SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
_______________
SCHEDULE 14C
INFORMATION
_______________
Information Statement
Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
Check the appropriate
box:
¨
|
|
Preliminary Information Statement
|
¨
|
|
Confidential, for Use of
the Commission Only (as permitted by Rule 14c-5(d)(2))
|
x
|
|
Definitive Information Statement
|
¨
|
|
Definitive Additional Materials
|
IDT CORPORATION
(Name of Registrant as
Specified In Charter)
Payment of Filing Fee
(Check the appropriate box):
x
|
|
No fee required.
|
¨
|
|
Fee computed on table below per Exchange Act Rule 14c-5(g), and
0-11.
|
|
|
(1)
|
|
Title of each class of securities to which transaction applies:
|
|
|
|
|
|
|
|
(2)
|
|
Aggregate number of securities to which transaction applies:
|
|
|
|
|
|
|
|
(3)
|
|
Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
|
|
|
|
|
|
|
|
(4)
|
|
Proposed maximum aggregate value of transaction:
|
|
|
|
|
|
|
|
(5)
|
|
Total fee paid:
|
|
|
|
|
|
¨
|
|
Fee paid previously with preliminary materials.
|
¨
|
|
Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
|
|
|
(1)
|
|
Amount Previously Paid:
|
|
|
|
|
|
|
|
(2)
|
|
Form, Schedule or Registration Statement No.:
|
|
|
|
|
|
|
|
(3)
|
|
Filing Party:
|
|
|
|
|
|
|
|
(4)
|
|
Date Filed:
|
|
|
|
|
|
Howard S. Jonas
Chairman of the Board of Directors
IDT Corporation
520 Broad Street
Newark, NJ 07102
June 1, 2016
Dear IDT Corporation Stockholder:
We are pleased to inform you
that the Board of Directors of IDT Corporation (“IDT”)
has approved the spin-off of Zedge, Inc. (“Zedge”), a
majority-owned subsidiary of IDT, to IDT’s stockholders. IDT
currently owns 82% of Zedge, 69% on a fully-diluted basis and will
be distributing all of that interest to IDT’s stockholders.
Following the spin-off, IDT’s business will consist of IDT
Telecom, our Gibraltar-based bank, as well as real estate holdings
and other interests.
The spin-off of Zedge will occur by way of a pro rata distribution
of Zedge Class A common stock and Class B common stock to
IDT’s stockholders. On the distribution date, each IDT
stockholder will receive one share of Zedge Class A common stock
for every three shares of IDT Class A common stock and one share of
Zedge Class B common stock for every three shares of IDT Class B
common stock, held at 5:00 p.m., New York City time, on May 26,
2016, which was the record date of the spin-off. The distribution
of shares of our Class B common stock will be issued in book-entry
form and physical certificates of Zedge will be issued only to
holders of IDT Class A common stock and, upon request, to holders
of IDT Class B common stock.
Stockholder approval of
the spin-off is not being sought, and you are not required to take
any action to receive your Zedge common stock.
Zedge will focus its efforts on evolving its content distribution
platform into the leading medium for digital self-expression for
both creators looking to promote their content and consumers who
utilize such content to express their identity, feelings, tastes
and interests. More immediately Zedge will continue expanding its
mobile personalization service that avails users with ringtones,
wallpapers, home screen app icons and notification sounds. By
creating a separate entity with management focused on the Zedge
businesses, we expect to unlock greater value than was the case as
part of IDT.
Following the spin-off, you will own shares in both IDT and Zedge.
Zedge Class B common stock will be listed for trading on the New
York Stock Exchange MKT LLC (“NYSE MKT”) under the
symbol “ZDGE”. We expect that listing to commence on
June 2, 2016. IDT Class B common stock will continue to trade on
the New York Stock Exchange under the symbol “IDT.” As
we have previously disclosed, we are working toward another
spin-off that will separate IDT Telecom and certain of our other
interests.
We intend for the spin-off to be tax-free for stockholders. To that
end, we have received a favorable legal opinion from Pryor Cashman
LLP as to the spin-off’s tax-free status. You should, of
course, consult your own tax advisor as to the particular
consequences of the spin-off to you.
The enclosed information statement, which is being mailed to all of
those who are IDT stockholders as of the record date, describes the
spin-off in detail and contains important information about Zedge,
including financial statements.
We look forward to your continued support as a stockholder of IDT.
We remain committed to working on your behalf to build long-term
stockholder value.
|
|
Sincerely,
|
|
|
|
|
|
Howard S. Jonas
Chairman of the Board of Directors
|
June 1, 2016
Dear Zedge, Inc. Stockholder:
It is my pleasure to welcome you as a stockholder of our newly
independent company, Zedge, Inc. We look forward to becoming an
independent company and increasing our value by executing our
business plan in a focused and deliberate fashion.
As an independent company, we will have the ability to focus
exclusively on the development of our business, and, in doing so,
we expect to create value for our stockholders, as well as to
concentrate our resources solely on our own operations and growth
opportunities.
Zedge provides one of the most popular content distribution
platforms, worldwide, centered on self-expression. Today our
platform enables consumers to personalize their mobile devices with
free, high quality ringtones, wallpapers, home screen app icons and
notification sounds. The Zedge smartphone app, available in the
Google Play, iTunes and Microsoft Market app stores, has been
installed over 190 million times, has more than 32 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 six years and is
ranked in the top 10 most popular free apps in the iTunes
Entertainment category. Zedge’s user base has grown
organically and until now the Company hasn’t made any
material investment in marketing, user acquisition or
advertising.
Following the spin-off, IDT stockholders will own shares in both
IDT and Zedge. Zedge’s Class B common stock will be listed
for trading on the NYSE MKT under the symbol “ZDGE”
starting June 2, 2016. IDT Class B common stock will continue to
trade on the NYSE under the symbol “IDT”. We invite you
to learn more about us by reviewing the enclosed information
statement. We look forward to our future as a separate
publicly-traded company and to your support as a stockholder.
I want to thank our users, employees, investors and business
partners for supporting us and helping us achieve and maintain our
leadership position. Without your continued support we would not be
here today and your belief in our goals, values and aspirations is
humbling. We will continue working hard to deliver best of breed
products and services in the world of digital self-expression and
personalization.
I am excited about the opportunity that faces us and appreciate
your support, as a holder of our common stock.
|
|
Sincerely,
|
|
|
|
|
|
Tom Arnoy
Chief Executive Officer
|
Tom Arnoy
|
|
Zedge, Inc.
|
|
Zedge Europe AS
|
CEO and Co-Founder
|
|
22 Cortlandt Street
|
|
Ladebekken 17
|
|
|
14th Floor
|
|
7041 Trondheim
|
|
|
New York, NY 10007
|
|
Norway
|
DATED JUNE 1,
2016
DEFINITIVE INFORMATION
STATEMENT
ZEDGE, INC.
Class A Common
Stock
and
Class B Common
Stock
(each, par value $0.01
per share)
This information statement is
being furnished by IDT Corporation, or IDT, to its stockholders in
connection with the distribution to holders of its Class A common
stock and Class B common stock, each par value $0.01 per share, of
all the outstanding shares of Class A common stock and Class B
common stock, each par value $0.01 per share, of Zedge, Inc., or
Zedge, held by IDT.
Prior to the distribution, Zedge has been a majority-owned
subsidiary of IDT and owns 100% of Zedge Europe AS.
The spin-off will separate our business from the remainder of
IDT’s operations and holdings. Following the spin-off,
IDT’s business will consist of IDT Telecom, Gibraltar-based
bank, as well as real estate holdings and other interests.
We believe that the spin-off
will more effectively deploy Zedge’s assets and will allow
for the realization of greater value to you by the creation of an
entity with management and resources that are focused solely on
Zedge’s business rather than having those assets remain
within IDT. Separating the two entities will allow management of
Zedge to design and implement strategies and tactics that are based
exclusively on its business characteristics and the industry in
which it competes. In addition, the spin-off will separate business
units with different risk profiles and performance characteristics
from one another and allow stockholders to choose to invest or
remain invested in a company that meets their investment criteria
and goals. Zedge will primarily focus its efforts on building its
content distribution platform 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. It will achieve this through the
development of ongoing feature enhancements, social marketing
activities, content partnerships, distribution opportunities and
localization methodologies, but not to the exclusion of other
strategies and tactics as it sees fit. In addition, the Company
will explore new and untapped opportunities in the mobile app and
personalization markets and execute on those that it believes can
provide significant returns. Accordingly, we believe the spin-off
will build long-term stockholder value.
Our business will initially consist of one reportable segment.
The spin-off of Zedge will
occur by way of a pro rata distribution of the Zedge Class A common
stock and Class B common stock held by IDT to IDT’s
stockholders. On the distribution date, each IDT stockholder will
receive one share of Zedge Class A common stock for every three
shares of IDT Class A common stock and one share of Zedge Class B
common stock for every three shares of IDT Class B common stock,
held at 5:00 p.m., New York City time, on May 26, 2016, which was
the record date for the spin-off. The distribution of shares of our
Class B common stock will be paid in book-entry form and physical
stock certificates will be issued only to holders of Class A common
stock and, upon request, to holders of Class B common
stock.
Holders of Zedge common stock immediately prior to the distribution
will not see any change to their ownership as a result of the
distribution.
No stockholder approval
of the spin-off is required or sought and you are not required to
take any action to receive your Zedge common stock.
We are not asking you for a proxy and you are requested not to send
us a proxy. IDT stockholders will not be required to pay for the
shares of our Class A common stock or Class B common stock to be
received by them in the spin-off or to surrender or exchange shares
of IDT Class A common stock or Class B common stock in order to
receive our Class A common stock and Class B common stock or to
take any other action in connection with the spin-off.
Currently, there is no trading market for Zedge’s Class A
common stock or Class B common stock. Zedge’s Class B common
stock will be listed for trading on the NYSE MKT under the symbol
“ZDGE” starting June 2, 1016. IDT Class B common stock
will continue to trade on the NYSE under the symbol
“IDT”.
We do not intend to list Zedge’s Class A common stock for
trading on any exchange or trading system.
In reviewing this Information Statement,
you should carefully consider the matters described under
“Risk Factors” beginning on page 7 for a discussion of
certain factors that should be considered by recipients of our
common stock.
Neither the Securities
and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this
Information Statement is truthful or complete. Any representation
to the contrary is a criminal offense.
This Information
Statement does not constitute an offer to sell or the solicitation
of an offer to buy any securities.
This Information Statement is first being mailed to IDT
stockholders on or about June 2, 2016.
TABLE OF
CONTENTS
QUESTIONS AND ANSWERS ABOUT THE
SPIN-OFF
|
|
1
|
EXECUTIVE SUMMARY
|
|
5
|
RISK FACTORS
|
|
7
|
SPECIAL NOTE ABOUT FORWARD-LOOKING
STATEMENTS
|
|
24
|
THE SPIN-OFF
|
|
25
|
DIVIDEND POLICY
|
|
31
|
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
DATA
|
|
32
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
37
|
BUSINESS
|
|
44
|
MANAGEMENT
|
|
48
|
CORPORATE GOVERNANCE
|
|
50
|
DIRECTOR COMPENSATION
|
|
53
|
EXECUTIVE COMPENSATION
|
|
54
|
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
|
|
57
|
OUR RELATIONSHIP WITH IDT AFTER THE SPIN-OFF AND
RELATED PERSON TRANSACTIONS
|
|
59
|
LEGAL PROCEEDINGS
|
|
61
|
DESCRIPTION OF OUR CAPITAL STOCK
|
|
62
|
WHERE YOU CAN FIND MORE INFORMATION
|
|
65
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ZEDGE, INC. AND SUBSIDIARIES
|
|
F-1
|
This information
statement is being furnished solely to provide information to IDT
stockholders who will receive shares of our common stock in the
distribution. This information statement is not, and is not to be
construed as, an inducement or encouragement to buy or sell any of
our or IDT’s securities. This information statement describes
our business, our relationship with IDT, and how the spin-off
affects IDT and its stockholders, and provides other information to
assist you in evaluating the benefits and risks of holding or
disposing of our common stock that you will receive in the
distribution. You should be aware of certain risks relating to the
spin-off, our business and ownership of our common stock, which are
described under the heading “Risk Factors.”
You should not assume
that the information contained in this information statement is
accurate as of any date other than the date set forth on the cover,
except as otherwise set forth herein. Changes to the information
contained in this information statement may occur after that date,
and we undertake no obligation to update the information, except in
the normal course of our public disclosure obligations and
practices.
Unless the context
indicates otherwise, all references in this information
statement:
•
to
“Zedge,” “us,” “we,” or
“our” are to Zedge, Inc. and its subsidiaries;
and
•
to “IDT”
are to IDT Corporation and its subsidiaries, and, with respect to
periods following the spin-off, IDT Corporation and its
subsidiaries other than Zedge.
The transaction in
which we will be separated from IDT and become a separately-traded
public company is referred to in this information statement as the
“separation,” the “distribution” or the
“spin-off.”
i
QUESTIONS AND ANSWERS
ABOUT THE SPIN-OFF
Q:
Why am I receiving this document?
A:
IDT is
delivering this document to you because you were a holder of
IDT’s Class A common stock or Class B common stock on the
record date for the distribution of our shares of our Class A
common stock and Class B common stock to IDT’s holders.
Accordingly, you are entitled to receive one share of our Class A
common stock for every three shares of IDT Class A common stock
that you held on the record date and one share of our Class B
common stock for every three shares of IDT Class B common stock
that you held on the record date. No action is required for you to
participate in the distribution.
Q:
What is the spin-off?
A:
The
spin-off is the overall transaction of separating our company from
IDT resulting in Zedge being owned by the public and continuing to
own and operate its assets and business. The final step of the
spin-off will be the pro rata distribution by IDT of our Class A
common stock and Class B common stock held by IDT to holders of
IDT’s Class A common stock and Class B common stock, as set
forth in the answer above. We refer to this last step as the
“distribution.” For additional information regarding
these transactions, see “The Spin-Off — Manner of
Effecting the Spin-Off” beginning on page 27.
Q:
What is Zedge?
A:
Up to the
time of the spin-off, we will be a majority-owned subsidiary of
IDT. Following the spin-off, we will be a separate publicly-traded
company. Zedge owns and operates Zedge Europe AS.
Q:
Why is IDT separating our businesses and distributing our
stock?
A:
IDT’s Board of Directors and management believe the
separation will provide the benefits set forth below under the
caption “The Spin-Off – Reasons for the Spin-Off”
beginning on page 25, including unlocking greater value for Zedge
than was the case as part of IDT. Management also considered the
other factors set forth below under the caption “The Spin-Off
— Other Benefits of the Spin-Off” on page 26.
Q:
Why is the separation of the two companies structured as a
spin-off?
A:
IDT’s Board of Directors believes that a spin-off of our
shares held by IDT is a cost-effective and tax efficient way to
separate the companies.
Q:
What was the record date for the distribution?
A:
The
record date was May 26, 2016 and ownership will be determined as of
5:00 p.m., New York City time, on that date. When we refer to the
“record date,” we are referring to that time and
date.
Q:
When will the spin-off be completed?
A:
Shares of
our common stock will be distributed at 11:59 p.m. on June 1, 2016.
We refer to this date as the “distribution date.”
Q:
What will be our relationship with IDT after the
spin-off?
A:
IDT and
Zedge each will be independent publicly-traded companies with no
common management and no ongoing relationship other than provision
of certain administrative, legal, financial, internal audit,
corporate and tax services, and as necessary to cooperate with
respect to certain matters related to periods prior to the
spin-off. Any relationships among management of Zedge and IDT are
described below under the caption “Our Relationship with IDT
After the Spin-Off and Related Person Transactions.”
1
Q:
What will happen to the listing of IDT’s Class B common
stock?
A:
Nothing.
We expect that IDT Class B common stock will continue to be traded
on the New York Stock Exchange under the symbol
“IDT.”
Q:
Will the spin-off affect the market price of my IDT
shares?
A:
Possibly.
As a result of the spin-off, the trading price of IDT shares
immediately following the distribution may be lower than
immediately prior to the distribution because the trading price
will no longer reflect the value of our assets. In addition, until
the market has fully analyzed the operations of IDT without these
assets, the price of IDT shares may fluctuate more than it has
historically. Furthermore, the combined trading prices of
IDT’s Class B common stock and, if and when outstanding, our
Class B common stock, after the distribution may be higher or lower
than the trading price of IDT Class B common stock prior to the
distribution. See the Risk Factor entitled “There may not be
an active trading market for shares of our common stock and Zedge
stockholders may find it difficult to transfer our
securities.” on page 19.
Q:
What will IDT stockholders receive in the spin-off?
A:
In the
spin-off, IDT stockholders will receive one share of our Class A
common stock for every three shares of IDT Class A common stock and
one share of our Class B common stock for every three shares of IDT
Class B common stock that they own as of the record date, and
compensation in lieu of fractional shares as set forth below.
Immediately after the spin-off, IDT stockholders will still own all
of IDT’s current business segments, but they will own them as
two separate investments rather than as a single investment.
Holders of our Class A common stock will be entitled to three votes
per share and holders of our Class B common stock will be entitled
to one tenth of one vote per share.
After the spin-off, the
certificates and book-entry interests representing IDT Class A
common stock and Class B common stock will represent such
stockholders’ interests in the IDT businesses (other than our
business) following the spin-off, and the certificates and
book-entry interests representing our Class A common stock and
Class B common stock that IDT stockholders receive in the spin-off
will represent their interest in Zedge’s business
only.
Q:
If an IDT stockholder owns unvested restricted stock or deferred
stock units of IDT, what will that stockholder receive in the
spin-off?
A
:
Holders of unvested restricted stock of IDT will receive, in
respect of those unvested restricted shares, one share of our Class
B common stock for every three unvested restricted shares of IDT
Class B common stock that they own as of the record date for the
spin-off. Those particular unvested restricted shares of our stock
that you will receive will be restricted under the same terms as
the IDT unvested restricted shares in respect of which they were
issued. This means that unvested restricted shares of our stock
received in the spin-off are subject to forfeiture on the same
terms, and their restrictions lapse at the same time, as the
corresponding IDT shares. Holders of deferred stock units, or DSUs
with respect to Class B common stock of IDT will receive, upon
vesting, in addition to the shares of IDT Class B common stock, one
share of our Class B common stock for every three shares of IDT
Class B common stock subject to the DSU. Vesting of the DSUs will
not be impacted by the spin-off.
Q:
If an IDT stockholder owns options to purchase shares of IDT stock
that have been issued by IDT, what will that option holder receive
in the spin-off?
A
:
In the spin-off, the exercise price of each outstanding option to
purchase IDT Class B common stock that was issued by IDT will be
proportionately reduced based on the relative trading prices of IDT
and Zedge following the spin-off.
Q:
What does an IDT stockholder need to do now?
A:
IDT
stockholders do not need to take any action, although we urge you
to read this entire document carefully. The approval of the IDT
stockholders is not required or sought to effect the spin-off, and
IDT stockholders have no appraisal rights in connection with the
spin-off. IDT is not seeking a proxy from any stockholders, and you
are requested not to send us a proxy.
2
IDT stockholders will not be required to pay anything for our
shares distributed in the spin-off or to surrender any shares of
IDT Class A common stock or Class B common stock. IDT stockholders
should not send in their IDT share certificates. IDT stockholders
will automatically receive their shares of our Class A common stock
and Class B common stock when the spin-off is effected.
Q:
Are there risks associated with owning Zedge common
stock?
A:
Yes. Our
business is subject to both general and specific risks relating to
our operations. In addition, our spin-off from IDT presents risks
relating to our becoming a separately-traded public company as well
as risks relating to the nature of the spin-off transaction itself.
See “Risk Factors” beginning on page 7.
Q:
What are the U.S. Federal income tax consequences of the spin-off
to IDT stockholders?
A:
IDT stockholders should not
recognize a gain or loss on the receipt of shares of our common
stock in the spin-off other than with respect to fractional shares
of our common stock for which cash is received. IDT stockholders
should apportion their tax basis in IDT common stock between such
IDT common stock and our common stock received in the spin-off in
proportion to the relative fair market values of such stock at the
time of the spin-off. An IDT stockholder’s holding period for
our common stock received in the spin-off should include the period
for which that stockholder’s IDT common stock was held. See
“The Spin-Off — Material U.S. Federal Income Tax
Consequences of the Spin-Off” beginning on page 28.
YOU SHOULD CONSULT YOUR
OWN TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE SPIN-OFF
TO YOU
.
Q:
What if I want to sell my IDT common stock or my Zedge common
stock?
A:
You should consult with your
own financial advisors, such as your stockbroker, bank or tax
advisor. We do not make any recommendations on the purchase,
retention or sale of shares of IDT common stock or our common
stock.
If you decide to sell any shares after the record date, but before
the spin-off, you should make sure your stockbroker, bank or other
nominee understands whether you want to sell your IDT common stock,
or your Zedge common stock after it is distributed, or both.
Q:
Where will I be able to trade shares of Zedge common
stock?
A:
There is
no current public market for our common stock. Zedge’s Class
B common stock will be listed for trading on the NYSE MKT under the
symbol “ZDGE” starting June 2, 2016. Trading in shares
of our Class B common stock began on a “when-issued”
basis on the record date, and “regular way” trading
will begin on June 2, 2016, then “when-issued” trading
with respect to our Class B common stock will end. We cannot
predict the trading prices for our Class B common stock before or
after the distribution date.
Q:
Do you intend to pay dividends on your common stock?
A:
We do not
anticipate paying dividends on our common stock until we achieve
sustainable profitability (after satisfying all of our operational
needs) and retain certain minimum cash reserves. Distributions will
be subject to the need to retain earnings for investment in growth
opportunities or the acquisition of complementary assets. The
payment of dividends in any specific period will be at the sole
discretion of our Board of Directors. We and IDT will be separate
entities after the spin-off. As such, our decision to pay (or not
pay) dividends in the future will not impact IDT’s decision
of whether to pay (or not pay) dividends in the future. See
“Dividend Policy” on page 31 for additional information
on our dividend policy following the spin-off.
Q:
Where can IDT stockholders get more information?
A:
If you
have any questions relating to the distribution, you should
contact:
IDT Corporation
520 Broad Street
Newark, New Jersey 07102
Attention: Bill Ulrey, Vice President–Investor Relations and
External Affairs
(973) 438-3838
3
Q:
Who will be the distribution agent for the spin-off?
A:
American
Stock Transfer & Trust Company will be the distribution agent
for the spin-off. The distribution agent can be contacted at:
59 Maiden Lane
Plaza Level
New York, New York 10038
Telephone (800) 937-5449
4
EXECUTIVE
SUMMARY
We provide one of the most popular content platforms for smartphone
personalization globally offering a wide array of free and
interesting content including ringtones, wallpapers, home screen
icons and notification sounds.
Summary of the
Spin-Off
The following is a summary of the terms of the spin-off. Please see
“The Spin-Off” beginning on page 25 for a more detailed
description of the matters described below.
Distributing company
|
|
IDT Corporation, a Delaware
corporation.
|
|
|
|
Distributed company
|
|
Zedge, Inc., a Delaware corporation.
Zedge’s principal executive offices are currently located at
22 Cortlandt Street 14
th
Floor, New York, NY 10007 and Ladebekken 17, 7041 Trondheim
Norway.
|
|
|
|
Distribution ratio
|
|
Each holder of IDT Class A common stock will
receive a distribution of one share of Zedge Class A common stock
for every three shares of IDT Class A common stock held on the
record date and each holder of IDT Class B common stock will
receive a distribution of one share of Zedge Class B common stock
for every three shares of IDT Class B common stock held on the
record date. For additional information regarding how holders of
IDT common stock will receive cash in lieu of fractional shares of
our common stock, see “The Spin-Off-Manner of Effecting the
Spin-Off on page 27.
|
|
|
|
Securities to be distributed
|
|
Approximately 0.5 million shares of Zedge Class
A common stock, which will constitute all of the outstanding shares
of Zedge Class A common stock immediately after the spin-off (based
on approximately 1.6 million shares of IDT Class A common stock
that were outstanding on the record date).
Approximately 7.2 million shares of Zedge Class
B common stock (based on approximately 21.5 million shares of IDT
Class B common stock that were outstanding on the record date),
which will include the shares of Zedge Class B common stock that
IDT received in respect of IDT’s portion of certain existing
shareholders purchasing $3 million of Zedge Class B common stock at
a pre-investment valuation for Zedge of $27 million.
The approximately 7.7 million shares of Zedge
Class A common stock and Zedge Class B common stock to be
distributed by IDT, will constitute approximately 82% of the
outstanding shares of capital stock of Zedge immediately after the
spin-off.
Prior to the spin-off, the equity interests in
Zedge not owned by IDT, including that portion of the $3 million of
Zedge Class B common stock purchased by Zedge stockholders other
than IDT, were recapitalized into approximately 1.6 million shares
of Zedge Class B common stock. These shares will not be distributed
to IDT stockholders in the spin-off. Also, options outstanding to
purchase 24,898 shares of current Zedge common stock have been
converted into options to purchase approximately 1.5 million shares
of Zedge Class B common stock.
|
|
|
|
Record date
|
|
The record date
was 5:00 p.m., New York City time, on May 26, 2016. In order to be
entitled to receive shares of Zedge Class A common stock and/or
Class B common stock in the spin-off, holders of shares of IDT
Class A common stock and Class B common stock must have been
stockholders as of 5:00 p.m., New York City time, on the record
date.
|
|
|
|
Distribution date
|
|
The distribution date will be June 1,
2016.
|
|
|
|
5
Relationship between Zedge and IDT
after the spin-off
|
|
Following the spin-off, IDT and Zedge each will be independent,
publicly-traded companies. We entered into a Services Agreement
with IDT, to allow us to utilize certain personnel of, and obtain
administrative, legal, financial, internal audit, corporate, tax
and other services from IDT unless we develop those capabilities
internally or arrange for such services from other
vendors.
|
|
|
|
Dividend policy
|
|
We do not anticipate paying dividends on our
common stock until we achieve sustainable profitability (after
satisfying all of our operational needs) and retain certain minimum
cash reserves. Distributions will be subject to the need to retain
earnings for investment in growth opportunities or the acquisition
of complementary assets. The payment of dividends in any specific
period will be at the sole discretion of our Board of
Directors.
|
|
|
|
Payment of intercompany indebtedness
|
|
Any intercompany debt between IDT and Zedge as
of the distribution date was repaid prior to the completion of the
spin-off and there is currently no indebtedness owing from Zedge to
IDT. The only contemplated obligations to IDT arising after the
spin-off would be obligations that arise under the Separation and
Distribution Agreement between Zedge and IDT (the “Separation
Agreement”), the Services Agreement between Zedge and IDT
(the “Services Agreement”) or the Tax Separation
Agreement between Zedge and IDT (the “Tax Separation
Agreement”).
|
Corporate Information
and Structure
Pursuant to the spin-off, we will be separated from IDT and become
a separate publicly-traded company. The spin-off and our resulting
separation from IDT involve the following steps:
•
As part of the spin-off, our capital stock has been recapitalized
so that, instead of having a single class of common stock and two
series of preferred stock authorized and outstanding, all such
shares have been converted into approximately 0.5 million shares of
our Class A common stock and 8.8 million shares of our Class B
common stock, all options to purchase our common stock have become
options to purchase a proportional number of shares of our Class B
common stock, and we have preferred stock authorized, but no
preferred shares will be outstanding. The rights of the various
classes of capital stock are described below under the heading
“Description of Our Capital Stock” beginning on page
62.
