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 and six months ended January 31, 2019 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 and six months ended January 31, 2019. 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. Additionally, the Company completed the rollout of Zedge
Premium (as described in Other Revenue below) in March 2018. Revenue generated from Zedge Premium remained insignificant in the
three months and six months ended January 31, 2019 given the early stage of this offering.
The
following table summarizes revenue by type of service for the periods presented:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Advertising revenue
|
|
|
2,374
|
|
|
|
2,785
|
|
|
|
4,572
|
|
|
|
5,218
|
|
Service revenue
|
|
|
178
|
|
|
|
194
|
|
|
|
349
|
|
|
|
343
|
|
Other revenue
|
|
|
21
|
|
|
|
66
|
|
|
|
33
|
|
|
|
143
|
|
Total Revenue
|
|
$
|
2,573
|
|
|
$
|
3,045
|
|
|
$
|
4,954
|
|
|
$
|
5,704
|
|
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 device. 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 three and six months ended January 31, 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 January 31, 2019, the aggregate amount owed by the Company to artists was approximately $33,000.
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 January 31, 2019, the Company’s deferred revenue balance was approximately $60,000.
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-Jan-19
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
86
|
|
|
$
|
-
|
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 January 31, 2019 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 – Norwegian Kroner (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 January 31, 2019, 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
|
|
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
|
|
$
|
3,500,000
|
|
|
|
28,677,905
|
|
The fair value of outstanding derivative
instruments recorded as liabilities in the accompanying consolidated balance sheets were as follows:
Derivatives Instruments
|
|
Balance Sheet Location
|
|
January 31,
2019
|
|
|
July 31,
2018
|
|
|
|
|
|
(in thousands)
|
|
Derivatives not designated or not qualifying as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Accrued expenses
|
|
$
|
86
|
|
|
$
|
41
|
|
The effects of derivative instruments
on the consolidated statements of comprehensive loss (income) were as follows:
|
|
|
|
Amount of Loss Recognized on Derivatives
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
January 31,
|
|
|
January 31,
|
|
Derivatives not designated or not qualifying as hedging instruments
|
|
Statement of Comprehensive Loss Location
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Foreign exchange forward contracts
|
|
Net loss resulting from foreign exchange transactions
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
174
|
|
|
$
|
2
|
|
Note 5—Accrued Expenses
Accrued expenses consist of the following:
|
|
January 31,
|
|
|
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Accrued vacation
|
|
$
|
596
|
|
|
$
|
559
|
|
Accrued payroll taxes
|
|
|
142
|
|
|
|
184
|
|
Accrued payroll and bonuses
|
|
|
301
|
|
|
|
393
|
|
Accrued severance
|
|
|
2
|
|
|
|
83
|
|
Hedge Payable
|
|
|
86
|
|
|
|
41
|
|
Accrued professional fees
|
|
|
57
|
|
|
|
96
|
|
Due to artists
|
|
|
33
|
|
|
|
-
|
|
Deferred revenues
|
|
|
60
|
|
|
|
-
|
|
Other
|
|
|
32
|
|
|
|
72
|
|
Total accrued expenses
|
|
$
|
1,309
|
|
|
$
|
1,428
|
|
Note 6—Equity
Changes in the components of equity were
as follows:
|
|
Six Months Ended
January 31,
2019
|
|
|
|
(in thousands)
|
|
Balance, July 31, 2018
|
|
$
|
10,010
|
|
Stock-based compensation**
|
|
|
331
|
|
Purchase of treasury stock
|
|
|
(31
|
)
|
Comprehensive loss:
|
|
|
|
|
Net loss
|
|
|
(946
|
)
|
Foreign currency translation adjustments
|
|
|
(131
|
)
|
Total comprehensive loss
|
|
|
(1,077
|
)
|
Balance, January 31, 2019
|
|
$
|
9,233
|
|
** This amount includes stock issued to pay for the Board of
Directors’ compensation of $45,000 and the Company’s matching contribution to employees’ 401(k) plan with a value
of $48,000.
