Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF
1933
For the fiscal year ended December 31, 2018
VidAngel, Inc.
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(Exact
name of registrant as specified in its charter)
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Delaware
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46-5217451
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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295 W Center St.
Provo, Utah
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84601
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(Address
of principal executive offices)
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(Zip
Code)
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(760) 933-8437
Registrant’s telephone number, including area
code
Part II.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We
make statements in this annual report on Form 1-K, or the Annual
Report, that are forward-looking statements within the meaning of
the federal securities laws. The words “believe,”
“estimate,” “expect,”
“anticipate,” “intend,” “plan,”
“seek,” “may,” “might,” and
similar expressions or statements regarding future periods are
intended to identify forward-looking statements. These
forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause our
actual results, performance or achievements, or industry results,
to differ materially from any predictions of future results,
performance or achievements that we express or imply in this annual
report or in the information incorporated by reference into this
Annual Report.
The
forward-looking statements included in this Annual Report are based
upon our current expectations, plans, estimates, assumptions and
beliefs that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions
and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our
control. Although we believe that the expectations reflected in
such forward-looking statements are based on reasonable
assumptions, our actual results and performance could differ
materially from those set forth in the forward-looking
statements.
Any
of the assumptions underlying forward-looking statements could be
inaccurate. You are cautioned not to place undue reliance on any
forward-looking statements included in this Annual Report. All
forward-looking statements are made as of the date of this Annual
Report and the risk that actual results will differ materially from
the expectations expressed in this Annual Report will increase with
the passage of time. Except as otherwise required by the federal
securities laws, we undertake no obligation to publicly update or
revise any forward-looking statements after the date of this Annual
Report, whether as a result of new information, future events,
changed circumstances or any other reason. Given the significant
uncertainties inherent in the forward-looking statements included
in this Annual Report, the inclusion of such forward-looking
statements should not be regarded as a representation by us or any
other person that the objectives and plans set forth in this Annual
Report will be achieved.
Item 1. Business
General
VidAngel
exists to help you make entertainment good for your home. We do
this by a) creating tools that make it simple for you, the user, to
skip or mute the parts in popular movies and TV shows that you find
unacceptable, and b) developing a system that collects &
analyzes data around the unacceptable parts, so creators have the
information they need to make better content, more suited to their
audience.
History
In
2013, four brothers, Neal, Daniel, Jeffrey, and Jordan Harmon,
founded VidAngel, Inc. (“we,” “us,”
“our,” “our Company”, or “the
Company”), an audiovisual content filtering company that
gives viewers the choice to remove objectionable content, such as
violence, sex, nudity, and/or language, from movies and television
programs streamed to them. 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 the Company to
give their own families, and everyone else, greater personal choice
in the movies and television programs they watch at home. Today, we
are the leading filtering company with applications available on
all major distribution platforms. The potential demand for our
service is significant.
We
were 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 us
and our members. Subsequently, the Company was converted into
VidAngel, Inc. a Delaware corporation, on February 12, 2014,
pursuant to Articles of Conversion we filed with the State of
Utah’s Department of Commerce.
Bankruptcy
Proceedings
On
October 18, 2017, the Petition Date, VidAngel, Inc., or the Debtor,
filed a voluntary petition for relief, or the Bankruptcy Filing,
under chapter 11, title 11 of the United States Code, or the
Bankruptcy Code, in the United States Bankruptcy Court for the
District of Utah, or the Bankruptcy Court, case number 17-29073. We
continue to operate the business as a “debtor in
possession” in accordance with the applicable provisions of
the Bankruptcy Code and the orders of the Bankruptcy
Court.
The
Bankruptcy Filing is intended to allow us the opportunity to
reorganize, to further monetize our newly developed intellectual
property and businesses, and to resolve legacy liabilities. Our
goal is to develop and implement a reorganization plan that meets
the standards for confirmation under the Bankruptcy Code. VidAngel
filed a proposed Plan of Reorganization, or the Plan, with the
Bankruptcy Court on January 4, 2019. As of the date of this report,
the Plan is still pending solicitation to creditors and
confirmation by the Bankruptcy Court. The Plan remains subject to
material modification. The confirmation of a reorganization plan
could materially alter the classifications and amounts of
VidAngel’s liabilities, equity interests, and assets reported
in our financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of
liabilities that might be altered by a reorganization plan, or to
the effect of any operational changes that may be
implemented.
Operation and Implication of the Bankruptcy Filing
Under
Section 362 of the Bankruptcy Code, the Bankruptcy Filing
automatically stayed all actions against us. As a result of the
Bankruptcy Filing, the realization of assets and the satisfaction
of liabilities are subject to uncertainty. The Debtor, operating as
debtor in possession under the Bankruptcy Code, may, subject to
approval of the Bankruptcy Court, sell or otherwise dispose of
assets and liquidate or compromise liabilities out of the ordinary
course of business for amounts other than those reflected in the
financial statements. Further, a confirmed reorganization plan or
other arrangement could materially alter the classifications and
amounts of VidAngel’s liabilities, equity interests, and
assets reported in our financial statements.
Subsequent to the
Petition Date, we received approval, but not direction, from the
Bankruptcy Court to pay or otherwise honor certain pre-petition
obligations generally designed to stabilize our existing business
operations. These obligations are mostly related to certain
employee wages, salaries and benefits, certain customer
obligations, and the payment of vendors and other providers in the
ordinary course for goods and services. We have retained, pursuant
to Bankruptcy Court approval, legal and financial professionals to
advise us in connection with our Bankruptcy Filing, other
litigations, and corporate affairs, and certain other professionals
to provide services and advice in the ordinary course of business.
From time to time, we may seek Bankruptcy Court approval to retain
additional professionals.
On
November 9, 2018, the Bankruptcy Court granted relief from the
automatic stay under Section 362 of the Bankruptcy Code permitting
the Disney Litigation to resume for the sole purpose of determining
the amount, if any, of the plaintiffs’ claims. For more
information related to this, see “Legal Proceedings—Disney Litigation and the Preliminary
Injunction.”
Reorganization Plan
We must
obtain the Bankruptcy Court’s approval of a reorganization
plan, which will enable us to emerge from chapter 11 as a
reorganized entity operating in the ordinary course of business
outside of bankruptcy. In connection with a reorganization plan, we
may require new credit facilities, or “exit financing.”
Our ability to obtain such approval and exit financing will depend
on, among other things, financial performance, outcomes of various
legal proceedings, and the timing and outcome of various ongoing
matters related to the Bankruptcy Filing. A reorganization plan
determines the rights of various creditors and security holders
with respect to their claims against and interests in the Debtor,
and is subject to the ultimate outcome of negotiations, legal
proceedings, other events, and Bankruptcy Court decisions. VidAngel
filed its proposed Plan with the Bankruptcy Court on January 4,
2019. That Plan is still pending solicitation to creditors and
confirmation by the Bankruptcy Court. The Plan remains subject to
material modification.
Current Operations
Our remote filtering and Remote Media Ownership
Management, or RMOM, services, also referred to as the Disc-Based
Service, are currently suspended due to a temporary preliminary
injunction, or the PI, issued December 12, 2016, by the United
States District Court for the Central District of California, or
the California Court, in an action brought by Disney Enterprises,
Inc. and several other content owners, collectively the Plaintiffs,
or the Disney Litigation. We are currently operating by offering a
revised version of our remote filtering system, the Stream-Based
Service, producing our own original content, consulting with
content creators, maintaining engagement with our existing users,
conducting research and development to create new intellectual
property, devising new methods to monetize existing intellectual
property, and defending against the Disney Litigation. See
“Suspended
Operations” and
“Legal
Proceedings—Disney Litigation and the
Preliminary Injunction.”
The New VidAngel Service
On
June 13, 2017, we launched a new version of VidAngel’s
service. The New service allows a user to automatically skip or
mute the distasteful parts of content available on Licensed
Streaming Services, or LSSs, such as Amazon Video, Amazon Prime,
Netflix, and HBO. We refer to the new system as the Stream-Based
Service. We charge a monthly subscription fee of $1.99 - $9.99 for
the Stream-Based Service, following a 30-day free trial. The
subscription gives a user the ability to link their account with
supported LSS’s and view the content available from a given
LSS with the aid of our automated remote-control
actions.
The
Stream-Based Service requires a user to have a valid account with a
LSS. This is typically done by signing up for a recurring monthly
subscription with the LSS. The user is then able to connect their
LSS account to a VidAngel account, after which they are able to
stream content available from the LSS account while activating our
automated remote-control features to skip or mute portions of the
content the user does not wish to view or hear.
Our
Stream-Based Service is layered on top of a user’s access to
the existing services of an LSS and is not endorsed by any LSS. As
a result, the Stream-Based Service is dependent upon access to data
and functionality available from the LSS, without which it could
become difficult to offer the level of experience necessary to
grow, or maintain, our current customer base.
Original Content
We
announced the “VidAngel Studios” concept in December
2016, and immediately began accepting submissions for digital
distribution, applications to perform comedy routines for the Dry
Bar Comedy series, and applications from creators interested in
helping us produce original content.
We
have received hundreds of inquiries and applications to partner on
some very interesting projects. As of the date of this filing, we
have produced and filmed over 200 original comedy specials from
various up-and-coming comedians. We launched our first theatrical
release, “Tim Timmerman, Hope of America,” and held the
largest film premiere in Utah history for it. It finished second,
in per theater average, for its opening weekend. We have also
licensed several motion pictures for exclusive digital
distribution.
