VidAngel, Inc. |
(Exact name of registrant as specified in its charter) |
Delaware | 46-5217451 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
295 W Center St. Provo, Utah | 84601 | |
(Address of principal executive offices) | (Zip Code) |
We have received hundreds of inquiries and applications to partner on some very interesting projects. As of the date of this filing, we have produced 48 original comedy specials from various up and coming comedians. We launched our first theatrical release, “Tim Timmerman, Hope of America,” and held one of the largest film premieres in Utah history for it. We have also licensed “The Last Descent”, from Excel Entertainment, and “Life on Bitcoin” for exclusive digital distribution.
1. BUY THE DISC – Users pay the retail price of $20.00 by making an initial credit card payment.
2. USERS WATCH FILTERED CONTENT- Users choose their own filters according to their preferences and watch their discs on their favorite devices.
3. USERS SELL THE DISC—If the user finishes within 24 hours, they have the option to sell the disc back, $18.00 for Blu-ray or $19.00 for DVD, for instant credit to each user’s VidAngel account for their next purchase. Within 48 hours, users have the option to sell the disc back for $16.00, for Blu-ray, or $18.00, for DVD, of instant credit. The sell back price continues to decrease by $2.00 per day for Blu-ray’s, and $1.00 per day for DVD’s until no sell-back value remains.
For the Year Ended December 31, | Change | |||||||||||||||
2016 | 2015 | 2016 vs. 2015 | ||||||||||||||
Contribution profit: | ||||||||||||||||
Revenues | $ | 8,053,867 | $ | 415,517 | $ | 7,638,350 | 1,838 | % | ||||||||
Cost of revenues | 2,752,179 | 256,831 | 2,495,348 | 972 | % | |||||||||||
Gross profit | $ | 5,301,688 | $ | 158,686 | $ | 5,143,002 | 3,241 | % | ||||||||
Gross margin | 66 | % | 38 | % |
For the Year Ended December 31, | Change | |||||||||||||||
2016 | 2015 | 2016 vs. 2015 | ||||||||||||||
Operating Expenses: | ||||||||||||||||
Cost of revenues | $ | 2,752,179 | $ | 256,831 | $ | 2,495,348 | 972 | % | ||||||||
Sales and marketing | 6,246,739 | 699,773 | 5,546,966 | 793 | % | |||||||||||
General and administrative | 1,508,878 | 429,490 | 1,079,388 | 251 | % | |||||||||||
Legal | 1,273,888 | 38,906 | 1,234,982 | 3,174 | % | |||||||||||
Research and development | 1,093,869 | 310,754 | 783,115 | 252 | % | |||||||||||
Total Operating Expenses: | $ | 12,875,553 | $ | 1,735,754 | $ | 11,139,799 | 642 | % |
Name | Position | Age | Term of Office | Hours/Year (for part-time employees) | ||||
Neal Harmon* | Chief Executive Officer, Director | 39 | October 2013 | n/a | ||||
Elizabeth Ellis | Chief Operating Officer | 40 | June 2015 | n/a | ||||
Jeffrey Harmon* | Chief Marketing Officer | 34 | October 2013 | n/a | ||||
Patrick Reilly | Director of Finance | 36 | January 2014 | n/a | ||||
David Quinto | General Counsel | 61 | August 2016 | n/a | ||||
Paul Ahlstrom | Director | 54 | February 2014 | n/a | ||||
Dalton Wright | Director | 36 | February 2014 | n/a |
Name | Capacity in which Compensation Was Received | Cash Compensation ($) | Other Compensation ($) | Total Compensation ($) | ||||||||||
Neal Harmon | CEO | $ | 100,000 | $ | n/a | $ | 100,000 | |||||||
Elizabeth Ellis | COO | 113,800 | 1,959 | (1) | 115,759 | |||||||||
Jeffrey Harmon | Director of Marketing | 100,000 | n/a | 100,000 | ||||||||||
Patrick Reilly | Director of Finance | 133,500 | 0 | (2) | 133,500 | |||||||||
David Quinto | General Counsel | 131,250 | 2,946 | (3) | 134,196 | |||||||||
Paul Ahlstrom | Director | n/a | n/a | n/a | ||||||||||
