vid_1a
An offering statement pursuant to Regulation A relating to these
securities has been filed with the Securities and Exchange
Commission. Information contained in this Preliminary
Offering Circular is subject to completion or amendment. These
securities may not be sold nor may offers to buy be accepted before
the offering statement filed with the Commission is
qualified. This Preliminary Offering Circular shall not
constitute an offer to sell or the solicitation of an offer to buy
nor may there be any sales of these securities in any state in
which such offer, solicitation or sale would be unlawful before
registration or qualification under the laws of any such
state. We may elect to satisfy our obligation to deliver
a Final Offering Circular by sending you a notice within two
business days after the completion of our sale to you that contains
the URL where the Offering Circular was filed may be
obtained.
Preliminary Offering Circular
June 24, 2020
Subject to Completion
VIDANGEL, INC.
295 W. Center St., Suite F
Provo, Utah 84601
(760) 933-8437
Class B Nonvoting Common Stock
$50,000,000 Maximum Offering Amount
(7,462,686 Shares of Class B Nonvoting Common Stock)
No Minimum
VIDANGEL, INC., a
Delaware corporation, referred to herein as VidAngel or the
Company, is offering up to $50,000,000 of its Class B nonvoting
common stock, which we refer to as the Offered Shares or our Class
B Common Stock. The Company is involved in the process of
reorganizing under chapter 11, title 11, of the United States
Bankruptcy Code. This offering
is expressly contingent upon the
Bankruptcy Court’s confirmation of the Trustee’s reorganization plan,
or a reorganization plan that
is substantially similar to the
Trustee’s reorganization plan. If an alternate plan of reorganization is
approved, the initial closing will not occur, and the Offering will
be terminated. All proceeds submitted will be promptly returned to
investors, without interest, and without deduction.
The
Company is offering the Offered Shares for a purchase price of
$6.70 per Offered Share. Unless terminated earlier by the Company
in its sole discretion, this offering will terminate on the
earliest to occur of (i) the date on which we sell the maximum
number of Offered Shares, or the Maximum Offering Amount, or (ii)
twelve (12) months from the date of qualification of this Offering.
We refer to either of these two dates as the Termination
Date. Subject
to the approval of the Trustee’s reorganization plan by the
Bankruptcy Court, the initial closing will occur at the
Company’s sole discretion and may be any date after the
Company has received and accepted an initial subscription for any
number of Offered Shares and before the Termination Date.
If, on the initial
closing date, we have sold less than the maximum Offered Shares,
then we will hold one or more additional closings for additional
sales, up to the maximum number of Offered Shares, through the
Termination Date. Purchases of Offered Shares in any amount
may be submitted through an investor's VidAngel customer account in
accordance with the billing information for such investor at
www.vidangel.com,
and will be held in a separate non-interest-bearing account held by
VidAngel. Upon each closing of this Offering, the proceeds for the
Offering will be distributed to the Company and the Offered Shares
will be issued to the investors. The purchase price per Offered
Share is $6.70 and the minimum purchase requirement is twenty-five
(25) Offered Shares ($167.50); however, we can waive the minimum
purchase requirement on a case to case basis in our sole
discretion. Once a subscription has been submitted and accepted by
the Company, an investor will not have the right to request the
return of its subscription payment prior to closing. We expect to
commence the sale of the Offered Shares as of the date on which the
Offering Statement of which this Offering Circular is a part is
declared qualified by the United States Securities and Exchange
Commission.
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Proceeds to
Other Persons
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Per Offered
Share:
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$6.70
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$0.00
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$6.70
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$0
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Maximum Offering
Amount:
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$50,000,000
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$0.00
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$50,000,000
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$0
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1
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We do
not intend to use commissioned sales agents or
underwriters. Please refer to the section entitled
“PLAN OF
DISTRIBUTION” of this Offering Circular for additional
information regarding distribution of the Offered
Shares
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Does
not include estimated offering expenses, including without
limitation, legal, accounting, printing, advertising, travel,
marketing, blue sky compliance and other expenses of this offering,
as well as transfer agent fees and fees payable to Issuer Direct.
Offering expenses are estimated at $325,000 if the Maximum Offering
Amount is raised. See “PLAN
OF DISTRIBUTION”.
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Generally,
no sale may be made to you in this offering if the aggregate
purchase price you pay is more than 10% of the greater of your
annual income or net worth. Different rules apply to
accredited investors and non-natural persons. Before
making any representation that your investment does not exceed
applicable thresholds, we encourage you to review Rule
251(d)(2)(i)(C) of Regulation A. For general information
on investing, we encourage you to refer to www.investor.gov.
An investment in the Offered Shares is subject
to certain risks and should be made only by persons or entities
able to bear the risk of and to withstand the total loss of their
investment. Prospective investors should carefully consider
and review the RISK FACTORS, beginning on PAGE
6.
THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, OR THE
COMMISSION, DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL TO
ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT
PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR
OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED
PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION;
HOWEVER, THE COMMISION HAS NOT MADE AN INDEPENDENT DETERMINATION
THAT THE SECURITIES OFFERED ARE EXEMPT FROM
REGISTRATION.
This
Offering Circular is following the offering circular format
described in Part II of Form 1-A.
TABLE OF CONTENTS
This summary of the Offering Circular highlights material
information contained elsewhere in this Offering
Circular. Because it is a summary, it may not contain
all of the information that is important to your decision of
whether to invest in the Offered Shares. To understand
this offering fully, you should read the entire Offering Circular
carefully, including the Risk
Factors section. The use of the words
“we,”
“us,”
“the Company,”
“VidAngel,” or
“our” refers to
VidAngel, Inc., except where the context otherwise requires. The
term “Bylaws”
refers to the bylaws of VidAngel, Inc. The term “Certificate” refers to VidAngel,
Inc.’s certificate of incorporation, as amended. The
“Stockholders
Agreement” refers to the Stockholders Agreement of
VidAngel, Inc. The term “Governing Documents” refers to the
Certificate, Bylaws and Stockholders Agreement.
VidAngel,
Inc. exists to help make entertainment good for your home. We do
this by, a) creating tools that make it simple for viewers to skip
or mute portions of popular movies and TV shows that contain
content they find distasteful, b) developing a system that collects
and analyzes data around the skipped parts so creators have the
information they need to make content better suited to their
audience, and c) licensing, producing, and creating original
content for our viewers.
The Company
In
2013, four brothers, Neal, Daniel, Jeffrey, and Jordan Harmon,
founded VidAngel, initially an audiovisual content filtering
company that gives viewers the choice to remove objectionable
content, such as violence, sex, nudity and/or language, from
streamed movies and television programs. As fathers of children
aged newborn to ten, they 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 content they watch at home. The brothers envisioned building
the best technology for skipping distasteful content in the privacy
of the home, attracting those who want to skip parts of modern
media, and then eventually distributing better content to those
people whom Hollywood has overlooked. Today, we are the leading
filtering company with applications available on all major
distribution platforms and our original content has reached
millions of underserved audiences globally. Management believes the
potential demand for this service is significant.
The
Company was formed as a Utah limited liability company on October
22, 2013, pursuant to a Certificate of Formation filed with the
State of Utah’s Department of Commerce and that certain
Operating Agreement of the Company, dated December 13, 2013, by and
among the Company and its members. Subsequently, the Company
was converted into VidAngel, Inc., a Delaware corporation, on
February 12, 2014, pursuant to Articles of Conversion filed with
the State of Utah’s Department of Commerce.
The Company currently has authorized capital stock consisting of
25,000,000 shares of common stock, par value $0.001 per share, 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 nonvoting common stock, or the Class B Common
Stock. Prior to the date of qualification of the offering
statement, which this Offering Circular is a part, our Board of
Directors anticipates authorizing and submitting to our Class A and
Class B stockholders a resolution to amend our Certificate,
increasing our authorized capital stock to 35,000,000 shares of
common stock, with 23,000,000 shares designated as Class A Common
Stock and 12,000,000 shares designated as Class B Common
Stock.
Investors in this
offering will acquire our Class B Common Stock and become holders
of our Class B Common Stock, or our Class B Common Stockholders,
with respect to their ownership of Offered Shares. Upon
investors’ receipt of Offered Shares purchased in this
Offering, they will become bound by our Bylaws, Certificate, and
Stockholders Agreement. Our Bylaws, Certificate, and
Stockholders Agreement govern the various rights and obligations of
our stockholders, including the Class B Common Stockholders. See
“SECURITIES BEING OFFERED
– Description of Certificate and
Bylaws.”
There is currently no
active market for our Class B Common Stock. We do not know the
extent to which investor interest will lead to the development and
maintenance of a liquid trading market, if at all. No assurance can
be given that the market price of shares of our Class B Common
Stock will not fluctuate or decline significantly in the future or
that Class B Common Stockholders will be able to sell their shares
when desired on favorable terms, or at all. See Risk
Factors-Risks Related to the Offering and Lack of
Liquidity.
Beginning one year from the date of original issuance of any Class
B Common Stock, Class B Stockholders will have the opportunity to
request, up to once per calendar year, that we redeem up to 50% of
such holder’s Class B Common Stock originally purchased from
us at a redemption price equal to the Stated Value of such redeemed
shares, less the applicable redemption fee (if any). We will not
redeem or repurchase any preferred shares if we are restricted by
applicable law or our Certificate of Incorporation, as amended,
from making such redemption or to the extent any such redemption
would cause or constitute a default under any borrowing agreements
to which we or any of our subsidiaries are a party or otherwise
bound. In addition, we will have no obligation to redeem shares
upon a redemption request made by a holder if we do not have
sufficient funds available to fund that redemption. We will have
discretion to determine whether we are in possession of
“sufficient funds” to fund a redemption request. We can
provide no assurance that any Class B Stockholders will have their
shares redeemed under the plan. See “SECURITIES BEING OFFERED – Share
Redemption Plan.”
On June
12, 2016, litigation was commenced against the Company by Disney
Enterprises, Inc., Twentieth Century Fox Film Corporation and
Warner Brothers Entertainment, Inc., hereinafter referred to as the
“Disney Litigation, alleging two claims: (a) copyright
infringement, and (b) violation of the Digital Millennium Copyright
Act (or the DMCA, codified at 17 U.S.C. Sections 1201-04). A
permanent injunction was granted against the Company on September
5, 2019, enjoining its streaming and filtering service from 1)
circumventing technological measures protecting Plaintiffs’
copyrighted works on DVD and Blu-ray discs, 2) copying those works
onto computers or servers, and 3) streaming or transmitting those
works onto its website, web applications via portable devices, or
media streaming services. On September 23, 2019, in connection with
the litigation, a judgment was entered against the Company in the
amount of $62,448,750. For more information related to this, see
“DESCRIPTION OF OUR
BUSINESS-Legal Proceedings”. The judgment and
injunction have resulted in a change of the Company’s initial
direction and business plan, with a greater focus on increasing its
subscriber-base to its stream-based filtering service and expanding
its distribution and fundraising of original content.
The
Company filed a voluntary bankruptcy petition on October 18, 2017
and is attempting to reorganize under chapter 11, title 11, of the
United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Utah. If the Trustee’s plan of
reorganization is confirmed by the Bankruptcy Court, the Company
plans to pursue an appeal of the final judgment amount awarded in
the Disney Litigation and appeal the issuance of the permanent
injunction. For more information related to this, see
“DESCRIPTION OF OUR
BUSINESS-Bankruptcy Proceedings”. Also see
"RISK FACTORS-We are engaged in
current litigation, the outcome of which, if not favorable to
VidAngel, would have a material adverse effect on us and our
ability to continue our business operations". Also see
“RISK
FACTORS-Risks Related to Our
Chapter 11 Reorganization.”
This Offering is expressly contingent upon the
Bankruptcy Court’s confirmation of the Trustee’s
reorganization plan, or a reorganization plan that is substantially
similar to the Trustee’s reorganization plan. If an
alternate plan of reorganization is approved, the initial closing
will not occur, and the Offering will be terminated. All proceeds
submitted will be promptly returned to investors, without interest,
and without deduction.
Taxation
We are
taxed as a subchapter C Corporation, and, as such, we are required
to pay federal income tax at the corporate tax rates on our taxable
income.
Securities Offered
We are
offering a maximum of 7,462,686 shares of our Class B Common Stock
in this Offering with a minimum purchase requirement of twenty-five
(25) Offered Shares; however, we can waive the minimum purchase
requirement in our sole discretion.
The
Offering will terminate on the earlier to occur of (i) the date on
which we sell the Maximum Offering Amount, or (ii) twelve (12)
months from the date of qualification of this Offering. We refer to
either of these two dates as the Termination Date. The initial
closing will occur at the Company’s sole discretion any date
after the Company has received and accepted an initial subscription
for any number of Offered Shares and before the Termination Date.
If, on the initial closing date we have sold less than the Maximum
Offering, we will hold one or more additional closings for
additional sales, up to the Maximum Offering Amount, until the
Termination Date. For each closing, proceeds for subscriptions must
be submitted through an investor’s VidAngel customer account
in accordance with the billing information for such investor at
www.vidangel.com,
and will be held in a separate non-interest bearing account held by
VidAngel. Upon each closing of this Offering, the proceeds for the
Offering will be distributed to the Company and the Offered Shares
will be issued to the investors. If the Company terminates the
Offering for any reason, which the Company may in its sole
discretion, all proceeds submitted but not yet closed upon will be
promptly returned to investors without interest, and without deduction. Once a
subscription has been submitted and accepted by the Company, an
investor will not have the right to request the return of its
subscription payment prior to closing.
The
Company is offering its Offered Shares through our Offering’s
website: vidangel.com/invest.
This Offering Circular will be furnished to prospective investors
at vidangel.com/invest
via download at any time. We are not selling the Offered Shares
through commissioned sales agents or underwriters.
Investors in the
Offered Shares join our existing Class B Common Stockholders. Our
Class B Common Stock is common nonvoting equity and contains no
preferences as to other classes of our capital stock.
Class B
Common Stockholders are not entitled to vote their Class B Common
Stock, including in the election of directors. See
“SECURITIES BEING OFFERED
– Description of Certificate and
Bylaws.”
Our ability to pay dividends depends on both
our achievement of positive cash flow and our Board of Directors
discretion in declaring dividends. For our most
recent fiscal year ended December 31, 2019, we realized a net loss
of $1,611,154. The Company has never declared or paid cash
dividends on its capital stock. The Company currently intends to
retain any future earnings to finance the growth and development of
its business and therefore does not anticipate paying any cash
dividends for the foreseeable future. The order and priority of our
dividends is further described in “SECURITIES BEING OFFERED –
Dividends.”
Management
The Company is governed by our certificate of incorporation, as
amended, or our Certificate, and our bylaws, or our Bylaws. The
following summary describes material provisions of our Certificate
and our Bylaws as those documents pertain to the management of the
Company, but it is not a complete description of our Certificate,
our Bylaws or any combination of the two. A copy of our Certificate
and our Bylaws are filed as exhibits to the Offering Statement of
which this Offering Circular is a part. See “SECURITIES BEING OFFERED – Description of
Certificate of Formation and Bylaws.”
Board of Directors
Subject
to our stockholders’ rights to consent to certain
transactions as provided under the Delaware General Corporate Law,
or DGCL, the business and affairs of the Company are controlled by,
and all powers are exercised by, our board of directors, or our
Board. Our Board is required to consist of not fewer than three (3)
nor more than five (5) directors, the exact number to be set from
time to time by the Board. Our Board is comprised of Paul Ahlstrom,
Neal Harmon and Dalton Wright. Our Board is elected each year at
the annual meeting of Class A Common Stockholders, to hold office
until the next annual meeting and until their successors are
elected and qualified. Any newly created directorships resulting
from an increase in the authorized number of directors and any
vacancies occurring in our Board may be filled by the affirmative
vote of the remaining directors. A director may resign at any time,
and the Class A Common Stockholders may remove a director at any
time, with or without cause, by the affirmative vote of a majority
of stockholders voting in such decision. As Class B
Stockholders, investors in this offering will have no rights to
vote in the election or removal of members of our
Board.
The
DGCL provides that stockholders of a Delaware corporation are not
entitled to the right to cumulate votes in the election of
directors unless its certificate of incorporation provides
otherwise. Our Certificate does not provide for cumulative
voting.
Our
Board may designate one or more committees. Such committees must
consist of one or more directors. Any such committee, to the extent
permitted by applicable law, will have and may exercise all the
powers and authority of the Board in the management of the business
and affairs of the Company.
Officers
The
Board has the authority to select the officers of the Company.
Under our Bylaws, the officers are required to consist of a
Chairman of the Board, a Chief Executive Officer, or CEO, a
Secretary and a Treasurer. In addition, the Board may elect one or
more Vice Chairmen, President, Chief Financial Officer and Vice
Presidents, and such other offices as the Board may determine. Two
or more of the aforementioned offices may be held by the same
person. Our officers are: (i) Neal Harmon, CEO; (ii) Jeffrey
Harmon, Chief Marketing Officer; (iii) Elizabeth Ellis, President
and Chief Operating Officer; (iv) Patrick Reilly, Chief Financial
Officer and Secretary; and (v) Joseph Wecker, Chief Technology
Officer.
At the
first meeting of the Board following the annual meeting of
stockholders, the Board appoints the officers, however the Board
may also empower the CEO to appoint subordinate officers and agents
for us. Each officer so elected holds office until such
officer’s successor is elected and qualified or until the
officer’s earlier resignation or removal. Each officer is
required to perform such duties as are provided in the Bylaws or as
the Board may from time to time determine. Subject to
the rights, if any, of an officer under any employment agreement,
any officer may be removed, with or without cause, by the
affirmative vote of a majority of the Board. An officer
may resign at any time by giving notice to the Board. Our CEO is in
charge of the general affairs of the Company, subject to the
oversight of the Board. In case any officer is absent, or for any
other reason the Board may deem sufficient, the CEO or the Board
may delegate the powers and duties of such officer to any other
officer or to any director.
Transfer Restrictions.
The Company’s Class B Common Stock is
subject to the terms and conditions of our Stockholders Agreement.
The following summary describes material provisions of our
Stockholders Agreement as this document pertains to our Class B
Common Stock, but it is not a complete description of our
Stockholders Agreement. A copy of the form of our Stockholders
Agreement is filed as an exhibit to the Offering Statement of which
this Offering Circular is a part. See “SECURITIES BEING OFFERED
– Description of Stockholders Agreement.”
Investors in our
Class B Common Stock will be subject to the restrictions on
transfer set forth in our Stockholders Agreement. Under
the terms of our Stockholders Agreement, transfer of shares of our
Class B Common Stock will be subject to a right of first refusal
exercisable first by the Company, second, by our Class A Common
Stockholders, and, third, by our remaining Class B Common
Stockholders party to the Stockholders Agreement. Prior
to any transfer or proposed transfer of shares, the transferring
shareholder, or the Seller, is required to give written notice to
us and to the remaining stockholders of such proposed
transfer. The certificates for our Class B Common Stock will
be legended to reflect these restrictions.
Summary Risk Factors
An
investment in our Offered Shares involves a number of risks. See
“RISK FACTORS,”
of this Offering Circular. Some of the more significant risks
include those set forth below.
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An
investment in our Offered Shares is a speculative investment, and
therefore, no assurance can be given that you will realize your
investment objectives.
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We
intend to retain all our earnings for the future operation and
expansion of our business and do not anticipate making any cash
distributions at any time in the foreseeable future.
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Over
our past two fiscal years, we have experienced aggregate net
losses, and have operated at a net loss since
inception.
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The
auditors of our financial statements have expressed an opinion
raising substantial doubt about our ability to continue as a going
concern.
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We have
limited operating history upon which to base an investment
decision.
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We are
new and face all the risks of an early-stage company.
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We are
engaged in current litigation, the outcome of which, if not
favorable to VidAngel, would have a material adverse effect on us
and our ability to continue business operations.
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If our
efforts to attract and retain customers are not successful, our
business will be adversely affected.
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Changes
in competitive offerings for entertainment video, including the
potential rapid adoption of piracy-based video offerings, could
adversely impact our business.
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If we
are not able to manage change and growth, our business could be
adversely affected.
