NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1—Basis of Presentation
The
accompanying unaudited consolidated financial statements of Zedge, Inc. and its subsidiaries, Zedge Europe AS and Zedge Canada,
Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and nine months ended April 30, 2018 are not necessarily
indicative of the results that may be expected for the fiscal year ending July 31, 2018. The balance sheet at July 31, 2017
has been derived from the Company’s audited financial statements at that date but does not include all of the information
and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the consolidated
financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July
31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The
Company was formerly a majority-owned subsidiary of IDT Corporation (“IDT”). On June 1, 2016, IDT’s interest
in the Company was spun-off by IDT to IDT’s stockholders and the Company became an independent public company through a
pro rata distribution of the Company’s common stock held by IDT to IDT’s stockholders (the “Spin-Off”).
The
Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal
year ending in the calendar year indicated (e.g., fiscal 2018 refers to the fiscal year ending July 31, 2018).
Note
2—Fair Value Measurements
The
following tables present the balance of assets and liabilities measured at fair value on a recurring basis:
|
|
Level 1 (1)
|
|
|
Level 2 (2)
|
|
|
Level 3 (3)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
April 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
137
|
|
|
$
|
-
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1)
– quoted prices in active markets for identical assets or liabilities
(2)
– observable inputs other than quoted prices in active markets for identical assets and liabilities
(3)
– no observable pricing inputs in the market
Fair
Value of Other Financial Instruments
The
Company’s other financial instruments at April 30, 2018 and July 31, 2017 included trade accounts receivable, trade accounts
payable and due to IDT Corporation. The carrying amounts of the trade accounts receivable, trade accounts payable and due to IDT
Corporation balances approximated fair value due to their short-term nature.
Note
3—Derivative Instruments
The
primary risk managed by the Company using derivative instruments is foreign exchange risk. Foreign exchange forward contracts
are entered into as hedges against unfavorable fluctuations in the U.S. Dollar - NOK exchange rate. Subsequent to the Spin-Off
and until November 2016, IDT provided hedging services to the Company pursuant to the Transition Services Agreement (see Note
7). As of November 16, 2016, the Company entered into a Foreign Exchange Agreement with Western Alliance Bank allowing the Company
to enter into foreign exchange contracts under its revolving credit facility with the bank (see Note 8). The Company does not
apply hedge accounting to these contracts; therefore the changes in fair value are recorded in earnings. By using derivative instruments
to mitigate exposures to changes in foreign exchange rates, the Company is exposed to credit risk from the failure of the counterparty
to perform under the terms of the contract. The credit or repayment risk is minimized by entering into transactions with high-quality
counterparties.
There
were no outstanding derivative instruments on April 30, 2018. On May 2, 2018, the Company entered into a series of forward contracts
pursuant to the Foreign Exchange Agreement with Western Alliance Bank as follows:
Settlement Date
|
|
U.S. Dollar Amount
|
|
|
NOK Amount
|
|
Jun-18
|
|
|
500,000
|
|
|
|
4,004,545
|
|
Jul-18
|
|
|
500,000
|
|
|
|
3,999,545
|
|
Aug-18
|
|
|
500,000
|
|
|
|
3,994,495
|
|
Sep-18
|
|
|
500,000
|
|
|
|
3,989,945
|
|
Oct-18
|
|
|
500,000
|
|
|
|
3,986,095
|
|
Nov-18
|
|
|
500,000
|
|
|
|
3,983,595
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,000,000
|
|
|
|
23,958,220
|
|
The