Why are we making our own
content? - We believe that the
large amount of filtering data gathered over the last few years has
given us unique insight into the type of content our users want to
view. Armed with this information, we believe that we can produce
the type of content that our users are seeking, without
compromising the quality of the content. We ultimately envision a
system that enables us to produce an array of family-friendly
content guided by audience feedback.
Are we changing our
mission? - No, our mission
remains the same. Our plan has always been to create the best
filtering service in the world, attract a large audience of
like-minded people, and build the best possible family-friendly
streaming platform. We do not envision that our content will
replace all the great Hollywood content currently available, or
that will be available in the future. When we started the Company
in 2013, we knew that the same people who wanted to filter existing
content would likely also want additional sources of
family-friendly content. We always hoped that eventually we would
become large enough that we could help create some of that content.
That day has arrived, and we are so excited for what the future
will bring.
VidAngel Studios
In
late November 2017, VidAngel Studios announced what we hope will
become the first of many unique opportunities to produce original
content overlooked by big Hollywood Studios. VidAngel Studios was
created to provide artists and creators a distribution and
marketing platform for content that might otherwise be ignored by
Hollywood. We are currently forming a registered broker-dealer to
assist artists with fundraising, and have submitted our application
to the Financial Industry Regulatory Authority, or FINRA. Having
the experience of personally navigating a Tier 2 Regulation A+
offering, we believe there is untapped potential to fund original
content and are developing a complete platform for artists to use
to create, fund, market, and distribute their content. We built
many of the necessary tools for our own offering back in 2016, and
with the necessary regulatory approvals, will be uniquely
positioned to leverage our experience and technical capability to
simplify the fundraising process for many creators while achieving
our goal of delivering the best content to our users.
User Base
We
believe that users of the Disc-Based Service are actively watching
and waiting for news about the outcome of the Disney Litigation and
the future of our services. In the event of a favorable outcome on
appeal, we believe they would resume using our services. We
continue to keep them updated on the status of the legal battle, as
well as any news concerning the possible restoration of our
services. If we are able to restore our services, we believe they
provide us with a significant market advantage over our current, or
would be, competitors for future revenue growth.
The
cost to acquire users is high, and any new services that enter the
marketplace would likely be faced with a similarly high Cost Per
Acquisition, or CPA. Our existing user base provides us with a
distinct advantage in the event we receive a favorable outcome on
the legal merits on appeal or if the courts declare that our
alternative service is not a copyright infringement as alleged by
the Plaintiffs in the Disney Litigation.
Marketing and Advertising
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 users. We
also rely extensively on word-of-mouth advertising and in the past
have relied on the marketing services of Harmon Brothers LLC, or
HB, which offers Internet-based and multi-media promotional and
marketing services, including the design, implementation and
execution of promotional and Web-based advertising campaigns. Our
relationship with Harmon Brothers LLC, or HB, was severed
officially on September 25, 2018. We are currently using our own
internal marketing team for our promotional and web-based
advertising campaigns. See “Interest of Management and
Others in Certain Transactions—Affiliated
Transactions.”
Our Intellectual Property
We
have three registered trademarks, “VIDANGEL”,
“DRY BAR”, and “DRY BAR COMEDY” and six
unregistered trademarks,
“VidMap,” “VidTag,” “watch
however the BLEEP you want,” “watch movies however the
BLEEP they want,” “watch movies & TV however the
BLEEP you want,” and “make entertainment good for your
home.”
In
addition, we, in conjunction with our Dry Bar Comedy line of
business, have produced and filmed well over 100 stand-up comedy
episodes. We are the copyright owner of the episodes produced
through our Dry Bar Comedy line of business, although we do not
have any copyright interest in the underlying
performances.
We
also own numerous Internet domain sites and websites, including:
www.vidangel.com; www.vidangle.com; www.viddevil.com;
www.stopjarjar.com; www.cleantube.com; www.kleentube.com;
www.drybarcomedy.com; and familynightout.tv.
As
of December 31, 2018, we had been issued a U.S. patent for seamless
streaming and filtering, filed March 31, 2015, with an expiration
date of March 30, 2035. Our patent and any 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 March 31, 2015; U.S.
Patent No. 9,363,561 issued June 7, 2016), and are currently
applying for registration in the European Community and in certain
Asian countries, including the People’s Republic of China.
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 identifies 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 word
“sh—“at the 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 user 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 word “f---“ should be entirely muted,
but that, for the word “crap”, 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 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. The 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 able not only to access the Content
they have physically deposited with RMOM, but are also able to buy
and sell Content to and from other users by means of the
RMOM’s trading system. The RMOM can 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 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 technologies. We also seek to protect our
intellectual property rights by requiring all employees and
independent contractors involved in developing intellectual
property on our behalf to execute acknowledgments that all
intellectual property generated or conceived by them on our behalf
or related to the work they perform for us is our property, and
assigning to us any rights, title, and interest, including
intellectual property rights, they may claim or have in those works
or property, to the extent allowable under applicable
law.
Despite our best efforts to protect our technology
and proprietary rights by enforcing our intellectual property
rights, licenses, and other contractual rights, unauthorized
parties might 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 might not be available or
might 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 might threaten litigation or sue us
based on alleged infringement or other violations of intellectual
property laws. 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 Legal
Proceedings.”
Management Teams
Under
the direction of our Chief Executive Officer, Neal Harmon, we
currently operate with five management teams: the product team, the
marketing team, the digital content team, the finance team and the
legal team.
The
product team is led by our Chief Technology Officer, Joseph Wecker,
who oversees all product & technology employees and contractors
who contribute technical support, application development, front
and back-end development, and maintenance of the
system.
The
marketing team is led by our Chief Marketing Officer, Jeffrey
Harmon, who oversees all marketing employees, contractors, and
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 President, Elizabeth
“Liz” Ellis, who oversees all employees involved in
customer service, content, and tagging. The content team is
responsible for providing users with the best content available,
while ensuring an exceptional user experience.
The
finance team is led by our Chief Financial Officer, Patrick Reilly,
who oversees all employees involved in finance, accounting, and
purchasing.
The
legal team is led by our Chief Legal Officer, David Quinto, who is
responsible for all legal matters and litigation
oversight.
Suspended Operations
Our remote filtering RMOM services were suspended
December 29, 2016, following the issuance of the Court’s PI.
See “Legal Proceedings—Disney
Litigation and the Preliminary Injunction.” At present, we are offering those
services only with respect to the Dry Bar Comedy series and a small
number of motion pictures as to which we own distribution rights.
The following describes our currently suspended remote filtering
and RMOM services. We do not anticipate resuming our RMOM services
unless we receive a favorable outcome in the trial court following
a full trial on the merits in the Disney
Litigation.
We
believe that our RMOM services provided consumers with the greatest
degree of personal choice in the entertainment marketplace. Our
service gave consumers personalized control of the content they
viewed while permitting them to view the content on modern devices,
such as cell phones, tablets, set top boxes (e.g. Apple TV, Roku,
Amazon Fire TV, etc.), and computers.
In connection with our remote
filtering and RMOM services, we hope to confirm the legal right
of consumers who own content, in any form (VHS, DVD, Blu-Ray,
Digital) to direct, and/or control, their individual viewing
experience by removing any distasteful parts.
To
provide our filtering service, VidAngel developed the following
core proprietary technologies:
1. Remote Media Ownership Management System
2. Crowd-Based Tagging System
3. Patented Seamless Streaming and Filtering
System
VidAngel
believes that one of the most crucial systems for it to maintain a
lawful business is the RMOM which ensures that we allow consumers
to watch only content they have lawfully obtained the copyright
holder’s permission to view, thus ensuring that the
compensation of all copyright holders is maximized.
Target Demographics
We
previously offered our remote filtering and RMOM services to the
movie and television home entertainment market in the United
States, which is highly competitive. We examined various
considerations related to the marketability and desirability of our
services, including a cost analysis comparing us to our closest
competitors, examined our unique profile, and examined our target
consumer markets. We believe our core target market is the
“Values Audience” population segment, which includes 52
million adults in the U.S., compromising 37% of the entertainment
market, whose religious faith is extremely important to them and is
a part of their daily lives. We believe the Values Audience
demonstrates stronger overall concern about the type of content
they are exposed to in movies and television shows. We believe that
within the Values Audience segment, parents take an especial
interest in our services.
Method of Distribution
Prior
to the PI, we offered our filtering application and RMOM service
through a host of Internet-connected screens, including TVs,
digital video players, television set-top boxes and mobile devices.
We have agreements with various technology companies and
distributors to make our service available through their television
set-top boxes. Our applications allowed movie & television
content to be purchased within the app, which required that we
share between 20 and 30 percent of our revenue with our technology
distribution partners (Apple, Google, Amazon, and Roku) for content
purchased using their platforms. We intend to make our technology
available for use on other platforms, and with other distribution
partners. We rely on third-party cloud service providers to operate
certain aspects of our business. We believe that to
legally offer consumers the level of viewing control over content,
as explicitly permitted under the Family Movie Act of 2005, we must
be able to verify ownership, and or rights, prior to delivering the
services.
A Quick Overview of the Service:
1. BUY THE CONTENT – Users pay the retail price by
making an initial credit card payment.
2. USERS DIRECT THEIR PERSONALIZED VIEWING EXPERIENCE-
Users are then able to select what, if any, automated actions to
employ during their private viewing session. From here, the user
can send the content to any of the many different devices our
technology supports.
