NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation and Recently Adopted
Accounting Pronouncements
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 months ended October 31, 2018 are not necessarily indicative of the results that may be expected
for the fiscal year ending July 31, 2019 or any other period. The balance sheet at July 31, 2018 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, 2018, 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 2019 refers to the fiscal year ending July 31, 2019).
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606)
, and additional changes, modifications, clarifications or interpretations related to this guidance thereafter,
which replaces existing revenue recognition guidance (Topic 605). The new guidance was effective for the annual and interim periods
beginning after December 15, 2017. See “ Note 2—Revenue ” for additional information regarding revenue recognition.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
a new accounting standard update on the classification
and measurement of financial instruments. The new guidance principally affects accounting standards for equity investments, financial
liabilities where the fair value option has been elected, and the presentation and disclosure requirements for financial instruments.
The Company adopted this new accounting standard prospectively for its measurement in non-marketable equity securities during the
three months ended October 31, 2018. The Company has elected to use the measurement alternative for its non-marketable equity securities,
defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less
impairment. The Company’s investment in a privately-held company is non-marketable equity securities without readily determinable
fair value and there was no upward or impairment adjustments during the three months ended October 31, 2018. See Note 10 –
Investment for further details.
Note 2—Revenue
Adoption of Topic 606, "Revenue from Contracts with
Customers"
On August 1, 2018, the
Company adopted Topic 606 using the modified retrospective method applied to those contracts not yet substantially completed as
of August 1, 2018. Results for reporting periods beginning after August 1, 2018 are presented under the new revenue standard, while
prior period amounts are not adjusted and continue to be reported in accordance with the Company's historical accounting practices
under Topic 605. The impact of adopting the new revenue standard was not material to our consolidated financial statements
and there was no adjustment to beginning retained earnings on August 1, 2018.
Pursuant to Topic 606, revenue is recognized
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for promised goods or services.
An entity applies the following five steps to achieve the core principle of Topic 606:
1. Identify the contract with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance
obligations in the contract
5. Recognize revenue when (or as) the entity satisfies
a performance obligation
Revenue Recognition
The Company generates approximately 90%
of its revenues from selling its advertising inventory to advertising networks, advertising exchanges, and direct arrangements
with advertisers. The remainder of the Company’s revenue is primarily generated from managing and optimizing the advertising
inventory of a third-party mobile application publisher, as well as overseeing the billing, collections and reporting related to
advertising for this publisher. The Company completed the rollout of Zedge Premium in March 2018. Revenue generated from Zedge
Premium remained insignificant in Q1 of fiscal 2019 given the early stage of this offering.
The following table summarizes revenue by
type of service for the periods presented:
|
|
Three Months Ended
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
Advertising revenue
|
|
|
2,198
|
|
|
|
2,433
|
|
Service revenue
|
|
|
171
|
|
|
|
149
|
|
Other revenue
|
|
|
12
|
|
|
|
77
|
|
Total Revenue
|
|
$
|
2,381
|
|
|
$
|
2,659
|
|
Advertising Revenue
: The Company generates
the bulk of its revenue from selling its Zedge app’s advertising inventory to advertising networks and advertising exchanges
and direct sales to advertisers. The Company also generates revenue from app publishers that pay the Company for installations
of their app.
|
●
|
Advertising Networks. An advertising network is a third party relationship where buyers of advertising inventory go to purchase
either specific targeted inventory or a large scale of inventory at a set price. Advertising Networks serve as an indirect source
of advertising fill to a variety of branded ad campaigns and performance-based ad campaigns.
|
|
●
|
Advertising Exchanges. An advertising exchange is similar to an advertising network, except that the exchange typically bids
in real-time for inventory. Advertisers may utilize an exchange when looking for scale or specific audiences, and accept that the
price will vary based on when and how much volume of inventory they wish to buy.
|
|
●
|
Direct Sales to Advertisers. The Company sells advertising directly to advertisers through a contractual relationship. These
relationships typically offer higher than average pricing than realized from sales via advertising networks or advertising exchanges.
|
|
●
|
App Installs. The Company earns revenue when a Zedge user installs an app offered by a publisher that pays us a pre-negotiated
fee for the installation (referred to as Cost Per Install or CPI). Our Game Channel generated revenue from CPIs. In April 2016,
the Company made the decision to deprioritize and reduce its investments in Game Channel and, in October 2018, replaced the Game
Channel with a game wall which offers Zedge users with a mix of interactive playable ads which, if installed by the user, generate
revenue for Zedge.
|
Service Revenue
: The Company manages
and optimizes the advertising inventory of a third-party mobile application publisher, as well as overseeing the billing, collections
and reporting related to advertising for this publisher. In exchange for these management and optimization services, Zedge shares
a portion the advertising revenues from this publisher whose revenue is also derived from sales of advertising.
