Item 1.
|
Financial Statements (Unaudited)
|
ZEDGE,
INC.
CONSOLIDATED
BALANCE SHEETS
|
|
January
31,
2017
|
|
|
July
31,
2016
|
|
|
|
(Unaudited)
|
|
|
(Note 1)
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,604
|
|
|
$
|
5,978
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $0 at January 31, 2017 and July 31, 2016
|
|
|
1,617
|
|
|
|
1,668
|
|
Prepaid expenses
|
|
|
192
|
|
|
|
210
|
|
Other current assets
|
|
|
326
|
|
|
|
107
|
|
Total current assets
|
|
|
7,739
|
|
|
|
7,963
|
|
Property and equipment, net
|
|
|
2,271
|
|
|
|
1,843
|
|
Goodwill
|
|
|
2,403
|
|
|
|
2,361
|
|
Other assets
|
|
|
262
|
|
|
|
266
|
|
Total assets
|
|
$
|
12,675
|
|
|
$
|
12,433
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
30
|
|
|
$
|
36
|
|
Accrued expenses
|
|
|
1,824
|
|
|
|
1,487
|
|
Deferred revenue
|
|
|
1
|
|
|
|
15
|
|
Due to IDT Corporation
|
|
|
77
|
|
|
|
299
|
|
Total current liabilities
|
|
|
1,932
|
|
|
|
1,837
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized shares—2,400; no shares issued
|
|
|
—
|
|
|
|
—
|
|
Class A common stock, $.01 par value; authorized shares—2,600; 525 shares issued and outstanding at January 31, 2017 and July 31, 2016
|
|
|
5
|
|
|
|
5
|
|
Class B common stock, $.01 par value; authorized shares—40,000; 9,114 and 8,819 shares issued and outstanding at January 31, 2017 and July 31, 2016, respectively
|
|
|
91
|
|
|
|
88
|
|
Additional paid-in capital
|
|
|
21,294
|
|
|
|
21,045
|
|
Accumulated other comprehensive loss
|
|
|
(758
|
)
|
|
|
(817
|
)
|
Accumulated deficit
|
|
|
(9,889
|
)
|
|
|
(9,725
|
)
|
Total stockholders’ equity
|
|
|
10,743
|
|
|
|
10,596
|
|
Total liabilities and stockholders’ equity
|
|
$
|
12,675
|
|
|
$
|
12,433
|
|
See
accompanying notes to consolidated financial statements.
ZEDGE,
INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
|
|
Three
Months Ended
January 31,
|
|
|
Six
Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands, except per share data)
|
|
Revenues
|
|
$
|
2,572
|
|
|
$
|
3,530
|
|
|
$
|
4,955
|
|
|
$
|
6,089
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of revenues (exclusive of amortization of capitalized software and technology development costs included below)
|
|
|
412
|
|
|
|
310
|
|
|
|
780
|
|
|
|
605
|
|
Selling, general and administrative
|
|
|
2,314
|
|
|
|
1,781
|
|
|
|
4,070
|
|
|
|
3,466
|
|
Depreciation and amortization
|
|
|
184
|
|
|
|
156
|
|
|
|
322
|
|
|
|
317
|
|
Write-off of capitalized software and technology development costs
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
(Loss) income from operations
|
|
|
(338
|
)
|
|
|
1,283
|
|
|
|
(226
|
)
|
|
|
1,701
|
|
Interest and other income
|
|
|
7
|
|
|
|
1
|
|
|
|
8
|
|
|
|
2
|
|
Net (loss) gain resulting from foreign exchange transactions
|
|
|
(17
|
)
|
|
|
(106
|
)
|
|
|
33
|
|
|
|
(161
|
)
|
(Loss) income before income taxes
|
|
|
(348
|
)
|
|
|
1,178
|
|
|
|
(185
|
)
|
|
|
1,542
|
|
Benefit from (provision for) income taxes
|
|
|
22
|
|
|
|
(67
|
)
|
|
|
21
|
|
|
|
(106
|
)
|
Net (loss) income
|
|
|
(326
|
)
|
|
|
1,111
|
|
|
|
(164
|
)
|
|
|
1,436
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation adjustment
|
|
|
(14
|
)
|
|
|
(68
|
)
|
|
|
59
|
|
|
|
(159
|
)
|
Total other comprehensive (loss) income
|
|
|
(14
|
)
|
|
|
(68
|
)
|
|
|
59
|
|
|
|
(159
|
)
|
Total comprehensive (loss) income
|
|
$
|
(340
|
)
|
|
$
|
1,043
|
|
|
$
|
(105
|
)
|
|
$
|
1,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share attributable to Zedge, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.18
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in calculation of (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,413
|
|
|
|
8,161
|
|
|
|
9,337
|
|
|
|
8,161
|
|
Diluted
|
|
|
9,413
|
|
|
|
8,962
|
|
|
|
9,337
|
|
|
|
8,948
|
|
See
accompanying notes to consolidated financial statements.