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If we
fail to maintain or, in new markets establish, a positive
reputation with customers concerning our service, including the
content we offer and the ease of use and accuracy of our content
filters, we may not be able to attract or retain customers, and our
operating results may be adversely affected.
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We face
risks, such as unforeseen costs and potential liability in
connection with content we acquire, filter and/or distribute
through our service.
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Any
significant disruption in or unauthorized access to our computer
systems or those of third parties that we utilize in our
operations, including those relating to cybersecurity or arising
from cyber-attacks, could result in a loss or degradation of
service, unauthorized disclosure of data, including customer and
corporate information, or theft of intellectual property, including
digital content assets, which could adversely impact our
business.
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If the
technology we use in operating our business fails, becomes
unavailable, or does not operate to expectations, our business and
operating results could be adversely impacted.
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Changes
in how network operators handle and charge for access to data that
travel across their networks could adversely impact our
business.
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Our
reputation and relationships with customers would be harmed if our
customer data, particularly billing data, were accessed by
unauthorized persons.
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If our
trademarks and other proprietary rights are not adequately
protected to prevent use or appropriation by our competitors, the
value of our brand and other intangible assets may be diminished,
and our business may be adversely affected.
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Intellectual
property claims against us could be costly and result in the loss
of significant rights related to, among other things, our web site,
filtering technology, our recommendation and merchandising
technology, title selection processes and marketing
activities.
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We are
engaged in legal proceedings that could cause us to incur
unforeseen expenses and could occupy a significant amount of our
management's time and attention.
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We are
dependent on our management to achieve our objectives, and our loss
of, or inability to obtain, key personnel could delay or hinder
implementation of our business and growth strategies, which could
adversely affect the value of your investment and our ability to
pay dividends.
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This is
a fixed price offering and the fixed offering price may not
accurately represent the current value of us or our assets at any
particular time. Therefore, the purchase price you pay for the
Offered Shares may not be supported by the value of our assets at
the time of your purchase.
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There
is currently no active trading market for our Class B Common Stock.
No assurance can be given that stockholders will be able to sell
their shares when desired, or at all.
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We may
change our operational policies and business and growth strategies
without stockholder consent, which may subject us to different and
more significant risks in the future.
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We
are involved in bankruptcy proceedings
to reorganize under chapter 11, title 11 of the United States
Bankruptcy Code, the outcome of which may have a material adverse
impact on our business, financial condition, results of operations,
and cash flows.
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Even if
a chapter 11 plan of reorganization is consummated, we may not be
able to achieve our stated goals and there is substantial doubt
regarding our ability to continue as a going concern.
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Interest of Management and Related Parties
We have
entered into an Investor Rights and Voting Agreement, creating
certain board rights, with some of our significant investors,
including Alta Ventures Mexico Fund I, the manager of which is Paul
Ahlstrom, one of our directors.
Reporting Requirements under Tier II of Regulation
A
The
Company has previously issued Class B Common Stock pursuant to Tier
II of Regulation A. The Company is offering the Offered Shares
pursuant to that same exemption. We are required to comply with
certain ongoing disclosure requirements under Rule 257 of
Regulation A. We are currently required to
file: an annual report with the SEC on Form 1-K; a
semi-annual report with the SEC on Form 1-SA; current reports with
the SEC on Form 1-U; and a notice under cover of Form
1-Z. The necessity to file current reports will be
triggered by certain corporate events. Parts I & II
of Form 1-Z will be filed by us if and when we decide to and are no
longer obligated to file and provide annual reports pursuant to the
requirements of Regulation A.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This
Offering Circular contains certain forward-looking statements that
are subject to various risks and
uncertainties. Forward-looking statements are generally
identifiable by use of forward-looking terminology such as
“may,” “will,” “should,”
“potential,” “intend,”
“expect,” “outlook,” “seek,”
“anticipate,” “estimate,”
“approximately,” “believe,”
“could,” “project,” “predict,”
or other similar words or expressions. Forward-looking statements
are based on certain assumptions, discuss future expectations,
describe future plans and strategies, contain financial and
operating projections or state other forward-looking
information. Our ability to predict results or the
actual effect of future events, actions, plans or strategies is
inherently uncertain. Although we believe that the
expectations reflected in our forward-looking statements are based
on reasonable assumptions, our actual results and performance could
differ materially from those set forth or anticipated in our
forward-looking statements. Factors that could have a
material adverse effect on our forward-looking statements and upon
our business, results of operations, financial condition, funds
derived from operations, cash available for dividends, cash flows,
liquidity and prospects include, but are not limited to, the
factors referenced in this Offering Circular, including those set
forth below.
When
considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this Offering
Circular. Readers are cautioned not to place undue
reliance on any of these forward-looking statements, which reflect
our views as of the date of this Offering Circular. The
matters summarized below and elsewhere in this Offering Circular
could cause our actual results and performance to differ materially
from those set forth or anticipated in forward-looking statements.
Accordingly, we cannot guarantee future results or
performance. Furthermore, except as required by law, we
are under no duty to, and we do not intend to, update any of our
forward-looking statements after the date of this Offering
Circular, whether as a result of new information, future events or
otherwise.
An investment in our Offered Shares is highly speculative and is
suitable only for persons or entities that are able to evaluate the
risks of the investment. An investment in our Offered
Shares should be made only by persons or entities able to bear the
risk of, and to withstand the total loss of, their
investment. Prospective investors should consider the
following risks before making a decision to purchase our Offered
Shares. To the best of our knowledge, we have included all material
risks to investors in this section.
General Risks of an Investment in Us
An
investment in our Offered Shares is a speculative investment and,
therefore no assurance can be given that you will realize your
investment objectives.
No
assurance can be given that investors will realize a return on
their investments in us or that they will not lose their entire
investment in our Offered Shares. For this reason, each
prospective investor of our Offered Shares should carefully read
this Offering Circular. ALL SUCH PERSONS OR ENTITIES SHOULD CONSULT
WITH THEIR ATTORNEY OR FINANCIAL ADVISOR PRIOR TO MAKING AN
INVESTMENT.
We do not intend to pay dividends for the
foreseeable future.
We
intend to retain all of our earnings for the future operation and
expansion of our business and do not anticipate making any cash
distributions at any time in the foreseeable future.
Over our past two fiscal years, we have
experienced aggregate net losses.
We
recorded a net loss of $1,611,154 in fiscal 2019 and $286,354 in
fiscal 2018, resulting in an aggregate net loss of $1,897,508 over
our last two fiscal years. If our ability to generate positive net
income remains inconsistent in the future, the value of our Class B
Common Stock would likely be materially and adversely
affected.
Our
auditors have expressed an opinion raising substantial doubt about
our ability to continue as a going concern.
The
Company recorded a net loss of $1,611,154, and used net cash of
$894,237, in fiscal year 2019. The Company also filed for chapter
11 bankruptcy in October 2017. In September 2019, a permanent
injunction was granted, and a judgment in the amount of $62,488,750
was entered against the Company. These matters, among others, raise
substantial doubt about our ability to continue as a going
concern.
Our
future indebtedness may limit our ability to declare and pay
dividends and may affect our operations.
Although we
don’t anticipate doing so in the near future, we may seek
debt financing eventually to assist with the financing of our
future operations. Our ability to make principal and
interest payments with respect to any such debt incurred depends on
future performance, which performance is subject to many factors,
some of which will be outside of our control. In addition, most of
such indebtedness will likely be secured by substantially all of
our assets and will contain restrictive covenants that limit our
ability to distribute cash and to incur additional
indebtedness. Payment of principal and interest on such
indebtedness, as well as compliance with the requirements and
covenants of such indebtedness, could limit our ability to pay
dividends to our stockholders, if at all. Such leverage may also
adversely affect our ability to finance future operations and
capital needs, or to pursue other business opportunities and make
results of operations more susceptible to adverse business
conditions.
We
have limited operating history upon which to base an investment
decision.
We are
an early-stage company in which you may lose your entire
investment. We began operations in 2013. Because we have a limited
operating history, we are unable to provide significant data upon
which to evaluate fully our prospects and an investment in our
securities. Our ability to succeed and generate operating profits
and positive operating cash flow will depend on our ability, among
other things, to:
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Develop
and execute our business model;
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Attract
and maintain an adequate customer base;
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Raise
additional capital as contemplated in this offering, if necessary,
in the future;
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Pending
and potential lawsuits threatening our ability to provide our
services; and
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Attract
and retain qualified personnel.
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We
cannot be certain that our business strategy will be successful in
the long-term because this strategy is still relatively new and
even if successful, we may face difficulty in managing our growth.
As an early-stage company, we will be particularly susceptible to
the risks and uncertainties described in these risk
factors.
We
are new and face all the risks of an early-stage
company.
We may
encounter challenges and difficulties frequently experienced by
early-stage companies; including:
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A lack
of operating experience;
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Increasing
net losses and negative cash flows;
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Insufficient
revenue or cash flow to be self-sustaining;
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An
unproven business model;
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Difficulties
in managing rapid growth.
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We
are engaged in current litigation, the outcome of which, if not
favorable to VidAngel, would have a material adverse effect on us,
our capitalization, and our ability to continue our business
operations.
Our remote filtering and Remote Media Ownership
Management, or RMOM, services, also referred to as the Disc-Based
Service, has been discontinued, due to a permanent injunction, or
the PI, issued by the United States District Court for the Central
District of California, or the California Court, in the Disney
Litigation. An Award of $62,448,750 was also issued by the
California Court in the Disney Litigation. We have filed a
notice of appeal to the judgment in the Disney Litigation. We do
not plan to use any of the proceeds of this offering to fund
expenses in our appeal of the adverse judgment in the Disney
Litigation, however, it is possible that a portion of working
capital derived from the proceeds of this offering could be used
for this purpose. See “DESCRIPTION OF THE BUSINESS – Legal
Proceedings” for a detailed summary of our current
litigation.
We can
provide no assurance as to the outcome of these or any future
actions, and such actions may result in substantial payments to
satisfy adverse judgments or settle claims or proceedings, enter
into costly licensing agreements, make expensive changes in our
methods of doing business, or cease conducting certain operations,
which would harm our business. Regardless of the outcome,
litigation has resulted in the past, and may result in the future,
in significant legal expenses and require significant attention and
resources of management. As a result, current and any future
litigation could result in losses, damages and expenses that have a
material adverse effect on our business.
Risks Related to Our Business
Our
new stream-based filtering service is dependent upon access to data
and functionality available from a third-party licensed streaming
service. If our access to these services becomes restricted, our
business could be adversely impacted.
On June
13, 2017, we launched a new version of VidAngel. The new
stream-based filtering service requires a user to first have access
to a licensed streaming service, or LSS, such as Amazon Video, Amazon Prime,
Netflix, and HBO. Our stream-based filtering service is layered on
top of a user’s access to the existing services of an LSS and
is not endorsed by any LSS. Our ability to provide our customers
with filtered content is dependent upon an LSS’s willingness
to allow our filtering technology to overlay the content that they
provide on their platform to the customer base we mutually share.
As a result, the stream-based filtering service is dependent upon
access to data and functionality available from the LSS, without
which it could become difficult to offer an acceptable consumer
experience. If our access to the content provided on these
streaming services is severely limited or restricted in the future,
our ability to grow our business could be adversely
impacted.
If
our efforts to attract and retain customers are not successful, our
business will be adversely affected.
We have
experienced positive customer growth since launching the latest
version of our service in June 2017. Our ability to continue to
attract customers will depend, in part, on our ability to
consistently provide our customers with compelling content choices,
a quality experience for selecting and viewing TV shows and movies,
and dynamic filtering solutions set to the customer’s
preferences. Furthermore, the relative service levels, content
offerings, pricing and related features of competitors to our
service may adversely impact our ability to attract and retain
customers. Our main direct competition is ClearPlay, Inc., or
ClearPlay, which also offers a filtering service, and Vudu. Other
entertainment video providers that do not currently offer a
filtering service, such as multichannel video programming
distributors, Internet-based movie and TV content providers
(including those that provide pirated content) and brick-and-mortar
DVD rental outlets, including without limitation Netflix, Amazon
Prime, Vimeo, Hulu, and Xfinity OnDemand, could become direct
competitors in the future. If consumers do not perceive our
service as valuable, including if we introduce new or adjust
existing features, adjust pricing or service offerings, or change
the mix of content in a manner that is not favorably received by
them, we may not be able to attract and retain customers. In
addition, many of our customers try our service resulting from
word-of-mouth advertising from existing customers. If our efforts
to satisfy our existing customers are not successful, we may not be
able to attract new customers, and, as a result, our ability to
maintain and/or grow our business will be adversely affected.
Customers may cease to use our service for many reasons, including
the need to cut household expenses, unsatisfactory availability of
content, competitive services providing a better value or
experience, and customer service issues not being satisfactorily
resolved. We must continually add new customers both to replace
departed customers and to grow our business beyond our current
customer base. If we are unable to compete successfully with
current and new competitors in retaining existing customers and
attracting new customers, our business will be adversely affected.
Further, if excessive numbers of customers cease using our service,
we may be required to incur significantly higher marketing
expenditures than we currently anticipate to replace these
customers with new customers.
Changes
in competitive offerings for entertainment video, including the
potential rapid adoption of piracy-based video offerings, could
adversely impact our business.
The
market for entertainment video is intensely competitive and subject
to rapid change. Through new and existing distribution channels,
consumers have increasing options to access entertainment video.
The various economic models underlying these channels include
subscription, transactional, ad-supported and piracy-based
services. All have the potential to capture meaningful segments of
the entertainment video market and could offer filtering services
in the future. Piracy, in particular, threatens to damage our
business, as its fundamental proposition to consumers is so
compelling and difficult to compete against: virtually all content
for free and some content available has already been edited for
objectionable content. Furthermore, in light of the compelling
consumer proposition, piracy services are subject to rapid global
growth. Traditional providers of entertainment video, including
broadcasters and cable network operators, as well as Internet-based
e-commerce entertainment video providers, are increasing their
Internet-based video offerings. Several of these competitors
have long operating histories, large customer bases, strong brand
recognition and significant financial, marketing and other
resources. They may secure better terms from suppliers, adopt more
aggressive pricing, and devote more resources to product
development, technology, infrastructure, content acquisitions and
marketing. New competitors may enter the market or existing
providers may adjust their services with unique offerings or
approaches to providing entertainment video. Companies also may
enter into business combinations or alliances that strengthen their
competitive positions. If we are unable to successfully or
profitably compete with current and new competitors who do or may
offer filtering services in the future, our business will be
adversely affected, and we may not be able to increase or maintain
market share, revenues or profitability.
If
we are not able to manage change and growth, our business could be
adversely affected.
We are
expanding our operations, scaling our filtering service to
effectively and reliably handle anticipated growth in both
customers and features related to our service, ramping up our
ability to provide customers with custom content filters, as well
as continuing to operate our service within the U.S. To enhance the
capacity of our stream-based filtering service, we are continuing
to develop software and other technology and utilize third-party
“cloud” storage services to ensure our users can view
desired content using the same modern devices as everyone else,
with the
added capability of controlling the viewing experience like never
before. As we ramp up our offering of content filters, we
are building out crowd-sourcing expertise in a number of distinct
roles, including video viewers, video taggers, video reviewers
and video publishers. If we are not able to manage the growing
complexity of our business, including improving, refining or
revising our systems and operational practices related to our video
operations and filtering content, our business may be adversely
affected. See “DESCRIPTION OF
THE BUSINESS.”
If
we fail to maintain or, in new markets establish, a positive
reputation with customers concerning our service, including the
content we offer and the ease of use and accuracy of our content
filters, we may not be able to attract or retain customers, and our
operating results may be adversely affected.
We
believe that a positive reputation is important to attract and
retain customers who have a number of choices for obtaining
entertainment video. To the extent our content, particularly our
content filters, is perceived as low quality, or our failure to
sufficiently filter offensive or otherwise undesired content to
customers, our ability to establish and maintain a positive
reputation may be adversely impacted. Furthermore, to the extent
our marketing, customer service and public relations efforts are
not effective or create a negative consumer reaction, our ability
to establish and maintain a positive reputation may be adversely
impacted. As we expand into new markets, we need to establish our
reputation with new customers. To the extent we are unsuccessful in
creating positive impressions, our business in new markets may be
adversely impacted.
Changes
in how we market our service could adversely affect our marketing
expenses and our customer base may be adversely
affected.
We
utilize a broad mix of marketing and public-relations programs,
including social media sites such as Facebook, YouTube and Twitter,
to promote our service to potential customers. We may limit or
discontinue the use or support of certain marketing sources or
activities if advertising rates increase or if we become concerned
that customers or potential customers deem certain marketing
practices intrusive or damaging to our brand. If the available
marketing channels are curtailed, our ability to attract new
customers may be adversely affected.
If
companies that promote our service determine that we negatively
impact their businesses, decide to compete more directly with our
business, enter a similar business, or choose to exclusively
support our competitors, we may no longer have access to certain
marketing channels. If we are unable to maintain or replace our
sources of customers with similarly effective sources, or if the
cost of our existing sources increases, our customer base and
marketing expenses may be adversely affected.
We
face risks, such as unforeseen costs and potential liability in
connection with content we acquire, filter and/or distribute
through our service.
As a
distributor of content, we face potential liability for negligence,
copyright and trademark infringement, or other claims based on the
nature and content of the materials that we acquire, filter and/or
distribute. We also may face potential liability for content used
in promoting our service, including marketing materials and
features on our Web site such as customer reviews. As we expand our
offering of content filters, we have become responsible for costs
of producing content maps and other features. We also take on risks
associated with filters, such as producing filters that do not
seamlessly stream content but rather produce an unsatisfactory
experience to the viewing customer. To the extent we do not
accurately anticipate costs or mitigate risks, including for
content that we obtain but ultimately do not make available on our
service, or if we become liable for content we acquire, filter
and/or distribute, our business may suffer. Litigation to defend
such claims could be costly and the expenses and damages arising
from any liability or unforeseen production risks could harm our
operating results. We may not be indemnified or insured against
such claims or costs of these types. See “DESCRIPTION OF OUR BUSINESS –
Legal Proceedings.”
We
rely upon a number of partners to make our service available on
their devices.
We
currently offer customers the ability to receive filtered content
through a host of Internet-connected screens, including TVs,
digital video players, television set-top boxes and mobile devices.
We have agreements with various tech companies and distributors to
make our service available through the television set-top boxes of
such service providers. We intend to continue to broaden our
capability to transmit filtered TV shows and movies to other
platforms and partners over time. If we are not successful in
maintaining existing and creating new relationships, or if we
encounter technological, content licensing, regulatory or other
impediments to delivering our filtered content to our customers via
those devices, our ability to grow our business could be adversely
impacted. Furthermore, the devices are manufactured and sold by
entities other than us and while these entities should be
responsible for the devices' performance, the connection between us
and those devices may nonetheless result in customer
dissatisfaction toward the Company and such dissatisfaction could
result in claims against us or otherwise adversely impact our
business. In addition, technology changes to our product
functionality and offering of content filters may require that
partners update their devices. If partners do not update or
otherwise modify their devices, our service and our
customers’ use and enjoyment could be negatively
impacted.
Any
significant disruption in or unauthorized access to our computer
systems or those of third parties that we utilize in our
operations, including those relating to cybersecurity or arising
from cyber-attacks, could result in a loss or degradation of
service, unauthorized disclosure of data, including customer and
corporate information, or theft of intellectual property, including
digital content assets, which could adversely impact our
business.
Our
reputation and ability to attract, retain and serve our customers
is dependent upon the reliable performance and security of our
computer systems and those of third parties that we utilize in our
operations. These systems may be subject to damage or interruption
from earthquakes, adverse weather conditions, other natural
disasters, terrorist attacks, power loss, telecommunications
failures, and cybersecurity breaches. Interruptions in these
systems, or with the Internet in general, could leave our service
unavailable or degraded, or otherwise hinder our ability to deliver
filtered content to our customers. Service interruptions, errors in
our software or the unavailability of computer systems used in our
operations could diminish the overall attractiveness of our service
to existing and potential customers.