Other Revenue
:
Zedge Premium is the Company’s marketplace where artists and brands can market, distribute and sell their digital content
to Zedge’s users. The content owner sets the price and the end user can purchase the content by paying for it with Zedge
Credits, the Company’s closed virtual currency. A user can earn Zedge Credits when taking specific actions such as watching
rewarded videos or completing electronic surveys. Alternatively, users can buy Zedge Credits with an in-app purchase. If a user
purchases Zedge Credits, Google Play or iTunes keeps 30% of the purchase price with the remaining 70% being credited to the end
user’s account. When a user purchases Zedge Premium content the artist or brand receives 70% of the actual value of the Zedge
Credits used to buy the content item (“Royalty Payment”) and the Company receives the remaining 30%, which is recognized
as Other Revenue. Some of the Zedge Premium content is available for print on demand merchandise, including phone cases and tee
shirts. When a user purchases a print-on-demand item the artist or brand is paid 70% of the net profit, after accounting for cost-of-goods
sold, shipping and handling, credit card processing, and other direct expenses and the Company recognizes Other Revenue from the
remaining 30%. In the first quarter of fiscal 2019, Other Revenue represented revenue solely derived from Zedge Premium. In prior
year periods, Other Revenue represented revenue from assorted monetization trials that the Company tested.
The Company recognizes
advertising revenue as advertisements are delivered to users through impressions, ad views or app installs (depending on the terms
agreed upon with the advertiser). For in-app display ads, in-app offers, engagement advertisements and other advertisements, the
Company’s performance obligation is satisfied over the life of the relevant contract (i.e., over time), with revenue being
recognized as advertising units are delivered. The advertiser may compensate the Company on a cost-per-impression, cost-per-click,
cost-per-action or cost-per-install basis.
The Company generally reports its revenue
net of amounts due to agencies and brokers because the Company is not the primary obligor in the relevant arrangements, it does
not finalize the pricing, and it does not establish or maintain a direct relationship with the advertiser. Certain advertising
arrangements that are directly between the Company and advertisers are recognized on a gross basis equal to the price paid to the
Company by the customer since the Company is the primary obligor and the Company determines the price. Any third party costs related
to such direct relationships are recognized as direct cost of revenues.
Payment terms
The majority of Zedge’s revenue is
derived from large credit-worthy entities, including Twitter, Google, Facebook, Apple and Amazon or affiliates of those entities.
The Company invoices its customers monthly. Payment terms are stipulated as a specific number of days subsequent to the end of
the month, generally ranging from 30 to 60 days. The Company endeavors to terminate relationships with smaller advertisers promptly
if balances become past due. Since these smaller advertisers rely on the Company to derive their own revenue, they generally pay
their outstanding balances on a timely basis. Historically, write-offs of revenue have been de minimis. Accordingly, the Company
does not maintain a bad debt allowance.
The Company makes Royalty Payments to the
artists and brands within sixty (60) days after the end of each calendar quarter. If the quarterly royalty amount is less than
two hundred dollars ($200), the Company may defer payment to a later period in which the artist or brand surpasses the $200 threshold.
The artist or brand forfeits any accrued royalty amounts below the $200 threshold upon expiration or termination of the artist’s
license agreement with the Company. This provision will become effective on the first anniversary for all existing license agreements
and for all new license agreements entered into on or after November 1, 2018. Additionally, the Company has established a minimum
threshold of twenty-five dollars ($25) in accrued Royalty Payments in order for an artist or brand to maintain its license agreement.
Accordingly, if an artist hasn’t generated a minimum of $25 in accrued Royalty Payments amount in a year, the Company may
deduct up to $25 from the artist’s accrued Royalty Payment account. As of October 31, 2018, the aggregate amount owed by
the Company to artists was approximately $13,000.