ZEDGE,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Operating activities
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(164
|
)
|
|
$
|
1,436
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
322
|
|
|
|
317
|
|
Deferred income taxes
|
|
|
5
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
143
|
|
|
|
9
|
|
Write-off of capitalized software and technology development costs
|
|
|
9
|
|
|
|
—
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
51
|
|
|
|
(728
|
)
|
Prepaid expenses and other current assets
|
|
|
(258
|
)
|
|
|
60
|
|
Other assets
|
|
|
(2
|
)
|
|
|
6
|
|
Trade accounts payable and accrued expenses
|
|
|
335
|
|
|
|
333
|
|
Due to IDT Corporation
|
|
|
(222
|
)
|
|
|
(5
|
)
|
Deferred revenue
|
|
|
(14
|
)
|
|
|
—
|
|
Net cash provided by operating activities
|
|
|
205
|
|
|
|
1,428
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Capitalized software and technology development costs and purchase of equipment
|
|
|
(757
|
)
|
|
|
(344
|
)
|
Net cash used in investing activities
|
|
|
(757
|
)
|
|
|
(344
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
166
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
166
|
|
|
|
—
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
12
|
|
|
|
(61
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(374
|
)
|
|
|
1,023
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,978
|
|
|
|
2,170
|
|
Cash and cash equivalents at end of period
|
|
$
|
5,604
|
|
|
$
|
3,193
|
|
See
accompanying notes to consolidated financial statements.
ZEDGE,
INC.
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 six months ended January 31, 2017 are not necessarily
indicative of the results that may be expected for the fiscal year ending July 31, 2017. The balance sheet at July 31, 2016 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, 2016,
as filed with the U.S. Securities and Exchange Commission (“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 2017 refers to the fiscal year ending July 31, 2017).
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)
|
|
January 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
44
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
July 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
15
|
|
(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, 2017 and July 31, 2016 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. This fair value estimate was classified as Level
2 of the fair value hierarchy.
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.
The
outstanding contracts at January 31, 2017 were as follows:
Settlement Date
|
|
U.S. Dollar Amount
|
|
NOK Amount
|
February 2017
|
|
500,000
|
|
4,235,537
|
March 2017
|
|
500,000
|
|
4,234,454
|
April 2017
|
|
250,000
|
|
2,067,554
|
May 2017
|
|
500,000
|
|
4,132,484
|
June 2017*
|
|
500,000
|
|
4,179,494
|
July 2017*
|
|
500,000
|
|
4,179,038
|
*
Entered into pursuant to the Foreign Exchange Agreement with Western Alliance Bank.