Dalton Wright | Director | n/a | n/a | n/a |
(1) | On July 17, 2015, Ms. Elizabeth Ellis was granted stock incentive options exercisable for 50,000 shares of our Class A Common Stock with an option price of $0.50 per share and on August 10, 2016, Ms. Ellis was granted stock incentive options exercisable for 28,000 shares of our Class A Common Stock with an option price of $0.82 per share, both pursuant to the terms and conditions of our Stock Incentive Plan. These options will vest in substantially equal annual increments over a four-year period. |
(2) | On February 18, 2016, Mr. Patrick Reilly was granted stock incentive options exercisable for 33,750 shares of our Class A Common Stock with an option price of $0.82 per share and on August 10, 2016, Mr. Reilly was granted stock incentive options exercisable for 29,250 shares of our Class A Common Stock with an option price of $0.82 per share, both pursuant to the terms and conditions of our Stock Incentive Plan. These options will vest in substantially equal annual increments over a four-year period. |
(3) | On April 15, 2015, Mr. David Quinto was granted stock incentive options exercisable for 225,000 shares of our Class A Common Stock with an option price of $0.50 per share. Upon acceptance of his Employment Agreement, dated July 21, 2016, Mr. Quinto agreed to a modification of the original option grant. The modification reduced the number of options available for exercise to 219,792 and modified the terms to align with our Stock Incentive Plan. These options will vest in substantially equal annual increments over a four-year period, beginning August 1, 2016. |
We currently have 25,000,000 shares of common stock par value $0.001 per share, authorized, of which 21,250,000 shares have been designated as Class A voting common stock, or the Class A Common Stock, and 3,750,000 have been designated as Class B nonvoting common stock, or the Class B Common Stock. As of December 31, 2016, we had 18,008,908 shares of Class A Common Stock issued and outstanding, and 2,991,752 shares of our Class B Common Stock issued and outstanding.
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 251 N University Ave Provo, UT 84601 | 8,938,520 shares | N/A | 49.63 % | ||||
Class A Common Stock | Alta Ventures Mexico Fund I, LLC 3315 Mayflower Avenue, Suite #1 Lehi, UT 84043 | 3,160,318 shares | N/A | 17.55 % | ||||
Class A Common Stock | Osborne Companies, LC 4290 North Vintage Circle Provo, UT 84604 | 2,222,733 shares | Options exercisable for 66,000 shares of Class A Common Stock | 12.33 % |
Promotion and Marketing Services Agreement with Harmon Brothers LLC.
Employment Agreement with our General Counsel, David Quinto
Investor Rights and Voting Agreement
Item 7. Financial Statements
Index to Financial Statements | |
Independent Auditor’s Report | F-3 |
Balance Sheets | F-4 |
Statements of Operations | F-5 |
Statements of Stockholders’ Equity | F-6 |
Statements of Cash Flows | F-7 |
Notes to Financial Statements | F-8 to F-18 |
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Management of
VidAngel, Inc.
We have audited the accompanying financial statements of VidAngel, Inc. (the Company), which comprise the balance sheets as of December 31, 2016 and 2015, the related statements of operations, stockholders’ equity, and cash flows for the years then ended, and the related notes to financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to error or fraud.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to error or fraud. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VidAngel, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.