Our
computer systems and those of third parties we use in our
operations are vulnerable to cybersecurity breaches, including
cyber-attacks such as computer viruses, denial of service attacks,
physical or electronic break-ins and similar disruptions. These
systems periodically experience directed attacks intended to lead
to interruptions and delays in our service and operations as well
as loss, misuse or theft of data. Any attempt by hackers to obtain
our data (including customer and corporate information) or
intellectual property (including digital content assets), disrupt
our service, or otherwise access our systems, or those of third
parties we use, if successful, could harm our business, be
expensive to remedy and damage our reputation. We have implemented
certain systems and processes to thwart hackers and protect our
data and systems. To date hackers have not had a material impact on
our service or systems however this is no assurance that hackers
may not be successful in the future. Our insurance does not cover
expenses related to such disruptions or unauthorized access.
Efforts to prevent hackers from disrupting our service or otherwise
accessing our systems are expensive to implement and may limit the
functionality of or otherwise negatively impact our service
offering and systems. Any significant disruption to our service or
access to our systems could result in a loss of customers and
adversely affect our business and results of
operation.
We
utilize our own communications and computer hardware systems
located either in our facilities or in that of a third-party Web
hosting provider. In addition, we utilize third-party
“cloud” computing services in connection with our
business operations. We also utilize our own and third-party
content delivery networks to help us deliver TV shows and movies in
high volume to our customers over the Internet. Problems faced by
us or our third-party Web hosting, "cloud" computing, or other
network providers, including technological or business-related
disruptions, as well as cybersecurity threats, could adversely
impact the experience of our customers.
We
rely upon certain third-party cloud computing service providers to
operate certain aspects of our service and any disruption of or
interference with our use of such services from our providers would
impact our operations and our business would be adversely
impacted.
Several
third-party cloud computing services providers provide VidAngel
with a distributed computing infrastructure platform for business
operations, or what is commonly referred to as a "cloud" computing
service. We have designed our software and computer systems so as
to utilize data processing, storage capabilities and other services
provided by such providers. Currently, we run the vast majority of
our computing using such third-party cloud computing services.
Given this, along with the fact that we cannot easily switch our
operations to another cloud provider, any disruption of or
interference with our use of such services from our providers would
impact our operations and our business would be adversely
impacted.
If
the technology we use in operating our business fails, becomes
unavailable, or does not operate to expectations, our business and
operating results could be adversely impacted.
We
utilize a combination of proprietary and third-party technology to
operate our business. This includes technology we have developed
such as our content delivery and filtering solution and filter
curation platform. We also use technology to recommend and
merchandise content to our consumers as well as to enable fast and
efficient delivery of content to our customers and their various
consumer electronic devices. For example, we have built and
deployed our video on a content delivery network, or CDN. To the
extent Internet Service Providers, or ISPs, do not interconnect
with our CDN, or if we experience difficulties in its operation,
our ability to efficiently and effectively deliver our content and
our offering of content filters to our customers could be adversely
impacted and our business and results of operation could be
adversely affected. Likewise, if our recommendation and
merchandising technology does not enable us to predict and
recommend titles that our customers will enjoy, our ability to
attract and retain customers may be adversely affected. We also
utilize third party technology to help market our service, process
payments, and otherwise manage the daily operations of our
business. If our technology or that of third parties we utilize in
our operations fails or otherwise operates improperly, our ability
to operate our service, retain existing customers and add new
customers may be impaired. Also, any harm to our customers’
personal computers or other devices caused by software used in our
operations could have an adverse effect on our business, results of
operations and financial condition. See “DESCRIPTION OF THE BUSINESS—Our
Intellectual Property.”
If
government regulations relating to the Internet or other areas of
our business change, we may need to alter the manner in which we
conduct our business, or incur greater operating
expenses.
The
adoption or modification of laws or regulations relating to the
Internet or other areas of our business could limit or otherwise
adversely affect the manner in which we currently conduct our
business. In addition, the continued growth and development of the
market for online commerce may lead to more stringent consumer
protection laws, which may impose additional burdens on us. If we
are required to comply with new regulations or legislation or new
interpretations of existing regulations or legislation, this
compliance could cause us to incur additional expenses or alter our
business model.
Changes
in laws or regulations that adversely affect the growth, popularity
or use of the Internet, including laws impacting net neutrality,
could decrease the demand for our service and increase our cost of
doing business. On October 1, 2019, the U.S. Court of Appeals
for the D.C. Circuit upheld a U.S. Federal Communications
Commission, or FCC, decision dated December 14, 2017 to repeal net
neutrality rules. To the extent network operators attempt to use
this ruling to extract fees from us to deliver our traffic or
otherwise engage in discriminatory practices, our business could be
adversely impacted. Within such a regulatory environment, coupled
with potentially significant political and economic power of local
network operators, we may experience discriminatory or
anti-competitive practices that could impede our growth, cause us
to incur additional expense or otherwise negatively affect our
business.
Changes
in how network operators handle and charge for access to data that
travel across their networks could adversely impact our
business.
We rely
upon the ability of consumers to access our service through the
Internet. If network operators block, restrict or otherwise impair
access to our service over their networks, our service and business
could be negatively affected. To the extent that network operators
implement usage-based pricing, including meaningful bandwidth caps,
or otherwise try to monetize access to their networks by data
providers, we could incur greater operating expenses and our new
customer acquisition and retention could be negatively impacted.
Furthermore, to the extent network operators create tiers of
Internet access service and either charge us for or prohibit us
from being available through these tiers, our business could be
negatively impacted.
Most
network operators that provide consumers with access to the
Internet also provide these consumers with multichannel video
programming. As such, many network operators have an incentive to
use their network infrastructure in a manner adverse to our
continued growth and success. While we believe that consumer
demand, regulatory oversight and competition will help check these
incentives, to the extent that network operators are able to
provide preferential treatment to their data as opposed to ours or
otherwise implement discriminatory network management practices,
our business could be negatively impacted.
Privacy
concerns could limit our ability to collect and leverage our
customer data and disclosure of customer data could adversely
impact our business and reputation.
In the
ordinary course of business, and in particular in connection with
merchandising our service to our customers, we collect and utilize
data supplied by our customers. We currently face certain legal
obligations regarding the manner in which we treat such
information. Other businesses have been criticized by privacy
groups and governmental bodies for attempts to link personal
identities and other information to data collected on the Internet
regarding users' browsing and other habits. Increased regulation of
data utilization practices, including self-regulation or findings
under existing laws that limit our ability to collect and use data,
could have an adverse effect on our business. In addition, if we
were to disclose data about our customers in a manner that was
objectionable to them, our business reputation could be adversely
affected, and we could face potential legal claims that could
impact our operating results.
Our
reputation and relationships with customers would be harmed if our
customer data, particularly billing data, were accessed by
unauthorized persons.
We
maintain personal data regarding our customers. This data is
maintained on our own systems as well as those of third parties we
use in our operations. With
respect to billing data, such as credit card numbers, we do not
store such information on our servers, but rely on third party
services that are PCI DSS compliant for storing and accessing
billing information. We take measures to protect against
unauthorized intrusion into our customers’ data. Despite
those measures, we, our payment processing services and other
third-party services we use could experience an unauthorized
intrusion into our customers’ data. In the event of such a
breach, current and potential customers may become unwilling to
provide the information to us necessary for them to become
customers. Additionally, we could face legal claims for such a
breach. The costs relating to any data breach could be material,
and we currently do not carry insurance against the risk of a data
breach. For these reasons, should an unauthorized intrusion into
our customers’ data occur, our business could be adversely
affected.
We
are subject to payment processing risk.
Our customers pay for our service using a variety
of payment methods, including credit and debit cards. We rely
on internal systems as well as those of third parties to process
payments. Acceptance and processing of these payment methods
are subject to certain rules and regulations and require payment of
interchange and other fees. To the extent there are
disruptions in our payment processing systems, increases in
payment processing fees, material changes in the payment ecosystem,
such as large re-issuances of payment cards, delays in receiving
payments from payment processors and/or changes to rules or
regulations concerning payment processing, our revenue, operating
expenses and operating results could be adversely
impacted. In addition, from time to time, we encounter
fraudulent use of payment methods, which could impact our results
of operation, and, if not adequately controlled and managed, could
create negative consumer perceptions of our
service.
If our trademarks and other proprietary rights
are not adequately protected to prevent use or appropriation by our
competitors, the value of our brand and other intangible assets may
be diminished, and our business may be adversely
affected.
We rely
and expect to continue to rely on a combination of proprietary
information, invention assignment, non-competition and arbitration
agreements with our employees, consultants and third parties with
whom we have relationships, as well as trademark, copyright, patent
and trade secret protection laws, to protect our proprietary
rights. We may also seek to enforce our proprietary rights through
court proceedings. We have applied and we expect to apply for
trademark registrations and the issuance of patents from time to
time. Such applications may not be approved, third
parties may challenge any copyrights, patents or trademarks issued
to or held by us, third parties may knowingly or unknowingly
infringe our intellectual property rights, and we may not be able
to prevent infringement or misappropriation without substantial
expense to us. If the protection of our intellectual property
rights is inadequate to prevent use or misappropriation by third
parties, the value of our brand and other intangible assets may be
diminished, competitors may be able to mimic our service and
methods of operations more effectively, the perception of our
business and service to customers and potential customers may
become confused in the marketplace, and our ability to attract
customers may be adversely affected.
We
currently hold various domain names relating to our brand,
including www.vidangel.com. Failure to
protect our domain names could adversely affect our reputation and
brand and make it more difficult for customers to find our web site
and our service. We may be unable, without significant cost or at
all, to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
Intellectual
property claims against us could be costly and result in the loss
of significant rights related to, among other things, our web site,
filtering technology, our recommendation and merchandising
technology, title selection processes and marketing
activities.
Trademark,
copyright, patent and other intellectual property rights are
important to us and other companies. Our intellectual property
rights extend to our technology, business processes and the content
on our web site. From time to time, third parties may allege that
we have violated their intellectual property rights. If we are
unable to obtain sufficient rights, successfully defend our use,
develop non-infringing technology, or otherwise alter our business
practices on a timely basis in response to claims for infringement,
misappropriation, misuse or other violation of third-party
intellectual property rights, our business and competitive position
may be adversely affected. Many companies are devoting significant
resources to developing patents that could potentially affect many
aspects of our business. There are numerous patents that broadly
claim means and methods of conducting business on the Internet.
Defending against intellectual property claims, whether they are
with or without merit or are determined in our favor, would result
in costly litigation and the diversion of technical and management
personnel. It also may result in our inability to use our current
web site, streaming technology, our recommendation and
merchandising technology or inability to market our service and
merchandise our products. As a result of such dispute, we may have
to develop non-infringing technology, enter into royalty or
licensing agreements, adjust our merchandising or marketing
activities or take other actions to resolve the claims. These
actions, if required, may be costly or unavailable on terms
acceptable to us. We are currently engaged in litigation with
Disney Enterprises, Inc., et. al., or the Disney
Litigation. In connection with the litigation, a judgment was
entered against the Company in the amount of $62,448,750, which is
currently the subject of an appeal. Our obligation to make
substantial payments to satisfy this judgment would adversely
affect our financial condition and our ability to continue business
operations. See “DESCRIPTION
OF THE BUSINESS – Legal Proceedings” below for a
detailed summary of our current litigation.
We
are engaged in legal proceedings that could cause us to incur
unforeseen expenses and could occupy a significant amount of our
management's time and attention.
From
time to time, we are subject to litigation or claims that could
negatively affect our business operations and financial position.
We are currently involved in the
Disney Litigation and recently filed a notice of appeal of the
final judgment awarding the Plaintiffs $62,448,750 with the Ninth
Circuit Court of Appeals on April 10, 2020. Subsequent to the
adverse judgment and injunction prohibiting us from engaging in
streaming or copying the copyrighted works of the Plaintiffs, we
filed a voluntary bankruptcy petition and are reorganizing under
Chapter 11 of the Bankruptcy Code. 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 may reassert one or more of its patent claims
against us when the stay is ended. It is possible that a
portion of our working capital derived from the proceeds of this
offering could be required to fund expenses in our defense of these
legal matters. As we grow, we expect the number of litigation
matters against us to increase. These matters have included
copyright infringements, which are typically expensive to defend.
Litigation disputes could cause us to incur unforeseen expenses,
could occupy a significant amount of our management's time and
attention and could negatively affect our business operations and
financial position. See “USE OF PROCEEDS TO ISSUER” and
“DESCRIPTION OF THE BUSINESS
– Legal Proceedings” below for a detailed
summary of our current litigation.
We
may seek additional capital that may result in stockholder dilution
or others having rights senior to those of our Class B Common
Stockholders.
From
time to time, we may seek to obtain additional capital, either
through equity, equity-linked or debt securities. The decision to
obtain additional capital will depend on many factors, among
others:
●
our degree of
success in capturing a larger portion of the overall market for
entertainment video;
●
the costs of
establishing or acquiring development, marketing and distribution
capabilities for our filtered content;
●
the costs of
preparing, filing and prosecuting patent applications, maintaining
and enforcing our issued patents and defending intellectual
property-related claims;
●
the extent to which
we acquire or invest in customer service, exclusive digital
distribution of original content or technologies and other
strategic relationships; and
●
the costs of
financing unanticipated working capital requirements and responding
to competitive pressures.
If we
raise additional funds through the issuance of equity,
equity-linked or debt securities, such securities may have rights,
preferences or privileges senior to the rights of our Class B
Common Stock and our stockholders may experience
dilution.
We
may lose key employees or may be unable to hire qualified
employees.
We rely
on the continued service of our senior management, including our
CEO and co-founder Neal Harmon, members of our executive team,
other key employees, and the hiring of new qualified employees. In
our industry, there is substantial and continuous competition for
highly-skilled business, product development, technical and other
personnel. We may not be successful in recruiting new personnel and
in retaining and motivating existing personnel, which may be
disruptive to our operations. See “DIRECTORS, EXECUTIVE OFFICERS AND
SIGNIFICANT EMPLOYEES.”
We
are dependent on our management to achieve our objectives, and our
loss of, or inability to obtain, key personnel could delay or
hinder implementation of our business and growth strategies, which
could adversely affect the value of your investment and our ability
to pay dividends.
Our
success depends on the diligence, experience and skill of our Board
and officers. Neal Harmon is our director and our Chief
Executive Officer. Jeffrey Harmon is our Chief Marketing
Officer. Elizabeth Ellis is our President & Chief
Operating Officer. Patrick Reilly is our Chief Financial
Officer. Joseph Wecker is our Chief Technology
Officer. We have neither employment agreements with, nor key
man insurance for, any of our officers and the loss of any of them,
but particularly Messrs. Harmon, could harm our business, financial
condition, cash flow and results of operations. Any such
event would likely result in a material adverse effect on your
investment.
Risks
Relating to the Formation and Internal Operation of the
Company
You
will have only limited rights regarding our management; therefore,
you will not have the ability to actively influence the day-to-day
management of our business and affairs.
Our
Board will have sole power and authority over the management of the
Company, subject only to the requirements of the
DGCL. See “SECURITIES BEING OFFERED – Description of
Our Certificate of Incorporation and Bylaws.”
Therefore, you will not have an active role in the Company’s
day-to-day management. Further, as a holder of
non-voting common stock, you will have no right to vote in the
election or removal of directors, nor will you have the right to
vote on major corporate actions that are subject to the approval of
the Class A Stockholders.
We
may change our operational policies and business and growth
strategies without stockholder consent, which may subject us to
different and more significant risks in the future.
Our
Board determines our operational policies and our business and
growth strategies. Our directors may make changes to, or approve
transactions that deviate from, those policies and strategies
without a vote of, or notice to, our stockholders. This could
result in us conducting operational matters or pursuing different
business or growth strategies than those contemplated in this
Offering Circular. Under any of these circumstances, we may expose
ourselves to different and more significant risks in the future,
which could materially and adversely affect our business and
growth.
Our
management will have significant control over our operations by
virtue of the equity ownership in us by entities controlled by our
director, co-founder and CEO, Neal Harmon.
Mr.
Neal Harmon is one of our three directors, our co-founder and our
CEO. Further, Harmon Ventures LLC owns 41.45% of the
Class A Common Stock of the Company and Harmon Ventures LLC is
owned by Neal, Jeffery, and Daniel Harmon, who are brothers.
Further, through their respective ownership, they collectively
control the voting of 8,938,520 shares of our Class A Common
Stock. Messrs. Harmon collectively control sufficient Class A
Common Stock to significantly influence the election of our board
of directors, and actions requiring the consent of a majority of
the Class A Common Stockholders and this will remain unchanged
following completion of this offering. See “SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN SECURITY HOLDERS.”
The
ability of a stockholder to recover all or any portion of such
stockholder’s investment in the event of a dissolution or
termination may be limited.
In the
event of a dissolution or termination of the Company, the proceeds
realized from the liquidation of the assets of the Company will be
distributed among the stockholders, but only after the satisfaction
of the claims of third-party creditors of the
Company. The ability of a stockholder to recover all or
any portion of such stockholder’s investment under such
circumstances will, accordingly, depend on the amount of net
proceeds realized from such liquidation and the number of claims to
be satisfied therefrom. There can be no assurance that
the Company will recognize gains on such liquidation, nor is there
any assurance that common stockholders will receive a distribution
in such a case.
The Board and our executive officers will have
limited liability for, and will be indemnified and held harmless
from, the losses of the Company.
The
Company will indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that he is or was a
director, officer, employee or agent of the Company, or is or was
serving at the request of our Company as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including
attorneys’ fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
best interest of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A successful claim for such indemnification
could deplete the Company’s assets by the amount
paid. See “SECURITIES BEING OFFERED – Description of
Certificate of Incorporation and Bylaws” below for a
detailed summary of the terms of our Certificate and
Bylaws. Our Certificate and Bylaws are filed as exhibits
to the Offering Statement of which this Offering Circular is a
part. See
“SECURITIES BEING OFFERED – Fiduciary Duties and
Indemnification.”
The
video-filtering industry is subject to rapid technological change.
We must continue to enhance and improve our
technology.
Our
current software and related web-based technology is developed and
in use. We may, however, use a substantial amount of the proceeds
of this offering to modify and enhance our current web site,
filtering platform, content offering, and offering of content
filters. We must continue to enhance and improve the performance,
functionality and reliability of the systems upon which our
business model is built.
The
development of any software is characterized by rapid technological
change, rapid introduction or changes in user requirements and
preferences, short development cycles, frequent introduction of new
products and services, new technologies and the emergence of new
industry standards and practices that could render our existing
technology obsolete. Our success will depend, in part, on our
ability to continue to develop new technologies to enhance our
existing technology in order to address the varied needs of
existing and new customers and respond to technological advances
and emerging industry standards and practices on a cost-effective
and timely basis. The development of our proprietary technology
involves significant technical and business risks. We may fail to
use new technologies effectively or to adapt our proprietary
technology and systems to customer requirements or emerging
industry standards. If we are unable to adapt to changing market
conditions, strategic partner and customer requirements or emerging
industry standards, that will have a material adverse effect on our
ability to succeed.
Our
business may be subject to regulatory or legislative
changes.
The
Company may face government regulation and legal uncertainties in
connection with its business. There may be a number of
federal, state or local legislative or regulatory proposals under
consideration of which the Company is not aware or which may be
considered or adopted in the future. Any new legislation
or regulation, or the application or interpretation of existing
laws or regulations, may negatively impact the Company’s
growth, impose additional burden on the Company or alter how the
Company does business. This could decrease the demand
for our services, increase our cost of doing business or otherwise
have a material adverse effect on the Company’s business,
results of operations and financial condition.
Members
of our Board and our executive officers may have other business
interests and obligations to other entities.
Neither
our directors nor our executive officers will be required to manage
the Company as their sole and exclusive function and they may have
other business interests and may engage in other activities in
addition to those relating to the Company, provided that such
activities do not compete with the business of the Company or
otherwise breach their agreements with the Company. We
are dependent on our directors and executive officers to
successfully operate the Company, and in particular Mr. Neal
Harmon. Their other business interests and activities
could divert time and attention from operating our
business.