The
fair value of outstanding derivative instruments recorded as assets in the accompanying consolidated balance sheets were as follows:
Asset
Derivatives
|
|
Balance
Sheet Location
|
|
January
31, 2017
|
|
|
July
31,
2016
|
|
|
|
|
|
(in thousands)
|
|
Derivatives not designated or not qualifying as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
44
|
|
|
$
|
21
|
|
The
fair value of outstanding derivative instruments recorded as liabilities in the accompanying consolidated balance sheets were
as follows:
Liability
Derivatives
|
|
Balance
Sheet Location
|
|
January
31, 2017
|
|
|
July
31, 2016
|
|
|
|
|
|
(in thousands)
|
|
Derivatives not designated or not qualifying as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Accrued expenses
|
|
$
|
—
|
|
|
$
|
15
|
|
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
January 31,
|
|
|
Six
Months Ended
January 31,
|
|
Derivatives not designated or not qualifying as hedging
instruments
|
|
Location of Loss Recognized on Derivatives
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
Foreign exchange forward contracts
|
|
Net loss (gain) resulting from foreign exchange transactions
|
|
$
|
(110
|
)
|
|
$
|
(123
|
)
|
|
$
|
(43
|
)
|
|
$
|
(225
|
)
|
Note
4—Accrued Expenses
Accrued
expenses consist of the following:
|
|
January
31,
2017
|
|
|
July
31,
2016
|
|
|
|
(in thousands)
|
|
Accrued vacation
|
|
$
|
601
|
|
|
$
|
494
|
|
Accrued payroll taxes
|
|
|
274
|
|
|
|
210
|
|
Accrued payroll and bonuses
|
|
|
76
|
|
|
|
72
|
|
Accrued direct cost of revenues
|
|
|
5
|
|
|
|
111
|
|
Accrued advertising
|
|
|
294
|
|
|
|
242
|
|
Accrued income taxes
|
|
|
69
|
|
|
|
119
|
|
Other
|
|
|
505
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
1,824
|
|
|
$
|
1,487
|
|
Note
5—Equity
Changes
in the components of equity were as follows:
|
|
Six Months Ended January 31,
2017
|
|
|
|
(in thousands)
|
|
Balance, July 31, 2016
|
|
$
|
10,596
|
|
Exercise of stock options
|
|
|
109
|
|
Stock-based compensation
|
|
|
143
|
|
Comprehensive loss:
|
|
|
|
|
Net loss
|
|
|
(164
|
)
|
Foreign currency translation adjustments
|
|
|
59
|
|
Total comprehensive loss
|
|
|
(105
|
)
|
Balance, January 31, 2017
|
|
$
|
10,743
|
|
Stock
Options
In
the six months ended January 31, 2017, the Company received proceeds of $109,335 from the exercise of stock options for which
the Company issued 277,200 shares of its Class B common stock. In addition, in the six months ended January 31, 2017, the Company
received proceeds of $56,840 from the exercise of stock options in fiscal 2016 which was recorded as a receivable as of July 31,
2016.
In
September 2016, the Compensation Committee of the Company’s Board of Directors approved an equity grant of options to purchase
231,327 shares of the Company’s Class B common stock to its executive officers, a consultant and a non-executive employee.
The options vest over a three-year period. 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 recognized 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
January 31,
|
|
|
Six
Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Basic weighted-average number of shares
|
|
|
9,413
|
|
|
|
8,161
|
|
|
|
9,337
|
|
|
|
8,161
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
801
|
|
|
|
—
|
|
|
|
787
|
|
Non-vested restricted Class B common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted-average number of shares
|
|
|
9,413
|
|
|
|
8,962
|
|
|
|
9,337
|
|
|
|
8,948
|
|
The
following shares were excluded from the dilutive earnings per share computations because their inclusion would have been anti-dilutive:
|
|
Three
Months Ended
January 31,
|
|
|
Six
Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
1,434
|
|
|
|
707
|
|
|
|
1,434
|
|
|
|
707
|
|
Non-vested restricted Class B common stock
|
|
|
53
|
|
|
|
—
|
|
|
|
53
|
|
|
|
—
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
1,487
|
|
|
|
707
|
|
|
|
1,487
|
|
|
|
707
|
|
For
the three and six months ended January 31, 2017, the diluted earnings per share equals basic earnings per share because the Company
had a net loss and the impact of the assumed exercise of stock options and vesting of restricted stock would have been anti-dilutive.
For the three and six months ended January 31, 2016, outstanding stock options were excluded from the calculation of diluted earnings
per share because the exercise price of the stock option was greater than the average market price of the Company’s stock
during the periods.
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 the Transition Services Agreement.
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. The Transition Services Agreement
has a twelve-month term (expiring May 31, 2017) with automatic renewals for additional six month terms unless terminated by either
party upon 90 days’ notice prior to the end of the then-current term. IDT’s charges are included in “Selling,
general and administrative expense” in the consolidated statements of comprehensive (loss) income.
|
|
Three
Months Ended
January 31,
|
|
|
Six
Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Payments by IDT on behalf of the Company
|
|
$
|
161
|
|
|
$
|
552
|
|
|
$
|
638
|
|
|
$
|
865
|
|
Cash repayments, net of advances
|
|
$
|
(157
|
)
|
|
$
|
(464
|
)
|
|
$
|
(860
|
)
|
|
$
|
(870
|
)
|
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 January 31, 2017, 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 shall be 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%. In December 2016, the applicable foreign exchange reserve percentage was changed so that major currency forward contracts
less than six months tenor is set at 10% and for contracts over six months tenor, 12.5%. As of January 31, 2017, there was $1.0
million of outstanding foreign exchange contracts with less than six months tenor under the credit facility (and no contracts
of greater than six months tenor) which reduced the available borrowing under the revolving credit facility by $100,000.