/s/ Tanner LLC
Salt Lake City, UT
April 27, 2017
2016 | 2015 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,084,448 | $ | 1,910,880 | ||||
Restricted cash | 1,506,754 | - | ||||||
Accounts receivable | 359,232 | 11,868 | ||||||
Prepaid expenses and other | 166,349 | 34,517 | ||||||
Total current assets | 11,116,783 | 1,957,265 | ||||||
Movie inventory | 1,745,183 | 206,887 | ||||||
Property and equipment, net | 70,073 | 2,780 | ||||||
Total assets | $ | 12,932,039 | $ | 2,166,932 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 800,416 | $ | - | ||||
Accrued expenses | 302,415 | 86,530 | ||||||
Deferred revenue | 5,885,163 | 669,341 | ||||||
Escrow obligation | 456,579 | - | ||||||
Total current liabilities | 7,444,573 | 755,871 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Common stock, $0.001 par value, 25,000,000 shares | ||||||||
authorized; 21,000,660 and 18,003,908 shares issued | ||||||||
and outstanding, respectively | 21,001 | 18,004 | ||||||
Additional paid-in capital | 12,203,478 | 3,508,073 | ||||||
Accumulated deficit | (6,737,013 | ) | (2,115,016 | ) | ||||
Total stockholders' equity | 5,487,466 | 1,411,061 | ||||||
Total liabilities and stockholders' equity | $ | 12,932,039 | $ | 2,166,932 |
See accompanying notes to financial statements. | F-4 |
2016 | 2015 | |||||||
Revenues, net | $ | 8,053,867 | $ | 415,517 | ||||
Operating expenses: | ||||||||
Cost of revenues | 2,752,179 | 256,831 | ||||||
Selling and marketing | 6,246,739 | 699,773 | ||||||
General and administrative | 1,508,878 | 429,490 | ||||||
Legal | 1,273,888 | 38,906 | ||||||
Research and development | 1,093,869 | 310,754 | ||||||
Total operating expenses | 12,875,553 | 1,735,754 | ||||||
Operating loss | (4,821,686 | ) | (1,320,237 | ) | ||||
Other income (expense): | ||||||||
Interest expense | (98 | ) | (52,435 | ) | ||||
Donation income, to be used for legal expenses | 171,163 | - | ||||||
Interest income | 28,624 | 507 | ||||||
Other expense, net | - | (9,851 | ) | |||||
Total other expense, net | 199,689 | (61,779 | ) | |||||
Loss before income taxes | (4,621,997 | ) | (1,382,016 | ) | ||||
Provision for income taxes | - | - | ||||||
Net loss | $ | (4,621,997 | ) | $ | (1,382,016 | ) |
See accompanying notes to financial statements. | F-5 |
Common Stock | ||||||||||||||||||||||||
Additional | Total | |||||||||||||||||||||||
Class A | Class B | Paid-in | Accumulated | Stockholders' | ||||||||||||||||||||
Shares | Shares | Amount | Capital | Deficit | Equity | |||||||||||||||||||
Balance as of January 1, 2015 | 13,411,257 | - | $ | 13,411 | $ | 584,766 | $ | (733,000 | ) | $ | (134,823 | ) | ||||||||||||
Convertible notes payable and related | ||||||||||||||||||||||||
accrued interest converted to | ||||||||||||||||||||||||
common stock | 3,526,896 | - | 3,527 | 1,915,933 | - | 1,919,460 | ||||||||||||||||||
Issuance of common stock, net of | ||||||||||||||||||||||||
issuance costs of $5,000 | 1,065,755 | - | 1,066 | 993,934 | - | 995,000 | ||||||||||||||||||
Stock-based compensation expense | - | - | - | 12,098 | - | 12,098 | ||||||||||||||||||
Contingent beneficial conversion feature | - | - | - | 1,342 | - | 1,342 | ||||||||||||||||||
Net loss | - | - | - | - | (1,382,016 | ) | (1,382,016 | ) | ||||||||||||||||
Balance as of December 31, 2015 | 18,003,908 | - | 18,004 | 3,508,073 | (2,115,016 | ) | 1,411,061 | |||||||||||||||||
Issuance of common stock, net of | ||||||||||||||||||||||||
issuance costs of $307,166 | - | 2,991,752 | 2,992 | 8,665,099 | - | 8,668,091 | ||||||||||||||||||
Stock options exercised | 5,000 | - | 5 | 2,495 | - | 2,500 | ||||||||||||||||||
Stock-based compensation expense | - | - | - | 27,811 | - | 27,811 | ||||||||||||||||||
Net loss | - | - | - | - | (4,621,997 | ) | (4,621,997 | ) | ||||||||||||||||
Balance as of December 31, 2016 | 18,008,908 | 2,991,752 | $ | 21,001 | $ | 12,203,478 | $ | (6,737,013 | ) | $ | 5,487,466 |
See accompanying notes to financial statements. | F-6 |
2016 | 2015 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (4,621,997 | ) | $ | (1,382,016 | ) | ||
Adjustments to reconcile net loss to net cash | ||||||||
used in operating activities: | ||||||||
Depreciation and amortization | 14,002 | 2,879 | ||||||
Contingent beneficial conversion feature | - | 1,342 | ||||||