Cost Comparisons to Our Competitors
When
compared to those of our primary filtering competitor, ClearPlay,
we believe our remote filtering and RMOM services were and can be
substantially more attractive to consumers on the basis of variety,
performance, and efficiency. When compared to other streaming
services, we believe our remote filtering and RMOM services have
represented and can again represent a significantly better value
proposition for the consumer.
Competition
Our
primary competitor in providing consumers with automated control
over their movie and television viewing is ClearPlay, Inc., or
ClearPlay. It offers a membership fee-based filtering service that
allows users to skip or mute, content they do not wish to view.
ClearPlay began offering a service in the latter half of 2017 that
is similar to ours, and currently works with Amazon. They began
testing their service on VUDU in December of 2018, but no titles
have been added since the test began.
ClearPlay
also offers a proprietary Blu-Ray and DVD player, which is
currently on backorder, for users to watch filtered content on
their TV. No additional hardware is needed to use ClearPlay’s
services on a PC or a Mac. ClearPlay users can transmit filtered
movies from their computer to a television by such methods as
connecting their computer to their TV with an HDMI
cable.
We
believe that we offered, and can still offer, a better value,
higher quality, and more user-friendly service than the services
currently offered by ClearPlay while allowing consumers to use
modern media consumption devices used by the rest of the
market.
We have previously been engaged in patent
litigation with Clearplay. On October 12, 2017, the case was
stayed until a final decision is rendered in the Disney Litigation.
Clearplay has also filed a claim in our chapter 11 bankruptcy case,
seeking an unliquidated sum.
We believe that ClearPlay might reassert one or
more of its patent claims against us when the stay is ended. Such
litigation could have a material adverse effect on our business
operations were we not to prevail. See
“Legal
Proceedings—ClearPlay
Litigation.”
Research and Development
During
the fiscal years ended December 31, 2018, and 2017, we spent
$1,567,015 and $1,499,482, respectively, on research and
development activities relating to our technology.
Employees
As
of December 31, 2018, we employed 33 persons full time and 9
persons part time. None of our employees are covered by a
collective bargaining agreement.
Legal Proceedings
We
currently are, 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 our ability
to continue business operations.
Disney Litigation and the Preliminary Injunction
On
December 12, 2016, the United States District Court for the Central
District of California, or the California Court, in the matter of
Disney Enterprises, Inc.; Lucasfilm Ltd., LLC; Twentieth Century
Fox Film Corporation and Warner Bros. Entertainment, Inc., or
Plaintiffs, v. VidAngel, Inc., or VidAngel, granted the
Plaintiffs’ motion for preliminary injunction, or the PI,
against us. On October 5, 2017, the California Court allowed the
Plaintiffs to amend the original complaint to add three (3) of
their subsidiaries, MVL Film Finance LLC, New Line Productions,
Inc., and Turner Entertainment Co., as additional Plaintiffs, or
collectively the Plaintiffs, and identified approximately 30
additional motion pictures as having allegedly been infringed.
Since then, the Plaintiffs have claimed that VidAngel unlawfully
decrypted and infringed 842 titles in total. The California Court
has not yet decided whether the Plaintiffs will be permitted to
seek recovery as to the belatedly identified titles.
On
March 6, 2019, the California Court granted the Plaintiffs’
motion for partial summary judgement as to liability. The order
found that the Company is liable for infringing the copyrights, and
violating the Digital Millennium Copyright Act, or DMCA, with
respect to certain motion pictures of the Plaintiffs’.
Damages related to the respective copyright infringements, and DMCA
violations, will be decided by a jury trial scheduled to commence
June 11, 2019. Statutory damages for copyright infringement range
from $200 to $150,000 per motion picture infringed, while statutory
damages for violation of the DMCA range from $200 to $2,500 per
violation. The amount of damages awarded will ultimately depend on
the number of motion pictures the California Court decides that the
Plaintiffs’ are permitted to seek recovery with respect to.
If the Plaintiffs’ are permitted to proceed with all 842
claims, the potential damages will fall between $336,800 and
$128,405,000. In addition, the California Court is permitted to
make an equitable award of applicable costs and attorneys’
fees.
Chapter 11 Bankruptcy
On
October 18, 2017, the Petition Date, VidAngel, Inc., or the Debtor,
filed a voluntary petition for relief, or the Bankruptcy Filing,
under chapter 11, title 11 of the United States Code, or the
Bankruptcy Code, in the United States Bankruptcy Court for the
District of Utah, or the Bankruptcy Court, case number 17-29073. We
continue to operate the business as a “debtor in
possession” in accordance with the applicable provisions of
the Bankruptcy Code and the orders of the Bankruptcy Court. Refer
to Item 1, Bankruptcy
Proceedings at the beginning of this Form 1-K filing for
additional information.
The Preliminary Injunction
The
PI enjoins us, pending trial, from: (1) circumventing technological
measures protecting Plaintiffs’ copyrighted works on DVDs,
Blu-rays, or any other medium; (2) copying Plaintiffs’
copyrighted works, including but not limited to copying the works
onto computers or servers; (3) streaming, transmitting or otherwise
publicly performing or displaying any of Plaintiffs’
copyrighted works over the Internet, via web applications, via
portable devices, via streaming devices, or by means of any other
device or process; or (4) engaging in any other activity that
violates, directly or indirectly, Plaintiffs’
anti-circumvention right under Section 1201 of the Copyright Act,
17 U.S.C. §1201(a), or infringing by any means, directly or
indirectly, Plaintiffs’ exclusive rights under Section 106 of
the Copyright Act, 17 U.S.C. §106.
We
were required to cease and have ceased filtering and streaming all
movies and television programs owned by the Plaintiffs pending
trial and will continue to desist from filtering and streaming the
Plaintiffs’ content unless we obtain modification of the
injunction. We have ceased filtering and streaming all movies and
television programs owned or licensed by all content providers
under the Disc-Based Service that used legally purchased DVD and
Blu-Ray discs as the authorized copy to avoid exposure to punitive
damages liability in the event we are ultimately unsuccessful in
court, unless such content providers consent to allow us to
continue offering our service.
The
foregoing description of the preliminary injunction is a
summary and is qualified in its entirety by the California
Court’s orders.
The 9th
Circuit Preliminary Injunction
Appeal
Following
the issuance of the PI in the Disney Litigation, we immediately
appealed the decision to the Ninth Circuit. On August 24, 2017, the
Ninth Circuit affirmed the issuance of the preliminary injunction
and on September 19, 2017, it issued its mandate to the California
Court.
The 9th
Circuit Counterclaims
Appeal
We
asserted affirmative defenses to the Plaintiffs’ claims and,
additionally asserted cross claims, principally for alleged
violations of the Sherman and Clayton Antitrust Acts. On August 10,
2017, the California Court granted the Plaintiffs motion to dismiss
all our cross claims and one of our affirmative defenses. We
appealed the decision as to the antitrust cross claims to the Ninth
Circuit. On August 17, 2018, the Ninth Circuit affirmed the
dismissal.
Utah Declaratory Relief Litigation
On
August 31, 2017, we filed suit in the United States District Court
for the District of Utah, or the Utah Court, or the Utah Litigation
(case number 2:17-cv-00909-DN), seeking a declaration that our new
Stream-Based Service is lawful, and that decrypting and copying
DVDs for the purpose of creating automated actions or filters, and
the transmission of the content, with the automated actions or
filters applied, from those copies is lawful provided there is no
economic harm to copyright owners. The complaint alleged that the
Stream-Based Service eliminates any, and all, possible economic
harm alleged in the Disney Litigation, and named as Defendants,
Sullivan Entertainment Group, Inc., also known as Sullivan
Entertainment Inc. and Sullivan Entertainment; Marvel Characters,
Inc., MVL Film Finance, LLC, Twentieth Century Fox Home
Entertainment, LLC, Fox Digital Entertainment, Inc., Fox
Broadcasting Company, Inc., New World Pictures, Ltd., Castle Rock
Entertainment, Inc., Turner Entertainment Co., Village Roadshow
Entertainment, Inc., Regency Entertainment (USA), Inc., and
Metro-Goldwyn-Mayer Studios, Inc.
On
August 6, 2018, the lawsuit was dismissed by the Utah Court citing
a lack of personal jurisdiction over the defendants.
ClearPlay Litigation
In 2014, we responded to a contention by ClearPlay
that we infringed on certain ClearPlay patents by suing ClearPlay
in the United States District Court for the Central District of
California (the case was later transferred 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
us alleging patent infringement. On February 17, 2015, the case was
stayed pending inter partes
review by the United States Patent and
Trademark Office, or the USPTO, of several of ClearPlay’s
patents. We were not 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 us, were invalidated
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. The findings of
invalidity were all affirmed by the Federal Circuit on August 16,
2016. On October 31, 2016, the magistrate judge, Brooke C.
Wells, conducted telephonic status conferences in this and a
related case brought by ClearPlay against DISH Network and ordered
that both cases be re-opened. ClearPlay then requested, and we
stipulated, to continue the time for the parties to file their
proposed scheduling order to December 5, 2016. We subsequently
accepted the dates proposed by ClearPlay for inclusion in the
proposed scheduling order. ClearPlay, however, twice requested, and
we twice stipulated to allow for, additional time to consider the
dates it had proposed. On January 18, 2017, ClearPlay reneged on
its agreement to enter into the proposed scheduling order and,
instead, moved to stay all proceedings involving us. On January 19,
2017, we brought our own motion seeking entry of the proposed
scheduling order. On February 2, 2017, we filed our opposition to
the stay motion and, on February 15, 2017, ClearPlay filed its
reply brief in support of its stay motion. On February 16, 2017, we
filed our reply brief in support of our request for entry of a
scheduling order.