Note
9—Business Segment and Geographic Information
The
Company provides a content distribution 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 free, high quality ringtones, wallpapers, home screen app
icons and notification sounds.
The Company conducts
business as one operating segment. There were no revenues from customers located outside of the United States in all periods presented.
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:
|
|
|
|
|
|
|
|
|
|
January 31, 2017
|
|
$
|
2,146
|
|
|
$
|
250
|
|
|
$
|
2,396
|
|
July 31, 2016
|
|
|
1,719
|
|
|
|
247
|
|
|
|
1,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2017
|
|
$
|
7,780
|
|
|
$
|
4,895
|
|
|
$
|
12,675
|
|
July 31, 2016
|
|
|
8,576
|
|
|
|
3,857
|
|
|
|
12,433
|
|
Note
10—Legal Proceeding and Tax Matters
Legal
Proceedings
In
March 2014, Saregama India, Limited filed a lawsuit against the Company before the Barasat District Court, seeking approximately
$1,595,700 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
believes that the possibility of it bearing material liability 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 October 31, 2016, the Company recorded a $0.2 million receivable from Norway’s SkatteFUNN government program designed
to stimulate research and development in Norwegian trade and industry, which related to previous periods. At January 31, 2017,
the balance was $0.3 million, which was included in “Other current assets” in the consolidated balance sheet.
Note
11—Recently Issued Accounting Standards Not Yet Adopted
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“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
March 2016, the FASB issued an ASU to improve the accounting for employee share-based payments. The new standard simplifies several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. The Company will adopt the new standard on
August 1, 2017. 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 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. The Company is required to adopt this standard on August 1, 2018.
Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard.
The Company is evaluating the impact that the standard will have on its consolidated financial statements and has not yet selected
an adoption date or a transition method. The Company cannot reasonably estimate the impact that the adoption of the standard will
have on its consolidated financial statements.
Item 2.
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
The
following information should be read in conjunction with the accompanying consolidated financial statements and the associated
notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s
Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal
year ended July 31, 2016, as filed with the U.S. Securities and Exchange Commission (or SEC).
As
used below, unless the context otherwise requires, the terms “the Company,” “Zedge,” “we,”
“us,” and “our” refer to Zedge, Inc., a Delaware corporation, and its subsidiaries, Zedge Europe AS and
Zedge Canada, Inc., collectively.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,”
“expects,” “plans,” “intends,” and similar words and phrases. These forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any
forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors,
risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A
to Part I “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2016. The forward-looking
statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to
update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult
all of the information set forth in this report and the other information set forth from time to time in our reports filed with
the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K
for the fiscal year ended July 31, 2016.
Overview
We
provide one of the most popular content platforms, 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. Today
our platform enables consumers to personalize their mobile devices with free, high-quality ringtones, wallpapers, home screen
app icons, widgets and notification sounds. Our smartphone app, available in Google Play and iTunes app stores, has been installed
over 246 million times, has more than 33 million monthly active users and has averaged among the top 25 free applications in the
Google Play store in the U.S. for the past seven years and in the top 15 most popular free apps in the iTunes Entertainment category.
To date, we have grown our user base without material investment in marketing, user acquisition or advertising.
We
generate over 90% of our revenues from selling our advertising inventory to advertising networks/exchanges, real time bidding
platforms, and game publishers. Advertising networks/exchanges are technology platforms that facilitate the buying and selling
of media advertising inventory from multiple ad networks. Advertisers are attracted to us because of our sizable and growing user
base and associated demographics and our focus on mobile phone personalization. The remainder of our revenue is primarily generated
from managing and optimizing advertising inventory for a third-party app publisher, as well as revenue billing, collection and
reporting with respect to the advertising.
A
key element in maintaining our position is our ability to meet user’s expectations, which necessitates retaining employees
with solid educational and professional credentials who are passionate about our mission to serve as a medium for self-expression.