Risks
Related to the Offering and Lack of Liquidity
There
has been no active public market for our Class B Common Stock prior
to this offering, and an active trading market may not be developed
or sustained following this offering, which may adversely impact
the market for shares of our Class B Common Stock and, along with
the restrictions in our Stockholders Agreement, make it difficult
to sell your shares.
Prior
to this offering, there was no active market for our Class B Common
Stock. We do not know the extent to which investor interest will
lead to the development and maintenance of a liquid trading market,
if at all. No assurance can be given that the market price of
shares of our Class B Common Stock will not fluctuate or decline
significantly in the future or that Class B Common Stockholders
will be able to sell their shares when desired on favorable terms,
or at all. Most transfers of the Offered Shares are also
subject to other restrictions on transfer set forth in our
Stockholders Agreement.
The
Company may not have sufficient funds to redeem Class B Common
Stock under our redemption plan.
Our
Share Redemption Plan gives the Company full discretion in
determining whether, or not, we are in possession of sufficient
funds to redeem shares requested by our Class B Stockholders. There
is no assurance that the Company will have sufficient funds to
facilitate the redemption of Class B Common Stock, or that the
Company will redeem any shares under the Share Redemption
Plan.
This
is a fixed price offering and the fixed offering price may not
accurately represent the current value of us or our assets at any
particular time. Therefore, the purchase price you pay for the
Offered Shares may not be supported by the value of our assets at
the time of your purchase.
This is
a fixed price offering, which means that the offering price for our
Offered Shares is fixed and will not vary based on the underlying
value of our assets at any time. Our Board has
determined the offering price in its sole
discretion. The fixed offering price for our Offered
Shares has been based on an internal valuation analysis of the
Company as a whole. Although we believe the valuation to be fair as
of the date it was determined, the fixed offering price established
for our Offered Shares may not be supported by the current value of
our Company or our assets at any particular time.
If
investors successfully seek rescission, we would face severe
financial demands that we may not be able to meet.
Our
Offered Shares have not been registered under the Securities Act of
1933, or the Securities Act, and are being offered in reliance upon
the exemption provided by Section 3(b) of the Securities Act and
Regulation A promulgated thereunder. We represent that
this Offering Circular does not contain any untrue statements of
material fact or omit to state any material fact necessary to make
the statements made, in light of all the circumstances under which
they are made, not misleading. However, if this
representation is inaccurate with respect to a material fact, if
this offering fails to qualify for exemption from registration
under the federal securities laws pursuant to Regulation A, or if
we fail to register the Offered Shares or find an exemption under
the securities laws of each state in which we offer the Offered
Shares, each investor may have the right to rescind his, her or its
purchase of the Offered Shares and to receive back from the Company
his, her or its purchase price with interest. Such
investors, however, may be unable to collect on any judgment, and
the cost of obtaining such judgment may outweigh the
benefits. If investors successfully seek rescission, we
would face severe financial demands we may not be able to meet and
it may adversely affect any non-rescinding investors.
Investor
Funds Will Not Be Held by a Third-Party Escrow Agent.
Purchases of Shares
may be submitted through an investor's VidAngel customer account in
accordance with the billing information for such investor at
www.vidangel.com,
and will not be held in an escrow account, but will be held in a
separate non-interest-bearing account held by VidAngel until the
initial closing. Upon the initial closing of this offering, the
proceeds for the offering will be distributed to the Company and
the Offered Shares will be issued to the investors. Although
VidAngel will segregate offering proceeds we receive in a separate
account, we will not be bound by the terms and conditions of a
legally enforceable escrow agreement regarding the escrow and
disbursement of these funds.
Risks Related to Our Chapter 11 Reorganization
The Company filed a voluntary petition for relief under chapter 11,
title 11 of the United States Bankruptcy Code. The Bankruptcy
Filing and the Reorganization under the Trustee’s Plan or a
substantially similar plan may have a material adverse impact on
our business, financial condition, results of operations, and cash
flows.
On
October 18, 2017, the Company filed a voluntary petition for
relief, or the Bankruptcy Filing, under chapter 11, title 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Utah, or the Bankruptcy Court, case number
17-29073. Prior to August 28, 2019, we operated the business as a
“debtor-in-possession” under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions
of the Bankruptcy Code and the orders of the Bankruptcy Court. On
August 28, 2019, the United States Trustee appointed George B.
Hofmann to serve as the chapter 11 trustee, or the Trustee, in our
case. An order was subsequently entered by the Bankruptcy Court
approving the appointment. The
Trustee presently oversees the business under the jurisdiction of
the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code and the orders of the Bankruptcy
Court.
The
timing and outcome of various ongoing matters related to the
bankruptcy proceedings could have a material adverse effect on our
business, financial condition, results of operations and liquidity.
So long as the matter continues, our senior management may be
required to spend a significant amount of time and effort dealing
with the proposed reorganization under the Trustee’s Plan, or
a substantially similar plan, instead of focusing on our business
operations. Certain requirements of the Bankruptcy Code also may
make it more difficult to retain management and the key personnel
necessary to the success and growth of our business.
Because
of the risks and uncertainties associated with bankruptcy
proceedings, we cannot predict or quantify the ultimate impact that
events occurring during the bankruptcy proceedings may have on our
business, cash flows, liquidity, financial condition and results of
operations, nor can we predict the ultimate impact that events
occurring during the bankruptcy proceedings may have on our
corporate or capital structure.
The Bankruptcy Court may not confirm the Trustee’s Plan or a
substantially similar plan of reorganization.
The
Trustee filed a proposed plan of reorganization, or the
Trustee’s Plan, with the Bankruptcy Court on April 9, 2020.
As of the date of this Offering, the Trustee’s Plan is
pending confirmation by the Bankruptcy Court. This Offering is
expressly contingent upon the Bankruptcy Court’s confirmation
of the Trustee’s Plan, or a reorganization plan that is
substantially similar to the Trustee’s Plan.
We
cannot assure you that the Trustee’s Plan, although filed,
will be confirmed by the Bankruptcy Court. Section 1129 of the
Bankruptcy Code, which sets forth the requirements for confirmation
of a plan of reorganization, requires, among other things, a
finding by the Bankruptcy Court that the plan of reorganization is
“feasible,” that all claims and interests have been
classified in compliance with the provisions of Section 1122 of the
Bankruptcy Code, and that, under the plan of reorganization, each
holder of a claim or interest within each impaired class either
accepts the plan of reorganization or receives or retains cash or
property of a value, as of the date the plan of reorganization
becomes effective, that is not less than the value such holder
would receive or retain if the debtor were liquidated under Chapter
7 of the Bankruptcy Code. There can be no assurance that the
Bankruptcy Court will conclude that the feasibility test and other
requirements of Section 1129 of the Bankruptcy Code have been met
with respect to the reorganization plan that has been
filed.
Notwithstanding
that the Trustee’s Plan has been filed, there can be no
assurance that modifications to the Trustee’s Plan would not
be required for confirmation.
If
the Trustee’s Plan or a substantially similar plan is not
confirmed, we will terminate this Offering.
We cannot predict the amount of time that we will spend in
bankruptcy to implement the Trustee’s Plan or a substantially
similar plan of reorganization, and a lengthy bankruptcy proceeding
could disrupt our business.
If
the Trustee’s Plan, or a substantially similar plan, is not
confirmed on a timely basis because of a challenge to the
Trustee’s Plan, or a substantially similar plan, or does not
become effective because of a failure to satisfy the conditions to
the effectiveness of the Trustee’s Plan, or a substantially
similar plan, we may be forced to operate in bankruptcy for an
extended period while attempting to develop a different plan of
reorganization that can be confirmed. A protracted bankruptcy case
would increase both the probability and the magnitude of the
disruption to our business operations. In addition, in a protracted
bankruptcy case, a party in interest may seek confirmation of an
alternative, competing plan that may propose different and
materially less advantageous treatment of holders of claims against
the Company and other parties in interest. Finally, there is no
guarantee that we can secure appropriate debtor-in-possession
financing necessary to conduct a protracted
bankruptcy.
The Company may fail to meet all conditions precedent to
effectiveness of the Trustee’s Plan or a substantially
similar plan, and the Trustee’s Plan or a substantially
similar plan, even though confirmed, may not become
effective.
The
confirmation and effectiveness of the Trustee’s Plan, or a
substantially similar plan, are subject to certain conditions that
may or may not be satisfied. We cannot assure you that all
requirements for confirmation and effectiveness required under the
Trustee’s Plan, or a substantially similar plan, will be
satisfied or that the Bankruptcy Court will conclude that the
requirements for confirmation and effectiveness of the
Trustee’s Plan, or a substantially similar plan, are
satisfied.
If
the conditions precedent to the Trustee’s Plan, or a
substantially similar plan, on the effective date of such plan have
not occurred, the confirmation of the Trustee’s Plan could be
denied.
If
the Chapter 11 case takes longer than expected to conclude, the
Company may exhaust our available cash. There is no assurance that
the Company will be able to obtain additional financing. In such
case, the liquidity necessary for the orderly functioning of our
businesses may be impaired materially.
Even if a reorganization plan is consummated, we may not be able to
achieve our stated goals and there is substantial doubt regarding
our ability to continue as a going concern.
Even
if the Trustee’s Plan or any other substantially similar
Chapter 11 plan of reorganization is consummated, we may continue
to face a number of risks, such as changes in economic conditions,
changes in our industry, and increasing expenses. Some of these
risks become more acute when a case under the Bankruptcy Code
continues for a protracted period without indication of how or when
the case may be completed. As a result of these risks and others,
we cannot guarantee that the Trustee’s Plan or any other
substantially similar Chapter 11 plan will achieve our stated
goals.
Furthermore,
even if our debts are restructured through the Trustee’s
Plan, or a substantially similar plan of reorganization, we may
need to raise additional funds through public or private debt or
equity financing or other various means to fund our business after
the completion of the bankruptcy proceedings. Our access to
additional financing may be limited, if it is available at all.
Therefore, adequate funds may not be available when needed or may
not be available on favorable terms, if they are available at
all.
As
a result of the entry into the bankruptcy proceedings, there is
substantial doubt regarding our ability to continue as a going
concern. As a result, we cannot give any assurance of our ability
to continue as a going concern, even if the Trustee’s Plan or
a substantially similar plan is confirmed.
As a result of the bankruptcy proceedings, our historical financial
information may not be indicative of our future performance, which
may be volatile.
During
the bankruptcy proceedings, we expect our financial results to
continue to be volatile as restructuring activities and expenses,
contract terminations and rejections, and claims assessments
significantly impact our consolidated financial statements. As a
result, our historical financial performance is likely not
indicative of our financial performance after the date of the
filing of bankruptcy. In addition, if we emerge from Chapter 11,
the amounts reported in subsequent consolidated financial
statements may materially change relative to historical
consolidated financial statements, including as a result of
revisions to our operating plans pursuant to the Trustee’s
Plan or a substantially similar plan of reorganization. We also may
be required to adopt fresh start accounting, in which case our
assets and liabilities will be recorded at fair value as of the
fresh start reporting date, which may differ materially from the
recorded values of assets and liabilities on our consolidated
balance sheets. Our financial results after the application of
fresh start accounting also may be different from historical
trends.
We may be subject to claims that will not be discharged in the
bankruptcy proceedings, which could have a material adverse effect
on our financial condition and results of operations.
The
Bankruptcy Court provides that the confirmation of a plan of
reorganization discharges a debtor from substantially all debts
arising prior to confirmation. With few exceptions, all claims that
arose before confirmation of a plan of reorganization (i) would be
subject to compromise and/or treatment under the Trustee's Plan or
a substantially similar plan and/or (ii) would be discharged in
accordance with the Bankruptcy Code and the terms of the
Trustee’s Plan or a substantially similar plan. Any claims
not ultimately discharged pursuant to the Trustee’s Plan or a
substantially similar plan could be asserted against the
reorganized entities and may have an adverse effect on our
financial condition and results of operations on a
post-reorganization basis.
We will be subject to liens on our personal property, including our
intellectual property, under the Trustee's Plan or a substantially
similar plan of reorganization, which if enforced, would
significantly impair our intellectual property rights and our
ability to continue as a going concern.
The
Trustee’s Plan provides that a Plan Administrator’s
Lien will be placed on all assets currently owned and controlled by
the Company or acquired, owned and controlled by the Company after
the Trustee Plan’s Effective Date, including intellectual
property, such as patents, patent applications, trademarks, trade
secrets, and copyrights. In the event of a future bankruptcy
proceeding, the cessation or liquidation of the Company’s
business operations, the Plan Administrator’s lien would be
enforced, liquidating any collateral that could be used to satisfy
the list of claims in accordance with the priorities set forth in
the Trustee’s Plan.
Any
liens on our intellectual property enforced under the
Trustee’s Plan or a substantially similar plan would have a
material adverse effect on our ability to continue our business
operations.
Risks Related to Our Stock Ownership
Provisions
in our governing documents and under Delaware law could discourage
a takeover that stockholders may consider favorable.
Our
charter documents may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable because they
provide for a right of first refusal on behalf of the Company, and
if the Company declines to exercise its rights to purchase a
stockholder’s shares, then that offer is extended to existing
shareholders.
As a
Delaware corporation, we are subject to certain Delaware
anti-takeover provisions. Under Delaware law, a corporation may not
engage in a business combination with any holder of 15% or more of
its capital stock unless the holder has held the stock for three
years or, among other things, the board of directors has approved
the transaction. Our board of directors could rely on Delaware law
to prevent or delay an acquisition of us.
Financial
forecasting may differ materially from actual results.
Given
the dynamic nature of our business, and the inherent limitations in
predicting the future, forecasts of our revenues, contribution
margins, net income and number of total and customers and other
financial and operating data may differ materially from actual
results. Such discrepancies could cause a decline in the price of
our Class B Common Stock.
Risks Related to Benefit Plan Investors
Fiduciaries
investing the assets of a trust or pension or profit-sharing plan
must carefully assess an investment in our Company to ensure
compliance with ERISA.
In
considering an investment in the Company of a portion of the assets
of a trust or a pension or profit-sharing plan qualified under
Section 401(a) of the Code and exempt from tax under
Section 501(a), a fiduciary should consider (i) whether
the investment satisfies the diversification requirements of
Section 404 of ERISA; (ii) whether the investment is
prudent, since the Offered Shares are not freely transferable and
there may not be a market created in which the Offered Shares may
be sold or otherwise disposed; and (iii) whether interests in
the Company or the underlying assets owned by the Company
constitute “Plan Assets” under ERISA. See
“ERISA
CONSIDERATIONS.”
VidAngel
is offering up to 7,462,686 shares of our Class B Common Stock at
an offering price of $6.70 per share. We have previously issued
stock options for the acquisition of Class A Common Stock pursuant
to our Stock Incentive Plan with a weighted average exercise price
of $0.44 per share, or $6.26 less than the Offered Shares. During
the Company’s previous Regulation A Offering which closed on
November 18, 2016, it issued 3,313,335 shares of Class B Common
Stock at an offering price of $3.00 per share.
Under
our Stock Incentive Plan, we granted options exercisable for
1,151,792 shares of Class A Common Stock to our directors,
officers, employees and consultants as equity incentive
compensation. The weighted average exercise price of those
outstanding options is $0.44 per share, or $6.26 average less per
share than the Offered Shares.
Currently, there
are outstanding (i) options exercisable for 10,000 shares of Class
A Common Stock with an expiration date of April 11, 2024, and an
exercise price of $0.18; (ii) options exercisable for 79,311 shares
of Class A Common Stock with an expiration date of May 5, 2024, and
an exercise price of $0.18; (iii) options exercisable for 10,000
shares of Class A Common Stock with an expiration date of October
10, 2024, and an exercise price of $0.18; (iv) options exercisable
for 10,000 shares of Class A Common Stock with an expiration date
of November 3, 2024 and a strike price of $0.30; (v) options
exercisable for 130,500 shares of Class A Common Stock with an
expiration date of April 17, 2025, and an exercise price of $0.50;
(vi) options exercisable for 70,000 shares of Class A Common Stock
with an expiration date of May 11, 2025, and an exercise price of
$0.50; (vii) options exercisable for 70,000 shares of Class A
Common Stock with an expiration date of July 17, 2025, and an
exercise price of $0.50; (viii) options exercisable for 5,000
shares of Class A Common Stock with an expiration date of November
18, 2025, and an exercise price of $0.50; (ix) options exercisable
for 103,750 shares of Class A Common Stock with an expiration date
of February 11, 2026, and an exercise price of $0.82; and (x)
options exercisable for 98,750 shares of Class A Common Stock with
an expiration date of August 10, 2026, and an exercise price of
$0.82. (xi) options exercisable for 51,445 shares of Class A Common
Stock with an expiration date of June 20, 2027, and an exercise
price of $0.32; and (xii) options exercisable for 16,500 shares of
Class A Common Stock with an expiration date of July 20, 2027, and
an exercise price of $0.32; and (xiii) options exercisable for
16,000 shares of Class A Common Stock with an expiration date of
October 25, 2027, and an exercise price of $0.32; and (xiv) options
exercisable for 40,000 shares of Class A Common Stock with an
expiration date of December 6, 2027, and an exercise price of
$0.32; and (xv) options exercisable for 205,206 shares of Class A
Common Stock with an expiration date of May 4, 2028, and an
exercise price of $0.32; and (xvi) options exercisable for 140,230
shares of Class A Common Stock with an expiration date of June 6,
2028, and an exercise price of $0.32; and (xvii) options
exercisable for 3,000 shares of Class A Common Stock with an
expiration date of October 19, 2028, and an exercise price of
$0.32; and (xviii) options exercisable for 60,000 shares of Class A
Common Stock with an expiration date of December 14, 2028, and an
exercise price of $0.32; and (xix) options exercisable for 21,100
shares of Class A Common Stock with an expiration date of June 17,
2029, and an exercise price of $0.32; and (xx) options exercisable
for 11,000 shares of Class A Common Stock with an expiration date
of July 16, 2029, and an exercise price of $0.32. Of the
outstanding stock options, options exercisable for 208,830 shares
of common stock were granted with no vesting period, and options
exercisable for 942,962 of Class A Common Stock have vesting
periods between 36 to 48 months from their vesting dates which
range from April 11, 2014 to July 1, 2019.
We are
not selling the shares through commissioned sales agents or
underwriters. We will use our existing
website, www.vidangel.com,
to provide notification of the offering. This Offering
Circular will be furnished to prospective investors at www.vidangel.com/invest
via download 24 hours per day, 7 days per week on our
website. Our website will be the exclusive means by
which prospective investors may subscribe in this
offering.
The
Offered Shares will be issued in one or more closings. For the
initial closing and each subsequent additional closing, proceeds
for subscriptions will be held in a separate non-interest-bearing
account by VidAngel, and may be submitted through an investors
VidAngel customer account in accordance with the billing
information for such investor at www.vidangel.com.
Upon each closing, any proceeds collected for such closing will be
disbursed to the Company and the Offered Shares for such closing
will be issued to investors. The separate non-interest-bearing
account will be opened by VidAngel prior to the date of
qualification of the offering statement of which this Offering
Circular is a part and will remain open until the Termination Date.
The subscription agreement is available at www.vidangel.com/invest.
The Company is involved in the process of reorganizing under
chapter 11, title 11 of the United States Bankruptcy Code. If the
Bankruptcy Court does not approve the Trustee’s Plan of
Reorganization (at least materially in its current form) and an
alternate plan of reorganization is approved, the initial closing
will not occur, and the Offering will be terminated. If the Company
terminates the Offering for any reason, investor funds received but
not yet closed upon will be promptly returned to investors without
interest, and without deduction.
Technology,
Anti-Money Laundering and Transfer Agent Services
Issuer
Direct has been engaged to provide certain technology, anti-money
laundering and transfer agent services in connection with this
Offering. The Company has agreed to pay Issuer Direct a
facilitation fee equal to $5.00 per domestic investor for the
anti-money laundering check and technology services for each
subscription agreement executed via electronic signature on
www.vidangel.com.
We have engaged Issuer Direct to serve as transfer agent for the
offering. As such, Issuer Direct is entitled to certain itemized
administrative fees. Issuer Direct is not participating as an
underwriter of the offering and will not solicit any investment in
the Company, recommend the Company's securities or provide
investment advice to any prospective investor, or distribute the
Offering Circular or other offering materials to investors. All
inquiries regarding this offering should be made directly to the
Company.