Magistrate Judge Wells granted ClearPlay’s
motion to stay the litigation at least until a decision is rendered
on the preliminary injunction by the Ninth Circuit. On October 12,
2017, the magistrate judge ordered the case stayed again, this time
until a final decision is rendered in the Disney Litigation. On
February 14, 2018, Clearplay filed a claim in our chapter 11
proceeding seeking an unliquidated sum.
We
believe ClearPlay might reassert its surviving claims when the stay
is lifted, and that if it does, the litigation could have a
material adverse effect on our business operations if Clearplay
were to prevail.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
You should read the following
discussion and analysis of our financial condition and results of
our operations together with our financial statements and related
notes appearing at the end of this Annual Report. This discussion
contains forward-looking statements reflecting our current
expectations that involve risks and uncertainties. Actual results
and the timing of events may differ materially from those contained
in these forward-looking statements.
Overview
We sell
a monthly subscription service for access to our technology that
permits a user to skip or mute limited portions of motion pictures
they find distasteful. The service is available on our website,
www.vidangel.com, or
via the VidAngel App on your iOS, Android, AppleTV, Amazon Fire TV,
or Roku device. Our service allows you to connect your Netflix,
Amazon Video, Amazon Prime, or HBO via Amazon Channels, account to
VidAngel, and watch the content available from these Licensed
Streaming Services, or LSS’s, through VidAngel. We provide
users with access to our proprietary and patented seamless
streaming and filtering technology, which gives them the ability to
personally control, and/or direct, the viewing of the motion
picture content, available from their LSS’s, by choosing to
skip or mute the parts they, or viewers in their household, find
distasteful. This type of service used to require the purchase of a
special device dedicated to the skipping, and/or muting task. With
our technology the computing power necessary for the skipping,
and/or muting, has been relocated to the Cloud, enabling the user
to watch using the same modern devices as everyone else, with the
added capability of controlling the viewing experience like never
before.
Results of Operations
The
following represents our performance highlights:
|
For the Year Ended December 31,
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Revenues
|
$7,547,299
|
$2,718,309
|
$4,828,990
|
178%
|
Operating Expenses:
|
|
|
|
|
Cost
of revenues
|
$2,382,418
|
$2,623,229
|
$(240,811)
|
-9%
|
Sales
and marketing
|
1,318,155
|
1,616,678
|
(298,523)
|
-18%
|
General
and administrative
|
1,663,392
|
2,189,186
|
(525,794)
|
-24%
|
Legal
|
915,717
|
1,540,929
|
(625,212)
|
-41%
|
Research
and development
|
1,567,015
|
1,499,482
|
67,533
|
5%
|
Total Operating Expenses:
|
$7,846,697
|
$9,469,504
|
$(1,622,807)
|
-17%
|
Revenues
We
derive revenues from the following business
activities:
●
Ticket &
concession sales
●
Sale of DVD &
Blu-Ray discs *
*
This business activity is currently suspended pending the outcome
of the Disney Litigation
The
Stream-Based Service was launched June 13, 2017. At release, all
new customers were given a 30-day free trial of the service. We
currently charge a monthly subscription fee of $1.99 - $9.99 for
the Stream-Based Service. The recorded Dry Bar Comedy shows are
made available to customers subscribing to the Stream-Based
Service.
Advertising revenue
is generated by publishing our original content on 3rd party websites such
as Facebook, YouTube, and Amazon. We are paid by the 3rd party websites
based on impressions delivered or the number of actions, such as
clicks, taken by users viewing our content. We recognize revenue in
the period in which the impressions, or actions,
occur.
Revenues for rental
& tips collected were for titles that we offered for rental.
These titles were available for viewing, once purchased, for a
fixed period of 24 hours. Once that viewing window closed, access
to the title was removed, and any revenue related to the
transaction was recognized. Tips are recognized upon receipt and
distributed in accordance with specific agreements we have with the
licensing parties.
Ticket
& concession sales for Dry Bar Comedy shows are recognized once
a show is complete. The revenue generated from the comedy shows is
used to offset the cost of production of the specials.
Revenues from the
sale of DVD & Blu-Ray discs were related to unrecognized
revenue from sales that occurred in FY 2016, or prior. With the
issuance of the PI in the Disney Litigation, this revenue source
has been halted until the legality of the business model is
determined by the courts.
The
substantial increase in revenues for 2018 is related to the
increase in subscription revenue from the Stream-Based Service and
a significant increase in the amount of advertising revenue earned
from 3rd
party websites. We launched the Stream-Based Service in July 2017.
Fiscal Year 2018 was the first full year of subscription
revenue.
The
decrease in our overall cost of revenues was related to the
postponement of Season 4 of Dry Bar Comedy. We moved the start date
to January 2019 in order to preserve cash resources.
Our
sales and marketing expense decreased in FY 2018 as we optimized
our online ad spending. We expect this expense to increase in FY
2019 as we hire internally to replace the services provided by HB,
grow our subscription base, and expand other revenue
streams.
We saw
a decrease in our general and administrative expense in FY 2018.
This was largely related to a lesser need for outside consultants
and the receipt of a tax credit related to the production of our
Dry Bar Comedy episodes.
Our
research and development expense remained constant in FY 2018 as we
focused on improving our existing products and optimizing existing
services. We expect these cots to increase in FY 2019 as we
continue to develop additional revenue generating products and
services.
The
decrease in legal expense was due to the automatic stay afforded by
Chapter 11 Bankruptcy. We expect our legal expenses for fiscal year
2019 to grow significantly as the Disney litigation
proceeds.
Liquidity and Capital Resources
Going Concern
Our
financial statements appearing elsewhere in this Form 1-K have been
prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the
normal course of business. We incurred net losses of $286,354 and
$6,722,004 for the years ended December 31, 2018 and 2017,
respectively. We used net cash of $338,544 and $7,871,872 for
operating activities in the years ended December 31, 2018 and 2017,
respectively. The net losses and use of cash in operating
activities resulted from, among other things, significant marketing
expenditures related to the acquisition of new customers, and
significant legal expenses related to the Disney Litigation. The
Company filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code on October 18, 2017.
These
conditions raise substantial doubt about our ability to continue as
a going concern. The financial statements appearing elsewhere in
this Form 1-K do not include any adjustments related to the
recoverability and classification of recorded asset amounts or
amounts and classifications of liabilities that might result from
this uncertainty.
Operating and Capital Expenditure Requirements
To date, we have funded our operations through
private and public offerings of common stock. As of
December 31, 2018, we had cash on hand of $2,494,112, of which
$954,381 was restricted. We do not have any short or long-term
notes payable. We project that our
current cash equivalents and future cash generated from new and
existing subscriptions will provide sufficient liquidity to fund
operations through at least April 30, 2020. These projections are
based on our current estimates for subscription sales, advertising
revenue, cost structure, cash burn rate, and other operating
assumptions. The assumptions made in these projections are subject
to change, including, but not limited to, the potential impact of a
damages award from the Disney Litigation, and could have a material
impact on our financial condition and ability to continue business
operations.
In
addition, we are currently exploring other alternatives, including
additional equity financing, increasing the number of paying
subscribers, other complementary revenue streams, or reducing our
current operating expenses. At this time, we have no commitments to
obtain any additional funds, and there can be no assurance that
such funds will be available on acceptable terms or at all. If we
are unable to obtain additional funding or reduce our existing cash
outflows below that of our existing cash inflows, our financial
condition and results of operations may be materially adversely
affected, and we may not be able to continue
operations.
Trends and Key Factors Affecting Our Performance
The
issuance of the PI in the Disney Litigation has had, and will
continue to have, a material impact on our financial position. We
are currently prohibited from streaming movies owned by the
plaintiffs in the Disney Litigation. Those movies comprised a large
portion of the titles available through our services when the PI
took effect. To comply with the PI, we were forced to cease
streaming all movies under the old Disc-Based model. We are
currently prohibited from streaming titles owned by the Plaintiffs
using our new Stream-Based Service.
Item 3. Directors and Officers
Subject
to our stockholders’ rights to consent to certain
transactions, our business and affairs are controlled by, and all
powers are exercised by, our Board. The Board must consist of not
fewer than three (3) nor more than five (5) directors, the exact
number of whom is to be set from time to time by the
Board. We currently have three directors: Neal Harmon,
Paul Ahlstrom, and Dalton Wright. The Board members are
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 the 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.
The Board has retained our executive officers to
manage the day-to-day operations, our library of movies, our
intellectual property and other investments, subject to the
supervision of the Board. Neal Harmon is currently our Chief
Executive Officer, Elizabeth Ellis is currently our President,
Jeffrey Harmon is currently our Chief Marketing Officer, Patrick
Reilly is currently our Chief Financial Officer, Joseph Wecker is
currently our Chief Technology Officer, and David Quinto is
currently our Chief Legal 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. The 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
|
|
41
|
|
October
2013
|
|
n/a
|
Elizabeth
Ellis
|
|
President
|
|
42
|
|
June
2015
|
|
n/a
|
Jeffrey
Harmon*
|
|
Chief
Marketing Officer
|
|
36
|
|
October
2013
|
|
n/a
|
Patrick
Reilly
|
|
Chief
Financial Officer
|
|
38
|
|
January
2014
|
|
n/a
|
Joseph
Wecker
|
|
Chief
Technology Officer
|
|
41
|
|
December
2018
|
|
n/a
|
David
Quinto
|
|
Chief
Legal Officer
|
|
63
|
|
August
2016
|
|
n/a
|
Paul
Ahlstrom
|
|
Director
|
|
55
|
|
February
2014
|
|
n/a
|
Dalton
Wright
|
|
Director
|
|
38
|
|
February
2014
|
|
n/a
|
*Neal Harmon and Jeffrey 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 also a member of
Harmon Ventures LLC, a Utah limited liability company, our largest
stockholder. He is also a managing member of Harmon Brothers, LLC,
a Utah limited liability company, 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 various activities such as designing and creating a
trucking logistics dashboard, to connect shippers and private
fleets. Neal 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.