Stock-based compensation expense | 27,811 | 12,098 | ||||||
Loss on sale of of property and equipment | - | 1,555 | ||||||
Increase in: | ||||||||
Restricted cash | (1,050,175 | ) | - | |||||
Accounts receivable | (347,364 | ) | (11,868 | ) | ||||
Prepaid expenses and other assets | (131,832 | ) | (14,504 | ) | ||||
Movie inventory | (1,538,296 | ) | (200,653 | ) | ||||
Increase in: | ||||||||
Accounts payable and accrued expenses | 1,016,301 | 71,167 | ||||||
Deferred revenue | 5,215,822 | 668,946 | ||||||
Net cash used in operating activities | (1,415,728 | ) | (851,054 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (81,295 | ) | (3,199 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock, net | 8,668,091 | 995,000 | ||||||
Exercise of stock options | 2,500 | - | ||||||
Proceeds from convertible notes payable | - | 1,597,917 | ||||||
Net cash provided by financing activities | 8,670,591 | 2,592,917 | ||||||
Net change in cash and cash equivalents | 7,173,568 | 1,738,664 | ||||||
Cash and cash equivalents at beginning of year | 1,910,880 | 172,216 | ||||||
Cash and cash equivalents at end of year | $ | 9,084,448 | $ | 1,910,880 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 98 | $ | - | ||||
Cash paid for income taxes | - | - | ||||||
Supplemental disclosure of non-cash investing and | ||||||||
financing information: | ||||||||
Convertible notes payable and related accrued interest | ||||||||
converted to common stock | $ | - | $ | 1,919,460 |
See accompanying notes to financial statements. | F-7 |
1. Description of Organization and Summary of Significant Accounting Policies | Organization VidAngel, Inc. (the Company) was incorporated on November 13, 2013 as a Utah limited liability Company. On February 7, 2014, the Company converted to a Delaware corporation. The Company resells Blu-Ray and DVD discs to its customers. The Company includes access to proprietary content filtering technology as part of the transaction. With the purchase of the disc, and access to the technology, the customer then has the ability to stream a customized version of the disc to their location for viewing on many of today’s most popular devices. After they are finished with a disc, the customer has the option to sell the disc back to the Company at a reduced price. The sell-back price varies depending on the type (Blu-Ray or DVD) of the disc, and the number of days the customer owned the disc. | |
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 5. | ||
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Key management estimates include the estimated life of the customer’s ownership of a disc, estimated life and salvage value of discs, valuation allowances for net deferred income tax assets, and valuation of stock-based compensation. | ||
Concentrations of Credit Risk The Company maintains its cash and cash equivalents in bank deposit accounts which, at times, exceed federally insured limits. At December 31, 2016 and 2015, the Company had approximately $10,270,000 and $1,660,000 of cash and cash equivalents that exceeded federally insured limits. To date, the Company has not experienced a loss or lack of access to its invested cash and cash equivalents; however, no assurance can be provided that access to the Company’s invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. |
1. Description of Organization and Summary of Significant Accounting Policies Continued | Concentrations of Credit Risk - continued 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 years ended December 31: |
2016 | 2015 |
| ||||||
Vendor A | 34 | % | * | |||||
Vendor B | 26 | % | 69 | % | ||||
Vendor C | 18 | % | * | |||||
Vendor D | * | 18 | % | |||||
*Vendor accounts for less than 10% |
Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities to the Company of three months or less to be cash equivalents. As of December 31, 2016 and 2015, these cash equivalents consisted of money market accounts. | ||
Restricted Cash Restricted cash includes cash that is restricted to a specific purpose. The Company has cash designated as a retainer for legal services as well as cash held in escrow from the purchase of shares of the Company’s Class B common stock for which the shares have not yet been issued. As of December 31, 2016 and 2015, the balance of restricted cash was $1,506,754 and $0, respectively. | ||
