ITEM
1. FINANCIAL STATEMENTS
Rightscorp,
Inc.
Consolidated
Balance Sheets
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
767,581
|
|
|
$
|
36,331
|
|
Prepaid expenses
|
|
|
9,504
|
|
|
|
19,639
|
|
Total Current Assets
|
|
|
777,085
|
|
|
|
55,970
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
73,857
|
|
|
|
56,453
|
|
Intangible assets, net
|
|
|
25,350
|
|
|
|
33,800
|
|
Total Assets
|
|
$
|
876,292
|
|
|
$
|
146,223
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
900,846
|
|
|
$
|
928,304
|
|
Convertible notes payable, net of discount of $100
and $10,891
|
|
|
209,900
|
|
|
|
202,609
|
|
Total Current Liabilities
|
|
|
1,110,746
|
|
|
|
1,130,913
|
|
Total Liabilities
|
|
|
1,110,746
|
|
|
|
1,130,913
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; 10,000,000 shares authorized; null shares
issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, $.001 par value; 250,000,000 shares authorized; 75,117,358
and 68,797,102 shares issued and outstanding, respectively
|
|
|
75,118
|
|
|
|
68,797
|
|
Common stock to be issued
|
|
|
380,000
|
|
|
|
380,000
|
|
Stock subscription payable
|
|
|
(5,000
|
)
|
|
|
-
|
|
Additional paid in capital
|
|
|
4,961,382
|
|
|
|
2,807,185
|
|
Accumulated deficit
|
|
|
(5,645,954
|
)
|
|
|
(4,240,672
|
)
|
Total stockholders’ deficit
|
|
|
(234,453
|
)
|
|
|
(984,690
|
)
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
876,292
|
|
|
$
|
146,223
|
|
See
accompanying notes to consolidated financial statements
Rightscorp,
Inc.
Consolidated
Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
251,481
|
|
|
$
|
52,670
|
|
|
$
|
440,414
|
|
|
$
|
101,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copyright holder fees
|
|
|
125,740
|
|
|
|
26,335
|
|
|
|
220,207
|
|
|
|
50,963
|
|
General and administrative
|
|
|
832,334
|
|
|
|
375,579
|
|
|
|
1,524,349
|
|
|
|
647,861
|
|
Sales and marketing
|
|
|
24,248
|
|
|
|
28,083
|
|
|
|
55,556
|
|
|
|
42,718
|
|
Depreciation and amortization
|
|
|
12,758
|
|
|
|
8,133
|
|
|
|
24,357
|
|
|
|
15,542
|
|
Total operating expenses
|
|
|
995,080
|
|
|
|
438,130
|
|
|
|
1,824,469
|
|
|
|
757,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(743,599
|
)
|
|
|
(400,142
|
)
|
|
|
(1,384,055
|
)
|
|
|
(669,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,640
|
)
|
|
|
(87,788
|
)
|
|
|
(21,226
|
)
|
|
|
(140,137
|
)
|
Total other expenses
|
|
|
(10,640
|
)
|
|
|
(87,788
|
)
|
|
|
(21,226
|
)
|
|
|
(140,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(754,239
|
)
|
|
|
(473,248
|
)
|
|
|
(1,405,282
|
)
|
|
|
(795,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(754,239
|
)
|
|
$
|
(473,248
|
)
|
|
$
|
(1,405,282
|
)
|
|
$
|
(795,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares – basic and diluted
|
|
|
71,921,185
|
|
|
|
28,641,418
|
|
|
|
70,504,426
|
|
|
|
29,192,679
|
|
See
accompanying notes to consolidated financial statements
Rightscorp,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,405,282
|
)
|
|
$
|
(795,295
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
24,357
|
|
|
|
15,542
|
|
Common stock issued for service
|
|
|
214,510
|
|
|
|
54,054
|
|
Warrants issued for service & compensation
|
|
|
15,838
|
|
|
|
72,029
|
|
Amortization of discount on convertible debt
|
|
|
10,791
|
|
|
|
104,142
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in prepaid expense
|
|
|
10,135
|
|
|
|
3,314
|
|
Decrease in other current asset
|
|
|
-
|
|
|
|
5,698
|
|
Increase (decrease) in accounts payable and accrued
liabilities
|
|
|
(26,728
|
)
|
|
|
237,645
|
|
Net cash used in operating activities
|
|
|
(1,156,379
|
)
|
|
|
(302,871
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of equipment and furniture
|
|
|
(33,312
|
)
|
|
|
(8,699
|
)
|
Net cash used in investing activities
|
|
|
(33,312
|
)
|
|
|
(8,699
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes
|
|
|
-
|
|
|
|
324,980
|
|
Repayment of convertible notes
|
|
|
-
|
|
|
|
(50,000
|
)
|
Common stock issued for cash
|
|
|
1,896,574
|
|
|
|
-
|
|
Proceeds from the exercise of warrants
|
|
|
24,367
|
|
|
|
-
|
|
Proceeds from related party debt
|
|
|
-
|
|
|
|
200,000
|
|
Net cash provided by financing activities
|
|
|
1,920,941
|
|
|
|
474,980
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
731,250
|
|
|
|
163,410
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
36,331
|
|
|
|
10,049
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
