Notes to Condensed Consolidated Financial
Statements
Three and six months ended June 30, 2017
and 2016
(Unaudited)
Note 1 – Nature of the Business and
Summary of Significant Accounting Policies
Rightscorp, 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”).
The Company has developed products and
intellectual property relating to providing data and analytics regarding copyright infringement via the Internet. The Company
provides services and data to help protect the rights of holders of copyrighted digital creative works. The Company has a patent-pending,
proprietary method for gathering and analyzing infringement data and for reducing copyright infringement and collecting damages
from infringers by notifying illegal downloaders via notifications sent to their Internet Service Providers.
Going Concern
The 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 six months ended June 30, 2017, the Company incurred a net loss of $1,068,422, used cash in operating activities
of $201,822, and at June 30, 2017, the Company had a stockholders’ deficit of $2,369,022. These factors raise substantial
doubt about the Company’s ability to continue as a going concern within one year after the date that the 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 raised 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 June 30, 2017, the Company had cash of $1,725.
On July 21, 2017, the Company issued an aggregate of 10,000,000 shares of common stock to an investor for a purchase price of $200,000.
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 they
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.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2017. The condensed consolidated balance sheet at December 31, 2016, has been derived
from the audited consolidated financial statements at such date. For further information, refer to the consolidated financial statements
and footnotes thereto included in Rightscorp, Inc.’s annual report on Form 10-K for the year ended December 31, 2016, as
filed with the SEC on April 14, 2017.
Principles of Consolidation
The financial statements include the accounts
of Rightscorp Inc., and its wholly-owned subsidiary Rightscorp Delaware. Intercompany balances and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of the financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period. Significant estimates include accounting for potential
liabilities, and the assumptions made in valuing share-based instruments issued for services, derivative liabilities, and the valuation
allowance for deferred income taxes. Actual results could differ from those estimates.
Concentrations
For the six months
ended June 30, 2017, one customer accounted for approximately 46% of our revenue. No other customers accounted for 10% or more
of our revenue during the six months ended June 30, 2017 or 2016.
Stock-Based Compensation
The 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 are amortized over the vesting period on a straight-line
basis. In certain circumstances where there are no future performance 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.
The fair value of the Company’s common
stock option and warrant grants is estimated using a Black-Scholes-Merton 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-Merton option pricing model, and based on actual experience.
The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in
future periods.
Derivative Financial Instruments
The 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.
Fair Value of Financial Instruments
Under 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:
Level 1 – Quoted prices in active markets
for identical assets or liabilities.
Level 2 – Inputs, other than the quoted
prices in active markets, are observable either directly or indirectly.
Level 3 – Unobservable inputs based on
the Company’s assumptions.
The Company is required to use observable market
data if such data is available without undue cost and effort. As of June 30, 2017, the amounts reported for cash, accrued liabilities
and accrued interest approximated fair value because of their short-term maturities.
At June 30, 2017 and December 31, 2016, derivative
liabilities of $286,883 and $280,316, respectively, were valued using Level 2 inputs.
Basic and diluted loss per share
Basic 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 effect is anti-dilutive.
At June 30, 2017 and June 30, 2016, the dilutive
impact of outstanding stock options for 5,600,000 and 970,000 shares, respectively, and outstanding warrants for 44,572,197 and
47,657,640 shares, respectively, have been excluded because their impact on the loss per share is anti-dilutive.
Recent Accounting Pronouncements
In 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, ASU 2016-20, and ASU 2017-05, 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.
In February 2016, the FASB issued ASU No. 2016-02,
Leases. This update will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured
at the present value of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and
liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section
of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization
of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability
will be classified as a financing activity while the interest component will be included in the operating section of the statement
of cash flows. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption
is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified
retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements
and related disclosures.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part
I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
with a Scope Exception.
ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial
instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments
(or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities.
A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward.