Deferred Revenues and Unsatisfied Performance Obligations
The Company records deferred revenues when
users purchase or earn Zedge Credits. Unused Zedge Credits represent the value of the Company's unsatisfied performance obligation
to its users. Revenue is recognized when Zedge App users use Zedge Credits to acquire Zedge Premium content. As of October 31,
2018, the Company’s deferred revenue balance was approximately $25,000.
Significant Judgments
The advertising networks and advertising
exchanges track and report the impressions and installs to Zedge and Zedge recognizes revenues based on these reports. The networks
and exchanges base their payments off of those reports and Zedge independently compares the data to each of the client sites to
validate the imported data and identify any differences. The number of impressions and installs delivered by the advertising networks
and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during
the reporting period.
Note 3—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)
|
|
31-Oct-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
133
|
|
|
$
|
-
|
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-Jul-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
41
|
|
(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 October 31, 2018 and July 31, 2018 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 4—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 8). 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 9). 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.
As of October 31, 2018, the outstanding foreign exchange contracts
entered into with Western Alliance Bank pursuant to the Foreign Exchange Agreement are as follows:
Settlement Date
|
|
U.S. Dollar Amount
|
|
|
NOK
Amount
|
|
Nov-18
|
|
$
|
500,000
|
|
|
|
3,983,595
|
|
Dec-18
|
|
|
500,000
|
|
|
|
4,059,365
|
|
Jan-19
|
|
|
500,000
|
|
|
|
4,053,465
|
|
Feb-19
|
|
|
500,000
|
|
|
|
4,048,715
|
|
Mar-19
|
|
|
500,000
|
|
|
|
4,118,040
|
|
Apr-19
|
|
|
500,000
|
|
|
|
4,112,740
|
|
May-19
|
|
|
500,000
|
|
|
|
4,107,440
|
|
Jun-19
|
|
|
500,000
|
|
|
|
4,102,240
|
|
Jul-19
|
|
|
500,000
|
|
|
|
4,097,140
|
|
Aug-19
|
|
|
500,000
|
|
|
|
4,091,590
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,000,000
|
|
|
|
40,774,330
|
|
The fair value of outstanding derivative
instruments recorded as liabilities in the accompanying consolidated balance sheets were as follows:
Asset Derivatives
|
|
Balance Sheet Location
|
|
October 31,
2018
|
|
|
July 31,
2018
|
|
|
|
|
|
(in thousands)
|
|
Derivatives not designated or not qualifying as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Accrued expenses
|
|
$
|
133
|
|
|
$
|
41
|
|
The effects of derivative instruments
on the consolidated statements of comprehensive loss were as follows:
|
|
|
|
Amount of Loss
|
|
|
|
|
|
Recognized on Derivatives
|
|
|
|
Statement of
|
|
Three Months Ended
|
|
|
|
Comprehensive
|
|
October 31,
|
|
Derivatives not designated or not qualifying as hedging instruments
|
|
Loss Location
|
|
2018
|
|
|
2017
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Net loss resulting from foreign exchange transactions
|
|
$
|
(150
|
)
|
|
$
|
(1
|
)
|
Note
5—Accrued Expenses
Accrued expenses consist of the following:
|
|
October 31,
|
|
|
July 31,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
Accrued vacation
|
|
$
|
600
|
|
|
$
|
559
|
|
Accrued payroll taxes
|
|
|
282
|
|
|
|
184
|
|
Accrued payroll and bonuses
|
|
|
525
|
|
|
|
393
|
|
Accrued severance
|
|
|
43
|
|
|
|
83
|
|
Hedge Payable
|
|
|
133
|
|
|
|
41
|
|
Accrued professional fees
|
|
|
77
|
|
|
|
96
|
|
Other
|
|
|
110
|
|
|
|
72
|
|
Total accrued expenses
|
|
$
|
1,770
|
|
|
$
|
1,428
|
|
Note 6—Equity
Changes in the components of equity were
as follows:
|
|
Three Months Ended
October 31,
2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance, July 31, 2018
|
|
$
|
10,010
|
|
Stock-based compensation
|
|
|
121
|
|
Purchase of treasury stock
|
|
|
(31
|
)
|
Comprehensive income:
|
|
|
|
|
Net loss
|
|
|
(706
|
)
|
Foreign currency translation adjustments
|
|
|
(131
|
)
|
Total comprehensive loss
|
|
|
(837
|
)
|
Balance, October 31, 2018
|
|
$
|
9,263
|
|
Stock Options
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. As of the grant date, 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. On the grant date, 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.