We
must offer advertisers exposure to an active and engaged user base with attractive demographic characteristics.
Our
ability to continue to present advertisers with a compelling platform depends on continued growth of our user base, increased
app usage and improved retention, which will require ongoing investment in product and technology and increased marketing efforts.
Our growth plan also depends on improved monetization techniques and selective strategic investments and acquisitions.
We
believe that our business model is scalable and allows for significant portions of revenue growth to flow to our bottom line.
We
were formerly a majority-owned subsidiary of IDT Corporation, or IDT. On June 1, 2016, IDT’s interest in Zedge was spun-off
by IDT to IDT’s stockholders and we became an independent public company through a pro rata distribution of our common stock
held by IDT to IDT’s stockholders (the Spin-Off).
Critical
Accounting Policies
Our
consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted
in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated
financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2016. The preparation of financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require
application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain
and may change in subsequent periods. Our critical accounting policies include those related to capitalized software and technology
development costs, revenue recognition and goodwill. Management bases its estimates and judgments on historical experience and
other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year
ended July 31, 2016.
Recently
Issued Accounting Standards Not Yet Adopted
In
June 2016, the Financial Accounting Standards Board, or FASB, issued an Accounting Standards Update, or 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.
We will adopt the new standard on August 1, 2020. We are evaluating the impact that the new standard will have on our consolidated
financial statements.
In
March 2016, the FASB issued an ASU to improve the accounting for employee share-based payments. The new standard simplifies several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. We will adopt the new standard on August 1,
2017. We are evaluating the impact that the new standard will have on our consolidated financial statements.
In
February 2016, the FASB issued ASU related to the accounting for leases. The new standard establishes a right-of-use, or 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. We 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. We are currently evaluating the impact
that the new standard will have on our 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,
or 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. We are required to adopt this
standard on August 1, 2018. Entities have the option of using either a full retrospective or modified retrospective approach for
the adoption of the standard. We are evaluating the impact that the standard will have on our consolidated financial statements
and have not yet selected an adoption date or a transition method. We cannot reasonably estimate the impact that the adoption
of the standard will have on our consolidated financial statements.
Results
of Operations
Three
and Six Months Ended January 31, 2017 Compared to Three and Six Months Ended January 31, 2016
|
|
Three months ended January 31,
|
|
|
Change
|
|
|
Six months ended January 31,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(in
thousands)
|
|
Revenues
|
|
$
|
2,572
|
|
|
$
|
3,530
|
|
|
$
|
(958
|
)
|
|
|
(27.1
|
)%
|
|
$
|
4,955
|
|
|
$
|
6,089
|
|
|
$
|
(1,134
|
)
|
|
|
(18.6
|
)%
|
Direct
cost of revenues
|
|
|
412
|
|
|
|
310
|
|
|
|
102
|
|
|
|
32.9
|
|
|
|
780
|
|
|
|
605
|
|
|
|
175
|
|
|
|
28.9
|
|
Selling,
general and administrative
|
|
|
2,314
|
|
|
|
1,781
|
|
|
|
533
|
|
|
|
29.9
|
|
|
|
4,070
|
|
|
|
3,466
|
|
|
|
604
|
|
|
|
17.4
|
|
Depreciation
and amortization
|
|
|
184
|
|
|
|
156
|
|
|
|
28
|
|
|
|
17.9
|
|
|
|
322
|
|
|
|
317
|
|
|
|
5
|
|
|
|
1.6
|
|
Write-off
of capitalized software and technology development costs.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
|
|
nm
|
|
(Loss)
income from operations
|
|
|
(338
|
)
|
|
|
1,283
|
|
|
|
(1,621
|
)
|
|
|
(126.3
|
)
|
|
|
(226
|
)
|
|
|
1,701
|
|
|
|
(1,927
|
)
|
|
|
(111.3
|
)
|
Interest
and other income
|
|
|
7
|
|
|
|
1
|
|
|
|
6
|
|
|
|
600.0
|
|
|
|
8
|
|
|
|
2
|
|
|
|
6
|
|
|
|
300.0
|
|
Net
(loss) gain resulting from foreign exchange transactions
|
|
|
(17
|
)
|
|
|
(106
|
)
|
|
|
89
|
|
|
|
84.0
|
|
|
|
33
|
|
|
|
(161
|
)
|
|
|
194
|
|
|
|
120.5
|
|
Benefit
from (provision for) from income taxes
|
|
|
22
|
|
|
|
(67
|
)
|
|
|
89
|
|
|
|
132.8
|
|
|
|
21
|
|
|
|
(106
|
)
|
|
|
127
|
|
|
|
119.8
|
|
Net
(loss) income
|
|
$
|
(326
|
)
|
|
$
|
1,111
|
|
|
$
|
(1,437
|
)
|
|
|
(129.3
|
)%
|
|
$
|
(164
|
)
|
|
$
|
1,436
|
|
|
$
|
(1,600
|
)
|
|
|
(111.4
|
)%
|
nm—not
meaningful
Revenues.