•
Prior to the Distribution, certain holders of our capital stock,
including IDT, collectively purchased common stock representing
approximately 10.0% of our capital stock for $3 million. These
shares have been split into approximately 1.1 million shares of
Class B common stock.
•
We entered into the Separation Agreement and Tax Separation
Agreement with IDT to effect the separation and provide a framework
for our relationship with IDT after the spin-off. For more
information on these agreements, see “Our Relationship with
IDT After the Spin-Off and Related Person Transactions”
beginning on page 59.
•
Under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), the registration statement on Form 10,
as amended, of which this information statement is a part, became
effective, and IDT will mail this information statement to its
stockholders.
•
Following the separation, we will operate as a separate
publicly-traded company, and Zedge’s Class B common stock
will be listed for trading on the NYSE MKT under the symbol
“ZDGE”. We expect that trading for Zedge’s Class
B common will commence on a regular way basis on June 2, 2016.
For a further explanation of the spin-off, see “The
Spin-Off” beginning on page 25.
6
RISK FACTORS
Our business,
operating results or financial condition could be materially
adversely affected by any of the following risks associated with
any one of our businesses, as well as the other risks highlighted
elsewhere in this document, particularly the discussions about
competition. The trading price of our common stock could decline
due to any of these risks. Note that references to
“our”, “us”, “we”, etc. used in
each risk factor below refers to the business about which such risk
factor is provided.
Risks Related to the Business
If we fail to attract advertisers or if our advertisers reduce
their spending with us, our revenues, profitability and prospects
may be materially and adversely affected.
In the fiscal years ended July 31, 2014 and 2015 and for the six
months ended January 31, 2016, our revenues from advertising
accounted for 100%, 94% and 94%, respectively, of our total
revenues. It is anticipated that our growth profitability and
prospects will continue to depend on our ability to sell
advertising inventory. Companies that advertise via Zedge may
choose to utilize other channels. If the size of the mobile
advertising market does not increase from current levels, or if we
are unable to capture and retain a sufficient share of that market,
our ability to maintain or increase our current level of
advertising revenues and our profitability and prospects could be
materially and adversely affected.
If we fail to maintain and enhance our brand, or if we incur
excessive expenses in this effort, our business, results of
operations and prospects may be materially and adversely
affected.
We believe that maintaining and enhancing our brand is of
significant importance to the success of our business. Historically
we have not made material investments in this effort. Yet, we
believe that enhancing the recognition and reputation of our brand
is important to our future success and ability to compete. A
well-recognized brand is important to increasing the number of
users and enhancing our attractiveness to advertisers and business
partners. Brand recognition and enhancement may directly affect our
ability to maintain our market position.
Many factors, some of which are beyond our control, are important
to maintaining and enhancing our brand and may negatively impact
our brand and reputation if not properly managed, such as:
•
our ability to maintain an easy and reliable user experience as
user preferences evolve and as we expand into new service
categories and new service lines;
•
our ability to increase brand awareness among existing and
potential users, advertisers and content providers through various
marketing and promotional activities;
•
our ability to adopt new technologies or adapt our products and
services to meet user needs or emerging industry standards; and
•
our ability to distinguish Zedge from the competition and maintain
this distinction.
In the future we may conduct various marketing and brand promotion
activities to expand our brand. Some of these may require material
investment. We cannot assure you, however, that these activities
will be successful or that we will be able to achieve the brand
promotion effect we expect. In addition, any negative publicity in
relation to our mobile internet products or services could harm our
brand and reputation.
We have sometimes received, and expect to continue to receive,
complaints from users regarding the quality of our products and
services. If our users’ complaints are not addressed to their
satisfaction, our reputation and our market position could be
significantly harmed, which may materially and adversely affect our
business and prospects.
We may not be able to continually meet user demand and retain or
expand our user base.
Although we constantly monitor and research user needs, we may be
unable to meet user demand on an ongoing basis or anticipate future
user demands. A decrease in the number of users may have a material
and adverse effect on our ability to sell advertising and on our
business, financial condition and results of operations. In order
to attract and retain users and remain competitive, we must
continue to innovate our products and services, improve user
experience, and implement new technologies and functionalities.
7
The mobile internet business is characterized by constant changes,
including but not limited to rapid technological evolution,
continual shifts in user demands, frequent introductions of new
products and services and constant emergence of new industry
standards and practices. As a result, users may leave us for our
competitors’ products and services more quickly than in other
sectors. Thus our success will depend, in part, on our ability to
respond to these changes on a timely and cost-effective basis,
including improving and marketing our existing products and
services and developing and pricing new products and services in
response to evolving user needs. Our ability to successfully retain
or expand our user base will depend on our ability to achieve the
following, among others:
•
Anticipate and effectively respond to the growing number of mobile
internet users in general and the Zedge users in particular;
•
Attract, retain and motivate talented application designers,
product managers and engineers who have experience developing
personalization products or other mobile internet products and
services;
•
Effectively market our existing and new mobile internet products in
response to evolving user needs;
•
Develop in a timely fashion and launch new Zedge products and
features and other mobile internet products cost-effectively;
•
Further improve our platform to provide a compelling and optimal
user experience through integration of products and services
provided by existing and new third party developers or business
partners; and
•
Continue to provide quality content to attract and retain users and
advertisers.
We cannot assure you that our existing products and services will
remain sufficiently popular with our users. We may be unsuccessful
in adding compelling new enhancements; products and services to
further diversify our product offerings. Unexpected technical,
commercial or operational problems could delay or prevent the
introduction of one or more of our new products or services.
Moreover, we cannot be sure that any of our new products and
services will achieve widespread market acceptance or generate
incremental revenue the way our existing Zedge service has. If we
fail to continue to achieve sufficient user satisfaction through
our products or services or our products and services fail to meet
our expectation to maintain and expand our user base, our business,
results of operations and financial condition will be materially
and adversely affected.
Our user base is heavily weighted to the Android operating system
and our revenues may suffer if the market demand for Android
smartphones decreases.
Our user base is heavily weighted to smartphones running the
Android operating system, which constitutes approximately 85% of
our monthly active mobile app users and most of our revenues. Any
significant downturn in the overall demand for Android smartphones
or the use of Android smartphones could significantly and adversely
affect the demand for our personalization app and would materially
affect our revenues. Although the Android smartphone market has
grown rapidly in recent years, it is uncertain whether the Android
smartphone market will continue growing at a similar rate in the
future. In addition, due to the constantly evolving nature of the
smartphone industry, another operating system for smartphones may
eclipse the Android operating system and result in a decline in
popularity. To the extent that the Zedge app continues to be
operated on Android smartphones and to the extent that our future
revenues substantially depend on the use and sales of Android
smartphones, our business would be vulnerable to any downturns in
the Android smartphone market.
We may not be able to effectively manage our growth or implement
our future business strategies, in which case our business and
results of operations may be materially and adversely
affected.
Our continued success depends on our ability to grow organically
and our strategic cooperation with third party partners. We have
experienced a period of significant rapid growth and expansion that
has placed, and continues to place, significant strain on our
management and resources. We cannot assure you that this level of
significant growth will be sustainable or achieved at all in the
future. We believe that our continued growth will depend on our
ability to develop and enhance our products and services, attract
new users, retain existing users, continue developing innovative
technologies in response to user demand, increase brand awareness
through marketing and promotional activities, react to changes in
market trends, expand into new market segments, attract new
advertisers, retain existing advertisers and take advantage of the
growth in the relevant markets. We cannot assure you that we will
achieve any of the above.
8
To manage our growth and attain and maintain profitability, we will
also need to further expand, train, manage and motivate our
workforce and manage our relationships with users, consultants,
business partners and advertisers. We anticipate that we will need
to implement a variety of enhanced and upgraded operational and
financial systems, procedures and controls, including the
improvement of our accounting and other internal management
systems. All of these endeavors involve risks and will require
substantial management efforts and skills and additional
expenditures. In addition, we currently enjoy a global customer
base. This geographic diversification may raise the level of
difficulty in managing our growth and profitability. We cannot
assure you that our current and planned personnel, systems,
procedures and controls will be adequate to support our future
operations. In addition, we cannot assure you that we will be able
to effectively manage our growth or implement our future business
strategies effectively, and failure to do so may materially and
adversely affect our business and results of operations.
Our products may contain errors, flaws or failures that may only
become apparent after their release, especially in terms of updates
to our app. From time to time we receive user feedback in
connection with errors, flaws or failures and such errors, flaws or
failures may also come to our attention during our internal testing
process. We generally have been able to resolve such errors, flaws
or failures in a timely manner, but we cannot assure you that we
will be able to detect and resolve all of them effectively or in a
timely manner. Errors, flaws or failures in our services and
products may adversely affect user experience and cause our users
to stop using our services and products, which could materially and
adversely affect our business and results of operations.
Our core values of focusing on our users first and acting for the
long-term may conflict with the short-term interests of our
business.
One of our core values is a focus on the user’s experience,
which we believe is essential to our success and serves the best,
long-term interests of Zedge and our stakeholders. Therefore, we
have made, in the past and/or may make in the future, significant
investments or changes in strategy that we think will benefit our
users, even if our decision negatively impacts our operating
results in the short term. In addition, our philosophy of putting
our users first may cause disagreements or negatively impact our
relationships with advertisers or other third parties. Our
decisions may not result in the long-term benefits that we expect,
in which case the success of our business and operating results
could be harmed.
The mobile advertising market may deteriorate or develop more
slowly than expected, which could harm our business.
Mobile connected devices, especially smartphones, are generally a
new advertising medium. Advertisers have historically spent a
smaller portion of their advertising budgets on mobile media as
compared to traditional advertising methods, such as television,
newspapers, radio and billboards, or online advertising over the
internet, such as placing banner ads on websites. Future demand and
market acceptance for mobile advertising is uncertain. Many
advertisers still have limited experience with mobile advertising
and may continue to devote larger portions of their advertising
budgets to more traditional offline or online personal
computer-based advertising, instead of shifting additional
advertising resources to mobile advertising. In addition, our
current and potential advertiser clients may ultimately find mobile
advertising to be less effective than traditional advertising media
or marketing methods or other technologies for promoting their
products and services, and they may even reduce their spending on
mobile advertising from current levels as a result. If the market
for mobile advertising deteriorates, or develops more slowly than
we expect, we may not be able to increase our revenue.
If mobile connected devices, their operating systems or content
distribution channels develop in ways that prevent users from
downloading our app or block advertising from being delivered to
our users, our ability to grow our business will be
impaired.
Our business model depends upon the continued compatibility between
our app and the major mobile operating systems. Third parties with
whom we do not have any formal relationships control the design of
mobile devices and operating systems. These parties frequently
introduce new devices, and from time to time they may introduce new
operating systems or modify existing ones. Network carriers,
including but not limited to Verizon, AT&T or T-Mobile, may
also impact the ability to download apps or access specified
content on mobile devices.
We rely upon third party distribution platforms, including Google
Play, iTunes and Microsoft Market for distribution of our app.
Google Play, iTunes and Microsoft Market are global application
distribution platforms and the main distribution channels for
Zedge. As such, the promotion, distribution and operation of our
apps are subject to the
9
respective distribution platforms’ standard terms and
policies for application developers, which are very broad and
subject to frequent changes and interpretation. Furthermore, the
distribution platforms may not enforce their standard terms and
policies for application developers consistently and uniformly
across all applications and with all publishers. In late January
2016, iTunes removed our app from their store claiming a policy
violation. Although we didn’t agree with their
interpretation, we modified the app and published a remediated
version in early March. During this period prospective iOS users
were unable to download our app yet existing users (i.e. users that
had already installed the app on their iPhone) were still able to
utilize it.
In addition, if any of these providers were to limit or disable
advertising on their platforms, devices or operating systems,
either because of technological constraints or because a maker of
these devices, developer of these operating systems or owner of
these distribution platforms wished to impair our ability to serve
ads on them, our ability to generate revenue could be significantly
harmed. Also, technologies may be developed that can block the
display of our ads. Most of our revenues are derived from fees paid
to us by advertisers in connection with the display of ads in our
mobile app. As a result, ad-blocking technology could, in the
future, adversely affect our operating results.
We do not have long-term agreements with our advertisers, and we
may be unable to retain existing advertisers, attract new
advertisers or replace departing advertiser with advertisers that
can provide comparable revenue to us.
Our success requires us to maintain and expand our current
advertiser relationships and to develop new relationships. Our
contracts with our advertising partners generally do not include
long-term obligations requiring them to purchase our inventory and
are cancelable upon short or no notice and without penalty.
Furthermore, the majority of our advertisers buy our inventory via
third-party platforms and bidding exchanges that own the
relationship with the advertiser. As a result, we may have limited
visibility as to our future advertising revenue streams. We cannot
assure you that our advertisers will continue to purchasing our
inventory, or that we will be able to replace, in a timely or
effective manner, departing advertisers with new advertisers that
generate comparable revenue. If a major advertiser representing a
significant portion of our business decides to materially reduce
its advertising spend with us or cease purchasing our advertising
inventory, our revenue could be significantly reduced.
We face competition in all aspects of our business. If we fail to
compete effectively or if our reputation is damaged, our business,
financial condition and results of operations may be materially and
adversely affected.
Although we are currently a leading platform for smartphone
personalization, we cannot guarantee that we will be able to
maintain this position in the future. We face potential competition
from other mobile internet companies and smartphone manufacturers,
not to mention that new market entrants may also emerge. If we are
not able to differentiate our business from that of our
competitors, drive value for our customers, and/or effectively
align our resources with our goals and objectives, we may not be
able to compete effectively against our competitors. Our failure to
compete effectively against any of the foregoing competitive
threats could materially and adversely harm our business. Increased
competition may result in new products and offerings which may in
turn require us to take actions to retain and attract our users and
advertisers in such a fashion which would lower gross margins. If
we fail to compete effectively, our market share would decrease and
our results of operations would be materially and adversely
affected.
If we are not able to effectively compete in any aspect of our
business or if our reputation is harmed by rumors or allegations
regarding our business or business practices, our overall user base
may decrease, making us less attractive to advertisers. We may be
required to spend additional resources to further increase our
brand recognition and promote our products and services, and such
additional spending could adversely affect our profitability.
If we fail to keep up with rapid technological changes in the
internet and smartphone industries, our results and future growth
may be adversely affected.
The internet industry and smartphone industries are characterized
by rapid and innovative technological changes. Our future success
will depend on our ability to respond to fast changing
technologies, adapt our products and services to evolving industry
standards and improve the performance, functionality and
reliability of our products and services. Our failure to continue
to adapt to such changes could harm our business. If we are slow to
develop products and services that are compatible with smartphones,
or if the products and services we develop are not widely accepted
and used by smartphone users, we may not be able to capture a
significant share of this important market. In addition, the
widespread adoption of new internet, networking or
telecommunications technologies
10
or other technological changes for smartphones could require
substantial expenditures to modify or adapt our products, services
or infrastructure. If we fail to keep up with rapid and innovative
technological changes to remain competitive, our future growth may
be adversely affected.
Our international operations and availability expose us to
additional risks that could harm our business, operating results,
and financial condition.
In addition to uncertainty about our ability to continue expanding
and monetizing internationally, there are additional risks inherent
in doing business internationally including:
•
tariffs, trade barriers, customs classifications and changes in
trade regulations;
•
difficulties in developing, staffing, and simultaneously managing
foreign operations as a result of distance, language, and cultural
differences;
•
stringent local labor laws and regulations;
•
strict and unclear laws around data privacy;
•
longer payment cycles;
•
credit risk and higher levels of payment fraud;
•
profit repatriation restrictions and foreign currency exchange
restrictions;
•
political or social unrest, economic instability, repression, or
human rights issues;
•
geopolitical events, including natural disasters, acts of war and
terrorism;
•
import or export regulations;
•
compliance with U.S. laws such as the Foreign Corrupt Practices
Act, and local laws prohibiting bribery and corrupt payments to
government officials;
•
antitrust and competition regulations;
•
potentially adverse tax developments;
•
seasonal volatility in business activity and local economic
conditions;
•
economic uncertainties relating to European sovereign and other
debt;
•
laws, regulations, licensing requirements, and business practices
that favor local competitors or prohibit foreign ownership or
investments;
•
laws, regulations or rulings that block access to Zedge;
•
different, uncertain or more stringent user protection, content,
data protection, privacy, intellectual property and other laws;
and
•
risks related to other government regulation, required compliance
with local laws or lack of legal precedent.
We are subject to numerous and sometimes conflicting U.S. and
foreign laws and regulations that increase our cost of doing
business. Violations of these complex laws and regulations that
apply to our international operations could result in damage
awards, fines, criminal actions, sanctions, or penalties against
us, our officers or our employees, prohibitions on the conduct of
our business and our ability to offer products and services, and
damage to our reputation. Although we have implemented policies and
procedures designed to promote compliance with these laws, there
can be no assurance that our employees, contractors, or agents will
not violate our policies. These risks inherent in our international
operations and expansion increase our costs of doing business
internationally and could result in harm to our business, operating
results, and financial condition.
11
Companies and governmental agencies may restrict access to our
website or mobile apps, or the Internet generally, which could lead
to the loss or slower growth of our player base.
Our users need to access the internet and in particular our website
or mobile application. Companies and governmental agencies, could
block access to our website or mobile application or the internet
generally. For example, in 2013 the Indian courts issued orders
restraining internet service providers from providing access to
various internet domains including Zedge’s. Access to Zedge
through any mode has been blocked in many parts of India since
February 2013 as discussed more fully in the Legal Proceedings
section on page 61. If companies or governmental entities block or
limit access to Zedge or otherwise adopt policies restricting
access to our advertiser’s products and services our business
could be negatively impacted resulting in a loss or slow-down of
user base growth and/or revenues.
Legal proceedings or allegations of impropriety could have a
material adverse impact on our reputation, results of operation,
financial condition and liquidity.
We have been, and may be in the future, subject to allegations or
lawsuits by entities claiming that we engage in unethical,
fraudulent or otherwise inappropriate business practices. Any such
lawsuit or allegation, with or without merit, or any perceived
unfair, unethical, fraudulent or inappropriate business practice by
us or perceived wrong doing by any key member of our management
team could harm our reputation and user base and distract our
management from day-to-day operations of our company. We cannot
assure that we will not be subject to lawsuits or allegations in
the future. Where we can make a reasonable estimate of the
liability relating to pending litigation and determine that an
adverse liability resulting from such litigation is probable, we
will record a related contingent liability. As additional
information becomes available, we will assess the potential
liability and revise estimates as appropriate. In fiscal years 2015
and 2014, and in the six months ended January 31, 2016, we did not
record any contingent liabilities relating to pending litigation.
However, when we record or revise our estimates of contingent
liabilities in the future, the amount of our estimates may be
inaccurate due to the inherent uncertainties relating to
litigation. In addition, the outcomes of actions we institute
against third parties may not be successful or favorable to us.
Litigations and allegations against us may also generate negative
publicity that significantly harms our reputation, which may
materially and adversely affect our user base and our ability to
attract publishers and advertisers. In addition to the related
cost, managing and defending litigation and related indemnity
obligations can significantly divert management’s and the
board of directors’ attention from operating our business. We
may also need to pay damages or settle the litigation with a
substantial amount of cash. All of these could have a material
adverse impact on our business, results of operation and cash
flows.
A variety of new and existing U.S. and foreign government laws and
regulations could subject us to claims, judgments, monetary
liabilities and other remedies, and to limitations on our business
practices.
We are subject to numerous U.S. and foreign laws and regulations
covering a wide variety of subject matters. New laws and
regulations, changes in existing laws and regulations or the
interpretation of them, our introduction of new products, or an
extension of our business into new areas, could increase our future
compliance costs, make our products and services less attractive to
our users, or cause us to change or limit our business practices.
We may incur substantial expenses to comply with laws and
regulations or defend against a claim that we have not complied
with them. Further, any failure on our part to comply with any
relevant laws or regulations may subject us to significant civil or
criminal liabilities, penalties, and negative publicity.
The application of existing
domestic and international laws and regulations to us relating to
issues such as user privacy and data protection, security,
defamation, pricing, advertising, taxation, gambling, sweepstakes,
promotions, consumer protection, accessibility, content regulation,
quality of services, law enforcement demands, telecommunications,
mobile, and intellectual property ownership and infringement in
many instances is unclear or unsettled. Further, the application to
us or our subsidiaries of existing laws regulating or requiring
licenses for certain businesses of our advertisers can be unclear.
U.S. export control laws and regulations also impose requirements
and restrictions on exports to certain nations and persons and on
our business. Internationally, we may also be subject to laws
regulating our activities in foreign countries and to foreign laws
and regulations that are inconsistent from country to country. New
regulations governing the transfer of personal information outside
of the European Union are being developed by regulators due to the
European Court of Justice invalidating the US-EU Safe Harbor
framework in October of 2015 and the new US-EU Privacy Shield
agreement reached in February of 2016. The new agreement will place
major new obligations on U.S. companies, the details of which have
not yet been finalized. The result will likely be an increase in
cost of compliance, and an increase in potential for liability for
non-compliance.
12
In addition, the Digital Millennium Copyright Act has provisions
that limit, but do not necessarily eliminate, our liability for
hosting, or for listing or linking to, third party websites and
apps that include materials that infringe copyrights or other
rights, so long as we comply with the statutory requirements of
this act. Various U.S. and international laws restrict the
distribution of materials considered harmful to children and impose
additional restrictions on the ability of online services to
collect information from minors. In the area of data protection,
most states have passed laws requiring notification to users when
there is a security breach for personal data. We face similar risks
and costs as our products and services are offered in international
markets and may be subject to additional regulations. Although we
have invested and continue to invest in systems and resources to
ensure that we are compliant with the Digital Millennium Copyright
Act and other U.S. and international laws around materials that
infringe on copyrights or other rights or other objectionable
content our systems may not be sufficient or we may unintentionally
err and fail to comply with these laws and regulations which could
expose us to claims, judgments, monetary liabilities and other
remedies, and to limitations on our business practices.
If we are unable to license, acquire or otherwise obtain access to
compelling content and services at reasonable cost or if we do not
develop or commission compelling content of our own, the number of
users of our services may not grow as anticipated, or may decline,
or users’ level of engagement with our products and services
may decline, all or any of which could harm our operating
results.
Our future success depends in
part on our ability to aggregate and host compelling content and
deliver that content to our users. We achieve this when users
upload their own user-generated content to our distribution
platform or when we create content or enter into business
partnerships with content owners and host this content to our
distribution platform. We believe that users value high-quality
content. As such we may need to make substantial payments to third
parties from whom we license or acquire such content or from whom
we have create this content on our behalf. Our ability to maintain
and build relationships with such third party providers may become
important to our success. As competition for compelling content
increases both domestically and internationally, our business
partners may alter business terms under which they avail their
content and services to us and potential providers may not offer
their content or services to us at all, or may offer them on terms
that are not agreeable to us. A change in commercial terms could
harm our operating results and financial condition. Further, much
of the content that we acquire may only be available on a
non-exclusive basis allowing competitors the ability of offering
this content to our disadvantage.
We may be subject to intellectual property infringement claims or
other allegations, which could require us to pay substantial
statutory penalties or other damages and fines, remove relevant
content, enter into license agreements, which may not be available
on commercially reasonable terms or could result in our app being
barred from any of the third party distribution
platforms.
There may be owners of technology patents, copyrights, trademarks,
trade secrets and content, who assert claims against us. If a claim
of infringement is brought against us we may be required to pay
substantial penalties or other damages and fines, remove relevant
content, enter into license agreements that may not be available on
commercially reasonable terms or at all or be barred from any of
the third party distribution platforms. Even though the allegations
or claims could be baseless, defense against any of these
allegations or claims would be both costly and time-consuming and
could significantly divert the efforts and resources of our
management and other personnel.
We may not be able to prevent others from unauthorized use of our
intellectual property, which could harm our business and
competitive position.
We regard our trademarks,
service marks, patents, domain names, trade secrets, proprietary
technologies and similar intellectual property as critical to our
success, and we rely on trademark and patent law, trade secret
protection and confidentiality and license agreements with our
employees and others to protect our proprietary rights As of
January 31, 2016, we have registered, amongst others, the following
domain names:
www.zedge.net
and
www.zedge.com.
In addition, we have been granted trademark protection for
“Zedge” in the U.S., E.U., U.K. and Canada and for
“Tonesync” in the U.S. and E.U. As discussed in the
Business
section below, we also have applied for trademark protections for
other marks in the U.S. and India as well as for copyright
protection for our flagship app, Zedge.
Monitoring unauthorized use of our intellectual property rights is
difficult and costly, and we cannot be certain that we can
effectively prevent misappropriation of our intellectual property,
particularly in countries where the laws may not protect our
proprietary rights as fully as in the United States. From time to
time, we may have to resort to litigation to enforce our
intellectual property rights, which could result in substantial
costs and diversion of our resources.
13
In addition, it is often difficult to create and enforce
intellectual property rights in certain international markets.
Patents, trademarks and service marks may also be invalidated,
circumvented, or challenged. Trade secrets are difficult to
protect, and our trade secrets may be leaked or otherwise become
known or be independently discovered by others. Confidentiality
agreements may be breached, and we may not have adequate remedies
for any breach. Even where adequate and relevant laws exist it may
not be possible to obtain swift and equitable enforcement of such
laws, or to obtain enforcement of a court judgment or an
arbitration award delivered in another jurisdiction, and
accordingly, we may not be able to effectively protect our
intellectual property rights or enforce agreements in such
countries.
We rely on third parties to provide the technologies necessary to
deliver content, advertising, and services to our users, and any
change in the licensing terms, costs, availability, or acceptance
of these formats and technologies could adversely affect our
business.
Our service and hosting providers may experience downtime from time
to time, which may negatively affect our brand and user perception
of the reliability of our service. Any scheduled or unscheduled
interruption could result in an immediate, and possibly
substantial, loss of revenues. Although we seek to reduce the
possibility of disruptions or other outages, our product may be
disrupted by problems relating either to our own technology or
third party technology that is used for our product. Our systems
may be vulnerable to damage or interruption from telecommunication
failures, power loss, computer attacks or viruses, earthquakes,
floods, fires, terrorist attacks and similar events. Parts of our
system are not fully redundant or backed up, and our disaster
recovery planning may not be sufficient for all eventualities.
Despite any precaution we may take, the occurrence of a natural
disaster or other unanticipated problems at our hosting facilities
could result in lengthy interruptions in the availability of our
products and services. Any interruption in the ability of our users
to use our products and services could reduce our future revenues,
harm our future profits, subject us to regulatory scrutiny and lead
users to seek alternative internet mobile products.
There can be no assurance that these providers will continue
licensing their technologies or intellectual property to us on
reasonable terms, or at all. Providers may change the fees they
charge users or otherwise change their business model in a manner
that slows the widespread acceptance of their technologies. Any
change in the licensing terms, costs, availability, or user
acceptance of these technologies could adversely affect our
business.