Jeffrey Harmon, Chief
Marketing Officer. Jeffrey is a
co-founder and Chief Marketing Officer of the Company. Jeffrey is
also a member of Harmon Ventures LLC, a Utah limited liability
company, our largest stockholder. He is also a managing-member of
Harmon Brothers, LLC, a Utah limited liability company, which is an
online-focused advertising and marketing company he co-founded with
his brothers. Jeffrey 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, traditional marketing, internet
marketing and business administration.
Elizabeth Ellis,
President. Liz has
served as Chief Operating Officer since 2015, where her duties
include overseeing all operating procedures and staffing. From 2009
until she joined us, 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, Chief
Financial Officer. Patrick
began providing consulting services in March 2014 and joined as the
Director of Finance in February 2016. Patrick oversees all
accounting and finance aspects of the business, including but not
limited to budgeting, forecasting, auditing, financial statement
preparation and funding. Prior to joining us, Patrick served as the
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.
Joseph Wecker, Chief
Technology Officer. Joseph
joined the Company in September 2017 as the Vice President of
Engineering. Prior to joining us, Joseph was a senior software
engineer at Justin.tv from 2019 to 2013. Justin.tv was subsequently
rebranded to Twitch.tv. Joseph was primarily responsible for
monetization at Justin.tv and was instrumental in the development
of Twitch.tv. Prior to this, Joseph was a Founder of Samaritan
Technologies, a volunteer management software company, and still
serves as a member of the Board of Directors.
David
Quinto, Chief
Legal Officer. David
joined in the capacity of General Counsel in August 2016 and was
named Chief Legal Officer in February 2019. David was a co-founder,
in 1986, and partner at Quinn Emanuel Urquhart & Sullivan LLP
from 1987 to March 2014, and along with Phyllis Kupferstein,
founded Kupferstein Manuel & Quinto, LLP in 2014. From 2015 to
August 2016, David was a partner with the international,
full-service firm Davis Wright Tremaine LLP. He has represented
numerous substantial 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 authored 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
practitioner’s guide to trade secret protection and
litigation nationally, Trade Secrets: Law and
Practice, published by
LexisNexis (5th ed.
2017). 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 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 financing rounds, 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
the popular book related to business
startups, Nail It Then Scale
It, and received his B.A. in
Communications from Brigham Young
University.
Dalton Wright,
Director. Dalton joined 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 Ventures Mexico, 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, Mr. Wecker
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,
2018.
Name
|
Capacity in which Compensation
Was Received
|
|
|
|
Neal
Harmon
|
Chief Executive
Officer
|
$27,050
|
$3,697(1)
|
$30,747
|
Elizabeth
Ellis
|
President
|
108,625
|
5,436(2)
|
114,061
|
Jeffrey
Harmon
|
Chief Marketing
Officer
|
18,000
|
4,313(3)
|
22,313
|
Patrick
Reilly
|
Chief Financial
Officer
|
103,350
|
7,805(4)
|
111,155
|
Joseph
Wecker
|
Chief Technology
Officer
|
141,500
|
1,518(5)
|
143,018
|
David
Quinto
|
Chief Legal
Officer
|
299,000
|
20,188(6)
|
319,188
|
Paul
Ahlstrom
|
Director
|
n/a
|
n/a
|
n/a
|
Dalton
Wright
|
Director
|
n/a
|
n/a
|
n/a
|
(1)
On June
6, 2018, Mr. Neal Harmon was granted stock incentive options
exercisable for 35,555 shares of our Class A Common stock with an
option price of $0.32 per share, pursuant to the terms and
conditions of our Stock Incentive Plan. These options vested
immediately.
(2)
On July
17, 2015, August 10, 2016, June 6, 2018, and December 14, 2018, Ms.
Elizabeth Ellis was granted stock incentive options exercisable for
50,000, 28,000, 1,018, and 20,000 shares of our Class A Common
Stock, respectively, with an option price of $0.50, $0.82, $0.32,
and $0.32 per share, respectively. All grants were made pursuant to
the terms and conditions of our Stock Incentive Plan. The June 6,
2018 options vested immediately, while the remaining options will
vest in substantially equal annual increments over a four-year
period from the grant date.
(3)
On June
6, 2018, Mr. Jeffrey Harmon was granted stock incentive options
exercisable for 41,481 shares of our Class A Common stock with an
option price of $0.32 per share, pursuant to the terms and
conditions of our Stock Incentive Plan. These options vested
immediately.
(4)
On
February 11, 2016, August 10, 2016, and December 14, 2018, Mr.
Patrick Reilly was granted stock incentive options exercisable for
33,750, 22,950, and 20,000 shares of our Class A Common Stock,
respectively, with an option price of $0.82, $0.82, and $0.50 per
share, respectively. All grants were made 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 from
the grant date.
(5)
On
October 25, 2017, December 6, 2017, June 6, 2018, and December 14,
2018, Mr. Joseph Wecker was granted stock incentive options
exercisable for 15,000, 30,000, 2,685, and 20,000 shares of our
Class A Common Stock, respectively, all with an option price of
$0.32. The grants were made pursuant to the terms and conditions of
our Stock Incentive Plan. The June 6, 2018 options vested
immediately, while the remaining options will vest in substantially
equal annual increments over a four-year period from the grant
date.
(6)
On
April 15, 2015, Mr. David Quinto was granted stock incentive
options exercisable for 225,000 shares of our Class A Common Stock
with an option price of $0.50 per share. Upon acceptance of his
Employment Agreement, dated July 21, 2016, Mr. Quinto agreed to a
modification of the original option grant. The modification reduced
the number of options available for exercise to 219,792 and
modified the terms to align with our Stock Incentive Plan. These
options will vest in substantially equal annual increments over a
four-year period, beginning August 1, 2016. Mr. David Quinto was
granted stock incentive options exercisable for 32,407 shares of
our Class A Common Stock with an option price of $0.32 per share,
pursuant to the terms and conditions of our Stock Incentive Plan.
These options vested immediately.
Employment Agreements
We
had an employment agreement with Mr. David Quinto with respect to
his position as our Chief Legal Officer. Mr. Quinto’s
employment began August 1, 2016, had a specified five-year term,
and required that he devote his time and attention during normal
business hours to our business and affairs and those of our
affiliates. Upon entering into this agreement with Mr.
Quinto, we attempted to ensure Mr. Quinto would be available to
defend us in the Disney Litigation through the court of appeals and
all the way to the Supreme Court, if necessary.
Mr.
Quinto voluntarily resigned his position as General Counsel on
February 11, 2019. He was subsequently rehired and appointed to
serve as our Chief Legal Officer under the same salary and stock
compensation terms previously agreed.
Stock Incentive Plan
In
effort to further our long-term stability and financial success by
attracting and retaining personnel, including employees, directors,
and consultants, we adopted the 2014 Stock Incentive Plan, or our
Stock Incentive Plan, in February 2014. The Stock Incentive
Plan was amended and restated in August 2016. There are
2,534,544 shares of Class A Common Stock authorized for issuance
through our Stock Incentive Plan. As of December 31,
2018, options exercisable for 1,410,378 shares of our Class A
Common Stock have been granted, and are outstanding, under our
Stock Incentive Plan, and options exercisable for 242,923 shares of
Class A Common Stock 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 we will
largely depend on for the successful conduct of our business and
further align those persons’ interests with the interests of
our 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 our profits or growth. The 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’s 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.
Item 4. Security Ownership of Management and Certain Security
holders
Principal Shareholders
We
currently have 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 December 31, 2018, we had 18,246,831 shares
of Class A Common Stock issued and outstanding, and 3,313,335
shares of our Class B Common Stock issued and
outstanding.
Capitalization
As
of December 31, 2018, Harmon Ventures, LLC, or Harmon Ventures,
owned indirectly by our CEO, Mr. Harmon, and two of his brothers,
Jeffrey Harmon and Daniel Harmon, 8,938,520 shares of our Class A
Common Stock. Alta Ventures Mexico Fund I, LLC, or Alta
Ventures Mexico Fund I, of which our director, Paul Ahlstrom, is
the managing director, owns 3,160,318 shares of our Class A Common
Stock. Osborne Companies, LC, or Osborne Companies, owns
2,222,733 shares of Class A Common Stock. Various
unaffiliated investors own the remaining shares of Class A Common
Stock.
The
following table sets forth those executive officers, directors and
other security holders that hold 10% or greater of any class of
shares, as of December 31, 2018.
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
295 W
Center St
Provo,
UT 84601
|
|
8,938,520
shares
|
|
N/A
|
|
48.99%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
Common Stock
|
|
Alta
Ventures Mexico
Fund I,
LLC
3315
Mayflower Avenue, Suite #1
Lehi,
UT 84043
|
|
3,160,318
shares
|
|
N/A
|
|
17.32%
|
|
|
|
|
|
|
|
|
|
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
|
|
12.18%
|
As of December 31, 2018, Harmon Ventures owned
41.46% of our total outstanding shares of capital stock, Alta
Ventures Mexico Fund I owned 14.66% of our total outstanding shares
of capital stock, and Osborne Companies, LC owned 10.31% 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 our directors, officers, employees or consultants or
our affiliates as equity incentive compensation under our Stock
Incentive Plan, which shares will have all benefits, rights and
preferences that our Board may designate as applicable to such
shares.
