vai_1a.htm
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Filed
Pursuant to Rule
253(g)(2)
File
No. 024-10596
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Offering
Circular
October 19, 2016
VIDANGEL,
INC.
249
N. University Ave.
Provo, Utah 84601
(760)
933-8437
$5,000,000 Minimum Offering Amount (1,666,667
Shares of Class B Nonvoting Common Stock)
$11,250,000 Maximum Offering Amount (3,750,000
Shares of Class B Nonvoting Common Stock)
VIDANGEL, INC., a
Delaware corporation, referred to herein as VidAngel or the
Company, is offering a minimum of $5,000,000 and a maximum of
$11,250,000 of its Class B nonvoting common stock, or our Class B
Common Stock. The offering will consist of a minimum of 1,666,667
and a maximum of 3,750,000 shares of our Class B Common Stock at an
offering price of $3.00 per share, or the Offered Shares. Unless
terminated earlier by the Company in its sole discretion, this
offering will terminate on the earliest to occur of (i) the date on
which we sell the maximum number of Offered Shares, or the Maximum
Offering, (ii) the date on which the ruling is issued by the court
on a motion for a preliminary injunction in connection with
litigation we are engaged in with Disney Enterprises, Inc., et al.,
or the Disney Litigation, or (iii) December 31, 2016. See
“DESCRIPTION OF THE BUSINESS
– Legal Proceedings.” We refer to any of these
three dates as the Termination Date. The initial closing date will
occur at the Company’s sole discretion and may be any date
after the Company has received and accepted subscriptions for at
least the minimum number of Offered Shares and before the
Termination Date. If, on the initial closing date, we have sold
less than the maximum Offered Shares, then we will hold one or more
additional closings for additional sales, up to the maximum number
of Offered Shares, through the Termination Date. Purchases of
Shares in excess of $5,000 must be transmitted by investors
directly by either wire transfer or electronic funds transfer via
ACH to a non-interest bearing escrow account maintained by Issuer
Direct. Purchases of Shares in the amount of $5,000 or less may be
submitted through an investor's VidAngel customer account in
accordance with the billing information for such investor at
www.vidangel.com, and will not be held in the escrow account
maintained by Issuer Direct, but will be held in a separate
non-interest bearing account held by VidAngel. Upon achieving the
minimum offering amount and the initial closing of this offering,
the proceeds for the offering will be distributed to the Company
and the Offered Shares will be issued to the
investors. If the minimum offering amount is not sold,
the proceeds from the offering will be promptly returned to
investors without interest. The minimum purchase
requirement is fifty (50) Offered Shares ($150); however, we can
waive the minimum purchase requirement on a case to case basis in
our sole discretion. We expect to commence the
sale of the Offered Shares as of the date on which the Offering
Statement of which this Offering Circular is a part is declared
qualified by the United States Securities and Exchange
Commission.
The date of
this Offering Circular is October 19,
2016
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Price
to Public
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Expense
Reimbursements1
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Proceeds to
Company2
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Proceeds
to Other Persons
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Per Offered
Share:
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$
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3.00
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$
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0.00
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$
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3.00
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$
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0
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Minimum Offering
Amount:
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$
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5,000,000
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$
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0.00
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$
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5,000,000
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$
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0
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Maximum Offering
Amount:
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$
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11,250,000
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$
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0.00
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$
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11,250,000
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$
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0
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1
We do not intend to use commissioned sales agents or
underwriters. Please refer to the section entitled
“PLAN OF DISTRIBUTION” of this Offering Circular
for additional information regarding distribution of the Offered
Shares
2
Does not include
estimated offering expenses including, without limitation, legal,
accounting, printing, advertising, travel, marketing, blue-sky
compliance and other expenses of this offering, as well as transfer
agent fees and fees payable to Issuer Direct. Offering expenses are
estimated at $280,000 if the Minimum Offering Amount is raised and
$430,000 if the Maximum Offering Amount is
raised. See
“PLAN OF
DISTRIBUTION”.
Generally,
no sale may be made to you in this offering if the aggregate
purchase price you pay is more than 10% of the greater of your
annual income or net worth. Different rules apply to
accredited investors and non-natural persons. Before
making any representation that your investment does not exceed
applicable thresholds, we encourage you to review Rule
251(d)(2)(i)(C) of Regulation A. For general information
on investing, we encourage you to refer to www.investor.gov.
An investment in the Offered Shares is subject
to certain risks and should be made only by persons or entities
able to bear the risk of and to withstand the total loss of their
investment. Prospective investors should carefully consider
and review the RISK FACTORS, beginning on PAGE
6.
THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, OR THE
COMMISSION, DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL TO
ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT
PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR
OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED
PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION;
HOWEVER, THE COMMISION HAS NOT MADE AN INDEPENDENT DETERMINATION
THAT THE SECURITIES OFFERED ARE EXEMPT FROM
REGISTRATION.
This Offering
Circular is following the offering circular format described in
Part II of Form 1-A.
TABLE
OF CONTENTS
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Page
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SUMMARY
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1
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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5
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RISK
FACTORS
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6
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DILUTION
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19
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PLAN OF
DISTRIBUTION
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20
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USE OF PROCEEDS TO
ISSUER
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23
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DESCRIPTION OF OUR
BUSINESS
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24
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DESCRIPTION OF OUR
PROPERTIES
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30
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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31
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DIRECTORS,
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
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35
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COMPENSATION OF
DIRECTORS AND EXECUTIVE OFFICERS
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37
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SECURITY OWNERSHIP
OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
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39
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INTEREST OF
MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS AND OTHER CONFLICTS
OF INTEREST
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40
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SECURITIES BEING
OFFERED
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41
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ERISA
CONSIDERATIONS
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45
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REPORTS
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47
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INDEPENDENT
AUDITORS
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47
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SUMMARY
This summary of the Offering Circular
highlights material information contained elsewhere in this
Offering Circular. Because it is a summary, it may not
contain all of the information that is important to your decision
of whether to invest in the Offered Shares. To
understand this offering fully, you should read the entire Offering
Circular carefully, including the Risk Factors section. The use
of the words “we,” “us,” “the Company,” “VidAngel,” or “our” refers to VidAngel, Inc.,
except where the context otherwise requires. The term
“Bylaws” refers
to the bylaws of VidAngel, Inc. The term “Certificate” refers to VidAngel,
Inc.’s certificate of incorporation, as amended. The
“Stockholders
Agreement” refers to the Stockholders Agreement of
VidAngel, Inc. The term “Governing Documents” refers to the
Certificate, Bylaws and Stockholders Agreement.
VidAngel, Inc. is
the leading entertainment filtering company, giving families the
choice to remove objectionable content from movies they watch in
their homes. By letting viewers customize content and watch
“however the BLEEP they want”, VidAngel believes it
offers the greatest degree of personal choice in the entertainment
marketplace.
The Company
In 2013, four
brothers, Neal, Daniel, Jeffrey, and Jordan Harmon, founded
VidAngel, a filtering company that gives viewers the choice to
remove objectionable content, such as violence, sex, nudity and/or
language, from authorized copies of movies and television programs.
The Harmon brothers, as fathers of children aged newborn to ten,
were searching for a better way to watch quality content with their
kids. They founded VidAngel to give their families, and all other
families, greater personal choice in the movies and television
programs they watch at home. VidAngel’s purpose is not only
to allow families to watch “however the BLEEP they
want,” but to protect an individual’s legal right to
customize the content they watch at home. Today, management
believes that VidAngel is the leading filtering company, with
applications, or Apps, available on all major platforms, and that
the potential demand for VidAngel’s service is
significant.
The
Company
was formed as a Utah limited liability company on October 22, 2013,
pursuant to a Certificate of Formation filed with the State of
Utah’s Department of Commerce and that certain Operating
Agreement of the Company, dated December 13, 2013, by and among the
Company and its members. Subsequently, the Company was
converted into VidAngel, Inc., a Delaware corporation, on February
12, 2014, pursuant to Articles of Conversion filed with the State
of Utah’s Department of Commerce.
The
Company
has authorized capital stock consisting of 25,000,000 shares of
common stock, par value $0.001 per share, or common stock, of which
21,250,000 shares have been designated as Class A voting common
stock, or the Class A Common Stock, and 3,750,000 have been
designated as Class B Common Stock.
Investors in this offering
will acquire our Class B Common Stock and become holders of our
Class B Common Stock, or our Class B Common Stockholders, with
respect to their ownership of Offered Shares. Upon
investors’ receipt of Offered Shares purchased in this
Offering, they will become bound by our Bylaws, Certificate and
Stockholders Agreement. Our Bylaws, Certificate and
Stockholders Agreement govern the various rights and obligations of
our stockholders, including the Class B Common
Stockholders.
On June 9, 2016,
Disney Enterprises, Inc., Twentieth Century Fox Film Corporation,
and Warner Bros. Entertainment, Inc. (three of the six major
studios), joined by LucasFilm Ltd., LLC, or, collectively, the
Plaintiffs, filed a federal lawsuit against VidAngel, or the Disney
Litigation, alleging two claims: (a) copyright infringement, and
(b) violation of the Digital Millennium Copyright Act (or the DMCA,
codified at 17 U.S.C. Sections 1201-04). The Plaintiffs are
seeking monetary damages, costs, and attorneys’ fees from
VidAngel, as well as preliminary and permanent injunctions
prohibiting VidAngel from continuing to engage in the alleged
violations. VidAngel contends that its business is expressly
allowed by the Family Movie Act of 2005 (or the FMA, largely
codified at 17 U.S.C. Section 110(11)) and by the doctrine of "fair
use)." VidAngel has alleged counterclaims asserting that the
Plaintiffs are engaged in anti-competitive behavior. The
Disney Litigation is currently at a very early stage.
VidAngel plans to use a substantial portion of the proceeds of this
offering to defend the Disney Litigation, including by prosecuting
its counterclaims, through appeal. If VidAngel loses
the Disney Litigation, the loss will have a material adverse effect
on VidAngel’s financial condition and on its ability to
continue business operations. See "RISK FACTORS-We are engaged in current
litigation, the outcome of which, if not favorable to VidAngel,
would have a material adverse effect on us and our ability to
continue our business operations" on page 7 and "DESCRIPTION OF OUR
BUSINESS-Legal Proceedings-Disney Litigation" on page
28.
Taxation
We are taxed as a
subchapter C Corporation, and, as such, we are required to pay
federal income tax at the corporate tax rates on our taxable
income.
Securities
Offered
We are offering a
minimum of 1,666,667 and a maximum of 3,750,000 shares of our Class
B Common Stock in this offering with a minimum purchase requirement
of fifty (50) Offered Shares; however we can waive the minimum
purchase requirement in our sole discretion. If we sell at least
the minimum number of Offered Shares, or the Minimum Offering, on
or before the Termination Date, then we will close on the Minimum
Offering, or the Initial Closing, and this offering will continue
until terminated on the earlier of (i) a ruling on the Disney
Litigation; (ii) the date on which we sell the maximum number of
Offered Shares, or the Maximum Offering, or (iii) December 31,
2016. See “DESCRIPTION OF THE
BUSINESS – Legal Proceedings.” The Initial
Closing will occur at the Company’s discretion on any date
after the Company sells at least the Minimum Offering and before
the Termination Date. If on the Initial Closing date we have sold
less than the Maximum Offering, we will hold one or more additional
closings, or Additional Closings, in our sole discretion for
additional sales, up to the Maximum Offering, until the Termination
Date. Purchases of Shares in excess of $5,000 must be transmitted
by investors directly by either wire transfer or electronic funds
transfer via ACH to a non-interest bearing escrow account
maintained by Issuer Direct. Purchases of Shares in the amount of
$5,000 or less may be submitted through an investor's VidAngel
customer account in accordance with the billing information for
such investor at www.vidangel.com, and will not be held in the
escrow account maintained by Issuer Direct, but will be held in a
separate non-interest bearing account held by VidAngel. Upon the
Initial Closing, the proceeds collected for such closing will be
disbursed to the Company and the Offered Shares for such closing
will be issued to investors. If a closing does not occur
for any reason, the proceeds for such closing will be
promptly returned to
investors, without interest and without
deduction.
Investors in
the
Offered Shares will become our Class B Common
Stockholders. Our Class B Common Stock is common
nonvoting equity and contains no preferences as to other classes of
our capital stock.
Class B Common
Stockholders are not entitled to vote their Class B Common Stock,
including in the election of directors. See
“SECURITIES BEING OFFERED
– Description of Certificate and
Bylaws.”
Our ability to pay dividends depends on both
our achievement of positive cash flow and our Board’s
discretion in declaring dividends. For our most
recent fiscal year ended December 31, 2015, we realized a net loss
of $1,382,016. The Company has never declared or
paid cash dividends on its capital stock. The Company currently
intends to retain any future earnings to finance the growth and
development of its business and therefore does not anticipate
paying any cash dividends for the foreseeable future. The order and
priority of our dividends is further described in
“SECURITIES BEING OFFERED
– Dividends.”
Management
The Company is governed by our certificate of
incorporation, as amended, or our Certificate, and our bylaws, or
our Bylaws. The following summary describes material provisions of
our Certificate and our Bylaws as those documents pertain to the
management of the Company, but it is not a complete description of
our Certificate, our Bylaws or any combination of the two. A copy
of our Certificate and our Bylaws are filed as exhibits to the
Offering Statement of which this Offering Circular is a part. See
“SECURITIES BEING OFFERED
– Description of Certificate of Formation and
Bylaws.”
Board of Directors
Subject to our
stockholders’ rights to consent to certain transactions as
provided under the Delaware General Corporate Law, or DGCL, the
business and affairs of the Company are controlled by, and all
powers are exercised by, our board of directors, or our Board. Our
Board is required to consist of not fewer than three (3) nor more
than five (5) directors, the exact number to be set from time to
time by the Board. Our Board is comprised of Paul Ahlstrom, Neal
Harmon and Dalton Wright. Our Board is elected each year at the
annual meeting of Class A Common Stockholders, to hold office until
the next annual meeting and until their successors are elected and
qualified. Any newly created directorships resulting from an
increase in the authorized number of directors and any vacancies
occurring in our Board may be filled by the affirmative vote of the
remaining directors. A director may resign at any time, and the
Class A Common Stockholders may remove a director at any time, with
or without cause, by the affirmative vote of a majority of
stockholders voting in such decision. As Class B
Stockholders, investors in this offering will have no rights to
vote in the election or removal of members of our
Board.
The DGCL provides
that stockholders of a Delaware corporation are not entitled to the
right to cumulate votes in the election of directors unless its
certificate of incorporation provides otherwise. Our Certificate
does not provide for cumulative voting.
Our Board may
designate one or more committees. Such committees must consist of
one or more directors. Any such committee, to the extent permitted
by applicable law, will have and may exercise all the powers and
authority of the Board in the management of the business and
affairs of the Company.
Officers
The Board has the
authority to select the officers of the Company. Under our Bylaws,
the officers are required to consist of a Chairman of the Board, a
Chief Executive Officer, or CEO, a Secretary and a Treasurer. In
addition, the Board may elect one or more Vice Chairmen, President,
Chief Financial Officer and Vice Presidents, and such other offices
as the Board may determine. Two or more of the aforementioned
offices may be held by the same person. Our officers are: (i) Neal
Harmon, CEO; (ii) Jeffrey Harmon, Chief Marketing Officer; (iii)
Elizabeth Ellis, Chief Operating Officer, or COO; (iv) Patrick
Reilly, Director of Finance and Secretary; and (v) David Quinto,
General Counsel.
At the first
meeting of the Board following the annual meeting of stockholders,
the Board appoints the officers, however the Board may also empower
the CEO to appoint subordinate officers and agents for us. Each
officer so elected holds office until such officer’s
successor is elected and qualified or until the officer’s
earlier resignation or removal. Each officer is required to perform
such duties as are provided in the Bylaws or as the Board may from
time to time determine. Subject to the rights, if any,
of an officer under any employment agreement, any officer may be
removed, with our without cause, by the affirmative vote of a
majority of the Board. An officer may resign at any time
by giving notice to the Board. Our CEO is in charge of the general
affairs of the Company, subject to the oversight of the Board. In
case any officer is absent, or for any other reason the Board may
deem sufficient, the CEO or the Board may delegate the powers and
duties of such officer to any other officer or to any
director.
Transfer
Restrictions
The Company’s Class B Common Stock is
subject to the terms and conditions of our Stockholders Agreement.
The following summary describes material provisions of our
Stockholders Agreement as this document pertains to our Class B
Common Stock, but it is not a complete description of our
Stockholders Agreement. A copy of the form of our Stockholders
Agreement is filed as an exhibit to the Offering Statement of which
this Offering Circular is a part. See “SECURITIES BEING OFFERED – Description of
Stockholders
Agreement.”
Investors in our
Class B Common Stock will be subject to the restrictions on
transfer set forth in our Stockholders Agreement. Under
the terms of our Stockholders Agreement, transfer of shares of our
Class B Common Stock will be subject to a right of first refusal
exercisable first by the Company, second, by our Class A Common
Stockholders, and, third, by our remaining Class B Common
Stockholders party to the Stockholders Agreement. Prior
to any transfer or proposed transfer of shares, the transferring
shareholder, or the Seller, is required to give written notice to
us and to the remaining stockholders of such proposed
transfer. The certificates for our Class B Common Stock will
be legended to reflect these restrictions.
Summary
Risk Factors
An investment in
our Offered Shares involves a number of risks. See
“RISK FACTORS,”
of this Offering Circular. Some of the more significant risks
include those set forth below.
●
An investment in
our Offered Shares is a speculative investment, and therefore, no
assurance can be given that you will realize your investment
objectives.
●
We intend to retain
all our earnings for the future operation and expansion of our
business and do not anticipate making any cash distributions at any
time in the foreseeable future.
●
Over our past two
fiscal years, we have experienced aggregate net
losses.
●
We have limited
operating history upon which to base an investment
decision.
●
We are new and face
all the risks of an early-stage company.
●
We are engaged in
current litigation, the outcome of which, if not favorable to
VidAngel, would have a material adverse effect on us and our
ability to continue business operations.
●
If our efforts to
attract and retain customers are not successful, our business will
be adversely affected.
●
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Changes in
competitive offerings for entertainment video, including the
potential rapid adoption of piracy-based video offerings, could
adversely impact our business.
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●
The long-term and
fixed cost nature of our content commitments may limit our
operating flexibility and could adversely affect our liquidity and
results of operations.
●
If we are not able
to manage change and growth, our business could be adversely
affected.
●
If we fail to
maintain or, in new markets establish, a positive reputation with
customers concerning our service, including the content we offer
and the ease of use and accuracy of our content filters, we may not
be able to attract or retain customers, and our operating results
may be adversely affected.
●
We face risks, such
as unforeseen costs and potential liability in connection with
content we acquire, filter and/or distribute through our
service.
●
Any significant
disruption in or unauthorized access to our computer systems or
those of third parties that we utilize in our operations, including
those relating to cybersecurity or arising from cyber-attacks,
could result in a loss or degradation of service, unauthorized
disclosure of data, including customer and corporate information,
or theft of intellectual property, including digital content
assets, which could adversely impact our
business.
●
If the technology
we use in operating our business fails, becomes unavailable, or
does not operate to expectations, our business and operating
results could be adversely impacted.
●
Changes in how
network operators handle and charge for access to data that travel
across their networks could adversely impact our
business.
●
Our reputation and
relationships with customers would be harmed if our customer data,
particularly billing data, were accessed by unauthorized
persons.
●
If our trademarks
and other proprietary rights are not adequately protected to
prevent use or appropriation by our competitors, the value of our
brand and other intangible assets may be diminished, and our
business may be adversely affected.
●
Intellectual
property claims against us could be costly and result in the loss
of significant rights related to, among other things, our web site,
filtering technology, our recommendation and merchandising
technology, title selection processes and marketing
activities.
●
We are engaged in
legal proceedings that could cause us to incur unforeseen expenses
and could occupy a significant amount of our management's time and
attention.
●
We are dependent on
our management to achieve our objectives, and our loss of, or
inability to obtain, key personnel could delay or hinder
implementation of our business and growth strategies, which could
adversely affect the value of your investment and our ability to
pay dividends.
●
This is a fixed
price offering and the fixed offering price may not accurately
represent the current value of us or our assets at any particular
time. Therefore, the purchase price you pay for the Offered Shares
may not be supported by the value of our assets at the time of your
purchase.
●
We may change our
operational policies and business and growth strategies without
stockholder consent, which may subject us to different and more
significant risks in the future.
Interest
of Management and Related Parties
We have entered
into a Promotion and Services Agreement for marketing services with
Harmon Brothers LLC, or HB, a company in which our co-founders and
executive officers, Neal Harmon and Jeffrey Harmon, own
substantially all the equity. We have entered into an
Investors Rights and Voting Agreement with certain of our
significant investors, creating certain board rights. We
have also recently entered into an employment agreement with our
General Counsel.
Reporting Requirements under Tier II of
Regulation A
Following this Tier
II, Regulation A offering, we will be required to comply with
certain ongoing disclosure requirements under Rule 257 of
Regulation A. We will be required to file: an
annual report with the SEC on Form 1-K; a semi-annual report with
the SEC on Form 1-SA; current reports with the SEC on Form 1-U; and
a notice under cover of Form 1-Z. The necessity to file
current reports will be triggered by certain corporate
events. Parts I & II of Form 1-Z will be filed by us
if and when we decide to and are no longer obligated to file and
provide annual reports pursuant to the requirements of Regulation
A.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Offering
Circular contains certain forward-looking statements that are
subject to various risks and
uncertainties. Forward-looking statements are generally
identifiable by use of forward-looking terminology such as
“may,” “will,” “should,”
“potential,” “intend,”
“expect,” “outlook,” “seek,”
“anticipate,” “estimate,”
“approximately,” “believe,”
“could,” “project,” “predict,”
or other similar words or expressions. Forward-looking statements
are based on certain assumptions, discuss future expectations,
describe future plans and strategies, contain financial and
operating projections or state other forward-looking
information. Our ability to predict results or the
actual effect of future events, actions, plans or strategies is
inherently uncertain. Although we believe that the
expectations reflected in our forward-looking statements are based
on reasonable assumptions, our actual results and performance could
differ materially from those set forth or anticipated in our
forward-looking statements. Factors that could have a
material adverse effect on our forward-looking statements and upon
our business, results of operations, financial condition, funds
derived from operations, cash available for dividends, cash flows,
liquidity and prospects include, but are not limited to, the
factors referenced in this Offering Circular, including those set
forth below.
When considering
forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this Offering
Circular. Readers are cautioned not to place undue
reliance on any of these forward-looking statements, which reflect
our views as of the date of this Offering Circular. The
matters summarized below and elsewhere in this Offering Circular
could cause our actual results and performance to differ materially
from those set forth or anticipated in forward-looking statements.
Accordingly, we cannot guarantee future results or
performance. Furthermore, except as required by law, we
are under no duty to, and we do not intend to, update any of our
forward-looking statements after the date of this Offering
Circular, whether as a result of new information, future events or
otherwise.
RISK
FACTORS
An investment in our Offered Shares is highly speculative and is
suitable only for persons or entities that are able to evaluate the
risks of the investment. An investment in our Offered
Shares should be made only by persons or entities able to bear the
risk of, and to withstand the total loss of, their
investment. Prospective investors should consider the
following risks before making a decision to purchase our Offered
Shares. To the best of our knowledge, we have included all material
risks to investors in this section.
General
Risks of an Investment in Us
An
investment in our Offered Shares is a speculative investment and,
therefore no assurance can be given that you will realize your
investment objectives.
No assurance can be
given that investors will realize a return on their investments in
us or that they will not lose their entire investment in our
Offered Shares. For this reason, each prospective
investor of our Offered Shares should carefully read this Offering
Circular. ALL SUCH
PERSONS OR ENTITIES SHOULD CONSULT WITH THEIR ATTORNEY OR FINANCIAL
ADVISOR PRIOR TO MAKING AN INVESTMENT.
We do not intend to pay dividends for the
foreseeable future.
We intend to retain
all of our earnings for the future operation and expansion of our
business and do not anticipate making any cash distributions at any
time in the foreseeable future.
Over our past two fiscal years, we have
experienced aggregate net losses.