We use open source software in our platform that may subject our
technology to general release or require us to re-engineer our
solutions, which may cause harm to our business.
We use open source software in connection with our services. From
time to time, companies that incorporate open source software into
their products have faced claims challenging the ownership of open
source software and/or compliance with open source license terms.
Therefore, we could be subject to suits by parties claiming
ownership of what we believe to be open source software or
noncompliance with open source licensing terms. Some open source
software licenses require users who distribute or make available
open source software as part of their software to publicly disclose
all or part of the source code to such software and/or make
available any derivative works of the open source code on
unfavorable terms or at no cost. While we monitor our use of open
source software and try to ensure that none is used in a manner
that would require us to disclose the source code or that would
otherwise breach the terms of an open source agreement, such use
could nevertheless occur and we may be required to release our
proprietary source code, pay damages for breach of contract,
re-engineer our applications, discontinue use in the event
re-engineering cannot be accomplished on a timely basis or take
other remedial action that may divert resources away from our
development efforts, any of which could adversely affect our
business, financial condition or operating results.
Our business depends on our ability to collect and use data to
deliver relevant content and ads, and any limitation on the
collection and use of this data could significantly diminish the
value of our services and cause us to lose clients and
revenue.
When one uses our products and services, we may collect both
personally identifiable and non-personally identifiable data about
the user. This may include but isn’t limited to the
user’s name, telephone number, email address, Facebook login
credentials, phone model, operating system, location, Identifier
for Advertising (IDFA), Android Advertising ID, the collection of
apps running on the user’s mobile device as well as
information relating to their interaction with advertisements
appearing within our app. Often we use some of this data to provide
a better experience for the user
14
by delivering both relevant content and advertisements or by
limiting the number of times a specific ad is presented to the same
mobile device. In addition, we use some of this data for
advertising reporting purposes.
Although our Privacy Policy and Terms of Service provide extensive
details about how we use customer data our clients may decide not
to allow us to collect some or all of this data or may limit our
use of this data. Any limitation on our ability to collect data
about user behavior and app interactions would likely make it more
difficult for us to deliver germane content to our users and
effective mobile advertising campaigns that meet the demands of our
advertisers.
Although our contracts with advertisers generally permit us to
aggregate data from advertising campaigns, these clients might
nonetheless request that we discontinue using data obtained from
their campaigns that have already been aggregated with other
clients’ campaign data. It would be difficult, if not
impossible to comply with these requests, and these kinds of
requests could also cause us to invest significant amounts of
resources. Interruptions, failures or defects in our data
collection, mining, analysis and storage systems, as well as
privacy concerns and regulatory restrictions regarding the
collection of data, could also limit our ability to aggregate and
analyze mobile device user data from our clients’ advertising
campaigns. If that happens, we may not be able to optimize the
placement of advertising for the benefit of our advertiser clients,
which could make our services less valuable, and, as a result, we
may lose clients and our revenue may decline.
Concerns about collection and use of personal data could damage our
reputation and deter current and potential users from using our
products and services, which could have material adverse effects on
our business and results of operations.
Concerns about our platform with regard to the collection, use or
disclosure of personal information or other privacy-related
matters, even if unfounded, could damage our reputation and results
of operations. We apply strict management and protection of user
provided data and only use this data as described in our Privacy
Policy and Terms of Service. While we strive to comply with our
Privacy Policy as well as all applicable data protection laws and
regulations, any failure or perceived failure to comply may result
in proceedings or actions against us by government entities or
others, and could damage our reputation. User and regulatory
attitudes towards privacy are evolving, and future regulatory or
user concerns about the extent to which personal information is
used or shared with advertisers or others may adversely affect our
ability to share certain data with advertisers, which may limit
certain methods of targeted advertising. In addition, new
regulatory requirements or orders or other federal, state or
international privacy or consumer protection-related laws and
regulations or proceedings or actions against us by governmental
entities or others (e.g., class action privacy litigation) could
result in us having to change our business practices, increase our
costs and adversely affect our business. For instance, U.S. courts
have begun to define a level of reasonable security that is
required when maintaining personal information, and such
requirements could both increase our cost of operations and subject
us to liability for failure to maintain such levels of
security.
Data collection, privacy and security have become the subject of
increasing public concern. If internet and mobile customers were to
reduce their use of our products, and services as a result of these
concerns, our business could be harmed. As noted above, we are also
subject to the possibility of security breaches, which themselves
may result in a violation of these laws.
Concerns about the security of personal data could also lead to a
decline in general usage of our products and services, which could
lead to lower user numbers. A significant reduction in user numbers
could have a material and adverse effect on our business, financial
condition and results of operations.
Activities of our advertiser clients could damage our reputation or
give rise to legal claims against us.
Our advertisers may not comply with federal, state and local laws,
including, but not limited to, laws and regulations relating to
mobile communications. Failure of our clients to comply with
federal, state or local laws or our policies could damage our
reputation and expose us to liability under these laws. We may also
be liable to third parties for content in the ads we deliver if the
artwork, text or other content involved violates copyrights,
trademarks or other intellectual property rights of third parties
or if the content is defamatory, unfair and deceptive, or otherwise
in violation of applicable laws. Although we generally receive
assurance from our advertising partners that their ads are lawful
and that they have the right to use any copyrights, trademarks or
other intellectual property included in an ad, and although we are
normally indemnified by the advertisers, a third party or
regulatory authority may still file a claim against us. Any such
claims could be costly and time consuming to defend and could also
hurt our reputation
15
within the mobile advertising industry. Further, if we are exposed
to legal liability, we could be required to pay substantial fines
or penalties, redesign our business methods, discontinue some of
our services or otherwise expend significant resources.
Security breaches or computer virus attacks could have a material
adverse effect on our business prospects and results of
operations.
Any significant breach of security of our computer systems could
significantly harm our business, reputation and results of
operations and could expose us to lawsuits brought by our users and
partners and to sanctions by governmental authorities in the
jurisdictions in which we operate. We cannot assure you that our IT
systems will be completely secure from future security breaches or
computer virus attacks. Anyone who is able to circumvent our
security measures could misappropriate proprietary information,
including the personal information of our users, obtaining
user’s names and passwords and enabling the hackers to access
user’s other online and mobile accounts, if those users use
identical user names and passwords. They could also misappropriate
other information, including our content. These circumventions may
cause interruptions in our operations or damage our brand image and
reputation. Our servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which
could cause system interruptions, website slowdown or
unavailability, delays in communication or transactions, or loss of
data. We may be required to incur significant additional costs to
protect against security breaches or to alleviate problems caused
by such breaches. In addition, a significant security breach or
virus attack on our system could result in a material adverse
impact on our business and results of operations.
We may incur net losses and experience negative cash flow from
operating activities in the future and may not be able to obtain
additional capital in a timely manner or on acceptable terms, or at
all.
In fiscal year 2015 and in the six months ended January 31, 2016,
we generated net income, compared to a net loss incurred in fiscal
year 2014. While we were profitable in those periods we may incur
net losses in the future as we grow our business. In addition, we
experienced cash flow from operating activities of $2.3 million,
$0.8 million and $1.4 million in fiscal years 2015 and 2014 and for
the six months ended January 31, 2016, respectively. Although we
generated positive cash flow from operating activities, we may
experience negative cash flows again in the future.
Our ability to achieve and maintain profitability and positive cash
flow from operating activities depends on various factors,
including but not limited to, the acceptance of our products and
services by mobile internet users, the growth and maintenance of
our user base, our ability to maintain existing and obtain new
advertisers, our ability to grow our revenues and the effectiveness
of our selling and marketing activities as well as control our
costs and expenses. We may not be able to achieve or sustain
profitability or positive cash flow from operating activities, and
if we achieve positive operating cash flow, it may not be
sufficient to satisfy our anticipated capital expenditures and
other cash needs. As such, we may not be able to fund our operating
expenses and expenditures and may be unable to fulfill our
financial obligations as they become due, which may result in
voluntary or involuntary dissolution or liquidation proceeding of
our company and a total loss of your investment.
We have granted, and may continue to grant, options, restricted
shares and other types of awards under our share incentive plans,
which may result in increased share-based compensation
expenses.
The expenses associated with share-based compensation have affected
our net income and may reduce our net income in the future, and any
additional securities issued under share-based compensation schemes
will dilute the ownership interests of our stockholders. We believe
the granting of share-based compensation is of significant
importance to our ability to attract and retain key personnel and
employees, or consultants, and we will continue to grant
share-based compensation in the future. As a result, our expenses
associated with share-based compensation may increase, which may
have an adverse effect on our results of operations.
We are exposed to fluctuations in foreign currency exchange
rates.
We have significant operations in Europe that are denominated in
foreign currencies, primarily the Norwegian Kroner, subjecting us
to foreign currency risk. The strengthening or weakening of the
U.S. Dollar versus these currencies impacts the expenses generated
in these foreign currencies when converted into the U.S. Dollar. In
fiscal year 2015, foreign currency movements relative to the U.S.
Dollar positively impacted gains from foreign exchange transactions
by approximately $0.2 million (net of a $0.1 million loss from
hedging activities). While we regularly enter into transactions to
hedge portions of our foreign currency exposure, it is impossible
to predict or eliminate the effects of this exposure. Fluctuations
in foreign exchange rates could significantly impact our financial
results.
16
If we fail to implement and maintain an effective system of
internal controls, we may be unable to accurately report our
results of operations, meet our reporting obligations or prevent
fraud.
We are a majority-owned subsidiary of IDT relying on IDT for
finance, accounting, internal audit and certain legal and human
resource department needs. Our independent registered public
accounting firm has not conducted an audit of our internal controls
over financial reporting. However, in connection with the audit of
our consolidated financial statements as of and for the fiscal year
ended July 31, 2015, we and our independent registered public
accounting firm identified three material weaknesses relating to
Financial Reporting, Account Reconciliations and Segregation of
Duties, which resulted in material audit adjustments.
Financial Reporting
As a subsidiary of IDT our results were immaterial to IDT’s
books and records. As such we did not maintain a sufficient
complement of personnel (either directly or through services
provided by IDT) with an appropriate level of accounting knowledge,
experience, and training in the application of Generally Accepted
Accounting Principles (GAAP) commensurate with our financial
reporting requirements and business environment.
Account Reconciliations
Account reconciliations have historically not been performed for
all significant accounts or performed on a timely basis. This did
not impact IDT’s books and records but was material to us on
a stand-alone basis. We need to establish internal controls to
identify and detect material misstatements using a stand-alone
materiality level.
Segregation of Duties
With the size of our company, segregation of duties issues would
inherently exist. Going forward we need to ensure that the
appropriate activity level controls exist to mitigate this issue
including ensuring a preparer and reviewer exists for all journal
entries recorded in the general ledger.
In order to remediate the material weaknesses, we will need to
either hire our own personnel, outsource to third party providers,
or alternatively rely on IDT, under a services arrangement with
greater service levels than were provided by IDT historically, to
provide us with an adequate allotment of resources with technical
accounting expertise, to design adequate review and monitoring
procedures in our accounting and finance organization, and identify
and implement improved processes and controls. Further we will need
to design and implement a system of internal controls over
financial reporting required to comply with our future obligations
and to strengthen our overall control environment. This initiative
will be time consuming, costly, and might place significant demands
on our financial and operational resources, as well as our IT
systems. However, we cannot assure you that we will be able to
continue implementing these measures in the future, or that we will
not identify additional material weaknesses or significant
deficiencies in the future. We have started to remediate the
material weaknesses by assigning IDT personnel to assist with the
preparation and review of Zedge’s financial reporting and
account reconciliations. We believe that this assignment of IDT
personnel should also remediate the segregation of duties issues as
well. However we are in the process of identifying any other
segregation of duties issues that may exist in an effort to
remediate them. We will monitor our progress, and take further
steps to fine tune our remediation for our current business needs
as we continue our evaluation.
Furthermore, it is possible that, had our independent registered
public accounting firm conducted an audit of our internal control
over financial reporting, such firm might have identified
additional material weaknesses and deficiencies. Upon the
completion of the spin-off, we will become a public company in the
United States subject to the Sarbanes-Oxley Act of 2002. Under
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, a
newly public company is not required to comply with either the
management or the auditor reporting requirements related to
internal control over financial reporting until its second annual
report, if applicable. As such we will be required to include a
report of management on our internal control over financial
reporting in our annual report beginning with our annual report for
the fiscal year ending July 31, 2017. In addition, should we become
an accelerated filer, our independent registered public accounting
firm must attest to and report on the effectiveness of our internal
control over financial reporting. Our management may conclude that
our internal control over financial reporting is not effective.
Moreover, even if our management concludes that our internal
control over financial reporting is effective, our independent
registered public accounting firm, after conducting its own
independent testing, may issue a report that is qualified if it is
not satisfied with our internal controls or the level at which our
controls are documented,
17
designed, operated or reviewed, or if it interprets the relevant
requirements differently from us. In addition, after we become a
public company, our reporting obligations may place a significant
strain on our management, operational and financial resources and
systems for the foreseeable future. We may be unable to timely
complete our evaluation testing and any required remediation.
During the course of documenting and testing our internal control
procedures, in order to satisfy the requirements of Section 404, we
may identify other weaknesses and deficiencies in our internal
control over financial reporting. In addition, if we fail to
maintain the adequacy of our internal control over financial
reporting, as these standards are modified, supplemented or amended
from time to time, we may not be able to conclude on an ongoing
basis that we have effective internal control over financial
reporting in accordance with Section 404. If we fail to achieve and
maintain an effective internal control environment, we could suffer
material misstatements in our financial statements and fail to meet
our reporting obligations, which would likely cause investors to
lose confidence in our reported financial information. This could
in turn limit our access to capital markets, harm our results of
operations, and lead to a decline in the trading price of our
stock.
Additionally, ineffective internal control over financial reporting
could expose us to increased risk of fraud or misuse of corporate
assets and subject us to potential delisting from the stock
exchange on which we list, regulatory investigations and civil or
criminal sanctions. We may also be required to restate our
financial statements from prior periods.
Future strategic alliances or acquisitions may not be successful
and may have a material and adverse effect on our business,
reputation and results of operations.
We may enter into strategic alliances, including joint ventures or
minority equity investments, with various third parties to further
our business purpose from time to time. These alliances could
subject us to a number of risks, including risks associated with
sharing proprietary information, non-performance by the third party
and increased expenses in establishing new strategic alliances, any
of which may materially and adversely affect our business. We may
have limited ability to monitor or control the actions of these
third parties and, to the extent any of these strategic third
parties suffers negative publicity or harm to their reputation from
events relating to their business, we may also suffer negative
publicity or harm to our reputation by virtue of our association
with any such third party.
In addition, although we have no immediate acquisition plans, if
appropriate opportunities arise, we may acquire additional assets,
products, technologies or businesses that are complementary to our
existing business. Future acquisitions and the subsequent
integration of new assets and businesses into our own would require
significant attention from our management and could result in a
diversion of resources from our existing business, which in turn
could have an adverse effect on our business operations. Acquired
assets or businesses may not generate the financial results we
expect. Acquisitions could result in the use of substantial amounts
of cash, potentially dilutive issuances of equity securities, the
occurrence of significant goodwill impairment charges, amortization
expenses for other intangible assets and exposure to potential
unknown liabilities of the acquired business. Moreover, the costs
of identifying and consummating acquisitions may be significant. In
addition to possible stockholders’ approval, we may also have
to obtain approvals and licenses from relevant government
authorities for the acquisitions and to comply with any applicable
laws and regulations, which could result in increased delay and
costs.
Our business, financial condition and results of operations, as
well as our ability to obtain financing, may be adversely affected
by downturn in the global economy.
The global financial markets have experienced significant
disruptions over the past ten years and the recovery from the lows
of 2008 and 2009 has been uneven. There is considerable uncertainty
over the long-term effects of the expansionary monetary and fiscal
policies adopted by the central banks and financial authorities of
some of the world’s leading economies. There have also been
concerns over unrest in the Middle East and Africa, which have
resulted in volatility in oil and other markets. We may be affected
by economic downturns. A prolonged slowdown in the world economy
may lead to a reduced amount of mobile internet advertising, which
could materially and adversely affect our business, financial
condition and results of operations.
Moreover, a slowdown or disruption in the global economy may have a
material and adverse impact on financings available to us. The
weakness in the economy could erode investor confidence, which
constitutes the basis of the credit market. Turmoil affecting the
financial markets and banking system may significantly restrict our
ability to obtain financing in the capital markets or from
financial institutions on commercially reasonable terms, or at
all.
18
The reporting requirements associated with our being a public
company could subject us to significant expenses.
As a result of the spin-off,
we will become a public reporting company and will be required to
file with the Securities and Exchange Commission reports required
by the Exchange Act of 1934. Specifically, among other
requirements, we will need to file quarterly reports on Form 10-Q,
annual reports on Form 10-K and under some circumstances, current
reports on Form 8-K, in accordance with strict timelines. We will
also be required to file annual proxy materials. In addition, as
part of those filings, we will be required to provide annual
audited financial statements. Also, we will need to establish an
internal audit function. We anticipate that compliance with such
requirements will significantly increase our legal and accounting
costs and will demand significant attention from management. The
resources and time required to comply with rules applicable to
public companies could divert financial and human resources from
focusing on our business, and we can provide no assurance that the
benefits of our being public outweigh the disadvantages and costs
associated with compliance. We currently anticipate our total costs
to increase by approximately $750,000 to $900,000 a 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.
There may not be an active trading market for shares of our Class B
common stock and stockholders may find it difficult to transfer our
securities.
Prior to the spin-off, there
is no public trading market for shares of our common stock. We have
applied and received authorization to have Zedge’s Class B
common stock listed for trading on the NYSE MKT under the symbol
“ZDGE”. We intend to satisfy all the requirements in
order for Zedge’s Class B common stock to commence trading
following the distribution date. We cannot predict the extent to
which investor interest in us will lead to the development of an
active trading market in our common stock or how liquid such a
market might become. It is possible that, if our Class B common
stock is eventually listed on the NYSE MKT an active trading market
will not develop or continue, and there can be no assurance as to
the price at which our Class B common stock will trade. The initial
share price of our Class B common stock may not be indicative of
prices that will prevail in any future trading market.
In addition, because of the significant changes that will take
place as a result of the spin-off, the trading market for our Class
B common stock and IDT’s Class B common stock after the
spin-off may be significantly different from that for IDT’s
Class B common stock prior to the spin-off.
We cannot predict the price
range or volatility of our Class B common stock after it is listed,
and sales of a substantial number of shares of our Class B common
stock may adversely affect the market price of our Class B common
stock.
Investors may suffer dilution.
We may engage in equity financing to fund our future operations and
growth. If we raise additional funds by issuing equity securities,
stockholders may experience significant dilution of their ownership
interest (both with respect to the percentage of total securities
held, and with respect to the book value of their securities) and
such securities may have rights senior to those of the holders of
our common stock.
We are controlled by our principal stockholder, which limits the
ability of other stockholders to affect our management.
Following the spin-off, Howard
S. Jonas, will be majority stockholder and a director, and will
have voting power over 839,302 shares of our Class B common stock
(which includes 524,775 shares of our Class A common stock, which
are convertible into shares of our Class B common stock on a
1-for-1 basis, and 314,527 shares of our Class B common stock),
representing approximately 66% of the combined voting power of our
outstanding capital stock. Mr. Jonas is able to control matters
requiring approval by our stockholders, including the election of
all of the directors and the approval of significant corporate
matters, including any merger, consolidation or sale of all or
substantially all of our assets. As a result, the ability of any of
our other stockholders to influence our management is
limited.
We intend to exercise our option for the “controlled
company” exemption under NYSE MKT rules with respect to our
Nominating Committee.
Following the spin-off, we will be a “controlled
company” as defined in section 801(a) of the NYSE MKT Company
Guide because more than 50% of the combined voting power of all of
our outstanding common stock will be beneficially owned by a single
stockholder. As a “controlled company,” we will be
exempt from certain NYSE MKT rules requiring a board of directors
with a majority of independent members, a compensation committee
composed
19
entirely of independent directors and a nominating committee
composed entirely of independent directors. These independence
standards are intended to ensure that directors who meet those
standards are free of any conflicting interest that could influence
their actions as directors. We intend to apply this
“controlled company” exemption for our corporate
governance practices only with respect to the independence
requirements of our Nominating Committee. Accordingly, with respect
to our Nominating Committee you will not have the same protections
afforded to stockholders of companies that are subject to all of
the corporate governance requirements of the NYSE MKT, and if we
were to apply the controlled company exemption to other
independence requirements, you would not have the protection
afforded by those requirements either.
We have limited resources and could find it difficult to raise
additional capital.
As a result of the spin-off, we will be independent from IDT. We
have no operating history as an independent company, and no current
sources of financing. Any financing formerly provided to any of our
businesses by IDT will no longer be available. We may need to raise
additional capital in order for stockholders to realize increased
value on our securities. Given the current global economy, there
can be no assurance that we will be able to obtain the necessary
funding on commercially reasonable terms in a timely fashion.
Failure to receive the funding could have a material adverse effect
on our business, prospects, and financial condition.
Our historical and pro forma financial information may not be
indicative of our future results as an independent
company.
The historical and pro forma financial information we have included
in this Information Statement may not reflect what our results of
operations, financial position and cash flows would have been had
we been an independent company during the periods presented or be
indicative of what our results of operations, financial position
and cash flows may be in the future when we are an independent
company. Our pro forma information should not be assumed to be
indicative of what our results of operations, cash flows or
financial condition actually would have been as a stand-alone
public company nor to be a reliable indicator of what our results
of operations, cash flows and financial condition actually may be
in the future.
Risks Related to the Separation from IDT
The combined post-separation value of IDT and Zedge common stock
may not equal or exceed the pre-separation value of IDT common
stock.
As a result of the distribution, IDT expects the trading price of
IDT common stock immediately following the distribution to be lower
than the “regular-way” trading price of such common
stock immediately prior to the distribution because the trading
price will no longer reflect Zedge’s value. The aggregate
market value of the IDT common stock and Zedge common stock
following the separation may be higher or lower than the market
value of IDT common stock immediately prior to the separation.
If the spin-off were to fail to qualify as a reorganization for
U.S. federal income tax purposes under Sections 368(a)(1)(D) and
355 of the Internal Revenue Code of 1986, our stockholders and/or
IDT might be subject to significant tax liability.
If the spin-off fails to qualify for tax-free treatment, IDT would
be treated as if it had sold the common stock of our company for
its fair market value, resulting in a taxable gain to the extent of
the excess of such fair market value over its tax basis in our
stock. In general, our initial public stockholders would be treated
as if they had received a taxable distribution equal to the fair
market value of our common stock that was distributed to them. For
additional information, see “Material U.S. Federal Income Tax
Consequences of the Spin-Off” beginning on page 28.
An active trading market for our common stock may not
develop.
Prior to the spin-off, there has been no public market for our
common stock. Although our Class B common stock has been approved
for listing on NYSE MKT, an active trading market for our shares
may never develop or be sustained following the spin-off. If an
active market for our common stock does not develop, it may be
difficult to sell shares you receive in the spin-off without
depressing the market price for the shares or to sell your shares
at all.
20
The trading price of the shares of our common stock is likely to be
volatile, and purchasers of our common stock could incur
substantial losses.
Our stock price is likely to be volatile. The stock market in
general and the market for mobile internet companies in particular
have experienced extreme volatility that has often been unrelated
to the operating performance of particular companies. As a result
of this volatility, investors may not be able to sell their common
stock at or above the price paid for the shares. The market price
for our common stock may be influenced by many factors,
including:
•
actual or anticipated variations in quarterly operating
results;
•
changes in financial estimates by us or by any securities analysts
who might cover our stock;
•
conditions or trends in our industry;
•
stock market price and volume fluctuations of other publicly traded
companies and, in particular, those that operate in the
advertising, internet or media industries;
•
announcements by us or our competitors of new product or service
offerings, significant acquisitions,
•
strategic partnerships or divestitures;
•
announcements of investigations or regulatory scrutiny of our
operations or lawsuits filed against us;
•
capital commitments;
•
additions or departures of key personnel; and
•
sales of our common stock, including sales by our directors and
officers or specific stockholders. In addition, in the past,
stockholders have initiated class action lawsuits against
technology companies following periods of volatility in the market
prices of these companies’ stock. Such litigation, if
instituted against us, could cause us to incur substantial costs
and divert management’s attention and resources.
If securities or industry analysts do not publish research or
publish unfavorable research about our business, our stock price
and trading volume could decline.
The trading market for our common stock will rely in part on the
research and reports that equity research analysts publish about us
and our business. We do not currently have and may never obtain
research coverage by equity research analysts. Equity research
analysts may elect not to provide research coverage of our common
stock after the completion of the spin-off, and such lack of
research coverage may adversely affect the market price of our
common stock. In the event we do have equity research analyst
coverage, we will not have any control over the analysts or the
content and opinions included in their reports. The price of our
stock could decline if one or more equity research analysts
downgrade our stock or issue other unfavorable commentary or
research. If one or more equity research analysts ceases coverage
of our company or fails to publish reports on us regularly, demand
for our stock could decrease, which in turn could cause our stock
price or trading volume to decline.
Our results of operations may be subject to wide fluctuations due
to a number of factors, which may adversely affect the trading
price of our stock.
We may experience seasonality
and other fluctuations in our business, reflecting fluctuations in
mobile internet and smartphone usage and advertising. Revenues from
mobile application products and services are typically higher in
the fourth quarter of the calendar year due to increased year-end
advertising and marketing budgets. Conversely we generally
experience lower advertising revenues during the first quarter due
to weaker advertising spend following the holidays. Thus, our
operating results in one or more future quarters or years may
fluctuate substantially or fall below the expectations of
securities analysts and investors. In such event, the trading price
of our stock may fluctuate significantly.
We may not achieve some or all of the expected benefits of the
separation, and the separation could harm our business.
We may not be able to achieve the full strategic and financial
benefits expected to result from the separation, or such benefits
may be delayed or not occur at all. The separation and distribution
is expected to provide the following
21
benefits, among others: enhanced strategic and management focus;
better ability to form strategic partnerships and relationships;
faster decision-making; more efficient allocation of capital;
alignment of incentives with performance objectives; direct access
to the capital markets; and a distinct investment identity.
We may not achieve these and other anticipated benefits for a
variety of reasons, including, among others:
•
the separation will require significant amounts of
management’s time and effort, which may divert
management’s attention from operating and growing our
business;
•
following the separation, we may be more susceptible to market
fluctuations and other adverse events than if we were still a part
of IDT;
•
following the separation, our business will be less diversified
than IDT’s business prior to the separation; and
•
the other actions required to separate the respective businesses
could disrupt our operations.
If we fail to achieve some or all of the benefits expected to
result from the separation, or if such benefits are delayed, our
business could be harmed.
If we are unable to attract and retain highly qualified employees,
we may not be able to grow effectively.
Our ability to compete and grow depends in large part on the
efforts and talents of our employees. Such employees, particularly
product managers, designers and engineers, are in high demand, and
we devote significant resources to identifying, hiring, training,
successfully integrating and retaining these employees. The loss of
employees or the inability to hire additional skilled employees as
necessary could result in significant disruptions to our business,
and the integration of replacement personnel could be
time-consuming and expensive and cause additional disruptions to
our business.