Item 5. Interest of Management and Others in Certain
Transactions
Affiliated Transactions
Promotion and Marketing Services Agreement with Harmon Brothers
LLC.
We
entered into 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 terminated the HB Marketing Agreement
on August 15, 2018, in accordance with Section 10 of the
agreement.
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 us are divided into
two categories: creative and production services and optimization
and distribution services. For creative and production services, HB
invoices us at cost according to each employee or
consultant’s personal hourly, billable rate. We also pay all
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, we pay 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 us. 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, we
paid $4,687,623 to HB in 2016, $469,640 to HB in 2017, and $701,173
to HB in 2018.
Investor
Rights and Voting Agreement
We
entered into an Investor Rights and Voting Agreement, or Investor
Agreement, dated February 27, 2014, with certain of our 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 maintains the number of directors on the 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.
Wholly Owned Subsidiaries
We
created VAS Portal, LLC., a wholly-owned subsidiary, in August
2018. On January 2, 2019, we sold VAS Portal, LLC to Harmon
Ventures, LLC, which is owned indirectly by our CEO, Mr. Harmon,
and two of his brothers, Jeffrey Harmon and Daniel Harmon, for $1.
We did this after FINRA suggested that the Bankruptcy Case would
likely prevent the entity from meeting the necessary requirements
for registration as a funding portal. Without the possibility of
registration, the entity had very little value to VidAngel. To
protect VidAngel’s interest in the entity, we entered into a
call option agreement with Harmon Ventures that gives the Company
the right to purchase all of the membership interest of VAS Portal,
LLC for $1 at any time beginning upon (i) the occurrence of the
confirmation of the plan for reorganization by the Bankruptcy Court
or (ii) the termination of the Disney Litigation and the Bankruptcy
proceeding, and ending one year following the latest to occur of
the foregoing. This right is also subject to the approval of FINRA
as to the change in ownership. As part of the transaction, VAS
Portal, LLC, entered into a Services Agreement with VidAngel, Inc.
to provide technology services related to the creation of a website
and other assets for VAS Portal, LLC.
We
subsequently loaned VAS Portal, LLC $100,000 in the form of a
promissory note, with interest at 2.89%, and due in full on January
2, 2020.
We are 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 us acts in good faith and in a manner reasonably believed
to be in or not opposed to our best interest and/or those of our
stockholder’s. We do not have any outstanding loans or loan
guarantees with any related party as of December 31,
2018.
Item 6. Other Information
None.
Item 7. Financial Statements
VIDANGEL, INC.
Consolidated Financial Statements
As of December 31, 2018 and 2017
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 consolidated financial statements of
VidAngel, Inc. and subsidiaries (collectively, the Company), which
comprise the consolidated balance sheets as of December 31, 2018
and 2017, the related consolidated statements of operations,
stockholders’ deficit, and cash flows for the years then
ended, and the related notes to consolidated 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 audit. 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 consolidated financial position of
the Company as of December 31, 2018 and 2017, and the consolidated
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.
Emphasis-of-Matter Regarding Going Concern
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As more fully described in Note 2, the Company has
incurred operating losses and negative cash flows from operating
activities for the years ended December 31, 2018 and 2017, expects
to incur further losses, has filed for Chapter 11 bankruptcy, and
has an accumulated deficit. These conditions, among others, raise
substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans in regard to these
matters also are described in Note 2. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty. Our opinion is not modified with
respect to this matter.
/s/
Tanner LLC
Salt
Lake City, Utah
April
30, 2019
Consolidated Balance
Sheets
As of December 31,
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
$1,539,731
|
$1,920,052
|
Restricted
cash
|
954,381
|
1,051,727
|
Accounts
receivable
|
266,436
|
8,007
|
Notes receivable,
current
|
349,866
|
-
|
Prepaid expenses
and other
|
133,907
|
125,582
|
|
|
|
Total current
assets
|
3,244,321
|
3,105,368
|
|
|
|
Movie
asset
|
1,206,687
|
1,443,820
|
Deposits
|
47,915
|
204,271
|
Property and
equipment, net
|
85,590
|
128,534
|
Certificate of
deposit
|
75,000
|
-
|
Notes receivable,
long-term
|
-
|
126,725
|
|
|
|
Total
assets
|
$4,659,513
|
$5,008,718
|
|
|
|
Liabilities
and Stockholders' Deficit
|
|
|
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$397,705
|
$519,187
|
Accrued
expenses
|
758,299
|
510,891
|
Deferred
revenue
|
3,813,134
|
4,184,411
|
|
|
|
Total current
liabilities
|
4,969,138
|
5,214,489
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
Common stock,
$0.001 par value, 25,000,000 shares
|
|
|
authorized;
21,560,166 and 21,377,191 shares issued
|
|
|
and outstanding,
respectively
|
21,560
|
21,377
|
Additional paid-in
capital
|
13,414,186
|
13,231,869
|
Accumulated
deficit
|
(13,745,371)
|
(13,459,017)
|
|
|
|
Total stockholders'
deficit
|
(309,625)
|
(205,771)
|
|
|
|
Total liabilities
and stockholders' deficit
|
$4,659,513
|
$5,008,718
|
See accompanying notes to consolidated financial
statements.
Consolidated Statements of Operations
Years Ended December 31,
|
|
|
|
|
|
Revenues,
net
|
$7,547,299
|
$2,718,309
|
|
|
|
Operating
expenses:
|
|
|
Cost of
revenues
|
2,382,418
|
2,623,229
|
General and
administrative
|
1,663,392
|
2,189,186
|
Research and
development
|
1,567,015
|
1,499,482
|
Selling and
marketing
|
1,318,155
|
1,616,678
|
Legal
|
915,717
|
1,540,929
|
|
|
|
Total operating
expenses
|
7,846,697
|
9,469,504
|
|
|
|
Operating
loss
|
(299,398)
|
(6,751,195)
|
|
|
|
Other income
(expense):
|
|
|
Interest
expense
|
(35)
|
(49)
|
Interest
income
|
13,179
|
29,340
|
|
|
|
Total other income,
net
|
13,144
|
29,291
|
|
|
|
Loss before income
taxes
|
(286,254)
|
(6,721,904)
|
|
|
|
Provision for
income taxes
|
100
|
100
|
|
|
|
Net
loss
|
$(286,354)
|
$(6,722,004)
|
See accompanying
notes to consolidated financial
statements.
Consolidated Statements of Stockholders’ Deficit
For the Years Ended December 31, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
January 1, 2017
|
18,008,908
|
2,991,752
|
$21,001
|
$12,203,478
|
$(6,737,013)
|
$5,487,466
|
|
|
|
|
|
|
|
Issuance of common
stock, net of issuance
|
|
|
|
|
|
|
costs of
$411
|
-
|
321,583
|
321
|
964,838
|
-
|
965,159
|
|
|
|
|
|
|
|
Stock options
exercised
|
54,948
|
-
|
55
|
27,419
|
-
|
27,474
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
-
|
-
|
-
|
36,134
|
-
|
36,134
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(6,722,004)
|
(6,722,004)
|
|
|
|
|
|
|
|
Balance as of
December 31, 2017
|
18,063,856
|
3,313,335
|
21,377
|
13,231,869
|
(13,459,017)
|
(205,771)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercised
|
182,975
|
-
|
183
|
83,179
|
-
|
83,362
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
-
|
-
|
-
|
99,138
|
-
|
99,138
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(286,354)
|
(286,354)
|
|
|
|
|
|
|
|
Balance as of
December 31, 2018
|
18,246,831
|
3,313,335
|
$21,560
|
$13,414,186
|
$(13,745,371)
|
$(309,625)
|
See accompanying
notes to consolidated financial
statements.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(286,354)
|
$(6,722,004)
|
Adjustments to
reconcile net loss to net cash
|
|
|
used in operating
activities:
|
|
|
Depreciation and
amortization
|
93,083
|
226,696
|
Stock-based
compensation expense
|
99,138
|
36,134
|
Increase (decrease)
in:
|
|
|
Restricted
cash
|
97,346
|
(1,552)
|
Accounts
receivable
|
(258,429)
|
351,225
|
Prepaid expenses
and other assets
|
(8,325)
|
40,767
|
Movie
asset
|
237,133
|
301,363
|
Deposits
|
156,356
|
(204,271)
|
Note
receivable
|
(223,141)
|
(126,725)
|
Increase (decrease)
in:
|
|
|
Accounts payable
and accrued expenses
|
125,926
|
(72,753)
|
Deferred
revenue
|
(371,277)
|
(1,700,752)
|
|
|
|
Net cash used in
operating activities
|
(338,544)
|
(7,871,872)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Purchase of
property and equipment
|
(50,139)
|
(285,157)
|
Purchase of
certificate of deposit
|
(75,000)
|
-
|
|
|
|
Net cash used in
investing activities
|
(125,139)
|
(285,157)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Proceeds from
issuance of common stock, net
|
-
|
965,159
|
Exercise of stock
options
|
83,362
|
27,474
|
|
|
|
Net cash provided
by financing activities
|
83,362
|
992,633
|
|
|
|
Net change in cash
and cash equivalents
|
(380,321)
|
(7,164,396)
|
|
|
|
Cash and cash
equivalents at beginning of year
|
1,920,052
|
9,084,448
|
|
|
|
Cash and cash
equivalents at end of year
|
$1,539,731
|
$1,920,052
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for
interest
|
$35
|
$49
|
Cash paid for
income taxes
|
100
|
100
|
See accompanying notes to consolidated financial
statements.