fair value of outstanding derivative instruments recorded as assets in the accompanying consolidated balance sheets were as follows:
Asset Derivatives
|
|
Balance Sheet Location
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
|
|
(in thousands)
|
|
Derivatives not designated or not qualifying as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
-
|
|
|
$
|
137
|
|
The
effects of derivative instruments on the consolidated statements of comprehensive loss were as follows:
|
|
Amount of Loss Recognized
on Derivatives
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
Derivatives not designated or not qualifying as hedging instruments
|
|
Location of Loss Recognized on Derivatives
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
(in
thousands)
|
|
Foreign exchange forward contracts
|
|
Net loss resulting from foreign exchange transactions
|
|
$
|
-
|
|
|
$
|
(92
|
)
|
|
$
|
(1
|
)
|
|
$
|
(68
|
)
|
Note
4—Accrued Expenses
Accrued
expenses consist of the following:
|
|
April 30,
2018
|
|
|
July 31,
2017
|
|
|
|
(in thousands)
|
|
Accrued vacation
|
|
$
|
960
|
|
|
$
|
685
|
|
Accrued payroll taxes
|
|
|
363
|
|
|
|
277
|
|
Accrued payroll and bonuses
|
|
|
366
|
|
|
|
250
|
|
Accrued severance
|
|
|
123
|
|
|
|
-
|
|
Accrued direct cost of revenues
|
|
|
-
|
|
|
|
6
|
|
Accrued advertising
|
|
|
43
|
|
|
|
184
|
|
Accrued income taxes
|
|
|
36
|
|
|
|
36
|
|
Accrued professional fees
|
|
|
142
|
|
|
|
130
|
|
Other
|
|
|
80
|
|
|
|
272
|
|
Total accrued expenses
|
|
$
|
2,113
|
|
|
$
|
1,840
|
|
Note
5—Equity
Changes
in the components of equity were as follows:
|
|
Nine Months Ended April 30,
2018
|
|
|
|
(in thousands)
|
|
Balance, July 31, 2017
|
|
$
|
10,622
|
|
Exercise of stock options
|
|
|
216
|
|
Stock issued to FreeForm noteholders
|
|
|
242
|
|
Stock-based compensation
(1)
|
|
|
429
|
|
Comprehensive loss:
|
|
|
|
|
Net loss
|
|
|
(1,302
|
)
|
Foreign currency translation adjustments
|
|
|
(50
|
)
|
Total comprehensive loss
|
|
|
(1,352
|
)
|
Balance, April 30, 2018
|
|
$
|
10,157
|
|
(1)
|
This
amount includes stock issued to pay for the Board of Directors’ compensation of
$104,000 and the Company’s matching contribution to employees’ 401(k) plan
contributions with a value of $33,000.
|
Stock
Options
In
the nine months ended April 30, 2018, the Company received proceeds of $216,000 from the exercise of stock options for which the
Company issued 137,111 shares of its Class B common stock.
In
September 2016, the Compensation Committee of our Board of Directors (the “Compensation Committee”) approved an equity
grant of options to purchase an aggregate of 231,327 shares of our Class B common stock to our executive officers, a non-executive
employee and a consultant. The options vest over a three-year period from grant. Unrecognized compensation expense related to
this grant was an aggregate of $681,000 based on the estimated fair value of the options on the grant date. The unrecognized compensation
expense is being recognized on a straight-line basis over the vesting period. In November 2017, the Company cancelled 53,026 shares
of this option grant because they exceeded the annual limit of 60,000 shares per grantee as set forth in Article 5(c) of the Amended
and Restated 2016 Stock Option and Incentive Plan dated October 18, 2017 (the “2016 Incentive Plan”). Simultaneously,
the Compensation Committee approved an option grant of 53,026 with similar terms. Unrecognized compensation expense related to
this option grant was an aggregate of $85,000 based on the estimated fair value of the options on the grant date.
On
October 18, 2017, the Compensation Committee approved the grant of options to purchase an aggregate of 124,435 shares of the Company’s
Class B common stock to 55 of its non-executive employees. The options vest over a three-year period from December 8, 2017. Unrecognized
compensation expense related to this grant was an aggregate of $159,000 based on the estimated fair value of the options on the
grant date. The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period.