On October 24, 2018, the Compensation
Committee approved the grant of options to purchase an aggregate of 17,493 shares of the Company’s Class B common stock to
five of its newly hired non-executive employees. The options vest over a three-year period from October 24, 2018. On the grant
date, unrecognized compensation expense related to this grant was an aggregate of $20,000 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.
At October 31, 2018, unrecognized compensation
expense related to unvested stock options was an aggregate of $309,000.
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 350,000 shares. This amendment was ratified by the Company’s stockholders
at the Annual Meeting of Stockholders held on January 17, 2018. At October 31, 2018, there were 381,000 shares of the Company’s
Class B common stock available for awards under the 2016 Incentive Plan.
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. In July 2018, the Company received a $25,000 refund from Freeform. Accordingly, the Company reduced the Freeform
transaction costs from $465,000 to $440,000.
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. At October 31, 2018, unrecognized compensation
expense related to unvested restricted stock was an aggregate of $269,000. In September 2018 we purchased 14,137 shares of our
Class B common stock from former Freeform employees for $30,543 to satisfy tax withholding obligations in connection with the vesting
of restricted stock.
Restricted Stock Award
On February 7, 2018, the Compensation Committee
and the Corporate Governance Committee 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 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. At October 31, 2018,
unrecognized compensation expense related to unvested restricted stock was an aggregate of $247,000.
Note 7—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
|
|
|
|
Oct. 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
Basic weighted-average number of shares
|
|
|
10,025
|
|
|
|
9,658
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Non-vested restricted Class B common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares
|
|
|
10,025
|
|
|
|
9,658
|
|
The following shares were excluded from
the dilutive earnings per share computations because their inclusion would have been anti-dilutive:
|
|
Three Months Ended
Oct. 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
Stock options
|
|
|
1,326
|
|
|
|
1,553
|
|
Non-vested restricted Class B common stock
|
|
|
253
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
1,579
|
|
|
|
1,797
|
|
For the three months ended October 31,
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 8—Related Party Transactions
Following the Spin-Off, IDT charges the Company
for services it provides pursuant to a Transition Services Agreement entered into in connection 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.
The payments made by IDT on behalf of the
Company and the Company’s cash repayments made to IDT were as follows:
|
|
Three Months Ended October
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
Payments by IDT on behalf of the Company
|
|
$
|
21
|
|
|
$
|
229
|
|
Cash repayments, net of advances
|
|
$
|
(8
|
)
|
|
$
|
(201
|
)
|
Note 9—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 for an initial
two years term which was extended for another two years term expiring September 26, 2020. 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 5.0% 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 26, 2020. 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 October 31, 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. This limit was raised to approximately
$6.5 million pursuant to the Loan and Security Modification Agreement dated May 30, 2018. 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.
At October 31, 2018, there were $3.0 million of outstanding foreign exchange contracts with less than six months tenor under the
credit facility, and $2.0 million of outstanding foreign exchange contracts with greater than six months tenor, which reduced the
available borrowing under the revolving credit facility by $550,000, see Note 4 above.
Note 10—Investment
In August 2018, the Company made a $250,000
investment in TreSensa, Inc. (“TreSensa”), representing a less than 1% equity ownership interest on a fully-diluted
basis, and concurrently entered into a playable ad distribution agreement with TreSensa under which the Company shall be paid a
higher percentage (when compared to industry norms) of revenue derived from all playable ads provided by TreSensa, from its available
catalogue for distribution through the Zedge App. In addition, the Company and TreSensa are working together to identify engaging
content interactions that are engaging to users and valuable to brand advertisers with the goal of expanding advertising relationships.
The Company’s interest in TreSensa,
a privately-held company, is comprised of non-marketable equity securities without a readily determinable fair value. On August
1, 2018, the Company adopted ASU 2016-01, a new standard on the classification and measurement for non-marketable securities. The
Company adjusts the carrying value of its non-marketable equity securities to fair value upon observable transactions for identical
or similar investments of the same issuer or upon impairment (referred to as the measurement alternative). All gains and losses
on non-marketable equity securities, realized and unrealized, are recognized in interest and other income (expense), net. The Company’s
non-marketable equity securities had a carrying value of $250,000 as of October 31, 2018. The maximum loss the Company can incur
for its investment in TreSensa is $250,000. This investment is included within Other Assets on the consolidated balance sheets.