767,581
|
|
|
$
|
173,460
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid during the period for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Non-Cash Investing & Financing Disclosure
|
|
|
|
|
|
|
|
|
Stock issued for conventional debt
|
|
$
|
3,500
|
|
|
$
|
-
|
|
Stock issued for convertible debt: accrued interest
|
|
$
|
729
|
|
|
|
|
|
Stock issued for subscription payable
|
|
$
|
5,000
|
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements
Rightscorp,
Inc.
Notes
to Consolidated Financial Statements
Note
1 – Nature of the Business
The
Company was organized under the laws of the State of Nevada on April 9, 2010, and its fiscal year end is December 31. The Company
is the parent company of Rightscorp, Inc., a Delaware corporation formed on January 20, 2011 (“Rightscorp Delaware”).
The acquisition of Rightscorp Delaware is treated as a reverse acquisition, and the business of Rightscorp Delaware became the
business of the Company.
The
Company has developed products and intellectual property rights relating to policing copyright infringement on the Internet. The
Company is dedicated to the vision that digital creative works should be protected economically so that the next generation of
great music, movies, video games and software can be made and their creators can prosper. The Company has a patent-pending, proprietary
method for solving copyright infringement by collecting payments from illegal downloaders via notifications sent to their ISP’s.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
financial statements as of June 30, 2014 reflect all adjustments which, in the opinion of management, are necessary to fairly
state the Company’s financial position and the results of its operations for the periods presented in accordance with the
accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts
have been reclassified from prior periods to properly reflect the nature of the accounts.
The
information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report
on Form 10-K for the fiscal year ended December 31, 2013 filed with the U.S. Securities and Exchange Commission on March 25, 2014.
Use
of Estimates
The
preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Recent
Accounting Pronouncements
There
are no recently issued accounting pronouncements that the Company has yet to adopt that are expected to have a material effect
on its financial position, results of operations, or cash flows.
Going
Concern
The
Company’s financial statements are prepared using accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course
of business. The Company had a cumulative net loss from inception (January 20, 2011) to June 30, 2014 of $5,645,954. The Company
has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a
going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital
to fund operating losses until it establishes a revenue stream and becomes profitable. If the Company is unable to obtain adequate
capital it could be forced to cease operations. Accordingly, these factors raise substantial doubt as to the Company’s
ability to continue as a going concern.
In
order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the
Company will need, among other things, additional capital resources. Management’s plans to continue as a going concern include
raising additional capital through borrowing and sales of common stock. However, management cannot provide any assurances that
the Company will be successful in accomplishing any of its plans.
The
accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern.
Note
3 – Fixed Assets and Intangible Assets
As
of June 30, 2014 and December 31, 2013, fixed assets and intangible assets consisted of the following:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Furniture and equipment
|
|
$
|
115,661
|
|
|
$
|
82,349
|
|
Less accumulated depreciation
|
|
|
(41,803
|
)
|
|
|
(25,896
|
)
|
Fixed assets, net
|
|
$
|
73,857
|
|
|
$
|
56,453
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Intangible assets
|
|
$
|
84,500
|
|
|
$
|
84,500
|
|
Less accumulated depreciation
|
|
|
(59,150
|
)
|
|
|
(50,700
|
)
|
Intangible assets, net
|
|
$
|
25,350
|
|
|
$
|
33,800
|
|
Depreciation
and amortization expense for the six months ended June 30, 2014 and June 30, 2013 was $24,357 and $15,542, respectively. Annual
amortization expense will be $16,900 per year through 2015.