Offering Expenses. We are
responsible for all offering fees and expenses, including the
following: (i) fees and disbursements of our legal counsel,
accountants and other professionals we engage; (ii) fees and
expenses incurred in the production of offering documents,
including design, printing, photograph, and written material
procurement costs; (iii) all filing fees, including blue sky filing
fees; (iv) all of the legal fees related to the registration and
qualification of the Offered Shares under state securities laws;
and (v) all costs of Issuer Direct’s services.
Pricing of the Offering
Prior
to the offering, there has been no public market for the Offered
Shares. The initial public offering price was determined by us. The
principal factors considered in determining the initial public
offering price include:
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the
information set forth in this Offering Circular;
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our
history and prospects and the history of and prospects for the
industry in which we compete;
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our
past and present financial performance;
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our
prospects for future earnings and the present state of our
development;
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the
general condition of the securities markets at the time of this
offering;
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the
status of litigation we are engaged in; and
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other
factors deemed relevant by us.
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Investment
Limitations
Generally,
no sale may be made to you in this offering if the aggregate
purchase price you pay is more than 10% of the greater of your
annual income or net worth. Different rules apply to
accredited investors and non-natural persons. Before
making any representation that your investment does not exceed
applicable thresholds, we encourage you to review Rule
251(d)(2)(i)(C) of Regulation A. For general information
on investing, we encourage you to refer to www.investor.gov.
As a
Tier 2, Regulation A offering, investors must comply with the 10%
limitation to investment in the offering. The only
investor in this offering exempt from this limitation is an
accredited investor, an “Accredited Investor,” as
defined under Rule 501 of Regulation D. If you meet one
of the following tests you should qualify as an Accredited
Investor:
(i)
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You are
a natural person who has had individual income in excess of
$200,000 in each of the two most recent years, or joint income with
your spouse in excess of $300,000 in each of these years, and have
a reasonable expectation of reaching the same income level in the
current year;
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(ii)
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You are
a natural person and your individual net worth, or joint net worth
with your spouse, exceeds $1,000,000 at the time you purchase
Offered Shares (please see below on how to calculate your net
worth);
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(iii)
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You are
an executive officer or general partner of the issuer or a manager
or executive officer of the general partner of the
issuer;
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(iv)
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You are
an organization described in Section 501(c)(3) of the Internal
Revenue Code of 1986, as amended, or the Code, a corporation, a
Massachusetts or similar business trust or a partnership, not
formed for the specific purpose of acquiring the Offered Shares,
with total assets in excess of $5,000,000;
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(v)
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You are
a bank or a savings and loan association or other institution as
defined in the Securities Act, a broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, an insurance company as defined by
the Securities Act, an investment company registered under the
Investment Company Act of 1940, as amended, or the Investment
Company Act, or a business development company as defined in that
act, any Small Business Investment Company licensed by the Small
Business Investment Act of 1958 or a private business development
company as defined in the Investment Advisers Act of
1940;
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(vi)
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You are
an entity (including an Individual Retirement Account trust) in
which each equity owner is an accredited investor;
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(vii)
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You are
a trust with total assets in excess of $5,000,000, your purchase of
Offered Shares is directed by a person who either alone or with his
purchaser representative(s) (as defined in Regulation D promulgated
under the Securities Act) has such knowledge and experience in
financial and business matters that he is capable of evaluating the
merits and risks of the prospective investment, and you were not
formed for the specific purpose of investing in the Offered Shares;
or
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(viii)
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You are
a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such
plan has assets in excess of $5,000,000.
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Offering Period and Expiration Date
This
offering will start on or after the date this Offering Circular is
declared qualified by the SEC and will terminate on the Termination
Date.
Procedures for Subscribing
If you
decide to subscribe for Offering Shares in this offering, you
should:
Go to
www.vidangel.com/invest,
click on the “Invest
Now” button and follow the procedures as
described.
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1.
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Electronically
receive, review, execute and deliver to us a subscription
agreement; and
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2.
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Pay for
your subscription price through a purchaser’s VidAngel
customer account in accordance with the billing information for
such purchaser at www.vidangel.com. or,
(ii) transmit funds directly by wire or electronic funds transfer
via ACH to the specified account maintained by VidAngel per the
instructions in the subscription agreement. We will bill your
customer account in accordance with your billing information at
www.vidangel.com.
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Any
potential investor will have ample time to review the subscription
agreement, along with their counsel, prior to making any final
investment decision.
Right to Reject Subscriptions.
After we receive your complete, executed subscription agreement and
the funds required under the subscription agreement have been
received, we have the right to review and accept or reject your
subscription in whole or in part, for any reason or for no reason.
We will return all monies from rejected subscriptions immediately
to you, generally without interest and without
deduction.
Acceptance of Subscriptions.
Upon our acceptance of a subscription agreement, we will
countersign the subscription agreement and issue the shares
subscribed at closing. Once you submit the subscription agreement
and it is accepted, you may not revoke or change your subscription
or request your subscription funds. All accepted subscription
agreements are irrevocable.
Under
Rule 251 of Regulation A, non-accredited, non-natural investors
are subject to the investment limitation and may only invest funds
which do not exceed 10% of the greater of the purchaser’s
revenue or net assets (as of the purchaser’s most recent
fiscal year end). A non-accredited, natural person may only
invest funds which do not exceed 10% of the greater of the
purchaser’s annual income or net worth (please see below on
how to calculate your net worth).
We may
engage a broker-dealer registered with the Securities and Exchange
Commission and a member of the Financial Industry Regulatory
Authority, to perform administrative functions in connection with
this offering, such as serve as registered agent where required for
state blue sky requirements, but in no circumstance will such
broker-dealer solicit a securities transaction, recommend our
securities, or provide investment advice to any prospective
investor.
NOTE: For the
purposes of calculating your net worth, or Net Worth, it is defined
as the difference between total assets and total
liabilities. This calculation must exclude the value of
your primary residence and may exclude any indebtedness secured by
your primary residence (up to an amount equal to the value of your
primary residence). In the case of fiduciary accounts,
net worth and/or income suitability requirements may be satisfied
by the beneficiary of the account or by the fiduciary, if the
fiduciary directly or indirectly provides funds for the purchase of
the Offered Shares.
In
order to purchase Offered Shares and prior to the acceptance of any
funds from an investor, an investor will be required to represent,
to the Company’s satisfaction, that he is either an
accredited investor or is in compliance with the 10% of net worth
or annual income limitation on investment in this
offering.
USE OF PROCEEDS TO ISSUER
Net
proceeds to the Company from this offering are anticipated to be
$50,000,000, assuming we sell the Maximum Offering, following the
payment of offering costs. Set forth below is a table
showing the estimated sources and uses of the proceeds from this
offering.
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Gross
Proceeds
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$50,000,000
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100.00%
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Estimated Offering
Expenses (1)
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$325,000
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0.65%
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Net
Proceeds
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$49,675,000
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99.35%
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Research and
Development
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$15,000,000
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30.00%
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Buildings/Real
Estate
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$8,000,000
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16.00%
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Capital
Equipment
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$3,175,000
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6.35%
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Acquisitions
(2)
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$5,000,000
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10.00%
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Strategic
Investments
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$8,500,000
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17.00%
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Working Capital
(3)
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$10,000,000
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20.00%
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Total
Use of Proceeds
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$50,000,000
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100.00%
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(1)
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Estimated offering
expenses include legal, accounting, printing, advertising, travel,
marketing, blue-sky compliance and other expenses of this offering,
as well as transfer agent fees.
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(2)
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We are
allocating 10% of the offering amount as a reserve for potential
acquisitions; however, there are no current agreements, or plans to
acquire any assets at this time.
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(3)
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We
intend to use approximately 20% of the gross offering proceeds if
the Maximum Offering is sold to manage our business and provide
working capital for operations. These amounts may
be used to pay expenses relating to salaries and other compensation
to our officers, employees.
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DESCRIPTION OF OUR BUSINESS
General
In
2013, four brothers, Neal, Daniel, Jeffrey, and Jordan Harmon,
founded VidAngel, initially an audiovisual content filtering
company that gives viewers the choice to remove objectionable
content, such as violence, sex, nudity and/or language, from
streamed movies and television programs. As fathers of children
aged newborn to ten, they 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 content they watch at home. The brothers envisioned building
the best technology for skipping distasteful content in the privacy
of the home, attracting those who want to skip parts of modern
media, and then eventually distributing better content to those
people whom Hollywood has overlooked. Today, we are the leading
filtering company with applications available on all major
distribution platforms and our original content has reached
millions of underserved audiences globally. Management believes the
potential demand for this service is significant.
In 2016, litigation was commenced against the
Company relating to claims of copyright infringement and other
matters. In connection with such litigation, a judgment was entered
against the Company in favor of the plaintiffs in the amount of
$62,448,750. For more information related to this,
see “Legal
Proceedings”.
Additionally, a permanent injunction was granted
in favor of the plaintiffs against the Company. The judgment and
injunction have resulted in a change of the Company’s initial
business direction and business plan. As a result of the judgment
and injunction, the Company filed a voluntary bankruptcy petition
in 2017. For more information related to this,
see “Bankruptcy
Proceedings”.
Bankruptcy Proceedings
On
October 18, 2017, the Petition Date, the Company, 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. Prior to August 28,
2019, we operated the business as a
“debtor-in-possession” under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions
of the Bankruptcy Code and the orders of the Bankruptcy Court. On
August 28, 2019, the United States Trustee appointed George B.
Hofmann to serve as the chapter 11 trustee, or the Trustee, in our
case. An order was subsequently entered by the Bankruptcy Court
approving the appointment. Henceforth, the Trustee will oversee the
business under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code
and the orders of the Bankruptcy Court.
In
order for us to meaningfully move forward with business operations,
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.
The
Trustee filed a proposed plan of reorganization, or the
Trustee’s Plan, with the Bankruptcy Court on April 9, 2020.
As of the date of this Offering, the Trustee’s Plan is
pending confirmation by the Bankruptcy Court. The Trustee’s
Plan remains subject to material modification.
The
following is a summary of certain provisions of the Trustee's plan
and is not intended to be a complete description of the Trustee's
plan.
The
Trustee Plan contemplates that:
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The
Company will continue as a “going concern,” thereby
ensuring the greatest return to creditors and shareholders by
allowing the Company to reorganize through continuation of its
business operations and satisfaction of its debts over
time.
●
Holders
of all allowed claims will be paid in full and holders of equity
interests shall retain their interests in the Company.
●
Classes
1 through 6 are impaired under the plan and have the right to vote
to accept or reject the Plan.
●
Holders
of allowed priority claims, Class 1 Claims, will receive the full
amount of their claim as of the Petition Date with interest
accruing at 1.43% from the Effective Date, on the date of initial
distribution.
●
Holders of general
unsecured claims, Class 2 Claims, shall receive 100% of the
principal amount of their claim as of the Petition Date, with
interest accruing at 1.43%, payable through fully amortized
quarterly payments until such claims are paid in full.
●
Holders
of Class 3 Claims, the Studio creditors, will receive 100% of the
principal amount, their pro rata distribution of $62,448,750, with
interest of 1.43% accruing from the Effective Date, on a quarterly
basis.
Creditors
Disney Enterprises, Inc., Lucasfilm Ltd. LLC, Twentieth Century Fox
Film Corporation, Warner Bros. Entertainment Inc., MVL Film Finance
LLC, New Line Productions, Inc., and Turner Entertainment Co., or
collectively, the Studio Creditors, filed their own proposed plan
of reorganization, the Studio’s Plan, with the Bankruptcy
Court on April 10, 2020, which was subsequently amended thereafter.
As of the date of this Offering, the Studio’s Plan is pending
confirmation by the Bankruptcy Court.
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.
If the
Bankruptcy Court does not approve the Trustee’s Plan of
Reorganization (at least materially in its current form) and an
alternate plan of reorganization is approved, the initial closing
will not occur, and the Offering will be terminated. We will not
move forward with any reorganization plan unless it is
substantially in the form of the Trustee’s Plan.
Current Operations
We
currently operate by offering the latest version of our remote
filtering service, 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”.
The Stream-Based Service
On
June 13, 2017, we launched the latest version of our remote
filtering 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
an 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 user experience necessary to
grow, or maintain, our current customer base.
The DVR Service
On
April 13, 2020, the Bankruptcy Court entered an order allowing the
Trustee to transition to a new filtering service based on Digital
Video Recording technology (“DVR Service”). This new
service is currently being tested and it is anticipated that a full
transition from The Stream-Based Service to the DVR Service will
occur on or before the effective date of a future confirmed plan.
The final pricing and features of this new service are not complete
and are subject to change, but the purpose of the change is to make
the system more legally defensible
as well as provide a broader content library and better user
experience long term. The performance improvements of this new
service may not be fully realized before the transition is
complete, but significant portions of research and development are
targeted for improving this service.
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
various projects. As of the date of this filing, we have produced
and filmed more than 300 original comedy specials from various
up-and-coming comedians and 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 to help make entertainment good for your home. 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 believed that the
same people who wanted to filter existing content would likely also
want additional sources of family-friendly content. Our mission has
three facets: 1) we help our users make their favorite Hollywood
entertainment good for their home by offering a highly customizable
and user-friendly filtering experience, 2) we let our users decide
what entertainment gets made by letting them fund original content
via the crowdfunding process, and 3) we help creators’ make
better decisions about their content by providing them with data
gathered from both crowdfunding and filtering, all resulting in
entertainment that is good for your home.
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 with a distribution and
marketing platform for content that might otherwise be ignored by
Hollywood.
User Base
We
believe that many users of our original remote filtering 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, of which there can be no assurance, we
believe they could possibly resume using our services. We continue
to keep them updated on the status of the legal proceedings, 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 will 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 of
the legal merits on appeal or if the courts declare that the
Stream-Based 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.”
Intellectual Property
As
of December 31, 2019, we have been issued a U.S. patent for
seamless streaming and filtering, filed March 31, 2015, with an
expiration date of March 30, 2035. We regard our trademarks,
service marks, copyrights, patents, domain names, trade dress,
trade secrets, proprietary technologies, and similar intellectual
property as important to our success. 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 four management teams: the product team, the
marketing team, the digital content team, and the finance
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.
Suspended
Operations
Our remote filtering RMOM services were initially
suspended December 29, 2016, following the issuance of a
preliminary injunction by the United States District Court for the
Central District of California, or the California Court. On
September 5, 2019, the California Court issued a permanent
injunction. See “Legal
Proceedings”. We do not
anticipate resuming our RMOM services.
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 a new service on Vudu in December of 2018, and have since
added hundreds of titles in 2019. The service does not currently
support streaming via Chromecast, and only provides a limited
number of category choices (i.e. language, violence, etc.) for
content that can be removed during streaming. It is unknown how
decisions are made as to what content meets the necessary criteria
for inclusion in a particular category.
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 to await
the final decision rendered in the Disney Litigation. Clearplay has
also filed a claim in our chapter 11 bankruptcy case, seeking an
unliquidated sum. On April 14, 2020, the Trustee filed an objection
to the claim in the Bankruptcy Court seeking an order to disallow
the claim in its entirety.
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, 2019, and 2018, we spent
$1,775,665 and $1,567,015, respectively, on research and
development activities relating to our technology.
Employees
As
of December 31, 2019, we employed 33 persons full time and 5
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
On
December 12, 2016, 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, 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 identify
additional motion pictures as having allegedly been infringed. The
Plaintiffs have claimed that VidAngel unlawfully decrypted and
infringed 819 titles in total.
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, were decided by a jury trial in June 2019. The jury
found that VidAngel willfully infringed the Plaintiffs’
copyrights and awarded statutory damages of $75,000 for each of the
819 infringed titles, or $61,425,000. The jury also awarded
statutory damages of $1,250 for DMCA violations for each of the 819
infringed titles, or $1,023,750. The total award for both counts is
$62,448,750. On September 23, 2019, a judgment consistent with the
jury’s verdict was entered against us by the California
Court. The Plaintiffs also plan to seek an award of costs and
attorneys’ fees.
On
April 1, 2020, VidAngel filed a notice of appeal of the final
judgement and orders denying post-trial motions with the California
Court. The appeal will be heard by the Ninth Circuit Court of
Appeals.
The Permanent Injunction
The
permanent injunction enjoins VidAngel, its officers, agents,
servants, employees, and attorneys, 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 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, 17 U.S.C. §1201(a), or that
infringes by any means, directly or indirectly, any
Plaintiffs’ exclusive rights in any copyrighted work 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 and will
continue to desist from filtering and streaming the
Plaintiffs’ content without first obtaining a license or
receiving declaratory relief. We have ceased filtering and
streaming all movies and television programs owned or licensed by
all content providers under the Disc-Based Service, which is the
service the California Court found to violate copyrights, even
though we used legally purchased DVD and Blu-Ray discs as the
authorized copy.
The
foregoing description of the permanent injunction is a summary
and is qualified in its entirety by the California Court’s
orders.
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. See “Bankruptcy
Proceedings” for
additional information.
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. On April 14, 2020, the Trustee filed an objection to the claim
in the Bankruptcy Court seeking an order to disallow the claim in
its entirety.
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. See “RISK FACTORS - We face risks, such as
unforeseen costs and potential liability in connection with content
we acquire, filter and/or distribute through our
service.” See also “RISK FACTORS—We are engaged in
current litigation, the outcome of which, if not favorable to
VidAngel, would have a material adverse effect on us and our
ability to continue our business
operations.”
DESCRIPTION OF OUR PROPERTIES
As of
the date of this Offering Circular, our primary assets are our
Intellectual Property and the contracts we have entered into
directly.
We
lease our office facilities at 295 W. Center St, Provo, Utah, under
a lease commencing on December 15, 2016 and ending on December 31,
2021; our office facilities at 249 North University Avenue, Provo,
Utah is a month-to-month lease. We currently lease our offices for
$15,000 and $1,750 per month, respectively. We do not currently own
or lease any other real property. See “DESCRIPTION OF BUSINESS” for more
information.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
This
Offering Circular contains certain forward-looking statements that
are subject to various risks and uncertainties. Factors that might
cause or contribute to such differences include, but are not
limited to, those discussed on Page 5 of this Offering Circular
under the heading “CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS.”
We
assume no obligation to revise or publicly release any revision to
forward-looking statements contained in the Offering Circular,
unless required by law.
Overview
We sell a monthly subscription service that
provides unlimited access to our original and licensed content, and
to our technology that permits viewers 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 iOS, Android, AppleTV, Amazon Fire TV,
or Roku device. Our service allows you to connect your Netflix,
Amazon Video, Amazon Prime, or HBO, Showtime, Starz, or CBS via
Amazon Channels, account to VidAngel, and watch the content
available from these Licensed Streaming Services, or LSS’s,
through VidAngel. We provide viewers 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 viewers to watch using the same modern
devices as everyone else, with the added capability of controlling
the viewing experience like never before.
On
January 20, 2017, we filmed our very first episode of Dry Bar Comedy. To date, we have
produced over 300 original comedy specials, spanning 6 seasons.
Dry Bar Comedy is one of
the largest collections of comedy that can be loved, by everybody,
everywhere. We are continuing our efforts to develop new and
innovative ways to engage audiences with content in the manner that
best fits their individual lifestyle and preference.
We
continue to produce our own streaming content and seek
relationships with artists, and other content creators. In 2018, we
partnered with The Chosen, LLC, or The Chosen, to develop a technology
platform for them to use to raise capital using Tier 2 of
Regulation A of the Securities Act of 1933, as amended.
The Chosen successfully
raised nearly $10M in capital to produce, it says, the first
multi-season television series about the life of Jesus Christ. The
first season of The Chosen
was released publicly in November 2019, with VidAngel as its
exclusive global distribution partner.