We recorded net
losses of $777,916 in fiscal 2014 and net losses of $1,382,016 in
fiscal 2015, resulting in an aggregate net loss of $2,159,932 over
our last two fiscal years. If our ability to generate positive net
income remains inconsistent in the future, the value of our Class B
Common Stock would likely be materially and adversely
affected.
Our
future indebtedness may limit our ability to declare and pay
dividends and may affect our operations.
Although we
don’t anticipate doing so in the near future, we may seek
debt financing eventually to assist with the financing of our
future operations. Our ability to make principal and
interest payments with respect to any such debt incurred depends on
future performance, which performance is subject to many factors,
some of which will be outside of our control. In addition, most of
such indebtedness will likely be secured by substantially all of
our assets and will contain restrictive covenants that limit our
ability to distribute cash and to incur additional
indebtedness. Payment of principal and interest on such
indebtedness, as well as compliance with the requirements and
covenants of such indebtedness, could limit our ability to pay
dividends to our stockholders, if at all. Such leverage may also
adversely affect our ability to finance future operations and
capital needs, or to pursue other business opportunities and make
results of operations more susceptible to adverse business
conditions.
We
have limited operating history upon which to base an investment
decision.
We are an
early-stage company in which you may lose your entire investment.
We began operations in 2013. Because we have a limited operating
history, we are unable to provide significant data upon which to
evaluate fully our prospects and an investment in our securities.
Our ability to succeed and generate operating profits and positive
operating cash flow will depend on our ability, among other things,
to:
●
Develop and execute
our business model;
●
Attract and
maintain an adequate customer base;
●
Raise additional
capital as contemplated in this offering, if necessary in the
future;
●
Pending and
potential lawsuits threatening our ability to provide our services;
and
●
Attract and retain
qualified personnel.
We cannot be
certain that our business strategy will be successful in the
long-term because this strategy is still relatively new and even if
successful, we may face difficulty in managing our growth. As an
early-stage company, we will be particularly susceptible to the
risks and uncertainties described in these risk
factors.
We
are new and face all the risks of an early-stage
company.
We may encounter
challenges and difficulties frequently experienced by early-stage
companies; including:
●
A lack of operating
experience;
●
Increasing net
losses and negative cash flows;
●
Insufficient
revenue or cash flow to be self-sustaining;
●
An unproven
business model;
●
Difficulties in
managing rapid growth.
We
are engaged in current litigation, the outcome of which, if not
favorable to VidAngel, would have a material adverse effect on us
and our ability to continue our business operations.
We are currently
engaged in the Disney Litigation, as well as litigation with
ClearPlay, Inc., or the ClearPlay Litigation, and plan to use a
substantial amount of the proceeds of this offering in our defense
in the Disney Litigation. If the Disney Litigation were to be
decided against VidAngel, it would have a material adverse effect
on not only our financial condition but our ability to continue
business operations. See “DESCRIPTION OF THE BUSINESS – Legal
Proceedings” below for a detailed summary of our
current litigation.
Risks
Related to Our Business
If
our efforts to attract and retain customers are not successful, our
business will be adversely affected.
We have experienced
positive customer growth since launching the latest version of our
service in December 2014. Our ability to continue to attract
customers will depend, in part, on our ability to consistently
provide our customers with compelling content choices, a quality
experience for selecting and viewing TV shows and movies, and
dynamic filtering solutions set to the customer’s
preferences. Furthermore, the relative service levels, content
offerings, pricing and related features of competitors to our
service may adversely impact our ability to attract and retain
customers. Our main direct competition is ClearPlay, Inc., or
ClearPlay, which also offers a filtering service. Other
entertainment video providers that do not currently offer a
filtering service, such as multichannel video programming
distributors, Internet-based movie and TV content providers
(including those that provide pirated content) and brick-and-mortar
DVD rental outlets, including without limitation Netflix, Amazon
Prime, Vimeo, Hulu, and Xfinity OnDemand, could become direct
competitors in the future. If consumers do not perceive our
service as valuable, including if we introduce new or adjust
existing features, adjust pricing or service offerings, or change
the mix of content in a manner that is not favorably received by
them, we may not be able to attract and retain customers. In
addition, many of our customers try our service resulting from
word-of-mouth advertising from existing customers. If our efforts
to satisfy our existing customers are not successful, we may not be
able to attract new customers, and, as a result, our ability to
maintain and/or grow our business will be adversely affected.
Customers may cease to use our service for many reasons, including
the need to cut household expenses, unsatisfactory availability of
content, competitive services providing a better value or
experience, and customer service issues not being satisfactorily
resolved. We must continually add new customers both to replace
departed customers and to grow our business beyond our current
customer base. Given, in particular, that our content costs are
largely fixed in nature, we may not be able to adjust our
expenditures or increase our (per customer) revenues commensurate
with a lowered growth rate such that our margins, liquidity and
results of operation may be adversely impacted. If we are unable to
compete successfully with current and new competitors in retaining
existing customers and attracting new customers, our business will
be adversely affected. Further, if excessive numbers of customers
cease using our service, we may be required to incur significantly
higher marketing expenditures than we currently anticipate to
replace these customers with new customers.
Changes
in competitive offerings for entertainment video, including the
potential rapid adoption of piracy-based video offerings, could
adversely impact our business.
The market for
entertainment video is intensely competitive and subject to rapid
change. Through new and existing distribution channels, consumers
have increasing options to access entertainment video. The various
economic models underlying these channels include subscription,
transactional, ad-supported and piracy-based services. All have the
potential to capture meaningful segments of the entertainment video
market and could offer filtering services in the future. Piracy, in
particular, threatens to damage our business, as its fundamental
proposition to consumers is so compelling and difficult to compete
against: virtually all content for free and some content available
has already been edited for objectionable content. Furthermore, in
light of the compelling consumer proposition, piracy services are
subject to rapid global growth. Traditional providers of
entertainment video, including broadcasters and cable network
operators, as well as Internet-based e-commerce entertainment video
providers, are increasing their Internet-based video
offerings. Several of these competitors have long operating
histories, large customer bases, strong brand recognition and
significant financial, marketing and other resources. They may
secure better terms from suppliers, adopt more aggressive pricing,
and devote more resources to product development, technology,
infrastructure, content acquisitions and marketing. New competitors
may enter the market or existing providers may adjust their
services with unique
offerings or approaches to providing entertainment video. Companies
also may enter into business combinations or alliances that
strengthen their competitive positions. If we are unable to
successfully or profitably compete with current and new competitors
who do or may offer filtering services in the future, our business
will be adversely affected, and we may not be able to increase or
maintain market share, revenues or profitability.
The
long-term and fixed cost nature of our content commitments may
limit our operating flexibility and could adversely affect our
liquidity and results of operations.
In connection with
obtaining video content, we typically purchase significant
quantities of physical DVDs or Blu-ray discs in anticipation of
customer demand, the payment terms of which are not tied to
customer usage or the size of our customer base. Given the
multiple-year duration and largely fixed cost nature of purchasing
physical DVDs and Blu-ray discs, if customer acquisition and
retention does not meet our expectations, our margins may
be adversely impacted. To the extent customer base and/or
revenue growth do not meet our expectations, our liquidity and
results of operations could be adversely affected as a result of
large capital expenditures for physical DVDs and Blu-ray discs. In
addition, the long-term and fixed cost nature of our purchasing
physical DVDs and Blu-ray discs may limit our flexibility in
planning for, or reacting to changes in our business and the market
segments in which we operate.
We are devoting
more resources to the development, marketing and distribution of
filtered content, including TV series and movies. We believe that
filtered content can help differentiate our service from other
offerings, enhance our brand and otherwise attract and retain
customers. To the extent our ability to provide customers with
custom content filters does not meet the Company’s and our
customers’ expectations, in particular, costs, viewing and
popularity, our business, including our brand and results of
operations may be adversely impacted.
If
we are not able to manage change and growth, our business could be
adversely affected.
We are expanding
our operations, scaling our filtering service to effectively and
reliably handle anticipated growth in both customers and features
related to our service, ramping up our ability to provide customers
with custom content filters, as well as continuing to operate our
service within the U.S. As we scale up our filtering service, we
are developing technology and utilizing third-party
“cloud” storage services. As we ramp up our offering of
content filters, we are building out crowd-sourcing expertise in a
number of distinct roles, including video viewers, video
taggers, video reviewers and video publishers. If we are not able
to manage the growing complexity of our business, including
improving, refining or revising our systems and operational
practices related to our video operations and filtering content,
our business may be adversely affected. See “DESCRIPTION OF THE
BUSINESS.”
If
we fail to maintain or, in new markets establish, a positive
reputation with customers concerning our service, including the
content we offer and the ease of use and accuracy of our content
filters, we may not be able to attract or retain customers, and our
operating results may be adversely affected.
We believe that a
positive reputation is important to attract and retain customers
who have a number of choices for obtaining entertainment video. To
the extent our content, particularly our content filters, is
perceived as low quality, or our failure to sufficiently filter
offensive or otherwise undesired content to customers, our ability
to establish and maintain a positive reputation may be adversely
impacted. Furthermore, to the extent our marketing, customer
service and public relations efforts are not effective or create a
negative consumer reaction, our ability to establish and maintain a
positive reputation may be adversely impacted. As we expand into
new markets, we need to establish our reputation with new
customers. To the extent we are unsuccessful in creating positive
impressions, our business in new markets may be adversely
impacted.
Changes
in how we market our service could adversely affect our marketing
expenses and our customer base may be adversely
affected.
We utilize a broad
mix of marketing and public-relations programs, including social
media sites such as Facebook, YouTube and Twitter, to promote our
service to potential customers. We may limit or discontinue the use
or support of certain marketing sources or activities if
advertising rates increase or if we become concerned that customers
or potential customers deem certain marketing practices intrusive
or damaging to our brand. If the available marketing channels are
curtailed, our ability to attract new customers may be adversely
affected.
If companies that
promote our service determine that we negatively impact their
businesses, decide to compete more directly with our business,
enter a similar business, or choose to exclusively support our
competitors, we may no longer have access to certain marketing
channels. If we are unable to maintain or replace our sources of
customers with similarly effective sources, or if the cost of our
existing sources increases, our customer base and marketing
expenses may be adversely affected.
We
face risks, such as unforeseen costs and potential liability in
connection with content we acquire, filter and/or distribute
through our service.
As a distributor of
content, we face potential liability for negligence, copyright and
trademark infringement, or other claims based on the nature and
content of the materials that we acquire, filter and/or distribute.
We also may face potential liability for content used in promoting
our service, including marketing materials and features on our Web
site such as customer reviews. As we expand our offering of content
filters, we have become responsible for costs of producing content
maps and other features. We also take on risks associated with
filters, such as producing filters that do not seamlessly stream
content but rather produce an unsatisfactory experience to the
viewing customer. To the extent we do not accurately anticipate
costs or mitigate risks, including for content that we obtain but
ultimately do not make available on our service, or if we become
liable for content we acquire, filter and/or distribute, our
business may suffer. Litigation to defend such claims could be
costly and the expenses and damages arising from any liability or
unforeseen production risks could harm our operating results. We
may not be indemnified or insured against such claims or costs of
these types. See “DESCRIPTION
OF OUR BUSINESS – Legal
Proceedings.”
If
studios, content providers, content distributors or other rights
holders refuse to sell us their content or other rights on terms
acceptable to us, our business could be adversely
affected.
Our ability to
provide our customers with a filtering service depends on studios,
content providers, wholesale content distributors and other rights
holders upon whom we rely to produce and/or provide us the content
we redistribute, filter, and stream to our customers.
If the studios,
content providers, wholesale content distributors and other rights
holders are not willing or able to sell us physical content on
terms acceptable to us, our ability to filter content remotely to
our customers would be adversely affected and/or our costs could
increase. Many of the methods by which we purchase physical media
from the studios, content providers, wholesale content distributors
or other rights holders could cease offering new content
to our service relatively quickly. The actions of such parties, as
well as other actions we may take could impair the availability of
new content for streaming through our service on short notice. As
competition increases, we may see the cost of programming increase.
We focus on programming an overall mix of content that delights our
customers in a cost efficient manner. Within that context, we are
selective about the titles we purchase for inclusion in our
service. If we do not maintain a compelling mix of content for
filtering, our customer acquisition and retention may be adversely
affected.
We
rely upon a number of partners to make our service available on
their devices.
We currently offer
customers the ability to receive filtered content through a host of
Internet-connected screens, including TVs, digital video players,
television set-top boxes and mobile devices. We have agreements
with various tech companies and distributors to make our service
available through the television set-top boxes of such service
providers. We intend to continue to broaden our capability to
transmit filtered TV shows and movies to other platforms and
partners over time. If we are not successful in maintaining
existing and creating new relationships, or if we encounter
technological, content licensing, regulatory or other impediments
to delivering our filtered content to our customers via those
devices, our ability to grow our business could be adversely
impacted. Furthermore, the devices are manufactured and sold by
entities other than us and while these entities should be
responsible for the devices' performance, the connection between us
and those devices may nonetheless result in customer
dissatisfaction toward the Company and such dissatisfaction could
result in claims against us or otherwise adversely impact our
business. In addition, technology changes to our product
functionality and offering of content filters may require that
partners update their devices. If partners do not update or
otherwise modify their devices, our service and our
customers’ use and enjoyment could be negatively
impacted.
Any
significant disruption in or unauthorized access to our computer
systems or those of third parties that we utilize in our
operations, including those relating to cybersecurity or arising
from cyber-attacks, could result in a loss or degradation of
service, unauthorized disclosure of data, including customer and
corporate information, or theft of intellectual property, including
digital content assets, which could adversely impact our
business.
Our reputation and
ability to attract, retain and serve our customers is dependent
upon the reliable performance and security of our computer systems
and those of third parties that we utilize in our operations. These
systems may be subject to damage or interruption from earthquakes,
adverse weather conditions, other natural disasters, terrorist
attacks, power loss, telecommunications failures, and cybersecurity
breaches. Interruptions in these systems, or with the Internet in
general, could leave our service unavailable or degraded, or
otherwise hinder our ability to deliver filtered content to our
customers. Service interruptions, errors in our software or the
unavailability of computer systems used in our operations could
diminish the overall attractiveness of our service to existing and
potential customers.
Our computer
systems and those of third parties we use in our operations are
vulnerable to cybersecurity breaches, including cyber-attacks such
as computer viruses, denial of service attacks, physical or
electronic break-ins and similar disruptions. These systems
periodically experience directed attacks intended to lead to
interruptions and delays in our service and operations as well as
loss, misuse or theft of data. Any attempt by hackers to obtain our
data (including customer and corporate information) or
intellectual property (including digital content assets), disrupt
our service, or otherwise access our systems, or those of third
parties we use, if successful, could harm our business, be
expensive to remedy and damage our reputation. We have implemented
certain systems and processes to thwart hackers and protect our
data and systems. To date hackers have not had a material impact on
our service or systems however this is no assurance that hackers
may not be successful in the future. Our insurance does not cover
expenses related to such disruptions or unauthorized access.
Efforts to prevent hackers from disrupting our service or otherwise
accessing our systems are expensive to implement and may limit the
functionality of or otherwise negatively impact our service
offering and systems. Any significant disruption to our service or
access to our systems could result in a loss of customers and
adversely affect our business and results of
operation.
We utilize our own
communications and computer hardware systems located either in our
facilities or in that of a third-party Web hosting provider. In
addition, we utilize third-party “cloud” computing
services in connection with our business operations. We also
utilize our own and third-party content delivery networks to help
us deliver TV shows and movies in high volume to our customers over
the Internet. Problems faced by us or our third-party Web hosting,
"cloud" computing, or other network providers, including
technological or business-related disruptions, as well as
cybersecurity threats, could adversely impact the experience of our
customers.
We
rely upon certain third party cloud computing service providers to
operate certain aspects of our service and any disruption of or
interference with our use of such services from our providers would
impact our operations and our business would be adversely
impacted.
Several third party
cloud computing services providers provide VidAngel with a
distributed computing infrastructure platform for business
operations, or what is commonly referred to as a "cloud" computing
service. We have designed our software and computer systems so as
to utilize data processing, storage capabilities and other services
provided by such providers. Currently, we run the vast majority of
our computing using such third party cloud computing services.
Given this, along with the fact that we cannot easily switch our
operations to another cloud provider, any disruption of or
interference with our use of such services from our providers would
impact our operations and our business would be adversely
impacted.
If
the technology we use in operating our business fails, becomes
unavailable, or does not operate to expectations, our business and
operating results could be adversely impacted.
We utilize a
combination of proprietary and third-party technology to operate
our business. This includes technology we have developed or that
has been assigned to us, such as our Content Delivery and Filtering
Solution, Filter Curation Platform, and our Remote Media Ownership
Management. We also use technology to recommend and merchandise
content to our consumers as well as to enable fast and efficient
delivery of content to our customers and their various consumer
electronic devices. For example, we have built and deployed our
video on a content delivery network, or CDN. To the extent Internet
Service Providers, or ISPs, do not interconnect with our CDN, or if
we experience difficulties in its operation, our ability to
efficiently and effectively deliver our content and our offering of
content filters to our customers could be adversely impacted and
our business and results of operation could be adversely affected.
Likewise, if our recommendation and merchandising technology does
not enable us to predict and recommend titles that our customers
will enjoy, our ability to attract and retain customers may be
adversely affected. We also utilize third party technology to help
market our service, process payments, and otherwise manage the
daily operations of our business. If our technology or that of
third parties we utilize in our operations fails or otherwise
operates improperly, our ability to operate our service, retain
existing customers and add new customers may be impaired. Also, any
harm to our customers’ personal computers or other devices
caused by software used in our operations could have an adverse
effect on our business, results of operations and financial
condition. See “DESCRIPTION
OF THE BUSINESS—Our Intellectual
Property.”
If
government regulations relating to the Internet or other areas of
our business change, we may need to alter the manner in which we
conduct our business, or incur greater operating
expenses.
The adoption or
modification of laws or regulations relating to the Internet or
other areas of our business could limit or otherwise adversely
affect the manner in which we currently conduct our business. In
addition, the continued growth and development of the market for
online commerce may lead to more stringent consumer protection
laws, which may impose additional burdens on us. If we are required
to comply with new regulations or legislation or new
interpretations of existing regulations or legislation, this
compliance could cause us to incur additional expenses or alter our
business model.
Changes in laws or
regulations that adversely affect the growth, popularity or use of
the Internet, including laws impacting net neutrality, could
decrease the demand for our service and increase our cost of doing
business. The failure to adopt laws protecting strong net
neutrality could also increase the cost of doing business. On
February 16, 2015, the U.S. Federal Communications Commission, or
FCC, adopted net neutrality rules intended, in part, to prevent
network operators from discriminating against legal traffic that
transverses their networks and to prevent Internet Service
Provider, or ISP, abuses at interconnection points. The FCC's
authority to adopt these rules is currently under review by the
U.S. Circuit Court of Appeals for the District of Columbia. To
the extent network operators attempt to use this ruling to extract
fees from us to deliver our traffic or otherwise engage in
discriminatory practices, or if the U.S. Circuit Court of Appeals
for the District of Columbia invalidates the rules, our business
could be adversely impacted. Within such a regulatory environment,
coupled with potentially significant political and economic power
of local network operators, we could experience discriminatory or
anti-competitive practices that could impede our growth, cause us
to incur additional expense or otherwise negatively affect our
business.
Changes
in how network operators handle and charge for access to data that
travel across their networks could adversely impact our
business.
We rely upon the
ability of consumers to access our service through the Internet. If
network operators block, restrict or otherwise impair access to our
service over their networks, our service and business could be
negatively affected. To the extent that network operators implement
usage based pricing, including meaningful bandwidth caps, or
otherwise try to monetize access to their networks by data
providers, we could incur greater operating expenses and our new
customer acquisition and retention could be negatively impacted.
Furthermore, to the extent network operators create tiers of
Internet access service and either charge us for or prohibit us
from being available through these tiers, our business could be
negatively impacted.
Most network
operators that provide consumers with access to the Internet also
provide these consumers with multichannel video programming. As
such, many network operators have an incentive to use their network
infrastructure in a manner adverse to our continued growth and
success. While we believe that consumer demand, regulatory
oversight and competition will help check these incentives, to the
extent that network operators are able to provide preferential
treatment to their data as opposed to ours or otherwise implement
discriminatory network management practices, our business could be
negatively impacted.
Privacy
concerns could limit our ability to collect and leverage our
customer data and disclosure of customer data could adversely
impact our business and reputation.
In the ordinary
course of business, and in particular in connection with
merchandising our service to our customers, we collect and utilize
data supplied by our customers. We currently face certain legal
obligations regarding the manner in which we treat such
information. Other businesses have been criticized by privacy
groups and governmental bodies for attempts to link personal
identities and other information to data collected on the Internet
regarding users' browsing and other habits. Increased regulation of
data utilization practices, including self-regulation or findings
under existing laws that limit our ability to collect and use data,
could have an adverse effect on our business. In addition, if we
were to disclose data about our customers in a manner that was
objectionable to them, our business reputation could be adversely
affected, and we could face potential legal claims that could
impact our operating results.
Our
reputation and relationships with customers would be harmed if our
customer data, particularly billing data, were accessed by
unauthorized persons.
We maintain
personal data regarding our customers. This data is maintained on
our own systems as well as those of third parties we use in our
operations. With respect to
billing data, such as credit card numbers, we do not store such
information on our servers, but rely on third party services that
are PCI DSS compliant for storing and accessing billing
information. We take measures to protect against unauthorized
intrusion into our customers’ data. Despite those measures,
we, our payment processing services and other third-party services
we use could experience an unauthorized intrusion into our
customers’ data. In the event of such a breach, current and
potential customers may become unwilling to provide the information
to us necessary for them to become customers. Additionally, we
could face legal claims for such a breach. The costs relating to
any data breach could be material, and we currently do not carry
insurance against the risk of a data breach. For these reasons,
should an unauthorized intrusion into our customers’ data
occur, our business could be adversely affected.
We
are subject to payment processing risk.
Our customers pay
for our service using a variety of payment methods, including
credit and debit cards. We rely on internal systems as well
as those of third parties to process payments. Acceptance and
processing of these payment methods are subject to certain rules
and regulations and require payment of interchange and other
fees. To the extent there are disruptions in our payment
processing systems, increases in payment processing fees,
material changes in the payment ecosystem, such as large
re-issuances of payment cards, delays in receiving payments from
payment processors and/or changes to rules or regulations
concerning payment processing, our revenue, operating expenses and
operating results could be adversely impacted. In
addition, from time to time, we encounter fraudulent use of payment
methods, which could impact our results of operation, and, if not
adequately controlled and managed, could create negative consumer
perceptions of our service.
If
our trademarks and other proprietary rights are not adequately
protected to prevent use or appropriation by our competitors, the
value of our brand and other intangible assets may be diminished,
and our business may be adversely affected.
We rely and expect
to continue to rely on a combination of proprietary information,
invention assignment, non-competition and arbitration agreements
with our employees, consultants and third parties with whom we have
relationships, as well as trademark, copyright, patent and trade
secret protection laws, to protect our proprietary rights. We may
also seek to enforce our proprietary rights through court
proceedings. We have applied and we expect to apply for trademark
registrations and the issuance of patents from time to
time. Such applications may not be approved, third
parties may challenge any copyrights, patents or trademarks issued
to or held by us, third parties may knowingly or unknowingly
infringe our intellectual property rights, and we may not be able
to prevent infringement or misappropriation without substantial
expense to us. If the protection of our intellectual property
rights is inadequate to prevent use or misappropriation by third
parties, the value of our brand and other intangible assets may be
diminished, competitors may be able to mimic our service and
methods of operations more effectively, the perception of our
business and service to customers and potential customers may
become confused in the marketplace, and our ability to attract
customers may be adversely affected.
We currently hold
various domain names relating to our brand, including www.vidangel.com. Failure to
protect our domain names could adversely affect our reputation and
brand and make it more difficult for customers to find our web site
and our service. We may be unable, without significant cost or at
all, to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
Intellectual
property claims against us could be costly and result in the loss
of significant rights related to, among other things, our web site,
filtering technology, our recommendation and merchandising
technology, title selection processes and marketing
activities.