2016
Stock Option and Incentive Plan
On
October 18, 2017, the Company’s Board of Directors amended the 2016 Incentive Plan to increase the number of shares of the
Company’s Class B common stock available for the grant of awards thereunder by an additional 350,000 shares. This amendment
was ratified by the Company’s stockholders during Annual Meeting held on January 17, 2018. At April 30, 2018, there were
386,000 shares of the Company’s Class B common stock available for awards under the 2016 Incentive Plan, inclusive of the
additional 350,000 shares discussed below.
Pursuant
to the 2016 Incentive Plan, the option exercise price for all stock option awards must not be less than the Fair Market Value
of the shares of Class B Common Stock covered by the option award on the date of grant. In general, Fair Market Value means the
closing sale price per share of Class B Common Stock on the exchange on which the Class B Common Stock is principally traded for
the last preceding date on which there was a sale of Class B Common Stock on such exchange.
Freeform
Transaction
In
September 2017, the Company entered into an Agreement and Release with Freeform Development, Inc. (“Freeform”) and
certain of its former employees, pursuant to which the Company obtained releases for certain employees from their Freeform employment
agreements in exchange for the repayment of certain of Freeform’s liabilities. The Company paid Freeform $125,000 in cash
to pay its operating liabilities (with any excess to be refunded to the Company), and the Company paid the holders of Freeform’s
convertible promissory notes cash of $97,567 and issued the noteholders a total of 126,679 shares of Zedge Class B common stock
with a fair value of $242,000 on issuance, which are subject to a two-year lock-up agreement. The Company believes this transaction
did not qualify as a business combination under Accounting Standard Update 2017-01, which the Company adopted early on August
1, 2017, and as such accounted for the payment of the Freeform liabilities that aggregated $465,000, as selling, general and administrative
expense in three months ended October 31, 2017. The Company expects to receive a $25,000 refund from Freeform Development
Inc. Accordingly, the Company recorded a receivable of $25,000 and reduced the Freeform acquihire costs from $465,000 to $440,000
during the three months ended April 30, 2018.
In
addition to the above payments, the Company also granted a total of 192,953 restricted shares of the Company’s Class B common
stock to former Freeform employees, which shall vest over a four-year period subject to continued employment. These shares had
an aggregate grant date fair value of $369,000 which is being amortized on a straight-line basis over the vesting period.
Restricted
Stock Award
On
February 7, 2018, the Compensation Committee and the Corporate Governance Committees of our Board of Directors approved a grant
of 108,553 restricted shares of the Company’s Class B Common Stock to our Executive Chairman Michael Jonas. Mr. Jonas has
agreed to accept all of his compensation for his service as Executive Chairman during fiscal 2018 in the form of equity in the
Company and to make receipt of such equity compensation contingent on the Company achieving certain milestones relative to its
fiscal 2018 budget. The grant was made at that time because the milestones previously set were achieved. These shares shall vest
in equal amounts on February 7, 2019, 2020 and 2021.These shares had an aggregate grant date fair value of $330,000 which is being
amortized on a straight-line basis over the vesting period.
Note
6—Earnings Per Share
Basic
earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the
weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per
share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted
stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock
method, unless the effect of such increase is anti-dilutive.
The
weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s
common stockholders consists of the following:
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Basic weighted-average number of shares
|
|
|
9,867
|
|
|
|
9,595
|
|
|
|
9,757
|
|
|
|
9,423
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested restricted Class B common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares
|
|
|
9,867
|
|
|
|
9,595
|
|
|
|
9,757
|
|
|
|
9,423
|
|
The
following shares were excluded from the dilutive earnings per share computations because their inclusion would have been anti-dilutive:
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
1,366
|
|
|
|
1,431
|
|
|
|
1,366
|
|
|
|
1,431
|
|
Non-vested restricted Class B common stock
|
|
|
346
|
|
|
|
53
|
|
|
|
346
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
1,712
|
|
|
|
1,484
|
|
|
|
1,712
|
|
|
|
1,484
|
|
For
the three and nine months ended April 30, 2018 and 2017, the diluted earnings per share equals basic earnings per share because
the Company incurred net loss during those periods and the impact of the assumed exercise of stock options and vesting of restricted
stock would have been anti-dilutive.