We believe that two critical components of our success are our
ability to retain our best people by preserving our culture and
maintaining competitive compensation practices. As we continue to
grow rapidly, and we develop the infrastructure of a public
company, we may find it difficult to maintain our entrepreneurial,
execution-focused culture. In addition, some of our employees may
be able to receive material proceeds from sales of our equity in
the public markets after our separation from IDT, which may reduce
their motivation to continue to work for us.
Our limited operating history makes it difficult to evaluate our
business and prospects and may increase your investment
risk.
We have only a limited operating history upon which you can
evaluate our business and prospects. Although we have experienced
significant revenue growth in recent periods, it is likely that we
will not be able to sustain this growth. As part of the nascent
mobile advertising industry, we will encounter risks and
difficulties frequently encountered by early-stage companies in
rapidly evolving industries, including the need to:
•
maintain our reputation and build trust with our advertiser and
developer clients;
•
offer competitive pricing to both advertisers and developers;
•
maintain and expand our network of advertising space through which
we deliver mobile advertising campaigns;
•
deliver advertising results that are superior to those that
advertisers or developers could achieve directly or through the use
of competing providers or technologies;
•
continue to develop and upgrade the technologies that enable us to
provide mobile advertising services;
•
respond to evolving government regulations relating to the
internet, telecommunications, privacy, direct marketing and
advertising aspects of our business;
•
identify, attract, retain and motivate qualified personnel; and
•
manage our expanding operations.
22
If we do not successfully address these risks, our revenue could
decline and our ability to pursue our growth strategy and attain
profitability could be compromised.
Our net operating loss carryforwards may expire unutilized or
underutilized, which could prevent us from offsetting future
taxable income.
We may be limited in the portion of net operating loss
carryforwards that we can use in the future to offset taxable
income for U.S. federal income tax purposes. Our gross state net
operating loss carryforwards are equal to or less than the federal
net operating loss carryforwards and expire over various periods
based on individual state tax law.
We periodically assess the likelihood that we will be able to
recover our net deferred tax assets. We consider all available
evidence, both positive and negative, including historical levels
of income, expectations and risks associated with estimates of
future taxable income and ongoing prudent and feasible profits. As
a result of this analysis of all available evidence, both positive
and negative, we concluded that a full valuation allowance against
our net deferred tax assets should be applied as of January 31,
2016. To the extent we determine that all or a portion of our
valuation allowance is no longer necessary, we will recognize an
income tax benefit in the period such determination is made for the
reversal of the valuation allowance. Once the valuation allowance
is eliminated or reduced, its reversal will no longer be available
to offset our current tax provision. These events could have a
material impact on our reported results of operations.
23
SPECIAL NOTE ABOUT
FORWARD-LOOKING STATEMENTS
This information statement and other materials filed or to be filed
by us and IDT, as well as information in oral statements or other
written statements made or to be made by us and IDT, contain
statements, including in this document under the captions
“Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business,” that are, or may be considered to be,
forward-looking statements. All statements that are not historical
facts, including statements about our beliefs or expectations, are
forward-looking statements. You can identify these forward-looking
statements by the use of forward-looking words such as
“outlook,” “believes,”
“expects,” “potential,”
“continues,” “may,” “will,”
“should,” “seeks,”
“approximately,” “predicts,”
“intends,” “plans,”
“estimates,” “anticipates,”
“foresees” or the negative version of those words or
other comparable words and phrases. Any forward-looking statements
contained in this information statement are based upon our
historical performance and on current plans, estimates and
expectations. The inclusion of this forward-looking information
should not be regarded as a representation by us or any other
person that the future plans, estimates or expectations
contemplated by us will be achieved.
We believe that the factors that could cause our actual results to
differ materially include but are not limited to the factors we
describe in this information statement, including under “Risk
Factors,” “The Spin-off” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” The following list
represents some, but not necessarily all, of the factors that could
cause actual results to differ from historical results or those
anticipated or predicted by these forward-looking statements:
•
Fluctuations in our financial results;
•
Changes in demand for our licenses or the prevalence of
communications over the internet use;
•
Acts of terrorism or war;
•
The availability of competing intellectual property at lower
prices;
•
Difficulty in developing, preserving and protecting our
intellectual property;
•
Adequacy of our internal controls;
•
Loss of key management and other personnel;
•
Our ability to comply with laws governing our operations and
industries;
•
Increases in tax liabilities;
•
Difficulty in implementing our business strategies;
•
Availability and access to financial and other resources;
•
Failure to qualify as a tax-free reorganization; and
•
Our ability to obtain financing;
These factors should not be construed as exhaustive and should be
read in conjunction with the other cautionary statements that are
included in this information statement. If one or more of these or
other risks or uncertainties materialize, or if our underlying
assumptions prove to be incorrect, actual results may vary
materially from what we projected. Consequently, actual events and
results may vary significantly from those included in or
contemplated or implied by our forward-looking statements. The
forward-looking statements included in this information statement
are made only as of the date of this information statement, and we
undertake no obligation to publicly update or review any
forward-looking statement made by us or on our behalf, whether as a
result of new information, future developments, subsequent events
or circumstances or otherwise.
24
THE SPIN-OFF
After a strategic review of IDT’s operations and costs, IDT
determined that separating Zedge’s businesses from its other
operations would best facilitate the growth and exploitation of
Zedge’s position and presence under its own management focus
and long-term growth plans and allow Zedge to create more long-term
value than to continue to have Zedge controlled by IDT. In
addition, by separating from the remaining IDT businesses, the
separate entities may avoid exposure to the risks associated with
the other company’s businesses.
The transaction is intended to be in the form of a tax-free
distribution to IDT’s stockholders. IDT’s Board of
Directors established a record date of May 26, 2016 and established
a distribution date for the spin-off shortly before the completion
of the distribution. You should consult your own tax advisor
concerning the tax impact of the spin-off on you.
Reasons for the
Spin-Off
IDT’s Board of Directors believes that the spin-off will
allow Zedge to better focus on its strategic mission and that its
prospects will be better served as an independent entity. Zedge
provides one of the most popular content distribution 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, Zedge’s platform is optimized for mobile device
personalization including ringtones, wallpapers, home screen icons
and notification sounds. The Zedge smartphone app, available in the
Google Play, iTunes and Microsoft Market app stores, has been
installed over 190 million times, has more than 32 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 six years and is
ranked in the top 10 most popular free apps in the iTunes
Entertainment category. Zedge has grown its user base without
material investment in marketing, user acquisition or
advertising.
Management believes that separating Zedge from the remaining IDT
businesses will allow management of each of IDT and Zedge to design
and implement corporate strategies and policies that are based
solely on the business characteristics of that company and the
industry in which they compete, to maintain a sharper focus on core
business and growth opportunities, and to concentrate their
financial resources wholly on their own operations. The companies
will be able to reinvest the proceeds from their operations into
their businesses, find other ways to deploy those resources or
distribute value to that company’s shareholders.
Management believes that a smaller entity with fewer diverse
business interests and a focus on the internet and mobile
applications is needed to best position Zedge for continued growth.
This structure will allow Zedge to better position itself as a
mobile internet growth company opening the door for new
partnerships, creating transparency and prioritizing opportunities
that may not align with IDT’s core business priorities.
Management believes that this will be better accomplished as part
of an independent Zedge and not as a controlled subsidiary of IDT.
Because of the need of having management with complete decision
making authority to achieve the full strategic and financial
benefits that they believe possible for Zedge, this is not
practicable in a non-taxable transaction that did not result in a
full separation from IDT. Further, as IDT has previously disclosed,
IDT is working toward another spin-off that will separate IDT
Telecom and many of its other interests.
In addition, IDT and Zedge also believe that management of Zedge
may better be able to enhance the value of Zedge under the proposed
structure more so than was possible as part of IDT or as a
standalone entity, due to Zedge’s ability to attract talent,
new business partners and establish a well-recognized brand.
IDT initially announced its intent to spin-off Zedge as part of
larger strategic restructuring in August 2015.
In August 2015, the IDT Board of Directors determined that a
spin-off of Zedge independent of the spin-off of the other proposed
entities, presented an opportunity to realize synergies from the
overlap of the nature and approach to generate value from those
businesses and eliminate restrictions on those efforts that
resulted from being part of IDT, and authorized the spin-off of
Zedge in its current form. The determination is based on the belief
that it is the plan with the greatest likelihood of realizing the
greatest value to the IDT shareholders.
On March 7, 2016, the IDT Board of Directors gave its final
approval for the spin-off in the form described in this information
statement.
25
IDT’s Board of Directors weighed the reasons for the spin-off
and the other benefits it is expected to bring against the negative
impacts thereof, including the one-time costs of effecting the
spin-off, the increased costs of maintaining IDT and Zedge as
separate public companies, the possibility of reduced liquidity in
the market for the Zedge common stock as a smaller company and the
disruption on operations caused by the separation. The Board of
Directors concluded that the reasons and benefits outweighed the
negative impacts and elected to proceed with the spin-off.
Other Benefits of the
Spin-Off
The Board of Directors of IDT considered the following potential
benefits in making the determination to effect the spin-off:
•
Reduce internal competition for capital. Instead of having limited
access to resources, Zedge will now be able to invest its resources
and cash flow exclusively into our business. In addition, it will
have direct access to capital markets to allow us to seek to
finance its operations and growth without having to compete with
IDT’s other businesses with respect to financing. As an
independent entity, it will be in a position to pursue strategies
our Board of Directors and management believe will create long-term
stockholder value, including organic and acquisition growth
opportunities, provided it continues to have access to capital.
•
Provide both companies heightened strategic flexibility to form
strategic business alliances in their target markets, unencumbered
by considerations of the potential impact on the other
business.
•
Provide for a market for Zedge equity, including options and
restricted shares, in order to provide the appropriate incentive
mechanisms to motivate and reward its management and employees. The
common stock of the independent, publicly-traded Zedge will have a
value that reflects the efforts and performance of its management
and employees. As a result, we will be able to develop better
incentive programs to attract and retain key employees through the
use of stock-based and performance-based incentive plans that more
directly link their compensation with Zedge’s financial
performance. These programs will be designed to more directly
reward employees based on Zedge’s performance.
•
Allow Zedge to effect future acquisitions utilizing its common
stock for all or part of the consideration and to issue a security
more directly tied to the performance of its business.
•
Increase transparency and clarity into the different businesses of
IDT and Zedge. The investment community will be better able to
evaluate the merits and future prospects of each company. This will
enhance the likelihood that each company will receive an
appropriate market valuation.
Neither Zedge nor IDT can assure you that, following the spin-off,
any of these benefits will be realized to the extent anticipated or
at all. For a description of the factors that might impact our
ability to achieve these benefits, see “Risk
Factors.”
Negative
Factors
In evaluating the spin-off, the IDT’s Board of Directors also
considered a number of other factors that may have weighed against
proceeding, including:
•
The one-time costs of the spin-off, and the ongoing costs of having
us operate as an independent public company, including legal,
auditing and other costs of compliance with laws and regulations
applicable to public companies, that are estimated to be between
$750,000 and $900,000 annually;
•
IDT’s capital structure and the need to replicate that
structure in Zedge;
•
The possibility that disruptions in normal business may result,
including as we are compelled to independently perform functions
that previously were provided by IDT; and
•
The risk that the combined trading prices of our common stock and
IDT common stock after the distribution may be lower than the
trading price of IDT common stock before the distribution.
26
IDT’s Board of Directors concluded, however, that the
potential long-term benefits of the spin-off outweigh these
factors, and that separating us from IDT in the form of a tax-free
distribution is appropriate and advisable.
Manner of Effecting the
Spin-Off
The general terms and conditions relating to the spin-off are set
forth in the Separation and Distribution Agreement between us and
IDT. The spin-off will be effective at 11:59 p.m., New York City
time on the distribution date, June 1, 2016. As a result of the
spin-off, each IDT stockholder will receive one share of our Class
A common stock for every three shares of IDT Class A common stock
and one share of our Class B common stock for every three shares of
IDT Class B common stock held as of the record date. The
distribution agent will first convert shares of our Class A common
stock into Class B common stock and then aggregate fractional
shares of our Class B common stock into whole shares, sell the
respective whole shares in the open market at prevailing market
prices and distribute the aggregate net cash proceeds of the
respective sales pro rata to each holder of our Class A common
stock and Class B common stock, respectively, who otherwise would
have been entitled to receive a fractional share in the
distribution. Recipients of cash in lieu of fractional shares will
not be entitled to any interest on the amounts of payment made in
lieu of fractional shares. The receipt of cash in lieu of
fractional shares generally will be taxable to the recipient
stockholders as described in “Material U.S. Federal Income
Tax Consequences of the Spin-Off” beginning on page 28.
In order to be entitled to receive shares of our common stock in
the spin-off, IDT stockholders must have been stockholders as of
the record date. The distribution of shares of our Class B common
stock will be paid in book-entry form and physical stock
certificates will be issued only to holders of our Class A common
stock and, upon request, to holders of our Class B common stock.
Each share of our Class A common stock and Class B common stock
that is distributed will be validly issued, fully paid and
non-assessable and free of preemptive rights. See
“Description of Our Capital Stock” beginning on page
62.
IDT stockholders will not be required to pay for shares of our
Class A common stock and Class B common stock received in the
spin-off or to surrender or exchange shares of IDT Class A common
stock and/or Class B common stock in order to receive our common
stock or to take any other action in connection with the spin-off.
No vote of IDT stockholders is required or sought in connection
with the spin-off, and IDT stockholders will have no appraisal
rights in connection with the spin-off.
If any stockholder of IDT on the record date sells shares of IDT
common stock after the record date but on or before the spin-off
date, the buyer of those shares, and not the seller, will become
entitled to receive the shares of our common stock issuable in
respect of the shares sold. See “Trading Between the Record
Date and Spin-Off Date” below for more information.
Trading Between the
Record Date and Distribution Date
Beginning on the record date and continuing up to and including
through the distribution date, there were two markets in IDT Class
B common stock: a “regular-way” market and an
“ex-distribution” market. Shares of IDT Class B common
stock that trade on the regular-way market traded with an
entitlement to receive shares of Zedge Class B common stock to be
distributed in the distribution. Shares that trade on the
ex-distribution market traded without an entitlement to receive
shares of Zedge Class B common stock to be distributed in the
distribution. Therefore, if you sold shares of IDT Class B common
stock in the “regular-way” market after the close of
business on the record date and up to and including through the
distribution date, you sold your right to receive shares of Zedge
Class B common stock in the distribution. If you own shares of IDT
Class B common stock at the close of business on the record date
and sold those shares on the “ex-distribution” market,
up to and including through the distribution date, you will still
receive the shares of Zedge Class B common stock that you would be
entitled to receive pursuant to your ownership of the shares of IDT
Class B common stock.
Furthermore, beginning on the record date and continuing up to and
including through the distribution date, there has been a
“when-issued” market in our Class B common stock.
“When-issued” trading refers to a sale or purchase made
conditionally because the security has been authorized but not yet
issued. The “when-issued” trading market has been a
market for shares of Zedge Class B common stock that will be
distributed to IDT stockholders on the distribution date. If you
owned shares of IDT Class B common stock at the close of business
on the record date, you would be entitled to shares of our Class B
common stock to be distributed in the distribution. You could have
traded this entitlement to shares of Zedge Class B common stock,
without trading the shares of IDT Class B common stock
27
you own, on the “when-issued” market. Trading in shares
of our Class B common stock began on a “when-issued”
basis on the record date, and “regular way” trading
will begin on June 2, 2016, then “when-issued” trading
with respect to our Class B common stock will end.
Results of the
Spin-Off
After the spin-off, we will be a separately traded, public company.
Immediately following the spin-off, we expect to have approximately
1 record holder of our Class A common stock and 522 record holders
of shares of our Class B common stock based on the number of
beneficial and record holders, respectively, of shares of IDT Class
A common stock and Class B common stock on May 26, 2016 and non-IDT
holders of shares prior to the spin-off. These numbers do not
include the number of persons whose shares are in nominee or in
“street name” accounts through brokers. The actual
number of shares to be distributed will be determined on the record
date and will reflect any exercise of IDT stock options between the
date the Board of Directors of IDT declares the distribution for
the spin-off and the record date for the spin-off.
We and IDT will be parties to a number of agreements that govern
the spin-off and the future relationship between the two companies.
For a more detailed description of these agreements, please see
“Our Relationship with IDT After the Spin-” beginning
on page 59.
Treatment of Stock
Options Issued by IDT in the Spin-Off
In the spin-off, the exercise price of each outstanding option to
purchase IDT Class B common stock that was issued by IDT will be
proportionately reduced based on the relative trading prices of IDT
and Zedge following the spin-off.
Interest of Zedge
Officers and Directors
The interest of our officers and board of directors in the spin-off
is reflected in their stock ownership as set forth in the Security
Ownership and Certain Beneficial Owners and Management table as
certain of them will be receiving shares of our common stock as a
result of the distribution.
Material U.S. Federal
Income Tax Consequences of the Spin-Off
The following is a summary of the material U.S. federal income tax
consequences to IDT, the holders of IDT Class A common stock and
Class B common stock, us and the holders of our common stock after
the spin-off as of the date hereof. This summary does not discuss
all tax considerations that may be relevant to stockholders in
light of their particular circumstances, nor does it address the
consequences to stockholders subject to special treatment under the
U.S. federal income tax laws, such as stockholders subject to the
alternative minimum tax, tax-exempt entities, non-resident alien
individuals, foreign entities, foreign trusts and estates and
beneficiaries thereof, stockholders who acquire shares as
compensation for services (including holders of IDT restricted
stock who did not make a Section 83(b) election), banks, insurance
companies, other financial institutions, traders in securities that
use mark-to-market accounting, and dealers in securities or
commodities. In addition, this summary does not address any state,
local or foreign tax consequences. This summary is based upon
provisions of the Internal Revenue Code of 1986 (the
“Code”), Treasury Regulations promulgated thereunder,
pertinent judicial authorities, rulings of the Internal Revenue
Service and such other relevant authorities, in effect on the date
hereof. Those authorities may be changed, perhaps retroactively, so
as to result in U.S. federal income tax consequences different from
those summarized below.
This summary is limited to holders of shares of IDT common stock
that are U.S. Holders, as defined immediately below. A U.S. Holder
is a beneficial owner of IDT common stock that is, for U.S. federal
income tax purposes:
•
an individual who is a citizen or a resident of the United
States;
•
a corporation, or other entity taxable as a corporation for U.S.
federal income tax purposes, created or organized under the laws of
the United States or any state thereof or the District of
Columbia;
•
an estate, the income of which is subject to U.S. federal income
taxation regardless of its source; or
•
a trust, if (i) a court within the United States is able to
exercise primary jurisdiction over its administration and one or
more United States persons have the authority to control all of its
substantial
28
decisions or (ii) in the case of a trust that was treated as a
domestic trust under the law in effect before 1997, a valid
election is in place under applicable Treasury Regulations.
This summary does not address the U.S. federal income tax
consequences to IDT stockholders who do not hold shares of IDT
common stock as a capital asset. Moreover, this summary does not
address any state, local or foreign tax consequences or any estate,
gift or other non-income tax consequences.
If a partnership (or any other entity treated as a partnership for
U.S. federal income tax purposes) holds shares of IDT common stock,
the tax treatment of a partner in that partnership will generally
depend on the status of the partner and the activities of the
partnership. Such partner or partnership should consult its own tax
advisor as to the tax consequences of the distribution.
YOU SHOULD CONSULT YOUR
OWN TAX ADVISOR WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL
AND NON-U.S. TAX CONSEQUENCES OF THE DISTRIBUTION.
THIS SUMMARY IS NOT
INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX
ADVICE TO ANY PARTICULAR INVESTOR
IDT received a legal opinion from Pryor Cashman LLP as to the U.S.
federal income tax treatment of the distribution. The legal opinion
provides that the distribution should qualify as a transaction
described in Section 368(a)(1)(D) of the Code and Section 355(a) of
the Code. An opinion of independent tax attorneys is not binding on
the IRS or the courts. In addition, there is no direct authority on
point with respect to some of the conclusions in the opinion and
therefore the IRS or the courts may disagree with these
conclusions. The opinion is based on, among other things, current
tax law and assumptions and representations as to factual matters
made by IDT, which if incorrect in certain material respects, would
jeopardize the conclusions reached in the opinion. Neither we nor
IDT are currently aware of any facts or circumstances that would
cause these assumptions and representations to be untrue or
incorrect in any material respect or that would jeopardize the
conclusions reached by Pryor Cashman LLP in the opinion.
Assuming the distribution qualifies under Section 355 of the Code,
for U.S. federal income tax purposes, we believe that:
•
no gain or loss will be recognized by IDT or us as a result of the
distribution;
•
no gain or loss will be recognized by, or be includible in the
income of, a holder of IDT common stock, solely as a result of the
receipt of our common stock in the distribution;
•
the aggregate tax basis of the shares of IDT common stock and our
common stock in the hands of IDT stockholders immediately after the
distribution will be the same as the aggregate tax basis of the
shares of IDT common stock held by the holder immediately before
the distribution, allocated between the shares of IDT common stock
and our common stock in proportion to their relative fair market
values immediately following the distribution; and
•
the holding period with respect to our common stock received by IDT
stockholders will include the holding period of their shares of IDT
common stock, provided that such shares of IDT common stock are
held as a capital asset immediately following the distribution.
If, notwithstanding the conclusions included in the opinion, it is
ultimately determined that the distribution does not qualify as
tax-free for IDT for U.S. federal income tax purposes, then IDT
would recognize gain in an amount equal to the excess of the fair
market value of our common stock distributed to IDT stockholders
over IDT’s tax basis in such shares.
In addition, if the distribution were not to qualify as tax-free
for IDT’s stockholders for U.S. federal income tax purposes,
each IDT stockholder that is subject to U.S. federal income tax and
who receives our common stock in the distribution could be treated
as receiving a distribution in an amount equal to the fair market
value of our common stock that was distributed to the stockholder,
which generally would be taxed as a dividend to the extent of the
stockholder’s pro rata share of IDT’s current and
accumulated earnings and profits and then treated as a non-taxable
return of capital to the extent of the stockholder’s basis in
the IDT stock and finally as capital gain from the sale or exchange
of IDT stock.
29
Even if the distribution otherwise qualifies for tax-free treatment
under Section 355 of the Code, it may result in corporate level
taxable gain to IDT under Section 355(e) of the Code if 50% or
more, by vote or value, of our stock or IDT’s stock is
acquired or issued as part of a plan or series of related
transactions that includes the distribution. For this purpose, any
acquisitions or issuances of IDT’s stock within two years
before the distribution, and any acquisitions or issuances of our
stock or IDT’s stock within two years after the distribution
may be presumed to be part of such a plan, although we or IDT may
be able to rebut that presumption. We are not aware of any
acquisitions or issuances of IDT’s stock within the two years
before the distribution that would be considered to occur as part
of a plan or series of related transactions that includes the
distribution. If an acquisition or issuance of our stock or
IDT’s stock triggers the application of Section 355(e) of the
Code, IDT would recognize taxable gain as described above and such
gain would be subject to U.S. federal income tax.
A merger, recapitalization or acquisition, or issuance or
redemption of our common stock after the spin-off, in some
circumstances, could be counted toward the 50% change of ownership
threshold. As a result, we may be unable to engage in strategic or
capital raising transactions that stockholders might consider
favorable, or to structure potential transactions in the manner
most favorable to us.
If you receive cash in lieu of a fractional share of our common
stock, you will be treated as though you first received a
distribution of the fractional share in the spin-off and then sold
it for the amount of such cash. You will recognize capital gain or
loss, provided that the fractional share is considered to be held
as a capital asset, measured by the difference between the cash you
receive for such fractional share and your tax basis in that
fractional share, as determined above.
If you are a “significant distributee” with respect to
the spin-off, you are required to attach a statement to your
federal income tax return for the year in which the spin-off occurs
setting forth our name and IRS employer identification number,
IDT’s name and IRS employer identification number, the date
of the spin-off, and the fair market value of the shares of our
common stock that you receive in the spin-off. Upon request, IDT
will provide the information necessary to comply with this
reporting requirement to each stockholder of record as of the
record date. You are a “significant distributee” with
respect to the spin-off if you own at least 5% of the outstanding
shares of IDT common stock immediately before the spin-off. You
should consult your own tax advisor concerning the application of
this reporting requirement in light of your particular
circumstances.
Certain State Income Tax
Matters
The above discussion does not address any tax consequences of the
spin-off other than the material U.S. federal income tax
consequences set forth above. IDT stockholders are encouraged to
consult their tax advisors concerning all possible state income tax
consequences of the spin-off.
Listing and Trading of
Common Stock
There is currently no public market for our common stock.
Zedge’s Class B common stock will be listed for trading on
the NYSE MKT under the symbol “ZDGE” starting June 2,
2016.
Trading in shares of our Class B common stock began on a
when-issued basis on the record date, and we expect that
“regular way” trading will begin on June 2, 2016.
When-issued trading refers to a sale or purchase made conditionally
because the security has been authorized but not yet issued. On
June 2, 2016, when-issued trading with respect to our Class B
common stock will end and regular way trading will begin. Regular
way trading refers to trading after a security has been issued and
typically involves a transaction that settles on the third full
business day following the date of the transaction.
We cannot predict what the trading price for our Class B common
stock will be after the distribution date. We also cannot predict
any change that may occur in the trading price of IDT Class B
common stock as a result of the spin-off. Until our Class B common
stock is fully distributed and an orderly market develops, the
prices at which it trades may fluctuate significantly and may be
lower or higher than the price that would be expected for a fully
distributed issue. See “Risk Factors—Risk Factors
Generally Relating to Us and Our Common Stock.”
30
The shares of our Class B common stock distributed to IDT
stockholders will be freely transferable except for shares received
by persons who may be deemed to be our “affiliates”
under the Securities Act of 1933, as amended (the “Securities
Act”). Persons that may be considered affiliates of us after
the spin-off generally include individuals or entities that
control, are controlled by or are under common control with us.
This may include some or all of our officers and directors as well
as our principal stockholders. Persons that are our affiliates will
be permitted to sell their shares only pursuant to an effective
registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as
the exemptions afforded by Section 4(1) of the Securities Act or
Rule 144 thereunder.
Following the spin-off, the number of shares of each of our Class A
common stock and Class B common stock, other than Class B common
stock that will be freely transferable, that could be sold pursuant
to Securities Act Rule 144 or that we have agreed to register under
the Securities Act for sale by resale is 0 and 6,764,931
respectively.
We do not intend to list or quote our Class A common stock on any
exchange or trading system.
Reason for Furnishing
this Information Statement
This information statement is being furnished solely to provide
information to IDT stockholders who will receive shares of our
common stock in the spin-off. It is not and is not to be construed
as an inducement or encouragement to buy or sell any securities. We
believe that the information contained in this information
statement is accurate as of the date set forth on the cover.
Changes may occur after that date and neither we nor IDT undertakes
any obligation to update the information except in the normal
course of our respective public disclosure obligations.
DIVIDEND
POLICY
We do not anticipate paying dividends on our common stock until we
achieve sustainable profitability (after satisfying all of our
operational needs) and retain certain minimum cash reserves.