Trademark,
copyright, patent and other intellectual property rights are
important to us and other companies. Our intellectual property
rights extend to our technology, business processes and the content
on our web site. From time to time, third parties may allege that
we have violated their intellectual property rights. If we are
unable to obtain sufficient rights, successfully defend our use,
develop non-infringing technology, or otherwise alter our business
practices on a timely basis in response to claims for infringement,
misappropriation, misuse or other violation of third-party
intellectual property rights, our business and competitive position
may be adversely affected. Many companies are devoting significant
resources to developing patents that could potentially affect many
aspects of our business. There are numerous patents that broadly
claim means and methods of conducting business on the Internet.
Defending against intellectual property claims, whether they are
with or without merit or are determined in our favor, would result
in costly litigation and the diversion of technical and management
personnel. It also may result in our inability to use our current
web site, streaming technology, our recommendation and
merchandising technology or inability to market our service and
merchandise our products. As a result of such dispute, we may have
to develop non-infringing technology, enter into royalty or
licensing agreements, adjust our merchandising or marketing
activities or take other actions to resolve the claims. These
actions, if required, may be costly or unavailable on terms
acceptable to us. We are currently engaged in litigation with
Disney Enterprises, Inc., et. al., or the Disney
Litigation. An adverse decision from the court in
connection with this litigation would adversely affect our
financial condition and our ability to continue business
operations. See “DESCRIPTION
OF THE BUSINESS – Legal Proceedings” below for a
detailed summary of our current litigation.
We
are engaged in legal proceedings that could cause us to incur
unforeseen expenses and could occupy a significant amount of our
management's time and attention.
From time to time,
we are subject to litigation or claims that could negatively affect
our business operations and financial position. We are currently
involved in the Disney Litigation and plan to use a substantial
amount of the proceeds of this offering in our
defense. As we grow, we expect the number of
litigation matters against us to increase. These matters have
included copyright infringements, which are typically expensive to
defend. Litigation disputes could cause us to incur unforeseen
expenses, could occupy a significant amount of our management's
time and attention and could negatively affect our business
operations and financial position. See “USE OF PROCEEDS
TO ISSUER” and “DESCRIPTION OF
THE BUSINESS – Legal Proceedings” below for a
detailed summary of our current litigation.
We
may seek additional capital that may result in stockholder dilution
or others having rights senior to those of our Class B Common
Stockholders.
From time to time,
we may seek to obtain additional capital, either through equity,
equity-linked or debt securities. The decision to obtain additional
capital will depend on, among other things, our business plans,
operating performance and condition of the capital markets. If we
raise additional funds through the issuance of equity,
equity-linked or debt securities, such securities may have rights,
preferences or privileges senior to the rights of our Class B
Common Stock and our stockholders may experience
dilution.
We
may lose key employees or may be unable to hire qualified
employees.
We rely on the
continued service of our senior management, including our CEO and
co-founder Neal Harmon, members of our executive team, other key
employees, and the hiring of new qualified employees. In our
industry, there is substantial and continuous competition for
highly-skilled business, product development, technical and other
personnel. We may not be successful in recruiting new personnel and
in retaining and motivating existing personnel, which may be
disruptive to our operations. See “DIRECTORS, EXECUTIVE OFFICERS AND
SIGNIFICANT EMPLOYEES.”
We
are dependent on our management to achieve our objectives, and our
loss of, or inability to obtain, key personnel could delay or
hinder implementation of our business and growth strategies, which
could adversely affect the value of your investment and our ability
to pay dividends.
Our success depends
on the diligence, experience and skill of our Board and
officers. Neal Harmon is our director and our Chief
Executive Officer. Jeffrey Harmon is our Chief Marketing
Officer. Elizabeth Ellis is our Chief Operating Officer.
Patrick Reilly is our Director of Finance. David
Quinto is our General Counsel. With the exception of Mr.
Quinto, we have neither employment agreements with, nor key man
insurance for, any of our officers and the loss of any of them, but
particularly Messrs. Harmon, could harm our business, financial
condition, cash flow and results of operations. Any such
event would likely result in a material adverse effect on your
investment.
Risks
Relating to the Formation and Internal Operation of the
Company
You
will have only limited rights regarding our management, therefore,
you will not have the ability to actively influence the day-to-day
management of our business and affairs.
Our Board will have
sole power and authority over the management of the Company,
subject only to the requirements of the DGCL. See
“SECURITIES BEING OFFERED
– Description of Our Certificate of Incorporation and
Bylaws.” Therefore, you will not have an active role
in the Company’s day-to-day management. Further,
as a holder of non-voting common stock, you will have no right to
vote in the election or removal of directors, nor will you have the
right to vote on major corporate actions that are subject to the
approval of the Class A Stockholders.
We
may change our operational policies and business and growth
strategies without stockholder consent, which may subject us to
different and more significant risks in the future.
Our Board
determines our operational policies and our business and growth
strategies. Our directors may make changes to, or approve
transactions that deviate from, those policies and strategies
without a vote of, or notice to, our stockholders. This could
result in us conducting operational matters or pursuing different
business or growth strategies than those contemplated in this
Offering Circular. Under any of these circumstances, we may expose
ourselves to different and more significant risks in the future,
which could materially and adversely affect our business and
growth.
Our
management will have significant control over our operations by
virtue of the equity ownership in us by entities controlled by our
director, co-founder and CEO, Neal Harmon.
Mr. Neal Harmon is
one of our three directors, our co-founder and our
CEO. Further, Harmon Ventures LLC owns 49.63% of the
Class A Common Stock of the Company and Harmon Ventures LLC is
owned by Neal, Jeffery, and Daniel Harmon, who are brothers.
Further, through their respective ownership, they collectively
control the voting of 8,938,520 shares of our Class A Common
Stock. Messrs. Harmon collectively control sufficient Class A
Common Stock to significantly influence the election of our board
of directors, and actions requiring the consent of a majority of
the Class A Common Stockholders and this will remain unchanged
following completion of this offering. See “SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN SECURITY HOLDERS.”
The
ability of a stockholder to recover all or any portion of such
stockholder’s investment in the event of a dissolution or
termination may be limited.
In the event of a
dissolution or termination of the Company, the proceeds realized
from the liquidation of the assets of the Company will be
distributed among the stockholders, but only after the satisfaction
of the claims of third-party creditors of the
Company. The ability of a stockholder to recover all or
any portion of such stockholder’s investment under such
circumstances will, accordingly, depend on the amount of net
proceeds realized from such liquidation and the amount of claims to
be satisfied therefrom. There can be no assurance that
the Company will recognize gains on such liquidation, nor is there
any assurance that common stockholders will receive a distribution
in such a case.
The Board and our executive officers will have
limited liability for, and will be indemnified and held harmless
from, the losses of the Company.
The
Company
will indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
Company) by reason of the fact that he is or was a director,
officer, employee or agent of the Company, or is or was serving at
the request of our Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the
Company, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. A
successful claim for such indemnification could deplete the
Company’s assets by the amount
paid. See “SECURITIES BEING OFFERED – Description of
Certificate of Incorporation and Bylaws” below for a
detailed summary of the terms of our Certificate and
Bylaws. Our Certificate and Bylaws are filed as exhibits
to the Offering Statement of which this Offering Circular is a
part. See
“SECURITIES BEING OFFERED – Fiduciary Duties and
Indemnification.”
The
video-filtering industry is subject to rapid technological change.
We must continue to enhance and improve our
technology.
Our current
software and related web-based technology is developed and in use.
We may, however, use a substantial amount of the proceeds of this
offering to modify and enhance our current web site, filtering
platform, content offering, and offering of content filters. We
must continue to enhance and improve the performance, functionality
and reliability of the systems upon which our business model is
built.
The development of
any software is characterized by rapid technological change, rapid
introduction or changes in user requirements and preferences, short
development cycles, frequent introduction of new products and
services, new technologies and the emergence of new industry
standards and practices that could render our existing technology
obsolete. Our success will depend, in part, on our ability to
continue to develop new technologies to enhance our existing
technology in order to address the varied needs of existing and new
customers and respond to technological advances and emerging
industry standards and practices on a cost-effective and timely
basis. The development of our proprietary technology involves
significant technical and business risks. We may fail to use new
technologies effectively or to adapt our proprietary technology and
systems to customer requirements or emerging industry standards. If
we are unable to adapt to changing market conditions, strategic
partner and customer requirements or emerging industry standards,
that will have a material adverse effect on our ability to
succeed.
Our business may be subject to regulatory or
legislative changes.
The Company may
face government regulation and legal uncertainties in connection
with its business. There may be a number of federal, state or
local legislative or regulatory proposals under consideration of
which the Company is not aware or which may be considered or
adopted in the future. Any new legislation or
regulation, or the application or interpretation of existing laws
or regulations, may negatively impact the Company’s growth,
impose additional burden on the Company or alter how the Company
does business. This could decrease the demand for our
services, increase our cost of doing business or otherwise have a
material adverse effect on the Company’s business, results of
operations and financial condition.
Risks
Related to Conflicts of Interest and Interested
Transactions
We
use the marketing services of HB, which is owned by our founders
and officers, Neal Harmon and Jeffery Harmon.
Messrs. Neal Harmon
and Jeffery Harmon hold ownership interests in HB, an advertising
agency which is now known for several of the world’s most
successful viral video campaigns (including Squatty Potty with 100
million views, PooPourri with 36 million views, Purple with 45
million views, among others). HB is in the business of providing
Internet-based and multi-media promotion and marketing services.
The Harmon brothers simultaneously started the ad agency HB at the
inception of VidAngel so that our marketing team would have outside
income. After we had built a successful VidAngel product and began
to rapidly grow, HB had already built a clientele and resources to
service large ad campaigns for its clients. VidAngel hired HB as an
independent contractor after the terms and conditions to engage it
was authorized and approved by the Board. Mr. Neal Harmon recused
himself from the decision. Although, the Board will continue to
review the HB marketing agreement annually, our co-founders, the
Harmon brothers will continue to benefit from such agreement for so
long as we engage them. See “INTEREST OF MANAGEMENT AND OTHERS IN
CERTAIN TRANSACTIONS.”
Members
of our Board and our executive officers will have other business
interests and obligations to other entities.
Neither our
directors nor our executive officers will be required to manage the
Company as their sole and exclusive function and they may have
other business interests and may engage in other activities in
addition to those relating to the Company, provided that such
activities do not compete with the business of the Company or
otherwise breach their agreements with the Company. We
are dependent on our directors and executive officers to
successfully operate the Company, and in particular Mr. Neal
Harmon. Their other business interests and activities
could divert time and attention from operating our
business.
Risks
Related to the Offering and Lack of Liquidity
There
has been no active public market for our Class B Common Stock prior
to this offering, and an active trading market may not be developed
or sustained following this offering, which may adversely impact
the market for shares of our Class B Common Stock and, along with
the restrictions in our Stockholders Agreement, make it difficult
to sell your shares.
Prior to this
offering, there was no active market for our Class B Common Stock.
We do not know the extent to which investor interest will lead to
the development and maintenance of a liquid trading market, if at
all. No assurance can be given that the market price of shares of
our Class B Common Stock will not fluctuate or decline
significantly in the future or that Class B Common Stockholders
will be able to sell their shares when desired on favorable terms,
or at all. Most transfers of the Offered Shares are also
subject to other restrictions on transfer set forth in our
Stockholders Agreement.
This
is a fixed price offering and the fixed offering price may not
accurately represent the current value of us or our assets at any
particular time. Therefore, the purchase price you pay for the
Offered Shares may not be supported by the value of our assets at
the time of your purchase.
This
is a fixed price offering, which means that the offering price for
our Offered Shares is fixed and will not vary based on the
underlying value of our assets at any time. Our Board
has determined the offering price in its sole
discretion. The fixed offering price for our Offered
Shares has been based on an internal valuation analysis of the
Company as a whole. Although we believe the valuation to be fair as
of the date it was determined, the fixed offering price established
for our Offered Shares may not be supported by the current value of
our Company or our assets at any particular
time.
The entire amount of your purchase price for your
Offered Shares will not be available for investment in the
Company.
A
portion of the offering proceeds will be used to pay legal fees and
expenses incurred in connection with the Disney Litigation,
research and development expenses, advertising and marketing
expenses and general working capital for the operation and
management of our Company. See “PLAN OF
DISTRIBUTION.” Thus, a portion of the gross
amount of the offering proceeds will not be available for
investment in the Company. See “USE OF PROCEEDS TO
ISSUER.”
If investors successfully seek rescission, we
would face severe financial demands that we may not be able to
meet.
Our
Offered Shares have not been registered under the Securities Act of
1933, or the Securities Act, and are being offered in reliance upon
the exemption provided by Section 3(b) of the Securities Act and
Regulation A promulgated thereunder. We represent that
this Offering Circular does not contain any untrue statements of
material fact or omit to state any material fact necessary to make
the statements made, in light of all the circumstances under which
they are made, not misleading. However, if this
representation is inaccurate with respect to a material fact, if
this offering fails to qualify for exemption from registration
under the federal securities laws pursuant to Regulation A, or if
we fail to register the Offered Shares or find an exemption under
the securities laws of each state in which we offer the Offered
Shares, each investor may have the right to rescind his, her or its
purchase of the Offered Shares and to receive back from the Company
his, her or its purchase price with interest. Such
investors, however, may be unable to collect on any judgment, and
the cost of obtaining such judgment may outweigh the
benefits. If investors successfully seek rescission, we
would face severe financial demands we may not be able to meet and
it may adversely affect any non-rescinding
investors.
Not All Investor
Funds Will Be Held by a Third Party Escrow
Agent.
Purchases
of Shares in excess of $5,000 must be transmitted directly by
investors by either wire transfer or electronic funds transfer via
ACH to a non-interest bearing escrow account maintained by Issuer
Direct. Purchases of Shares in the amount of $5,000 or less may be
submitted through an investor's VidAngel customer account in
accordance with the billing information for such investor at
www.vidangel.com, and will not be held in the escrow account
maintained by Issuer Direct, but will be held in a separate
non-interest bearing account held by VidAngel until the Minimum
Offering is sold.Upon
achieving the minimum offering amount and the initial closing of
this offering, the proceeds for the offering will be distributed to
the Company and the Offered Shares will be issued to the investors.
If the Minimum Offering is not sold or the offering does not close
for any reason, the proceeds from the offering will be promptly
returned to investors without interest in accordance with
Securities Exchange Act Rule 10b-9. Although VidAngel will
segregate offering proceeds we receive in a separate account, we
will not be bound by the terms and conditions of a legally
enforceable escrow agreement regarding the escrow and disbursement
of these funds.
Risks Related to Our Stock
Ownership
Provisions in our governing documents and under
Delaware law could discourage a takeover that stockholders may
consider favorable.
Our
charter documents may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable because they
provide for a right of first refusal on behalf of the Company, and
if the Company declines to exercise its rights to purchase a
stockholder’s shares, then that offer is extended to existing
shareholders.
As a Delaware
corporation, we are subject to certain Delaware anti-takeover
provisions. Under Delaware law, a corporation may not engage in a
business combination with any holder of 15% or more of its capital
stock unless the holder has held the stock for three years or,
among other things, the board of directors has approved the
transaction. Our board of directors could rely on Delaware law to
prevent or delay an acquisition of us.
Financial
forecasting may differ materially from actual results.
Given the dynamic
nature of our business, and the inherent limitations in predicting
the future, forecasts of our revenues, contribution margins, net
income and number of total and customers and other financial and
operating data may differ materially from actual results. Such
discrepancies could cause a decline in the price of our Class B
Common Stock.
Risks
Related to Benefit Plan Investors
Fiduciaries
investing the assets of a trust or pension or profit sharing plan
must carefully assess an investment in our Company to ensure
compliance with ERISA.
In considering an
investment in the Company of a portion of the assets of a trust or
a pension or profit-sharing plan qualified under
Section 401(a) of the Code and exempt from tax under
Section 501(a), a fiduciary should consider (i) whether
the investment satisfies the diversification requirements of
Section 404 of ERISA; (ii) whether the investment is
prudent, since the Offered Shares are not freely transferable and
there may not be a market created in which the Offered Shares may
be sold or otherwise disposed; and (iii) whether interests in
the Company or the underlying assets owned by the Company
constitute “Plan Assets” under ERISA. See
“ERISA
CONSIDERATIONS.”
DILUTION
VidAngel
is offering a minimum of 1,666,667 and a maximum of 3,750,000
shares of our Class B Common Stock at an offering price of $3.00
per share. We have previously issued stock options for the
acquisition of Class A Common Stock pursuant to our Stock Incentive
Plan with a weighted average exercise price of $0.56 per share. We
also closed three rounds of financing on November 28, 2015, during
which we sold Class A Common Stock for a weighted average price of
$0.64 per share. The aggregate average price between the exercise
price for stock options issued pursuant to the Stock Incentive Plan
and the price of shares of Class A Common Stock issued pursuant to
the two rounds of financing on November 18, 2015 is $0.62, or $2.38
less per share than the Offered Shares
Under our Stock
Incentive Plan, we granted options exercisable for 1,022,811 shares
of Class A Common Stock to our directors, officers, employees and
consultants as equity incentive compensation. The weighted average
exercise price of those outstanding options is $0.56 per share, or
$2.44 average less per share than the Offered Shares. Currently,
there are outstanding (i) options exercisable for 10,000 shares of
Class A Common Stock with an expiration date of April 11, 2024, and
an exercise price of $0.18; (ii) options exercisable for 79,311
shares of Class A Common Stock with an expiration date of May 5,
2024, and an exercise price of $0.18; (iii) options exercisable for
10,000 shares of Class A Common Stock with an expiration date of
October 10, 2024, and an exercise price of $0.18; (iv) options
exercisable for 10,000 shares of Class A Common Stock with an
expiration date of November 3, 2024 and a strike price of $0.30;
(v) options exercisable for 225,000 shares of Class A Common Stock
with an expiration date of April 15, 2025, and an exercise price of
$0.50; (vi) options exercisable for 135,500 shares of Class A
Common Stock with an expiration date of April 17, 2025, and an
exercise price of $0.50; (vii) options exercisable for 70,000
shares of Class A Common Stock with an expiration date of May 11,
2025, and an exercise price of $0.50; (viii) options exercisable
for 70,000 shares of Class A Common Stock with an expiration date
of July 17, 2025, and an exercise price of $0.50; (ix) options
exercisable for 120,000 shares of Class A Common Stock with an
expiration date of November 18, 2025, and an exercise price of
$0.50; (x) options exercisable for 134,250 shares of Class A Common
Stock with an expiration date of February 11, 2026, and an exercise
price of $0.82; and (xi) options exercisable for 158,750 shares of
Class A Common Stock with an expiration date of August 10, 2026,
and an exercise price of $0.82. Of the outstanding stock options,
options exercisable for 326,000 shares of common stock were granted
with no vesting period, and options exercisable for 696,811 of
Class A Common Stock have vesting periods between 36 to 48 months
from their vesting dates which range from April 11, 2014 to July
20, 2016.
On
November 28, 2015, VidAngel conducted three separate
financings involving the issuance of convertible promissory notes
during which we raised an aggregate amount of $2,919,460 in
exchange for the issuance of notes convertible into 3,526,896
shares of Class A Common Stock with an average per share conversion
price of $0.54, and sold an additional 1,065,755 shares of Class A
Common Stock at a price of $0.94 per share. In the second
convertible note financing, Alta Ventures Mexico Fund I, LP, of
which our director, Paul Ahlstrom, is the managing director,
purchased convertible promissory notes convertible into 618,119
shares of Class A Common Stock for $409,397 with an average per
share conversion price of $0.66, or $2.34 average less per share
than the Offered Shares, and purchased an additional 426,302 shares
of Class A Common Stock for $400,000, or $0.94 per share, which is
$2.06 less than the Offered Shares.
PLAN
OF DISTRIBUTION
We are
not selling the shares through commissioned sales agents or
underwriters. We will use our existing
website, www.vidangel.com, to provide
notification of the offering. This Offering Circular
will be furnished to prospective investors at www.vidangel.com/invest via
download 24 hours per day, 7 days per week on our
website. Our website and Issuer Direct’s website
will be the exclusive means by which prospective investors may
subscribe in this offering.
The Offered Shares
will be issued in one or more closings. For the Initial Closing and
each subsequent Additional Closing, proceeds for subscriptions over
$5,000 must be transmitted directly by wire or electronic funds
transfer via ACH to the specified bank account maintained by Issuer
Direct pursuant to the instructions in the subscription
agreement. Such funds will be kept in a non-interest
bearing escrow account maintained by Issuer Direct until the
Initial Closing and the Minimum Offering is sold. Proceeds for
subscriptions of $5,000 or less will be held in a separate
non-interest bearing account by VidAngel until the Initial Closing
and the Minimum Offering is sold, and may be submitted through an
investors VidAngel customer account in accordance with the billing
information for such investor at www.vidangel.com. Upon each
closing, any proceeds collected for such closing will be disbursed
to the Company and the Offered Shares for such closing will be
issued to investors. We must sell the Minimum Offering if any
shares are to be sold at all. The separate non-interest bearing
account will be opened by VidAngel prior to the date of
qualification of the offering statement of which this Offering
Circular is a part and will remain open until the Termination Date.
The subscription agreement is available at www.vidangel.com/invest. If, on
the Termination Date, investor funds are not received in respect of
the Minimum Offering, then all investor funds that were deposited
into either the separate non-interest bearing account with us or
into the escrow account with Issuer Direct will be returned
promptly to investors in
accordance with Securities Exchange Act Rule
10b-9.
Technology,
Anti-Money Laundering and Transfer Agent Services
Issuer Direct has
been engaged to provide certain technology, anti-money laundering
and transfer agent services in connection with this offering. The
Company has agreed to pay Issuer Direct a facilitation fee equal to
$5.00 per domestic investor for the anti-money laundering check and
technology services for each subscription agreement executed via
electronic signature on www.vidangel.com. For
transactions conducted on Issuer Direct’s website, the
Company has agreed to pay $25.00 for the same service. We have also
engaged Issuer Direct to serve as transfer agent for the offering
and have agreed to pay a $2,500.00 account set up fee. Issuer
Direct is also entitled to certain other itemized administrative
fees, including (i) up to $15.00 per investor (depending on whether
subscription is by ACH or wire transfer) for processing incoming
funds, (ii) $25.00 per physical stock certificate request (which
will be only provided upon request and fee payment by the VidAngel
customer requesting the certificate), and (iii) $25.00 per wire
transfer for outbound funds to us upon the closing of this
offering. For the Company, the itemized fees payable to Issuer
Direct will not exceed a maximum of $150,000. Issuer Direct is not
participating as an underwriter of the offering and will not
solicit any investment in the Company, recommend the Company's
securities or provide investment advice to any prospective
investor, or distribute the Offering Circular or other offering
materials to investors. All inquiries regarding this offering
should be made directly to the Company.
Offering Expenses. We are
responsible for all offering fees and expenses, including the
following: (i) fees and disbursements of our legal counsel,
accountants and other professionals we engage; (ii) fees and
expenses incurred in the production of offering documents,
including design, printing, photograph, and written material
procurement costs; (iii) all filing fees, including blue sky filing
fees; (iv) all of the legal fees related to the registration and
qualification of the Offered Shares under state securities laws
(not to exceed $600,000 in the aggregate); and (v) all costs of
Issuer Direct’s services.
Pricing
of the Offering
Prior to the
offering, there has been no public market for the Offered Shares.
The initial public offering price was determined by us. The
principal factors considered in determining the initial public
offering price include:
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the information set
forth in this Offering Circular;
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our history and
prospects and the history of and prospects for the industry in
which we compete;
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our past and
present financial performance;
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our prospects for
future earnings and the present state of our
development;
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the general
condition of the securities markets at the time of this
offering;
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the
status
of litigation we are engaged in; and
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other factors
deemed relevant by us.
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Investment Limitations
Generally,
no sale may be made to you in this offering if the aggregate
purchase price you pay is more than 10% of the greater of your
annual income or net worth. Different rules apply to
accredited investors and non-natural persons. Before
making any representation that your investment does not exceed
applicable thresholds, we encourage you to review Rule
251(d)(2)(i)(C) of Regulation A. For general information
on investing, we encourage you to refer to www.investor.gov.