Results of Operations
The
following represents our performance highlights:
|
For the Year Ended December 31,
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Revenues
|
$10,754,844
|
$7,547,299
|
$3,207,545
|
42%
|
Operating Expenses:
|
|
|
|
|
Cost
of revenues
|
$4,143,717
|
$2,382,418
|
$1,761,299
|
74%
|
Legal
|
2,373,203
|
915,717
|
1,457,486
|
159%
|
General
and administrative
|
2,149,802
|
1,663,392
|
486,410
|
29%
|
Sales
and marketing
|
1,934,729
|
1,318,155
|
616,574
|
47%
|
Research
and development
|
1,775,665
|
1,567,015
|
208,650
|
13%
|
Total Operating Expenses:
|
$12,377,116
|
$7,846,697
|
$4,530,419
|
58%
|
Revenues
We
derive revenues from the following business
activities:
●
Ticket and
concession sales
●
Consulting and
technology services
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. All licensed content is made available to
customers subscribing to the Stream-Based Service.
Media
revenues are generated by the sale of products licensed for
distribution. Products may be of a digital or physical nature and
revenue is recognized upon delivery to the customer.
Content
licensing revenue is generated by publishing our original content
on third party websites such as
Facebook, YouTube, and Amazon. We are paid by the third
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.
Consulting and
technology services are performed for customers on an ad-hoc
basis.
The
increase in revenues for 2019 is due to the addition of media
revenues, which are earned from the sales of products licensed for
distribution, and consulting and technology service revenue. We
also saw modest increases in our subscription revenue from the
Stream-Based Service, and ticket and concession revenues from live
Dry Bar Comedy
performances.
The
increase in cost of revenues was largely due to licensing fees
associated with media revenues, and an increase in expenses related
to the production and filming of a greater number of Dry Bar Comedy specials in 2019. Costs
associated with the delivery of physical media products and higher
transaction processing fees also contributed to the
increase.
The
increase in sales and marketing expense was largely due to the
addition of headcount necessary to support our internal marketing
efforts, and modest growth in general marketing expenses. We expect
these expenses to increase significantly in FY 2020 as we continue
to expand our subscription base and look to foster growth in other
revenue streams.
We also
saw an increase in our general and administrative expenses for FY
2019. This was largely due to the receipt of a tax credit in 2018
for the production of Dry Bar
Comedy, for which we were not eligible in 2019. We also saw
an increase in expenses for outside consultants, and higher U.S.
Trustee fees from our bankruptcy filing.
The
increase in research and development expense was due to the
addition of headcount as we look to continue our focus on improving
existing products, optimizing existing services, and developing new
technology to better meet the needs of our customers.
The
increase in legal expense was due to our defense in the Disney
Litigation. We expect legal expenses for fiscal year 2020 to be
significantly lower.
Liquidity and Capital Resources
Going Concern
Our
financial statements appearing elsewhere in this Offering Circular
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 $1,611,154 and
$286,354 for the years ended December 31, 2019 and 2018,
respectively. We used net cash of $894,237 and $435,890 in
operating activities in the years ended December 31, 2019 and 2018,
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 Offering Circular 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, 2019, we had cash on hand of $1,584,455. 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, media
sales, and advertising revenues, will provide sufficient liquidity
to fund operations through at least May 5, 2021. These projections
are based on our current estimates for subscription sales, media
sales, advertising revenue, cost structure, cash burn rate, and
other operating assumptions. The assumptions made in these
projections are subject to change, 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.
Short Term Liquidity
VidAngel has no
short-term liquidity requirements as of the date of this Offering
Circular.
Long-Term Liquidity
VidAngel has no
long-term liquidity requirements as of the date of this Offering
Circular.
COVID-19 Pandemic
On
March 11, 2020, the World Health Organization, or WHO, officially
characterized the outbreak of COVID-19 as a pandemic, hereafter
referred to as the Pandemic. On March 13, 2020, we instituted
mandatory work-from-home procedures for all employees. The
transition happened quickly, with minimal disruption to day-to-day
operations.
The
impact on the business, to-date, has been positive.
●
In response to
government directives, we cancelled the remaining Dry Bar Comedy Live performances for
the first half of 2020. We typically film shows up to 6-months in
advance of release, incurring expenses related to their production
up-front. We do not believe that cancelling the remainder of the
season will impact our ability to deliver new episodes of
Dry Bar Comedy for the next
6-12 months.
●
Measures taken by
government officials around the world have forced many individuals
to self-isolate, or quarantine, at home. In order to relieve some
of the stress and anxiety related to COVID-19, we immediately began
offering our service for free. More than 200,000 people took us up
on the offer and enjoyed the benefits of our service.
●
The first season of
The Chosen tv series was
released in November 2019. To date, we have streamed more than 21
million episodes worldwide. Over 58% of the episodes have been
streamed during the Pandemic. We believe that a combination of
quarantine measures and lower digital advertising costs, has led to
a significant increase in sales.
The
full extent of the impact of the COVID-19 pandemic on our business,
operations and financial results will depend on a number of factors
that we do not control and may not be able to accurately predict.
We will continue to assess the situation as it progresses and take
any action required by federal, state, or local authorities, or
that we determine is in the best interests of our employees,
customers, and stockholders.
Trends and Key Factors Affecting Our Performance
The
issuance of the preliminary injunction in the Disney Litigation had
a material impact on our financial position. The preliminary
injunction prohibited us from streaming movies owned by the
plaintiffs in the Disney Litigation, which titles comprised a large
portion of all titles available under the old Disc-Based
Service.
Furthermore,
the issuance of the permanent injunction 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 using our
new Stream-Based Service.
DIRECTORS, EXECUTIVE OFFICERS AND
SIGNIFICANT EMPLOYEES
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, and Joseph Wecker
is currently our Chief Technology 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
|
|
42
|
|
October
2013
|
|
n/a
|
Jeffery
Harmon*
|
|
Chief
Marketing Officer
|
|
37
|
|
October
2013
|
|
n/a
|
Elizabeth
Ellis
|
|
President,
or Chief Operating Officer
|
|
43
|
|
June
2015
|
|
n/a
|
Patrick
Reilly
|
|
Chief
Financial Officer
|
|
39
|
|
January
2014
|
|
n/a
|
Joseph
Wecker
|
|
Chief
Technology Officer
|
|
42
|
|
December
2018
|
|
n/a
|
Paul
Ahlstrom
|
|
Director
|
|
56
|
|
February
2014
|
|
n/a
|
Dalton
Wright
|
|
Director
|
|
39
|
|
February
2014
|
|
n/a
|
*Neal
Harmon and Jeffery Harmon are brothers.
Biographical Information
Biographical
information regarding our directors and executive officers is set
forth below.
Neal Harmon, Chief Executive
Officer, Director. Neal has
served as VidAngel, Inc.’s Chief Executive Officer since he
co-founded 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, 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 2009 to 2013. Justin.tv was subsequently
rebranded as 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.
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 terms and conditions
in financing rounds, serving as a board member for 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, and Mr.
Wecker 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,
2019.
Name
|
|
Capacity in
which Compensation Was Received
|
|
Cash
Compensation
($)
|
|
Other
Compensation
($)
|
|
Total
Compensation
($)
|
Neal
Harmon
|
|
Chief
Executive Officer
|
|
$142,000
|
|
262
(1)
|
|
$142,262
|
Elizabeth
Ellis
|
|
President
|
|
$120,000
|
|
3,263
(2)
|
|
$123,263
|
Jeffery
Harmon
|
|
Chief
Marketing Officer
|
|
$142,000
|
|
n/a
|
|
$142,000
|
Patrick
Reilly
|
|
Chief
Financial Officer
|
|
$120,000
|
|
4,492
(3)
|
|
$124,492
|
Joseph
Wecker
|
|
Chief
Technology Officer
|
|
$150,000
|
|
1,662
(4)
|
|
$151,662
|
Paul
Ahlstrom
|
|
Director
|
|
n/a
|
|
n/a
|
|
n/a
|
Dalton
Wright
|
|
Director
|
|
n/a
|
|
n/a
|
|
n/a
|
(1)
|
On June 17, 2019, Mr. Neal Harmon was granted stock incentive
options exercisable for 2,600 shares of our Class A Common Stock
with an option price of $0.32. The grants were made pursuant to the
terms and conditions of our Stock Incentive Plan. The 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 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 $0.32 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.
|
(4)
|
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.
|
Stock Incentive Plan
In an
effort to further the long-term stability and financial success of
the Company by attracting and retaining personnel, including
employees, directors and consultants for the Company, the Company
adopted its 2014 Stock Incentive Plan, or our Stock Incentive Plan,
in February 2014. There are currently 2,534,544 shares
of Class A Common Stock in VidAngel authorized for issuance through
our Stock Incentive Plan. As of the date of this
Offering Circular, options exercisable for 1,399,506 shares of our
Class A Common Stock have been granted under our Stock Incentive
Plan, and of those options granted, options exercisable for 247,714
shares of Class A Common Stock in VidAngel have been exercised. Our
Board of Directors anticipates authorizing an additional 965,456
shares of Class A Common Stock for issuance through our Stock
Incentive Plan, for a total of 3,500,000 shares of Class A Common
Stock. Through the use of stock incentives, the Stock Incentive
Plan will stimulate the efforts of those persons upon whose
judgment, interest and efforts the Company is and will be largely
dependent for the successful conduct of its business and will
further the identification of those persons’ interests with
the interests of the Company’s stockholders.
The
Stock Incentive Plan is administered by our Board. The
board has the power and sole discretion to grant or award a stock
incentive, or an Award, to any employee of, director of, or
consultant to the Company, each a Participant, who, in the sole
judgment of our Board, has contributed, or can be expected to
contribute, to the profits or growth of the Company. Our
Board also has the power and sole discretion to determine the size,
terms, conditions and nature of each Award to achieve the
objectives of the Award and the Stock Incentive
Plan. This includes, without limitation, the
Board’ ability to determine: (i) which
eligible persons shall receive an Award and the nature of the
Award, (ii) the number of securities to be covered by each
Award, (iii) the fair market value of such securities,
(iv) the time or times when an Award shall be granted,
(v) whether an award shall become vested over a period of
time, according to a performance-based or other vesting schedule or
otherwise, and when it shall be fully vested, (vi) the terms
and conditions under which restrictions imposed upon an Award shall
lapse, (vii) whether a change of control exists,
(viii) factors relevant to the satisfaction, termination or
lapse of restrictions on certain Awards, (ix) when certain
Awards may be exercised, (x) whether to approve a
Participant’s election with respect to applicable withholding
taxes, (xi) conditions relating to the length of time before
disposition of securities received in connection with an Award is
permitted, (xii) notice provisions relating to the sale of
securities acquired under the Stock Incentive Plan, and
(xiii) any additional requirements relating to Awards that the
Board deems appropriate.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS
The
Company currently has authorized capital stock consisting of
25,000,000 shares of common stock, par value $0.001 per share, 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. Our Board of Directors
anticipates authorizing and submitting to our Class A and Class B
stockholders a resolution to amend our Certificate to increase our
authorized capital stock to 35,000,000 shares of common stock, with
23,000,000 shares designated as Class A Common Stock and 12,000,000
shares designated as Class B Common Stock. As of the date of this
Offering Circular, we have 18,251,622 shares of Class A Common
Stock issued and outstanding, and 3,313,335 shares of Class B
Common Stock issued and outstanding.
Capitalization
As of
the date of this Offering Circular, Harmon Ventures, LLC, or Harmon
Ventures, owned indirectly by our CEO, Mr. Harmon, and his two
brothers, Jeffrey Harmon and Daniel Harmon, owns 8,938,520 shares
of our Class A Common Stock. Alta Ventures Mexico Fund
I, LLC, or Alta Ventures Mexico Fund I, 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 common stock.
The
following table sets forth those executive officers, directors and
other security holders holding 10% or a greater percentage of any
class of shares, as of the date of this Offering
Circular.
Title of
Class
|
|
Name and Address
of Beneficial Owner
|
|
Amount and
Nature of Beneficial Ownership
|
|
Amount and
Nature of Beneficial Ownership Acquirable
|
|
Percent of
Class
|
Class A
Common Stock
|
|
Harmon
Ventures, LLC
295 W
Center St
Provo,
UT 84601
|
|
8,938,520
shares
|
|
N/A
|
|
48.97%
|
|
|
|
|
|
|
|
|
|
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%
|
Upon
closing of the Maximum Offering, Harmon Ventures will own 30.79% of
our total outstanding shares of capital stock, Alta Ventures Mexico
Fund I will own 11.00% of our total outstanding shares of capital
stock, and Osborne Companies, LC will own 7.69% of our total
outstanding shares of capital stock. See “COMPENSATION OF DIRECTORS AND EXECUTIVE
OFFICERS – Stock Incentive Plan” above.
Our
Board may, from time to time, also cause shares of capital stock to
be issued to directors, officers, employees or consultants of our
Company or its affiliates as equity incentive compensation under
our Stock Incentive Plan, which shares will have all benefits,
rights and preferences as our Board may designate as applicable to
such shares.
INTEREST OF
MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS AND OTHER CONFLICTS
OF INTEREST
Affiliated Transactions
Investor Rights and Voting Agreement
The
Company entered into an Investor Rights and Voting Agreement, or
Investor Agreement, dated February 27, 2014 with certain of
VidAngel’s investors, including Alta Ventures Mexico Fund I,
the manager of which is Paul Ahlstrom, one of our
directors. The Investor Agreement requires us to provide
certain information and inspection rights, provides for
confidentiality, and requires the parties to this agreement to vote
their respective shares of common stock in a manner which maintain
the number of directors on our Board at no more than five and to
elect as a director an individual designated by Alta Ventures
Mexico Fund I for so long as it owns at least 1,000,000 shares of
our common stock.
The
Company is permitted to enter into transactions with, including
making loans to and loan guarantees on behalf of, our directors,
executive officers and their affiliates; so long as the person or
persons approving the transaction on behalf of the Company acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interest of the Company. We do not have any
outstanding loans or loan guarantees with any related party, and,
as of the date of this Offering Circular, we do not have any
intentions to enter into any such transactions.
VAS Portal, LLC
We
created VAS Portal, LLC, a wholly-owned subsidiary, in 2018. 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.
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. The Company
entered into a call option agreement with the related party 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. 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. The
promissory note with VAS Portal, LLC, was also amended to change
the maturity date to June 30, 2021.
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. Other than the
promissory note due from VAS Portal, LLC as described above, we do
not have any outstanding loans or loan guarantees with any related
party as of December 31, 2019.
General
The
Company is offering a maximum of 7,462,686 of our Class B Common
Stock at a price of $6.70 per share ($50,000,000). The minimum
subscription is twenty-five (25) Offered Shares ($167.50); however,
we can waive the minimum subscription on a case to case basis in
our sole discretion. The Offered Shares are common equity and are
not entitled to any preferences regarding distributions.
See
“–Distributions.”
This
offering will terminate on the Termination Date, provided that if
we have received and accepted subscriptions for the Maximum
Offering on or before the Termination Date, then this offering will
terminate when all Offered Shares have been sold, whichever occurs
first. If, at the Initial Closing, we have sold less than the
Maximum Offering, we will hold Additional Closings, up to the
Maximum Offering, through the Termination Date. Purchases of Shares
may be submitted through an investor's VidAngel customer account in
accordance with the billing information for such investor at
www.vidangel.com,
and will be held in a separate non-interest-bearing account held by
VidAngel. Upon each closing, the proceeds collected for such
closing will be disbursed to the Company and the Offered Shares for
such closing will be issued to investors. If a closing does not
occur for any reason, the proceeds for such closing will be
promptly returned to investors, generally without interest (within
3-5 business days) and without deduction.
The
Company and stockholders are governed by our Certificate and
Bylaws. See
“Description of Certificate
of Incorporation and Bylaws” below for a detailed
summary of terms of our Certificate and Bylaws. Our
Certificate and Bylaws are filed as an exhibit to the Offering
Statement of which this Offering Circular is a part. The
Company has: 25,000,000 shares of common stock, par value $0.001,
authorized, of which 21,250,000 shares have been designated as
Class A Common Stock, and 3,750,000 have been designated as Class B
Common Stock. Our Board has the right to create,
authorize and issue new shares in the Company, including new
classes, provided that it may not authorize or issue shares senior
to the rights and preferences of our common stock without the
consent of the common stockholders holding a majority of the
outstanding shares of each class of common stock. Our Board
anticipates authorizing and submitting to our stockholders a
resolution to amend our Certificate to increase our authorized
capital stock to 35,000,000 shares of common stock, with 23,000,000
shares designated as Class A Common Stock and 12,000,000 shares
designated as Class B Common Stock.
Registrar, Paying Agent and Transfer Agent for our
Offered Shares
Duties
Issuer
Direct Corporation will serve as the registrar and transfer agent
for our Offered Shares. We will pay all fees charged by
the transfer agent for transfers of our Offered Shares except for
special charges for services requested by a Class B Common
Stockholder.
There
will be no charge to our Class B Common Stockholders for
disbursements of our cash dividends, if any, although we do not
anticipate issuing dividends for the foreseeable future. We will
indemnify the transfer agent, its agents and each of their
respective stockholders, directors, officers and employees against
all claims and losses that may arise out of acts performed or
omitted for its activities in that capacity, except for any
liability due to any gross negligence or intentional misconduct of
the indemnified person or entity.
Resignation or Removal
The
transfer agent may resign, by notice to us, or be removed by us.
The resignation or removal of the transfer agent will become
effective upon our appointment of a successor transfer agent and
registrar and its acceptance of the appointment. If no successor
has been appointed and has accepted the appointment within
30 days after notice of the resignation or removal, our Board,
or a designee of our Board, may act as the transfer agent and
registrar until a successor is appointed.
Share Redemption Plan
The
Company has adopted the following share redemption plan for all
issued and outstanding Class B Common Stock. However, this
share redemption plan is only a policy of the Company and can be
modified or terminated by our Board of Directors at any
time.
Redemption Request at the Option of a Holder
Beginning
one year from the date of original issuance of any Class B Common
Stock, a Class B shareholder will have the opportunity to request,
up to once per calendar year, that we redeem up to 50% of
such holder’s Class B Common Stock originally purchased from
us at a redemption price equal to the Stated Value of such redeemed
shares, less the applicable redemption fee (if any). As a
percentage of the aggregate redemption price of a holder’s
shares to be redeemed, the redemption fee shall be:
●
15% if the redemption is requested
after the first anniversary and before the second anniversary of
the original issuance of such shares.
● 10%
if the redemption is requested after the second anniversary and
before the third anniversary of the original issuance of such
shares.
●
5% if the redemption is requested after the third
anniversary and before the fourth anniversary of the original
issuance of such shares.
●
3% if the redemption is requested after the fourth
anniversary and before the fifth anniversary of the original
issuance of such shares.
●
0% if the redemption is requested after the fifth
anniversary of the original issuance of such shares.
Restrictions on Redemption and Repurchase
We
will not be obligated in all cases to redeem shares of Class B
Common Stock. In particular, we will not redeem or repurchase any
preferred shares if we are restricted by applicable law or our
Certificate of Incorporation, as amended, from making such
redemption or to the extent any such redemption would cause or
constitute a default under any borrowing agreements to which we or
any of our subsidiaries are a party or otherwise bound. In
addition, we will have no obligation to redeem shares upon a
redemption request made by a holder if we do not have sufficient
funds available to fund that redemption. We will have discretion to
determine whether we are in possession of “sufficient
funds” to fund a redemption request.
Stated Value
Each
share of Class B Common Stock will have a “Stated
Value” which shall be the fair market value as determined by
the Board of Directors in its sole discretion on a quarterly basis,
subject to appropriate adjustment upon certain events such as
recapitalizations, stock dividends, stock splits, stock
combinations, and reclassifications.
Dividends
No dividends to investors in our Offered
Shares are assured, nor are any returns on, or of, an
investor’s investment guaranteed. Dividends are
subject to our ability to generate positive cash flow from
operations. All dividends are further subject to the
discretion of our Board. It is possible that we may have
cash available for dividends, however, we anticipate retaining all
of our earnings for the future operation of the Company and do not
anticipate making any cash distributions in the foreseeable
future.
Our Board, in
its sole discretion, may determine from time to time to declare and
pay dividends out of any funds legally available therefore. The
Company has never declared or paid cash dividends on its capital
stock. The Company currently intends to retain any future earnings
to finance the growth and development of its business and therefore
does not anticipate paying any cash dividends for the foreseeable
future.
