UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-K
ANNUAL REPORT
ANNUAL REPORT PURSUANT TO REGULATION A OF THE SECURITIES ACT OF 1933
For the fiscal year ended December 31, 2019
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) |
(760) 933-8437
Registrant’s telephone number, including area code
Part II.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We make statements in this annual report on Form 1-K, or the Annual Report, that are forward-looking statements within the meaning of the federal securities laws. The words “believe,” “estimate,” “expect,” “anticipate,” “intend,” “plan,” “seek,” “may,” “might,” and similar expressions or statements regarding future periods are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any predictions of future results, performance or achievements that we express or imply in this annual report or in the information incorporated by reference into this Annual Report.
The forward-looking statements included in this Annual Report are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, future business decisions, and the impact of the recent novel coronavirus (COVID-19) pandemic, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements.
Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this Annual Report. All forward-looking statements are made as of the date of this Annual Report and the risk that actual results will differ materially from the expectations expressed in this Annual Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Annual Report, whether as a result of new information, future events, changed circumstances or any other reason. Given the significant uncertainties inherent in the forward-looking statements included in this Annual Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Annual Report will be achieved.
Item 1. Business
General
VidAngel exists to help you make entertainment good for your home. We do this by a) creating tools that make it simple for you, the user, to skip or mute the parts in popular movies and TV shows that you find unacceptable, and b) developing a system that collects & analyzes data around the unacceptable parts, so creators have the information they need to make better content, more suited to their audience. We are also engaged in the licensing, production, and creation of original content for our users.
History
In 2013, four brothers, Neal, Daniel, Jeffrey, and Jordan Harmon, founded VidAngel, Inc. (“we,” “us,” “our,” “our Company”, or “the Company”), initially an audiovisual content filtering company that gives viewers the choice to remove objectionable content, such as violence, sex, nudity, and/or language, from movies and television programs streamed to them. The Harmon brothers, as fathers of children aged newborn to ten, were searching for a better way to watch quality content with their kids. They founded the Company to give their own families, and everyone else, greater personal choice in the movies and television programs they watch at home. Today, we are the leading filtering company with applications available on all major distribution platforms. The potential demand for our service is significant.
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, 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. 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.
The Bankruptcy Filing is intended to allow us the opportunity to reorganize, to further monetize our newly developed intellectual property and businesses, and to resolve legacy liabilities. Our goal is to develop and implement a reorganization plan that meets the standards for confirmation under the Bankruptcy Code.
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The Trustee filed a proposed plan of reorganization, or the Trustee’s Plan, with the Bankruptcy Court on March 5, 2020. As of the date of this report, the Trustee’s Plan is pending solicitation to creditors and confirmation by the Bankruptcy Court. The Trustee’s Plan remains subject to material modification.
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. As of the date of this report, the Studio’s Plan is pending approval of a disclosure statement. The Studio’s Plan remains subject to material modification.
The confirmation of a reorganization plan could materially alter the classifications and amounts of VidAngel’s liabilities, equity interests, and assets reported in our financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be altered by a reorganization plan, or to the effect of any operational changes that may be implemented.
Operation and Implication of the Bankruptcy Filing
Under Section 362 of the Bankruptcy Code, the Bankruptcy Filing automatically stayed all actions against us. As a result of the Bankruptcy Filing, the realization of assets and the satisfaction of liabilities are subject to uncertainty. The Debtor, operating under the direction of the Trustee in accordance with the applicable provisions of the Bankruptcy Code, may, subject to approval of the Bankruptcy Court, sell or otherwise dispose of assets and liquidate or compromise liabilities out of the ordinary course of business for amounts other than those reflected in the financial statements. Further, a confirmed reorganization plan or other arrangement could materially alter the classifications and amounts of VidAngel’s liabilities, equity interests, and assets reported in our financial statements.