As a Tier 2,
Regulation A offering, investors must comply with the 10%
limitation to investment in the offering. The only
investor in this offering exempt from this limitation is an
accredited investor, an “Accredited Investor,” as
defined under Rule 501 of Regulation D. If you meet one
of the following tests you should qualify as an Accredited
Investor:
(i)
You are a natural
person who has had individual income in excess of $200,000 in each
of the two most recent years, or joint income with your spouse in
excess of $300,000 in each of these years, and have a reasonable
expectation of reaching the same income level in the current
year;
(ii)
You are a natural
person and your individual net worth, or joint net worth with your
spouse, exceeds $1,000,000 at the time you purchase Offered Shares
(please see below on how to calculate your net
worth);
(iii)
You are an
executive officer or general partner of the issuer or a manager or
executive officer of the general partner of the
issuer;
(iv)
You are an
organization described in Section 501(c)(3) of the Internal Revenue
Code of 1986, as amended, or the Code, a corporation, a
Massachusetts or similar business trust or a partnership, not
formed for the specific purpose of acquiring the Offered Shares,
with total assets in excess of $5,000,000;
(v)
You are a bank or a
savings and loan association or other institution as defined in the
Securities Act, a broker or dealer registered pursuant to Section
15 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, an insurance company as defined by the Securities
Act, an investment company registered under the Investment Company
Act of 1940, as amended, or the Investment Company Act, or a
business development company as defined in that act, any Small
Business Investment Company licensed by the Small Business
Investment Act of 1958 or a private business development company as
defined in the Investment Advisers Act of 1940;
(vi)
You are an entity
(including an Individual Retirement Account trust) in which each
equity owner is an accredited investor;
(vii)
You are a trust
with total assets in excess of $5,000,000, your purchase of Offered
Shares is directed by a person who either alone or with his
purchaser representative(s) (as defined in Regulation D promulgated
under the Securities Act) has such knowledge and experience in
financial and business matters that he is capable of evaluating the
merits and risks of the prospective investment, and you were not
formed for the specific purpose of investing in the Offered Shares;
or
(viii)
You are a plan
established and maintained by a state, its political subdivisions,
or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has
assets in excess of $5,000,000.
Offering
Period and Expiration Date
This offering will
start on or after the date this Offering Circular is declared
qualified by the SEC and will terminate on the Termination
Date.
Procedures
for Subscribing
If you decide to
subscribe for Offering Shares in this offering, you
should:
Go to
www.vidangel.com/invest, click on the “Invest Now” button and follow the
procedures as described.
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1.
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Electronically
receive, review, execute and deliver to us a subscription
agreement; and
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2.
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If your
subscription price is greater than $5,000, deliver funds directly
by wire or electronic funds transfer via ACH to the specified bank
account maintained by VidAngel.
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3.
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If your subscription price is $5,000 or less,
you may (i) pay for your subscription price through a
purchaser’s VidAngel customer account in accordance with the
billing information for such purchaser at www.vidangel.com. or,
(ii) if greater than $1,000, transmit funds directly by wire or
electronic funds transfer via ACH to the specified account
maintained by VidAngel per the instructions in the subscription
agreement we will bill your customer account in accordance with
your billing information at www.vidangel.com.
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Any potential
investor will have ample time to review the subscription agreement,
along with their counsel, prior to making any final investment
decision.
The Company has
engaged Issuer Direct to provide certain technology and
administrative services in connection with the offering, including
the online platform by which subscribers may receive, review,
execute and deliver subscription agreements
electronically.
Right to Reject Subscriptions.
After we receive your complete, executed subscription agreement and
the funds required under the subscription agreement have been
received, we have the right to review and accept or reject your
subscription in whole or in part, for any reason or for no reason.
We will return all monies from rejected subscriptions immediately
to you, generally without interest and without
deduction.
Acceptance of Subscriptions.
Upon our acceptance of a subscription agreement, we will
countersign the subscription agreement and issue the shares
subscribed at closing. Once you submit the subscription agreement
and it is accepted, you may not revoke or change your subscription
or request your subscription funds. All accepted subscription
agreements are irrevocable.
Under Rule 251 of
Regulation A, non-accredited,
non-natural investors are subject to the investment
limitation and may only invest funds which do not exceed 10% of the
greater of the purchaser’s revenue or net assets (as of the
purchaser’s most recent fiscal year end). A
non-accredited, natural
person may only invest funds which do not exceed 10% of the
greater of the purchaser’s annual income or net worth (please
see below on how to calculate your net worth).
We may engage a
broker-dealer registered with the Securities and Exchange
Commission and a member of the Financial Industry Regulatory
Authority, to perform administrative functions in connection with
this offering, such as serve as registered agent where required for
state blue sky requirements, but in no circumstance will such
broker-dealer solicit a securities transaction, recommend our
securities, or provide investment advice to any prospective
investor.
NOTE: For the
purposes of calculating your net worth, or Net Worth, it is defined
as the difference between total assets and total
liabilities. This calculation must exclude the value of
your primary residence and may exclude any indebtedness secured by
your primary residence (up to an amount equal to the value of your
primary residence). In the case of fiduciary accounts,
net worth and/or income suitability requirements may be satisfied
by the beneficiary of the account or by the fiduciary, if the
fiduciary directly or indirectly provides funds for the purchase of
the Offered Shares.
In order to
purchase Offered Shares and prior to the acceptance of any funds
from an investor, an investor will be required to represent, to the
Company’s satisfaction, that he is either an accredited
investor or is in compliance with the 10% of net worth or annual
income limitation on investment in this
offering.
USE OF PROCEEDS TO ISSUER
Net proceeds to the
Company from this offering are anticipated to be $10,820,000,
assuming we sell the Maximum Offering, and $4,720,000, assuming we
sell the Minimum Offering, following the payment of offering
costs. Set forth below is a table showing the estimated
sources and uses of the proceeds from this offering.
|
|
Minimum Offering
|
|
% of Offering Proceeds
|
|
Maximum Offering Amount
|
|
% of Offering Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proceeds
|
|
$
|
5,000,000
|
|
|
|
100.00
|
%
|
|
$
|
11,250,000
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Offering
Expenses(1)
|
|
$
|
280,000
|
|
|
|
5.60
|
%
|
|
$
|
430,000
|
|
|
|
3.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Proceeds
|
|
$
|
4,720,000
|
|
|
|
94.40
|
%
|
|
$
|
10,820,000
|
|
|
|
96.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
Development
|
|
$
|
500,000
|
|
|
|
10.00
|
%
|
|
$
|
2,000,000
|
|
|
|
17.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising and
Promotion
|
|
$
|
900,000
|
|
|
|
18.00
|
%
|
|
$
|
4,750,000
|
|
|
|
42.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal Fees and
Expenses(2)
|
|
$
|
2,000,000
|
|
|
|
40.00
|
%
|
|
$
|
3,000,000
|
|
|
|
26.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
Capital(3)
|
|
$
|
1,320,000
|
|
|
|
26.40
|
%
|
|
$
|
1,070,000
|
|
|
|
9.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Use of Proceeds
|
|
$
|
5,000,000
|
|
|
|
100.00
|
%
|
|
$
|
11,250,000
|
|
|
|
100.00
|
%
|
|
|
(1)
|
Estimated offering
expenses include legal, accounting, printing, advertising, travel,
marketing, blue-sky compliance and other expenses of this offering,
as well as transfer agent fees.
|
(2)
|
Legal Fees and
expenses associated with the Disney Litigation.
|
(3)
|
We intend to use
approximately 94.40% of the gross offering proceeds if the Minimum
Offering is sold or 96.18% of the gross offering proceeds if the
Maximum Offering is sold to manage our business and provide working
capital for operations. These amounts may be used
to pay expenses relating to salaries and other compensation to our
officers, employees.
|
DESCRIPTION
OF OUR BUSINESS
General
In 2013, four
brothers, Neal, Daniel, Jeffrey, and Jordan Harmon, founded
VidAngel, a filtering company that gives viewers the choice to
remove objectional content, such as violence, sex, nudity, and/or
language, from authorized copies of movies and television programs
released on discs. The Harmon brothers, as fathers of children aged
newborn to ten, were searching for a better way to watch quality
content with their kids. They founded VidAngel to give their
families, and all other families, greater personal choice in the
movies and television programs they watch at home. VidAngel’s
purpose is not only to allow families to watch “however the
BLEEP they want,” but to protect an individual’s legal
right to customize the content they watch at home. Today,
management believes that VidAngel is the leading filtering company
with Apps, available on all major platforms, and that the potential
demand for our service is significant.
The
Company
was formed as a Utah limited liability company on October 22, 2013
pursuant to a Certificate of Formation filed with the State of
Utah’s Department of Commerce and that certain Operating
Agreement of the Company, dated December 13, 2013, by and among the
Company and its members. Subsequently, the Company was
converted into VidAngel, Inc. a Delaware corporation, on February
12, 2014, pursuant to Articles of Conversion filed with the State
of Utah’s Department of Commerce
The
Operations of the Company
Management believes
that VidAngel offers the greatest degree of personal choice in the
entertainment marketplace by selling DVD and Blu-ray movies and
television shows on disc and providing its users the technology to
filter and view their movies and TV shows remotely on modern
devices such as cell phones, tablets, set top boxes (e.g. Apple TV,
Roku, Amazon Fire TV, etc.), computers and, we
anticipate, in the future, gaming consoles and smart
TVs.
In connection with
offering its filtering service, VidAngel resells DVD and
Blu-ray movies and television shows on discs to our customers for a
fixed price of $20.00 per disc, or the Sale Price. Upon
purchase of such disc, our customer agrees to have us retain
physical custody of the disc. Once our customer finishes
watching the purchased content through its chosen platform, they
may choose either to keep the purchased title or sell the disc back
to us at a reduced repurchase price, or the Repurchase Price. If
customers elect to return their discs to us, the Repurchase Price
offered by VidAngel reflects the (i) format of the disc and (ii)
total number of 24-hour periods our customers have owned their
discs. The Repurchase Prices paid by VidAngel are currently the
Sales Price less $1.00 per 24-hour period for each DVD, and $2.00
per 24-hour period for each Blu-ray disc. Our customers have access
to our content filtering technology for use with a specific disc
for as long as they own it. Our service allows our
customers to direct their individual viewing experience by removing
certain audio or video segments that contain material considered
objectionable by our customer. Once a customer chooses to sell the
disc back to us, their access to our content filtering technology
for that disc terminates and VidAngel’s obligations to such
customer are complete.
To provide a remote
filtering service, VidAngel has developed the following core
proprietary technologies:
1.
Patent-pending
Remote Media Ownership Management System
2.
Patent-pending
Crowd-based Tagging System
3.
Patented Seamless
Streaming and Filtering System
VidAngel believes
that one of the most crucial systems in maintaining a lawful
business is the first system for RMOM. This system ensures that
VidAngel does not sell any DVD or Blu-ray discs without owning the
media. This system ensures that all copyright holders are
compensated for their copyrighted works. VidAngel engaged an
independent third party to conduct a Service Organization Control
Report, or SOC 2 Type 1, to report on controls for the Processing
Integrity Principle. The report, which is as of January 27, 2016,
includes our Infrastructure, Software, People, Procedures and
Data.
Under the direction
of our CEO, VidAngel currently operates with five management teams:
the Tech Team, the Marketing Team, the Digital Content Team, the
Finance Team and the Legal Team.
The Tech Team is
led by our Director of Technology, Jarom McDonald, PhD, who
oversees all technology employees and contractors who contribute
technical support, application development, and front and back-end
development and maintenance of the system. The Marketing Team is
led by our CMO who oversees the Director of Marketing and any
marketing interns. The Marketing Team is responsible for all
content creation and advertising relating to the growth of the
Company. The Digital Content Team is led by our COO, who oversees
all employees involved in customer service, inventory management,
streaming and tagging. The Digital Content Team is responsible for
providing users with the best possible customer experience. The
Finance Team is led by our Director of Finance who oversees all
employees involved in finance, accounting and purchasing. The Legal
Team is led by our General Counsel, who is responsible for all
Company legal matters and litigation oversight.
Target Demographics
VidAngel offers its
filtering and RMOM services to the U.S. movie and TV show home
entertainment market, which is highly competitive. The Company has
examined various considerations with regards to the marketability
and desirability for its services, including a cost analysis
compared to its closest competitors, examined the Company’s
unique profile, and examined its target consumer markets. We
believe our core target market is the “Values Audience”
segment, some 52 million adults of the U.S. population representing
37% of the entertainment market whose religious faith is extremely
important to them and is a part of their daily lives. The Company
believes the Values Audience demonstrates stronger overall concern
about the explicit content that they, and their family members, are
exposed to in TV shows and movies. VidAngel believes that within
the Values Audience segment, parents will tend to take a particular
interest in the Company’s services.
Method of Distribution
VidAngel offers its
filtering application and RMOM through a host of Internet-connected
screens, including TVs, digital video players, television set-top
boxes and mobile devices. VidAngel has agreements with various
technology companies and distributors to make our service available
through the television set-top boxes of service providers. Our Apps
allow for purchasing of Blu-ray and DVD discs within the App, which
requires that we share between 20 and 30 percent of our revenue
with these technology distribution partners for the discs purchased
on their platforms (Apple, Google, Amazon, and Roku). We intend to
continue to broaden our capability to sell and deliver discs on
other platforms and partners over time. We rely on certain
third-party cloud service providers to operate certain aspects of
our business. For VidAngel to legally offer filtered
movies, users must own the disc while filtering it. To make this as
affordable and user-friendly as possible, we have created an
instant “Sell-Back” option to buy the disc back from
customers and put the credit from the repurchase into the
customer’s VidAngel account.
Quick Overview:
(using a $20.00 disc)
1.
BUY THE DISC
– Users pay the retail price of $20.00 as an initial credit
card payment.
2.
USER WATCH
FILTERED- Users choose their own filters according to their
preferences and watch their disc on their favorite
device.
3.
USERS SELL THE
DISC—When finished within 24 hours, users may sell back the
disc, $18.00 for Blu-ray or $19.00 for DVD, for instant credit to a
user’s VidAngel account for their next purchase. Within 48
hours, users may sell back the disc for $16.00, for Blu-ray, or
$18.00, for DVD, of instant credit. The sell back price continues
to decrease by $2.00 per day for Blu-ray’s, and $1.00 per day
for DVD’s until no sell back value
remains.
When customers are
ready for the next disc, the credit is already in the
customer’s VidAngel account and will automatically be applied
to their purchase. Customers may continue to buy and sell discs
with account credit and pay only $2.00 per Blu-ray
disc. Customer’s credit cards will be only charged
if the customer’s account credit is lower than the retail
price of the next disc the customer wishes to
purchase. If a customer’s account balance is less
than the cost of the disc, the customer will be charged the small
difference to bring the account balance up to that
amount. If the disc price is lower than the
customer’s credit balance, the customer will have no charge
and their purchase will be entirely paid with credit. For
example: If a customer has $15.00 in their account and
wants to buy a $20.00 disc, the customer’s credit card will
be charged the $5.00 difference. When a customer sells
the disc back after the $2.00 watch price, the customer’s
VidAngel account will be credited the remaining
$18.00. As a customer continues to use the account
credit, the customer may have small charges of varying sizes
depending on the retail price of the disc the customer purchases
next.
Marketing and
Advertising
VidAngel utilizes a
broad mix of marketing and public relations programs, including
social media sites such as Facebook, Youtube and Twitter, to
promote our service to potential customers. VidAngel also relies
extensively on word-of-mouth from our existing customers who have
enjoyed a positive experience from use of our service. We also rely
on the marketing services of HB, who is in the business of
providing internet-based and multi-media promotion and marketing
services, including the design, implementation and execution of
promotional and web-based advertising campaigns. See
“Interest of Management and
Others in Certain Transactions and Other Conflicts of
Interest—Affiliated Transactions.”
Cost Comparisons to our Competitors
When compared to
our primary filtering competitor, ClearPlay, VidAngel believes we
are substantially more attractive on the basis of cost, filtering
and efficiency. When compared to other streaming services, we
believe VidAngel still represents a significantly better value
proposition on the basis of its unique RMOM. Whereas streaming
services can cost up to $4-$5 per a movie, VidAngel, through its
RMOM, permits a user to watch a movie for as little as $1 with the
“Sell-Back” option.
Our Intellectual Property
We rely on a
combination of patent, copyright, trademark and trade secret laws
in the United States and other jurisdictions, as well as license
agreements and other contractual documents, to protect our
proprietary technology. We rely on a number of registered and
unregistered trademarks to protect our brand. As of the date of
this Offering Circular, we have one registered trademark
“VidAngel,” and five unregistered trademarks,
“VidMap,” “VidTag,” “watch
however the BLEEP you want,” “watch movies however the
BLEEP they want,” and “watch movies & TV however
the BLEEP you want.” VidAngel, Inc. owns numerous
Internet domain sights and websites, including: www.vidangel.com;
www.vidangle.com; www.viddevil.com; www.stopjarjar.com;
www.cleantube.com; and www.kleentube.com. As of the date of this
Offering Circular, in the United States, we have been issued a U.S.
patent for seamless streaming and filtering, filed on March 31,
2015 with an expiration date of March 30, 2035, and have two patent
applications for: (i) curating filters for audiovisual content, or
Filter Curation Platform (U.S. Patent Application No. 14/621972),
and (ii) a method and system for a remote media ownership
management, or RMOM, apparatus, system and method (US. Patent
Application No. 11/608165), pending for examination. Our patent and
pending patents are discussed in further depth below.
Patents
Seamless streaming and
filtering. We currently own a patent
for a Seamless streaming and filtering (the “Streaming and
Filter Solution”) method and system (U.S Patent Application.
No. 14/674,364, filed on March 31, 2015; U.S. Patent No. 9,363,561
issued on June 7, 2016) . The Streaming and Filtering Solution is
designed to smoothly filter content streamed over HTTP Live
Streaming, or HLS. HLS streams content, e.g. movies, by dividing
the content into a series of short media segment files. The client
requests each of the media segment files identified by the HLS
index file, and the server transmits each media segment file upon
the client’s request. The Streaming and Filtering Solution
generates a content map for a movie, the content map identifying
all parts of a movie with filterable content (e.g. vulgarity,
sex/nudity, violence, etc.). The content map generates categories
and subcategories of filterable elements (e.g. Vulgarity
(category): “f---“(subcategory)). The content map may
be generated in a variety of ways, e.g. by a human who watches a
movie and documents the characteristics of filterable elements in
the movie; through a community or crowd-based approach;
programmatically; or in any other way by which filterable elements
may be identified. For example, the content map may identify time
periods during the movie which may be filtered for language, e.g.,
the “sh—“ word at minute: second marker
45:39.5-45:40. A content map entry may include identification of
the temporal (e.g. minute markers during the movie), spatial (e.g.,
area of display to be cut, cropped, kept, blurred, or otherwise
filtered), and audible (e.g. channels or other content aspects
containing filterable content) dimensions of filterable content in
the movie (or other type of content), or other characteristics of a
particular filterable element. The client selects its own
preferences, which may be based on a particular user or person, the
physical location to which content is being streamed, or any other
criteria for determining how to filter content. For example,
preferences may indicate that the “f---“ should be
entirely muted, but that, for the “crap” word, the
volume should be merely turned down halfway. The Streaming and
Filtering Solution dynamically generates a media segment file as
directed by the user’s preferences, and the file is then
transmitted to the client without ever placing the filtered media
segment file in fixed storage. Generating a filtered media segment
may comprise omitting an entire segment, omitting one or more
chronological segments of the media segment file, completely muting
all audio, partially turning down all sound, muting only one or
more of all of the audio channels, turning down the sound on one or
more of the audio channels, turning up the sound on one or more
audio channels, cropping the video, blurring all or part of the
video, replacing all or part of the video, or any other audio,
visual, or other effect or manipulation known in the
art.
Curating
Filters for Audiovisual Content. We own a
patent application for a curating filters for audiovisual content,
or Filter Curation Platform, method and system (U.S. Patent
Application No. 14/621972 filed February 13, 2015. The Filter
Curation Platform enables users to curate and access custom
filters to adapt the playback of audiovisual content.
The Filter Curation Platform may enable users (i.e. video viewers,
video taggers, video reviewers and video publishers), which have
different roles, to create one or more video tags for a movie, and
thereby create a full or partial video map for the movie. A video
tag is a short description of a segment/clip of a multimedia file.
A video tag includes a type, start time, end time, and a category.
Examples of video tag categories may include positive and negative
categories, such as action, dramatic, scary, alcohol/drugs,
profane/crude language, sex/nudity, and violence, among other
categories. A video tagger may create video maps for
audiovisual content. A video reviewer is a user who may review
video maps for mistakes, make corrections, and provide feedback on
the video maps created by video taggers. A video publisher is a
user who may prepare, finalize, and publish video maps to a
multimedia portal. Multiple video taggers may tag the same portions
of a movie, and a video reviewer may access the video maps from
multiple video taggers. The process may be iterative in many ways,
so that multiple video taggers, video reviewers and video
publishers may prepare, review, edit and pass among each other
video maps in various orders and workflows. Once the video map has
been published, the video viewer, via a media player interface may
define filters using a video map of the movie. The video viewer may
customize the filter to display (or make audible) some categories
or specific segments of filterable content, but not others. Video
maps may receive scores from video users, such as receiving one
halo for poor quality and up to five haloes for excellent quality.
In some cases, video taggers, video reviewers and video publishers
may receive cash consideration for their services.
Apparatus,
System and Method for Remote Media Ownership
Management. We also own a patent application for a
remote media ownership management, or RMOM, apparatus, system and
method (US. Patent Application No. 11/608165) filed December 7,
2006. RMOM is an apparatus, system and method that allows a
consumer to deposit physical media units, or PMUs or Content, such
as music CDs or movies, with the RMOM’s transfer facility,
where such a deposit is listed on an ownership register, in
exchange for the user’s ability to access their Content
remotely. Users are not only able to access the Content
they have physically deposited with RMOM, but users are also able
to buy and sell Content to and from other users by use of the
RMOM’s trading system. The RMOM may collect monetary
commissions for the operator and applicable taxes. The RMOM may
further comprise a media verification component configured to
identify damaged incoming Content as an acceptable representation
of ownership of the Content. For example, a music CD with scratches
such that the media on the music CD is not playable with the
standard CD player may nevertheless clearly be a genuine copy of
the music CD. In the example, depending upon the law where the
system operates, a digital media equivalent may be provided to the
owning user of the damaged incoming Content when the owning user
requests access to the content of the music CD. The RMOM overcomes
previous limitations in the art by allowing users to access and
trade Content without the constraints and risks of maintaining the
Content at the location of the user.
In
addition, we seek to protect our intellectual property rights by
implementing a policy that requires all of our employees and
independent contractors involved in development of intellectual
property on our behalf to enter into agreements acknowledging that
all works or other intellectual property generated or conceived by
them on our behalf are our property, and assigning to us any
rights, including intellectual property rights, that they may claim
or otherwise have in those works or property, to the extent
allowable under applicable law.
Despite our efforts
to protect our technology and proprietary rights through
enforcement of our intellectual property rights, licenses and other
contractual protections, unauthorized parties may still copy or
otherwise obtain and use our software and other technology. As we
continue to expand our operations, effective intellectual property
protection, including copyright, trademark and trade secret
protection may not be available or may be limited in foreign
countries. Significant impairment of our intellectual property
rights could harm our business or our ability to compete. Further,
companies in the communications and technology industries
frequently own large numbers of patents, copyrights and trademarks
and may threaten litigation or file suit against us based on
allegations of infringement or other violations of intellectual
property rights. We are currently subject to, and expect to face in
the future, allegations that we have infringed the intellectual
property rights of third parties, including our competitors and
non-practicing entities. See “DESCRIPTION OF OUR BUSINESS
– Legal
Proceedings.”
Competition
Our primary
competitor in providing a filtering service is ClearPlay. ClearPlay
operates a membership fee-based filtering service that allows users
to filter content they find objectionable. ClearPlay users select
the movie they want to watch on ClearPlay’s website, then
rent the Standard Definition movie on Google Play, and return to
the ClearPlay website where they select their filters before
watching the movie. ClearPlay offers hardware for use by users to
watch filtered content on their TV, such as the ClearPlay Blu-Ray
and DVD Player and the FilterStik. The FilterStik is a USB-sized
device that can be plugged into a viewing platform, such as a
standard DVD player, in order to filter content; however, no
additional hardware is needed to use ClearPlay’s services
from either a PC or Mac. It is possible for ClearPlay users to
transmit the filtered movie from their computer to TV by methods
such as connecting their computer to their TV with an HDMI cable.