Note
7—Related Party Transactions
Prior
to the Spin-Off, IDT charged the Company for certain transactions and allocated routine expenses based on Company specific items
covered under a Master Services Agreement. This agreement provided for, among other things: (1) the allocation between the Company
and IDT of costs of employee benefits, taxes and other liabilities and obligations; (2) services provided by IDT relating to human
resources and employee benefits administration; and (3) finance, accounting, tax, facilities and legal services provided by IDT
to the Company. Following the Spin-Off, IDT charges the Company for services it provides pursuant to a Transition Services Agreement
entered into effective with the Spin-Off. The services provided pursuant to the Transition Services Agreement include human resources,
payroll, investor relations, legal, accounting, tax, financial systems, management consulting and foreign exchange risk management.
As of October 31, 2017, most of these services were discontinued and are being performed directly by Zedge or vendors retained
by Zedge. Amounts charged by IDT to the Company are included in “Selling, general and administrative expense” in the
consolidated statements of comprehensive loss.
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Payments by IDT on behalf of the Company
|
|
$
|
14
|
|
|
$
|
160
|
|
|
$
|
274
|
|
|
$
|
798
|
|
Cash repayments, net of advances
|
|
$
|
(26
|
)
|
|
$
|
(181
|
)
|
|
$
|
(313
|
)
|
|
$
|
(1,041
|
)
|
Note
8—Revolving Credit Facility
As
of September 27, 2016, the Company entered into a loan and security agreement with Western Alliance Bank for a revolving credit
facility of up to $2.5 million. Advances under this facility may not exceed the lesser of $2.5 million or 80% of the Company’s
eligible accounts receivable, subject to certain concentration limits. The revolving credit facility is secured by a lien on substantially
all of the Company’s assets. The outstanding principal amount bears interest per annum at the greater of 3.5% or the prime
rate plus 1.25%. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity
date of September 27, 2018. The Company is required to pay an annual facility fee of $12,500 to Western Alliance Bank.
The
Company is also required to comply with various affirmative and negative covenants and to maintain certain financial ratios during
the term of the revolving credit facility. The covenants include a prohibition on the Company paying any dividend on its capital
stock. The Company may terminate this agreement at any time without penalty or premium provided that it pays down any outstanding
principal, accrued interest and bank expenses. At April 30, 2018, there were no amounts outstanding under the revolving credit
facility and the Company was in compliance with all of the covenants.
As
of November 16, 2016, the Company entered into a Foreign Exchange Agreement with Western Alliance Bank to allow the Company to
enter into foreign exchange contracts not to exceed $5.0 million in the aggregate at any point in time under its revolving credit
facility. The available borrowing under the revolving credit facility is reduced by an applicable foreign exchange reserve percentage
as determined by Western Alliance Bank, in its reasonable discretion from time to time, which was initially set at 10% of the
nominal amount of the foreign exchange contracts in effect at the relevant time. In December 2016, the applicable foreign exchange
reserve percentage was changed so that the reduction of available borrowing for major currency forward contracts of less than
six months tenor is set at 10% of the nominal amount of the foreign exchange contracts, and for contracts over six months tenor,
12.5% of the nominal amount of the foreign exchange contracts. As of April 30, 2018, there were no outstanding foreign exchange
contracts under the Foreign Exchange Agreement. On May 2, 2018, the Company entered into a series of forward contracts, see Note
3 above.
Note
9—Business Segment and Geographic Information
The
Company provides a content platform, worldwide, centered on self-expression, attracting both creators looking to promote their
content and consumers who utilize such content to express their identity, feelings, tastes and interests. The Company’s
platform enables consumers to personalize their mobile devices with high quality ringtones, wallpapers, home screen app icons
and notification sounds. The bulk of the content is generally available free of charge. The Company conducts business as one operating
segment.