Subsequent to the Petition Date, we received approval, but not direction, from the Bankruptcy Court to pay or otherwise honor certain pre-petition obligations generally designed to stabilize our existing business operations. These obligations are mostly related to certain employee wages, salaries and benefits, certain customer obligations, and the payment of vendors and other providers in the ordinary course for goods and services. We have retained, pursuant to Bankruptcy Court approval, legal and financial professionals to advise us in connection with our Bankruptcy Filing, other litigations, and corporate affairs, and certain other professionals to provide services and advice in the ordinary course of business. From time to time, we may seek Bankruptcy Court approval to retain additional professionals.
On November 9, 2018, the Bankruptcy Court granted relief from the automatic stay under Section 362 of the Bankruptcy Code permitting the Studio Creditors to resume litigation for the sole purpose of determining the amount, if any, of their claims. For more information related to this, see “Legal Proceedings—Disney Litigation and the Preliminary Injunction.”
Reorganization Plan
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 with the Bankruptcy Court on March 5, 2020. As of the date of this report, the Trustee’s Plan is pending solicitation to creditors and confirmation by the Bankruptcy Court. The Trustee’s Plan remains subject to material modification.
The Studio Creditors subsequently filed their own plan with the Bankruptcy Court on April 10, 2020. As of the date of this report, the Studio’s Plan is pending the approval of a disclosure statement. The Studio’s Plan remains subject to material modification.
At this time, we are unable to predict if the Trustee’s Plan, the Studio’s Plan, or any plan will be confirmed by the Bankruptcy Court. If we are unable to obtain the Bankruptcy Court’s approval of a reorganization plan, it will likely have an adverse effect on our future operations and financial condition.
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—Disney Litigation and the Preliminary Injunction.”
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.
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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.
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. We have also licensed several motion pictures for exclusive digital distribution.
Why are we making our own content? - We believe that the large amount of filtering data gathered over the last few years has given us unique insight into the type of content our users want to view. Armed with this information, we believe that we can produce the type of content that our users are seeking, without compromising the quality of the content. We ultimately envision a system that enables us to produce an array of family-friendly content guided by audience feedback.
Are we changing our mission? - No, our mission remains the same. Our plan has always been to create the best filtering service in the world, attract a large audience of like-minded people, and build the best possible family-friendly streaming platform. We do not envision that our content will replace all the great Hollywood content currently available, or that will be available in the future. When we started the Company in 2013, we believed that the same people who wanted to filter existing content would likely also want additional sources of family-friendly content.
VidAngel Studios
In late November 2017, VidAngel Studios announced what we hope will become the first of many unique opportunities to produce original content overlooked by big Hollywood Studios. VidAngel Studios was created to provide artists and creators a distribution and marketing platform for content that might otherwise be ignored by Hollywood. We are currently forming a registered broker-dealer to assist artists with fundraising. Having the experience of personally navigating a Tier 2 Regulation A+ offering, we believe there is untapped potential to fund original content and are developing a complete platform for artists to use to create, fund, market, and distribute their content. We built many of the necessary tools for our own offering back in 2016, and with the necessary regulatory approvals, will be uniquely positioned to leverage our experience and technical capability to simplify the fundraising process for many creators while achieving our goal of delivering the best content to our users.
User Base
We believe that 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 would likely be faced with a similarly high Cost Per Acquisition, or CPA. Our existing user base provides us with a distinct advantage in the event we receive a favorable outcome on the legal merits on appeal or if the courts declare that 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.”
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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.
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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—Disney Litigation and the Preliminary Injunction.” 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 until a final decision is rendered in the Disney Litigation. Clearplay has also filed a claim in our chapter 11 bankruptcy case, seeking an unliquidated sum. 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.
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Legal Proceedings
We currently are, and from time to time might again become, involved in litigation. Litigation has the potential to cause us to incur unexpected losses, some of which might not be covered by insurance but can materially affect our financial condition and our ability to continue business operations.