Liquidating Preferences
Upon
the dissolution and liquidation of the Company, no stockholder will
receive a preference in the distribution of liquidation proceeds.
Liquidating distributions will be shared pari passu among our common
stock.
Basis for Dividends
The
Company’s ability, and our Board’ decisions, to issue
dividends to our stockholders will be based upon the operating
results of the Company. Our Board has discretion over
whether to declare and pay dividends to our stockholders, however,
we do not anticipate issuing any dividends for the foreseeable
future.
Description of Certificate of Incorporation and Bylaws
The Company is governed by our certificate of incorporation, or our
Certificate, and our bylaws, or our Bylaws. The following summary
describes material provisions of our Certificate and our Bylaws,
but it is not a complete description of our Certificate, our Bylaws
or any combination of the two. A copy of our Certificate and our
Bylaws are filed as exhibits to the Offering Statement of which
this Offering Circular is a part.
Board of Directors
Subject
to our stockholders’ rights to consent to certain
transactions as provided under the Delaware General Corporate Law,
or DGCL, the business and affairs of the Company are controlled by,
and all powers are exercised by, our board of directors, or our
Board. Our Board is required to consist of not less than three (3)
nor more than five (5) directors, the exact number to be set from
time to time by the Board. Our Board is comprised of Paul Ahlstrom,
Neal Harmon and Dalton Wright. Our Board is elected each year at
the annual meeting of stockholders, to hold office until the next
annual meeting and until their successors are elected and
qualified. Any newly created directorships resulting from an
increase in the authorized number of directors and any vacancies
occurring in our Board may be filled by the affirmative vote of the
remaining directors. A director may resign at any time, and the
stockholders may remove a director at any time, with or without
cause, by the affirmative vote of a majority of stockholders voting
in such decision.
The
DGCL provides that stockholders of a Delaware corporation are not
entitled to the right to cumulate votes in the election of
directors unless its certificate of incorporation provides
otherwise. Our Certificate does not provide for cumulative
voting.
Our
Board may designate one or more committees. Such committees must
consist of one or more directors. Any such committee, to the extent
permitted by applicable law, will have and may exercise all the
powers and authority of the Board in the management of the business
and affairs of the Company.
Officers
The
Board has the authority to select the officers of the Company. The
officers consist of a Chairman of the Board, a Chief Executive
Officer, or CEO, a Secretary and a Treasurer. In addition, the
Board may elect one or more Vice Chairmen, President, Chief
Financial Officer and Vice Presidents, and such other offices as
the Board may determine. Two or more of the aforementioned offices
may be held by the same person. Our officers are: (i) Neal Harmon,
Chief Executive Officer; (ii) Jeffrey Harmon, Chief Marketing
Officer; (iii) Elizabeth Ellis, President and Chief Operating
Officer; (iv) Patrick Reilly, Chief Financial Officer and
Secretary; and (v) Joseph Wecker, Chief Technology
Officer.
At the
first meeting of the Board following the annual meeting of
stockholders, the Board appoints the officers, however, the Board
may also empower the CEO to appoint subordinate officers and agents
for us. Each officer so elected holds office until such
officer’s successor is elected and qualified or until the
officer’s earlier resignation or removal. Each officer is
required to perform such duties as are provided in the Bylaws or as
the Board may from time to time determine. Subject to
the rights, if any, of an officer under any employment agreement,
any officer may be removed, with or without cause, by the
affirmative vote of a majority of the Board. An officer
may resign at any time on giving notice to the Board. Our CEO is in
charge of the general affairs of the Company, subject to the
oversight of the Board. In case any officer is absent, or for any
other reason the Board may deem sufficient, the CEO or the Board
may delegate the powers and duties of such officer to any other
officer or to any director.
Fiduciary Duties and Indemnification
The
Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, or Proceeding (other than an
action by or in the right of the Company), by reason of the fact
that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all
liability and loss suffered and expenses reasonably incurred by
such person in connection with any such Proceeding. The Company
shall be required to indemnify a person in connection with a
Proceeding initiated by such person only if the Proceeding was
authorized by the Board.
Company Stock
The
Company may issue up to 25,000,000 shares of capital stock, of
which 25,000,000 shares will be common stock, par value $0.001 per
share of which 21,250,000 shares have been designated as Class A
Common Stock, and 3,3750,000 have been designated as Class B Common
Stock. Our Board anticipates authorizing and submitting to our
Class A and Class B stockholders a resolution to amend our
Certificate to increase our authorized capital stock to 35,000,000
shares of common stock, with 23,000,000 shares designated as Class
A Common Stock and 12,000,000 shares designated as Class B Common
Stock.
Stockholder Rights
Voting
Class B
Common Stockholders will not be entitled to vote other than as
required by law. Only holders of Class A Common Stock
are entitled to one vote for each share of Class A Common Stock
held of record on all matters on which the holders of shares of
Class A Common Stock are entitled to vote.
Meetings
The
annual meeting of the stockholders shall be held at such date, time
and place, if any, as shall be determined by the Board and stated
in the notice of the meeting. Special meetings of the stockholders
shall be called pursuant to resolution approved by the Board,
chairperson of our Board, the Chief Executive Officer or President
(in the absence of a Chief Executive Officer) or by Class A Common
Stockholders holding shares of Class A Common Stock in the
aggregate entitled to cast votes not less than ten (10%) percent of
the votes at that meeting. The only business which may be conducted
at a special meeting shall be the matter or matters set forth in
the notice of such meeting.
Dividends and Liquidations
Upon
any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, a Liquidation Event, the assets and funds
of the Corporation available for distribution to its stockholders,
if any, shall be distributed common stockholders, pro rata, then
outstanding.
Amendment
Class A
Common Stockholders may amend, alter or repeal our Certificate and
our Bylaws.
Description of our Stockholders Agreement
Our Class B Common Stock is governed by our Stockholders Agreement.
The following summary describes material provisions of our
Stockholders Agreement, but it is not a complete description of our
Stockholders Agreement. A copy of our Stockholders Agreement is
filed as an exhibit to the Offering Statement of which this
Offering Circular is a part.
Transfer
restrictions.
Investors in our
Class B Common Stock will be subject to the restrictions on
transfer set forth in our Stockholders Agreement. Under
the terms of our Stockholders Agreement, transfer of shares of our
Class B Common Stock will be subject to a right of first refusal
exercisable first by the Company, second, by our Class A Common
Stockholders, and, third, by our remaining Class B Common
Stockholders pursuant to the Stockholders
Agreement. Prior to any transfer or proposed transfer of
shares, the transferring shareholder, or the Seller, is required to
give written notice to us and to the remaining stockholders of such
proposed transfer. The certificates for our Class B Common
Stock will be legended to reflect these restrictions.
Restrictions
Imposed by the USA PATRIOT Act and Related Acts
In
accordance with the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001, or the USA PATRIOT Act, the securities offered hereby may
not be offered, sold, transferred or delivered, directly or
indirectly, to any “unacceptable investor,” which means
anyone who is:
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a
“designated national,” “specially designated
national,” “specially designated terrorist,”
“specially designated global terrorist,” “foreign
terrorist organization,” or “blocked person”
within the definitions set forth in the Foreign Assets Control
Regulations of the United States, or U.S., Treasury
Department;
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acting
on behalf of, or an entity owned or controlled by, any government
against whom the U.S. maintains economic sanctions or embargoes
under the Regulations of the U.S. Treasury
Department;
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within
the scope of Executive Order 13224 — Blocking Property
and Prohibiting Transactions with Persons who Commit, Threaten to
Commit, or Support Terrorism, effective September 24,
2001;
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a
person or entity subject to additional restrictions imposed by any
of the following statutes or regulations and executive orders
issued thereunder: the Trading with the Enemy Act, the National
Emergencies Act, the Antiterrorism and Effective Death Penalty Act
of 1996, the International Emergency Economic Powers Act, the
United Nations Participation Act, the International Security and
Development Cooperation Act, the Nuclear Proliferation Prevention
Act of 1994, the Foreign Narcotics Kingpin Designation Act, the
Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the
Cuban Liberty and Democratic Solidarity Act and the Foreign
Operations, Export Financing and Related Programs Appropriations
Act or any other law of similar import as to any
non-U.S. country, as each such act or law has been or may be
amended, adjusted, modified or reviewed from time to
time; or
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designated
or blocked, associated or involved in terrorism, or subject to
restrictions under laws, regulations, or executive orders as may
apply in the future similar to those set forth above.
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An
investment in us by an employee benefit plan is subject to
additional considerations because the investments of these plans
are subject to the fiduciary responsibility and prohibited
transaction provisions of ERISA and restrictions imposed by
Section 4975 of the Code. For these purposes the term
“employee benefit plan” includes, but is not limited
to, qualified pension, profit-sharing and stock bonus plans, Keogh
plans, simplified employee pension plans and tax deferred annuities
or IRAs established or maintained by an employer or employee
organization. Among other things, consideration should be given
to:
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whether
the investment is prudent under Section 404(a)(1)(B) of
ERISA;
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whether
in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of ERISA;
and
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whether
the investment will result in recognition of unrelated business
taxable income by the plan and, if so, the potential after-tax
investment returns.
|
The
person with investment discretion with respect to the assets of an
employee benefit plan, often called a fiduciary, should determine
whether an investment in us is authorized by the appropriate
governing instrument and is a proper investment for the
plan.
Section 406 of
ERISA and Section 4975 of the Code prohibit employee benefit
plans from engaging in specified transactions involving “plan
assets” with parties that are “parties in
interest” under ERISA or “disqualified persons”
under the Code with respect to the plan.
In
addition to considering whether the purchase of Offered Shares is a
prohibited transaction, a fiduciary of an employee benefit plan
should consider whether the plan will, by investing in us, be
deemed to own an undivided interest in our assets, with the result
that our operations would be subject to the regulatory restrictions
of ERISA, including its prohibited transaction rules, as well as
the prohibited transaction rules of the Code.
The
Department of Labor regulations provide guidance with respect to
whether the assets of an entity in which employee benefit plans
acquire equity interests would be deemed “plan assets”
under some circumstances. Under these regulations, an
entity’s assets would not be considered to be “plan
assets” if, among other things:
(1) the
equity interests acquired by employee benefit plans are publicly
offered securities - i.e., the equity interests are widely held by
100 or more investors independent of the issuer and each other,
freely transferable and registered under some provisions of the
federal securities laws;
(2) the
entity is an “operating company”—i.e., it is
primarily engaged in the production or sale of a product or service
other than the investment of capital either directly or through a
majority-owned subsidiary or subsidiaries; or
(3)
there is no significant investment by benefit plan investors, which
is defined to mean that less than 25% of the value of each class of
equity interest is held by the employee benefit plans referred to
above.
We do
not intend to limit investment by benefit plan investors in us
because we anticipate that we will qualify as an “operating
company”. If the Department of Labor were to take
the position that we are not an operating company and we had
significant investment by benefit plans, then we may become subject
to the regulatory restrictions of ERISA which would likely have a
material adverse effect on our business and the value of our common
stock.
Plan
fiduciaries contemplating a purchase of Offered Shares should
consult with their own counsel regarding the consequences under
ERISA and the Code in light of the serious penalties imposed on
persons who engage in prohibited transactions or other
violations.
ACCEPTANCE
OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY OUR BOARD OR ANY OTHER PARTY RELATED TO US THAT
THIS INVESTMENT MEETS THE RELEVANT LEGAL REQUIREMENTS WITH RESPECT
TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THIS INVESTMENT IS
APPROPRIATE FOR ANY PARTICULAR PLAN. THE PERSON WITH
INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND
FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN US IN
LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN.
We will
furnish the following reports, statements, and tax information to
each stockholder:
Reporting Requirements under Tier II of
Regulation A. Following this Tier II, Regulation
A offering, we will be required to comply with certain ongoing
disclosure requirements under Rule 257 of Regulation
A. We will be required to file: an annual
report with the SEC on Form 1-K; a semi-annual report with the SEC
on Form 1-SA; current reports with the SEC on Form 1-U; and a
notice under cover of Form 1-Z. The necessity to file
current reports will be triggered by certain corporate events,
similar to the ongoing reporting obligation faced by issuers under
the Exchange Act, however the requirement to file a Form 1-U is
expected to be triggered by significantly fewer corporate events
than that of the Form 8-K. Parts I & II of Form 1-Z
will be filed by us if and when we decide to and are no longer
obligated to file and provide annual reports pursuant to the
requirements of Regulation A.
Annual Reports. As soon as
practicable, but in no event later than one hundred twenty (120)
days after the close of our fiscal year, ending December 31, our
Board will cause to be mailed or made available, by any reasonable
means, to each Stockholder as of a date selected by the Board, an
annual report containing financial statements of the Company for
such fiscal year, presented in accordance with GAAP, including a
balance sheet and statements of operations, company equity and cash
flows, with such statements having been audited by an accountant
selected by the Board. The Board shall be deemed to have
made a report available to each stockholder as required if it has
either (i) filed such report with the SEC via its Electronic Data
Gathering, Analysis and Retrieval, or EDGAR, system and such report
is publicly available on such system or (ii) made such report
available on any website maintained by the Company and available
for viewing by the stockholders.
Tax Information. On or before
June 30th of the year immediately following our fiscal year, which
is currently January 1st through December 31st, we will send to
each stockholder such tax information as shall be reasonably
required for federal and state income tax reporting
purposes.
Stock Certificates. We do not
anticipate issuing stock certificates representing Offered Shares
purchased in this offering to the Class B Common
Stockholders. However, we are permitted to issue stock
certificates and may do so at the request of our transfer
agent. The number of Offered Shares held by each Class B
Common Stockholder, will be maintained by us or our transfer agent
in the Company register.
The
balance sheets of VidAngel as of December 31, 2019 and 2018, and
the statements of operations, stockholders’ deficit and cash
flows of VidAngel for the years ended December 31, 2019 and 2018,
have been included in this Offering Circular and have been audited
by Tanner LLC, independent auditors, as stated in their report
appearing herein.
Index to Consolidated Financial Statements
VidAngel, Inc.
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Consolidated Financial Statements as of December 31, 2019
and 2018 for the Years Then Ended
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VIDANGEL, INC.
Consolidated Financial Statements
As of December 31, 2019 and 2018
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, 2019
and 2018, 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 audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to error or fraud. In making
those risk assessments, the auditors consider internal control
relevant to the entity’s preparation and fair presentation of
the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
the Company as of December 31, 2019 and 2018, and the consolidated
results of their operations and their 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, 2019 and 2018, 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
May 5,
2020
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
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Assets
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|
Current
assets:
|
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|
Cash
and cash equivalents
|
$1,584,455
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$1,539,731
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Restricted
cash
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-
|
954,381
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Holdback
Receivable
|
445,000
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-
|
Accounts
receivable
|
633,581
|
266,436
|
Physical
Media Inventory
|
106,789
|
-
|
Notes
receivable, current
|
-
|
349,866
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Prepaid
expenses and other
|
20,157
|
133,907
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Total
current assets
|
2,789,982
|
3,244,321
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Movie
asset
|
970,372
|
1,206,687
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Deposits
|
47,915
|
47,915
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Property
and equipment, net
|
36,063
|
85,590
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Business
CD
|
76,172
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75,000
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Note
receivable - long term
|
107,488
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-
|
Total
assets
|
$4,027,992
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$4,659,513
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Liabilities and Stockholders' Deficit
|
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Current
liabilities:
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Accounts
payable
|
$1,033,862
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$397,705
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Accrued
expenses
|
781,035
|
758,299
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Deferred
revenue
|
4,081,222
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3,813,134
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Total
current liabilities
|
5,896,119
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4,969,138
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Commitments
and contingencies
|
|
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Stockholders'
deficit:
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|
|
Common
stock, $0.001 par value, 25,000,000 shares
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authorized;
21,560,166 shares issued and outstanding
|
21,560
|
21,560
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Additional
paid-in capital
|
13,466,838
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13,414,186
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Accumulated
deficit
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(15,356,525)
|
(13,745,371)
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Total
stockholders' deficit
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(1,868,127)
|
(309,625)
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Total
liabilities and stockholders' deficit
|
$4,027,992
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$-
|
See
accompanying notes to consolidated financial
statements.
F-1
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31,
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Revenues,
net
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$10,754,844
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$7,547,299
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Operating
expenses:
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|
Cost
of revenues
|
4,143,717
|
2,382,418
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Legal
|
2,373,203
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915,717
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General
and administrative
|
2,149,802
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1,663,392
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Selling
and marketing
|
1,934,729
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1,318,155
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Research
and development
|
1,775,665
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1,567,015
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Total
operating expenses
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12,377,116
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7,846,697
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Operating
loss
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(1,622,272)
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(299,398)
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Other
income (expense):
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Interest
expense
|
(112)
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(35)
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Interest
income
|
11,330
|
13,179
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Total
other income, net
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11,218
|
13,144
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Loss
before income taxes
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(1,611,054)
|
(286,254)
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Provision
for income taxes
|
100
|
100
|
|
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|
Net
loss
|
$(1,611,154)
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$(286,354)
|
See
accompanying notes to consolidated financial
statements.
F-2
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Deficit
For the Years Ended December 31, 2019 and 2018
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Balance as of December 31,
2017
|
18,063,856
|
3,313,335
|
$21,377
|
$13,231,869
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$(13,459,017)
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$(205,771)
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Stock options
excercised
|
182,975
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-
|
183
|
83,179
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-
|
83,362
|
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|
|
|
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|
|
Stock-based compensation
expense
|
-
|
-
|
-
|
99,138
|
-
|
99,138
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|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
-
|
-
|
-
|
52,652
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-
|
52,652
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(1,611,154)
|
(1,611,154)
|
|
|
|
|
|
|
|
Balance as of December
31, 2019
|
18,246,831
|
3,313,335
|
$21,560
|
$13,466,838
|
$(15,356,525)
|
$(1,868,127)
|
See accompanying
notes to consolidated financial statements.
F-3
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows
For the Years Ended December 31,
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Cash flows from operating activities:
|
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Net
loss
|
$(1,611,154)
|
$(286,354)
|
Adjustments
to reconcile net loss to net cash, restricted
|
|
|
cash,
and cash equivalents used in operating activities:
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|
|
Depreciation
and amortization
|
64,947
|
93,083
|
Stock-based
compensation expense
|
52,652
|
99,138
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Change
in operating assets and liabilities:
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|
|
Accounts
receivable
|
(367,145)
|
(258,429)
|
Holdback
recevable
|
(445,000)
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-
|
Physical
Media Inventory
|
(106,789)
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-
|
Prepaid
expenses and other assets
|
113,750
|
(8,325)
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Movie
Asset Inventory
|
236,315
|
237,133
|
Deposits
|
-
|
156,356
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Note
Receivable
|
242,378
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(223,141)
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Certificate
of Deposits
|
(1,172)
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-
|
Accounts
payable and accrued expenses
|
766,405
|
125,926
|
Deferred
revenue
|
160,576
|
(371,277)
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|
Net
cash, restricted cash, and cash equivalents used in operating
activities
|
|
|
used
in operating activities
|
(894,237)
|
(435,890)
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase
of property and equipment
|
(15,420)
|
(50,139)
|
Purchase
of certificate of deposit
|
-
|
(75,000)
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|
|
Net
cash, restricted cash and cash equivalents
|
|
|
used
in investing activities
|
(15,420)
|
(125,139)
|
|
|
|
Cash flows from financing activities:
|
|
|
Exercise
of stock options
|
-
|
83,362
|
|
|
|
Net
change in cash and cash equivalents
|
(909,657)
|
(477,667)
|
|
|
|
Cash,
restricted cash, and cash equivalents
|
|
|
at
beginning of year
|
2,494,112
|
2,971,779
|
|
|
|
Cash,
restricted cash, and cash equivalents at end of year
|
$1,584,455
|
$2,494,112
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash
paid for interest
|
$112
|
$35
|
Cash
paid for income taxes
|
$100
|
$100
|
See accompanying notes to consolidated financial
statements.
F-4
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements
December 31, 2019 and 2018
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.