Distributions will be subject to the need to retain earnings for
investment in growth opportunities or the acquisition of
complementary assets. The payment of dividends in any specific
period will be at the sole discretion of our Board of
Directors.
31
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated financial data reported below
consist of an unaudited pro forma consolidated balance sheet as of
January 31, 2016 and unaudited pro forma consolidated statements of
comprehensive income for the six months ended January 31, 2016 and
for the fiscal year ended July 31, 2015. The unaudited pro forma
consolidated financial data reported below should be read in
conjunction with our “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
our audited consolidated financial statements as of July 31, 2015
and 2014 and for the fiscal years then ended and the notes thereto,
and the unaudited interim consolidated financial statements as of
January 31, 2016 and for the six months ended January 31, 2016 and
2015 and the notes thereto, all of which are included elsewhere in
this Information Statement.
The pro forma consolidated balance sheet adjustments assume that
our spin-off from IDT occurred as of January 31, 2016. The pro
forma adjustments to the consolidated statements of comprehensive
income for the six months ended January 31, 2016 and for the year
ended July 31, 2015 assume that the spin-off occurred as of August
1, 2014.
In connection with and prior to the spin-off, IDT and certain other
equity holders of Zedge purchased a total of $3 million of our
common stock at a pre-investment valuation for us of $27 million.
In addition, any intercompany balance due to IDT as of the spin-off
date has been repaid. There is currently no indebtedness owing from
us to IDT. The following unaudited pro forma consolidated financial
statements reflect the purchase of our common stock and the
repayment of our intercompany balance due to IDT prior to the
spin-off as described above. The following unaudited pro forma
consolidated financial statements reflect the recapitalization of
42,481 outstanding shares of our Series A convertible preferred
stock, 56,295 outstanding shares of our Series B convertible
preferred stock, 947 outstanding shares of our Series B convertible
preferred stock in excess of the amount authorized that is included
in Mezzanine Equity, and 35,517 outstanding shares of our common
stock, an aggregate of 135,240 total outstanding shares. Including
the shares of our Class B common stock purchased for $3 million,
our total pro forma shares outstanding will be an aggregate of
9,311,480 shares, comprised of 524,775 shares of our Class A common
stock and 8,786,705 shares of our Class B common stock.
In the distribution of our shares held by IDT to its stockholders,
each IDT stockholder is receiving one share of our Class A common
stock for every three shares of IDT Class A common stock and one
share of our Class B common stock for every three shares of IDT
Class B common stock held on the record date for the spin-off. The
distribution by IDT to its stockholders is expected to include (i)
524,775 shares of our Class A common stock, based on 1,574,326
shares of IDT Class A common stock outstanding on the record date
and (ii) 7,151,559 shares of our Class B common stock, based on
21,454,677 shares of IDT Class B common stock outstanding on the
record date.
The unaudited pro forma financial statements assume that the
charges for the services that IDT will provide to us will be
similar to those currently being charged via inter-company
billings. Accordingly, the pro forma financial statements assume
that future service agreements will not result in a significantly
different impact on our results of operations as compared to
periods preceding the spin-off.
In addition, the service agreements between IDT and Zedge may
include additional services to be provided by IDT to Zedge
following the spin-off that will be required by Zedge, as a
separate publicly-traded company. Such services may include
assistance with internal audit, periodic reports required to be
filed with the SEC, as well as maintaining minutes, books and
records of meetings of the Board of Directors and its committees.
Charges for these additional services were not included in the
historical consolidated financial statements or in the pro forma
adjustments since they were not applicable for periods that we were
not a separate public company. The additional costs (including for
services that may be provided by IDT and others) related to being a
publicly-traded company and being separated from IDT, are currently
estimated to be between $750,000 and $900,000 annually. Several of
the costs included in this estimated range are preliminary, subject
to negotiation, and may vary from the estimates when finalized.
The unaudited pro forma consolidated balance sheet and unaudited
consolidated statements of comprehensive income included in this
Information Statement have been derived from our audited and
unaudited consolidated financial statements included elsewhere in
this Information Statement and do not purport to represent what our
financial position, results of operations or cash flows actually
would have been had the spin-off occurred on the dates indicated,
or to project financial performance for any future period.
32
ZEDGE, INC.
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY 31, 2016
(in thousands, except share data)
(unaudited)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,193
|
|
|
$
|
3,000
|
|
|
(A)
|
|
$
|
5,829
|
|
|
|
|
|
|
|
|
(364
|
|
|
)
(B)
|
|
|
|
|
Trade accounts receivable, net
|
|
|
2,350
|
|
|
|
|
|
|
|
|
|
2,350
|
|
Prepaid expenses
|
|
|
91
|
|
|
|
|
|
|
|
|
|
91
|
|
Other current assets
|
|
|
132
|
|
|
|
|
|
|
|
|
|
132
|
|
TOTAL
CURRENT ASSETS
|
|
|
5,766
|
|
|
|
2,636
|
|
|
|
|
|
8,402
|
|
Property and equipment, net
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
1,753
|
|
Goodwill
|
|
|
2,297
|
|
|
|
|
|
|
|
|
|
2,297
|
|
Other assets
|
|
|
109
|
|
|
|
|
|
|
|
|
|
109
|
|
TOTAL
ASSETS
|
|
$
|
9,925
|
|
|
$
|
2,636
|
|
|
|
|
$
|
12,561
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
75
|
|
|
|
|
|
|
|
|
$
|
75
|
|
Accrued expenses
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
1,652
|
|
Deferred revenue
|
|
|
4
|
|
|
|
|
|
|
|
|
|
4
|
|
Due to IDT Corporation
|
|
|
364
|
|
|
$
|
(364
|
|
|
)
(B)
|
|
|
—
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,095
|
|
|
|
(364
|
|
)
|
|
|
1,731
|
|
TOTAL
LIABILITIES
|
|
|
2,095
|
|
|
|
(364
|
|
)
|
|
|
1,731
|
|
MEZZANINE EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B convertible preferred stock
|
|
|
100
|
|
|
|
(100
|
|
|
)
(C)
|
|
|
—
|
|
TOTAL
MEZZANINE EQUITY
|
|
|
100
|
|
|
|
(100
|
|
|
)
|
|
|
—
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock —
historical 42,481 shares, pro forma nil shares issued and
outstanding
|
|
|
4
|
|
|
|
(4
|
|
|
)
(C)
|
|
|
—
|
|
Series B convertible preferred stock —
historical 56,295 shares, pro forma nil shares issued and
outstanding
|
|
|
6
|
|
|
|
(6
|
|
|
)
(C)
|
|
|
—
|
|
Common stock — historical 34,417 shares,
pro forma nil shares issued and outstanding
|
|
|
3
|
|
|
|
(3
|
|
|
)
(C)
|
|
|
—
|
|
Class A common stock — historical nil
shares, pro forma 524,775 shares issued and outstanding
|
|
|
—
|
|
|
|
5
|
|
|
(C)
|
|
|
5
|
|
Class B common stock — historical nil
shares, pro forma 8,786,705 shares issued and
outstanding
|
|
|
—
|
|
|
|
9
|
|
|
(A)
|
|
|
88
|
|
|
|
|
|
|
|
|
79
|
|
|
(C)
|
|
|
|
|
Additional paid-in capital
|
|
|
17,803
|
|
|
|
2,991
|
|
|
(A)
|
|
|
20,823
|
|
|
|
|
|
|
|
|
29
|
|
|
(C)
|
|
|
|
|
Accumulated deficit
|
|
|
(9,272
|
)
|
|
|
|
|
|
|
|
|
(9,272
|
)
|
Accumulated other comprehensive loss
|
|
|
(814
|
)
|
|
|
|
|
|
|
|
|
(814
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
7,730
|
|
|
|
3,100
|
|
|
|
|
|
10,830
|
|
TOTAL
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’
EQUITY
|
|
$
|
9,925
|
|
|
$
|
2,636
|
|
|
|
|
$
|
12,561
|
|
33
ZEDGE, INC.
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
FOR THE SIX MONTHS ENDED JANUARY 31, 2016
(in thousands, except share and per share data)
(unaudited)
|
|
|
|
|
|
|
REVENUES
|
|
$
|
6,089
|
|
|
|
|
$
|
6,089
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Direct cost of revenues (exclusive of
amortization of capitalized software and technology development
costs included below)
|
|
|
605
|
|
|
|
|
|
605
|
|
Selling, general and administrative
|
|
|
3,466
|
|
|
|
|
|
3,466
|
|
Depreciation and amortization
|
|
|
317
|
|
|
|
|
|
317
|
|
INCOME FROM OPERATIONS
|
|
|
1,701
|
|
|
|
|
|
1,701
|
|
Interest income
|
|
|
2
|
|
|
|
|
|
2
|
|
Net losses resulting from foreign exchange
transactions
|
|
|
(161
|
)
|
|
|
|
|
(161
|
)
|
INCOME BEFORE INCOME TAXES
|
|
|
1,542
|
|
|
|
|
|
1,542
|
|
Provision for income taxes
|
|
|
106
|
|
|
(D)
|
|
|
106
|
|
NET
INCOME
|
|
|
1,436
|
|
|
|
|
|
1,436
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation
adjustment
|
|
|
(159
|
)
|
|
|
|
|
(159
|
)
|
TOTAL
OTHER COMPREHENSIVE LOSS
|
|
|
(159
|
)
|
|
|
|
|
(159
|
)
|
TOTAL
COMPREHENSIVE INCOME
|
|
$
|
1,277
|
|
|
|
|
$
|
1,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Zedge, Inc.
common stockholders:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
10.71
|
|
|
(E)
|
|
$
|
0.18
|
|
Diluted
|
|
$
|
9.76
|
|
|
(E)
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in
calculation of earnings per share
:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,417
|
|
|
(E)
|
|
|
8,048,728
|
|
Diluted
|
|
|
47,343
|
|
|
(E)
|
|
|
8,947,877
|
|
34
ZEDGE, INC.
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
FOR THE YEAR ENDED JULY 31, 2015
(in thousands, except share and per share data)
(unaudited)
|
|
|
|
|
|
|
REVENUES
|
|
$
|
9,052
|
|
|
|
|
$
|
9,052
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
Direct cost of revenues (exclusive of
amortization of capitalized software and technology development
costs included below)
|
|
|
1,082
|
|
|
|
|
|
1,082
|
|
Selling, general and administrative
|
|
|
5,723
|
|
|
|
|
|
5,723
|
|
Depreciation and amortization
|
|
|
624
|
|
|
|
|
|
624
|
|
INCOME FROM OPERATIONS
|
|
|
1,623
|
|
|
|
|
|
1,623
|
|
Interest income
|
|
|
5
|
|
|
|
|
|
5
|
|
Net gains resulting from foreign exchange
transactions
|
|
|
171
|
|
|
|
|
|
171
|
|
INCOME BEFORE INCOME TAXES
|
|
|
1,799
|
|
|
|
|
|
1,799
|
|
Provision for income taxes
|
|
|
212
|
|
|
(D)
|
|
|
212
|
|
NET
INCOME
|
|
|
1,587
|
|
|
|
|
|
1,587
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation
adjustment
|
|
|
(733
|
)
|
|
|
|
|
(733
|
)
|
TOTAL
OTHER COMPREHENSIVE LOSS
|
|
|
(733
|
)
|
|
|
|
|
(733
|
)
|
TOTAL
COMPREHENSIVE INCOME
|
|
$
|
854
|
|
|
|
|
$
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Zedge, Inc.
common stockholders:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
11.84
|
|
|
(E)
|
|
$
|
0.20
|
|
Diluted
|
|
$
|
10.81
|
|
|
(E)
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in
calculation of earnings per share
:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,355
|
|
|
(E)
|
|
|
8,048,728
|
|
Diluted
|
|
|
47,124
|
|
|
(E)
|
|
|
8,933,806
|
|
35
ZEDGE, INC.
NOTES AND MANAGEMENT’S ASSUMPTIONS
TO THE PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a description of the pro forma adjustments to the
consolidated financial statements:
(A)
|
|
In connection with and prior to the spin-off,
IDT and certain other equity holders of Zedge purchased shares of
our Class B common stock for $3 million in cash based on a
pre-investment valuation for us of $27 million. This sale of shares
of our common stock is reflected as if it occurred on January 31,
2016.
|
(B)
|
|
All intercompany balances due to IDT as of the
spin-off date were repaid prior to the completion of the spin-off.
There is currently no indebtedness owing from us to IDT.
|
|
|
|
(C)
|
|
This pro forma adjustment includes the
following:
The recapitalization of 42,481 outstanding
shares of our Series A convertible preferred stock, 56,295
outstanding shares of our Series B convertible preferred stock, 947
outstanding shares of our Series B convertible preferred stock in
excess of the amount authorized that is included in Mezzanine
Equity, and 35,517 outstanding shares of our common stock, an
aggregate of 135,240 total outstanding shares. Including the shares
of our Class B common stock purchased for $3 million, our total pro
forma shares outstanding is an aggregate of 9,311,480 shares,
comprised of 524,775 shares of our Class A common stock and
8,786,705 shares of our Class B common stock.
The distribution of our shares held by IDT to
its stockholders of (i) 524,775 shares of our Class A common stock,
is based on 1,574,326 shares of IDT Class A common stock
outstanding on the record date and (ii) 7,151,559 shares of our
Class B common stock, is based on 21,454,677 shares of IDT Class B
common stock outstanding on the record date. In the distribution,
each IDT stockholder will receive one share of our Class A common
stock for every three shares of IDT Class A common stock and one
share of our Class B common stock for every three shares of IDT
Class B common stock held on the record date for the
spin-off.
|
|
|
|
(D)
|
|
Our historical consolidated financial statements
included provisions for federal and state income taxes on a
separate tax return basis for all periods presented. Accordingly,
there is no pro forma adjustment for income taxes.
|
|
|
|
(E)
|
|
Earnings per share is calculated as if the
shares of our Class A common stock and Class B common stock to be
issued upon the recapitalization of our shares and the distribution
of our shares by IDT to its stockholders were issued and
outstanding as of August 1, 2014. Diluted earnings per share was
determined in the same manner as basic earnings per share, except
that the number of shares was increased for the assumed exercise of
stock options to purchase shares of our Class B common stock using
the treasury stock method, unless the effect of such increase was
anti-dilutive.
|
36
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide one of the most popular content distribution 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 and notification sounds. Our smartphone app, available in
the Google Play, iTunes and Microsoft Market app stores, has been
installed over 190 million times, has more than 32 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 six years and is
ranked in the top 10 most popular free apps in the iTunes
Entertainment category. We have grown our user base without
material investment in marketing, user acquisition or advertising.
IDT currently owns 82% of us, which may increase based on
investments made prior to the spin-off. The spin-off will separate
our business from the remainder of IDT’s operations and
holdings. We will operate as an independent public company
following the spin-off. 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, we will 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 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.
We generate over 90% of our revenues from selling our advertising
inventory to advertising networks/exchanges, real time bidding
platforms, direct advertisers and game publishers. Advertisers are
attracted to Zedge because of our sizable and growing user base;
user demographics; non-incentivized acquisition platform
specifically for mobile game publishers; and our focus on mobile
phone personalization. Separately, being that we consistently
optimize the service and introduce new ad formats and
implementations, we do not view the number of impressions or any
other similar metric as a material performance indicator.
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 Zedge and its 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.
Reportable
Segments
Our business consists of one reportable segment.
Presentation of financial information
Critical Accounting
Policies
Our financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the
United States of America, or U.S. GAAP. The preparation of
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenue 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
37
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. See Note 1 to the Consolidated Financial
Statements in this Information Statement for a complete discussion
of our significant accounting policies.
Capitalized software and
technology development costs
Software and technology development activities generally fall into
three stages:
1.
Planning stage
activities
include developing a project or business plan
that outlines the goals for the content distribution platform or
new product or service; determining the functionality; identifying
hardware and software applications that will achieve functionality,
security, and traffic flows; and selecting the internal resources
that will be assigned to the project as well as the external
vendors where applicable.
2.
Application and
infrastructure development stage activities
focus on
acquiring or developing hardware and software to operate a content
distribution platform or new product and service; and
3.
Post-Implementation/Operating
stage activities
address training, administration,
maintenance, and all other activities to operate an existing
content distribution platform or new product or service.
During the Planning Stage, Zedge expenses all costs as
incurred.
During the Application and Infrastructure Development Stage,
capitalization of costs begins when the project has been properly
authorized and is probable of completion (if a project is
subsequently cancelled prior to placement in service, costs that
have been capitalized to date will be reviewed for potential
impairment). Capitalization ceases no later than the point at which
a computer software project is substantially complete and ready for
its intended use. Amortization begins for each project when the
code is ready for use, whether or not it is actually placed in
service at that time (an exception being if the project’s
functionality completely depends on the completion of another
project; then, amortization begins when that project is ready for
use).
During the Post-Implementation/Operation Stage, training costs and
maintenance costs are expensed as incurred. However, upgrades and
enhancements, defined as modifications to existing internal-use
software that result in additional functionality (modifications to
enable the software to perform tasks that it was previously
incapable of performing, normally requiring new software
specifications and perhaps a change to all or part of the existing
software specifications) are treated as though they were new
projects, and are assessed utilizing the same stages and criteria
on a project by project basis. As such, internal costs incurred for
upgrades and enhancements are expensed or capitalized based on the
requirements noted above, while costs incurred for maintenance are
expensed as incurred. These projects are tracked individually, such
that the beginning and ending of the capitalization can be
appropriately established, as well as the amounts capitalized
therein.
Amortization of these costs is included in depreciation and
amortization in the Statement of Comprehensive Income (Loss).
Revenue
Recognition
We generate over 90% of our revenues from selling our advertising
inventory to advertising networks/exchanges, real time bidding
platforms, direct advertisers and game publishers. We recognize
advertising revenue as advertisements are delivered to users
through impressions or ad views, as long as evidence of the
arrangement with the payor exists (generally through an executed
contract), the price is fixed and determinable, and we have
assessed collectability as reasonably assured. The advertiser may
compensate us on a cost-per-impression, cost-per-click,
cost-per-action or cost-per-install basis.
We generally report our revenue net of amounts due to agencies and
brokers because we are not the primary obligor in the relevant
arrangements, we do not finalize the pricing, and we do not
establish or maintain a direct relationship with the advertiser.
Certain advertising arrangements that are directly between us and
advertisers are recognized gross equal to the price paid to us by
the customer since we are the primary obligor and we determine the
price. Any third party costs related so such direct relationships
are recognized as direct cost of revenues.
38
Goodwill
Goodwill is deemed to have an indefinite life and is not amortized.
Goodwill is reviewed annually (or more frequently under various
conditions) for impairment using a fair value approach.
The goodwill impairment assessment involves estimating the fair
value of our reporting unit and comparing it to its carrying
amount, which is known as Step 1. If the carrying value of the
reporting unit exceeds its estimated fair value, Step 2 is
performed to determine if an impairment of goodwill is required. We
estimate the fair value of our reporting unit using discounted cash
flow methodologies, as well as considering third party market value
indicators. Goodwill impairment is measured by the excess of the
carrying amount of the reporting unit’s goodwill over its
implied fair value.
We have the option to perform a qualitative assessment to determine
whether it is necessary to perform the two-step quantitative
goodwill impairment test. However, we may elect to perform the
two-step quantitative goodwill impairment test even if no
indications of a potential impairment exist.
For our annual impairment tests, our estimated fair value
substantially exceeded our carrying value in Step 1; therefore, it
was not necessary to perform Step 2. Calculating the fair value of
the reporting unit, and allocating the estimated fair value to all
of the tangible assets, intangible assets and liabilities, requires
significant estimates and assumptions by management. Should our
estimates or assumptions regarding the fair value of our reporting
unit prove to be incorrect, we may be required to record impairment
of goodwill in future periods and such impairment could be
material.
Recent Issued Accounting
Standards Not Yet Adopted
In March 2016, the Financial Accounting Standards Board, or FASB,
issued Accounting Standards Update, or ASU, No. 2016-09,
Improvements to
Employee Share-Based Payment Accounting
. 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 No. 2016-02,
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 November 2015, the FASB issued an ASU to simplify the
presentation of deferred income taxes, as well as align the
presentation of deferred income tax assets and liabilities with
International Financial Reporting Standards, or IFRS. The ASU
requires that deferred tax assets and liabilities be classified as
noncurrent in a classified balance sheet instead of separated into
current and noncurrent amounts. The ASU is effective for our
financial statements beginning August 1, 2017. Earlier application
is permitted. The change may be applied either prospectively or
retrospectively. We are evaluating when to apply the ASU for our
consolidated balance sheet.
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. We will 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.
39
Results of
Operations
Six Months Ended January
31, 2016 Compared to Six Months Ended January 31, 2015
(in
thousands)
|
|
|
|
|
|
|
Six
months ended January 31,
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,089
|
|
|
$
|
4,425
|
|
|
$
|
1,664
|
|
|
37.6
|
%
|
Direct cost of revenues
|
|
|
605
|
|
|
|
535
|
|
|
|
70
|
|
|
13.1
|
|
Selling, general and administrative
|
|
|
3,466
|
|
|
|
2,936
|
|
|
|
530
|
|
|
18.1
|
|
Depreciation and amortization
|
|
|
317
|
|
|
|
356
|
|
|
|
(39
|
)
|
|
(11.0
|
)
|
Income from operations
|
|
|
1,701
|
|
|
|
598
|
|
|
|
1,103
|
|
|
184.4
|
|
Interest income
|
|
|
2
|
|
|
|
4
|
|
|
|
(2
|
)
|
|
(50.0
|
)
|
Net (losses) gains resulting from foreign
exchange transactions
|
|
|
(161
|
)
|
|
|
128
|
|
|
|
(289
|
)
|
|
(225.8
|
)
|
Provision for income taxes
|
|
|
(106
|
)
|
|
|
(82
|
)
|
|
|
(24
|
)
|
|
(29.3
|
)
|
Net income
|
|
$
|
1,436
|
|
|
$
|
648
|
|
|
$
|
788
|
|
|
121.6
|
%
|
Revenues.
Revenues
increased in the six months ended January 31, 2016 compared to the
six months ended January 31, 2015 due mainly to growth of both
Android and iOS users. We experienced a 32% increase in monthly
active users, or MAU, to 33.6 million on January 31, 2016 from 25.5
million MAU on January 31, 2015. MAU is a performance indicator
that captures the number of unique users that utilized our app in
the previous 30 days, determined by a user opening the app in the
relevant period. In addition, our average revenue per monthly
active user, or ARPMAU, increased to $0.0292 in the six months
ended January 31, 2016 from $0.0291 ARPMAU in the six months ended
January 31, 2015. Other contributors to the revenue growth
included: initiatives to increase app usage via push notifications;
translating the app into six new languages consisting of Chinese,
French, German, Japanese, Korean and Portuguese; and migrating to a
more advanced ad mediation platform on iOS, which help increase
demand for our advertising inventory increasing the price
accordingly.
Direct cost of
revenues
. Direct cost of revenues consists primarily
of costs associated with the running of our content distribution
platform including hosting, marketing automation and content
filtering services. The increase in direct cost of revenues
resulted from our growth in users and was attributable to the fees
that we pay to third parties that provide us with internet hosting
and marketing automation services. Although we experienced robust
user growth, our direct cost of revenues grew at a slower pace as a
result of implementing core technology and network changes
resulting in more favorable pricing. Conversely the costs
associated with push notification marketing increased as a result
of both the complete rollout and the expanding customer base.
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 six months ended January 31, 2016
compared to the six months ended January 31, 2015 was primarily due
to an increase in headcount from 42 employees as of January 31,
2015 to 53 employees as of January 31, 2016. During that time, we
hired engineers, designers and marketing personnel who focused on
enhancing our content delivery platform, building and testing new
product initiatives and increasing user engagement. We also
incurred higher recruitment costs in Norway to locate and retain
employees, higher facilities costs to seat our newly hired
employees, and higher consulting and professional fees as a result
of preparing for the spin-off. In addition, subsequent to January
2015, we also started creating and purchasing content, which added
to selling, general and administrative expense, which was not
present in the year earlier period.
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.
Net (losses) gains
resulting from foreign exchange transactions
. Net
(losses) gains resulting from foreign exchange transactions are
comprised of losses or gains incurred from movements in Norwegian
Krone, or NOK, relative to the U.S. Dollar, as well as in the six
months ended January 31, 2016 losses of $225,000 from hedging
activities.
Provision for income
taxes
. The increase in the provision for income taxes
in the six months ended January 31, 2016 compared to the six months
ended January 31, 2015 directly related to the increase in our
income before
40
income taxes to $1.5 million in the six months ended January 31,
2016 compared to $730,000 in the six months ended January 31,
2015.
Year Ended July 31, 2015
Compared to Year Ended July 31, 2014
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,052
|
|
|
$
|
6,529
|
|
|
$
|
2,523
|
|
|
38.6
|
%
|
Direct cost of revenues
|
|
|
1,082
|
|
|
|
909
|
|
|
|
173
|
|
|
19.0
|
|
Selling, general and administrative
|
|
|
5,723
|
|
|
|
5,068
|
|
|
|
655
|
|
|
12.9
|
|
Depreciation and amortization
|
|
|
624
|
|
|
|
578
|
|
|
|
46
|
|
|
8.0
|
|
Income (loss) from operations
|
|
|
1,623
|
|
|
|
(26
|
)
|
|
|
1,649
|
|
|
nm
|
|
Interest income
|
|
|
5
|
|
|
|
6
|
|
|
|
(1
|
)
|
|
(16.7
|
)
|
Impairment of investment in Bizgames
|
|
|
—
|
|
|
|
(63
|
)
|
|
|
63
|
|
|
100.0
|
|
Net gains resulting from foreign exchange
transactions
|
|
|
171
|
|
|
|
75
|
|
|
|
96
|
|
|
128.0
|
|
Provision for income taxes
|
|
|
(212
|
)
|
|
|
(138
|
)
|
|
|
(74
|
)
|
|
(53.6
|
)
|
Net income (loss)
|
|
$
|
1,587
|
|
|
$
|
(146
|
)
|
|
$
|
1,733
|
|
|
nm
|
|
Revenues.
Revenues
increased in fiscal year 2015 compared to fiscal year 2014 due
mainly to growth of both Android and iOS users. We experienced a
45% increase in MAU to 28.2 million on July 31, 2015 from 19.5
million MAU on July 31, 2014. In addition, our ARPMAU, increased to
$0.0275 in fiscal year ended 2015 from $0.0256 ARPMAU in fiscal
year ended 2014. Other contributors to the revenue growth included:
rolling out reengagement campaigns to Android; localizing our app
and app store listings into three languages including French,
German and Portuguese; and migrating to a robust ad mediation
platform on iOS, which exposed our inventory to additional
advertising demand from new prospective purchasers driving up the
price.
Direct cost of
revenues
. Direct cost of revenues consists primarily
of costs associated with the running of our content distribution
platform including hosting, marketing automation and content
filtering services. The increase in direct cost of revenues
resulted from our growth in users and was attributable to the fees
that we pay to third parties that provide us with internet hosting
and marketing automation services. Although we experienced robust
user growth, our direct cost of revenues grew at a slower pace as a
result of implementing core technology and network changes
resulting in more favorable pricing. Conversely the costs
associated with push notification marketing increased as a result
of both the complete rollout and the expanding customer base.