VIDANGEL, INC.
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
|
|
Organization and Basis of Presentation
The
Company comprises VidAngel, Inc. and its wholly owned subsidiaries
VAS Portal, LLC (a Utah limited liability company organized on
August 3, 2018), and VAS Brokerage, LLC, (a Delaware limited
liability company organized on July 11, 2018). VidAngel, Inc. was
originally organized as a Utah limited liability company on
November 13, 2013. On February 7, 2014, the entity converted to a
Delaware corporation. On December 29, 2016, the Company complied
with an injunction and ceased selling discs and streaming
customized versions of the discs, pending the outcome of certain
legal matters; see Note 4. Pre-injunction the Company was in the
business of reselling Blu-Ray and DVD discs to its customers. The
Company included 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 had 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
were finished with a disc, the customer had 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. Post-injunction the
Company offers filtering subscriptions to use its proprietary
content filtering technology in conjunction with many of
today’s popular streaming services. Additionally, the Company
created Dry Bar Comedy, an ongoing stand-up comedy series that the
Company films. Tickets are sold to live events, and the Company
receives advertising revenue from online platforms of its filmed
events.
The
Company filed for Chapter 11 bankruptcy on October 18, 2017 and
will continue to operate its business as a debtor in possession
under the jurisdiction of the court and in accordance with the
applicable provisions of the Bankruptcy Code and the orders of the
court; see Note 2.
Principles of Consolidation
The
consolidated financial statements include the accounts of VidAngel,
Inc. and its wholly owned subsidiaries, VAS Portal, LLC, and VAS
Brokerage, LLC. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The
preparation of consolidated 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, estimated life and salvage value of discs, valuation
allowances for net deferred income tax assets, and valuation of
stock-based compensation.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
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, 2018 and 2017, the Company had approximately
$2,341,000 and $2,724,000 of cash and cash equivalents and
restricted cash 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:
|
|
|
|
|
|
|
Vendor
A
|
21%
|
25%
|
Vendor
B
|
*
|
10%
|
*Vendor
accounts for less than 10%
|
|
|
Individual customer revenues that were 10% or more
of total revenues were as follows for the years ended
December 31:
|
|
|
|
|
|
|
Customer
A
|
24%
|
*
|
*Customer
accounts for less than 10%
|
|
|
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, 2018, and 2017, these cash
equivalents consisted of money market accounts.
|
|
|
Restricted Cash
Restricted
cash includes cash that is restricted to a specific purpose. The
Company has cash designated as a retainer for legal services. As of
December 31, 2018 and 2017, the balance of restricted cash was
$954,381 and $1,051,727, respectively.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Accounts Receivable
The
Company records its accounts receivable at sales value and
establishes specific reserves for those customer accounts
identified with collection problems due to insolvency or other
issues. The Company’s accounts receivable are considered past
due when payment has not been received within 30 days of the
invoice date. The amounts of the specific reserves are estimated by
management based on various assumptions including the
customer’s financial position, age of the customer’s
receivables, and changes in payment schedules and
histories.
Account
balances are charged off against the allowance for doubtful
accounts receivable when the potential for recovery is remote.
Recoveries of receivables previously charged off are recorded when
payment is received. The allowance for doubtful accounts was $0 as
of December 31, 2018 and 2017.
Movie Asset
Movie
asset includes DVD and Blu-Ray discs purchased by the Company for
resale, not in excess of realizable value. Movie asset is recorded
at cost less accumulated depreciation. Depreciation is calculated
using the straight-line method over the estimated economic useful
life of five years. Movie asset is depreciated over the estimated
economic useful life to the estimated salvage value. Depreciation
of $247,045 and $284,590 for the years ended December 31, 2018 and
2017, respectively, is included in cost of revenues in the
statements of operations. The Company periodically reviews the
movie asset for excess supply, obsolescence, and valuations above
estimated realizable amounts, and provides a reserve to cover these
items. Management determined that no allowance for movie asset was
necessary as of December 31, 2018 and 2017.
Property
and EquipmentProperty 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
|
Production
equipment
|
1
year
|
Furniture
and fixtures
|
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.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
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
long-lived assets to be impaired as of December 31, 2018 and
2017.
Revenue Recognition (Pre-injunction)
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. More than 99% of the Company’s
transactions are short-term.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Revenue Recognition (Pre-injunction) - Continued
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.
On
December 29, 2016, the Company complied with an injunction and
ceased selling discs and streaming customized versions of the
discs, pending the outcome of certain legal matters; see Note
4.
Revenue Recognition (Post-injunction)
Post-injunction
the Company offers filtering subscriptions to use its proprietary
content filtering technology in conjunction with many of
today’s popular streaming services for a monthly membership
fee. The customer is charged the full price at the start of the
subscription period, which is initially recognized as deferred
revenue and recognized as revenue daily as the subscription service
is provided. During the time that the customer owns a subscription,
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 to use in
conjunction with other popular video streaming platforms. Access to
this technology is available during the entire period of the
subscription, and is extinguished at the end of the subscription
period in which the customer cancels their
subscription.
Additionally,
the Company created Dry Bar Comedy, an ongoing stand-up comedy
series that the Company films. Tickets are sold to live stand-up
comedy events. The Company receives advertising revenue by
publishing its original content on third party websites (such as
Facebook, YouTube and Amazon). The third party websites pay the
Company based on impressions delivered or the number of actions,
such as clicks, taken by users viewing the Company’s content.
The Company recognizes revenue in the period in which the
impressions or actions occur.
Stock-Based Compensation
Stock-based
payments made to employees, including grants of employee stock
options, are measured using a fair value-based method (see Note 5).
The related expense is recorded in the statements of operations
over the period of service.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Advertising
Advertising
costs are expensed as incurred. Advertising expenses totaled
$486,932 and $973,144 for the years ended December 31, 2018 and
2017, respectively.
Income Taxes
Income
taxes are provided for the tax effects of transactions reported in
the consolidated 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.
Reclassifications
Provision
for income taxes amounts in the 2017 consolidated financial
statements have been reclassified to conform with the current year
presentation.
Subsequent Events
Management
has evaluated events and transactions for potential recognition or
disclosure through April 30, 2019, which is the day the
consolidated financial statements were available to be
issued.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
2. Going Concern
|
|
The
Company’s consolidated financial statements are prepared in
accordance with US GAAP which assumes the Company is a going
concern and contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The
Company incurred net losses of $286,354 and $6,722,004 for the
years ended December 31, 2018 and 2017, respectively. The Company
used net cash of $338,544 and $7,871,872 in operating activities
for the years ended December 31, 2018 and 2017, respectively. The
net losses and use of cash in operating activities resulted from,
among other things, significant sales and marketing expenditures
and legal related expenditures. On December 29, 2016, the Company
complied with an injunction and ceased selling discs and streaming
customized versions of the discs, pending the outcome of certain
legal matters; see Note 4. The Company also filed for Chapter 11
bankruptcy on October 18, 2017.
These
matters, among others, raise substantial doubt about the
entity’s ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might
result from the outcome of this uncertainty.
In
addition, the Company is currently exploring other alternatives,
including additional equity financing, increasing the number of
paying subscribers, or reducing operating expenses. At this time,
the Company has no commitments to obtain any additional funds, and
there can be no assurance that such funds will be available on
acceptable terms or at all. If the Company is unable to obtain
additional funding or reduce the existing cash outflows below that
of existing cash inflows, the Company’s consolidated
financial condition and results of operations may be materially
adversely affected, and the Company may not be able to continue
operations.
|
|
|
|
3. Property and
Equipment
|
|
Property and equipment consisted of the following as of December
31:
|
|
|
|
|
|
|
Computer
equipment
|
$113,394
|
$84,775
|
Production
equipment
|
110,326
|
92,972
|
Leasehold
Improvements
|
106,230
|
106,230
|
Furniture and
fixtures
|
93,678
|
89,512
|
|
|
|
|
423,628
|
373,489
|
Less accumulated
depreciation and amortization
|
(338,038)
|
(244,955)
|
|
|
|
|
$85,590
|
$128,534
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
3. Property and
Equipment
Continued
|
|
Depreciation and amortization expense on property and equipment for
the years ended December 31, 2018 and 2017 was $93,083 and
$226,696, 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 consolidated financial position, results of
operations, or liquidity.
Litigation
is necessary to defend the Company. 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 and 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 received.
