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 March 31, 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.
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 March 31, 2014 of $4,891,714. The Company
has not yet established an ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a
going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital
to fund operating losses until it establishes a revenue stream and becomes profitable. If the Company is unable to obtain adequate
capital it could be forced to cease development of operations.
In
order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the
Company will need, among other things, additional capital resources. Management’s plans to continue as a going concern include
raising additional capital through borrowing and sales of common stock. However, management cannot provide any assurances that
the Company will be successful in accomplishing any of its plans.
The
ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described
in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note
3 – Fixed Assets and Intangible Assets
As
of March 31, 2014 and December 31, 2013, fixed assets and intangible assets consisted of the following:
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
Furniture and equipment
|
|
$
|
98,695
|
|
|
$
|
82,349
|
|
Less accumulated depreciation
|
|
|
(33,270
|
)
|
|
|
(25,896
|
)
|
Fixed assets, net
|
|
$
|
65,425
|
|
|
$
|
56,453
|
|
|
|
March
31, 2014
|
|
|
December
31, 2013
|
|
Intangible assets
|
|
|
84,500
|
|
|
|
84,500
|
|
Less accumulated depreciation
|
|
|
(54,925
|
)
|
|
|
(50,700
|
)
|
Intangible assets, net
|
|
$
|
29,575
|
|
|
$
|
33,800
|
|
Depreciation
and amortization expense for the three months ended March 31, 2014 and March 31, 2013 was $11,599 and $7,409, respectively. Annual
amortization expense will be $16,900 per year through 2015.
Note
4 – Accounts Payable and Accrued Liabilities
As
of March 31, 2014 and December 31, 2013, accounts payable and accrued liabilities consisted of the following:
|
|
March
31, 2014
|
|
|
December
31, 2013
|
|
Accrued payroll
|
|
|
443,346
|
|
|
$
|
495,428
|
|
Accrued legal fees
|
|
|
273,153
|
|
|
|
239,015
|
|
Accrued interest
|
|
|
20,987
|
|
|
|
16,515
|
|
Other
|
|
|
237,059
|
|
|
|
177,346
|
|
Total
|
|
$
|
974,545
|
|
|
$
|
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 three months ended March 31, 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 the sale 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 three months ended March 31, 2014, resulting in a final debt discount balance of $5,504 as of March 31, 2014.
The
Company evaluated these convertible notes for derivatives and determined that they do not qualify for derivative treatment.
As
of March 31, 2014 and December 31, 2013 outstanding convertible notes payable consisted of the following:
|
|
March
31, 2014
|
|
|
December
31, 2013
|
|
Convertible Note Issued on 8/6/12
|
|
|
|
|
|
|
|
|
Original Principal: $100,000.00
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 5/6/13, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 10/25/12
|
|
|
|
|
|
|
|
|
Original Principal: $50,000.00
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 7/25/13, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 11/29/12
|
|
|
|
|
|
|
|
|
Original Principal: $6,500
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 8/29/13, extended on a monthly basis per verbal contract
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
0
|
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 9/26/13
|
|
|
|
|
|
|
|
|
Original Principal: $10,000.00
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 6/26/14
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Note Issued on 10/2/13
|
|
|
|
|
|
|
|
|
Original Principal: $50,000.00
|
|
|
|
|
|
|
|
|
Interest Rate: 10%
|
|
|
|
|
|
|
|
|
Maturity Date: 7/2/14
|
|
|
|
|
|
|
|
|
Conversion price amended to $0.1276 on 10/4/13
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Total Outstanding Convertible Notes Payable
|
|
|
210,000
|
|
|
|
213,500
|
|
Less Debt Discount
|
|
|
5,504
|
|
|
|
10,891
|
|
|
|
$
|
204,496
|
|
|
$
|
202,609
|
|
As
of March 31, 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 three months ended March 31, 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, 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 March 31, 2014, we entered into a Consulting Agreement with John Carris Investments, LLC. We agreed to
issue up to 300,000 shares of common stock in exchange for services per the Consulting Agreement. Upon execution of the agreement,
we issued 75,000 shares of common stock for prepaid services at $0.73 per share.
During
the three months ended March 31, 2014, we issued 63,939 shares of common stock to a note holder in a cashless conversion at $0.0862
per share. At time of conversion, the note was valued at $6,250 for outstanding principal and interest owed.
During
the three months ended March 31, 2014, we issued 33,135 shares of common stock to a note holder in a note conversion at $0.1276
per share. At time of conversion, the note was valued at $4,228 for outstanding principal and interest owed.
During
the three months ended March 31, 2014, we received $471,000 in funding from Hartford Equity per their financing agreement with
the Company. We have reserved 942,000 shares of our common stock to be issued to Hartford.
During
the three months ended March 31, 2014, we had a balance of $851,000 of common stock to be issued to Hartford Equity. $300,000
was received from Hartford Equity in 2013 in exchange for 600,000 shares of common stock per the financing agreement. $80,000
of debt related to the merger was assumed by Hartford Equity in exchange for 160,000 shares of common stock per the Subscription
Agreement dated October 28, 2013. As of May 13, 2014, these shares have not been issued.
Note
7 – Stock Warrants
During
the three months ended March 31, 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 three months ended March 31, 2014 were valued at $15,838. The following weighted-average
assumptions were used in the Black-Scholes calculation:
|
|
March
31, 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 three months ended March 31, 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
|
|
|
|
4.80
|
|
Exercised
|
|
|
(96,014
|
)
|
|
$
|
0.08
|
|
|
|
3.60
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Balance
outstanding, March 31, 3014
|
|
|
6,976,689
|
|
|
$
|
0.25
|
|
|
|
2.92
|
|
Exercisable,
March 31, 2014
|
|
|
6,976,689
|
|
|
$
|
0.25
|
|
|
|
2.92
|
|
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 events
have been evaluated through the date the consolidated financial statements were issued. There have been no subsequent events
that require recognition or disclosure through the date the consolidated financial statements were issued.