For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a
dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments
with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial
conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December
15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using
a full or modified retrospective approach. The Company plans to adopt ASU 2017-11 in the third quarter of 2017. The adoption of
ASU 2017-11 is expected to have a material impact on the Company’s financial statements and related disclosures because
derivative liabilities from financial instruments (or embedded conversion features) that have down round features are expected
to be reclassified from liabilities to additional paid-in capital, effective as of the beginning of the fiscal year.
Other 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.
Note 2 – Fixed Assets
As of June 30, 2017 and December 31, 2016,
fixed assets consisted of the following:
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Computer equipment and fixtures
|
|
$
|
312,756
|
|
|
$
|
312,756
|
|
|
Accumulated depreciation
|
|
|
(293,470
|
)
|
|
|
(258,643
|
)
|
|
Fixed assets, net
|
|
$
|
19,286
|
|
|
$
|
54,113
|
|
Depreciation and amortization expense for the
three months ended June 30, 2017 and June 30, 2016 was $16,643 and $22,490, respectively.
Depreciation and amortization expense for the
six months ended June 30, 2017 and June 30, 2016 was $34,827 and $45,306, respectively.
Note 3 – Accounts Payable and Accrued
Liabilities
As of June 30, 2017 and December 31, 2016,
accounts payable and accrued liabilities consisted of the following:
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Accounts payable
|
|
$
|
963,613
|
|
|
$
|
862,860
|
|
|
Due to copyright holders
|
|
|
663,943
|
|
|
|
601,421
|
|
|
Accrued payroll
|
|
|
248,978
|
|
|
|
180,894
|
|
|
Insurance premium financing payable
|
|
|
9,616
|
|
|
|
40,802
|
|
|
Advance from BMG Rights Management
|
|
|
200,000
|
|
|
|
–
|
|
|
Accrued settlement
|
|
|
–
|
|
|
|
200,000
|
|
|
Total
|
|
$
|
2,086,150
|
|
|
$
|
1,885,977
|
|
At December 31, 2016, the Company had accrued
$200,000 related to a the settlement of class action complaint. On January 7, 2017, BMG Rights Management (US) LLC (“BMG”)
advanced the Company $200,000, which was used to pay off the settlement. The advance from BMG is to be applied to future billings
from the Company to BMG for consulting services.
Note 4 – Derivative Liabilities
In September 2014, the Company issued certain
warrants which included an anti-dilution provision that allows for the exercise price of the warrants to be adjusted if the Company
issues securities at a price lower than the current exercise price of these warrants.
Pursuant to current 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 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. In July 2017, the FASB issued ASU 2017-11, which when adopted by the Company, is expected
to effect the Company’s accounting for its derivative liabilities (see Note 1).
At December 31, 2016, the fair value of the
derivative liabilities was $280,316. During the six months ended June 30, 2017, the fair value of the derivative liabilities increased
by $58,057. At June 30, 2017, the fair value of the derivative liabilities was $286,883.
At June 30, 2017 and December 31, 2016, the
fair value of the derivative liabilities was determined through use of a probability-weighted Black-Scholes-Merton valuation model
based on the following assumptions:
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Expected volatility
|
|
|
193%
|
|
|
|
172%
|
|
|
Expected life
|
|
|
2.24 years
|
|
|
|
2.7 years
|
|
|
Risk-free interest rate
|
|
|
1.38%
|
|
|
|
1.5%
|
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
The expected volatilities are based on historical
volatility of the Company’s stock. The expected life of the warrants was based on the remaining term of the warrants. The
risk-free interest rates were based on rates established by the Federal Reserve Bank. 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.
Note 5 – Common stock
During the six months ended June 30, 2017,
the Company issued an aggregate of 4,500,000 shares of common stock to investors for a purchase price of $180,000, or $0.04 per
share.
During the six months ended June 30,
2017, the Company issued 1,850,000 shares of its common stock upon exercise of warrants at an exercise price of $0.01 per share
for total proceeds of $18,500.
During the six months
ended June 30, 2016, the Company sold 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.
During the six months
ended June 30, 2016, the Company issued 5,580,000 shares of its common stock upon the exercise of 5,580,000 warrants valued at
$55,800.