Disney Litigation and the Preliminary Injunction
On December 12, 2016, the 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. Refer to Item 1, Bankruptcy Proceedings at the beginning of this Form 1-K filing for additional information.
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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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of our operations together with our financial statements and related notes appearing at the end of this Annual Report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements.
Overview
We sell a monthly subscription service for access to our technology that permits a user to skip or mute limited portions of motion pictures they find distasteful. The service is available on our website, www.vidangel.com, or via the VidAngel App on your iOS, Android, AppleTV, Amazon Fire TV, or Roku device. Our service allows you to connect your Netflix, Amazon Video, Amazon Prime, or HBO, 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 users with access to our proprietary and patented seamless streaming and filtering technology, which gives them the ability to personally control, and/or direct, the viewing of the motion picture content, available from their LSS’s, by choosing to skip or mute the parts they, or viewers in their household, find distasteful. This type of service used to require the purchase of a special device dedicated to the skipping, and/or muting task. With our technology the computing power necessary for the skipping, and/or muting, has been relocated to the cloud, enabling the user to watch using the same modern devices as everyone else, with the added capability of controlling the viewing experience like never before.
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.
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Results of Operations
The following represents our performance highlights:
For the Year Ended December 31, | Change | |||
2019 | 2018 | 2019 vs. 2018 | ||
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:
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Subscription fees
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Media revenue
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Content Licensing
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Rental fees
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Tips
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Ticket and concession sales
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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 3rd party websites such as Facebook, YouTube, and Amazon. We are paid by the 3rd party websites based on impressions delivered or the number of actions, such as clicks, taken by users viewing our content. We recognize revenue in the period in which the impressions, or actions, occur.
Revenues for rental & tips collected were for titles that we offered for rental. These titles were available for viewing, once purchased, for a fixed period of 24 hours. Once that viewing window closed, access to the title was removed, and any revenue related to the transaction was recognized. Tips are recognized upon receipt and distributed in accordance with specific agreements we have with the licensing parties.
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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 Form 1-K have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We incurred net losses of $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, together with the judgment in the Disney Litigation, raise substantial doubt about our ability to continue as a going concern. The financial statements appearing elsewhere in this Form 1-K do not include any adjustments related to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might result from this uncertainty.
Operating and Capital Expenditure Requirements
To date, we have funded our operations through private and public offerings of common stock. As of December 31, 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.
9
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. More than 200,000 people have taken us up on the offer and are currently enjoying 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 24 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 helped lead 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.
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Item 3. Directors and Officers
Subject to our stockholders’ rights to consent to certain transactions, our business and affairs are controlled by, and all powers are exercised by, our Board. The Board must consist of not fewer than three (3) nor more than five (5) directors, the exact number of whom is to be set from time to time by the Board. We currently have three directors: Neal Harmon, Paul Ahlstrom, and Dalton Wright. The Board members are elected each year, at the annual meeting of stockholders, to hold office until the next annual meeting and until their successors are elected and qualified. Any newly created directorships resulting from an increase in the authorized number of directors, and any vacancies occurring in the Board, may be filled by the affirmative vote of a majority of the remaining directors. A director may resign at any time, and the stockholders may remove any director or the entire Board at any time, with or without cause, by the affirmative vote of a majority of stockholders voting in such decision.
The Board has retained our executive officers to manage the day-to-day operations, our library of movies, our intellectual property and other investments, subject to the supervision of the Board. Neal Harmon is currently our Chief Executive Officer, Elizabeth Ellis is currently our President, Jeffrey Harmon is currently our Chief Marketing Officer, Patrick Reilly is currently our Chief Financial Officer, 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 | ||||
Elizabeth Ellis | President | 43 | June 2015 | n/a | ||||
Jeffrey Harmon* | Chief Marketing Officer | 37 | October 2013 | 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 Jeffrey Harmon are brothers.
11
Biographical Information
Biographical information regarding our directors and executive officers is set forth below.