Net
long-lived assets and total assets held outside of the United States, which are located primarily in Norway, were as follows:
|
|
United States
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Long-lived assets, net:
|
|
|
|
|
|
|
|
|
|
April 30, 2018
|
|
$
|
3,163
|
|
|
$
|
239
|
|
|
$
|
3,402
|
|
July 31, 2017
|
|
$
|
2,537
|
|
|
$
|
271
|
|
|
$
|
2,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2018
|
|
$
|
8,049
|
|
|
$
|
4,509
|
|
|
$
|
12,558
|
|
July 31, 2017
|
|
$
|
8,910
|
|
|
$
|
3,621
|
|
|
$
|
12,531
|
|
Note
10— Commitments & Contingencies and Tax Matters
Legal
Proceedings
In
March 2014, Saregama India, Limited filed a lawsuit against the Company before the Barasat District Court (the “Court”),
seeking approximately $1.6 million as damages and an injunction for copyright infringement. The main ground for the lawsuit was
an allegation that the Company avails the plaintiff’s sound recordings through the Company’s platform with full knowledge
that the sound recordings have been uploaded and are being communicated to the public without obtaining any license from the plaintiff.
The
Company
filed an application under Order
7 Rule 10 of the Indian Code of Civil Procedure stating that the suit was wrongly instituted in the present Court and therefore
the complaint should be returned to the Plaintiff. After hearing submissions of the counsels of Saregama and the Company, the
Court found merit in the application filed by the Company and on February 16, 2017 ordered the complaint along with court fee
be returned to Saregama, with a direction to submit the same before the proper jurisdiction.
The
Company has not received any notice that a new suit has been filed in any other jurisdiction by Saregama and believes that the
possibility of material liability related to this on the matter is remote.
The
Company may from time to time be subject to other legal proceedings that arise in the ordinary course of business. Although there
can be no assurance in this regard, the Company does not expect any of those legal proceedings to have a material adverse effect
on the Company’s results of operations, cash flows or financial condition.
Tax
Audits
In
September 2016, the Company was notified that the Zedge Europe AS tax returns for 2012 through 2016 were going to be audited by
the tax authorities in Norway. The initial audit meeting took place in October 2016 and the audit is progressing. No significant
issues have been identified at this time. Amounts asserted by taxing authorities or the amount ultimately assessed against the
Company could be greater than any accrued amount. Accordingly, provisions may be recorded in the future as estimates are revised
or underlying matters are settled or resolved. Imposition of assessments as a result of tax audits could have an adverse effect
on the Company’s results of operations, cash flows and financial condition.
Research
and Development Credits
As
of April 30, 2018, the balance of the Company’s net receivable from SkatteFUNN, a Norwegian government program designed
to stimulate research and development in Norwegian trade and industry, was $212,000 which was included in “Other current
assets” in the consolidated balance sheet. SkatteFUNN credits of $0 and $39,000 were recorded as a reduction of selling,
general and administrative expense for the three months and nine months ended April 30, 2018 respectively, and $33,000 and $ 289,000
were recorded as a reduction of selling, general and administrative expense for the three months and nine months ended April 30,
2017, of which $204,000 was related to prior periods. The Company has not worked on SkatteFUNN related projects since January
2018.
Note
11—Provision for (benefit from) Income taxes
The
increase in the provision for income taxes in the three months ended April 30, 2018 compared to the same periods in fiscal 2017,
and the changes from a benefit from to a provision for income taxes in the nine months ended April 30, 2018 compared to the same
periods in fiscal 2017 was primarily due to the jurisdiction in which loss was incurred in the three and nine months ended April
30, 2018 compared to the same periods in fiscal 2017 and our ability to utilize net operating losses the Company holds in those
jurisdictions.