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 January 31, 2019, unrecognized compensation
expense related to unvested stock options was an aggregate of $210,000.
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 January 31, 2019, there were 367,000 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 ASU 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 the 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 January 31, 2019, unrecognized compensation
expense related to unvested restricted stock was an aggregate of $246,000. 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 January 31, 2019,
unrecognized compensation expense related to unvested restricted stock was an aggregate of $220,000.
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
|
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Basic weighted-average number of shares
|
|
|
10,051
|
|
|
|
9,749
|
|
|
|
10,038
|
|
|
|
9,703
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Non-vested restricted Class B common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of shares
|
|
|
10,051
|
|
|
|
9,749
|
|
|
|
10,038
|
|
|
|
9,703
|
|
The following shares were excluded from
the dilutive earnings per share computations because their inclusion would have been anti-dilutive:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
|
Stock options
|
|
|
1,301
|
|
|
|
1,499
|
|
|
|
1,301
|
|
|
|
1,499
|
|
Non-vested restricted Class B common stock
|
|
|
253
|
|
|
|
241
|
|
|
|
253
|
|
|
|
241
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
1,554
|
|
|
|
1,740
|
|
|
|
1,554
|
|
|
|
1,740
|
|
For the three months and six months ended
January 31, 2019 and 2018, 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
Between the Spin-Off and October 31, 2017,
IDT charged 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. From October 31, 2017, most
of these services have been 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
|
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by IDT on behalf of the Company
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
21
|
|
|
$
|
261
|
|
Cash repayments, net of advances
|
|
$
|
(15
|
)
|
|
$
|
(86
|
)
|
|
$
|
(23
|
)
|
|
$
|
(287
|
)
|
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 January 31, 2019, 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 January 31, 2019, there were $3.0 million of outstanding foreign exchange contracts with less than six months tenor under the
credit facility, and $0.5 million of outstanding foreign exchange contracts with greater than six months tenor, which reduced the
available borrowing under the revolving credit facility by $362,500 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 ownership 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 January 31, 2019. 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 and six months ended January 31, 2019.
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,
wallpapers, stickers, ringtones, notification sounds
and video wallpapers.
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-Jan-19
|
|
$
|
3,512
|
|
|
$
|
239
|
|
|
$
|
3,751
|
|
31-Jul-18
|
|
$
|
3,234
|
|
|
$
|
235
|
|
|
$
|
3,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
31-Jan-19
|
|
$
|
6,777
|
|
|
$
|
4,062
|
|
|
$
|
10,839
|
|
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. In a report dated December 20, 2018, the Norwegian Tax Authorities informed the Company
that they have concluded their audit with no changes. However, they recommended that the Company adopt a profit split method with
Zedge Europe AS instead of the cost-plus method that the Company has used to set transfer pricing. The Company is evaluating this
recommendation.
Research and Development Credits
As of January 31, 2019, 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. The Company has not applied for any SkatteFUNN credit since January 2018. For the three months and six months ended January
31, 2018, the Company received SkatteFUNN credits of $4,500 and $39,200 respectively which were recorded as a reduction of selling,
general and administrative expense.
Note 13—Provision for (benefit from) Income taxes
The change from a provision for income taxes
in the three months ended January 31, 2018 to a benefit from income taxes in the three months ended January 31, 2019 was primarily
due to the jurisdiction in which loss was incurred in the three months ended January 31, 2019 compared to the same period in fiscal
2018 and our ability to utilize net operating losses the Company holds in certain jurisdictions. The tax expense consists of minimum
state taxes based on allocated net worth.
As part of the Tax Cuts and Jobs Act of
2017, Global Intangible Low-Taxed Income inclusion (GILTI) and Foreign Derived Intangible Income (FDII) deduction became effective
on January 1, 2018. There was no impact to income tax expense resulting from the GILTI and FDII in light of the Company’s
available NOL carry forward and its full valuation allowance.
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 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 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 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.