Selling, general and
administrative expense
. Selling, general and
administrative expense consists mainly of payroll, benefits, sales
commissions, facilities, marketing and consulting and professional
fees. The increase in selling, general and administrative expenses
in fiscal year 2015 compared to fiscal year 2014 was primarily due
to an increase in headcount from 32 employees as of July 31, 2014
to 51 employees as of July 31, 2015. During that time, we hired
additional developers and designers to enhance our website and
mobile applications and develop additional offerings, as well as
hiring marketing personnel focused on increasing user engagement.
We also incurred higher recruitment costs in Norway to locate and
retain employees, higher facilities costs to seat our newly hired
employees and higher consulting and professional fees as a result
of us preparing for the spin-off. In addition, in fiscal year 2015,
we also started creating, purchasing and licensing content, which
added to selling, general and administrative expense, which was not
present in the year earlier period.
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.
Impairment of
investment in Bizgames
. In August 2012, our subsidiary
Zedge Europe AS made an investment to purchase 10.5% of the common
shares of Bizgames Studios AS, a Norwegian corporation. At that
time, we entered into a promotional, advertising and porting
services agreement with Bizgames in connection with which we were
issued an additional 4.0% of Bizgames common shares. The combined
14.5% investment in Bizgames’ common shares was recorded at
$67,000. Additionally, also alongside another investor, Zedge
Europe AS loaned Bizgames approximately $30,000 at an annual
interest rate of 8.0%, which was to be repaid by February 2014. At
July 31,
41
2014, we wrote-off the balance of our investment in Bizgames, and
reserved for the entirety of our loan outstanding to Bizgames,
inclusive of related interest, because the loan has not been repaid
and there was no timetable for repayment. Additionally, we had not
collected any cash associated with Bizgames revenue, nor were we
successful in obtaining timely financial information.
Net gains resulting
from foreign exchange transactions
. Net gains
resulting from foreign exchange transactions are comprised of gains
generated from movements in NOK relative to the U.S. Dollar,
partially offset in fiscal year 2015 by losses of $58,000 from
hedging activities.
Provision for income
taxes
. The increase in the provision for income taxes
in fiscal year 2015 compared to fiscal year 2014 directly related
to the increase in our income before income taxes to $1.8 million
in fiscal year 2015 compared to a loss before income taxes of
$8,000 in fiscal year 2014.
Liquidity and Capital
Resources
General
Historically, we satisfied our cash requirements primarily through
intercompany debt funding from IDT, which was mostly satisfied by
us through the conversion of the intercompany debt into equity. Any
remaining balances were repaid from our cash from operations since
turning profitable. Prior to the spin-off, we continued to maintain
an intercompany balance due to IDT that relates to charges for
services provided to us by IDT and payroll costs for our personnel
that are paid by IDT. In connection with and prior to the spin-off,
IDT and certain other equity holders of Zedge purchased a total of
$3 million of our common stock at a pre-investment valuation for us
of $27 million. In addition, all intercompany balances due to IDT
as of the spin-off date have been repaid. There is currently no
indebtedness owing from us to IDT.
We anticipate 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.
As of January 31, 2016, we had cash and cash equivalents of $3.2
million and working capital (current assets less current
liabilities) of $3.7 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 ended January 31, 2017.
|
|
Six
months ended
January 31,
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$1,428
|
|
$957
|
|
$2,284
|
|
$826
|
Investing activities
|
|
(344)
|
|
(438)
|
|
(899)
|
|
(814)
|
Financing activities
|
|
—
|
|
9
|
|
9
|
|
—
|
Effect of exchange rates on cash and cash
equivalents
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The cash provided by operating activities in the six months ended
January 31, 2016 and 2015, fiscal year 2015 and fiscal year 2014
was primarily due to the continued growth in Zedge revenues.
Investing
Activities
Cash used in investing activities for the six months ended January
31, 2016 and 2015, fiscal year 2015 and fiscal year 2014 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. In particular,
we recently overhauled our core web technology.
42
Financing
Activities
In fiscal year 2015, we received $9,000 from the exercise of stock
options.
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 increased to $2.4 million at
January 31, 2016, from $1.6 million at July 31, 2015, and from $1.3
million at July 31, 2014 primarily due to the continued growth in
our revenues. Historically, we have no or very little 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. Google, Twitter, Millennial Media and
Facebook) 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. Our cash
collections during the six months ended January 31, 2016, fiscal
year 2015 and fiscal year 2014 were $6.4 million, $9.6 million, and
$6.4 million, respectively.
Concentration of Credit
Risk and Significant Customers
We routinely assess the financial strength of our customers. As a
result, we believe that our accounts receivable credit risk
exposure is limited and has not experienced significant write-downs
in our accounts receivable balances. At January 31, 2016 and for
the six months then ended, three customers represented 47%, 22% and
12% of our revenue, and one customer represented 60% of our
accounts receivable balance, respectively. At July 31, 2015 and for
the year then ended, two customers represented 37%, and 25% of our
revenue, and three customers represented 55%, 13% and 12% of our
accounts receivable balance, respectively. At July 31, 2014 and for
the year then ended, three customers represented 23%, 23% and 13%
of our revenue and 42%, 17%, and 13% of our accounts receivable
balance, respectively. All 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
As of January 31, 2016, 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.
In connection with the spin-off, we and IDT will enter into a tax
separation agreement, which sets forth the responsibilities of IDT
and us 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. IDT will be generally responsible for our
federal, state, local and foreign income taxes for periods before
and including the spin-off. We will be generally responsible for
all other taxes relating to our business. We and IDT will each
generally be responsible for managing those disputes that relate to
the taxes for which each of us is responsible and, under certain
circumstances, may jointly control any dispute relating to taxes
for which both of us are responsible.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Smaller reporting companies are not required to provide the
information required by this item.
43
BUSINESS
Zedge provides one of the most popular content distribution
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 and notification sounds. Our smartphone app,
available in the Google Play, iTunes and Microsoft Market app
stores, has been installed over 190 million times, has more than 32
million monthly active users or MAUs and has averaged among the top
25 free applications in the Google Play store in the U.S. for the
past six years and is ranked in the top 10 most popular free apps
in the iTunes Entertainment category. Zedge has grown its user base
without material investment in marketing, user acquisition or
advertising.
According to a 2014 study conducted by
Business
Intelligence
, mobile users want highly personalized
smartphone experiences. Furthermore, in January 2016, Flurry
Analytics revealed that personalization apps saw their sessions
balloon more than 332% in 2015. Although much of this growth was
attributable to Emoji keyboards, the appeal for personalization is
evident from their research. We believe that Zedge’s
popularity stems from its ability to meet this need by offering a
large and diverse content catalogue, providing an intuitive and
user-friendly experience and rendering the content in a customized
and personally relevant manner. To this end, we invest heavily in
both product design and development and the underlying technology
required to satisfy our user’s expectations. Our growth has
been organic in nature, without any significant investment in
marketing or user acquisition campaigns. As a result of
Zedge’s large, active user base, we offer advertisers,
marketers, consumer brands and content providers, including,
musicians, artists and brands a powerful way to engage with their
prospects and customers.
Users primarily access Zedge from its smartphone app, which offers
consumers an easy and modular way to customize their phones without
handing over many of the core elements of the native operating
system to a third party and overwhelming the user with a myriad of
complex options. Depending on the phone’s mobile operating
system users are simply able to select personalization content from
all or some of the following categories: ringtones, alarms,
notification sounds, wallpapers and app icons. Aside from their
selection, everything else remains the same. Furthermore, once a
user has installed our app they aren’t required to install
any other apps from the app store in order to avail them of our
content. Aside from providing an exceptionally fun, easy and
intuitive experience that allows the user to maintain the control
they desire, our service is attractive because of the wide array of
high-quality, free content that we offer, as well as the relevance
of our content recommendations.
As of January 31, 2016 Zedge had in excess of 33 million MAUs.
Close to 40% of Zedge’s app user base is located in North
America with around 30% in Europe. Approximately 65% of our
customers are male.
Zedge generates over 90% of its revenues from selling its
advertising inventory to advertising networks/exchanges, real time
bidding platforms, direct advertisers and game publishers.
Advertisers are attracted to Zedge because of our sizable and
growing user base; user demographics; non-incentivized acquisition
platform specifically for mobile game publishers; and our focus on
mobile phone personalization.
During fiscal year 2015, Zedge generated revenues of $9.1 million
and income from operations of $1.6 million compared to revenues of
$6.5 million and loss from operations of $26,000, in fiscal year
2014. Of the $9.1 million in revenues, 94% related to
advertising.
During the six months ended January 31, 2016, three customers
represented 47%, 22% and 12% of Zedge’s revenue. During
fiscal year 2015, two customers represented 37%, and 25% of
Zedge’s revenue. During fiscal year 2014, three customers
represented 23%, 23% and 13% of Zedge’s revenue.
Our Competitive
Advantage
We believe that the following competitive strengths have positively
impacted the growth of our business:
•
Leading global
provider of mobile personalization content
. We are a
dominant personalization app, globally, enabling users to easily
personalize their mobile phones with a wide variety of free, high
quality ringtones, wallpapers, app icons and notification sounds.
We have averaged in the top 25 free applications in the Google Play
store in the United States for six years. In December 2015, Google
Play selected Zedge as one of the “Best Apps of 2015”
in United States, Canada, Brazil, United Kingdom, Australia, Middle
East and North Africa. This recognition and ranking positions us
well for continued
44
growth and leadership in the personalization space. Furthermore,
our iPhone app climbed to 5
th
place in Top Free iPhone Entertainment Apps within two weeks of
re-launching on iTunes in March 2016.
•
High quality
product
. Zedge is zealous about providing our
customers with a high quality product and superior user experience.
We believe that our success has resulted from prioritizing the
customer’s needs and that this focus is critical for our
long-term growth and expansion. To this end we invest significant
resources in product development, design and usability. We beta
test product enhancements extensively and closely monitor customer
feedback in order to insure that we are meeting the user’s
needs. We strive to remain relevant to our users and do our best to
insure that we not only have a wide array of excellent content but
that we also avail this content to our users in a fashion that is
personally germane. Our high user ranking validates our product
oriented focus as we enjoy an overall user rating of 4.6 stars out
of a total of 5 stars in the Google Play store with more than 2.7
million Five Star ratings out of a total of about 3.8 million
ratings. In addition, our retention rate, as defined by the number
of users who keep the app installed on their phone vs. the total
number of users that have installed the app, remains at
approximately 45%.
•
Large, global
customer base
. We benefit from having a large customer
base of more than 32 million MAUs. In January of 2016 approximately
40% of our users were in North America and 30% in Europe, regions
that provide for exceptional monetization. We are one of around 80
Android apps, globally, that has surpassed 100 million installs. To
serve our global user base our Android app is available in nine
languages. Our global footprint aids us in securing a highly
diverse portfolio of content addressing various customer tastes and
preferences. In addition, our customer base attracts advertisers
and game publishers that want access to users from lucrative
markets that are capable of purchasing their products and
services.
•
Employees
. We
have attracted and retained great employees with solid educational
and professional credentials who are passionate about Zedge and its
mission to serve as a medium for self-expression. Our culture is
one of respect where we empower our employees to be creative,
allowing them to make good decisions and accomplish great
things.
•
Management
team
. We have an experienced and stable management
team with a strong track record of execution and a deep knowledge
of the mobile app landscape. Our core management team possesses a
solid understanding of the mobile app universe, product design and
development, operations and monetization. Collectively our
management team has proven its ability in building and scaling our
business, globally, in a fiscally viable fashion.
•
Technology and
infrastructure
. We pride ourselves on building
scalable technology that reliably serves millions of MAUs. We use a
combination of off-the-shelf and proprietary technology and
infrastructure solutions that can scale efficiently to meet the
needs of our expanding customer base.
Our Strategy
We strive to become the world’s leading platform for helping
people express their identity through digital content. To achieve
this we anticipate that we will:
•
Continue growing our
user base, globally
. We expect to continue devoting
material resources in growing our user base by studying user needs
and enhancing our flagship app accordingly; selectively and
opportunistically implementing paid user acquisition campaigns;
expanding into new markets by localizing and collaborating with
regionally relevant strategic partners; and developing offering new
and exciting products and services that extend beyond our current
flagship app.
•
Increase usage and
retention
. We plan on investing in projects and
enhancements that will increase customer usage and user retention.
This may mean that we forge relationships with content holders or
strategic partners interested in gaining access to our customer
base in exchange for timely and premium content that is of value to
our users or that we develop new and enhanced products and
mechanisms for engaging with our customer base.
45
•
Ongoing product and
technology investment
. Continued investment in the
core product feature sets and functionalities that have positioned
us as a leader in the personalization space as well as new
technology initiatives deemed to provide value to our users and
personalization content acquisition platform.
•
Increase our
marketing efforts
. Historically we haven’t
invested materially in marketing initiatives. Going forward, we
envision the need to better promote our brand and amplify our
voice. We also envisage entering into commercial relationships with
major brands, movie studios, music labels and pop culture
influencers whose association is expected to be accretive enhancing
our business and value proposition. Furthermore we will also invest
in app store optimization, search, marketing automation, social
marketing and community management in order to retain and expand
our customer base.
•
Improve
monetization
. We will continue exploring additional
monetization methods including in-app purchases, subscription
models, e-commerce, new advertising products and brand
sponsorships. We believe that our large and ever increasing
customer base is an attractive medium for advertisers, brands and
content holders and with time new monetization opportunities will
arise that prove to be valuable to us.
•
Selectively pursue
strategic investments and acquisitions
. On a selective
basis we will look to invest in or purchase entities that can
provide synergistic growth opportunities. Our acquisition of
Sincerial AS, in 2010, served as the cornerstone of our focus on
data driven content recommendations, one of our strategic
advantages. We plan to leverage our understanding of the industry
and pursue opportunities that we believe can have a material
positive impact on our business.
Our History
In 2003, Tom Arnoy, Kenneth Sundnes and Paul Shaw launched a
consumer website that people could use to upload and download
ringtones. Traffic to the website grew, primarily by word of mouth,
drawing customers in from the emerging markets. In December 2006,
IDT acquired 90% of Zedge Limited, a UK based company. Zedge
Holdings, Inc. was incorporated in Delaware in 2008. On September
18, 2008, Zedge Limited, Tom Arnoy, Kenneth Sundnes and IDT entered
into a Conversion Agreement, converting the equity in Zedge Ltd. to
Zedge Holdings, Inc. and on September 23, 2008, IDT purchased
94,750 shares of Zedge Holdings’ Series B Preferred Stock for
$1,000,000.
In 2010, IDT and Shaman II, L.P. invested an additional $1.7
million in Zedge Holdings, Inc. Over a two-year period in 2011 and
2012, IDT and Shaman II, L.P. invested an additional $2,349,959 in
Zedge Holdings, Inc. In January 2016, Zedge Holdings, Inc.’s
name was changed to Zedge, Inc.
In late 2009, we introduced our Android app. The app provided
ease-of-use by negating the need for the customer to first download
a ringtone or wallpaper to their computer and then upload that
content to their mobile phone.
In late 2011, Tom Arnoy was promoted to CEO and Jonathan Reich was
retained as COO. We improved our underlying technology. Over a
two-year period in 2011 and 2012, IDT and Shaman II, LP invested an
additional $2.25 million.
We launched our iOS app in 2013 followed by launch of our Windows
Mobile app in 2014.
During 2014 and 2015, Zedge introduced app icons, social sharing
features and marketing automation capabilities. In addition, we
began localizing our app by not only expanding the number of
languages it supported but also by launching localized versions of
its Google Play listings. Today, Zedge is available in Chinese,
English, French, German, Japanese, Korean, Norwegian, Portuguese
and Spanish.
Our
Technology
Zedge has developed a scalable distributed platform that is
comprised of both open source and proprietary technologies centered
on content management and discovery, web and app development, data
mining and analytics, deep learning, mobile content/device
compatibility, advertising and reporting. From an end user’s
perspective, the platform minimizes response latency while
maximizing content relevancy and discoverability. We optimize by
utilizing systems, algorithms and heuristics that organize the
content based upon real user data and that render the content in
the most relevant fashion possible. Zedge’s architecture
provides a fully redundant production
46
environment that can tolerate multiple server failures with minimal
end-user disruption. It utilizes a variety of bare-metal and
cloud-hosted servers; a mix that we find gives the right balance
between performance, scalability, flexibility, cost and ease of
use.
Competition
Zedge faces competition across many different fronts including:
•
Mobile
personalization products
. Generally, we compete with
other mobile app developers. More specifically, ringtones,
wallpapers and app icons are a commodity and many smaller app
developers and websites offer both free and paid ringtones,
wallpapers and app icons. In addition, Android app launchers offer
users a limited set of similar personalization options when
compared to Zedge. We believe that Zedge has a competitive
advantage in this space due to its large user base, its modular
approach that allows the customer to selectively choose what they
would like to personalize without handing over the core elements of
the native operating system to a third party and overwhelming the
user with a myriad of complex options, its large content catalogue,
its proprietary recommendation engine, its market ranking and its
longevity. Zedge is unaware of any service that hosts a content
library as extensive as Zedge’s library, or that curates the
content in such a relevant and easy to use fashion.
•
Advertisers
. We
face significant competition for advertising spend from both
digital media providers and traditional media outlets, including
television, radio and print.
Intellectual
Property
Our trademarks, copyrights, domain names, proprietary technology,
know-how and other intellectual property are vital to our success.
We seek to protect our intellectual property rights by relying on
federal, state and common law rights in the United States and other
countries, as well as contractual restrictions. We enter into
confidentiality and non-disclosure agreements with our employees
and business partners. The agreements we enter into with our
employees also provide that all software, inventions, developments,
works of authorship and trade secrets created by them during the
course of their employment are Zedge’s property.
As of January 31, 2016, we have been granted trademark protection
for “Zedge” in the U.S., E.U., U.K. and Canada and for
“Tonesync” in the U.S. and E.U. We also have applied
for trademark protection for “We make phones personal”,
“Tattoo your phone” and “Zedge Snakk” in
the U.S. and “Zedge” in India as well as for copyright
protection for our flagship app, Zedge. In addition, we have
registered, amongst others, the following domain names:
zedge.net
and
zedge.com
.
Employees
As of January 31, 2016 we had 53 full time employees.
Facilities
Our principal executive office is located in a leased premise
comprising approximately 500 square feet of space in New York City.
This location currently houses commercial operations including
sales, marketing, business development and ad operations. Our
Trondheim, Norway facility with approximately 11,000 square feet of
space accommodates our product, design and technology teams and is
under lease through 2018. Finally, we entered into a lease in
October 2014 for approximately 400 square feet of office space in
Helsinki, Finland, where we employ a satellite development center.
Our servers are hosted in leased data centers in different
geographic locations in the U.S. These data centers are owned and
maintained by a third party data center provider.
47
MANAGEMENT
Directors and Executive
Officers
Set forth below is information concerning our executive officers
and directors.
|
|
|
|
|
Tom Arnoy
|
|
40
|
|
Chief Executive Officer
|
Jonathan Reich
|
|
50
|
|
Chief Financial Officer and Chief Operating
Officer
|
Marie Therese Carney
|
|
47
|
|
Director
|
Mark Ghermezian
|
|
33
|
|
Director
|
Stephen Greenberg
|
|
71
|
|
Director
|
Howard S. Jonas*
|
|
59
|
|
Director
|
Michael Jonas*
|
|
32
|
|
Director
|
Set forth below is biographical information with respect to the
Company’s current executive officers and directors:
Tom Arnoy
is one of our founders, has served as our Chief
Executive Officer since 2011 and has served as a member of our
board of directors since September 2008. From 2008 to 2011, Mr.
Arnoy served as our President. Prior to joining Zedge, Mr. Arnoy
was involved in several different mobile internet businesses
including Webway AS, a Norwegian based venture; IMC Labs, which Mr.
Arnoy founded in 2000 and ultimately became a part of Mobile Forza
AS, a Norwegian mobile incubator and consulting company. At Mobile
Forza AS, Mr. Arnoy managed the product and technology teams in
Trondheim, Norway. In addition to these roles, Mr. Arnoy was a
project leader for MobileZone AS, a joint venture between Siemens
Mobile and Mobile Forza AS. Mr. Arnoy has served as a director of
Patchbox, AS, a private investment company, since 2015.
Jonathan Reich
has served as Chief Financial Officer since
2016 and Chief Operating Officer of Zedge since 2011. From 2007 to
2014, Mr. Reich served as President of Fabrix Systems, Inc. and
from 1999 to 2007 he served in various positions at Net2Phone, Inc.
culminating with him serving as Chief Executive Officer of
Net2Phone Global Services. Mr. Reich is a director at the
non-profit organization, Hand-in-Hand, since 2005. Mr. Reich
received a B.S. and M.S. in Operations Research from Columbia
University’s School of Engineering and Applied Science in
1989 and 1993 respectively.
Marie Therese (MT) Carney
has been the Chief Executive
Officer and Founder of Untitled Worldwide, LLC since 2013. At
Untitled Worldwide, Ms. Carney builds efficient marketing campaigns
that help startups using her extensive experience building and
managing large teams of creative people, designing shared goals and
finding ways for groups to work together. Prior to founding
Untitled Worldwide, Ms. Carney was Worldwide-President of Marketing
at Walt Disney Studios from 2011 to 2012 where she was responsible
for a complete overhaul of the studios marketing organization
creating a more efficient and streamlined process that produced
exciting, integrated, targeted and cost efficient campaigns. Prior
to Disney, MT co-founded Naked Communications in America, a company
that created a wave of change across the marketing community with
its highly prized intelligent strategic solutions. Ms.
Carney’s previous experiences include Worldwide Planning
Director at Ogilvy and Mather and Chief Strategy Officer at
Universal McCann.
Key Attributes,
Experience and Skills:
Ms. Carney brings an insightful perspective to the Board based upon
her extensive background in marketing and entrepreneurship. She has
worked closely with start-ups and multinationals on developing
their business and marketing strategies both important areas for
us. Her skill and experience in managing creative personnel will
also serve to support management in their performance.
Mark Ghermezian
has been Chief Executive Officer and
Co-Founder of Appboy, Inc., an intelligent CRM for mobile
marketers, since 2011. Mr. Ghermezian has also been the Managing
Partner of T5 Capital Partners, an investment firm focused on early
stage technologies across verticals, since January 2011.
Additionally, Ghermezian regularly speaks, writes, and presents
about the future of mobile, investment strategy, and the startup
landscape.
48
Key Attributes,
Experience and Skills:
Mr. Ghermezian, a serial entrepreneur, is a well-recognized leader
in the world of marketing automation and he brings to the Board
extensive knowledge of the mobile apps eco-system. Besides his
industry-specific experience, his work on the investment side, both
as a fund manager and writer and speaker, will benefit Zedge, as it
charts its course as an independent public company.
Stephen Greenberg
has been managing member of Pilgrim
Mediation Group since May 2012 and managing member of Bento Box
Entertainment since January 2013. Mr. Greenberg previously served
as Chairman of the Board and Chief Executive Officer of Net2Phone,
Inc. and IDT Spectrum, Inc. from 2002 to 2006. In April 2015, Mr.
Greenberg was elected the 29
th
Chairman of the Board the Conference of Presidents of Major
American Jewish Organizations, the central coordinating body on
international and national concerns for 50 National Jewish
Organizations. Immediately prior to his election, Mr. Greenberg
served as Chairman of the National Coalition for Eurasian Jewry.
Mr. Greenberg has been a member of the board of American Friends of
Beit Hatfusot since 1995 and previously served as the
organization’s President and a member of the board of Tel
Aviv Foundation since 2005. Mr. Greenberg was also a member of the
board of International Hillel from 2006 to 2012. Mr. Greenberg
received a B.A. in English
Cum Laude
from
Washington & Jefferson College in 1965 and a J.D. with honors
from George Washington University in 1968.
Key Attributes,
Experience and Skills:
Mr. Greenberg is a seasoned professional and executive. He has
overseen and advised companies as CEO as well as an attorney.
Steve’s experience running Net2Phone will bring to the Board
the perspective of an executive of a developing company that was
newly public and dealing with the challenges of that position. His
problem solving skills, proven through his experience as an
attorney, a mediator and a leader in public service, as well as his
broad contacts in numerous fields, will also serve Zedge well.
Howard S. Jonas
has served as Chairman of the Board of
Directors of Genie Energy Ltd. since January, 2011, when Genie was
spun off from IDT Corporation (IDT). Also, he has served as Chief
Executive Officer of Genie since January 2014 and Co-Vice Chairman
of Genie Energy International Corporation since September 2009. He
has been a director of IDT Energy since June 2007 and a director of
American Shale Oil Corporation LLC since January 2008. Mr. H. Jonas
founded IDT in August 1990, and has served as Chairman of its Board
of Directors since its inception. Mr. Jonas has served as Chief
Executive Officer of IDT from October 2009 through December 2013.
Mr. H. Jonas also serves as the Chairman of the Board of IDW Media
Holdings, Inc., a former subsidiary of IDT that was spun off to
stockholders in September 2009. From August 2006 until August 2011,
Mr. H. Jonas served as a director of Starz Media Holdings, LLC,
Starz Media, LLC and Starz Foreign Holdings, LLC, each of which is
a subsidiary of Liberty Media Corporation. Mr. H. Jonas is also the
founder and has been President of Jonas Media Group (f/k/a Jonas
Publishing) since its inception in 1979. Mr. H. Jonas received a
B.A. in Economics from Harvard University.
Key Attributes,
Experience and Skills:
As Chairman of IDT Corporation, Genie Energy Ltd. And IDW Media
Holdings, Inc., Mr. H. Jonas brings to the Board extensive and
detailed knowledge of all aspects of our Company and each industry
in which it is involved. In addition, having Mr. H. Jonas on the
Board provides our Company with effective leadership.
Michael Jonas
has served as Executive Vice President of
Genie since May 2014, Director of Global Exploration and Business
Development since August 2014, Chief Executive Officer of Genie Oil
Development since May 2015. In such capacities, Mr. M. Jonas is
responsible for government affairs, public relations, and business
development for Genie Oil & Gas and all of the Company’s
business development in Mongolia. From November 2005 through
December 2011, Mr. M. Jonas served IDT in various positions such as
analyst, vice president and manager of international business. Mr.
Jonas is a founding member of Mongolian Oil Shale Association.
Key Attributes,
Experience and Skills:
Mr. M. Jonas has served as an executive officer of growing
businesses and has managed development efforts for larger
organizations. His experience in overseeing operations in growth
mode will bring hands-on experience to the Board and guidance to
management in executing our growth plan.
49
CORPORATE
GOVERNANCE
Director
Independence
Our Board of Directors has determined that majority of our
directors are independent under criteria established by the NYSE
MKT. Specifically, the board determined that Ms. Carney and Messrs.
Ghermezian and Greenberg are independent in accordance with our
Corporate Governance Guidelines and the rules of the NYSE MKT and
other applicable laws. Our current Board of Directors also include
Howard Jonas and Michael Jonas.