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|
|
The
Company filed for Chapter 11 bankruptcy on October 18, 2017 and
operated 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 until
August 28, 2019. On that date, the United States Trustee appointed
George B, Hofmann to serve as a chapter 11 trustee, and an order
was subsequently entered by the court approving it. Henceforth, the
chapter 11 trustee will oversee the business 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.
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|
|
Use of Estimates
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America (US GAAP) 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 economic useful lives of
property and equipment, estimated useful lives of the movie asset
based on the estimated economic useful life to the estimated
salvage value, valuation allowances for net deferred income tax
assets, and valuation of stock-based compensation.
|
|
|
Concentrations of Credit Risk
The
Company maintains its cash, restricted cash, and cash equivalents
in bank deposit accounts which, at times, exceed federally insured
limits. At December 31, 2019 and 2018, the Company had
approximately $1,304,000 and $2,341,000 of cash, restricted cash,
and cash that exceeded federally insured limits.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Concentrations of Credit Risk - continued
To
date, the Company has not experienced a loss or lack of access to
its invested cash, restricted cash, and cash equivalents; however,
no assurance can be provided that access to the Company’s
invested cash, restricted 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:
|
|
|
Individual
customer revenues that were 10% or more of total revenues were as
follows for the years ended December 31:
|
|
|
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, 2019, and 2018, 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. The
following table provides a reconciliation of cash, cash
equivalents, and restricted cash within the consolidated balance
sheets that sum to the total of the same such amounts shown in the
statements of cash flows.
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$1,584,455
|
$1,539,731
|
Restricted cash
|
-
|
954,381
|
|
|
|
Total cash, restricted cash, and
cash
equivalents
shown in the
statements
of cash flows
|
$1,584,455
|
$2,494,112
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1.
Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Holdback Receivable
During
2019, one of the Company’s credit card processing vendors
required a holdback reserve to be established, and is used to
offset any chargebacks. The balance of the holdback reserve as of
December 31, 2019 is $445,000. If and when the holdback reserve is
released, the amount will be returned to the Company.
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 receivable
was $0 as of December 31, 2019 and 2018.
|
|
|
Physical Media Inventory
Physical
media inventory consists of discs, purchased for resale, for The
Chosen tv series. Physical media inventory is recorded at average
cost. The Company periodically reviews the physical media inventory
for excess supply, obsolesce, and valuations above estimated
realization amounts, and provides a reserve to cover these items.
Management determined that no allowance for physical media
inventory was necessary as of December 31, 2019.
|
|
|
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 $239,890 and $247,045 for the years ended December 31, 2019 and
2018, 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, 2019 and 2018.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using
the straight-line method over the estimated economic useful lives
of the assets or over the related lease terms (if shorter) as
follows:
|
Office
and computer equipment
|
3
years
|
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.
|
|
|
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, 2019 and
2018.
|
|
|
Recently Adopted Accounting Pronouncement
In May
2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers
(Topic 606). Topic 606 supersedes the revenue recognition
requirements in Accounting standards Codification (ASC) Topic 605,
Revenue Recognition (Topic
605), and requires the recognition of revenue when promised goods
or services are transferred to customers in an amount that reflects
the consideration to which the entity expects to be entitled to in
exchange for those goods or services. Topic 606 also includes
Subtopic 340-40, Other Assets and
Deferred Costs – Contracts with Customers, which
requires the deferral of incremental costs of obtaining a contract
with a customer. The Company adopted the requirements of Topic 606
effective January 1, 2019, utilizing the modified retrospective
method of transition. Adoption of Topic 606 did not result in
adjustments to revenue, deferred revenue, receivables, or deferred
costs.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Recently Adopted Accounting Pronouncement - continued
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) Restricted
Cash. ASU 2016-18 changes the cash flow presentation of and
disclosures related to restricted cash. The Company adopted the
requirements of ASU 2016-18 effective January 1, 2019.
Revenue Recognition
The
Company recognizes revenue when a customer obtains control of
promised products or services. The amount of revenue recognized
reflects the consideration that the Company expects to be entitled
to receive in exchange for these products or services. To achieve
the core principle of Topic 606, the Company applies the following
five steps: 1) Identify the contract with the customer; 2) Identify
the performance obligations in the contract; 3) Determine the
transaction price; 4) Allocate the transaction price to performance
obligations in the contract; and 5) Recognize revenue when or as
the Company satisfies a performance obligation.
|
|
|
Filtering Subscription Revenue
Post-injunction
on December 29, 2016, the Company offers subscriptions to use its
proprietary content filtering technology in conjunction with many
of today’s popular streaming services for a monthly fee.
Customers subscribe for this service online through the
Company’s website. The customer is charged the full price at
the start of the subscription period, and monthly thereafter, which
amount 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. Any incentive allowances provided to customers
such as credits and free subscription periods are recorded as
reductions of revenue. Filtering subscription revenue is recognized
over time, typically in daily increments as the customers pay on a
monthly basis.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Revenue Recognition – continued
Digital and Physical Media Revenue
The
Company partnered with The Chosen, LLC, or The Chosen, an
independent filmmaker, to distribute The Chosen’s licensed
original content and related merchandise. Digital delivery
represents streaming-based delivery of The Chosen’s content
via the Company’s service. Physical media represents Blu-Ray
or DVD discs of The Chosen’s content. Revenue is recognized
as products are delivered upon streaming, or upon shipment of
physical media. Digital and physical media revenue is recognized at
a point in time – when streamed digitally, or when physically
shipped.
|
|
|
Content Licensing
The
Company receives content licensing revenue by publishing short
versions of its original content (from the Dry Bar Comedy series
– see description below) on third-party websites (such as
Facebook, YouTube, and Amazon). The Company grants the third-party
websites a license to display the Company’s original content
to the customers of the third-party websites. The third-party
websites are interested in increasing traffic on their websites,
and 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 via the third-party websites.
The Company recognizes revenue in the period in which the
impressions or actions occur, at a point in time. The third-party
websites provide the Company monthly reports of the Company’s
advertising revenue.
|
|
|
Consulting Revenue
The
Company partnered with The Chosen to provide a technology platform
and consulting services to assist The Chosen in raising funds using
Tier 2 of the updated Regulation A of the Securities Act of 1933,
or Reg A+. The Chosen, LLC, successfully raised approximately
$10,000,000 pursuant to the Reg A+ offering to produce, it says,
the first multi-season television series about the life of Jesus
Christ. The Company’s fixed consulting fee was earned upon
the closing of The Chosen’s Reg A+ offering in 2019. Revenue
was recognized upon completion of the performance obligation and
once control of the service was delivered to the customer, which
was over time, and which all occurred in 2019.
|
|
|
Ticket Revenue and Concession Revenue
The
Company created Dry Bar Comedy, an ongoing stand-up comedy series
that the Company films. The Company sells ticket to the live
stand-up comedy events. Revenue is recognized at the conclusion of
the event, at a point in time.
The
Company also sells concessions at these events, and revenue from
concessions is recognized when the concessions are purchased, at a
point in time.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Revenue Recognition – continued
Rental Revenue
Rental
revenues are amounts received from customers in order to access
specific content for a limited amount of time, typically 24 hours.
This essentially represents 24-hour use of the Company’s
subscription service to access one specific item of content.
Revenue is recognized upon the completion of the 24-hour period, at
a point in time.
Tip Revenue
The
Company receives tips from customers who wished to show
appreciation to the Company and the content providers from the
content they created. Most of the tips are received from customers
who subscribe to the Company’s subscription service, and who
viewed a Dry Bar Comedy show via the subscription filtering service
and enjoyed the comedian’s performance. The Company
recognizes revenue from tips on a gross basis. Content providers
receive a portion of all revenues attributed to their content which
is included in cost of revenues. Revenue is recognized in the
period the tips were received, at a point in time.
|
|
|
Venue Revenue
The
Company occasionally has third parties interested in using the
building in which Dry Bar Comedy is filmed and produced. The
Company charges a fee for use of the space. Revenue is recognized
on the date the venue was used, at a point in time.
|
|
|
The
following table presents the Company’s revenue recognized
over time or at a point in time (as previously described) for the
years ended December 31:
|
|
|
|
|
|
|
Over time
revenue
|
$6,219,093
|
$5,351,171
|
Point in time
revenue
|
4,535,751
|
2,196,128
|
|
|
|
Total revenues,
net
|
$10,754,844
|
$7,547,299
|
|
|
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. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1. Description of
Organization
and
Summary
of
Significant
Accounting
Policies
Continued
|
|
Advertising
Advertising
costs are expensed as incurred. Advertising expenses totaled
$453,669 and $486,932 for the years ended December 31, 2019 and
2018, 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.
|
|
|
Reclassification
Certain
amounts in the 2018 consolidated financial statements have been
reclassified to conform to the 2019 presentation.
|
|
|
Subsequent Events
Management
has evaluated events and transactions for potential recognition or
disclosure through May 5, 2020, which is the date the consolidated
financial statements were available to be issued.
|
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 $1,611,154 and $286,354 for the
years ended December 31, 2019 and 2018, respectively. The Company
used net cash of $894,237 and $435,890 in operating activities for
the years ended December 31, 2019 and 2018, 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. 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.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
2. Going
Concern
Continued
|
|
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
|
$124,280
|
$113,394
|
Production
equipment
|
111,398
|
110,326
|
Leasehold
improvements
|
109,692
|
106,230
|
Furniture and
fixtures
|
93,678
|
93,678
|
|
|
|
|
439,048
|
423,628
|
Less accumulated depreciation and
amortization
|
(402,985)
|
(338,038)
|
|
|
|
|
$36,063
|
$85,590
|
|
|
Depreciation and amortization expense on property and equipment for
the years ended December 31, 2019 and 2018 was $64,947 and $93,083,
respectively.
|
4. Commitments
and
Contingencies
|
|
Litigation
The
Company is involved in legal proceedings from time to time arising
in the normal course of business. The Company has received, and may
in the future continue to receive, claims from third parties.
Management, after consultation with legal counsel, believes that
the outcome of these proceedings may have a material impact on the
Company’s consolidated financial position, results of
operations, or liquidity.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
4. Commitments
and
Contingencies
Continued
|
|
Litigation – continued
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.
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 May 5, 2020, 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, were decided by a jury trial in
June 2019. The jury found that the Company willfully infringed the
Plaintiffs’ copyrights and awarded statutory damages of
$75,000 for each of the 819 infringed works, for a total of
$61,425,000. The jury also rejected the Company’s argument
that its violations of the DMCA were innocent and awarded the
Plaintiffs’ statutory damages of $1,250 for each of the 819
infringed works, for a total of $1,023,750. The total award for
both counts is $62,448,750. On October 4, 2019, a notice of appeal
was filed by the Company. The Company believes the range of
potential damages is now between $0 and $62,448,750, as the Company
is in the appeals process. As no amount within the probable range
of loss is a better estimate than any other amount, and the minimum
amount of the range is $0, no amount has been accrued as of
December 31, 2019.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
4. Commitments
and
Contingencies
Continued
|
|
Expectations
may change in the future as the litigation and events related
thereto unfold. During 2019 and 2018 the Company incurred
$2,373,203 and $915,717, 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
The Company has a non-cancelable office lease that matures on
December 31, 2021, and the annual lease amount is $180,000. As of
December 31, 2019, future minimum lease payments under
non-cancelable operating leases with terms of one year or more are
as follows:
|
Year Ending
December 31:
|
|
|
|
2020
|
$180,000
|
2021
|
180,000
|
|
$360,000
|
|
|
Rental expense under operating leases was $189,600 and $186,683 for
the years ended December 31, 2019 and 2018,
respectively.
|
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,
2019 and 2018. 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 1,135,038 and 881,243
shares available for grant under the Plan as of December 31, 2019
and 2018, respectively.
|
|
|
Stock-based
compensation expense for the years ended December 31, 2019 and 2018
was $52,652 and $99,138, respectively. As of December 31, 2019 and
2018, the Company had $48,980 and $97,661 respectively, of
unrecognized stock-based compensation costs related to non-vested
awards that will be recognized over a weighted-average period of
1.7 years. The Company uses an estimated 30% forfeiture
rate.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
5. Stock Options
Continued
|
|
The
following sets forth the outstanding common stock options and
related activity for the years ended December 31, 2019 and
2018:
|
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
|
|
Outstanding as of January 1,
2018
|
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
|
Granted
|
52,100
|
0.32
|
Exercised
|
-
|
-
|
Forfeited
|
(305,895)
|
0.46
|
|
|
|
Outstanding as of December 31,
2019
|
1,156,583
|
0.44
|
|
|
The
following summarizes information about stock options outstanding as
of December 31, 2019:
|
Number of
Options Outstanding
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Number
of
Options
Exercisable
|
Weighted Average
Exercise Price
|
|
|
|
|
|
99,311
|
4.38
|
$0.18
|
99,311
|
$0.18
|
10,000
|
4.85
|
0.30
|
10,000
|
0.30
|
569,272
|
8.36
|
0.32
|
338,209
|
0.32
|
275,500
|
5.39
|
0.50
|
275,500
|
0.50
|
202,500
|
6.36
|
0.82
|
184,707
|
0.82
|
|
|
|
|
|
1,156,583
|
6.93
|
$0.44
|
907,727
|
$0.44
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
5. Stock Options
Continued
|
|
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:
|
|
2019
|
|
2018
|
|
|
|
|
Risk-free interest
rate
|
1.85 –
1.88%
|
|
2.73 –
3.05%
|
Expected stock price
volatility
|
50%
|
|
50%
|
Expected dividend
yield
|
0%
|
|
0%
|
Expected life of
options
|
5 years
|
|
5 years
|
|
|
As of
December 31, 2019 and 2018, the aggregate intrinsic value of
options outstanding was $14,104. As of December 31, 2019 and 2018,
the aggregate intrinsic value of options exercisable was
$14,104.
|
|
|
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).
|
|
|
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.
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
6. Common
Stock
Continued
|
|
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.
|
|
|
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.
|
7. Related Party
Transactions
|
|
The
Company has a marketing services contract with an entity owned by
one of the Company’s officers and stockholders. During 2019
and 2018, the Company incurred expenses of $0 and $546,320,
respectively, to the related party for marketing services. As of
December 31, 2019 and 2018, the Company had outstanding accounts
payable to an entity owned by one of the Company's officers and
stockholders of approximately $24,000 and $68,000, respectively. As
of December 31, 2019 and 2018, the Company had a note receivable to
an entity owned by one of the Company’s officers and
stockholders of approximately $100,000 and $100,000, respectively.
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.
|
8. Income Taxes
|
|
The
provision (benefit) for income taxes differs from the amount
computed at federal statutory rates as follows:
|
|
|
|
|
|
|
Federal income tax at
statutory rates
|
$(338,342)
|
$(60,113)
|
State income tax at
statutory rates
|
(61,675)
|
(7,652)
|
Change in valuation
allowance
|
384,094
|
48,855
|
Change in statutory
rates
|
–
|
–
|
Other
|
16,023
|
19,010
|
|
|
|
|
$100
|
$100
|
|
|
Significant
components of the Company’s net deferred income tax assets
(liabilities) are as follows as of December 31:
|
|
|
|
|
|
|
Net operating loss
carryforwards
|
$2,462,334
|
$2,255,076
|
Depreciation and
amortization
|
42,496
|
44,294
|
Accrual to cash
adjustments
|
1,264,313
|
1,088,144
|
Stock-based
compensation
|
15,435
|
12,970
|
Valuation
allowance
|
(3,784,578)
|
(3,400,484)
|
|
|
|
|
$–
|
$–
|
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
8. Income Taxes
Continued
|
|
As of
December 31, 2019, the Company has net operating loss (NOL)
carryforwards available to offset future taxable income, if any, of
approximately $9,885,000 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 $1,645,000 and can be carried forward
indefinitely.
|
|
|
The
utilization of the NOL carryforwards is subject to annual
limitations under Section 382 of the Internal Revenue Code. Section
382 imposes limitations on a corporation’s ability to utilize
its NOL carryforwards if it experiences an “ownership
change.” In general terms, an ownership change results from
transactions increasing the ownership of certain stockholders in
the stock of a corporation by more than 50% over a three-year
period.
|
|
|
The
Company has concluded that there are no significant uncertain tax
positions requiring disclosure, and there are no material amounts
of unrecognized tax benefits.
|
PART III – EXHIBITS
EXHIBIT INDEX
The
following exhibits are filed as part of this Preliminary Offering
Circular on Form 1-A:
Exhibit
Number
|
|
Description
|
|
|
|
|
|
|
Certificate
of Incorporation of VidAngel, Inc., as amended, incorporated by reference to Exhibit 2.1 of our
Form 1-A filed on September 22, 2016
|
|
2.2*
|
|
Form of
Third Amendment to Certificate of Incorporation of VidAngel,
Inc.
|
|
|
|
Bylaws
of VidAngel, Inc., incorporated by
reference to Exhibit 2.2 of our Form 1-A filed on
September
16, 2016
|
|
|
|
Investor
Rights and Voting Agreement between VidAngel, Inc. and certain
investors, incorporated by reference
to Exhibit 3.1 of our Form 1-A filed on September 22,
2016
|
|
|
|
Form of
Stockholders Agreement between VidAngel, Inc. and the Class B
Common Stockholders, incorporated by
reference to Exhibit 3.1 of our Form 1-A filed on October 6,
2016
|
|
3.3*
|
|
Form of First Amendment to Stockholders Agreement between
VidAngel, Inc. and the Class B Common Stockholders
|
|
4.1*
|
|
Form of
Subscription Agreement
|
|
10.1
|
|
Powers
of Attorney (included on the signature page to this Offering
Circular)
|
|
|
|
Consent
of Tanner LLC
|
|
11.2*
|
|
Consent
of Kaplan Voekler Cunningham and Frank PLC (included in Exhibit
12.1)
|
|
12.1*
|
|
Opinion
of Kaplan Voekler Cunningham and Frank, PLC as to legality of the
securities being registered
|
|
|
|
|
|
|
|
|
*
To be filed by Amendment
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer certifies
that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 1-A and has duly caused this
Offering Circular to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Provo, State of
Utah on June 24, 2020.
|
VIDANGEL, INC.
|
|
|
|
|
|
|
By:
|
/s/
Neal S. Harmon
|
|
|
|
Neal S.
Harmon
|
|
|
|
Chief
Executive Officer and Director
|
|
POWER OF ATTORNEY
We, the
undersigned directors and officers of VidAngel, Inc. (the
“Company”) hereby severally constitute and
appoint Neal S. Harmon and Patrick Reilly, with full power of
substitution, our true and lawful attorneys-in-fact and agents, to
do any and all things in our names in the capacities indicated
below which said Neal S. Harmon and Patrick Reilly may deem
necessary or advisable to enable the Company to comply with the
Securities Act of 1933, as amended, and any rules regulations
and requirements of the Securities and Exchange Commission, in
connection with the Regulation A Offering Circular on Form 1-A of
the Company, including specifically but not limited to, power and
authority to sign for us in our names in the capacities indicated
below, the Regulation A offering circular and any and
all amendments thereto; and we hereby ratify and confirm all that
said Neal S. Harmon and Patrick Reilly shall lawfully do or cause
to be done by virtue thereof.
This
offering circular
has been signed by the following persons in the capacities and on
the dates indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Neal S. Harmon
|
|
Chief
Executive Officer and
|
|
June
24, 2020
|
Neal S.
Harmon
|
|
Director
(principal
executive officer)
|
|
|
|
|
|
|
|
/s/
Patrick Reilly
|
|
Chief
Financial Officer
|
|
June
24, 2020
|
Patrick
Reilly
|
|
(principal
financial and accounting officer)
|
|
|
|
|
|
|
|
/s/
Dalton Wright
|
|
Director
|
|
|
Dalton
Wright
|
|
|
|
June
24, 2020
|
/s/
Paul Ahlstrom
|
|
Director
|
|
June
24, 2020
|
Paul
Ahlstrom
|
|
|
|
|
* /s/
Neal S. Harmon
|
|
Attorney-In-Fact
|
|
June
24, 2020
|
Neal
S. Harmon
|
|
|
|
|