and Services.
January 7, 2016, HJ Associates & Consultants, LLP resigned as the independent registered public accounting firm for the Company.
On January 11, 2016, the Company engaged Haynie & Company as its new independent registered public accounting firm. Effective
February 3, 2016, the Company dismissed Haynie & Company as its independent registered accounting firm and engaged Weinberg
& Company, P.A. to serve as its independent registered accounting firm.
aggregate fees billed for the two most recently completed fiscal years ended December 31, 2016 and December 31, 2015 for professional
services rendered by Haynie & Company and Weinberg & Company, P.A., for the audit of our annual consolidated financial
statements, quarterly reviews of our interim consolidated financial statements and services normally provided by the independent
accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
Year Ended December 31, 2016 Year Ended December 31, 2015 Audit Fees and Audit Related Fees $65,847 $ 77,000(1)
Tax Fees 2,840 3,500(2)
All Other Fees - - Total $68,687 $80,500 (1)
$28,000 for audit services for HJ Associates & Consultants, LLP, $4,000 for Haynie & Company, and $45,000 for Weinberg
$3,500 for tax services for HJ Associates & Consultants, LLP.
and reviewing our company’s financial statements for the subject year. “Audit-related fees” are fees
not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the
performance of the audit and review of our company’s financial statements. “Tax fees” are fees billed
by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees”
are fees billed by the auditor for products and services not included in the foregoing categories.
32 Part
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)
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)
of the Company (incorporated by reference to the Company’s S-1 Registration Statement filed on December 30, 2010)
of Warrant (Incorporated by reference from the Current Report on Form 8-K filed with the SEC on October 28, 2013)
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)
Purchase Agreement dated September 24, 2014 (Incorporated by reference from Current Report on Form 8-K filed with the SEC
on September 30, 2014)
of Representation Agreement (Incorporated by reference from the Registration Statement on Form S-1/A filed with the SEC on
February 16, 2016)
Agreement by and between the Company and BMG Rights Management (US) LLC dated as of December 1, 2011 (Incorporated by reference
from the Registration Statement on Form S-1/A filed with the SEC on February 16, 2016)
Agreement by and between the Company and Warner Bros. Entertainment Inc. dated as of March 18, 2013 (Incorporated by reference
of Securities Purchase Agreement (incorporated by reference to 8-K filed with the SEC on October 7, 2015)
of Warrant (incorporated by reference to 8-K filed with the SEC on October 7, 2015)
Amendment to Representation Agreement between the Company and BMG Rights Management (US) LLC (Incorporated by reference from
the Registration Statement on Form S-1/A filed with the SEC on February 16, 2016)
Agreement, dated June 18, 2013, between the Company and Warner Bros. Entertainment (Incorporated by reference from the Registration
Statement on Form S-1/A filed with the SEC on February 16, 2016)
of Securities Purchase Agreement (incorporated by reference from 8-K filed with the SEC on February 26, 2016)
of Warrant (incorporated by reference from 8-K filed with the SEC on February 26, 2016)
Agreement between the Company and Cecil Kyte (incorporated by reference to 8-K filed March 21, 2017)
of Rightscorp, Inc. (Incorporated by reference from the Registration Statement on Form S-1 filed with the SEC on November
33 31.1*
of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 Certifications under Sarbanes-Oxley
Executive Officer and Chief Financial Officer (Principal
Executive, Financial and Accounting Officer)