As of August 4, 2016, ClearPlay charges a membership fee of $7.99 a
month or $79.99 annually. In addition to membership fees, ClearPlay
users must pay the full retail rental or purchase price for the
content they intend to filter and view. VidAngel believes it offers
a better value, as well as a higher quality and more user-friendly
service than ClearPlay for modern media consumption devices.
ClearPlay and VidAngel were previously engaged in litigation
regarding patent rights. ClearPlay was also engaged in other
litigation, which ultimately resulted in the invalidation of many
of ClearPlay’s patent claims. We believe ClearPlay will
reassert one or more of its patent claims against us in the near
future . Such litigation could have a material adverse effect
on our business operations were we not to prevail. See
“Description of Our
Business—ClearPlay Litigation.”
Research
and Development
During the fiscal
years ended December 31, 2014 and 2015, we spent $35,990 and
$310,754, respectively, on research and development activities
relating to our technology.
Employees
As of June 30,
2016, we employed a total of 20 full-time and 24 part-time
individuals. None of our employees are covered by
a collective bargaining agreement.
Legal
Proceedings
VidAngel currently
is, and from time to time might again become, involved in
litigation. Litigation has the potential to cause us to incur
unexpected losses, some of which might not be covered by insurance
but can materially affect our financial condition and its ability
to continue our business operations.
Disney Litigation
On June 9, 2016,
the Plaintiffs initiated the Disney Litigation against VidAngel in
the United States District Court for the Central District of
California, or the California District Court. They alleged
two claims: (a) that VidAngel requires, but does not have, the
Plaintiffs’ authorization to make digital copies of the
Plaintiffs’ copyrighted works and thus violates 17 U.S.C.
Sections 106(1) and (4), and (b) that VidAngel violates Section
1201 (a)(1)(A) of the DMCA by circumventing a technological measure
that effectively controls access to works protected under the
Copyright Act. The Plaintiffs are seeking monetary damages,
costs, and attorneys’ fees from VidAngel, as well as
preliminary and permanent injunctions prohibiting VidAngel from
continuing to engage in the challenged conduct.
VidAngel
filed its Answer and Counter-Complaint on July 12, 2016, asserting
that its technology does not infringe on the Plaintiffs’
rights and otherwise complies with applicable law. Among
other defenses, VidAngel argues that the circumvention of
technological access-control measures in making digital copies of
copyrighted works is: (a) authorized by the FMA, which permits the
filtering and transmission of copyrighted material owned by third
parties, and (b) is further permitted under the DMCA by the
“fair use” doctrine. VidAngel has also alleged
numerous counterclaims against the Plaintiffs, including that the
Plaintiffs are engaging in an unreasonable restraint on interstate
trade in violation of Section 1 of the Sherman Antitrust Act and
Section 4 of the Clayton Antitrust Act (codified at 15 U.S.C.
Sections 1 and 5, respectively). The Plaintiffs have reserved
October 31, 2016, on the California District Court’s calendar
to argue their motion seeking the entry of a preliminary
injunction. The Plaintiffs filed and served their motion on
August 22, 2016. VidAngel filed and served its opposition to
the motion on September 12, 2016, and the Plaintiffs filed a reply
in support of the motion on October 3,
2016.
The
Plaintiffs have additionally said that they plan to schedule a
motion to dismiss VidAngel’s counterclaims for hearing on
December 19, 2016.
Due to the
nature of the claims and counterclaims, as well as the very early
stage of the litigation, VidAngel is unable to predict the eventual
result or estimate the amount of any potential liability or
recovery. VidAngel plans to use a substantial portion of the
proceeds of this offering to defend the Disney Litigation,
including by prosecuting its counterclaims. If the Disney
Litigation is decided adversely to VidAngel, it would have a
material adverse effect on VidAngel’s financial condition and
its ability to continue business operations.
ClearPlay Litigation
In 2014, VidAngel
(then doing business as VidAngel, LLC), responded to a contention
by ClearPlay, Inc., or ClearPlay, that we were infringing on
certain ClearPlay patents by suing ClearPlay in the United States
District Court for the Central District of California (the case
later moved to Utah). In doing so, we requested judicial
determinations that our technology and service did not infringe
eight patents owned by ClearPlay and that the patents were invalid.
In turn, ClearPlay counterclaimed against VidAngel alleging patent
infringement. On February 17, 2015, the case was stayed pending
inter parties review by the United States Patent and Trademark
Office’s, or the USPTO’s, review of several of
ClearPlay’s patents. We were not a party to or involved in
the USPTO’s review of those patents. Owing to those
proceedings, on May 29, 2015, the Utah trial court closed the case
without prejudice to the parties’ rights to reassert any or
all claims later. In July and August 2015, many of
ClearPlay’s patent claims, including many of the claims
asserted against VidAngel, were ruled unpatentable by the USPTO.
Some of ClearPlay’s other patent claims were upheld and still
others were never challenged in the USPTO. Following the
USPTO’s rulings, ClearPlay appealed some of the USPTO’s
invalidity decisions to the United States Court of Appeals for the
Federal Circuit. These findings of invalidity were all
affirmed by the court on August 16, 2016. The Utah District
Court’s order staying this litigation instructed ClearPlay to
contact the Court within two weeks of the final Inter
Partes Review decision after which the Court would set a telephonic
status conference. It has been over a year since the Inter
Partes Review decisions were issued. We believe ClearPlay will
reassert its surviving claims in the near future and that the
litigation could have a material adverse effect on VidAngel’s
business operations if Clearplay were to prevail.
See “RISK FACTORS - We
face risks, such as unforeseen costs and potential liability in
connection with content we acquire, filter and/or distribute
through our service.” See also “RISK FACTORS—We are engaged in
current litigation, the outcome of which, if not favorable to
VidAngel, would have a material adverse effect on us and our
ability to continue our business
operations.”
29
DESCRIPTION
OF OUR PROPERTIES
As of the date of
this Offering Circular, our primary assets are our Intellectual
Property and the contracts we have entered into
directly.
We lease our office
facilities at 249 North University Avenue, Provo, Utah, under a
month-to-month lease. We currently rent our offices for $1,750.00 a
month. We do not currently own or lease any other real property.
See “DESCRIPTION OF BUSINESS” for more
information.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Forward Looking Statements
This Offering
Circular contains certain forward-looking statements that are
subject to various risks and uncertainties. Factors that might
cause or contribute to such differences include, but are not
limited to, those discussed on Page 5 of this Offering Circular
under the heading “CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS”.
We assume no
obligation to revise or publicly release any revision to
forward-looking statements contained in the Offering Circular,
unless required by law.
Overview
VidAngel is a
reseller of Blu-ray and DVD discs and offers a large variety of
movies and TV shows on discs, in both formats, for purchase on our
website, www.vidangel.com. Upon
purchase of such disc at the Sales Price, our customer agrees to
have us retain physical custody of the disc. As part of the
purchase transaction, we include access to our proprietary and
patented content filtering technology that provides our customers
with ultimate control over the purchased content and allows for
seamless removal and/or muting of content deemed objectionable by
our customers. Once our customer finishes watching
purchased content, they may choose to either keep the purchased
title or to sell the disc back to us at a reduced price. If
customers elect to return their disc to us, the Repurchase Price
offered by VidAngel reflects the (i) format of the disc and (ii)
total number of 24-hour periods our customers own their discs. Our
customers have access to our content filtering technology for use
with a specific disc for as long as they own it. Our
service allows our customers to direct their individual viewing
experience by removing certain audio or video segments that contain
material considered objectionable by our customer. Once a customer
chooses to sell the disc back to us, their access to our content
filtering technology for that disc terminates and VidAngel’s
obligations to such customer are complete.
Revenue Model
Each disc is sold
to our customers for the Sales Price of $20.00 per
disc. Upon purchase of such disc, our customer agrees to
have us retain physical custody of the disc. If
customers elect to return their disc to us after viewing the
purchased content, VidAngel offers a Repurchase Price for the disc.
The Repurchase Prices paid by VidAngel are currently the Sales
Price less $1.00 per 24-hour period for each DVD, and $2.00 per
24-hour period for each Blu-ray disc.
VidAngel separates
its revenue transactions into two (2) groups. Those groups are
defined by the length of total time of disc ownership. For clarity
purposes, the groups are defined as “short-term
ownership” and “long-term ownership.” Currently,
the majority of our transactions exist within the short-term
ownership category. These customers currently account for 99.5% of
all transactions through July 31, 2016. The remaining 0.50% of all
transactions are from the long-term ownership
category.
For transactions in
the short-term ownership category, revenue is recognized on a daily
basis for each 24-hour period a disc is owned. The amount of
revenue recognized is equal to the Sales Price less the Repurchase
Price and depends on the format of the disc. The average revenue
per transaction through July 31, 2016 was $1.54 for transactions in
the short-term ownership category.
For
transactions in the long-term ownership category, revenue is
recognized using a subscription model, or ratably over the expected
term/life of the customer. The average revenue per
transaction through July 31, 2016 was $18.49 per
transaction in the long-term ownership category.
For our fiscal year
ended December 31, 2015, we earned $415,517 in revenue, of which
$383,288 is attributed to short-term owners, and $32,229 is
attributable to long-term owners.
For the six months
ended June 30, 2016, we earned $2,405,430 in revenue, of which
$2,334,658 is attributed to short-term owners, and $70,772 is
attributable to long-term owners.
Growth
Opportunity
According to
PricewaterhouseCoopers, transaction-based home video is the
fastest-growing segment of the streaming market, and is projected
to reach $8.5 billion by 2019 (with a 2014-19 Compound Annual
Growth Rate or CAGR of 25.6%)1. Management
believes that the market for filtered content is largely untapped,
as opposition from content creators and agreements with
distribution channels and partners make the process overly
burdensome, and costly for the average consumer. In April 2005, the
Family Entertainment and Copyright Act was signed into law and
included provisions that exempted as a violation of
copyright law “…the creation or provision of
a computer program or other technology that enables…[the]
making imperceptible [of limited portions of audio or video content
of a motion picture,] and that is designed and marketed to be used,
at the direction of a member of a private household…”.
In May 2016, VidAngel commissioned an independent third-party study
by the NRG Research Group to determine the percentage of American
consumers who would be interested in or more likely to use a
service similar to VidAngel’s. The study estimated the size
of the home entertainment audience at 140.2 million Americans, and
indicates that 40% of such audience said they will
“definitely” or “probably” use the service,
with 19% indicating that they will “definitely” use the
service.
Management believes
that this study confirmed the existence of a significant market
that is being underserved, and that VidAngel holds the unique
advantage of being the only company that currently provides this
market with the ability to view and remove content on the most
popular devices and platforms available on the market today, such
as cell phones, tablets, set top boxes (e,g. Apple TV, Roku Amazon
Fire TV), and computers, and, in the future, gaming consoles and
Smart TVs. VidAngel began privately testing its technology in
December 2014 and launched publicly in August 2015. Since launching
publicly in August of 2015 to the period ending June 30th, 2016,
VidAngel has seen significant growth and user adoption, with
transaction growth of over 2,600% and user growth of over 1,800%.
Management believes that this growth is merely a small percentage
of the potential market, and that as VidAngel continues to improve
its technology, and releases new versions of our application to
work on the devices and platforms used by consumers today, that its
growth will continue at a high rate for the foreseeable
future.
Growth Strategy
VidAngel employs a
three pillar marketing strategy that includes digital acquisition,
customer retention, and customer sharing:
Digital acquisition:
VidAngel uses
highly targeted digital ads to attract customers,
including:
●
Marketing
videos
produced with innovative ad agency Harmon
Brothers;
●
Banner ads produced
in-house;
●
Targeted
advertising on Facebook, YouTube, Roku, and soon other set-top box
platforms; and
●
Advertising with
podcast and video channels
Customer activation and
retention:
VidAngel continues
to refine its customer acquisition funnel with rigorous A/B testing
of customer emails, landing page layout, and design of various
platforms. VidAngel also keeps its customers active by engaging
through entertaining emails, social media posts, blog posts,
customer service, and similar methods of outreach.
Customer sharing:
According to
VidAngel customer surveys, roughly half the members of
VidAngel’s customer base were referred by friends. To
capitalize on word of mouth advertising, VidAngel plans to continue
incentivizing customers to share VidAngel with friends through the
use of sharing incentives and gamification.
Operating
Results
VidAngel operates
on a fiscal year basis from January to
December.
First six
month of Fiscal Year 2016 (1/1/2016 –
6/30/2016)
In the first six
months of 2016, we focused our efforts on growth. We started by
adding new content to the library of titles available for purchase
on our application in order to meet the demand of our existing
customer base. We closed out fiscal year 2015 with approximately
1,500 titles available for purchase, and during the first six
months of 2016 have added over 1,000 new titles. We continue to add
new titles at an increasing rate, and plan to continue for the
foreseeable future.
In conjunction with
adding new titles, we have continued to advertise our service
aggressively. In the first six months of 2016, we spent $2,353,396
on advertising related to our service. The aggressive advertising
campaign resulted in the addition of over 144,700 new VidAngel
customers. Revenues generated from all customers during the first
six months of 2016, were $2,405,430, an increase of 3,600% from the
first six months of 2015, or 578% of the total revenue from fiscal
year 2015. We plan to maintain our aggressive spending on
advertising, for the foreseeable future, in order to further
stimulate the growth of our customer base.
VidAngel had a net
loss of $2,219,233 for the first six months of fiscal year 2016.
This loss was largely related to the increased advertising spend to
fuel user growth.
Fiscal Year 2015 (1/1/2015
– 12/31/2015)
In fiscal year
2015, we began early beta testing of a new version of our service.
The new service removed many of the obstacles that limited the
original version, and management believes it began to show promise
immediately. Over the first eight months of fiscal year 2015,
VidAngel refined and improved the technology of the new version,
while allowing a limited number of users to preview the service,
and assist in troubleshooting. The response from beta testers was
promising and VidAngel generated revenues of $126,877 from January
1, 2015 through August 31, 2015. In late August 2015,
VidAngel opened access to the platform to the public, and began
marketing the product aggressively. The use of the service
increased dramatically and VidAngel generated revenues of $288,640
from September 1, 2015, through December 31, 2015.
Following the
release to the general public, we became aware that the
architecture of the current technology would not support the
growing user base, and we invested a significant amount of capital
and resources into updating the architecture to handle a much
larger user base, and that could scale up to meet increased
demand.
VidAngel had a net
loss of $1,382,016 for the fiscal year ended December 31,
2015.
Fiscal Year
2014 (1/1/2014 - 12/31/2014)
In fiscal year
2014, VidAngel released the first version of its service that
allowed customers to filter movies and videos available on YouTube
and the Google Play Hollywood library. Initial customer signup
response was strong, but the service suffered from technical
limitations, no high definition content, limited support and an
unstable customer experience. Actual usage was extremely low.
Management began exploring alternative strategies and, after
creating the current model, the service was ultimately
terminated.
VidAngel had a net
loss of $777,916 for the fiscal year ended December 31,
2014.
Liquidity
and Capital Resources
As of June 30,
2016, we had cash on hand of $1,480,525. We also expect
that the proceeds from this offering will improve our financial
performance by providing additional capital necessary to advertise
our service more aggressively and by enabling us to make our
application usable on additional device platforms, thereby making
access to our service simpler, and by enhancing our service by
improving the technology for delivery to our customers. We have not
identified any additional material internal or external sources of
liquidity as of the date of this Offering Circular.
Short Term Liquidity
VidAngel has no
short term liquidity requirements as of the date of this Offering
Circular.
Long-Term Liquidity
VidAngel has no
long term liquidity requirements as of the date of this Offering
Circular.
Trend
Information
VidAngel
experienced substantial monthly transaction growth since our public
launch in August 2015. We processed and delivered 497,980
transactions for the month ended June 30, 2016, compared to 18,089
in August 2015, and have recognized over $2.4M in revenue related
to transactions for the first six (6) months of Fiscal Year 2016.
The number of active users who purchased a disc in June 2016 was
110,251, compared with 5,770 when we launched to the public in
August 2015, which represents growth of over 1800%.
Our
customer’s experience using our Apps, has improved
significantly for every device on which our product is currently
available. For example, out of 5 stars possible, our Apple app
store rating has increased from 2.5 stars to 4.9 stars; our Google
Play app has improved to 4.8 stars; our Roku app to 4.5 stars; our
Kindle app to 4.4 stars; and our Amazon Fire TV app to 4.6
stars.
Customer
satisfaction has consistently grown as we’ve improved our
technology over time as seen in the chart below. The percentage of
customers rating their experience with us as great has increased
from just above 50 percent to over 80 percent. We are continuously
testing and working on changes to our technology and content
delivery network which management believes will further increase
the performance of our product, and subsequently the customer
satisfaction gains we have seen to date.
Source: This chart
was generated from 139,435 responses to a VidAngel survey sent to
customers upon completion of a purchase transaction.
DIRECTORS,
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
Subject to our
stockholders’ rights to consent to certain transactions, the
business and affairs of the Company are controlled by, and all
powers are exercised by, our Board. Our Board shall consist of not
fewer than three (3) nor more than five (5) directors, the exact
number to be set from time to time by the Board. We
currently have three directors: Neal Harmon, Paul Ahlstrom and
Dalton Wright. Our Board shall be elected each year, at
the annual meeting of stockholders, to hold office until the next
annual meeting and until their successors are elected and
qualified. Any newly created directorships resulting from an
increase in the authorized number of directors and any vacancies
occurring in our Board, may be filled by the affirmative vote of a
majority of the remaining directors. A director may resign at any
time, and the stockholders may remove any director or the entire
Board at any time, with or without cause, by the affirmative vote
of a majority of stockholders voting in such decision.
Our Board has
retained our executive officers to manage our day-to-day
operations, our library of movies, our intellectual property and
other investments, subject to the supervision of our Board. Neal
Harmon is currently our Chief Executive Officer, Patrick Reilly is
currently our Director of Finance, Elizabeth Ellis is currently our
Chief Operating Officer and Jeffery Harmon is currently our Chief
Marketing Officer. Our executive officers have accepted
their appointment, or nomination to be appointed, on the basis of
the compensation to be paid to them. See “COMPENSATION OF DIRECTORS AND EXECUTIVE
OFFICERS – Remuneration of Executive Officers and Managers
of Our Company” for more information. Our
executive officers will serve for such period as the Board
determines, subject to the terms of any employment agreements we
enter into with them, or their earlier death, resignation or
removal. Our Board may remove our executive officers
subject to the terms of any employment agreements we enter into
with them. See
“COMPENSATION OF DIRECTORS
AND EXECUTIVE OFFICERS – Employment Agreements” for more
information.
The individuals
listed below are our executive officers and directors. The
following table and biographical descriptions set forth certain
information with respect to the individuals who currently serve as
our directors and executive officers:
Name
|
|
Position
|
|
Age
|
|
Term
of Office
|
|
Hours/Year
(for part-time employees)
|
Neal
Harmon*
|
|
Chief Executive
Officer, Director
|
|
38
|
|
October
2013
|
|
n/a
|
Jeffery
Harmon*
|
|
Chief Marketing
Officer
|
|
33
|
|
October
2013
|
|
n/a
|
Elizabeth
Ellis
|
|
Chief Operating
Officer
|
|
39
|
|
June
2015
|
|
n/a
|
Patrick
Reilly
|
|
Director of
Finance
|
|
35
|
|
January
2014
|
|
n/a
|
David
Quinto
|
|
General
Counsel
|
|
61
|
|
August
2016
|
|
n/a
|
Paul
Ahlstrom
|
|
Director
|
|
53
|
|
February
2014
|
|
n/a
|
Dalton
Wright
|
|
Director
|
|
36
|
|
February
2014
|
|
n/a
|
*Neal Harmon and
Jeffery Harmon are brothers.
Biographical
Information
Biographical
information regarding our directors and executive officers is set
forth below.
Neal Harmon, Chief Executive Officer,
Director. Neal has served as VidAngel, Inc.’s Chief
Executive Officer since he helped co-found the company in 2013.
Neal is a member of Harmon Ventures LLC, a Utah limited liability
company, the Company’s largest stockholder. He also is a
managing member of Harmon Brothers, LLC, a marketing agency he
co-founded with his brothers. Neal worked for Orabrush,
Inc. from 2009 to 2013, a company he co-founded, where he served in
such capacities as Chief Operating Officer and as a member of the
board. Since 2005, Neal has also worked for the Neal S Harmon
Company, a Utah corporation, as a consultant, entrepreneur and
investor, engaging in such activities such as designing and
creating a trucking logistics dashboard to connect shippers and
private fleets, among web-based and other projects. Neal received
his received his master’s degree from Brigham Young
University in Instructional Psychology and Technology in 2002, and
his undergraduate degree from Brigham Young University in American
Studies in 2001.
Jeffery Harmon, Chief Marketing
Officer. Jeffery is a co-founder and Chief Marketing Officer
of VidAngel, Inc. He is currently a managing-member of Harmon
Brothers, LLC, a Utah limited liability company, which is an
online-focused advertising and marketing company. Jeffery
co-founded Orabrush, Inc. in 2009 and served as its CEO from
2009-2010. He continued to serve as Chief Marketing Officer and
Co-Founder of Orabrush from 2010 to 2013. He is currently active
with other start-up companies and concepts. He attended Brigham
Young University from 2006 to 2008, where he studied business
marketing, tradition marketing, internet marketing and business
administration.
Elizabeth Ellis, Chief Operating
Officer. Liz has served as Chief Operating
Officer at VidAngel, Inc. since 2016, where her duties include
overseeing all operating procedures and staffing. From 2009 until
she started her tenure at VidAngel, Inc., Liz was the Director of
Human Relations and Office Manager at Orabrush, Inc., where she
oversaw personnel and was responsible for various operational
tasks. Liz holds a B.S. from Brigham Young University.
Patrick Reilly, Director of Finance.
Patrick began providing consulting services to VidAngel, Inc. in
March 2014, and joined as the Director of Finance in February 2016.
Patrick oversees all accounting and finance duties, including but
not limited to budgeting, forecasting, auditing, financial
statement preparation and funding at VidAngel, Inc. Patrick served
as Financial Controller at Moki Mobility, Inc. a computer software
company, from 2013 to February 2016, where he was responsible for
finance and accounting duties. From 2009 to 2013,
Patrick was the Vice President of Finance and Financial Controller
at Allegiance, Inc., where he was responsible for all finance and
accounting duties of the company. Patrick graduated from
Utah Valley University in 2005 with a B.S. in Business
Administration with concentrations in finance and
banking.
David Quinto, General Counsel. David
joined VidAngel, Inc. as our General Counsel in August 2016. David
was a co-founder and partner at Quinn Emanuel Urquhart &
Sullivan LLP from 1987 through 2014, and along with Phyllis
Kupferstein, founded Kupferstein Manuel & Quinto, LLP in 2014.
From 2015 through 2016, David was a partner with the international,
full service firm Davis Wright Tremaine LLP. He has represented
numerous “Fortune 500” companies, including Avery
Dennison, Lockheed Martin, Samsung, Louis Vuitton, Mattel, Johnson
Controls, Hilton Hotels, Grendene S.A., and Sae-A Trading Co. Ltd.,
as well as the Academy of Motion Picture Arts and Sciences, the
Academy of Television Arts and Sciences, the Producers Guild of
America, and the America’s Cup Organizing Committee. David
has expertise in trade secret, trademark, trade dress, copyright,
unfair competition and complex business disputes. He published a
treatise that analyzed the application of tort law to the Internet
titled “Law of Internet
Disputes,” published by Aspen Law and business and he
co-authors a practitioners guide to trade secret protection and
litigation nationally, published by LexisNexis (4th ed. 2016). David
graduated with his J.D. from the Harvard Law School in 1982, and
received his B.A. from Amherst College in 1977.
Paul Ahlstrom, Director. Paul joined
VidAngel as our director in 2014. Paul has served as Managing
Director of Alta Ventures Mexico Fund I, LP since 2010, where his
responsibilities include all aspects of investor relations,
evaluating a business’s products or services for potential
investment opportunity, creating deal flow, negotiating the terms
and conditions in each of the company’s financing, serving as
a board member of portfolio companies, and preparing financial
statements and financial analysis. Over his career, Paul has
directly participated in more than 125 venture capital investments
and previously represented vSpring Capital on the boards of
Ancestry.com, which was sold in 2007 to a private equity firm and
went public in 2009 (NASDAQ:ACOM), Senforce, which was sold to
Novell (NASDAQ: NOVL), and Altiris (NASDAQ:ATRS), which went public
and was then sold to Symantec. (NASDAQ: SYMC), GlobalSim and
Aeroprise. Mr. Ahlstrom has also served as an advisor and board to
many successful venture-backed startups including Rhomobile sold to
Motorola, SpaceMonkey, SendMi, Convert.com and Jott. Paul is the
author of popular startup book Nail It Then Scale It, and received his
B.A. in Communications from Brigham Young
University.