Note
4 – Accounts Payable and Accrued Liabilities
As
of June 30, 2014 and December 31, 2013, accounts payable and accrued liabilities consisted of the following:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Accrued payroll
|
|
$
|
383,370
|
|
|
$
|
495,428
|
|
Accrued legal fees
|
|
|
304,835
|
|
|
|
239,015
|
|
Accrued interest
|
|
|
26,222
|
|
|
|
16,515
|
|
Other
|
|
|
186,419
|
|
|
|
177,346
|
|
Total
|
|
$
|
900,846
|
|
|
$
|
928,304
|
|
Note
5 – Convertible Notes Payable
Between
January 3, 2013 and October 2, 2013, the Company entered into convertible notes with external parties for use as operating capital.
The convertible notes payable agreements require the Company to repay the principal, together with 10% annual interest by the
agreements’ expiration dates ranging between October 2, 2013 and July 2, 2014. The notes are secured and mature nine months
from the issuance date. Until the maturity date, the holders may elect to convert the note in whole or in part into shares of
common stock at a conversion price of $0.1276 per share. During the six months ended June 30, 2014, an aggregate of $3,500 of
principal and $728 of interest was converted to 33,135 shares of restricted common stock.
In
connection with the issuance of these notes, the Company issued warrants that were recorded as a debt discount at an initial aggregate
value of $131,927. The value of these warrants, along with the value of previously issued warrants, was amortized during the six
months ended June 30, 2014, resulting in a final debt discount balance of $100 as of June 30, 2014.
The
Company evaluated these convertible notes for derivatives and determined that they do not qualify for derivative treatment.
As
of June 30, 2014 and December 31, 2013 outstanding convertible notes payable consisted of the following:
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Convertible Note Issued on 8/6/12
|
|
|
|
|
|
|
|
|
Original Principal: $100,000
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 5/6/13, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 10/25/12
|
|
|
|
|
|
|
|
|
Original Principal: $50,000
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 7/25/13, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 11/29/12
|
|
|
|
|
|
|
|
|
Original Principal: $6,500
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 8/29/13, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
0
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 9/26/13
|
|
|
|
|
|
|
|
|
Original Principal: $10,000
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 6/26/14, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 10/2/13
|
|
|
|
|
|
|
|
|
Original Principal: $50,000
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 7/2/14, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total Outstanding Convertible Notes Payable
|
|
|
210,000
|
|
|
|
213,500
|
|
Less Debt Discount
|
|
|
100
|
|
|
|
10,891
|
|
|
|
$
|
209,900
|
|
|
$
|
202,609
|
|
As
of June 30, 2014, the annual maturities of outstanding convertible notes were $210,000 for the year ending December 31, 2014.
Note
6 – Capital Stock
The
total number of shares of all classes of capital stock, which the Company is authorized to issue, is 260,000,000 shares, consisting
of 250,000,000 shares of common stock, par value $.001 per share (the “Common Stock”), and 10,000,000 shares of preferred
stock, par value $.001 per share (the “Preferred Stock”). The Board of Directors of the Company is authorized to provide
for the issuance of shares of Preferred Stock in one or more series and to establish from time to time the number of shares to
be included in each series and to fix the designation, powers, preferences and relative, participating, optional or other special
rights, if any, if each series and the qualifications, limitations and restrictions thereof.
|
●
|
During
the six months ended June 30, 2014, we entered into a securities purchase agreement (the “Purchase Agreement”)
with Seaside 88, LP (the “Investor”), pursuant to which we agreed to sell, and the Investor agreed to purchase,
up to 7,000,000 shares of common stock, in closings to be held monthly over a one-year period, subject to certain conditions. The
initial closing under the Purchase Agreement, pursuant to which we sold to the Investor 835,530 shares of common stock at
a purchase price of $0.374 per share for total proceeds of $312,488, occurred on March 7, 2014.