Controlled Company Exemption
Following the spin-off, we will be a “controlled
company” as defined in section 801(a) of the NYSE MKT Company
Guide because more than 50% of our voting power will be
beneficially held by Howard Jonas. As a “controlled
company,” we will be exempt from certain NYSE MKT listing
standards As discussed below, we intend to apply the NYSE MKT
“controlled company” exemption only for our corporate
governance practices with respect to the independence requirements
of our Nominating Committee.
Committees of the Board
of Directors
Our Board of Directors has established an Audit Committee, a
Nominating Committee, a Compensation Committee, and a Corporate
Governance Committee. All members of the Audit, Compensation and
Governance Committees will meet the criteria for independence as
established by NYSE MKT and under the Sarbanes-Oxley Act of 2002.
Each of the Committees is described in greater detail below. The
Board has established written charters for each of the Committees,
which will be available on our website located at
www.zedge.net
following the spin-off. Following the spin-off, any changes to the
charters will be reflected on our website.
Audit
Committee
The Audit Committee consists of Ms. Carney, Mr. Ghermezian and Mr.
Greenberg. The principal duties of the Audit Committee under its
written charter will include: (i) responsibilities associated with
our external and internal audit staffing and planning; (ii)
accounting and financial reporting issues associated with our
financial statements and filings with the SEC; (iii) financial and
accounting organization and internal controls; (iv) auditor
independence and approval of non-audit services; and (v)
“whistle-blower” procedures for reporting questionable
accounting and audit practices.
The Audit Committee charter will requires that the Committee be
comprised of at least three directors, all of whom must be
independent under the NYSE MKT listing standards and the
Sarbanes-Oxley Act of 2002. In addition, each member of the Audit
Committee must be financially literate within the meaning of the
NYSE MKT listing standards, and at least one member will have
sufficient accounting or financial management expertise to qualify
as an “audit committee financial expert,” as determined
by the Board of Directors in accordance with SEC rules.
Nominating
Committee
The Nominating Committee consists of Mr. Howard Jonas and Mr.
Greenberg. The principal duties of the Nominating Committee under
its charter will include: (i) developing the criteria and
qualifications for membership on the Board of Directors; (ii)
recommending candidates to fill new or vacant positions on the
Board of Directors; and (iii) conducting appropriate inquiries into
the backgrounds of potential candidates. We intend to apply the
NYSE MKT exemption related to a controlled company which allows a
“controlled company” to be exempted from complying with
rules requiring that only independent directors comprise our
Nominating Committee.
Compensation
Committee
The Compensation Committee consists of Ms. Carney, Mr. Ghermezian
and Mr. Greenberg. The principal duties of the Compensation
Committee under its charter will include: (i) ensuring that a
succession plan for the Chief Executive Officer is in place; (ii)
reviewing management’s recommendations as to compensation for
executive officers and making recommendations to the Board of
Directors; (iii) approving the compensation for
50
the Chief Executive Officer and other executive officers; (iv)
reviewing and approving compensation policies and practices for the
Company more generally; (v) reviewing and approving major changes
in employee benefit plans; (vi) reviewing short and long-term
incentive plans and equity grants; (vii) recommending to the full
Board of Directors changes to the compensation of the independent
members of the Board of Directors; and (viii) administering our
Stock Option and Incentive Plan. The Compensation Committee charter
will require that the Committee be comprised of at least two
directors, both of whom must be independent under our Corporate
Governance Guidelines.
Corporate Governance
Committee
The Corporate Governance Committee consists of Ms. Carney, Mr.
Ghermezian and Mr. Greenberg. The principal duties of the Corporate
Governance Committee under its charter will include: (i) reviewing
our Corporate Governance Guidelines and other policies and
governing documents and recommending revisions as appropriate; (ii)
reviewing any potential conflicts of independent directors and
establishing director independence; (iii) reviewing and monitoring
related person transactions; and (iv) overseeing the
self-evaluations of the Board of Directors, the Audit Committee and
the Compensation Committee. The Corporate Governance Committee
charter will require that the Committee be comprised of at least
two directors, both of whom must be independent under the NYSE MKT
listing standards.
Governance
Practices
Following the spin-off, we will observe corporate governance
practices and principal governance documents which are designed to
ensure that we maximize stockholder value in a manner that is
consistent with both the legal requirements applicable to us and a
business model that requires our employees to conduct business with
the highest standards of integrity. Prior to the spin-off, our
Board of Directors will adopt and will adhere to corporate
governance principles which the Board and senior management believe
promote this purpose, are sound and represent best practices, and
will review these governance practices, the corporate laws of the
State of Delaware under which we were incorporated, the NYSE MKT
listing standards and the regulations of the SEC, as well as best
practices recognized by governance authorities to benchmark the
standards under which it operates. Our principal governance
documents will be as follows:
•
Corporate Governance Guidelines;
•
Board of Directors committee charters, including:
•
Audit Committee charter;
•
Nominating Committee charter;
•
Compensation Committee charter;
•
Corporate Governance Committee charter; and
•
Code of Business Conduct and Ethics.
Our governance documents will be available following the
distribution date on our web site at
www.zedge.net
.
Our Board of Directors, with assistance from its Corporate
Governance Committee, will regularly assess our governance
practices in light of legal requirements and governance best
practices.
Director Executive
Sessions
Under our Corporate Governance Guidelines, the outside directors
will meet in regularly scheduled executive sessions without
management. We expect that a lead independent director will be
selected by the Board of Directors to serve as the presiding
director at these meetings.
51
Communications with the
Board of Directors
After the spin-off, stockholders and other interested persons
seeking to communicate directly with the Board of Directors, with
the lead independent director or the independent directors as a
group, should submit their written comments c/o Lead Independent
Director at our principal executive offices set forth on page C3.
The lead independent director will review any such communication at
the next regularly scheduled Board meeting unless, in his or her
judgment, earlier communication to the Board is warranted.
If a stockholder communication raises concerns about the ethical
conduct of us or our management, it should be sent directly to our
Corporate Secretary at our principal executive offices set forth on
page C3. The Corporate Secretary will promptly forward a copy of
any such communication to the Chairman of the Audit Committee, and
take such actions as they authorize to ensure that the subject
matter is addressed by the appropriate committee of the Board of
Directors, by management and/or by the full Board.
The Corporate Secretary may filter out and disregard or re-direct
(without providing a copy to the directors or advising them of the
communication), or may otherwise handle at his or her discretion,
any director communication that falls into any of the following
categories:
•
Obscene materials;
•
Unsolicited marketing or advertising material or mass mailings;
•
Unsolicited newsletters, newspapers, magazines, books and
publications;
•
Surveys and questionnaires;
•
Resumes and other forms of job inquiries;
•
Requests for business contacts or referrals;
•
Material that is threatening or illegal; or
•
Any communications or materials that are not in writing.
In addition, the Corporate Secretary may handle in his or her
discretion any director communication that can be described as an
“ordinary business matter.” Such matters include the
following:
•
Routine questions, service and product complaints and comments that
can be appropriately addressed by management; and
•
Routine invoices, bills, account statements and related
communications that can be appropriately addressed by
management.
Code of Business Conduct
and Ethics
Prior to the distribution date, we will adopt a Code of Business
Conduct and Ethics which will apply to our directors, Chief
Executive Officer, Chief Financial Officer and all other Zedge
employees.
52
DIRECTOR
COMPENSATION
None of the Company’s directors who will serve on the Board
following the spin-off received compensation for their service as a
director. Mr. Arnoy’s compensation was solely in respect of
his service as an executive officer, thus is only set forth in the
Executive Compensation section of this Information Statement.
Each non-employee director of the Company who attends at least 75%
of the regularly scheduled meetings of the Board of Directors
during a calendar year will receive total compensation of $50,000.
If our market value is $40 million or higher based on a thirty day
average ending on the relevant measurement period, all compensation
will be in the form of shares of restricted common stock of the
Company that will vest over two years from grant. If our market cap
is below $40 million using the same formulation, a portion of the
compensation will be paid in cash. The portion shall be pro rata
based on the difference between $40 million and our market cap. For
example, if our market cap is $30 million a non-employee director
would receive $12,500 in cash and the remaining in restricted
stock. The measurement period for the Company valuation for the
directors who serve at the time of the spin-off will be closing
prices for the first thirty days of trading post-spin-off, and for
all other periods, the average of the closing prices during
December of the preceding year. Shares will vest in equal
installments on the date of grant and the first and second
anniversaries of grant. If a director voluntarily resigns from the
Board, unvested shares will be forfeited.
Payments of directors’ fees are to be made in January of the
calendar year following attendance of at least 75% of the regularly
scheduled Board meetings during the preceding year, and is
pro-rated based on the quarter for non-employee directors who join
the Board of Directors or depart from the Board of Directors during
the prior year, if such director attended 75% of the applicable
board meetings for such partial year. The Company’s Chief
Executive Officer may, in his discretion, waive the requirement of
75% attendance by a director to receive the annual retainer in the
case of mitigating circumstances. Directors will not be entitled to
additional compensation for serving on committees of the Board or
per-meeting fees.
The non-employee director compensation will be reflected in the
Company’s stock option and incentive plan to achieve the
advantages of a stockholder-approved compensation plan. The
Compensation Committee periodically reviews our director
compensation practices. The Compensation Committee believes that
our director compensation is fair and appropriate in light of the
responsibilities and obligations of our directors. Directors do not
receive any annual fees for committee services, nor are there any
additional fees paid to the lead independent director or audit
committee financial expert.
53
EXECUTIVE
COMPENSATION
Compensation of our
Named Executive Officers
Prior to the spin-off, all of the named executive officers were
employees of IDT and all compensation for fiscal year 2015
disclosed in the table below was paid by IDT for services provided
by the named executive officers to our business segments and other
units of IDT. During fiscal year 2015, Tom Arnoy served as Chief
Executive Officer of Zedge and Jonathan Reich served as the Chief
Operating Officer of Zedge.
The historical compensation of Tom Arnoy and Jonathan Reich was set
by IDT management and the Zedge Board of Directors.
SUMMARY COMPENSATION
TABLE (With respect to IDT Corporation)
Name and Principal
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom Arnoy Chief
Executive Officer
|
|
2015
|
|
$
|
244,000
|
|
|
$
|
75,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
325,000
|
Jonathan Reich Chief
Operating Officer
|
|
2015
|
|
$
|
355,637
|
(1)
|
|
$
|
75,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
430,637
|
Following the spin-off, the compensation of our executive officers
will be set by the Compensation Committee of our Board of Directors
after discussions with management about the recommended levels and
components of compensation for each of the individuals.
In general, it is anticipated that each of our executive officers
will receive base compensation that is commensurate with the
officer’s duties, responsibilities and compensation levels
for similarly situated individuals in comparable positions. In
addition, executive officers may receive bonus compensation and
compensatory equity-based awards.
Any bonus compensation to executive officers will be determined by
our Compensation Committee based on factors it deems appropriate,
including the achievement of specific performance targets and our
financial and business performance. No such targets have yet been
established.
Equity compensation awards will generally be granted pursuant to
our 2016 Stock Option and Incentive Plan described below at levels
determined by the Compensation Committee. No grants have been made
nor has the Company agreed to any specific grant or level of
grants.
Outstanding Equity
Awards at 2015 Fiscal Year-End
The following table provides information on the current holdings of
stock options and unvested restricted stock by our Named Executive
Officers at July 31, 2015.
|
|
|
|
|
|
|
Number of Securities Underlying
Unexercised Options (#) Exercisable
(1)
|
|
Number of Securities Underlying
Unexercised Options (#) Unexercisable
|
|
Option
Exercise
Price
($)
|
|
|
|
Number of Shares or Units of Stock That
Have
Not Vested
(#)
|
|
Market Value of Shares or Units of Stock
That Have
Not Vested
($)
|
Tom Arnoy
|
|
9/23/2008
|
|
125
|
|
—
|
|
$
|
10.00
|
|
9/23/2018
|
|
—
|
|
—
|
|
|
5/12/2010
|
|
2,675
|
|
|
|
$
|
7.80
|
|
5/11/2020
|
|
—
|
|
—
|
|
|
11/1/2011
|
|
1,363
|
|
|
|
$
|
105.50
|
|
10/31/2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan
Reich
|
|
11/1/2011
|
|
2,985
|
|
—
|
|
$
|
105.50
|
|
10/31/2021
|
|
—
|
|
—
|
54
Company Long-Term
Incentive Plan
The Company previously adopted the Zedge Holdings, Inc. 2008
Omnibus Stock Incentive Plan, as amended and restated on November
1, 2011 (the “2008 Plan”). The maximum number of shares
of Zedge common stock reserved for the grant of awards under the
2008 Plan is 27,118, and options to purchase an aggregate of 27,098
have been granted under the 2008 Plan. The 2008 Plan was intended
to enhance the Zedge’s and its related entities’
ability to attract and retain highly qualified officers, directors,
key employees, and other persons, and to motivate such persons to
serve Zedge and its related entities and to expend maximum effort
to improve the business results and earnings of Zedge. To this end,
the 2008 Plan provides for the grant of stock options, restricted
stock, and deferred stock units. Stock options granted under the
2008 Plan may be nonqualified stock options or incentive stock
options, as provided therein, except that stock options granted to
outside directors and any consultants or advisers providing
services to the Company or a related entity shall in all cases be
nonqualified stock options. All of Zedge’s employees,
officers, directors, related entities, and consultants and advisors
to Zedge or its related entities were eligible for awards under the
2008 Plan. Under the 2008 Plan, there are options to purchase
24,898 shares of Zedge common stock currently outstanding, which
will be modified to represent options to purchase 1,514,860 shares
of Zedge Class B common stock in the recapitalization prior to the
spin-off. The 2008 Plan will expire in 2018, although options
previously granted under the 2008 Plan will continue to remain
outstanding after that date until their exercise or expiration in
accordance with their terms. On May 23, 2016, the Board of
Directors adopted, effective as of the distribution date, a
long-term incentive plan, which was approved by our stockholders on
May 24, 2016 (the “2016 Plan”). Future grants will be
made under the 2016 Plan.
2016 Plan
Objectives.
The
2016 Plan is designed to attract and retain officers, employees and
consultants, to encourage the sense of proprietorship of such
officers, employees and consultants and to stimulate the active
interest of such persons in our development and financial success.
These objectives are to be accomplished by making awards under the
2016 Plan and thereby providing participants with a proprietary
interest in our growth and performance.
Eligibility.
All
of our employees, consultants and directors will be eligible for
awards under the 2016 Plan. Our Compensation Committee will select
the participants from time to time by the grant of awards.
Shares Available for
Awards.
No shares of our Class A common stock and a
number of shares of our Class B common stock to be equal to 0.75%
of the outstanding shares of our common stock following the
spin-off will be available for awards under the 2016 Plan.
Administration.
We
intend that the 2016 Plan will be administered by our Compensation
Committee. The Committee will have full and exclusive power to
interpret the 2016 Plan and to adopt such rules, regulations and
guidelines for carrying out the 2016 Plan as they may deem
necessary or proper, all of which powers shall be exercised in our
best interests and in keeping with the objectives of the 2016
Plan.
Awards.
At
the discretion of the Compensation Committee, awards may be in the
form of (1) options, representing rights to purchase a specified
number of shares Class B common stock at a specified price; (2)
stock appreciation rights, representing rights to receive a
payment, in cash or common stock, equal to the excess of the fair
market value or other specified value of a number of shares of
Class B common stock on the rights’ exercise date over a
specified strike price; and (3) grants of restricted or
unrestricted Class B common stock or deferred stock units
denominated in Class B common stock. The Compensation Committee
will determine the type or types of awards to be made to each
participant under the 2016 Plan and the terms, conditions and
limitations applicable to each such award. Each award will be
embodied in an award agreement containing such terms, conditions
and limitations as determined by the Compensation Committee in its
sole discretion, provided that the Compensation Committee may
delegate authority to members of management to approve grants in
awards to individuals who are not directors or executive
officers.
Payment of
Awards.
Generally, payment of awards may be made in
the form of cash or Class B common stock or combinations thereof
and may include such restrictions as the Compensation Committee
determines including, in the case of Class B common stock, as
applicable, restrictions on transfer and forfeiture provisions.
55
The following is a brief description of these awards:
Stock
Options.
An award may consist of a right to purchase a
specified number of shares of Class B common stock at a price
specified by the Compensation Committee in the award agreement or
otherwise. A stock option may be in the form of an incentive stock
option to a participant who is an employee, which in addition to
being subject to applicable terms, conditions and limitations
established by the Committee, complies with Section 422 of the
Code, or, in the case of participants who are employees or
directors, in the form of a nonqualified option. The 2016 Plan
authorizes the Committee to specify the manner of payment of the
option price.
Stock Appreciation
Rights.
A stock appreciation right
(“SAR”), consists of a right to receive a payment, in
cash or Class B common stock, as applicable, equal to the excess of
the fair market value or other specified valuation of a specified
number of shares of Class B common stock on the date the SAR is
exercised over a specified strike price as set forth in the award
agreement.
Stock
Awards.
A stock award may consist of Class B common
stock, as applicable, or may be denominated in units of Class B
common stock, as applicable. All or part of any stock award may be
subject to conditions established by the Compensation Committee and
set forth in the award agreement. The Committee may permit dividend
equivalents with respect to restricted stock units. Such awards may
be based on fair market value or other specified valuations.
The 2016 Plan will have reserved for issuance pursuant to awards
made under the 2016 Plan shares of Class B common stock
representing 0.75% of the anticipated outstanding shares of the
Company’s common stock following the spin-off.
56
SECURITY OWNERSHIP BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Eighty two percent (82%) of our outstanding shares are held
beneficially and of record by IDT. In addition, shares of our
common stock that IDT received prior to the distribution, in
respect of IDT’s portion of certain existing shareholders
purchasing shares of Zedge Class B common stock for $3 million at a
pre-investment valuation for Zedge of $27 million, are held
beneficially and of record by IDT. The following table sets forth
information concerning shares of our Class A common stock and Class
B common stock projected to be beneficially owned immediately after
the distribution date by:
•
each person or entity known by us to be the beneficial owner of 5%
or more of the outstanding shares each of IDT’s classes of
common stock;
•
each person who we currently anticipate will be one of our
directors at the time of the distribution;
•
each person who we currently anticipate will be one of our named
executive officers at the time of the distribution; and
•
all persons who we currently anticipate will be our directors and
executive officers at the time of the distribution as a group.
The projected share amounts in the table below are based on the
number of shares of IDT’s Class A common stock and Class B
common stock owned by each person or entity at March 12, 2016,
adjusted for the three for one distribution ratio in the spin-off.
Percentage ownership information is based on the following
projected amount of Zedge outstanding shares: (i) 524,775 shares of
Class A common Stock (based on 1,574,326 shares of IDT Class A
common stock that were outstanding on April 1, 2016), and (ii)
7,151,559 shares of Class B common Stock (based on 21,454,677
shares of IDT Class B common stock that were outstanding on April
1, 2016), which will include the shares of Zedge Class B common
stock that IDT received in respect of IDT’s portion of
certain existing shareholders purchasing $3 million of Zedge Class
B common stock at a pre-investment valuation for Zedge of $27
million.
In addition, prior to the spin-off, the equity interests in Zedge
not owned by IDT, in addition to that portion of the $3 million of
Zedge Class B common stock purchased by Zedge stockholders other
than IDT at a pre-investment valuation for Zedge of $27 million,
have been recapitalized into 1,635,146 shares of Zedge Class B
common stock. These shares will not be distributed to IDT
stockholders in the spin-off. Also, options outstanding to purchase
24,898 shares of current Zedge common stock have been converted
into options to purchase 1,514,860 shares of Zedge Class B common
stock.
Percentage ownership information assumes the conversion of all
1,574,326 currently outstanding shares of IDT Class A Common Stock
into Class B Common Stock for the percentage ownership information
of Howard Jonas and all directors and Named Executive Officers as a
group). To our knowledge, except as otherwise indicated in the
footnotes below, each person or entity has sole or shared voting
and investment power with respect to the shares of common stock set
forth opposite such persons or entity’s name. Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to the
securities.
|
|
Number of Shares of Class B Common Stock
|
|
Percentage of Ownership of Class B Common
Stock
|
|
Percentage of Aggregate Voting
Power
§
|
Howard S. Jonas
520 Broad Street
Newark, NJ 07102
|
|
839,302
|
(1)
|
|
9.0
|
%
|
|
65.5
|
%
(2)
|
Tom Arnoy
|
|
487,961
|
(3)
|
|
5.1
|
%
|
|
1
|
%
|
Jonathan Reich
|
|
187,382
|
(4)
|
|
2
|
%
|
|
|
*
|
All directors, Named Executive Officers and
other executive officers as a group 3 persons)
|
|
1,514,645
|
(5)
|
|
16.2
|
%
|
(6)
|
|
66.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
57
58
OUR RELATIONSHIP WITH
IDT AFTER THE SPIN-OFF AND RELATED PERSON TRANSACTIONS
General
In connection with the spin-off, we and IDT have entered into a
Separation and Distribution Agreement and a Tax Separation
Agreement to complete the separation of our businesses from IDT and
to distribute our common stock held by IDT to IDT stockholders.
These agreements will govern the relationship between us and IDT
after the distribution and will also provide for the allocation of
employee benefits, taxes and other liabilities and obligations
attributable to periods prior to the distribution. Along with the
Separation Agreement and Tax Agreement, we and IDT have entered
into a Transition Services Agreement. These agreements reflect
agreement between affiliated parties established without
arms-length negotiation. However, we believe that the terms of this
agreement will equitably reflect the benefits and costs of our
relationship with IDT.
The key provisions of these agreements are summarized below. We may
enter into other agreements with IDT prior to or concurrently with
the separation that would relate to other aspects of our
relationship with IDT following the spin-off to allow us to utilize
certain personnel of, and obtain administrative, financial,
internal audit, treasury, legal, corporate, tax, payroll processing
and other services from IDT until we develop those capabilities
internally or arrange for such services from other vendors. Unless
amended, the Transition Services Agreement will terminate twelve
months following the spin-off. Following the separation, we may
enter into other commercial agreements with IDT from time to time,
the terms of which will be determined at those relevant times. In
fiscal year 2015 and fiscal year 2014, IDT allocated to Zedge an
aggregate of approximately $2.2 million and $1.4 million,
respectively, for payroll, benefits, insurance, facilities and
other expenses, which were included in “Selling, general and
administrative expense” in the consolidated statements of
comprehensive income (loss) and “Purchase of property and
equipment” in the consolidated statements of cash flows
(relating to capitalized software and technology development
costs).
Copies of these agreements described below will be filed as
exhibits to our Form 10, of which this information statement is a
part. The summaries of the material agreements are qualified in
their entireties by reference to the full text of the agreements.
We encourage you to read the full text of these material
agreements.
Separation and
Distribution Agreement
The Separation and Distribution Agreement sets forth the agreements
between us and IDT with respect to the principal corporate
transactions required to effect our separation from IDT; the
distribution of our common shares to IDT stockholders; and other
agreements governing the relationship between IDT and us following
the separation. IDT will only consummate the spin-off if specified
conditions are met or approved by the IDT board. These conditions
include, among others, that all actions and filings necessary or
appropriate under Federal and state securities laws and state blue
sky laws of the United States (and any comparable laws under any
foreign jurisdictions) in connection with the distribution shall
have been taken and made and, where applicable, become effective or
accepted.
The
Investment
In connection with and prior to the spin-off, certain existing
shareholders of Zedge, including IDT, purchased $3 million of Zedge
common stock at a pre-investment valuation for Zedge of $27
million.
The
Separation
Following the spin-off, IDT will have no interest in our assets and
business and will have no obligation with respect to our
liabilities after the distribution other than as described below
and set forth in more detail in the Separation and Distribution
Agreement. Similarly, we will have no interest in the assets of
IDT’s other business segments and will have no obligation
with respect to the liabilities of IDT’s retained businesses
after the distribution other than as described below and set forth
in more detail in the Separation and Distribution Agreement.
59
The
Distribution
IDT delivered to the distribution agent certificates representing
all of the outstanding shares of our common stock that IDT owns.
IDT instructed the distribution agent to distribute those shares on
June 1, 2016 or as soon thereafter as practicable, so that each IDT
stockholder will receive one share of our Class A common stock for
every three shares of IDT Class A common stock and one share of our
Class B common stock for every three shares of IDT Class B common
stock, in each case, as such stockholder owns as of the record date
of the spin-off.
Termination
The Separation Agreement provides that it may be terminated by IDT
at any time prior to the distribution date.
Liabilities and
Indemnification
Generally, IDT indemnified us, and we indemnify IDT, for losses
related to the failure of the other to pay, perform or otherwise
discharge, any of the its liabilities and obligations set forth in
the Separation Agreement. All liabilities and obligations related
to Zedge will remain Zedge’s obligation whether the liability
and or obligation arose pre-spin-off or post spin-off and all
liabilities and obligations related to IDT will remain IDT’s
obligation whether the liability and or obligation arose
pre-spin-off or post spin-off.
Expenses
Except as expressly set forth in the Separation Agreement, whether
or not the separation and distribution are completed, all third
party fees, costs and expenses paid or incurred in connection with
the transactions contemplated by the Separation Agreement will be
paid by Zedge.
Tax Separation
Agreement
In connection with the spin-off, we and IDT entered into a tax
separation agreement, which sets forth the responsibilities of IDT
and us 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. IDT is generally responsible for our
federal, state, local and foreign income taxes for periods before
and including the spin-off. We will be generally responsible for
all other taxes relating to our business. We and IDT are generally
responsible for managing those disputes that relate to the taxes
for which each of us is responsible and, under certain
circumstances, may jointly control any dispute relating to taxes
for which both of us are responsible.
Transition Services
Agreement
In connection with the spin-off, we and IDT entered into a
Transition Services Agreement pursuant to which IDT will provide
us, among other things, certain administrative and other services
following the distribution date, including services relating to
payroll processing and employee benefits administration, finance,
accounting, tax, internal audit, investor relations and legal. For
each of these areas, a service schedule will summarize the services
to be provided and the responsibilities of IDT and us. The services
will be paid for by us as calculated in the Transition Services
Agreement.
Related Person
Transactions
For a complete list of IDT’s fiscal year 2015 related person
transactions, please see IDT’s Proxy Statement for its 2015
Annual Meeting of Stockholders, filed with the SEC on October 30,
2015.
60
LEGAL
PROCEEDINGS
On August 9, 2012, Blue Spike LLC filed a patent lawsuit against
Zedge in the United States District Court for the Eastern District
of Texas. Blue Spike alleged that Zedge was infringing four patents
related to automatic content recognition technologies, provided to
Zedge by a supplier. On December 3, 2012, Zedge filed an answer
denying the allegations in the complaint and asserting defenses and
counterclaims. On July 15, 2013, Zedge filed an amended answer
asserting additional defenses and counterclaims. Plaintiff served
its infringement contentions on February 26, 2014. The case was
bifurcated with the plaintiff’s case proceeding solely
against the supplier. Proceedings in the case against Zedge, a
customer, being stayed entirely until after the litigation against
the supplier concluded. In the supplier case, the supplier filed a
motion for summary judgment of non-infringement, which was heard on
August 25, 2015. On September 8, 2015, the United States District
Court for the Northern District of California, in a co-pending
case, found asserted claims of the patents in suit to be invalid
for lack of patentable subject matter. On September 11, 2015, the
magistrate judge who heard the motion issued a report and
recommended granting the motion for summary judgment of
non-infringement as to the supplier’s technology, which is
the same technology underlying the claim against Zedge. The Court
then continued all activity and case deadlines, to allow the
supplier and the plaintiff to negotiate a resolution of the dispute
between them. That process is ongoing. The Court recently lifted
the stay of the case and scheduled trial on all remaining issues in
the case between Blue Spike and the supplier. The supplier is
seeking final rulings on non-infringement and invalidity, and is
seeking to continue all case deadlines involving Zedge to a date
after final resolution of non-infringement and invalidity of the
patents, and after the trial involving Blue Spike and the supplier,
which has been the structure of the case throughout the course of
the proceedings. Zedge is indemnified by the supplier for all
losses related to this matter.