Accounts Receivable The Company records its accounts receivable at sales value and establishes specific reserves for those customer accounts identified with collection problems due to insolvency or other issues. The Company’s accounts receivable are considered past due when payment has not been received within 30 days of the invoice date. The amounts of the specific reserves are estimated by management based on various assumptions including the customer’s financial position, age of the customer’s receivables, and changes in payment schedules and histories. Account balances are charged off against the allowance for doubtful accounts receivable when the potential for recovery is remote. Recoveries of receivables previously charged off are recorded when payment is received. The allowance for doubtful accounts was $0 as of December 31, 2016 and 2015. |
1. Description of Organization and Summary of Significant Accounting Policies Continued | Movie Inventory Movie inventory includes DVD and Blu-Ray discs purchased by the Company for resale, not in excess of realizable value. Movie inventory 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 inventory is depreciated over the estimated economic useful life to the estimated salvage value. The Company periodically reviews inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provides a reserve to cover these items. Management determined that no allowance for obsolete inventory was necessary as of December 31, 2016 and 2015. | |
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 |
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 assets to be impaired as of December 31, 2016 and 2015. |
1. Description of Organization and Summary of Significant Accounting Policies Continued | Revenue Recognition The Company resells Blu-Ray and DVD discs to its customers for a fixed price of $20. Upon purchase of the disc, the customer agrees to have the Company retain physical custody of the purchased disc until such a time that the customer either requests to have the disc shipped to them directly, or the customer decides to sell the disc back to the Company at an agreed upon price, which reduces $1 per day for DVD discs, and $2 per day for Blu-Ray discs. During the time that the customer owns the disc, the Company gives the customer access to a patented video streaming technology that permits the customer to direct their individual viewing experience by allowing them to remove certain audio or video segments that contain material that may be considered objectionable by a member of the private household. Access to this technology is available during the entire period of which the customer owns the disc purchased from the Company, and is extinguished upon the customer selling the disc back to the Company. Revenue is recognized when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) services have been rendered, (3) the Company’s price to the buyer is fixed or determinable, and (4) collectability is reasonably assured. The Company separates its revenue transactions into two pools based on length of time of disc ownership – short-term and long-term ownership of discs. Transactions that have a short-term ownership of a disc exhibit a very short ownership time period, usually on average selling the disc back to the Company within 5 hours. For these transactions, the Company recognizes revenue on a daily basis, in an amount equal to the daily reduction in the sell-back price from the customer to the Company ($1 or $2 per day), and ceasing upon the customer’s sell-back of the disc. More than 99% of the Company’s transactions are short-term. | |
Transactions that have a long-term ownership exhibit a longer period of time of ownership – in excess of 20 days. A majority of the customers entering long-term transactions appear to be building a library of movie titles, and may own the associated discs indefinitely. The Company estimates the expected period of the long-term transactions, and recognizes revenue based on a subscription model, or ratably over the expected term. Cash received from customers prior to recognition of revenue is recorded as deferred revenue. | ||
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 5. |