Dalton Wright, Director. Dalton joined
VidAngel, Inc. as our director in 2014. Dalton has been a partner
at Kickstart Seed Fund, L.P. since 2013, a seed-stage investment
fund that develops close relationships with universities, angel
groups and entrepreneurs to launch high-growth start-ups in both
Utah and the Mountain West. Dalton serves as a director of numerous
other corporate boards. From 2009 to 2012, Dalton was Senior
Associate and Founding Team Member at Alta Mexico Ventures, a seed,
venture and growth capital fund targeting high growth companies in
Mexico. Dalton graduated from the Wharton Business School at the
University of Pennsylvania with his M.B.A. in 2014, and holds a
B.A. in finance from the University of Utah.
COMPENSATION OF DIRECTORS AND EXECUTIVE
OFFICERS
Messrs. Harmon, Ms.
Ellis, Mr. Reilly and Mr. Quinto receive compensation for acting in
their capacities as our executive officers. We reimburse
Messrs. Ahlstrom and Wright for their expenses incurred in acting
in their capacity as a director. See – Remuneration of Executive Officers and
Directors of the Company” below for more detailed
information.
Remuneration of Executive Officers and
Directors of the Company
Set forth below is
a table of remuneration that our executive officers and directors
received for our fiscal year ended December 31, 2015.
Name
|
|
Capacity
in which Compensation
Was
Received
|
|
Cash
Compensation
($)
|
|
Other
Compensation
($)
|
|
Total
Compensation
($)
|
Neal
Harmon
|
|
CEO
|
|
$100,000
|
|
n/a
|
|
$100,000
|
Elizabeth
Ellis
|
|
COO
|
|
$100,000
|
|
Indeterminate(1)
|
|
$100,000
|
Jeffery
Harmon
|
|
Director of
Marketing
|
|
$100,000
|
|
n/a
|
|
$100,000
|
Paul
Ahlstrom
|
|
Director
|
|
n/a
|
|
n/a
|
|
$n/a
|
Dalton
Wright
|
|
Director
|
|
n/a
|
|
n/a
|
|
$n/a
|
(1)
|
On July 17, 2015,
Ms. Elizabeth Ellis was granted stock incentive options exercisable
for 50,000 shares of VidAngel’s Class A Common Stock with an
option price of $0.50 per share and on August 10, 2016, Ms. Ellis
was granted stock incentive options exercisable for 28,000 shares
of VidAngel’s Class A Common Stock with an option price of
$0.82 per share, both pursuant to the terms and conditions of our
Stock Incentive Plan. These options will vest in substantially
equal annual increments over a four-year period.
|
Employment
Agreements
We have recently
entered into an employment agreement with Mr. David Quinto with
respect to his position as our General Counsel. Mr. Quinto’s
employment begins on August 1, 2016, has no specified term, and
will require him to devote his time and attention during normal
business hours to the business and affairs of the Company and the
Company’s affiliates. By entering this agreement with
Mr. Quinto, we have attempted to ensure Mr. Quinto is available to
defend VidAngel in the Disney Litigation through the court of
appeals and all the way to the Supreme Court, if
necessary.
Mr. Quinto’s
employment agreement provides for an initial base salary of
$350,000, payable semi-monthly, which will thereafter be subject to
potential annual increases based on his performance after review by
our Board which must approve any salary increase. Mr.
Quinto has also been granted an option exercisable for 219,792
shares of Class A Common Stock.
If Mr.
Quinto’s employment is terminated by us without
“cause,” or by him for “good reason,”
within 12 months of a “change of control” (each as
defined in the applicable employment agreement), Mr. Quinto will be
entitled to receive accelerated vesting of 100% of his
option.
If Mr.
Quinto’s employment is terminated by us without
“cause” or by the executive for “good
reason” prior to July 31, 2021, and provided the Company is
conducting business in the United States substantially unimpaired
by any injunction, Mr. Quinto will be entitled to receive severance
pay in the form of the continued payment of his base salary, at the
rate in effect as of the date of termination and in accordance with
the Company’s customary payroll practices, until July 31,
2021. If the Company’s business operations in the
United States are substantially impaired such that the Company
cannot operate profitably, Mr. Quinto will be permitted to draw
down on a cash collateral account established by VidAngel to secure
payment of Mr. Quinto’s cash compensation to ensure he can
continue his defense of VidAngel in the Disney
Litigation. Mr. Quinto’s right to receive the
severance pay will be subject to the delivery of a release of
claims in favor of the Company.
Mr. Quinto’s
employment agreement also required him to enter into a Proprietary
Information, Invention Assignment, Non-Competition and Arbitration
Agreement with the Company.
Stock
Incentive Plan
In an effort to
further the long-term stability and financial success of the
Company by attracting and retaining personnel, including employees,
directors and consultants for the Company, the Company adopted its
2014 Stock Incentive Plan, or our Stock Incentive Plan, in February
2014. There are 2,534,544 shares of Class A Common Stock
in VidAngel authorized for issuance through our Stock Incentive
Plan. As of the date of this Offering Circular, options
exercisable for 1,022,811 shares of our Class A Common Stock have
been granted under our Stock Incentive Plan, and of those options
granted, options exercisable for 5,000 shares of Class A Common
Stock in VidAngel have been exercised. Through the use of stock
incentives, the Stock Incentive Plan will stimulate the efforts of
those persons upon whose judgment, interest and efforts the Company
is and will be largely dependent for the successful conduct of its
business and will further the identification of those
persons’ interests with the interests of the Company’s
stockholders.
The Stock Incentive
Plan is administered by our Board. The board has the
power and sole discretion to grant or award a stock incentive, or
an Award, to any employee of, director of, or consultant to the
Company, each a Participant, who, in the sole judgment of our
Board, has contributed, or can be expected to contribute, to the
profits or growth of the Company. Our Board also has the
power and sole discretion to determine the size, terms, conditions
and nature of each Award to achieve the objectives of the Award and
the Stock Incentive Plan. This includes, without
limitation, the Board’ ability to
determine: (i) which eligible persons shall receive
an Award and the nature of the Award, (ii) the number of
securities to be covered by each Award, (iii) the fair market
value of such securities, (iv) the time or times when an Award
shall be granted, (v) whether an award shall become vested
over a period of time, according to a performance-based or other
vesting schedule or otherwise, and when it shall be fully vested,
(vi) the terms and conditions under which restrictions imposed
upon an Award shall lapse, (vii) whether a change of control
exists, (viii) factors relevant to the satisfaction,
termination or lapse of restrictions on certain Awards,
(ix) when certain Awards may be exercised, (x) whether to
approve a Participant’s election with respect to applicable
withholding taxes, (xi) conditions relating to the length of
time before disposition of securities received in connection with
an Award is permitted, (xii) notice provisions relating to the
sale of securities acquired under the Stock Incentive Plan, and
(xiii) any additional requirements relating to Awards that the
Board deems appropriate.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS
The
Company
has: 25,000,000 shares of common stock par value $0.001 per share,
authorized, of which 21,250,000 shares have been designated as
Class A voting common stock, or the Class A Common Stock, and
3,750,000 have been designated as Class B Common
Stock. As of the date of this Offering Circular, we have
18,008,908 shares of Class A Common Stock issued and
outstanding.
Capitalization
As of the date of
this Offering Circular, Harmon Ventures, LLC, or Harmon Ventures,
owned indirectly by our CEO, Mr. Harmon, and his two brothers,
Jeffrey Harmon and Daniel Harmon, owns 8,938,520 shares of our
common stock. Alta Ventures Mexico Fund I, LLC, or Alta
Ventures Mexico Fund I, owns 3,160,318 shares of our common
stock. Osborne Companies, LC, or Osborne Companies, owns
2,222,733 shares of common stock. Various unaffiliated
investors own the remaining shares of common
stock.
The following table
sets forth those executive officers, directors and other security
holders holding 10% or a greater percentage of any class of shares,
as of the date of this Offering Circular.
Title
of Class
|
|
Name
and Address of Beneficial Owner
|
|
Amount
and Nature of Beneficial Ownership
|
|
Amount
and Nature of Beneficial Ownership Acquirable
|
|
Percent
of Class
|
Class A Common
Stock
|
|
Harmon Ventures,
LLC
1154
Holly
Cir Provo, UT
84604
|
|
8,938,520
shares
|
|
N/A
|
|
49.63%
|
|
|
|
|
|
|
|
|
|
Class A Common
Stock
|
|
Alta Ventures
Mexico
Fund I,
LLC
3315 Mayflower
Avenue, Suite #1
Lehi,
U
T
84043
|
|
3,160,318
shares
|
|
N/A
|
|
17.55%
|
|
|
|
|
|
|
|
|
|
Class A Common
Stock
|
|
Osborne Companies,
LC
4290 North Vintage
Circle
Provo, UT
84604
|
|
2,222,733
shares
|
|
Options exercisable
for 66,000 shares of Class A Common Stock
|
|
12.33%
|
Upon closing of the
Minimum Offering, Harmon Ventures will own approximately 46.41% of
our total outstanding shares of capital stock, Alta Ventures Mexico
Fund I will own approximately 16.41% of our total outstanding
shares of capital stock, and Osborne Companies, LC will own
approximately 11.54% of our total outstanding shares of capital
stock. Upon closing of the Maximum Offering, Harmon Ventures will
own 41.08% of our total outstanding shares of capital stock, Alta
Ventures Mexico Fund I will own 14.52% of our total outstanding
shares of capital stock, and Osborne Companies, LC will own 10.22%
of our total outstanding shares of capital
stock. See
“COMPENSATION OF DIRECTORS
AND EXECUTIVE OFFICERS – Stock Incentive
Plan” above.
Our Board may, from
time to time, also cause shares of capital stock to be issued to
directors, officers, employees or consultants of our Company or its
affiliates as equity incentive compensation under our Stock
Incentive Plan, which shares will have all benefits, rights and
preferences as our Board may designate as applicable to such
shares.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS AND OTHER CONFLICTS OF INTEREST
Affiliated
Transactions
Promotion and Marketing Services Agreement
with Harmon Brothers LLC.
VidAngel entered a
“Promotion and Marketing Services Agreement” or the HB
Marketing Agreement, with Harmon Brothers LLC, or HB. HB
is owned by Neal Harmon, Jeffrey Harmon, and Daniel
Harmon. HB is in the business of providing
internet-based and multi-media promotion and marketing services,
including the design, implementation and execution of promotional
and web-based advertising campaigns. HB’s services to the
Company are divided into two categories: creative and production
services and optimization and distribution services. For creative
and production services, HB invoices the Company at cost according
to each employee or consultant’s personal hourly, billable
rate. VidAngel also pays all of HB’s expenses incurred in
producing promotional and web-based advertising, including without
limitation, props, food and catering onset, facility rentals,
travel, equipment rentals, and other costs of
production. For optimization and distribution services,
VidAngel pays HB a percentage-based fee for the management of
third-party adspend (Adwords, Facebook, etc.) which drives traffic
to the content produced, co-produced or otherwise created by HB,
for VidAngel. The percentage-based management fee continues for the
life of the content. In exchange for the promotion and advertising
services from HB, including third-party adspend billed at cost,
VidAngel paid $0 to HB in 2014, $344,739 to HB in 2015, and
$2,166,989 to HB through June 30, 2016.
Employment Agreement with our General Counsel,
David Quinto
We have recently
entered into an employment agreement with Mr. David Quinto with
respect to his position as our General Counsel. Mr. Quinto’s
employment began on August 1, 2016, has a five year term, and will
require him to devote his time and attention during normal business
hours to the business and affairs of the Company and the
Company’s affiliates.
Mr. Quinto’s
employment agreement provides for an initial base salary of
$350,000, payable semi-monthly, which will thereafter be subject to
potential annual increases based on his performance after review by
our Board which must approve any salary increase.
Investor Rights and Voting Agreement
The
Company
entered into an Investor Rights and Voting Agreement, or Investor
Agreement, dated February 27, 2014 with certain of VidAngel’s
investors, including Alta Ventures Mexico Fund I, the manager of
which is Paul Ahlstrom, one of our directors. The
Investor Agreement requires us to provide certain information and
inspection rights, provides for confidentiality, and requires the
parties to this agreement to vote their respective shares of common
stock in a manner which maintain the number of directors on our
Board at no more than five and to elect as a director an individual
designated by Alta Ventures Mexico Fund I for so long as it owns at
least 1,000,000 shares of our common stock.
The
Company
is permitted to enter into transactions with, including making
loans to and loan guarantees on behalf of, our directors, executive
officers and their affiliates; so long as the person or persons
approving the transaction on behalf of the Company acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Company. We do not have any
outstanding loans or loan guarantees with any related party, and,
as of the date of this Offering Circular, we do not have any
intentions to enter into any such transactions.
SECURITIES
BEING OFFERED
General
The Company is
offering a minimum of 1,666,667 and a maximum of 3,750,000 of our
Class B Common Stock at a price of $3.00 per share ($5,000,000 and
$11,250,000, respectively). The minimum subscription is fifty (50)
Offered Shares ($150); however, we can waive the minimum
subscription on a case to case basis in our sole discretion. The
Offered Shares are common equity and are not entitled to any
preferences regarding distributions. See “–Distributions.”
This offering will
terminate on the Termination Date, provided that if we have
received and accepted subscriptions for the Maximum Offering on or
before the Termination Date, then this offering will terminate when
all Offered Shares have been sold, whichever occurs first. If, at
the Initial Closing, we have sold less than the Maximum Offering,
we will hold Additional Closings, up to the Maximum Offering,
through the Termination Date. Purchases of Shares in excess of
$5,000 must be transmitted by investors directly by either wire
transfer or electronic funds transfer via ACH to the escrow account
maintained by Issuer Direct. Purchases of Shares in the amount of
$5,000 or less may be submitted through an investor's VidAngel
customer account in accordance with the billing information for
such investor at www.vidangel.com, and will not be held in a
non-interest bearing escrow account by Issuer Direct, but will be
held in a separate non-interest bearing account held by VidAngel.
Upon each closing, the proceeds collected for such closing will be
disbursed to the Company and the Offered Shares for such closing
will be issued to investors. If a closing does not occur for any
reason, the proceeds for such closing will be promptly returned to
investors, generally without interest (within one business day) and
without deduction.
The
Company
and stockholders are governed by our Certificate and
Bylaws. See
“– Description of
Certificate of Incorporation and Bylaws” below for a
detailed summary of terms of our Certificate and
Bylaws. Our Certificate and Bylaws are filed as an
exhibit to the Offering Statement of which this Offering Circular
is a part. The Company has: 25,000,000 shares of common
stock, par value $0.001, authorized, of which 21,250,000 shares
have been designated as Class A Common Stock, and 3,750,000 have
been designated as Class B Common Stock. Our Board has
the right to create, authorize and issue new shares in the Company,
including new classes, provided that it may not authorize or issue
shares senior to the rights and preferences of our common stock
without the consent of the common stockholders holding a majority
of the outstanding shares of each class of common
stock.
Registrar,
Paying Agent and Transfer Agent for our
Offered Shares
Duties
Issuer Direct
Corporation will serve as the registrar and transfer agent for our
Offered Shares. We will pay all fees charged by the
transfer agent for transfers of our Offered Shares except for
special charges for services requested by a Class B Common
Stockholder.
There will be no
charge to our Class B Common Stockholders for disbursements of our
cash dividends, if any, although we do not anticipate issuing
dividends for the foreseeable future. We will indemnify the
transfer agent, its agents and each of their respective
stockholders, directors, officers and employees against all claims
and losses that may arise out of acts performed or omitted for its
activities in that capacity, except for any liability due to any
gross negligence or intentional misconduct of the indemnified
person or entity.
Resignation or Removal
The transfer agent
may resign, by notice to us, or be removed by us. The resignation
or removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its
acceptance of the appointment. If no successor has been appointed
and has accepted the appointment within 30 days after notice
of the resignation or removal, our Board, or a designee of our
Board, may act as the transfer agent and registrar until a
successor is appointed.
No dividends to investors in our Offered
Shares are assured, nor are any returns on, or of, an
investor’s investment guaranteed. Dividends are
subject to our ability to generate positive cash flow from
operations. All dividends are further subject to the
discretion of our Board. It is possible that we may have
cash available for dividends, however, we anticipate retaining all
of our earnings for the future operation of the Company and do not
anticipate making any cash distributions in the foreseeable
future.
Our Board, in
its sole discretion, may determine from time to time to declare and
pay dividends out of any funds legally available therefore. The
Company has never declared or paid cash dividends on its capital
stock. The Company currently intends to retain any future earnings
to finance the growth and development of its business and therefore
does not anticipate paying any cash dividends for the foreseeable
future.
Liquidating Preferences
Upon the
dissolution and liquidation of the Company, no stockholder will
receive a preference in the distribution of liquidation proceeds.
Liquidating distributions will be shared pari passu among our common
stock.
Basis for Dividends
The
Company’s
ability, and our Board’ decisions, to issue dividends to our
stockholders will be based upon the operating results of the
Company. Our Board has discretion over whether to
declare and pay dividends to our stockholders, however, we do not
anticipate issuing any dividends for the foreseeable
future.
Description
of Certificate of Incorporation and Bylaws
The Company is governed by our certificate of
incorporation, or our Certificate, and our bylaws, or our Bylaws.
The following summary describes material provisions of our
Certificate and our Bylaws, but it is not a complete description of
our Certificate, our Bylaws or any combination of the two. A copy
of our Certificate and our Bylaws are filed as exhibits to the
Offering Statement of which this Offering Circular is a
part.
Board of
Directors
Subject to our
stockholders’ rights to consent to certain transactions as
provided under the Delaware General Corporate Law, or DGCL, the
business and affairs of the Company are controlled by, and all
powers are exercised by, our board of directors, or our Board. Our
Board is required to consist of not less than three (3) nor more
than five (5) directors, the exact number to be set from time to
time by the Board. Our Board is comprised of Paul Ahlstrom, Neal
Harmon and Dalton Wright. Our Board is elected each year at the
annual meeting of stockholders, to hold office until the next
annual meeting and until their successors are elected and
qualified. Any newly created directorships resulting from an
increase in the authorized number of directors and any vacancies
occurring in our Board may be filled by the affirmative vote of the
remaining directors. A director may resign at any time, and the
stockholders may remove a director at any time, with or without
cause, by the affirmative vote of a majority of stockholders voting
in such decision.
The DGCL provides
that stockholders of a Delaware corporation are not entitled to the
right to cumulate votes in the election of directors unless its
certificate of incorporation provides otherwise. Our Certificate
does not provide for cumulative voting.
Our Board may
designate one or more committees. Such committees must consist of
one or more directors. Any such committee, to the extent permitted
by applicable law, will have and may exercise all the powers and
authority of the Board in the management of the business and
affairs of the Company.
Officers
The Board has the
authority to select the officers of the Company. The officers
consist of a Chairman of the Board, a Chief Executive Officer, or
CEO, a Secretary and a Treasurer. In addition, the Board may elect
one or more Vice Chairmen, President, Chief Financial Officer and
Vice Presidents, and such other offices as the Board may determine.
Two or more of the aforementioned offices may be held by the same
person. Our officers are: (i) Neal Harmon, CEO; (ii) Jeffrey
Harmon, Chief Marketing Officer; (iii) Elizabeth Ellis, Chief
Operating Officer, or COO; (iv) Patrick Reilly, Director of Finance
and Secretary; and (v) David Quinto, General Counsel.
At the first
meeting of the Board following the annual meeting of stockholders,
the Board appoints the officers, however, the Board may also
empower the CEO to appoint subordinate officers and agents for us.
Each officer so elected holds office until such officer’s
successor is elected and qualified or until the officer’s
earlier resignation or removal. Each officer is required to perform
such duties as are provided in the Bylaws or as the Board may from
time to time determine. Subject to the rights, if any,
of an officer under any employment agreement, any officer may be
removed, with our without cause, by the affirmative vote of a
majority of the Board. An officer may resign at any time
on giving notice to the Board. Our CEO is in charge of the general
affairs of the Company, subject to the oversight of the Board. In
case any officer is absent, or for any other reason the Board may
deem sufficient, the CEO or the Board may delegate the powers and
duties of such officer to any other officer or to any
director.
Fiduciary Duties and Indemnification
The Company shall
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative, or Proceeding (other than an action by or in the
right of the Company), by reason of the fact that he is or was a
director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against all liability and loss
suffered and expenses reasonably incurred by such person in
connection with any such Proceeding. The Company shall be required
to indemnify a person in connection with a Proceeding initiated by
such person only if the Proceeding was authorized by the
Board.
Company Stock
The Company may
issue up to 25,000,000 shares of capital stock, of which 25,000,000
shares will be common stock, par value $0.001 per share of which
21,250,000 shares have been designated as Class A Common Stock, and
3,750,000 have been designated as Class B Common
Stock.
Stockholder Rights
Voting
Class B Common
Stockholders will not be entitled to vote other than as required by
law. Only holders of Class A Common Stock are entitled
to one vote for each share of Class A Common Stock held of record
on all matters on which the holders of shares of Class A Common
Stock are entitled to vote.
Meetings
The annual meeting
of the stockholders shall be held at such date, time and place, if
any, as shall be determined by the Board and stated in the notice
of the meeting. Special meetings of the stockholders shall be
called pursuant to resolution approved by the Board, chairperson of
our Board, the Chief Executive Officer or President (in the absence
of a Chief Executive Officer) or by Class A Common Stockholders
holding shares of Class A Common Stock in the aggregate entitled to
cast votes not less than ten (10%) percent of the votes at that
meeting. The only business which may be conducted at a special
meeting shall be the matter or matters set forth in the notice of
such meeting.
Dividends and Liquidations
Upon any
liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, a Liquidation Event, the assets and funds
of the Corporation available for distribution to its stockholders,
if any, shall be distributed common stockholders, pro rata, then
outstanding.
Amendment
Class A Common
Stockholders may amend, alter or repeal our Certificate and our
Bylaws.
Description
of our Stockholders Agreement
Our Class B Common Stock is governed by our
Stockholders Agreement. The following summary describes material
provisions of our Stockholders Agreement, but it is not a complete
description of our Stockholders Agreement. A copy of our
Stockholders Agreement is filed as an exhibit to the Offering
Statement of which this Offering Circular is a
part.
Transfer
restrictions.
Investors in our
Class B Common Stock will be subject to the restrictions on
transfer set forth in our Stockholders Agreement. Under
the terms of our Stockholders Agreement, transfer of shares of our
Class B Common Stock will be subject to a right of first refusal
exercisable first by the Company, second, by our Class A Common
Stockholders, and, third, by our remaining Class B Common
Stockholders pursuant to the Stockholders
Agreement. Prior to any transfer or proposed transfer of
shares, the transferring shareholder, or the Seller, is required to
give written notice to us and to the remaining stockholders of such
proposed transfer. The certificates for our Class B Common
Stock will be legended to reflect these restrictions.
Restrictions Imposed by the USA PATRIOT Act and
Related Acts
In accordance with
the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or
the USA PATRIOT Act, the securities offered hereby may not be
offered, sold, transferred or delivered, directly or indirectly, to
any “unacceptable investor,” which means anyone who
is:
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a “designated
national,” “specially designated national,”
“specially designated terrorist,” “specially
designated global terrorist,” “foreign terrorist
organization,” or “blocked person” within the
definitions set forth in the Foreign Assets Control Regulations of
the United States, or U.S., Treasury Department;
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acting on behalf
of, or an entity owned or controlled by, any government against
whom the U.S. maintains economic sanctions or embargoes under the
Regulations of the U.S. Treasury Department;
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within the scope of
Executive Order 13224 — Blocking Property and
Prohibiting Transactions with Persons who Commit, Threaten to
Commit, or Support Terrorism, effective September 24,
2001;
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a person or entity
subject to additional restrictions imposed by any of the following
statutes or regulations and executive orders issued thereunder: the
Trading with the Enemy Act, the National Emergencies Act, the
Antiterrorism and Effective Death Penalty Act of 1996, the
International Emergency Economic Powers Act, the United Nations
Participation Act, the International Security and Development
Cooperation Act, the Nuclear Proliferation Prevention Act of 1994,
the Foreign Narcotics Kingpin Designation Act, the Iran and Libya
Sanctions Act of 1996, the Cuban Democracy Act, the Cuban Liberty
and Democratic Solidarity Act and the Foreign Operations, Export
Financing and Related Programs Appropriations Act or any other law
of similar import as to any non-U.S. country, as each such act
or law has been or may be amended, adjusted, modified or reviewed
from time to time; or
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designated or
blocked, associated or involved in terrorism, or subject to
restrictions under laws, regulations, or executive orders as may
apply in the future similar to those set forth above.