Neal Harmon, Chief Executive Officer, Director. Neal has served as VidAngel, Inc.’s Chief Executive Officer since he helped co-found the Company in 2013. Neal is also a member of Harmon Ventures LLC, a Utah limited liability company, our largest stockholder. He is also a managing member of Harmon Brothers, LLC, a Utah limited liability company, a marketing agency he co-founded with his brothers. Neal worked for Orabrush, Inc. from 2009 to 2013, a company he co-founded, where he served in such capacities as Chief Operating Officer and as a member of the board. Since 2005, Neal has also worked for the Neal S Harmon Company, a Utah corporation, as a consultant, entrepreneur and investor, engaging in various activities such as designing and creating a trucking logistics dashboard, to connect shippers and private fleets. Neal received his master’s degree from Brigham Young University in Instructional Psychology and Technology in 2002, and his undergraduate degree from Brigham Young University in American Studies in 2001.
Jeffrey Harmon, Chief Marketing Officer. Jeffrey is a co-founder and Chief Marketing Officer of the Company. Jeffrey is also a member of Harmon Ventures LLC, a Utah limited liability company, our largest stockholder. He is also a managing-member of Harmon Brothers, LLC, a Utah limited liability company, which is an online-focused advertising and marketing company he co-founded with his brothers. Jeffrey co-founded Orabrush, Inc. in 2009 and served as its CEO from 2009-2010. He continued to serve as Chief Marketing Officer and Co-Founder of Orabrush from 2010 to 2013. He is currently active with other start-up companies and concepts. He attended Brigham Young University from 2006 to 2008, where he studied business marketing, traditional marketing, internet marketing and business administration.
Elizabeth Ellis, President. Liz has served as Chief Operating Officer since 2015, where her duties include overseeing all operating procedures and staffing. From 2009 until she joined us, Liz was the Director of Human Relations and Office Manager at Orabrush, Inc., where she oversaw personnel and was responsible for various operational tasks. Liz holds a B.S. from Brigham Young University.
Patrick Reilly, Chief Financial Officer. Patrick began providing consulting services in March 2014 and joined as the Director of Finance in February 2016. Patrick oversees all accounting and finance aspects of the business, including but not limited to budgeting, forecasting, auditing, financial statement preparation and funding. Prior to joining us, Patrick served as the Financial Controller at Moki Mobility, Inc. a computer software company, from 2013 to February 2016, where he was responsible for finance and accounting duties. From 2009 to 2013, Patrick was the Vice President of Finance and Financial Controller at Allegiance, Inc., where he was responsible for all finance and accounting duties of the company. Patrick graduated from Utah Valley University in 2005 with a B.S. in Business Administration with concentrations in finance and banking.
Joseph Wecker, Chief Technology Officer. Joseph joined the Company in September 2017 as the Vice President of Engineering. Prior to joining us, Joseph was a senior software engineer at Justin.tv from 2009 to 2013. Justin.tv was subsequently rebranded to Twitch.tv. Joseph was primarily responsible for monetization at Justin.tv and was instrumental in the development of Twitch.tv. Prior to this, Joseph was a Founder of Samaritan Technologies, a volunteer management software company, and still serves as a member of the Board of Directors.
Paul Ahlstrom, Director. Paul joined as our director in 2014. Paul has served as Managing Director of Alta Ventures Mexico Fund I, LP since 2010, where his responsibilities include all aspects of investor relations, evaluating a business’s products or services for potential investment opportunity, creating deal flow, negotiating the terms and conditions in financing rounds, serving as a board member of portfolio companies, and preparing financial statements and financial analysis. Over his career, Paul has directly participated in more than 125 venture capital investments and previously represented vSpring Capital on the boards of Ancestry.com, which was sold in 2007 to a private equity firm and went public in 2009 (NASDAQ:ACOM), Senforce, which was sold to Novell (NASDAQ: NOVL), and Altiris (NASDAQ:ATRS), which went public and was then sold to Symantec (NASDAQ: SYMC), GlobalSim and Aeroprise. Mr. Ahlstrom has also served as an advisor and board to many successful venture-backed startups including Rhomobile sold to Motorola, SpaceMonkey, SendMi, Convert.com and Jott. Paul is the author of the popular book related to business startups, Nail It Then Scale It, and received his B.A. in Communications from Brigham Young University.