1. Description of Organization and Summary of Significant Accounting Policies | 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 6). The related expense is recorded in the statements of operations over the period of service. | |
Continued | Advertising Advertising costs are expensed as incurred. Advertising expenses totaled $5,059,783 and $430,084 for the years ended December 31, 2016 and 2015, respectively. | |
Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the tax bases of assets and liabilities. The deferred taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred income tax assets are reviewed periodically for recoverability, and valuation allowances are provided when it is more likely than not that some or all of the deferred income tax assets may not be realized. | ||
The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open tax years based on an assessment of many factors including experience and interpretations of tax laws applied to the facts of each matter. The Company files income tax returns in the U.S. federal jurisdiction and certain state jurisdictions. With few exceptions, the Company is subject to U.S. federal and state and local income tax examinations by tax authorities for years ending December 2016, 2015, and 2014. | ||
Reclassifications Certain amounts in the 2015 financial statements have been reclassified to conform with the current year presentation. | ||
Subsequent Events Management has evaluated events and transactions for potential recognition or disclosure through April 27, 2017, which is the day the financial statements were available to be issued. |
2. Change in Acounting Principle | Prior to December 31, 2015, the Company recorded movie inventory at the lower of cost or market, with cost being determined on a first in, first out method. The Company periodically reviewed inventory for excess supply, obsolescence, and valuations above estimated realizable amounts, and provided a reserve to cover these amounts. During 2016 the Company determined movie inventory is depreciable as the value of the movies generally declines with the passage of time. The useful life of the movie inventory was determined to be 5 years and the residual value of each movie is estimated as $5 for each disc. Beginning in 2016, the Company depreciates all movie inventories over 5 years and includes the deprecation in cost of revenues on the statement of operations. The change in accounting principle has a minimal effect on the prior years; therefore, the impact of the change was not retroactively applied to 2015. | |
3. Property and Equipment | Property and equipment consisted of the following as of December 31: |
2016 | 2015 | |||||||
Computer equipment | $ | 50,349 | $ | 4,730 | ||||
Leasehold improvements | 22,233 | 3,199 | ||||||
Furniture and fixtures | 16,642 | - | ||||||
89,224 | 7,929 | |||||||
Less accumulated depreciation and amortization | (19,151 | ) | (5,149 | ) | ||||
$ | 70,073 | $ | 2,780 |
Depreciation and amortization expense on property and equipment for the years ended December 31, 2016 and 2015 was $14,002 and $2,879, respectively. | |||
4. Convertible Notes Payable | Convertible notes payable were due various investors with an annual interest rate equal to 7%, and a maturity date of November 7, 2015. The notes were secured by substantially all of the assets of the Company. The notes were converted into shares of common stock during 2015. Certain notes raised in June 2015 were converted into shares of common stock pursuant to a contingent beneficial conversion feature, totaling $1,342. The balance of the convertible notes payable was $0 as of December 31, 2016 and 2015. |
5. Commitments and Contingencies | Litigation The Company is involved in legal proceedings from time to time arising in the normal course of business. The Company has received, and may in the future continue to receive, claims from third parties. Management, after consultation with legal counsel, believes that the outcome of these proceedings may have a material impact on the Company’s financial position, results of operations, or liquidity. | |
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 deemed probable of recovery. | ||