Revenues decreased in the three and six months ended January 31, 2017 compared to the same periods in fiscal 2016 primarily
due to a 26.6% and 19.2% decrease in our average revenue per monthly active user, or ARPMAU, to $0.0237 from $0.0323 in the three
months ended January 31, 2017 and 2016, respectively, and to $0.0236 from $0.0292 in the six months ended January 31, 2017 and
2016, respectively. The ARPMAU decrease was primarily due to our app being temporarily removed from the iTunes Store in late January,
2016 which lowered the revenue per user that we were able to generate, as well as our decision to reduce our investments in our
Game Channel in mid-April 2016, which resulted in a decline in game installs for which we are paid on a “cost per install”
basis. In addition, the decrease was also attributable to user growth accelerating at a faster past in emerging markets when compared
to the U.S. negatively impacting ARPMAU due to advertising rates being lower in the less well developed economies.
Also,
we experienced lower advertising eCPMs (“effective cost per thousand impressions”) than expected when compared to
last year due to what we believe to be a shift in advertising budgets allocating more spend for video and/or native ad units vs.
static ad units like banners and interstitials. Due to user concerns and the current nature of our product we have limited amounts
of higher value ad formats although we have recently started addressing this by testing new, higher value ad formats that do not
negatively impact on the user experience. Monthly Active Users, or MAU during the last 30 days of the quarter, decreased by 0.6%
to 33.4 million at January 31, 2017 from 33.6 million at January 31, 2016. We have several initiatives underway focused on content
discovery and availability which we believe will improve user growth, engagement and retention. In addition, we are releasing
new features and investing in product marketing across both the Android and iOS apps in order to reverse the downturn we experienced
on a year-over-year basis. MAU is a performance indicator that captures the number of unique users that opened our app in the
previous 30-day period. Our install count, that is the number of times the Zedge app has been installed on devices, increased
to 246.3 million at January 31, 2017 from 189.1 million a year ago.
Zedge
introduced a standalone wallpaper app in iTunes in March 2016 and a standalone ringtone app in iTunes in December 2016. The rollout
of these individual apps was done in order to both fully comply with iTunes terms and conditions as well as mitigate risk considering
that iTunes removed our bundled ringtone and wallpaper app in January 2016 leaving us with no market offering for many months.
In mid-December 2016, we launched a new ad strategy with our Wallpaper and Ringtones apps, intended to improve user engagement.
Direct
cost of revenues
. The increase in direct cost of revenues in the three and six months ended January 31, 2017 compared to the
same periods in fiscal 2016 was attributable to the fees that we pay to third parties that provide us with internet hosting, content
serving and filtering and marketing automation services. The costs associated with content serving and filtering and push notification
marketing increased as a result of a new product offering from one of our vendors and because of expanding the addressable customer
base that benefits from marketing automation services, respectively.
Selling,
general and administrative expense
. Selling, general and administrative expense consists mainly of payroll, benefits, facilities,
marketing, content acquisition and consulting and professional fees. The increase in selling, general and administrative expense
in the three and six months ended January 31, 2017 compared to the same periods in fiscal 2016 was mostly due to increases in
payroll and benefits, accounting, tax and legal fees. The increase was partially offset by a reduction in benefits expense in
the six months ended January 31, 2017 due to the recording of a $0.2 million receivable from Norway’s SkatteFUNN government
program designed to encourage research and development in Norwegian trade and industry, which related to previous periods. In
addition, our headcount increased from 53 employees at January 31, 2016 to 61 employees at January 31, 2017.