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 consolidated financial position, results of
operations, and liquidity of the Company. The Company records a
provision for each liability when determined to be probable, and
the amount of the loss may be reasonably estimated. These
provisions are reviewed annually and adjusted as additional
information becomes available.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
4. Commitments
and
Contingencies
Continued
|
|
Litigation -
Continued
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 April 30, 2019, the date the consolidated
financial statements were available to be released, management has
determined an adverse outcome on one or more of the claims is
probable, but not estimable, and has not accrued any estimated
losses related to these matters. In the matter of Disney
Enterprises, Inc. and several other content owners (collectively,
the Plaintiffs), on March 6, 2019, the United States District Court
for the Central District of California (California Court) granted
the Plaintiffs’ motion for partial summary judgement as to
liability. The order found that the Company is liable for
infringing the copyrights, and violating the Digital Millennium
Copyright Act (DMCA), with respect to certain motion pictures of
the Plaintiffs’. Damages related to the respective copyright
infringements, and DMCA violations, will be decided by a jury trial
scheduled to commence June 11, 2019. Statutory damages for
copyright infringement range from $200 to $150,000 per motion
picture infringed, while statutory damages for violation of the
DMCA range from $200 to $2,500 per violation. The amount of damages
awarded will ultimately depend on the number of motion pictures the
California Court decides that the Plaintiffs’ are permitted
to seek recovery with respect to. If the Plaintiffs are permitted
to proceed with all 842 claims, the potential damages will fall
between $336,800 and $128,405,000. In addition, the California
Court is permitted to make an equitable award of applicable costs
and attorneys’ fees. Damages are not guaranteed, and it is
possible that no damages are awarded.
|
|
|
Expectations
may change in the future as the litigation and events related
thereto unfold. During 2018 and 2017 the Company incurred $915,717
and $1,540,929, respectively, in legal and litigation costs, which
are included in legal expenses in the accompanying statements of
operations.
|
|
On
December 29, 2016, the Company complied with an injunction and
ceased selling discs and streaming customized versions of the
discs, pending the outcome of certain legal matters.
|
|
Operating Leases
On December 17, 2018 the Company
amended their lease for their office facility. The amended lease
matures on December 31, 2021, and the annual lease amount is
$180,000. As of December 31, 2018, future minimum lease payments
under non-cancelable operating leases with terms of one year or
more are as follows:
|
Year Ending
December 31:
|
|
|
|
2019
|
$180,000
|
2020
|
180,000
|
2021
|
180,000
|
|
$540,000
|
|
|
Rental expense under operating leases was $186,683 and $204,600 for
the years ended December 31, 2018 and 2017,
respectively.
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
5. 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 2,534,544 shares of common stock authorized for grant to
employees, officers, directors and consultants, as of December 31,
2018 and 2017. 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 881,243 and 1,229,484
shares available for grant under the Plan as of December 31, 2018
and 2017, respectively.
|
|
|
Stock-based
compensation expense for the years ended December 31, 2018 and 2017
was $99,138 and $36,134, respectively. As of December 31, 2018 and
2017, the Company had $97,661 and $149,720 respectively, of
unrecognized stock-based compensation costs related to non-vested
awards that will be recognized over a weighted-average period of
2.2 years. The Company uses an estimated 30% forfeiture
rate.
|
|
|
The following sets forth the outstanding common stock options and
related activity for the years ended December 31, 2018 and
2017:
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
|
Outstanding as of
January 1, 2017
|
1,019,811
|
$0.56
|
Granted
|
409,325
|
0.32
|
Exercised
|
(54,948)
|
0.50
|
Forfeited
|
(129,076)
|
0.46
|
|
|
|
Outstanding as of
December 31, 2017
|
1,245,112
|
0.49
|
Granted
|
453,114
|
0.32
|
Exercised
|
(182,975)
|
0.46
|
Forfeited
|
(104,873)
|
0.41
|
|
|
|
Outstanding as of
December 31, 2018
|
1,410,378
|
0.45
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
5. Stock Options
Continued
|
The following summarizes information about stock options
outstanding as of December 31, 2018:
|
Number of
Options Outstanding
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted Average
Exercise Price
|
|
|
|
|
|
99,311
|
5.38
|
$0.18
|
99,311
|
$0.18
|
10,000
|
5.85
|
0.30
|
10,000
|
0.30
|
628,987
|
9.19
|
0.32
|
235,463
|
0.32
|
442,080
|
6.72
|
0.50
|
329,520
|
0.50
|
230,000
|
7.36
|
0.82
|
153,122
|
0.82
|
|
|
|
|
|
1,410,378
|
7.83
|
0.45
|
827,416
|
0.45
|
|
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:
|
|
|
|
|
|
|
Risk-free interest
rate
|
2.73 – 3.05%
|
1.77 – 2.11%
|
Expected stock
price volatility
|
50%
|
50%
|
Expected dividend
yield
|
0%
|
0%
|
Expected life of
options
|
5 years
|
5 years
|
|
As of
December 31, 2018 and 2017, the aggregate intrinsic value of
options outstanding was $14,104. As of December 31, 2018 and 2017,
the aggregate intrinsic value of options exercisable was $14,104
and $2,166, 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. Common Stock
|
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 (Class A Common Stock), and 3,750,000 have been
designated as Class B Common Stock (collectively, Common
Stock).
|
VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
6. Common Stock
Continued
|
|
Voting Rights
Each
outstanding share of Class A Common Stock shall be entitled to one
(1) vote on each matter to be voted on by the stockholders of the
Company. Each outstanding share of Class B Common Stock shall not
be entitled to a vote on any matter to be voted on by the
stockholders of the Company, unless specifically required by the
Delaware General Corporation Law.
|
|
|
Liquidation Rights
The
holders of Common Stock outstanding shall be entitled to receive
all of the assets and funds of the Company remaining and available
for distribution. Such assets and funds shall be divided among and
paid to the holders of Common Stock, on a pro-rata basis, according
to the number of shares of Common Stock held by them.
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Dividends
Dividends
may be paid on the outstanding shares of Common Stock as and when
declared by the Board, out of funds legally available
therefore.
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Identical Rights
Holders
of the Class B Common Stock shall rank equally with, and have
identical rights and privileges as, holders of all other shares of
the Common Stock, except with regard to voting rights as provided
above.
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7. Related Party
Transactions
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The
Company has a marketing services contract with an entity owned by
one of the Company’s officers and stockholders. During 2018
and 2017, the Company incurred expenses of $546,320 and $600,911,
respectively, to the related party for marketing services. As of
December 31, 2018 and 2017, the Company had outstanding accounts
payable to an entity owned by one of the Company's officers and
stockholders of approximately $68,000 and $210,000, respectively.
As of December 31, 2018 and 2017, the Company had a note receivable
to an entity owned by one of the Company’s officers and
stockholders of approximately $100,000 and $0,
respectively.
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8. Income Taxes
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The provision (benefit) for income taxes differs from the amount
computed at federal statutory rates as follows:
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Federal
income tax at statutory rates
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$(60,113)
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$(2,285,448)
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State
income tax at statutory rates
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(7,652)
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(220,024)
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Change
in valuation allowance
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48,855
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829,348
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Change
in statutory rates
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–
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1,659,023
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Other
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19,010
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17,201
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$100
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$100
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VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
8. Income Taxes
Continued
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Significant components of the Company’s net deferred income
tax assets (liabilities) are as follows as of December
31:
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Net operating loss
carryforwards
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$2,255,076
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$2,055,577
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Depreciation and
amortization
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44,294
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42,873
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Accrual to cash
adjustments
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1,088,144
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1,241,306
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Accruals and
reserves
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12,970
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11,873
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Valuation
allowance
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(3,400,484)
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(3,351,629)
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$–
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$–
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As of
December 31, 2018, the Company has net operating loss (NOL)
carryforwards available to offset future taxable income, if any, of
approximately $9,038,000 which will begin to expire in 2036. The
portion of the NOL carryforward relating to periods prior to
January 1, 2018 for federal income tax purposes totaled
approximately $8,239,000 and will expire during the years 2036 and
2037. The portion of the NOL carryforward relating to periods
subsequent to January 1, 2018 for federal income tax purposes total
approximately $799,000 and can be carried forward
indefinitely.
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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.
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The
Company has concluded that there are no significant uncertain tax
positions requiring disclosure, and there are no material amounts
of unrecognized tax benefits.
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9. Subsequent
Events
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On
January 2, 2019, the Company sold its wholly-owned subsidiary VAS
Portal, LLC to a related party for $1. Almost no activity occurred
in VAS Portal, LLC from the date of its organization through
January 2, 2019. The Company also loaned VAS Portal, LLC $100,000
on January 2, 2019 in the form of a promissory note, with interest
at 2.89% and due on January 2, 2020. A call option agreement was
entered in which the Company has the right to purchase all of the
membership interest of VAS Portal, LLC back from the related party
for $1 at any time beginning upon (i) the occurrence of the
confirmation of the plan for reorganization by the bankruptcy court
or (ii) the termination of the litigation against Disney et al and
the bankruptcy proceeding, and ending one year following the latest
to occur of the foregoing.
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The restriction on restricted cash was removed in February 2019;
the restricted cash is no longer designated as a retainer for legal
services.
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Item 8. Exhibits
INDEX OF EXHIBITS
The following exhibits are filed as part of this Form
1-K.
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Exhibit
Number
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Description
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VIDANGEL, INC.
Notes to Consolidated Financial Statements
Continued
December 31, 2018 and 2017
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly
caused this Annual Report on Form 1-K to be signed on its behalf by
the undersigned, thereunto duly authorized, in Provo, Utah on April
30, 2019.
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VidAngel, Inc.
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By:
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/s/
Neal S. Harmon
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Name:
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Neal
S. Harmon
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Title:
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Chief
Executive Officer
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Pursuant to the requirements of Regulation A, this report has been
signed below by the following persons on behalf of the issuer in
the capacities and on the dates indicated.
Signature
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Title
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Date
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/s/
Neal S. Harmon
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Chief
Executive Officer and Director
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April
30, 2019
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Neal S.
Harmon
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(Principal
Executive Officer)
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/s/ Patrick Reilly
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Chief
Financial Officer
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April
30, 2019
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Patrick Reilly
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(Principal
Financial and Accounting Officer)
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/s/ Dalton Wright
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Director
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April
30, 2019
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Dalton Wright
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/s/ Paul Ahlstrom
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Director
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April
30, 2019
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Paul Ahlstrom
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