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ERISA
CONSIDERATIONS
An investment in us
by an employee benefit plan is subject to additional considerations
because the investments of these plans are subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA and
restrictions imposed by Section 4975 of the Code. For these
purposes the term “employee benefit plan” includes, but
is not limited to, qualified pension, profit-sharing and stock
bonus plans, Keogh plans, simplified employee pension plans and tax
deferred annuities or IRAs established or maintained by an employer
or employee organization. Among other things, consideration should
be given to:
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whether the
investment is prudent under Section 404(a)(1)(B) of
ERISA;
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whether in making
the investment, that plan will satisfy the diversification
requirements of Section 404(a)(1)(C) of ERISA;
and
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whether the
investment will result in recognition of unrelated business taxable
income by the plan and, if so, the potential after-tax investment
returns.
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The person with
investment discretion with respect to the assets of an employee
benefit plan, often called a fiduciary, should determine whether an
investment in us is authorized by the appropriate governing
instrument and is a proper investment for the plan.
Section 406 of
ERISA and Section 4975 of the Code prohibit employee benefit
plans from engaging in specified transactions involving “plan
assets” with parties that are “parties in
interest” under ERISA or “disqualified persons”
under the Code with respect to the plan.
In addition to
considering whether the purchase of Offered Shares is a prohibited
transaction, a fiduciary of an employee benefit plan should
consider whether the plan will, by investing in us, be deemed to
own an undivided interest in our assets, with the result that our
operations would be subject to the regulatory restrictions of
ERISA, including its prohibited transaction rules, as well as the
prohibited transaction rules of the Code.
The Department of
Labor regulations provide guidance with respect to whether the
assets of an entity in which employee benefit plans acquire equity
interests would be deemed “plan assets” under some
circumstances. Under these regulations, an entity’s assets
would not be considered to be “plan assets” if, among
other things:
(1) the equity
interests acquired by employee benefit plans are publicly offered
securities - i.e., the equity interests are widely held by 100 or
more investors independent of the issuer and each other, freely
transferable and registered under some provisions of the federal
securities laws;
(2) the entity is
an “operating company”—i.e., it is primarily
engaged in the production or sale of a product or service other
than the investment of capital either directly or through a
majority-owned subsidiary or subsidiaries; or
(3) there is no
significant investment by benefit plan investors, which is defined
to mean that less than 25% of the value of each class of equity
interest is held by the employee benefit plans referred to
above.
We do not intend to
limit investment by benefit plan investors in us because we
anticipate that we will qualify as an “operating
company”. If the Department of Labor were to take
the position that we are not an operating company and we had
significant investment by benefit plans, then we may become subject
to the regulatory restrictions of ERISA which would likely have a
material adverse effect on our business and the value of our common
stock.
Plan fiduciaries
contemplating a purchase of Offered Shares should consult with
their own counsel regarding the consequences under ERISA and the
Code in light of the serious penalties imposed on persons who
engage in prohibited transactions or other violations.
ACCEPTANCE
OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY OUR BOARD OR ANY OTHER PARTY RELATED TO US THAT
THIS INVESTMENT MEETS THE RELEVANT LEGAL REQUIREMENTS WITH RESPECT
TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THIS INVESTMENT IS
APPROPRIATE FOR ANY PARTICULAR PLAN. THE PERSON WITH
INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND
FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN US IN
LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN.
REPORTS
We will furnish the
following reports, statements, and tax information to each
stockholder:
Reporting Requirements under Tier II of
Regulation A. Following this Tier II, Regulation
A offering, we will be required to comply with certain ongoing
disclosure requirements under Rule 257 of Regulation
A. We will be required to file: an annual
report with the SEC on Form 1-K; a semi-annual report with the SEC
on Form 1-SA; current reports with the SEC on Form 1-U; and a
notice under cover of Form 1-Z. The necessity to file
current reports will be triggered by certain corporate events,
similar to the ongoing reporting obligation faced by issuers under
the Exchange Act, however the requirement to file a Form 1-U is
expected to be triggered by significantly fewer corporate events
than that of the Form 8-K. Parts I & II of Form 1-Z
will be filed by us if and when we decide to and are no longer
obligated to file and provide annual reports pursuant to the
requirements of Regulation A.
Annual Reports. As soon as
practicable, but in no event later than one hundred twenty (120)
days after the close of our fiscal year, ending December 31, our
Board will cause to be mailed or made available, by any reasonable
means, to each Stockholder as of a date selected by the Board, an
annual report containing financial statements of the Company for
such fiscal year, presented in accordance with GAAP, including a
balance sheet and statements of operations, company equity and cash
flows, with such statements having been audited by an accountant
selected by the Board. The Board shall be deemed to have
made a report available to each stockholder as required if it has
either (i) filed such report with the SEC via its Electronic Data
Gathering, Analysis and Retrieval, or EDGAR, system and such report
is publicly available on such system or (ii) made such report
available on any website maintained by the Company and available
for viewing by the stockholders.
Tax Information. On or before
June 30th of the year immediately following our fiscal year, which
is currently January 1st through December 31st, we will send to
each stockholder such tax information as shall be reasonably
required for federal and state income tax reporting
purposes.
Stock Certificates. We do not
anticipate issuing stock certificates representing Offered Shares
purchased in this offering to the Class B Common
Stockholders. However, we are permitted to issue stock
certificates and may do so at the request of our transfer
agent. The number of Offered Shares held by each Class B
Common Stockholder, will be maintained by us or our transfer agent
in the Company register.
INDEPENDENT
AUDITORS
The balance sheet
of VidAngel as of the fiscal years ended December 31, 2015 and
2014, and the statements of operations, stockholders’ equity
and cash flows of VidAngel for each of the two years ended December
31, 2015 and 2014, have been included in this Offering Circular and
have been audited by Tanner LLC, independent auditors, as stated in
their report appearing herin.
Index
to Financial Statements
VidAngel, Inc. Interim Financial Statements For
the Six Months Ended June 30, 2016 and 2015
|
|
|
|
Balance Sheets as
of June 30, 2016 and December 31, 2015 (Unaudited)
|
|
F-2
|
Statements of
Operations For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
|
|
F-3
|
Statements of
Stockholders’ Equity (Deficit) For the Six Months Ended June
30, 2016 And the Year Ended December 31, 2015
(Unaudited)
|
|
F-4
|
Statements of Cash
Flows For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
|
|
F-5
|
Notes to Financial
Statements For the Six Months Ended June 30, 2016
(Unaudited)
|
|
F-6
|
|
|
|
VidAngel, Inc.
|
|
|
|
|
|
Financial
Statements as of December 31, 2015 and 2014 for the Years Then
Ended
|
|
|
|
|
|
Balance Sheets as
of December 31, 2015 and December 31, 2014
|
|
F-13
|
Statements of
Operations For Years Ended December 31, 2015 and December 31,
2014
|
|
F-14
|
Statements of
Stockholders Equity For the Years Ended December 31, 2015 and
December 31, 2014
|
|
F-15
|
Statements of Cash
Flows For the Years Ended December 31, 2015 and December 31,
2014
|
|
F-16
|
Notes to Financial
Statements, December 31, 2015 and December 31, 2014
|
|
F-17
|
VIDANGEL, INC.
Interim Financial
Statements
As of And For the Six Months Ended June 30, 2016 and
2015
Notice to Reader
Our auditors have not reviewed the unaudited
interim financial statements for the six months ended June 30, 2016
and 2015. These financial statements and the notes thereto have
been prepared by the Company’s management in accordance with
accounting principles generally accepted in the United States of
America using management’s best judgments, consistent with
prior periods, and should be read in conjunction with the audited
financial statements for the years ended December 31, 2015 and
2014.
VIDANGEL, INC.
Balance Sheets
As of June 30, 2016 and December 31, 2015
(Unaudited)
|
|
June 30,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
1,480,525
|
|
|
$
|
1,910,880
|
|
Accounts
receivable
|
|
|
689
|
|
|
|
11,868
|
|
Prepaid expenses
and other
|
|
|
299,083
|
|
|
|
34,517
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
|
1,780,297
|
|
|
|
1,957,265
|
|
|
|
|
|
|
|
|
|
|
Movie
inventory
|
|
|
886,253
|
|
|
|
206,887
|
|
Property and
equipment, net
|
|
|
34,510
|
|
|
|
2,780
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,701,060
|
|
|
$
|
2,166,932
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
222,494
|
|
|
$
|
-
|
|
Accrued
expenses
|
|
|
35,789
|
|
|
|
86,530
|
|
Deferred
revenue
|
|
|
3,248,449
|
|
|
|
669,341
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
3,506,732
|
|
|
|
755,871
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit):
|
|
Common stock,
$0.001 par value, 25,000,000 shares
|
|
authorized;
18,008,908 and 18,003,908 shares issued
|
|
and outstanding,
respectively
|
|
|
18,009
|
|
|
|
18,004
|
|
Additional paid-in
capital
|
|
|
3,510,568
|
|
|
|
3,508,073
|
|
Accumulated
deficit
|
|
|
(4,334,249
|
)
|
|
|
(2,115,016
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders'
equity (deficit)
|
|
|
(805,672
|
)
|
|
|
1,411,061
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders' equity (deficit)
|
|
$
|
2,701,060
|
|
|
$
|
2,166,932
|
|
See accompanying
notes to financial statements.
VIDANGEL, INC.
Statements
of Operations
|
|
|
|
|
|
|
|
|
June 30 ,
2016
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
2,405,430
|
|
|
$
|
64,291
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
Cost of
revenues
|
|
|
815,284
|
|
|
|
51,544
|
|
Selling and
marketing
|
|
|
2,836,930
|
|
|
|
50,689
|
|
General and
administrative
|
|
|
629,120
|
|
|
|
125,086
|
|
Research and
development
|
|
|
353,904
|
|
|
|
40,777
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
4,635,238
|
|
|
|
268,096
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(2,229,808
|
)
|
|
|
(203,805
|
)
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
Interest
income
|
|
|
10,602
|
|
|
|
-
|
|
Interest
expense
|
|
|
(27
|
)
|
|
|
-
|
|
Other expense,
net
|
|
|
-
|
|
|
|
(8,508
|
)
|
|
|
|
|
|
|
|
|
|
Total other
expense, net
|
|
|
10,575
|
|
|
|
(8,508
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
|
|
(2,219,233
|
)
|
|
|
(212,313
|
)
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,219,233
|
)
|
|
$
|
(212,313
|
)
|
See accompanying
notes to financial statements.
VIDANGEL, INC.
Statements
of Stockholders’ Equity (Deficit)
For the Six Months Ended June 30, 2016 and the
Year Ended December 31, 2015 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
|
|
|
Total Stockholders' Equity (Deficit)
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
Accumulated Deficit
|
|
|
|
|
|
Members' Interest
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
January 1, 2015
|
|
$
|
-
|
|
|
|
13,411,257
|
|
|
$
|
13,411
|
|
|
$
|
584,766
|
|
|
$
|
(733,000
|
)
|
|
$
|
(134,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable and
related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued interest
converted to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
|
-
|
|
|
|
3,526,896
|
|
|
|
3,527
|
|
|
|
1,915,933
|
|
|
|
-
|
|
|
|
1,919,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance costs of
$5,000
|
|
|
-
|
|
|
|
1,065,755
|
|
|
|
1,066
|
|
|
|
993,934
|
|
|
|
-
|
|
|
|
995,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,098
|
|
|
|
-
|
|
|
|
12,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,342
|
|
|
|
-
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,382,016
|
)
|
|
|
(1,382,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2015
|
|
|
-
|
|
|
|
18,003,908
|
|
|
|
18,004
|
|
|
|
3,508,073
|
|
|
|
(2,115,016
|
)
|
|
|
1,411,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock
options
|
|
|
-
|
|
|
|
5,000
|
|
|
|
5
|
|
|
|
2,495
|
|
|
|
-
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,219,233
|
)
|
|
|
(2,219,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June
30, 2016
|
|
$
|
-
|
|
|
|
18,008,908
|
|
|
$
|
18,009
|
|
|
$
|
3,510,568
|
|
|
$
|
(4,334,249
|
)
|
|
$
|
(805,672
|
)
|
See accompanying
notes to financial statements.
VIDANGEL, INC.
Statements
of Cash Flows
For the Six Months Ended June 30, 2016 and 2015
(Unaudited)
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,219,233
|
)
|
|
$
|
(212,313
|
)
|
Adjustments to
reconcile net loss to net cash
|
|
|
|
|
|
used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
5,795
|
|
|
|
1,047
|
|
Decrease (increase)
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
11,179
|
|
|
|
-
|
|
Prepaid expenses
and other assets
|
|
|
(264,566
|
)
|
|
|
7,131
|
|
Movie
inventory
|
|
|
(679,366
|
)
|
|
|
(31,736
|
)
|
Increase (decrease)
in:
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expenses
|
|
|
171,753
|
|
|
|
(25,091
|
)
|
Deferred
revenue
|
|
|
2,579,108
|
|
|
|
92,474
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
operating activities
|
|
|
(395,330
|
)
|
|
|
(168,488
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
|
(37,525
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from
convertible notes payable
|
|
|
-
|
|
|
|
335,417
|
|
Exercise of stock
options
|
|
|
2,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
by financing activities
|
|
|
2,500
|
|
|
|
335,417
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
and cash equivalents
|
|
|
(430,355
|
)
|
|
|
166,928
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of year
|
|
|
1,910,880
|
|
|
|
172,216
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
1,480,525
|
|
|
$
|
339,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
27
|
|
|
$
|
-
|
|
See accompanying
notes to financial statements.
VIDANGEL, INC.
Notes to Financial
Statements
For
the Six Months Ended June 30, 2016 (Unaudited)
The interim
financial information presented should be read in conjunction with
the entity’s latest annual audited financial
statements.
1. Basis of Presentation
|
|
The accompanying
financial statements have been prepared by the Company, without
audit, and reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the
interim periods presented. The financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim
financial reporting. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such rules and
regulations. It is the opinion of management that the financial
statements reflect all adjustments which are necessary for a fair
presentation of the financial position, results of operations and
cash flows for the interim periods presented. The results of
operations for the six months ended June 30, 2016 are not
necessarily indicative of the results expected for the entire
fiscal year.
|
2. Description
of
Organization
and Summary
of Significant
Accounting
Policies
|
|
Organization
VidAngel, Inc. (the
Company) was incorporated on November 13, 2013 as a Utah limited
liability Company. On February 7, 2014, the Company converted to a
Delaware corporation. The Company resells Blu-Ray and DVD discs to
its customers. The Company includes access to proprietary content
filtering technology as part of the transaction. With the purchase
of the disc, and access to the technology, the customer then has
the ability to stream a customized version of the disc to their
location for viewing on many of today’s most popular devices.
After they are finished with a disc, the customer has the option to
sell the disc back to the Company at a reduced price. The sell-back
price varies depending on the type (Blu-Ray or DVD) of the disc,
and the number of days the customer owned the disc.
|
|
|
Use of
Estimates
The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates. Key management estimates include the
estimated life of the customer’s ownership of a disc,
valuation allowances for net deferred income tax assets, and
valuation of stock-based compensation.
|
VIDANGEL, INC.
Notes to Financial
Statements
Continued
For the Six Months Ended June 30, 2016
(Unaudited)
2. Description
of
Organization
and Summary
of Significant
|
|
Cash and Cash
Equivalents
The Company
considers all highly liquid investments with original maturities to
the Company of three months or less to be cash
equivalents. As of June 30, 2016 these cash equivalents
consisted of money market accounts.
|
Accounting
Policies Continued
|
|
Movie
Inventory
Movie inventory
includes DVD and Blu-Ray discs purchased by the Company for resell,
not in excess of realizable value. Movie inventory is recorded at
the lower of cost or market, with cost being determined on a first
in, first out method. The Company periodically reviews inventories
for excess supply, obsolescence, and valuations above estimated
realizable amounts, and provides a reserve to cover these items.
Management determined that no allowance for obsolete inventory was
necessary as of June 30, 2016.
|
|
|
Property and
Equipment
Property and
equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using
the straight-line method over the estimated economic useful lives
of the assets or over the related lease terms (if shorter) as
follows:
|
|
|
|
Office and computer equipment
|
3 years
|
|
|
|
Leasehold improvements
|
1 year
|
|
|
Expenditures that
materially increase values or capacities or extend useful lives of
property and equipment are capitalized. Routine maintenance,
repairs, and renewal costs are expensed as incurred. Upon sale or
other retirement of depreciable property, the cost and accumulated
depreciation and amortization are removed from the related accounts
and any gain or loss is reflected in the statement of
operations.
|
|
|
Impairment of
Long-Lived Assets
The Company reviews
its property and equipment, and other long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may be
impaired. If it is determined that the estimated
undiscounted future cash flows are not sufficient to recover the
carrying value of the asset, an impairment loss is recognized in
the statements of operations for the difference between the
carrying value and the fair value of the asset. Management does not
consider any of the Company’s assets to be impaired as of
June 30, 2016.
|
VIDANGEL, INC.
Notes to Financial
Statements
Continued
For the Six Months Ended June 30, 2016
(Unaudited)
2. Description
of
Organization
and Summary
of Significant
Accounting
Policies
Continued
|
|
Revenue
Recognition
The Company resells
Blu-Ray and DVD discs to its customers for a fixed price of
$20. Upon purchase of the disc, the customer agrees to
have the Company retain physical custody of the purchased disc
until such a time that the customer either requests to have the
disc shipped to them directly, or the customer decides to sell the
disc back to the Company at an agreed upon price, which reduces $1
per day for DVD discs, and $2 per day for Blu-Ray
discs. During the time that the customer owns the disc,
the Company gives the customer access to a patented video streaming
technology that permits the customer to direct their individual
viewing experience by allowing them to remove certain audio or
video segments that contain material that may be considered
objectionable by a member of the private
household. Access to this technology is available during
the entire period of which the customer owns the disc purchased
from the Company, and is extinguished upon the customer selling the
disc back to the Company. Revenue is recognized when all of the
following criteria have been met: (1) persuasive evidence of an
arrangement exists, (2) services have been rendered, (3) the
Company’s price to the buyer is fixed or determinable, and
(4) collectability is reasonably assured.
The Company
separates its revenue transactions into two pools based on length
of time of disc ownership – short-term and long-term
ownership of discs.
Transactions that
have a short-term ownership of a disc exhibit a very short
ownership time period, usually on average selling the disc back to
the Company within 5 hours. For these transactions, the
Company recognizes revenue on a daily basis, in an amount equal to
the daily reduction in the sell-back price from the customer to the
Company ($1 or $2 per day), and ceasing upon the customer’s
sell-back of the disc. Approximately 99.5% of the
Company’s transactions are short-term.
Transactions that
have a long-term ownership exhibit a longer period of time of
ownership – in excess of 20 days. A majority of the
customers entering long-term transactions appear to be building a
library of movie titles, and may own the associated discs
indefinitely. The Company estimates the expected period of
the long-term transactions, and recognizes revenue based on a
subscription model, or ratably over the expected term.
Cash
received from customers prior to recognition of revenue is recorded
as deferred revenue.
|
|
|
Advertising
Advertising costs
are expensed as incurred. Advertising expenses totaled
$2,353,396 for the six months ended June 30, 2016.
|
VIDANGEL, INC.
Notes to Financial
Statements
Continued
For the Six Months Ended June 30, 2016
(Unaudited)
3. Commitments
and
Contingencies
|
|
Litigation
The Company is
involved in legal proceedings from time to time arising in the
normal course of business. The Company has received, and may
in the future continue to receive, claims from third
parties. Management, after consultation with legal
counsel, believes that the outcome of these proceedings may have a
material impact on the Company’s financial position, results
of operations, or liquidity.
|
|
|
Current and future
litigation may be necessary to defend the Company and its customers
by determining the scope, enforceability, and validity of these
claims. The results of any current or future complex litigation
matters cannot be predicted with certainty, and regardless of the
outcome, litigation can have an adverse impact because of defense
and settlement costs, distraction of management resources, and
other factors. Additionally, these matters may change in the future
as the litigation and factual discovery unfolds. Legal fees are
expensed as incurred. Insurance recoveries associated with legal
costs incurred are recorded when they are deemed probable of
recovery.
|
|
|
The Company
assesses whether there is a reasonable possibility that a loss, or
additional losses beyond those already accrued, may be incurred
(“Material Loss”). If there is a reasonable possibility
that a Material Loss may be incurred, the Company discloses an
estimate or range of the amount of loss, either individually or in
the aggregate, or discloses that an estimate of loss cannot be
made. If a Material Loss occurs due to an unfavorable outcome in
any legal matter, this may have an adverse effect on the financial
position, results of operations, and liquidity of the Company. The
Company records a provision for each liability when determined to
probable, and the amount of the loss may be reasonably estimated.
These provisions are reviewed annually and adjusted as additional
information becomes available.
|
|
|
The Company is
involved in various litigation matters and believes that any
reasonably possible adverse outcome of these matters could
potentially be material, either individually or in the aggregate,
to the Company’s financial position, results of operations
and liquidity. As of the date of the independent auditors’
report management has determined an adverse outcome is not yet
probable or estimable, and has not accrued any estimated losses
related to these matters. Expectations may change in the
future as the litigation and events related thereto unfold. For the
six months ended June 30, 2016 the Company incurred $99,950 in
legal and litigation costs, which are included in general and
administrative expenses in the accompanying statements of
operations.
|
VIDANGEL, INC.
Notes to Financial
Statements
Continued
For the Six Months Ended June 30, 2016
(Unaudited)
4. Related
Party
Transactions
|
|
The Company has a
marketing services contract with an entity owned by one of the
Company’s stockholders. For the six months
ended June 30, 2016, the Company incurred expenses of $2,166,989,
to the related party for marketing services.
|
5.
Subsequent
Events
|
|
Litigation
As described more
fully in Note 3, the Company is subject to claims and litigation
that arise in the normal course of business. Management reviews
those claims and believes none of them meet the standard for
accrual or disclosure. In August 2016, a motion
for preliminary injunction was filed in District Court in attempt
to stop the operations of the Company while the litigation is
resolved. The initial complaint was filed in June 2016, and was
brought against the Company for infringing on exclusive rights
under the Copyright Act and for violating the Digital Millennium
Copyright Act. The Company believes its legal position
has merit, and is vigorously defending the matter. The
potential loss associated with the lawsuit is not estimable and the
probability of the loss is unknown.
|
|
|
Employment
Agreement
On July 21, 2016,
the Company hired an attorney as in-house general counsel.
The associated employment agreement includes certain common stock
option modifications, severance terms in certain circumstances, and
the establishment of a cash collateral account.
|
VIDANGEL,
INC.
Financial
Statements as of December 31, 2015 and 2014
and
For the Years Then Ended
Together
with Independent Auditors’ Report
INDEPENDENT
AUDITORS’ REPORT
To
the Board of Directors and Management of
VidAngel,
Inc.
We have audited the
accompanying financial statements of VidAngel, Inc. (the Company),
which comprise the balance sheets as of December 31, 2015 and 2014,
the related statements of operations, stockholders’ equity,
and cash flows for the years then ended, and the related notes to
financial statements.
Management’s
Responsibility for the Financial Statements
Management is
responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
error or fraud.
Auditors’
Responsibility
Our responsibility
is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free from material misstatement.
An audit involves
performing procedures to obtain audit evidence about the amounts
and disclosures in the financial statements. The procedures
selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to error or fraud. In making those risk
assessments, the auditors consider internal control relevant to the
entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the
financial statements.
We believe that the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the
financial statements referred to above present fairly, in all
material respects, the financial position of VidAngel, Inc. as of
December 31, 2015 and 2014, and the results of its operations and
its cash flows for the years then ended, in accordance with
accounting principles generally accepted in the United States of
America.