Selling,
general and administrative expense included stock-based compensation expense of $117,000 and $3,000 in the three months ended
January 31, 2017 and 2016, respectively, and $143,000 and $9,000 in the six months ended January 31, 2017 and 2016, respectively.
At January 31, 2017, unrecognized compensation expense related to unvested stock-based compensation was an aggregate of $711,000.
The unrecognized compensation expense will be recognized on a straight-line basis over the remaining vesting period that ends
in 2020. In September 2016, the Compensation Committee of our Board of Directors approved an equity grant of options to purchase
231,327 shares of our Class B common stock to our executive officers, a consultant and a non-executive employee. The options vest
over a three-year period. 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 recognized on a straight-line basis over
the vesting period.
While
many of the costs of being a public company were already borne by us either directly or by allocation of corporate overhead from
IDT, those expenses were allocated among all of IDT’s operations, and we need to have the proper infrastructure in place
to perform the necessary, legal, treasury, accounting, internal audit and reporting functions. We anticipate our total costs will
increase by $750,000 to $900,000 per year as a result of the Spin-Off. Several of the costs included in this estimated range are
preliminary, subject to negotiation, and may vary from the estimates when finalized.
Depreciation
and amortization
. Depreciation and amortization consists mainly of amortization of capitalized software and technology development
costs of our internal developers on various projects that we invested in specific to the various platforms on which we operate
our service.
Write-off
of capitalized software and technology development costs
. In the six months ended January 31, 2017, we decided not to launch
a project that was in development. Since this abandoned project did not have any future benefit, we charged the capitalized software
and technology development costs for the project to expense.
Net
(loss) gain resulting from foreign exchange transactions
. Net (loss) gain resulting from foreign exchange transactions are
comprised of losses and gains generated from movements in Norwegian Krone, or NOK, relative to the U.S. Dollar, including gains
or losses from our NOK hedging activities. In the three months ended January 31, 2017 and 2016, we had losses of $110,000 and
$123,000, respectively, from NOK hedging activities, and in the six months ended January 31, 2017 and 2016, we had losses of $43,000
and $225,000, respectively, from NOK hedging activities.
Benefit
from (Provision for) income taxes
. The decrease in the provision for income taxes in the three and six months ended January
31, 2017 compared to the same periods in fiscal 2016 was due to the jurisdiction in which income was earned in the three and six
months ended January 31, 2017 compared to the same periods in fiscal 2016 and our ability to use net operating losses in those
jurisdictions.
Liquidity
and Capital Resources
General
At
January 31, 2017, we had cash and cash equivalents of $5.6 million and working capital (current assets less current liabilities)
of $5.8 million. We currently expect that our cash and cash equivalents on hand, and our cash from operations will be sufficient
to meet our anticipated cash requirements during the twelve months ending January 31, 2018.
|
|
Six
months ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
205
|
|
|
$
|
1,428
|
|
Investing activities
|
|
|
(757
|
)
|
|
|
(344
|
)
|
Financing activities
|
|
|
166
|
|
|
|
—
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
12
|
|
|
|
(61
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
$
|
(374
|
)
|
|
$
|
1,023
|
|
Operating
Activities
Our
cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results
and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable. Cash
provided by operating activities in the six months ended January 31, 2017 and 2016 was primarily due to the revenues generated
from our service offerings. We anticipate that our total operating costs will increase by $750,000 to $900,000 per year as a result
of being a public reporting company. Several of the costs included in this estimated range are preliminary, subject to negotiation,
and may vary from the estimates when finalized.
In
September 2016, we were 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 us could be
greater than the 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 our results
of operations, cash flows and financial condition.
Investing
Activities
Cash
used in investing activities in the six months ended January 31, 2017 and 2016 consisted mostly of capitalized software and technology
development costs related to various projects that we invested in specific to the various platforms on which we operate our service.
Financing
Activities
We
received proceeds of $109,335 from the exercise of stock options in the six months ended January 31, 2017 in connection with which
we issued 277,200 shares of our Class B common stock. In addition, in the six months ended January 31, 2017, we received proceeds
of $56,840 from the exercise of stock options in fiscal 2016 which was recorded as a receivable as of July 31, 2016. No stock
options were exercised in the six months ended January 31, 2016.