|
|
|
|
|
|
Subsequent
closings will occur on a monthly basis over a one-year period, subject to certain conditions. We agreed to sell to the Investor,
at each subsequent closing, 10% of the total number of shares of our common stock traded during the 20 trading days immediately
preceding such closing, at a purchase price per share equal to the lower of (a) the average of the high and low trading prices
of the common stock for the 5 consecutive trading days immediately prior to a closing date, multiplied by 0.50 and (b) the
average of the high and low trading prices of the common stock for the trading day immediately prior to a closing date, multiplied
by 0.55, provided that, no monthly closing will occur if the purchase price for such closing would be lower than $0.25 per
share (the “Floor”). The failure to have a subsequent closing due to failure to meet the Floor will not impact
any other subsequent closing. The Investor agreed not to engage in any short sales of our common stock while it holds any
shares purchased under the Purchase Agreement. The Company has the right to terminate the Purchase Agreement at any time by
providing written notice to the Investor. During the three months ended June 30, 2014, we issued 1,145,740 shares of common
stock to the Investor for total proceeds of $333,135.
|
|
|
|
|
●
|
During
the six months ended June 30, 2014, we entered into a Consulting Agreement with an Investment Bank. We agreed to issue up
to 300,000 shares of common stock in exchange for services per the Consulting Agreement. Upon execution of the agreement,
we issued 75,000 shares of common stock for prepaid services at $0.73 per share. The agreement was cancelled on May 1, 2014.
We are not obligated to issue any more shares.
|
|
|
|
|
●
|
During
the six months ended June 30, 2014, we issued 334,711 shares of common stock to note holders in a cashless conversion at $0.0862
per share.
|
|
|
|
|
●
|
During
the six months ended June 30, 2014, we issued 282,117 shares of common stock upon exercise for warrants at an exercise price
of $0.0862 per share for total proceeds of $24,367.
|
|
|
|
|
●
|
During
the six months ended June 30, 2014, we issued 33,135 shares of common stock to a note holder in a note conversion at $0.1276
per share. At the time of conversion, the note was valued at $4,228 for outstanding principal and interest owed.
|
|
|
|
|
●
|
During
the six months ended June 30, 2014, we issued 1,370,000 shares of common stock to multiple investors at $0.25 per share for
total proceeds of $342,500.
|
|
|
|
|
●
|
During
the six months ended June 30, 2014, we received $921,000 in funding from Hartford Equity per their financing agreement with
the Company. We have issued 1,842,000 shares of our common stock to Hartford.
|
|
|
|
|
●
|
During
the six months ended June 30, 2014, we had a balance of $380,000 of common stock to be issued to Hartford Equity. $300,000
was received from Hartford Equity in 2014 in exchange for 600,000 shares of common stock per the financing agreement. $80,000
of debt related to the merger was assumed by Hartford Equity in exchange for 160,000 shares of common stock per the Subscription
Agreement dated October 28, 2013. As of August 13, 2014, all of the 760,000 shares have not been issued.
|
Note
7 – Stock Warrants
During
the six months ended June 30, 2014, we issued warrants to purchase 50,000 shares of common stock. The shares were issued to an
employee with an exercise price of $0.61 per share.
Using
the Black-Scholes method, warrants issued during the six months ended June 30, 2014 were valued at $15,838. The following weighted-average
assumptions were used in the Black-Scholes calculation:
|
|
June 30, 2014
|
|
Expected term (years)
|
|
|
5
|
|
Expected volatility
|
|
|
140
|
%
|
Risk-free interest rate
|
|
|
1.66
|
%
|
Dividend yield
|
|
|
0
|
%
|
A
summary of the Company’s warrant activity during the six months ended June 30, 2014 is presented below:
|
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term
|
|
Balance
outstanding, December 31, 2013
|
|
|
|
7,022,703
|
|
|
$
|
0.65
|
|
|
|
4.80
|
|
Granted
|
|
|
|
50,000
|
|
|
$
|
0.61
|
|
|
|
4.55
|
|
Exercised
|
|
|
|
(680,671
|
)
|
|
$
|
0.09
|
|
|
|
3.07
|
|
Forfeited
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Expired
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Balance
outstanding, June 30, 2014
|
|
|
|
6,392,032
|
|
|
$
|
0.27
|
|
|
|
2.68
|
|
Exercisable,
June 30, 2014
|
|
|
|
6,392,032
|
|
|
$
|
0.42
|
|
|
|
2.68
|
|
Note
8 – Commitments & Contingencies
Since
May 31, 2012 the Company leases its office space on a month-to-month basis at a fixed rate of $2,600 per month.