Dalton Wright, Director. Dalton joined as our director in 2014. Dalton has been a partner at Kickstart Seed Fund, L.P. since 2013, a seed-stage investment fund that develops close relationships with universities, angel groups and entrepreneurs to launch high-growth start-ups in both Utah and the Mountain West. Dalton serves as a director of numerous other corporate boards. From 2009 to 2012, Dalton was Senior Associate and Founding Team Member at Alta Ventures Mexico, a seed, venture, and growth capital fund targeting high growth companies in Mexico. Dalton graduated from the Wharton Business School at the University of Pennsylvania with his M.B.A. in 2014 and holds a B.A. in finance from the University of Utah.
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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 |
Jeffrey 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 effort to further our long-term stability and financial success by attracting and retaining personnel, including employees, directors, and consultants, we adopted the 2014 Stock Incentive Plan, or our Stock Incentive Plan, in February 2014. The Stock Incentive Plan was amended and restated in August 2016. There are 2,534,544 shares of Class A Common Stock authorized for issuance through our Stock Incentive Plan. As of December 31, 2019, options exercisable for 1,156,583 shares of our Class A Common Stock have been granted, and are outstanding, under our Stock Incentive Plan, and options exercisable for 242,923 shares of Class A Common Stock have been exercised. Through the use of stock incentives, the Stock Incentive Plan will stimulate the efforts of those persons upon whose judgment, interest and efforts we will largely depend on for the successful conduct of our business and further align those persons’ interests with the interests of our stockholders.
The Stock Incentive Plan is administered by our Board. The Board has the power and sole discretion to grant or award a stock incentive, or an Award, to any employee of, director of, or consultant to the Company, each a Participant, who in the sole judgment of our Board, has contributed, or can be expected to contribute, to our profits or growth. The Board also has the power and sole discretion to determine the size, terms, conditions and nature of each Award to achieve the objectives of the Award and the Stock Incentive Plan. This includes, without limitation, the Board’s ability to determine: (i) which eligible persons shall receive an Award and the nature of the Award, (ii) the number of securities to be covered by each Award, (iii) the fair market value of such securities, (iv) the time or times when an Award shall be granted, (v) whether an award shall become vested over a period of time, according to a performance-based or other vesting schedule or otherwise, and when it shall be fully vested, (vi) the terms and conditions under which restrictions imposed upon an Award shall lapse, (vii) whether a change of control exists, (viii) factors relevant to the satisfaction, termination or lapse of restrictions on certain Awards, (ix) when certain Awards may be exercised, (x) whether to approve a Participant’s election with respect to applicable withholding taxes, (xi) conditions relating to the length of time before disposition of securities received in connection with an Award is permitted, (xii) notice provisions relating to the sale of securities acquired under the Stock Incentive Plan, and (xiii) any additional requirements relating to Awards that the Board deems appropriate.
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Item 4. Security Ownership of Management and Certain Security holders
Principal Shareholders
We currently have 25,000,000 shares of common stock par value $0.001 per share, authorized, of which 21,250,000 shares have been designated as Class A voting common stock, or the Class A Common Stock, and 3,750,000 shares have been designated as Class B non-voting common stock, or the Class B Common Stock. As of December 31, 2019, we had 18,246,831 shares of Class A Common Stock issued and outstanding, and 3,313,335 shares of our Class B Common Stock issued and outstanding.