As
of September 27, 2016, we 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 our eligible accounts
receivable subject to certain concentration limits. The revolving credit facility is secured by a lien on substantially all of
our 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. We are required to pay an annual facility fee of $12,500 to Western Alliance Bank. We are also required to comply with
various affirmative and negative covenants as well as maintain certain financial ratios during the term of the revolving credit
facility. The covenants include a prohibition on us not paying any dividend on our capital stock. We may terminate this agreement
at any time without penalty or premium provided that we pay down any outstanding principal, accrued interest and bank expenses.
At January 31, 2017, there were no amounts outstanding under the revolving credit facility and we were in compliance with all
of the covenants.
As
of November 16, 2016, we entered into a Foreign Exchange Agreement with Western Alliance Bank to allow us to enter into foreign
exchange contracts not to exceed $5.0 million in the aggregate at any point in time under our revolving credit facility. The available
borrowing under the revolving credit facility shall be 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%. In December 2016, the
applicable foreign exchange reserve percentage was changed so that major currency forward contracts less than six months tenor
is set at 10% and for contracts over six months tenor, 12.5%. As of January 31, 2017, there was $1.0 million of outstanding foreign
exchange contracts with less than six months tenor under the credit facility (and no contracts of greater than six months tenor)
which reduced the available borrowing under the revolving credit facility by $100,000.
We
do not anticipate paying dividends on our common stock until we achieve sustainable profitability and retain certain minimum cash
reserves. The payment of dividends in any specific period will be at the sole discretion of our Board of Directors.
Changes
in Trade Accounts Receivable
Gross
trade accounts receivable were $1.6 million at January 31, 2017 and $1.7 million at July 31, 2016. Our cash collections during
the six months ended January 31, 2017 and 2016 were $5.5 million and $6.4 million, respectively.
Concentration
of Credit Risk and Significant Customers
Historically,
we have had very little or no bad debt, which is common with other platforms of our size that derive their revenue from digital
advertising, as we aggressively manage our collections and perform due diligence on our customers. In addition, the majority of
our revenue is derived from large, credit-worthy customers (e.g. MoPub (owned by Twitter), Millennial Media (owned by AOL, which
is owned by Verizon), Google, Facebook, and Amazon) and we terminate our services with smaller customers immediately upon balances
becoming past due. Since these smaller customers rely on us to derive their own revenue, they generally pay their outstanding
balances on a timely basis.
In
the six months ended January 31, 2017, three customers represented 49%, 18% and 11% of our revenue, and in the six months ended
January 31, 2016, three customers represented 47%, 22% and 12% of our revenue. At January 31, 2017, two customers represented
60% and 11% of our accounts receivable balance, and at July 31, 2016, one customer represented 62% of our accounts receivable
balance. All of these significant customers were advertising exchanges operated by leading companies, and the receivables represent
many smaller amounts due from advertisers.
Contractual
Obligations and Other Commercial Commitments
Smaller
reporting companies are not required to provide the information required by this item.
Off-Balance
Sheet Arrangements
At
January 31, 2017, we did not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that
are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital
expenditures or capital resources, other than the following.
In
connection with our Spin-Off, we and IDT entered into various agreements prior to the Spin-Off including a Separation and Distribution
Agreement to effect the separation and provide a framework for our relationship with IDT after the Spin-Off, and a Tax Separation
Agreement, which sets forth the responsibilities of us and IDT with respect to, among other things, liabilities for federal, state,
local and foreign taxes for periods before and including the Spin-Off, the preparation and filing of tax returns for such periods
and disputes with taxing authorities regarding taxes for such periods. Pursuant to Separation and Distribution Agreement, among
other things, we indemnify IDT and IDT indemnifies us for losses related to the failure of the other to pay, perform or otherwise
discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among
other things, IDT indemnifies us from all liability for taxes of ours and any of our subsidiaries or relating to our business
with respect to taxable periods ending on or before the Spin-Off, and we indemnify IDT from all liability for taxes of ours and
any of our subsidiaries or relating to our business accruing after the Spin-Off. Notwithstanding the foregoing, we are responsible
for, and IDT has no obligation to indemnify us for, any tax liability of ours resulting from an audit, examination or other proceeding
related to any tax returns that relate solely to us and our subsidiaries regardless of whether such tax return relates to a period
prior to or following the Spin-Off.