Note
9 – Subsequent Events
Subsequent
to the end of the period we issued 39,974 shares of common stock upon exercise for warrants at an exercise price of $0.0862 per
share for total proceeds of $3,446, 100,000 shares of common stock to an accredited investor at $0.25 per share for total proceeds
of $25,000, and 523,699 shares of common stock issued for services valued at $204,243.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The
following discussion and analysis of the results of operations and financial condition of Rightscorp, Inc. (the “Company”,
“we”, “us” or “our”) for the six months ended June 30, 2014 and 2013, should be read in conjunction
with the financial statements of Rightscorp, Inc., and the notes to those financial statements that are included elsewhere in
this Form 10-Q. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties,
such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from
those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the
Risk Factors and Business sections in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed
with the Securities and Exchange Commission on March 25, 2014. Words such as “anticipate,” “estimate,”
“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,”
“intend,” “may,” “will,” “should,” “could,” and similar expressions
are used to identify forward-looking statements.
Overview
The
Company was organized under the laws of the State of Nevada on April 9, 2010, and its fiscal year end is December 31. The Company
is the parent company of Rightscorp, Inc., a Delaware corporation formed on January 20, 2011 (“Rightscorp Delaware”).
The acquisition of Rightscorp Delaware is treated as a reverse acquisition, and the business of Rightscorp Delaware became the
business of the Company.
The
Company has developed products and intellectual property rights relating to policing copyright infringement on the Internet. The
Company is dedicated to the vision that digital creative works should be protected economically so that the next generation of
great music, movies, video games and software can be made and their creators can prosper. The Company has a patent-pending, proprietary
method for solving copyright infringement by collecting payments from illegal downloaders via notifications sent to their ISP’s.
Results
of Operations
Three
Months ended June 30, 2014 Compared To Three Months ended June 30, 2013
We
generated revenues of $251,481 during the three months ended June 30, 2014, an increase of $198,811 or 377% as compared to $52,670
for the three months ended June 30, 2013. This increase in revenue was driven by an increase in the number of copyrights ingested
into our system for which we have contracts to detect infringements of, from approximately 21,000 on June 30, 2013 to approximately
100,000 on June 30, 2014.
We
incurred operating expenses of $995,080 during the three months ended June 30, 2014, an increase of $556,950 as compared to $438,130
for the three months ended June 30, 2013. We pay copyright holders a percentage of the revenue we collect. This increase was due
to increased payroll expenses and fees paid to copyright holders in the period. General and administrative expenses were $832,334
for the three months ended June 30, 2014, compared to $375,579 for the three months ended June 30, 2013, an increase of $456,755
due to increased wages expenses, professional and investment banking fees, and travel and other expenses related to securing financing.
Sales and marketing costs were $24,248 for the period ended June 30, 2014 compared to $28,083 for the three months ended June
30, 2013, a decrease of $3,835. Depreciation and amortization expenses were $12,758 during the three months ended June 30, 2014,
an increase of $4,625, as compared to $8,133 for the three months ended June 30, 2013.
Other
expense totaled $10,640 during the three months ended June 30, 2014, a decrease of $77,149 from the three months ended June 30,
2013, due to decreased interest owed on convertible notes used to finance our operations.
As
a result of the foregoing, during the three months ended June 30, 2014, we recorded a net loss of $754,239 compared to $473,248
for the three months ended June 30, 2013.
Six
Months ended June 30, 2014 Compared To Six Months ended June 30, 2013
We
generated revenues of $440,414 during the six months ended June 30, 2014, an increase of $338,488 or 332% as compared to $101,926
for the six months ended June 30, 2013. This increase in revenue was driven by an increase in the number of copyrights ingested
into our system for which we have contracts to detect infringements of, from approximately 21,000 on June 30, 2013 to approximately
100,000 on June 30, 2014.
We
incurred operating expenses of $1,824,469 during the six months ended June 30, 2014, an increase of $1,067,385, as compared to
$757,084 for the six months ended June 30, 2013. We pay copyright holders a percentage of the revenue we collect. This increase
was due to increased payroll expenses and fees paid to copyright holders in the period. General and administrative expenses were
$1,524,349 for the period ended June 30, 2014, compared to $647,861 for the six months ended June 30, 2013, an increase of $876,488
due to increased wages expenses, professional and investment banking fees, and travel and other expenses related to securing financing.
Sales and marketing costs were $55,556 for the period ended June 30, 2014 compared to $42,718 for the six months ended June 30,
2013, an increase of $12,838 due to increased presence at industry conferences to meet potential clients. Depreciation and amortization
expenses were $24,357 during the six months ended June 30, 2014, an increase of $8,815, as compared to $15,542 for the six months
ended June 30, 2013.