Capitalization
As of December 31, 2019, Harmon Ventures, LLC, or Harmon Ventures, owned indirectly by our CEO, Mr. Harmon, and two of his brothers, Jeffrey Harmon and Daniel Harmon, 8,938,520 shares of our Class A Common Stock. Alta Ventures Mexico Fund I, LLC, or Alta Ventures Mexico Fund I, of which our director, Paul Ahlstrom, is the managing director, owns 3,160,318 shares of our Class A Common Stock. Osborne Companies, LC, or Osborne Companies, owns 2,222,733 shares of Class A Common Stock. Various unaffiliated investors own the remaining shares of Class A Common Stock.
The following table sets forth those executive officers, directors and other security holders that hold 10% or greater of any class of shares, as of December 31, 2019.
Title of Class | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Amount and Nature of Beneficial Ownership Acquirable | Percent of Class |
Class A Common Stock | Harmon Ventures, LLC 295 W Center St Provo, UT 84601 | 8,938,520 shares | N/A | 48.99% |
Class A Common Stock | Alta Ventures Mexico Fund I, LLC 3315 Mayflower Avenue, Suite #1 Lehi, UT 84043 | 3,160,318 shares | N/A | 17.32% |
Class A Common Stock | Osborne Companies, LC 4290 North Vintage Circle Provo, UT 84604 | 2,222,733 shares | Options exercisable for 66,000 shares of Class A Common Stock | 12.18% |
As of December 31, 2019, Harmon Ventures owned 41.46% of our total outstanding shares of capital stock, Alta Ventures Mexico Fund I owned 14.66% of our total outstanding shares of capital stock, and Osborne Companies, LC owned 10.31% of our total outstanding shares of capital stock. See “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS – Stock Incentive Plan” above.
Our Board may, from time to time, also cause shares of capital stock to be issued to our directors, officers, employees or consultants or our affiliates as equity incentive compensation under our Stock Incentive Plan, which shares will have all benefits, rights and preferences that our Board may designate as applicable to such shares.
Item 5. Interest of Management and Others in Certain Transactions
Affiliated Transactions
Promotion and Marketing Services Agreement with Harmon Brothers LLC.
We entered into a “Promotion and Marketing Services Agreement,” or the HB Marketing Agreement, with Harmon Brothers LLC, or HB. HB is owned by Neal Harmon, Jeffrey Harmon, and Daniel Harmon. HB terminated the HB Marketing Agreement on August 15, 2018, in accordance with Section 10 of the agreement.
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HB is in the business of providing Internet-based and multi-media promotion and marketing services, including the design, implementation and execution of promotional and Web-based advertising campaigns. HB’s services to us are divided into two categories: creative and production services and optimization and distribution services. For creative and production services, HB invoices us at cost according to each employee or consultant’s personal hourly, billable rate. We also pay all expenses incurred in producing promotional and web-based advertising, including without limitation, props, food and catering (on set), facility rentals, travel, equipment rentals, and other costs of production. For optimization and distribution services, we pay HB a percentage-based fee for the management of third-party adspend (Adwords, Facebook, etc.) which drives traffic to the content produced, co-produced or otherwise created by HB, for us. The percentage-based management fee continues for the life of the content. In exchange for the promotion and advertising services from HB, including third-party adspend billed at cost, we paid $4,687,623 to HB in 2016, $469,640 to HB in 2017, and $701,173 to HB in 2018.
Investor Rights and Voting Agreement
We entered into an Investor Rights and Voting Agreement, or Investor Agreement, dated February 27, 2014, with certain of our investors, including Alta Ventures Mexico Fund I, the manager of which is Paul Ahlstrom, one of our directors. The Investor Agreement requires us to provide certain information and inspection rights, provides for confidentiality, and requires the parties to this agreement to vote their respective shares of common stock in a manner which maintains the number of directors on the Board at no more than five and to elect as a director an individual designated by Alta Ventures Mexico Fund I for so long as it owns at least 1,000,000 shares of our common stock.
Wholly Owned Subsidiaries
We created VAS Portal, LLC, a wholly-owned subsidiary, in 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.