The Company periodically evaluates the
carrying value of the investments in privately-held companies when events and circumstances indicate that the carrying
amount of the investment may not be recovered. The Company estimates the fair value of the investments to assess
whether impairment losses shall be recorded using Level 3 inputs. These investments include the Company’s holdings in privately-held companies that
are not exchange traded and therefore not supported with observable market prices; hence, the Company may determine the
fair value by reviewing equity valuation reports, current financial results, long-term plans of the privately-held companies, the
amount of cash that the privately-held companies have on-hand, the ability to obtain additional financing and overall market conditions
in which the privately-held companies operate or based on the price observed from the most recent completed financing round. No
impairment charge or upward adjustment was recorded in the three months ended October 31, 2018.
Note 11—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 mostly free, high-quality ringtones, wallpapers, home screen app icons,
widgets and notification sounds. In March 2018, the Company completed its rollout of
Zedge Premium, a marketplace where
artists and brands can monetize their licensed content by making it available to the Company’s existing user base. 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:
|
|
|
|
|
|
|
|
|
|
31-Oct-18
|
|
$
|
3,383
|
|
|
$
|
222
|
|
|
$
|
3,605
|
|
31-Jul-18
|
|
$
|
3,234
|
|
|
$
|
235
|
|
|
$
|
3,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
31-Oct-18
|
|
$
|
7,257
|
|
|
$
|
4,139
|
|
|
$
|
11,396
|
|
31-Jul-18
|
|
$
|
7,647
|
|
|
$
|
4,072
|
|
|
$
|
11,719
|
|
Note 12— Commitments & Contingencies and Tax
Matters
Legal Proceedings
In March 2014, Saregama India, Limited (“Saregama”)
filed a lawsuit against the Company before the Barasat District Court, seeking approximately $1.6 million as damages and an injunction
for copyright infringement. Saregama claims that the Company availed the plaintiff’s sound recordings to the general public
through the Company’s platform without obtaining any licenses from the plaintiff. There have been no material updates
to this matter since the filing in March 2014. The Company believes that the likelihood of material liability relating to this
matter is remote.
On October 5, 2018, Tellagemini Communication
LLC (“Tellagemini”) filed a complaint in the U.S. District Court for the District of Delaware claiming that the Company
is infringing a U.S. patent owned by the plaintiff and inducing its customers to infringe as well seeking unspecified damages.
On November 14, 2018, Tellagemini voluntarily dismissed its complaint against the Company without prejudice.
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 October 31, 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 $37,000 which was included in “Other current assets” in the consolidated balance
sheet. SkatteFUNN credits of $0 and $25,800 were recorded as a reduction of selling, general and administrative expense for the
three months ended October 31, 2018 and 2017 respectively. The Company has not worked on SkatteFUNN related projects since January
2018.
Note 13—Provision for (benefit from) Income taxes
The change from a benefit from income taxes
in the three months ended October 31, 2017 to a provision for income taxes in the three months ended October 31, 2018 was primarily
due to the jurisdiction in which loss was incurred in the three months ended October 31, 2018 compared to the same periods in fiscal
2018 and our ability to utilize net operating losses the Company holds in those jurisdictions. The tax expense consists of minimum
state taxes based on allocated net worth.
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.
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 refines its estimates or completes its accounting of such tax effects. As originally reported, there was
no impact to tax expense as a result of the Tax Act due to the full valuation allowance of the deferred tax assets of the Company.
Note 14—Recently Issued Accounting Standards Not
Yet Adopted
Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the FASB issued a new ASU
which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance
is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is
evaluating the impact that this ASU will have on its consolidated financial statements.
In August 2018, the FASB issued an ASU which
eliminates, adds and modifies certain disclosure requirements for fair value measurements. The update eliminates the requirement
to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and introduces a requirement
to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.
This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019,
and early adoption is permitted. The Company is evaluating the impact that this ASU will have on its consolidated financial statements.
In June 2018, the FASB issued an ASU which
expands the scope of ASC Topic 718,
Compensation - Stock Compensation
, to include share-based payment transactions for acquiring
goods and services from non-employees. The new guidance is effective for annual and interim periods beginning after December 15,
2018. The Company does not expect that the new standard will have a significant impact on its consolidated financial statements.
In February 2018, the FASB issued
an 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. The Company does not expect that the new standard will have
a significant impact 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 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.