/s/ Tanner
LLC
Salt Lake City,
Utah
July 29,
2016
VIDANGEL, INC.
Balance
Sheets
As
of December 31,
|
|
2015
|
|
|
2014
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
1,910,880
|
|
|
$
|
172,216
|
|
Accounts
receivable
|
|
|
11,868
|
|
|
|
-
|
|
Prepaid expenses
and other
|
|
|
34,517
|
|
|
|
20,013
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
|
1,957,265
|
|
|
|
192,229
|
|
|
|
|
|
|
|
|
|
|
Movie
inventory
|
|
|
206,887
|
|
|
|
6,234
|
|
Property and
equipment, net
|
|
|
2,780
|
|
|
|
4,015
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,166,932
|
|
|
$
|
202,478
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
-
|
|
|
$
|
65,522
|
|
Accrued
expenses
|
|
|
86,530
|
|
|
|
4,301
|
|
Deferred
revenue
|
|
|
669,341
|
|
|
|
395
|
|
Convertible notes
payable
|
|
|
-
|
|
|
|
267,083
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
755,871
|
|
|
|
337,301
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock,
$0.001 par value, 25,000,000 and
|
|
|
|
|
|
|
|
|
15,000,000 shares
authorized, respectively; 18,003,908 and
|
|
|
|
|
|
|
|
|
13,411,257 shares
issued and outstanding, respectively
|
|
|
18,004
|
|
|
|
13,411
|
|
Additional paid-in
capital
|
|
|
3,508,073
|
|
|
|
584,766
|
|
Accumulated
deficit
|
|
|
(2,115,016
|
)
|
|
|
(733,000
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders'
equity (deficit)
|
|
|
1,411,061
|
|
|
|
(134,823
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders' equity (deficit)
|
|
$
|
2,166,932
|
|
|
$
|
202,478
|
|
See accompanying
notes to financial statements.
|
F-13
|
VIDANGEL, INC.
Statements
of Operations
Years
Ended December 31,
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
415,517
|
|
|
$
|
19,265
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
|
256,831
|
|
|
|
93,232
|
|
Selling and
marketing
|
|
|
699,773
|
|
|
|
210,167
|
|
General and
administrative
|
|
|
468,396
|
|
|
|
452,407
|
|
Research and
development
|
|
|
310,754
|
|
|
|
35,990
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
1,735,754
|
|
|
|
791,796
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(1,320,237
|
)
|
|
|
(772,531
|
)
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(52,435
|
)
|
|
|
(2,047
|
)
|
Other expense,
net
|
|
|
(9,344
|
)
|
|
|
(3,238
|
)
|
|
|
|
|
|
|
|
|
|
Total other
expense, net
|
|
|
(61,779
|
)
|
|
|
(5,285
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
|
|
(1,382,016
|
)
|
|
|
(777,816
|
)
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,382,016
|
)
|
|
$
|
(777,916
|
)
|
See accompanying
notes to financial statements.
|
F-14
|
VIDANGEL, INC.
Statements
of Stockholders’ Equity
For
the Years Ended December 31, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
|
|
|
|
Total
Stockholders'
Equity
(Deficit)
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
Accumulated
Deficit
|
|
|
|
|
|
Members'
Interest
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
January 1, 2014
|
|
$
|
26,343
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(44,916
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(733,000
|
)
|
|
|
(777,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion from LLC
to C-Corp
|
|
|
18,573
|
|
|
|
10,000,000
|
|
|
|
10,000
|
|
|
|
(28,573
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance costs of
$3,000
|
|
|
-
|
|
|
|
3,411,257
|
|
|
|
3,311
|
|
|
|
593,689
|
|
|
|
-
|
|
|
|
597,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock for
services
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
|
|
17,900
|
|
|
|
-
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock- based
compensation
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750
|
|
|
|
-
|
|
|
|
1,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2014
|
|
|
-
|
|
|
|
13,411,257
|
|
|
|
13,411
|
|
|
|
584,766
|
|
|
|
(733,000
|
)
|
|
|
(134,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
payable and related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued interest
converted to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stock
|
|
|
-
|
|
|
|
3,526,896
|
|
|
|
3,527
|
|
|
|
1,915,933
|
|
|
|
-
|
|
|
|
1,919,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance costs of
$5,000
|
|
|
-
|
|
|
|
1,065,755
|
|
|
|
1,066
|
|
|
|
993,934
|
|
|
|
-
|
|
|
|
995,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock- based
compensation
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,098
|
|
|
|
-
|
|
|
|
12,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
beneficial conversion
feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,342
|
|
|
|
-
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,382,016
|
)
|
|
|
(1,382,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2015
|
|
$
|
-
|
|
|
|
18,003,908
|
|
|
$
|
18,004
|
|
|
$
|
3,508,073
|
|
|
$
|
(2,115,016
|
)
|
|
$
|
1,411,061
|
|
See accompanying
notes to financial statements.
|
F-15
|
VIDANGEL, INC.
Statements
of Cash Flows
For
the Years Ended December 31,
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,382,016
|
)
|
|
$
|
(777,916
|
)
|
Adjustments to
reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
2,879
|
|
|
|
2,095
|
|
Contingent
beneficial conversion feature
|
|
|
1,342
|
|
|
|
-
|
|
Issuance of common
stock for services
|
|
|
-
|
|
|
|
18,000
|
|
Stock-based
compensation expense
|
|
|
12,098
|
|
|
|
1,750
|
|
Loss on sale of
assets
|
|
|
1,555
|
|
|
|
-
|
|
Decrease (increase)
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(11,868
|
)
|
|
|
-
|
|
Prepaid expenses
and other assets
|
|
|
(14,504
|
)
|
|
|
(18,773
|
)
|
Movie
inventory
|
|
|
(200,653
|
)
|
|
|
(6,234
|
)
|
Increase (decrease)
in:
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expenses
|
|
|
71,167
|
|
|
|
49,721
|
|
Deferred
revenue
|
|
|
668,946
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
operating activities
|
|
|
(851,054
|
)
|
|
|
(730,962
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
|
(3,199
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of common stock, net
|
|
|
995,000
|
|
|
|
597,000
|
|
Proceeds from
convertible notes payable
|
|
|
1,597,917
|
|
|
|
267,083
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
by financing activities
|
|
|
2,592,917
|
|
|
|
864,083
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
and cash equivalents
|
|
|
1,738,664
|
|
|
|
133,121
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of year
|
|
|
172,216
|
|
|
|
39,095
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of year
|
|
$
|
1,910,880
|
|
|
$
|
172,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and
|
|
|
|
|
|
|
|
|
financing
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
payable and related accrued interest
|
|
|
|
|
|
|
|
|
converted to common
stock
|
|
$
|
1,919,460
|
|
|
$
|
-
|
|
Conversion of LLC
to C-Corp
|
|
|
-
|
|
|
|
28,573
|
|
See accompanying
notes to financial statements.
|
F-16
|
VIDANGEL,
INC.
Notes
to Financial Statements
December
31, 2015 and 2014
1.
Description of
Organization
and Summary
of Significant
Accounting
Policies
|
|
Organization
VidAngel, Inc. (the
Company) was incorporated on November 13, 2013 as a Utah limited
liability Company. On February 7, 2014, the Company
converted to a Delaware corporation. The Company resells
Blu-Ray and DVD discs to its customers. The
Company includes access to proprietary content filtering technology
as part of the transaction. With the purchase of the
disc, and access to the technology, the customer then has the
ability to stream a customized version of the disc to their
location for viewing on many of today’s most popular devices.
After they are finished with a disc, the customer has the option to
sell the disc back to the Company at a reduced price. The sell-back
price varies depending on the type (Blu-Ray or DVD) of the disc,
and the number of days the customer owned the disc.
|
|
|
Use of Estimates
The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates. Key management estimates include the
estimated life of the customer’s ownership of a disc,
valuation allowances for net deferred income tax assets, and
valuation of stock-based compensation.
|
|
|
Concentrations of Credit Risk
The Company
maintains its cash and cash equivalents in bank deposit accounts
which, at times, exceed federally insured limits. At
December 31, 2015 and 2014, the Company had approximately
$1,660,000 and $19,000 of cash and cash equivalents that exceeded
federally insured limits. To date, the Company has not experienced
a loss or lack of access to its invested cash and cash equivalents;
however, no assurance can be provided that access to the
Company’s invested cash and cash equivalents will not be
impacted by adverse conditions in the financial
markets.
|
|
|
Major vendors are
defined as those vendors having expenditures made by the Company
which exceed 10% of the Company’s total cost of
revenues. Concentrations of vendors were as follows for
the year ended December 31, 2015:
|
|
|
Vendor
A
69%
Vendor
B
18%
|
|
|
There were no
vendor concentrations for the year ended December 31,
2014.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December
31, 2015 and 2014
1. Description
of
Organization
and Summary
of Significant
Accounting
Policies
Continued
|
|
Cash and Cash Equivalents
The Company
considers all highly liquid investments with original maturities to
the Company of three months or less to be cash
equivalents. As of December 31, 2015 and 2014, these
cash equivalents consisted of money market accounts.
|
|
|
Movie Inventory
Movie inventory
includes DVD and Blu-Ray discs purchased by the Company for resell,
not in excess of realizable value. Movie inventory is
recorded at the lower of cost or market, with cost being determined
on a first in, first out method. The Company
periodically reviews inventories for excess supply, obsolescence,
and valuations above estimated realizable amounts, and provides a
reserve to cover these items. Management determined that
no allowance for obsolete inventory was necessary as of December
31, 2015 and 2014.
|
|
|
Property and Equipment
Property and
equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated
economic useful lives of the assets or over the related lease terms
(if shorter) as follows:
|
|
|
Office and
computer
equipment
3 years
Leasehold
improvements
1 year
|
|
|
Expenditures that
materially increase values or capacities or extend useful lives of
property and equipment are capitalized. Routine maintenance,
repairs, and renewal costs are expensed as
incurred. Upon sale or other retirement of depreciable
property, the cost and accumulated depreciation and amortization
are removed from the related accounts and any gain or loss is
reflected in the statement of operations.
|
|
|
Impairment of Long-Lived Assets
The Company reviews
its property and equipment, and other long-lived assets
for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may be
impaired. If it is determined that the estimated
undiscounted future cash flows are not sufficient to recover the
carrying value of the asset, an impairment loss is recognized in
the statements of operations for the difference between the
carrying value and the fair value of the asset. Management does not
consider any of the Company’s assets to be impaired as of
December 31, 2015 and 2014.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December
31, 2015 and 2014
1. Description
of
Organization
and Summary
of Significant
Accounting
Policies
Continued
|
|
Revenue Recognition
The Company resells
Blu-Ray and DVD discs to its customers for a fixed price of
$20. Upon purchase of the disc, the customer agrees to
have the Company retain physical custody of the purchased disc
until such a time that the customer either requests to have the
disc shipped to them directly, or the customer decides to sell the
disc back to the Company at an agreed upon price, which reduces $1
per day for DVD discs, and $2 per day for Blu-Ray
discs. During the time that the customer owns the disc,
the Company gives the customer access to a patented video streaming
technology that permits the customer to direct their individual
viewing experience by allowing them to remove certain audio or
video segments that contain material that may be considered
objectionable by a member of the private
household. Access to this technology is available during
the entire period of which the customer owns the disc purchased
from the Company, and is extinguished upon the customer selling the
disc back to the Company. Revenue is recognized when all of the
following criteria have been met: (1) persuasive evidence of an
arrangement exists, (2) services have been rendered, (3) the
Company’s price to the buyer is fixed or determinable, and
(4) collectability is reasonably assured.
The Company
separates its revenue transactions into two pools based on length
of time of disc ownership – short-term and long-term
ownership of discs.
Transactions that
have a short-term ownership of a disc exhibit a very short
ownership time period, usually on average selling the disc back to
the Company within 5 hours. For these transactions, the
Company recognizes revenue on a daily basis, in an amount equal to
the daily reduction in the sell-back price from the customer to the
Company ($1 or $2 per day), and ceasing upon the customer’s
sell-back of the disc. Approximately 99.65% of the
Company’s transactions are short-term.
Transactions that
have a long-term ownership exhibit a longer period of time of
ownership – in excess of 20 days. A majority of the
customers entering long-term transactions appear to be building a
library of movie titles, and may own the associated discs
indefinitely. The Company estimates the expected period of
the long-term transactions, and recognizes revenue based on a
subscription model, or ratably over the expected term.
Cash received from
customers prior to recognition of revenue is recorded as deferred
revenue.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December
31, 2015 and 2014
1.
Description of
Organization
and Summary
of Significant
Accounting
Policies
Continued
|
|
Stock-Based Compensation
Stock-based
payments made to employees, including grants of employee stock
options, are measured using a fair value-based
method. The related expense is recorded in the
statements of operations over the period of service.
Advertising
Advertising costs
are expensed as incurred. Advertising expenses totaled
$430,084 and $67,044 for the years ended December 31, 2015 and
2014, respectively.
Income Taxes
Income taxes are
provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the tax
bases of assets and liabilities. The deferred taxes represent the
future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred income tax assets are reviewed
periodically for recoverability, and valuation allowances are
provided when it is more likely than not that some or all of the
deferred income tax assets may not be realized.
|
|
|
The Company
believes that it has appropriate support for the income tax
positions taken and to be taken on its tax returns and that its
accruals for tax liabilities are adequate for all open tax years
based on an assessment of many factors including experience and
interpretations of tax laws applied to the facts of each
matter. The Company files income tax returns in the U.S.
federal jurisdiction and certain state jurisdictions. With
few exceptions, the Company is subject to U.S. federal and state
and local income tax examinations by tax authorities for years
ending December 2015, 2014, and 2013.
|
|
|
Subsequent Events
Management has
evaluated events and transactions for potential recognition or
disclosure through July 29, 2016, which is the day the financial
statements were available to be issued.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December 31, 2015 and 2014
2.
Property and
Equipment
|
|
Property and
equipment consisted of the following as of December
31:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
$
|
4,730
|
|
|
$
|
6,285
|
|
Leasehold
improvements
|
|
|
3,199
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,929
|
|
|
|
6,285
|
|
Less accumulated
depreciation and amortization
|
|
|
(5,149
|
)
|
|
|
(2,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,780
|
|
|
$
|
4,015
|
|
|
|
Depreciation and
amortization expense on property and equipment for the years ended
December 31, 2015 and 2014 was $2,879 and $2,095,
respectively.
|
3. Convertible
Notes
Payables
|
|
Convertible notes
payable were due various investors with an annual interest rate
equal to 7%, and a maturity date of November 7,
2015. The notes were secured by substantially all of the
assets of the Company. The notes were converted into shares of
common stock during 2015. Certain notes raised in June
2015 were converted into shares of common stock pursuant to a
contingent beneficial conversion feature, totaling
$1,342. The balance of the convertible notes payable as
of December 31, 2015 and 2014 was $0 and $267,083,
respectively.
|
4. Commitments
and
Contingencies
|
|
Litigation
The Company is
involved in legal proceedings from time to time arising in the
normal course of business. The Company has received, and may
in the future continue to receive, claims from third
parties. Management, after consultation with legal
counsel, believes that the outcome of these proceedings may have a
material impact on the Company’s financial position, results
of operations, or liquidity.
|
|
|
Current and future
litigation may be necessary to defend the Company and its customers
by determining the scope, enforceability, and validity of these
claims. The results of any current or future complex litigation
matters cannot be predicted with certainty, and regardless of the
outcome, litigation can have an adverse impact because of defense
and settlement costs, distraction of management resources, and
other factors. Additionally, these matters may change in the future
as the litigation and factual discovery unfolds. Legal fees are
expensed as incurred. Insurance recoveries associated with legal
costs incurred are recorded when they are deemed probable of
recovery.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December 31, 2015 and 2014
4. Commitments
and
Contingencies
Continued
|
|
Litigation - continued
The Company
assesses whether there is a reasonable possibility that a loss, or
additional losses beyond those already accrued, may be incurred
(“Material Loss”). If there is a reasonable possibility
that a Material Loss may be incurred, the Company discloses an
estimate or range of the amount of loss, either individually or in
the aggregate, or discloses that an estimate of loss cannot be
made. If a Material Loss occurs due to an unfavorable outcome in
any legal matter, this may have an adverse effect on the financial
position, results of operations, and liquidity of the Company. The
Company records a provision for each liability when determined to
probable, and the amount of the loss may be reasonably estimated.
These provisions are reviewed annually and adjusted as additional
information becomes available.
|
|
|
The Company is
involved in various litigation matters and believes that any
reasonably possible adverse outcome of these matters could
potentially be material, either individually or in the aggregate,
to the Company’s financial position, results of operations
and liquidity. As of the date of the independent auditors’
report management has determined an adverse outcome is not yet
probable or estimable, and has not accrued any estimated losses
related to these matters. Expectations may change in the
future as the litigation and events related thereto unfold. During
2015 and 2014 the Company incurred $38,906 and $262,394,
respectively, in legal and litigation costs, which are included in
general and administrative expenses in the accompanying statements
of operations. Also see Note 8.
|
|
Operating Leases
The Company leases
office facilities under a month-to-month operating lease. Rental
expense under operating leases was $9,545 and $5,000 for the years
ended December 31, 2015 and 2014, respectively.
|
5. Stock
Options
|
|
Stock Options
The Company’s
2014 Stock Incentive Plan (the Plan), originally approved on
February 27, 2014, provides for the grant of incentive stock
options, nonqualified options, stock appreciation rights, and
shares of restricted stock. Under the terms of the Plan, there
are 1,034,544 shares of common stock available for grant to
employees, officers, directors and consultants. The Board of
Directors determines the terms of each grant. Generally, the
options have a vesting period of 4 years with 1/48th vesting on each
monthly anniversary of the vesting reference date over the
four-year period, thereafter, and have a contractual life of ten
(10) years. Certain stock options have provisions to
accelerate vesting upon the occurrence of certain
events. There are 299,733 and 915,233 shares available for
grant under the Plan as of December 31, 2015 and 2014,
respectively.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December 31, 2015 and 2014
5. Stock
Options
Continued
|
|
Stock-based
compensation expense for the years ended December 31, 2015 and 2014
was $12,098 and $1,750, respectively. As of December 31,
2015 and 2014, the Company had $94,556 and $106,654, respectively,
of unrecognized stock-based compensation costs related to
non-vested awards that will be recognized over a weighted-average
period of 4 years.
|
|
|
The following sets
forth the outstanding common stock options and related activity for
the years ended December 31, 2015 and 2014:
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
|
|
|
|
|
|
|
Outstanding as of
January 1, 2014
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
188,813
|
|
|
|
0.186
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(69,502
|
)
|
|
|
0.186
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2014
|
|
|
119,311
|
|
|
|
0.190
|
|
Granted
|
|
|
625,500
|
|
|
|
0.500
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(10,000
|
)
|
|
|
0.186
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
December 31, 2015
|
|
|
734,811
|
|
|
|
0.450
|
|
|
|
The following
summarizes information about stock options outstanding as of
December 31, 2015 and 2014:
|
2015
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Options
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,311
|
|
|
|
8.39
|
|
|
$
|
0.18
|
|
|
|
69,690
|
|
|
$
|
0.18
|
|
|
10,000
|
|
|
|
8.85
|
|
|
|
0.30
|
|
|
|
3,900
|
|
|
|
0.30
|
|
|
625,500
|
|
|
|
9.45
|
|
|
|
0.50
|
|
|
|
60,790
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734,811
|
|
|
|
|
|
|
|
|
|
|
|
134,380
|
|
|
|
|
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December 31, 2015 and 2014
5.
Stock Options
Continued
2014
|
|
Number
of Options Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Options
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,311
|
|
|
|
9.38
|
|
|
$
|
0.18
|
|
|
|
63,062
|
|
|
$
|
0.18
|
|
|
10,000
|
|
|
|
9.85
|
|
|
|
0.30
|
|
|
|
500
|
|
|
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,311
|
|
|
|
|
|
|
|
|
|
|
|
63,562
|
|
|
|
|
|
|
|
The fair value of
each stock-based award granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Risk-free interest
rate
|
|
|
1.31 – 1.69
|
%
|
|
|
1.49 – 1.68
|
%
|
Expected stock
price volatility
|
|
|
50
|
%
|
|
|
50
|
%
|
Expected dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life of
options
|
|
5
years
|
|
|
5
years
|
|
|
|
As of December 31,
2015 and 2014, the aggregate intrinsic value of options outstanding
was $268,919 and $0, respectively. As of December 31,
2015 and 2014, the aggregate intrinsic value of options outstanding
and exercisable was $52,644 and $0, respectively.
|
|
|
Expected option
lives and volatilities were based on historical data of the Company
and comparable companies in the industry. The risk free interest
rate was calculated using similar rates published by the Federal
Reserve. The Company has no plans to declare any future
dividends.
|
6. Related
Party
Transactions
|
|
The Company has a
marketing services contract with an entity owned by one of the
Company’s stockholders. During 2015 and
2014, the Company incurred expenses of $375,870 and $0,
respectively, to the related party for marketing
services.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December 31, 2015 and 2014
7. Income
Taxes
|
|
The provision
(benefit) for income taxes differs from the amount computed at
federal statutory rates as follows:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Federal income tax
at statutory rates
|
|
$
|
(469,919
|
)
|
|
$
|
(264,457
|
)
|
State income tax at
statutory rates
|
|
|
(45,064
|
)
|
|
|
(25,526
|
)
|
Change in valuation
allowance
|
|
|
512,083
|
|
|
|
288,557
|
|
Other
|
|
|
2,900
|
|
|
|
1,526
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
–
|
|
|
$
|
100
|
|
|
|
Significant
components of the Company’s net deferred income tax assets
(liabilities) are as follows as of December 31:
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Accruals and
reserves
|
|
$
|
264,401
|
|
|
$
|
19,410
|
|
Valuation
allowance
|
|
|
(264,401
|
)
|
|
|
(19,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
Net operating loss
carryforwards
|
|
$
|
542,350
|
|
|
$
|
276,004
|
|
Depreciation and
amortization
|
|
|
374
|
|
|
|
(372
|
)
|
Valuation
allowance
|
|
|
(542,724
|
)
|
|
|
(275,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
As of December 31,
2015, the Company has net operating loss (NOL) carryforwards
available to offset future taxable income, if any, of approximately
$1,454,000, which will begin to expire in 2034.
|
|
|
The utilization of
the NOL carryforwards is subject to annual limitations under
Section 382 of the Internal Revenue Code. Section 382
imposes limitations on a corporation’s ability to utilize its
NOL carryforwards if it experiences an “ownership
change.” In general terms, an ownership change
results from transactions increasing the ownership of certain
stockholders in the stock of a corporation by more than 50% over a
three-year period.
|
|
|
The Company has
concluded that there are no significant uncertain tax positions
requiring disclosure, and there are no material amounts of
unrecognized tax benefits.
|
VIDANGEL,
INC.
Notes
to Financial Statements
Continued
December 31, 2015 and 2014
8. Subsequent
Events
|
|
Litigation
As described more
fully in Note 4, the Company is subject to claims and litigation
that arise in the normal course of business. Management reviews
those claims and believes none of them meet the standard for
accrual or disclosure. In June 2016, a complaint
was brought against the Company for infringing on exclusive rights
under the Copyright Act and for violating the Digital Millennium
Copyright Act. The Company believes its legal position
has merit, and is vigorously defending the matter. The
potential loss associated with the lawsuit is not estimable and the
probability of the loss is unknown.
|
|
|
Stock Repurchase Agreement
On January 21,
2016, the Company entered into a stock repurchase agreement with
one of the shareholders. The agreement was for the
shareholder to sell to the Company and the Company agreed to
purchase from the shareholder 397,350 shares of the Company’s
common stock for $325,000.
|
|
|
Employment Agreement
On July 21, 2016,
the Company hired an attorney as in-house general counsel.
The associated employment agreement includes certain common stock
option modifications, severance terms in certain circumstances, and
the establishment of a cash collateral account.
|
VidAngel,
Inc.
$11,250,000
Maximum Offering Amount (3,750,000 Shares of Class B Nonvoting
Common Stock)
$5,000,000 Minimum Offering Amount (1,666,667 shares of Class B
Nonvoting Common Stock)
Offering
Circular
October
19, 2016