Item 6. Other Information
None.
Item 7. Financial Statements
15
VIDANGEL, INC.
Consolidated Financial Statements
As of December 31, 2019 and 2018
and For the Years Then Ended
Together with Independent Auditors’ Report
16
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
17
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
2019 | 2018 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $1,584,455 | $1,539,731 |
Restricted cash | - | 954,381 |
Holdback Receivable | 445,000 | - |
Accounts receivable | 633,581 | 266,436 |
Physical Media Inventory | 106,789 | - |
Notes receivable, current | - | 349,866 |
Prepaid expenses and other | 20,157 | 133,907 |
Total current assets | 2,789,982 | 3,244,321 |
Movie asset | 970,372 | 1,206,687 |
Deposits | 47,915 | 47,915 |
Property and equipment, net | 36,063 | 85,590 |
Business CD | 76,172 | 75,000 |
Note receivable - long term | 107,488 | - |
Total assets | $4,027,992 | $4,659,513 |
Liabilities and Stockholders' Deficit | ||
Current liabilities: | ||
Accounts payable | $1,033,862 | $397,705 |
Accrued expenses | 781,035 | 758,299 |
Deferred revenue | 4,081,222 | 3,813,134 |
Total current liabilities | 5,896,119 | 4,969,138 |
Commitments and contingencies | ||
Stockholders' equity (deficit): | ||
Common stock, $0.001 par value, 25,000,000 shares | ||
authorized; 21,560,166 shares issued and outstanding | 21,560 | 21,560 |
Additional paid-in capital | 13,466,838 | 13,414,186 |
Accumulated deficit | (15,356,525) | (13,745,371) |
Total stockholders' deficit | (1,868,127) | (309,625) |
Total liabilities and stockholders' deficit | $4,027,992 | $4,659,513 |
See accompanying notes to consolidated financial statements.
18
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31,
2019 | 2018 | |
Revenues, net | $10,754,844 | $7,547,299 |
Operating expenses: | ||
Cost of revenues | 4,143,717 | 2,382,418 |
Legal | 2,373,203 | 915,717 |
General and administrative | 2,149,802 | 1,663,392 |
Selling and marketing | 1,934,729 | 1,318,155 |
Research and development | 1,775,665 | 1,567,015 |
Total operating expenses | 12,377,116 | 7,846,697 |
Operating loss | (1,622,272) | (299,398) |
Other income (expense): | ||
Interest expense | (112) | (35) |
Interest income | 11,330 | 13,179 |
Total other income, net | 11,218 | 13,144 |
Loss before income taxes | (1,611,054) | (286,254) |
Provision for income taxes | 100 | 100 |
Net loss | $(1,611,154) | $(286,354) |
See accompanying notes to consolidated financial statements.
19
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Deficit
For the Years Ended December 31, 2019 and 2018
Additional | Total | |||||
Common Stock | Paid-in | Accumulated | Stockholders' | |||
Class A Shares | Class B Shares | Amount | Capital | Deficit | Equity (Deficit) | |
Balance as of December 31, 2017 | 18,063,856 | 3,313,335 | $21,377 | $13,231,869 | $(13,459,017) | $(205,771) |
Stock options excercised | 182,975 | - | 183 | 83,179 | - | 83,362 |
Stock-based compensation expense | - | - | - | 99,138 | - | 99,138 |
Net loss | - | - | - | - | (286,354) | (286,354) |
Balance as of December 31, 2018 | 18,246,831 | 3,313,335 | 21,560 | 13,414,186 | (13,745,371) | (309,625) |
Stock-based compensation expense | - | - | - | 52,652 | - | 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.