The Company assesses whether there is a reasonable possibility that a loss, or additional losses beyond those already accrued, may be incurred (“Material Loss”). If there is a reasonable possibility that a Material Loss may be incurred, the Company discloses an estimate or range of the amount of loss, either individually or in the aggregate, or discloses that an estimate of loss cannot be made. If a Material Loss occurs due to an unfavorable outcome in any legal matter, this may have an adverse effect on the financial position, results of operations, and liquidity of the Company. The Company records a provision for each liability when determined to probable, and the amount of the loss may be reasonably estimated. These provisions are reviewed annually and adjusted as additional information becomes available. | ||
The Company is involved in various litigation matters and believes that any reasonably possible adverse outcome of these matters could potentially be material, either individually or in the aggregate, to the Company’s financial position, results of operations and liquidity. As of April 27, 2017, the date the financial statements were available to be released, management has determined an adverse outcome is not yet probable or estimable, and has not accrued any estimated losses related to these matters. Expectations may change in the future as the litigation and events related thereto unfold. During 2016 and 2015 the Company incurred $1,273,888 and $38,906, 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. |
5. Commitments and Contingencies continued | Operating Leases The Company leases office facilities under a five-year operating lease. The Company has the option to cancel the lease agreement in the first 12 months with a 90-day notice with a minimum of a 4-month lease commitment. The Company has not elected the option the cancel the lease agreement. As of December 31, 2016, future minimum lease payments under non-cancelable operating leases with terms of one year or more are as follows: |
Years Ending December 31: | Amount | |||
2017 | $ | 180,000 | ||
2018 | 185,400 | |||
2019 | 190,962 | |||
2020 | 196,691 | |||
2021 | 202,592 | |||
$ | 955,645 |
Rental expense under operating leases was $28,725 and $9,545 for the years ended December 31, 2016 and 2015, respectively. | ||
6. Stock Options | Stock Options The Company’s 2014 Stock Incentive Plan (the Plan), originally approved on February 27, 2014, provides for the grant of incentive stock options, nonqualified options, stock appreciation rights, and shares of restricted stock. Under the terms of the Plan, there are 2,534,544 and 1,034,544 shares of common stock authorized for grant to employees, officers, directors and consultants, as of December 31, 2016 and 2015, respectively. 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 1,509,733 and 299,733 shares available for grant under the Plan as of December 31, 2016 and 2015, respectively. | |
Stock-based compensation expense for the years ended December 31, 2016 and 2015 was $27,811 and $12,098, respectively. As of December 31, 2016 and 2015, the Company had $140,671 and $94,556, respectively, of unrecognized stock-based compensation costs related to non-vested awards that will be recognized over a weighted-average period of 4 years. |
6. Stock Options Continued | The following sets forth the outstanding common stock options and related activity for the years ended December 31, 2016 and 2015: |
Number of Options | Weighted Average Exercise Price Per Share | |||||||
Outstanding as of January 1, 2015 | 119,311 | $ | 0.190 | |||||
Granted | 625,500 | 0.500 | ||||||
Exercised | - | - | ||||||
Forfeited | (10,000 | ) | 0.186 | |||||
Outstanding as of December 31, 2015 | 734,811 | 0.450 | ||||||
Granted | 293,000 | 0.820 | ||||||
Exercised | (5,000 | ) | 0.500 | |||||
Forfeited | (3,000 | ) | 0.820 | |||||
Outstanding as of December 31, 2016 | 1,019,811 | 0.558 |
The following summarizes information about stock options outstanding as of December 31, 2016: |
Number of Options Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number of Options Exercisable | Weighted Average Exercise Price | ||||||||||||||
99,311 | 7.38 | $ | 0.18 | 85,984 | $ | 0.18 | ||||||||||||
10,000 | 7.85 | 0.30 | 6,944 | 0.30 | ||||||||||||||
620,500 | 8.45 | 0.50 | 414,129 | 0.50 | ||||||||||||||