Note 6 – Stock Compensation
Common stock issued for services
During the six months ended June 30, 2017,
the Company issued a total of 15,940,227 shares of common stock for services valued at $442,865, including 5,000,000 shares of
common stock issued to the Company’s CEO as part of an employment agreement, 3,000,000 shares of common stock issued to
a consultant, and 7,940,227 shares of common stock issued to employees. The fair value of the shares was based on the closing
price of the Company’s common stock on the date the shares were granted, which ranged from $0.022 per share to $0.0355 per
share. For the three and six months ended June 30, 2017, total fair value of shares granted of $174,685 and $442,685, respectively,
is included in general and administrative expense. During the six months ended June 30, 2016, the Company did not issue any shares
of common stock for services.
Options
On February 14, 2017, the Company
granted options to purchase 5,000,000 shares of common stock with an exercise price of $0.05 to the Company’s CEO as
part of an employment agreement. Options exercisable into 1,000,000 shares of common stock vested immediately and the options
exercisable into 4,000,000 shares of common stock will vest monthly over 48 months beginning on February 14, 2018. The fair
value of these options was determined to be $160,416.
On May 8, 2017, the Company granted options
to purchase 450,000 shares of common stock with an exercise price of $0.05 to the Company’s employees. The options vested
immediately. The fair value of these options was determined to be $18,861.
The Company used the Black-Scholes-Merton option-pricing
models with the following assumptions to calculate fair value :
|
|
|
February 14, 2017
|
May 8, 2017
|
|
|
Expected volatility
|
|
|
173%
|
194%
|
|
|
Risk-free interest rate
|
|
|
2.47%
|
2.39%
|
|
|
Expected dividend yield
|
|
|
0%
|
0%
|
|
|
Expected life
|
|
|
10 years
|
10 years
|
|
The expected volatility is based on historical
volatility of the Company’s stock. The expected life of the options was based on the term of the options. The risk-free interest
rate was based on rates established by the Federal Reserve Bank. 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. For the six months ending June
30, 2016, the Company had no stock options requiring an assessment of value.
During the three months ended June 30, 2017
and 2016, the Company recorded compensation costs of $27,990 and $11,942, respectively, relating to the vesting of stock options.
During the six months ended June 30, 2017 and 2016, the Company recorded compensation costs of $66,194 and $23,883, respectively,
relating to the vesting of stock options. As of June 30, 2017, the aggregate value of unvested options was $116,387, which
will continue to be amortized as compensation cost as the options vest over terms ranging from one to four years, as applicable.
The stock option activity for the six months
ended June 30, 2017 is as follows:
|
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Balance outstanding, December 31, 2016
|
|
|
900,000
|
|
|
$
|
0.17
|
|
|
|
4.67
|
|
|
Granted
|
|
|
5,450,000
|
|
|
|
0.05
|
|
|
|
9.65
|
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Forfeited/expired
|
|
|
(750,000
|
)
|
|
|
0.15
|
|
|
|
–
|
|
|
Balance outstanding, June 30, 2017
|
|
|
5,600,000
|
|
|
$
|
0.06
|
|
|
|
9.60
|
|
|
Exercisable, June 30, 2017
|
|
|
1,933,332
|
|
|
$
|
0.07
|
|
|
|
9.53
|
|
At June 30, 2017, the Company’s outstanding
and exercisable options had no intrinsic value.
Warrants
On February 14, 2017, pursuant to the employment
agreement with the Company CEO, warrants exercisable into 3,000,000 shares of common stock issued to the Company’s CEO in
2015 were deemed fully vested and the exercise price of the warrants was reduced from $0.25 per share to $0.05 per share. The Company
determined the expense related to this modification was $13,023 and is included in general and administrative expense.
On January 20, 2017, the Company issued warrants
exercisable into 350,000 shares of common stock for services. The fair value of warrants issued for services was determined to
be $9,378. The Company recorded the full $9,378 in general and administrative expense since it determined that the award is a certainty
and the service performance and its future benefit are not assured in this arrangement.