20
VIDANGEL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31,
2019 | 2018 | |
Cash flows from operating activities: | ||
Net loss | $(1,611,154) | $(286,354) |
Adjustments to reconcile net loss to net cash, restricted | ||
cash, and cash equivalents used in operating activities: | ||
Depreciation and amortization | 64,947 | 93,083 |
Stock-based compensation expense | 52,652 | 99,138 |
Change in operating assets and liabilities: | ||
Accounts receivable | (367,145) | (258,429) |
Holdback recevable | (445,000) | - |
Physical Media Inventory | (106,789) | - |
Prepaid expenses and other assets | 113,750 | (8,325) |
Movie Asset Inventory | 236,315 | 237,133 |
Deposits | - | 156,356 |
Note Receivable | 242,378 | (223,141) |
Certificate of Deposits | (1,172) | - |
Accounts payable and accrued expenses | 766,405 | 125,926 |
Deferred revenue | 160,576 | (371,277) |
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) |
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.
21
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. | |
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. | ||
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. |
22
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: |
2019 | 2018 | |
Vendor A | 13% | 21% |
Individual customer revenues that were 10% or more of total revenues were as follows for the years ended December 31: |
2019 | 2018 | |
Customer A | 12% | 24% |
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. |
2019 | 2018 | |
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 |
23
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. |
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 |
24
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
1. Description of | Property and Equipment – continued |
Organization and Summary of Significant Accounting Policies Continued | 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. | ||
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. |
25
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. |
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. |
26
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 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: |
2019 | 2018 | |
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. |
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. |
27
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
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. | |
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: |
2019 | 2018 | |
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. |
28
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
4. Commitments and Contingencies | Litigation The Company is involved in legal proceedings from time to time arising in the normal course of business. The Company has received, and may in the future continue to receive, claims from third parties. Management, after consultation with legal counsel, believes that the outcome of these proceedings may have a material impact on the Company’s consolidated financial position, results of operations, or liquidity. |
Litigation is necessary to defend the Company. The results of any current or future complex litigation matters cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact because of defense and settlement costs, distraction of management and resources, and other factors. Additionally, these matters may change in the future as the litigation and factual discovery unfolds. Legal fees are expensed as incurred. Insurance recoveries associated with legal costs incurred are recorded when they are received. | ||
The Company assesses whether there is a reasonable possibility that a loss, or additional losses beyond those already accrued, may be incurred (Material Loss). If there is a reasonable possibility that a Material Loss may be incurred, the Company discloses an estimate or range of the amount of loss, either individually or in the aggregate, or discloses that an estimate of loss cannot be made. If a Material Loss occurs due to an unfavorable outcome in any legal matter, this may have an adverse effect on the consolidated financial position, results of operations, and liquidity of the Company. The Company records a provision for each liability when determined to be probable, and the amount of the loss may be reasonably estimated. These provisions are reviewed annually and adjusted as additional information becomes available. | ||
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. |
29
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
4. Commitments and | Litigation-Continued |
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: | Amount |
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. | ||
30
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: |
Number of Options | 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 |
31
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. |
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. |
32
VIDANGEL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Continued
December 31, 2019 and 2018
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: |
2019 | 2018 | |
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: |
2019 | 2018 | |
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) |
$– | $– |
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. |
33
Item 8. Exhibits
INDEX OF EXHIBITS
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 6.1 of 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. | |
2019 Letter to Shareholders |
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SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this Annual Report on Form 1-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Provo, Utah on May 5, 2020.
VidAngel, Inc. | |||
By: | /s/ Neal S. Harmon | ||
Name: | Neal S. Harmon | ||
Title: | Chief Executive Officer |
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Neal S. Harmon | Chief Executive Officer and Director | May 5, 2020 | ||
Neal S. Harmon | (Principal Executive Officer) | |||
May 5, 2020 | ||||
/s/ Patrick Reilly | Chief Financial Officer | |||
Patrick Reilly | (Principal Financial and Accounting Officer) | |||
/s/ Dalton Wright | Director | May 5, 2020 | ||
Dalton Wright | ||||
/s/ Paul Ahlstrom | Director | May 5, 2020 | ||
Paul Ahlstrom |
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