In addition, the decrease in the Norwegian corporate tax
rate from 24.0% to 23.0% resulted in an increase in deferred tax expense of approximately $7,000.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”). The Tax Act significantly revises U.S. corporate income taxation by, among other things, lowering
the U.S. corporate income tax rate from 35.0 % to 21.0% effective January 1, 2018. The decrease in the U.S. federal corporate
tax rate from 35.0% to 21.0% will result in a blended statutory tax rate of 26.4% for the fiscal year ending July 31, 2018.
The Company does not anticipate any impact to tax expense due to the full valuation allowance of the Company and believes that
the most significant impact on its consolidated financial statements will be reduction of approximately $425,000 for the deferred
tax assets related to net operating losses and other assets. Such reduction is offset by changes to the Company’s
valuation allowance.
In
December 2017, the SEC issued Staff Accounting Bulletin 118, which allows a measurement period, not to exceed one year, to finalize
the accounting for the income tax impacts of the Tax Act. Until the accounting for the income tax impacts of the Tax Act is complete,
the reported amounts are based on reasonable estimates, are disclosed as provisional and reflect any adjustments in subsequent
periods as the Company refine its estimates or complete our accounting of such tax effects.
Note
12—Recently Issued Accounting Standards Not Yet Adopted
In
February 2018, the Financial Accounting Standards Board (“FASB”) issued a new Accounting Standards Update (“ASU”)
to give entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform
to retained earnings (accumulated deficits). The new guidance also requires entities to make additional disclosures, regardless
of whether reclassification of tax effects is elected. This guidance will be effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact that
this ASU will have on its consolidated financial statements.
In
August 2017, the FASB issued an ASU intended to improve the financial reporting of hedging relationships to better portray the
economic results of an entity’s risk management activities in its financial statements. In addition, the ASU includes certain
targeted improvements to simplify the application of hedge accounting guidance in U.S. GAAP. The amendments in this ASU are effective
for the Company on August 1, 2019. Early application is permitted. Entities will apply the amendments to cash flow and net investment
hedge relationships that exist on the date of adoption using a modified retrospective approach. The presentation and disclosure
requirements will be applied prospectively. The Company is evaluating the impact that this ASU will have on its consolidated financial
statements.
In
May 2017, the FASB issued an ASU to provide guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting. Pursuant to this ASU, an entity should account for the effects of a modification
unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement
method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative
measurement method is used) of the original award immediately before the original award is modified (if the modification does
not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to
estimate the value immediately before and after the modification); (2) the vesting conditions of the modified award are the same
as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification
of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award
immediately before the original award is modified. The Company will adopt the amendments in this ASU prospectively to an award
modified on or after on August 1, 2018. The Company is evaluating the impact that the new standard will have on its consolidated
financial statements.
In
June 2016, the FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For
receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model
that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized
losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances
instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more
information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect
adjustment to retained earnings. The Company will adopt the new standard on August 1, 2020. The Company is evaluating the impact
that the new standard will have on its consolidated financial statements.
In
February 2016, the FASB issued an ASU related to the accounting for leases. The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The Company will adopt the new standard on August 1, 2019. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating
the impact that the new standard will have on its consolidated financial statements.
In
May 2014, the FASB and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard
that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards
(“IFRS”). The goals of the revenue recognition project were to clarify and converge the revenue recognition principles
under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. To accomplish
this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance
obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations
in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Entities have the option
of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company expects
to adopt this standard on August 1, 2018 using the modified retrospective approach. The Company has identified its main revenue
streams, which are advertising revenue, app installs and advertising ops outsourcing. In addition, the Company substantially completed
reviewing contracts and other relevant documents for most of its customers that comprises its main revenue streams. Based on this
preliminary analysis to date of the adoption of the standard, the Company has not identified a significant impact on its consolidated
financial statements, although this is subject to change as the Company completes the process.