290,000 | 9.39 | 0.82 | 5,104 | 0.82 | ||||||||||||||
1,019,811 | 8.61 | 0.56 | 512,161 | 0.45 |
The fair value of each stock-based award granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: |
2016 | 2015 | |||||||
Risk-free interest rate | 1.07 – 1.23 | % | 1.31 – 1.69 | % | ||||
Expected stock price volatility | 50 | % | 50 | % | ||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected life of options | 5 years | 5 years |
6. Stock Options Continued | As of December 31, 2016 and 2015, the aggregate intrinsic value of options outstanding was $267,319 and $268,919, respectively. As of December 31, 2016 and 2015, the aggregate intrinsic value of options exercisable was $141,184 and $52,644, respectively. | |
Expected option lives and volatilities were based on historical data of the Company and comparable companies in the industry. The risk free interest rate was calculated using similar rates published by the Federal Reserve. The Company has no plans to declare any future dividends. | ||
7. 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. | ||
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. | ||
8. Related Party Transactions | The Company has a marketing services contract with an entity owned by one of the Company’s stockholders. During 2016 and 2015, the Company incurred expenses of $4,689,867 and $375,870, respectively, to the related party for marketing services. |
9. Income Taxes | The provision (benefit) for income taxes differs from the amount computed at federal statutory rates as follows: |
2016 | 2015 | |||||||
Federal income tax at statutory rates | $ | (1,571,445 | ) | $ | (469,919 | ) | ||
State income tax at statutory rates | (151,668 | ) | (45,064 | ) | ||||
Change in valuation allowance | 1,715,156 | 512,083 | ||||||
Other | 7,957 | 2,900 | ||||||
$ | – | $ | – |
Significant components of the Company’s net deferred income tax assets (liabilities) are as follows as of December 31: |
2016 | 2015 | |||||||
Current: | ||||||||
Accrual to cash adjustment | $ | 2,407,509 | $ | 264,401 | ||||
Accruals and reserves | 57,988 | – | ||||||
Valuation allowance | (2,465,497 | ) | (264,401 | ) | ||||
$ | – | $ | – | |||||
Long-term: | ||||||||
Net operating loss carryforwards | $ | 54,530 | $ | 542,350 | ||||
Depreciation and amortization | 2,254 | 374 | ||||||
Valuation allowance | (56,784 | ) | (542,724 | ) | ||||
$ | – | $ | – |
As of December 31, 2016, the Company has net operating loss (NOL) carryforwards available to offset future taxable income, if any, of approximately $146,000, which will begin to expire in 2035. | ||
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. |
The following exhibits are filed as part of this Form 1-K. | |
Exhibit Number | Description | ||
2.1 | 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 | Bylaws of VidAngel, Inc., incorporated by reference to Exhibit 2.2 of our Form 1-A filed on September 16, 2016 | ||
3.1 | 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 | ||
3.2 | 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 | ||
4.1 | Form of Subscription Agreement, incorporated by reference to Exhibit 4.1 of our Form 1-A filed on September 16, 2016 | ||
6.1 | Employment Agreement between VidAngel, Inc. and David Quinto, incorporated by reference to Exhibit 6.1of our Form 1-A filed on September 22, 2016 | ||
6.2 | Promotion and Marketing Services Agreement between VidAngel, Inc. and Harmon Brothers LLC incorporated by reference to Exhibit 6.2 of our Form 1-A filed on September 22, 2016 | ||
8.1 | Escrow Agreement between Issuer Direct, Inc. and VidAngel, Inc., incorporated by reference to Exhibit 8.1 of our Form 1-A filed on September 22, 2016. | ||
9.1 | 2016 Letter to Stockholders. |
VidAngel, Inc. | |||
By: | /s/ Neal S. Harmon | ||
Name: | Neal S. Harmon | ||
Title: | Chief Executive Officer |
Signature | Title | Date | ||
/s/ Neal S. Harmon | Chief Executive Officer and Director | April 27, 2017 | ||
Neal S. Harmon | (Principal Executive Officer) | |||
/s/ Patrick Reilly | Director of Finance | April 27, 2017 | ||
Patrick Reilly | (Principal Financial and Accounting Officer) | |||
/s/ Dalton Wright | Director | April 27, 2017 | ||
Dalton Wright | ||||
/s/ Paul Ahlstrom | Director | April 27, 2017 | ||
Paul Ahlstrom |