For the six months ending June 30, 2017 and
2016, the fair value of warrant awards was estimated using the Black-Scholes-Merton option-pricing model with the following assumptions:
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
Expected volatility
|
|
|
171%
|
|
|
|
121%
|
|
|
Risk-free interest rate
|
|
|
1.5%
|
|
|
|
1.08%
|
|
|
Expected dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Expected life
|
|
|
2.5 years
|
|
|
|
3 years
|
|
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.
During the three months ended June 30, 2017
and 2016, the Company recorded compensation costs of $19,569 and $22,527, respectively, relating to the vesting of stock warrants.
During the six months ended June 30, 2017 and 2016, the Company recorded compensation costs of $19,569 and $76,388, respectively,
relating to the vesting of stock warrants. As of June 30, 2017, the aggregate value of unvested warrants was $0.
A summary of the Company’s warrant activity
during the six months ended June 30, 2017 is presented below:
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Balance outstanding, December 31, 2016
|
|
|
46,958,072
|
|
|
$
|
0.11
|
|
|
|
2.13
|
|
|
Granted
|
|
|
350,000
|
|
|
|
0.01
|
|
|
|
2.81
|
|
|
Exercised
|
|
|
(1,850,000
|
)
|
|
|
0.01
|
|
|
|
2.30
|
|
|
Forfeited/expired
|
|
|
(885,875
|
)
|
|
|
0.09
|
|
|
|
–
|
|
|
Balance outstanding, June 30, 2017
|
|
|
44,572,197
|
|
|
|
0.10
|
|
|
|
1.66
|
|
|
Exercisable, June 30, 2017
|
|
|
44,572,197
|
|
|
$
|
0.10
|
|
|
|
1.66
|
|
At June 30, 2017, the Company’s outstanding
warrants had an intrinsic value of $348,480.
Note 7 – Subsequent Event
On July 21, 2017, the Company issued an
aggregate of 10,000,000 shares of common stock to an investor for a purchase price of $200,000, or $0.02 per share. In connection
with the foregoing, the Company relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act
of 1933, as amended, for transactions not involving a public offering.
On July 30, 2017, Rightscorp, Inc. (the “Company”)
entered into two agreements to provide services to a holder (the “Client”) of multiple copyrights at risk of infringement
through peer-to-peer (“P2P”) networks.
Pursuant to a “Representation Agreement,”
the Company will collect data as to infringements of protected copyrights of the Client and, if applicable, send notices to the
Internet Service Providers of infringers of such infringements including, without limitation, DMCA notices and take down letters
in the form required by law. In exchange, the Company will receive 50% of all gross proceeds of any settlement revenue received
by the Client from pre-lawsuit “advisory notices,” and 37.5% of all gross proceeds received by the Client from “final
warning” notices sent immediately prior to a lawsuit. The Representation Agreement is non-exclusive; however, if the Company
receives monthly revenues crossing certain thresholds (“Exclusivity Thresholds”, which range from $10,000 in the first
month to $100,000 after 12 months), the Company will not provide representation to direct competitors of the Client unless monthly
revenues fall below the Exclusivity Thresholds.
Pursuant to a “Services Agreement”,
the Company will provide a number of services to the Client for the purpose of detecting and verifying those copyrighted works
of the Client being accessed through P2P networks, as well as information about infringers. The Company will also provide certain
reporting, litigation support, and copyright protection advising services to the Client. During the term of the Services Agreement,
the Company will not provide litigation support services to any of the Client’s direct competitors for the purposes of enforcing
copyrights against individual P2P infringers. In exchange for these services, Client shall pay a monthly fee to the Company (the
“Service Fee”), in addition to reasonable costs and expenses. The monthly Service Fee shall increase every three months
for the term of the Services Agreement, from $10,000 per month in the first three months, to $85,000 per month after 16 months.
The Representation
Agreement and the Services Agreement both have an initial term of three years, followed by automatic renewals in monthly increments.
The Representation Agreement and the Services Agreement may be terminated by the Client at any time for any reason upon 45 days
prior written notice to the Company.