Other
expense totaled $21,226 during the six months ended June 30, 2014, a decrease of $118,912 from the six months ended June 30, 2013,
due to decreased interest owed on convertible notes used to finance our operations.
As
a result of the foregoing, during the six months ended June 30, 2014, we recorded a net loss of $1,405,282 compared to $795,295
for the six months ended June 30, 2013.
Liquidity
and Capital Resources
As
of June 30, 2014 we had cash and equivalents of $767,581, which we estimate will be sufficient to sustain our operations for four
months. We expect that it will take approximately $1,800,000 to operate the Company over the next 12 months. We anticipate that
$300,000 in needed capital will come from the remaining $300,000 available from the $2.0 million financing transaction entered
into with Hartford Equity, Inc. We anticipate the additional $600,000 will come from the Seaside 88 financing which we entered
into in March 2014 or from seeking other sources of financing, as discussed below; however, Seaside 88’s obligation to purchase
additional shares is subject to certain conditions, including a minimum market price for our common stock, that may not be met.
Our revenues continue to increase, which generate cashflow reducing the need for financing. It is possible that the Company could
become cashflow positive from operations in 2014 no longer requiring financing to offset negative cashflows.
Our
current cash requirements are significant based upon our plan to develop our intellectual property and grow our business. Beyond
the financing transactions entered into with Hartford Equity Inc. and Seaside 88, we may in the future use debt and equity financing
to fund operations, as we look to expand and fund development of our products and services and changes in our operating plans,
increased expenses, acquisitions, or other events, may cause us to seek additional financing sooner than anticipated. There are
no assurances that we will be able to raise such required working capital on favorable terms, or that such working capital will
be available on any terms when needed. The terms of such additional financing may result in substantial dilution to existing shareholders.
Any failure to secure additional financing may force the Company to modify its business plan. In addition, we cannot be assured
of profitability in the future.
We
had cash and equivalents of $767,581 and $36,331 at June 30, 2014 and December 31, 2013, respectively.
Operating
Activities
During
the six months ended June 30, 2014, we used $1,156,379 of cash in operating activities. Non-cash adjustments included $24,357
related to the depreciation and amortization, $214,510 for common stock issued for services, $15,838 for warrants issued to employee,
$10,791 related to amortization of discount on convertible debt, and net changes in operating assets and liabilities of $16,593.
During
the six months ended June 30, 2013, we used $302,871 of cash in operating activities. Non-cash adjustments included $15,542 related
to the depreciation and amortization, $54,054 for common stock issued for services, $72,029 warrants issued for services, $104,142
related to amortization of discount on convertible debt, and net changes in operating assets and liabilities of $246,657.
Investing
Activities
During
the six months ended June 30, 2014, we acquired equipment in the aggregate amount of $33,312 related to office operations. During
the six months ended June 30, 2013, we acquired equipment in the aggregate amount of $8,699 related to office operations.
Financing
Activities
Financing
activities provided $1,920,941 to us during the six months ended June 30, 2014. We received $1,896,574 in proceeds from common
stock issued for cash, and $24,367 in proceeds from common stock to be issued for cash. During the six months ended June 30, 2013,
financing activities provided $474,981. We received $324,980 in proceeds from convertible notes, and $20,000 in proceeds from
related party debt. As of June 30, 2014, we had an accumulated deficit of $5,645,954.
Critical
Accounting Policies and Estimates
The
discussion and analysis of its financial condition and results of operations is based upon the Company’s unaudited condensed
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires it to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. On an on-going basis, the Company evaluates its critical accounting policies and estimates.
The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions. The Company’s critical accounting policies and estimates are discussed in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2013.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s
rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures
were designed to provide reasonable assurance that the controls and procedures would meet their objectives.
As
required by SEC Rule 13a-15(b), our management carried out an evaluation, with the participation of our Chief Executive and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of
the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures were not effective at the reasonable assurance level.
A
material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing
Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected. Management has identified the following
two material weaknesses in our disclosure controls and procedures:
1.
We 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.
2.
We 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 weakness.
To
address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial
statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows
for the periods presented.
Changes
in internal controls
There
were no changes in our internal control over financial reporting during the quarter ended June 30, 2014 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.