In March 2014, Saregama India, Limited filed a lawsuit against
Zedge before the Barasat District Court, seeking approximately
US$1,595,700 as damages and an injunction for copyright
infringement. The main ground for the lawsuit was that Zedge
allegedly avails the plaintiff’s sound recordings through
Zedge’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. Zedge
believes that any possible liability on the matter is remote.
The plaintiff also alleged that, despite the order of interim
injunction of the Calcutta High Court, dated February 11, 2013,
Zedge continues to make such sound recordings available to the
public through the Zedge platform. On June 8, 2015, Zedge moved to
dismiss the complaint on the grounds that the Court has no
jurisdiction to hear the suit and that the suit has been wrongly
instituted in the district court by the plaintiff. On the same day,
Zedge also moved the district court seeking a rejection of the
complaint on the grounds that the money suit is not maintainable
because the Plaintiff has also filed a similar suit in the Calcutta
High Court on the same facts and circumstances and cause of action
as the present suit. Zedge intends to vigorously defend this
suit.
In 2013, the record label Saregama India Limited, along with
Phonographic Performance Limited (PPL) and the Indian Music
Industry (IMI) filed a civil suit before the Calcutta High Court
for copyright infringement seeking, among other things, a permanent
and interim injunction restraining certain defendants and internet
service providers (“ISPs”) from providing access to a
number of websites. The suit listed the platforms and websites that
the plaintiffs wanted the defendants to block in India, including
zedge.net. The plaintiffs’ grounds for seeking injunctive
relief was that these websites provided users access to sound
recordings of the plaintiffs, without obtaining any license from
the plaintiffs, thereby, infringing their copyright in these sound
recordings. Plaintiffs were granted an interim injunction, thereby
restraining the defendants and the ISP’s from providing
access to the websites (including Zedge’s platform), until
the suit is finally decided by the Court. Accordingly, access to
Zedge, through any mode, has been blocked in many parts of India
since February 2013.
Zedge was not aware of these orders as it was not made a party to
this suit. On becoming aware of the injunction, Zedge moved the
Calcutta High Court seeking to be added as a defendant in the suit
to enable it to defend against the blocking of the Zedge Platform
in India. On the same day, Zedge also filed an application seeking
to vacate the interim injunction on the grounds that the orders
were obtained without notice to Zedge and by concealing material
facts in case. The matter is pending further hearing before the
Calcutta High Court.
In addition to the foregoing, the Company may from time to time be
subject to other legal proceedings that arise in the ordinary
course of business.
61
RECENT SALES OF
UNREGISTERED SECURITIES;
USE OF PROCEEDS FROM REGISTERED SECURITIES
In August 2013, Zedge granted options to purchase 800 shares of its
common stock at an exercise price of $10.50 to an employee.
In Fiscal 2015, Zedge issued 1,100 shares to two employees in
connection with the exercise of options with an exercise price of
$7.80 with respect to 900 shares and an exercise price of $10.00
per share with respect to 200 shares for a total purchase price of
$8,966.
In March 2016, Zedge issued 1,100 shares to an employee in
connection with the exercise of an option to purchase 1,100 shares
of its common stock with an exercise price of $7.80 for a total
purchase price of $8,580.
These sales were exempt from registration under the Securities Act
pursuant to Securities Act Rule 701.
DESCRIPTION OF OUR
CAPITAL STOCK
Our authorized capital stock consists of (i) 2.6 million shares of
Class A common stock, (ii) 40 million shares of Class B common
stock, and (iii) 2.4 million shares of Preferred Stock. We have
registered shares of our Class B common stock under the Securities
Exchange Act of 1934, as amended, under our registration statement
on Form 10 filed with the SEC. No shares of Preferred Stock are
currently outstanding.
The following statements set forth the material terms of our
classes of authorized stock; however, reference is made to the more
detailed provisions of, and such statements are qualified in their
entirety by reference to, our Third Amended Certificate of
Incorporation, which has been filed as an exhibit to registration
statement on Form 10 of which this Information Statement forms a
part.
Class A Common
Stock
Holders of shares of our Class A common stock are entitled to three
votes for each share on all matters to be voted on by the
stockholders. Holders of our Class A common stock are entitled to
share ratably in dividends, if any, as may be declared from time to
time by the Board of Directors in its discretion from funds legally
available therefor. Each share of our Class A common stock may be
converted, at any time and at the option of the holder, and
automatically converts upon transfers to unaffiliated parties, into
one fully paid and non-assessable share of our Class B common
stock. In the distribution, on the distribution date, each IDT
stockholder will receive one share of Zedge Class A common stock
for every three shares of IDT Class A common stock held on the
record date.
As of April 1, 2016, there were 1,574,326 shares of IDT Class A
common stock outstanding. Based on those numbers, we anticipate
that upon the distribution, there will be 524,775 shares of our
Class A common stock outstanding.
Class B Common
Stock
Holders of shares of our Class B common stock are entitled to one
tenth of one vote for each share on all matters to be voted on by
the stockholders. Holders of our Class B common stock are entitled
to share ratably in dividends, if any, as may be declared from time
to time by the Board of Directors in its discretion from funds
legally available therefor. In the distribution, on the
distribution date, each IDT stockholder will receive one share of
Zedge Class B common stock for every three shares of IDT Class B
common stock held on the record date.
As of April 1, 2016, there were 21,454,677 shares of IDT Class B
common stock outstanding. Based on those numbers, plus the portion
of our capital stock not held by IDT prior to the spin-off, and the
Zedge equity that certain existing shareholders of Zedge, including
IDT received from the purchase of $3 million of Zedge Class B
common stock at a pre-investment valuation for Zedge of $27
million, we anticipate that upon the distribution, there will be
8,786,705 shares of our Class B common stock outstanding. This
includes approximately 18% of the outstanding equity currently held
by non-IDT Zedge shareholders, which have been recapitalized into
1,635,146 shares of Zedge Class B common stock. All the Zedge
shareholders have consented to such recapitalization.
In addition, options outstanding to purchase 24,898 shares of
current Zedge common stock have been converted into options to
purchase 1,514,860 shares of Zedge Class B common stock.
62
Preferred
Stock
The Board of Directors has the authority to fix the price, rights,
preferences, privileges and restrictions, including voting rights,
of those shares without any further vote or action by the
stockholders.
There are currently no shares of our preferred stock
outstanding.
Anti-Takeover Effects of
Our Charter and By-Laws
Some provisions of Delaware law and our Certificate of
Incorporation and By-Laws could make the following more
difficult:
•
acquisition of us by means of a tender offer;
•
acquisition of us by means of a proxy contest or otherwise; or
•
removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids. These
provisions also are designed to encourage persons seeking to
acquire control of us to first negotiate with our Board of
Directors. We believe that the benefits of increased protection
give us the potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us and
outweigh the disadvantages of discouraging those proposals because
negotiation of them could result in an improvement of their
terms.
Certificate of Incorporation; By-Laws
Our Certificate of Incorporation and By-Laws contain provisions
that could make more difficult the acquisition of us by means of a
tender offer, a proxy contest or otherwise. These provisions are
summarized below.
Undesignated
Preferred Stock.
The authorization of our undesignated
preferred stock makes it possible for our Board of Directors to
issue our preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change
control of us. These and other provisions may have the effect of
deferring hostile takeovers or delaying changes of control of our
management.
Size of Board and
Vacancies.
Our Certificate of Incorporation provides
that the number of directors on our Board of Directors will be
fixed exclusively by our Board of Directors. Newly created
directorships resulting from any increase in our authorized number
of directors or any vacancies in our Board of Directors resulting
from death, resignation, retirement, disqualification, removal from
office or other cause will be filled solely by the vote of our
remaining directors in office.
Stockholder
Meetings.
Under our By-Laws, only our (i) Chief
Executive Officer, (ii) President or (iii) Corporate Secretary may
call special meetings of our stockholders.
Indemnification and
Limitation of Liability of Directors and Officers
Our Certificate of Incorporation provides that, to the fullest
extent permitted by the Delaware General Corporate Law
(“DGCL”), our directors shall not be personally liable
to us or our stockholders for monetary damages for breach of
fiduciary duty as a director. Section 102(7) of the DGCL, however,
states that such a provision may not eliminate or limit the
liability of a director (i) for any breach of the director’s
duty of loyalty to us or our stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the DGCL,
relating to unlawful dividends, distributions or the repurchase or
redemption of stock or (iv) for any transaction from which the
director derives an improper personal benefit.
Our By-Laws provide that we shall indemnify and hold harmless, to
the fullest extent permitted by the DGCL, any person against
expenses (including attorneys’ fees), judgments, fines and
amounts paid in settlement, actually and reasonably incurred in
connection with any threatened, pending or completed legal
proceedings in which such person is involved by reason of the fact
that he is or was a director or officer of ours if he acted in good
faith and in a manner that he reasonably believed to be in or not
opposed to our best interests, and, with respect to any criminal
action or proceeding, if he had no reasonable cause to believe that
his conduct was unlawful. If the legal proceeding,
63
however, is by or in our right, such director or officer may not be
indemnified in respect of any claim, issue or matter as to which he
shall have been adjudged to be liable to us unless a court
determines otherwise.
We may enter into agreements to indemnify our directors and
officers in addition to the indemnification provided for in our
Certificate of Incorporation. Such agreements, among other things,
would indemnify our directors and officers for certain expenses
(including attorneys’ fees), judgments, fines and settlement
amounts incurred by such person in any action or proceeding,
including any action by or in our rights, on account of services as
our director or officer or as a director or officer of any
subsidiary of ours, or as a director or officer of any other
company or enterprise to which the person provides services at our
request.
We intend to obtain directors’ and officers’ liability
insurance providing coverage to our directors and officers.
Annual Meeting of
Stockholders
Our By-Laws provide that an annual meeting of stockholders will be
held each year on a date fixed by resolution of our Board of
Directors. The first annual meeting of our stockholders after the
spin-off is expected to be held on January 18, 2017.
In order for a stockholder to bring, pursuant to our By-Laws,
nominations or other proposals before the 2017 annual stockholders
meeting, the stockholder must comply with the requirements for
stockholder proposals set forth in the Proxy Statement relating to
such meeting and submit such proposals by August 15, 2016. In
addition, any stockholder proposal submitted with respect to the
Company’s 2017 annual meeting of stockholders, which proposal
is submitted outside the requirements of Rule 14a-8 under the
Exchange Act and, therefore, will not be included in the relevant
proxy materials, will be considered untimely for purposes of Rule
14a-4 and 14a-5 if written notice thereof is received by the
Company’s Corporate Secretary after September 25, 2016.
64
WHERE YOU CAN FIND MORE
INFORMATION
We have filed with the SEC a registration statement on Form 10 with
respect to the shares of our common stock to be received by the
stockholders of IDT in the spin-off. This information statement
does not contain all of the information set forth in the Form 10
registration statement and the exhibits to the Form 10 registration
statement. For further information with respect to Zedge and its
common stock, reference is hereby made to the Form 10 registration
statement, including its exhibits. Statements made in this
information statement relating to the contents of any contract,
agreement or other documents are not necessarily complete and you
should refer to the exhibits attached to the registration statement
for copies of the actual contract, agreement or other document,
with each such statement being qualified in all respects by
reference to the document to which it refers. You may review a copy
of the Form 10 registration statement, including its exhibits, at
the SEC’s public reference room, located at 100 F Street,
N.E., Washington, D.C. 20549. You may obtain copies of all or any
part of these materials from the SEC upon the payment of certain
fees prescribed by the SEC. You may obtain further information on
the operation of the public reference room by calling the SEC at
1-800-SEC-0330. In addition, copies of the Form 10 registration
statement and related documents may be obtained through the SEC
Internet address at
http://www.sec.gov
.
As a result of the spin-off and the filing of the Form 10
Registration Statement, we will become subject to the information
and reporting requirements of the Securities Exchange Act of 1934,
as amended, or the Exchange Act, and, in accordance with the
Exchange Act, will file reports, proxy statements and other
information with the SEC. After the spin-off, these reports, proxy
statements and other information may be inspected and copied at the
public reference facilities of the SEC listed above. You also will
be able to obtain copies of this material from the public reference
facilities of the SEC as described above, or inspect them without
charge at the SEC’s website.
In addition, we intend to furnish holders of our common stock with
annual reports containing consolidated financial statements audited
by an independent accounting firm.
65
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
ZEDGE, INC.
Report of Independent Registered Public
Accounting Firm
|
|
F-2
|
Consolidated Balance Sheets as of July 31, 2015
and 2014
|
|
F-3
|
Consolidated Statements of Comprehensive Income
(Loss) for the Years Ended July 31, 2015 and 2014
|
|
F-4
|
Consolidated Statements of Stockholders’
Equity for the Years Ended July 31, 2015 and 2014
|
|
F-5
|
Consolidated Statements of Cash Flows for the
Years Ended July 31, 2015 and 2014
|
|
F-6
|
Notes to Consolidated Financial
Statements
|
|
F-7
|
Consolidated Balance Sheets as of January 31,
2016 and July 31, 2015
|
|
F-22
|
Consolidated Statements of Comprehensive Income
(Loss) for the Six Months Ended January 31, 2016 and
2015
|
|
F-23
|
Consolidated Statements of Cash Flows for the
Six Months Ended January 31, 2016 and 2015
|
|
F-24
|
Notes to Consolidated Financial
Statements
|
|
F-25
|
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Zedge, Inc. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of
Zedge, Inc. and Subsidiaries (the “Company”) as of July
31, 2015 and 2014 and the related consolidated statements of
comprehensive income (loss), stockholders’ equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Zedge, Inc. and Subsidiaries at July 31, 2015 and 2014,
and the results of their operations and their cash flows for the
years then ended
,
in conformity
with accounting principles generally accepted in the United States
of America.
/s/ BDO USA, LLP
Woodbridge, New Jersey
March 8, 2016
F-2
ZEDGE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
2,170
|
|
|
$
|
765
|
|
Trade Accounts Receivable, net of Allowance for
Doubtful Accounts of $0 as of July 31, 2015 and 2014
|
|
|
1,622
|
|
|
|
1,288
|
|
Prepaid Expenses
|
|
|
103
|
|
|
|
43
|
|
Other Current Assets
|
|
|
180
|
|
|
|
127
|
|
TOTAL
CURRENT ASSETS
|
|
|
4,075
|
|
|
|
2,223
|
|
Property and Equipment, net
|
|
|
1,724
|
|
|
|
1,449
|
|
Goodwill
|
|
|
2,438
|
|
|
|
3,182
|
|
Other Assets
|
|
|
115
|
|
|
|
107
|
|
TOTAL
ASSETS
|
|
$
|
8,352
|
|
|
$
|
6,961
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Trade Accounts Payable
|
|
$
|
116
|
|
|
$
|
31
|
|
Accrued Expenses
|
|
|
1,319
|
|
|
|
833
|
|
Deferred Revenue
|
|
|
4
|
|
|
|
6
|
|
Due to IDT Corporation
|
|
|
369
|
|
|
|
489
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
1,808
|
|
|
|
1,359
|
|
TOTAL
LIABILITIES
|
|
|
1,808
|
|
|
|
1,359
|
|
MEZZANINE EQUITY:
|
|
|
|
|
|
|
|
|
Series B Convertible Preferred Stock
|
|
|
100
|
|
|
|
100
|
|
TOTAL
MEZZANINE EQUITY
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock
(Liquidation Preference of $7,001 as of July 31, 2015 and 2014)
$0.10 par value; authorized shares—42,481 42,481 shares
issued and outstanding as of July 31, 2015 and 2014
|
|
|
4
|
|
|
|
4
|
|
Series B Convertible Preferred Stock
(Liquidation Preference of $5,939 as of July 31, 2015 and 2014)
$0.10 par value; authorized shares—56,295 56,295 shares
issued and outstanding as of July 31, 2015 and 2014
|
|
|
6
|
|
|
|
6
|
|
Common Stock $0.10 par value; authorized
shares—600,000; 34,417 and 33,317 shares issued and
outstanding as of July 31, 2015 and 2014, respectively
|
|
|
3
|
|
|
|
3
|
|
Additional Paid-in Capital
|
|
|
17,794
|
|
|
|
17,706
|
|
Accumulated Deficit
|
|
|
(10,708
|
)
|
|
|
(12,295
|
)
|
Accumulated Other Comprehensive Loss
(Income)
|
|
|
(655
|
)
|
|
|
78
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
6,444
|
|
|
|
5,502
|
|
TOTAL
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’
EQUITY
|
|
$
|
8,352
|
|
|
$
|
6,961
|
|
See accompanying notes to consolidated financial statements.
F-3
ZEDGE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share data)
|
|
|
|
|
REVENUES
|
|
$
|
9,052
|
|
|
$
|
6,529
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Direct Cost of
Revenue (Exclusive of Amortization of Capitalized Software and
Technology Development Costs Shown Separately Below)
|
|
|
1,082
|
|
|
|
909
|
|
Selling, General and Administrative
|
|
|
5,723
|
|
|
|
5,068
|
|
Depreciation and Amortization
|
|
|
624
|
|
|
|
578
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
1,623
|
|
|
|
(26
|
)
|
Interest Income
|
|
|
5
|
|
|
|
6
|
|
Impairment of Investment in Bizgames
|
|
|
—
|
|
|
|
(63
|
)
|
Net gains resulting from foreign exchange
transactions
|
|
|
171
|
|
|
|
75
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
1,799
|
|
|
|
(8
|
)
|
Provision for Income Taxes
|
|
|
212
|
|
|
|
138
|
|
NET
INCOME (LOSS)
|
|
|
1,587
|
|
|
|
(146
|
)
|
Changes in Foreign Currency Translation
Adjustment
|
|
|
(733
|
)
|
|
|
(143
|
)
|
TOTAL
OTHER COMPREHENSIVE LOSS
|
|
|
(733
|
)
|
|
|
(143
|
)
|
TOTAL
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
854
|
|
|
$
|
(289
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Zedge,
Inc.
c
ommon
stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
11.84
|
|
|
$
|
(4.38
|
)
|
Diluted
|
|
$
|
10.81
|
|
|
$
|
(4.38
|
)
|
Weighted-average number of shares used in
calculation of earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,355
|
|
|
|
33,317
|
|
Diluted
|
|
|
47,124
|
|
|
|
33,317
|
|
See accompanying notes to consolidated financial statements.
F-4
ZEDGE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
|
|
Shares of Common Stock
Outstanding
|
|
|
|
Shares of Preferred Stock
Outstanding
|
|
|
|
Additional Paid-in
Capital
|
|
|
|
Accumulated Other Comprehensive Income
(Loss)
|
|
Total Stockholders’
Equity
|
Balance – July 31,
2013
|
|
33,317
|
|
$
|
3
|
|
98,776
|
|
$
|
10
|
|
$
|
17,484
|
|
$
|
(12,149
|
)
|
|
$
|
221
|
|
|
$
|
5,569
|
|
Net Loss
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(146
|
)
|
|
|
—
|
|
|
|
(146
|
)
|
Foreign Currency
Translation Adjustment
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(143
|
)
|
|
|
(143
|
)
|
Stock Based
Compensation Expense
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
222
|
|
|
—
|
|
|
|
—
|
|
|
|
222
|
|
Balance – July 31,
2014
|
|
33,317
|
|
|
3
|
|
98,776
|
|
|
10
|
|
|
17,706
|
|
|
(12,295
|
)
|
|
|
78
|
|
|
|
5,502
|
|
Net Income
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,587
|
|
|
|
—
|
|
|
|
1,587
|
|
Foreign Currency
Translation Adjustment
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(733
|
)
|
|
|
(733
|
)
|
Stock Based
Compensation Expense
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
|
—
|
|
|
|
79
|
|
Exercise of Stock
Options
|
|
1,100
|
|
|
—
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
Balance – July 31,
2015
|
|
34,417
|
|
$
|
3
|
|
98,776
|
|
$
|
10
|
|
$
|
17,794
|
|
$
|
(10,708
|
)
|
|
$
|
(655
|
)
|
|
$
|
6,444
|
|
See accompanying notes to consolidated financial statements.
F-5
ZEDGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,587
|
|
|
$
|
(146
|
)
|
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
624
|
|
|
|
578
|
|
Stock-based compensation
|
|
|
79
|
|
|
|
222
|
|
Recovery of provision for doubtful
accounts
|
|
|
—
|
|
|
|
(11
|
)
|
Deferred taxes
|
|
|
(16
|
)
|
|
|
(70
|
)
|
Impairment of investment in Bizgames
|
|
|
—
|
|
|
|
63
|
|
Net gains resulting from foreign exchange
transactions
|
|
|
(171
|
)
|
|
|
(75
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(334
|
)
|
|
|
(144
|
)
|
Other current assets and prepaid
expenses
|
|
|
(97
|
)
|
|
|
(13
|
)
|
Other assets
|
|
|
(8
|
)
|
|
|
(4
|
)
|
Trade accounts payable and accrued
expenses
|
|
|
743
|
|
|
|
252
|
|
Due to IDT Corporation
|
|
|
(121
|
)
|
|
|
192
|
|
Deferred revenue
|
|
|
(2
|
)
|
|
|
(18
|
)
|
Net cash provided by operating
activities
|
|
|
2,284
|
|
|
|
826
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(899
|
)
|
|
|
(814
|
)
|
Net cash used in investing activities
|
|
|
(899
|
)
|
|
|
(814
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
9
|
|
|
|
—
|
|
Net cash provided by financing
activities
|
|
|
9
|
|
|
|
—
|
|
Effect of exchange rates on cash and cash
equivalents
|
|
|
11
|
|
|
|
7
|
|
Net increase in cash and cash
equivalents
|
|
|
1,405
|
|
|
|
19
|
|
Cash and cash equivalents at beginning of
year
|
|
|
765
|
|
|
|
746
|
|
Cash and cash equivalents at end of
year
|
|
$
|
2,170
|
|
|
$
|
765
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
Cash payments made for taxes
|
|
$
|
208
|
|
|
$
|
98
|
|
See accompanying notes to consolidated financial statements.
F-6
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description
of Business and Summary of Significant Accounting
Policies
Description of Business
Zedge, Inc. (“Zedge” or “the Company”), a
Delaware corporation, is currently a majority-owned subsidiary of
IDT Corporation (“IDT” or the “Parent”).
Zedge was incorporated in 2008. Zedge’s discovery platform
offers free games, ringtones and wallpapers. IDT owns approximately
82% of Zedge, which conducts business as one operating segment.
The consolidated financial statements include all of the accounts
of Zedge, Inc. and Zedge Europe AS, a Norwegian corporation. All
significant intercompany accounts and transactions have been
eliminated.
Basis of Accounting
The assets and liabilities in these financial statements are
recorded at historical cost. Direct expenses historically incurred
by IDT on behalf of the entities are reflected in these financial
statements. The most significant expenses as covered under a Master
Services Agreement with IDT are as follows: legal and professional
fees, salaries and employee benefits have been allocated based on
specific identification; certain facility costs, as well as certain
salaries consisting of payroll, human resources, purchasing,
accounts payable, treasury, network and telephone services, legal,
travel, and consulting fees were allocated to these entities based
on estimates of the incremental cost incurred by IDT; medical and
dental benefits were allocated to these entities based on rates
similar to COBRA health benefit provision rates charged to former
IDT employees; stock-based compensation and retirement benefits
under IDT’s defined contribution plan were allocated to these
entities based on specific identification. Insurance was allocated
to these entities based on a combination of headcount and specific
policy identification. Management believes that the assumptions and
methods of allocation used were reasonable. However, the costs as
allocated are not necessarily indicative of the costs that would
have been incurred if these entities operated on a stand-alone
basis. Therefore, the consolidated financial statements included
herein may not necessarily be indicative of the financial position,
results of operations, changes in stockholders’ equity and
cash flows of the Company to be expected in the future or what they
would have been had the Company been a separate stand-alone entity
during the periods presented.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may
differ from those estimates.
Revenue Recognition
Zedge generates over 90% of its revenues from selling its
advertising inventory to both advertising networks/exchanges and
real time bidding platforms, direct advertisers and game
publishers. The Company recognizes advertising revenue as
advertisements are delivered to users through impressions or ad
views, as long as evidence of the arrangement with the payor exists
(generally through an executed contract), the price is fixed and
determinable, and the Company has assessed collectability as
reasonably assured.
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 gross equal to
the price paid to the Company by the customer since it 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.
F-7
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description
of Business and Summary of Significant Accounting Policies
(cont’d)
Concentration of Credit Risk and Significant Customers
The Company routinely assesses the financial strength of its
customers. As a result, the Company believes that its accounts
receivable credit risk exposure is limited and has not experienced
significant write-downs in its accounts receivable balances. As of
July 31, 2015 and for the year then ended, two customers
represented 37%, and 25% of the Company’s revenue, and three
customers represented 55%, 13% and 12% of the Company’s
accounts receivable balance, respectively. As of July 31, 2014 and
for the year then ended, three customers represented 23%, 23% and
13% of the Company’s revenue and 42%, 17%, and 13% of the
Company’s accounts receivable balance, respectively.
Direct Cost of Revenues
Direct cost of revenues for the Company consists primarily of
server, network and connectivity costs. Such costs are charged to
expense as incurred.
Long-Lived Assets
Equipment, buildings, computer software and furniture and fixtures
are recorded at cost and are depreciated on a straight-line basis
over their estimated useful lives, which range as follows:
capitalized software and technology development costs—3
years; other—3, 5, 7, 10 or 20 years. Other is comprised of
equipment, computer software, furniture and fixtures and leasehold
improvements. Leasehold improvements are recorded at cost and are
depreciated on a straight-line basis over the term of their lease
or their estimated useful lives, whichever is shorter.
The Company tests the recoverability of its long-lived assets with
finite useful lives whenever events or changes in circumstances
indicate that the carrying value of the asset may not be
recoverable. The Company tests for recoverability based on the
projected undiscounted cash flows to be derived from such asset. If
the projected undiscounted future cash flows are less than the
carrying value of the asset, the Company will record an impairment
loss, if any, based on the difference between the estimated fair
value and the carrying value of the asset. The Company generally
measures fair value by considering sale prices for similar assets
or by discounting estimated future cash flows from such asset using
an appropriate discount rate. Cash flow projections and fair value
estimates require significant estimates and assumptions by
management. Should the estimates and assumptions prove to be
incorrect, the Company may be required to record impairments in
future periods and such impairments could be material.
Capitalized Software and Technology Development Costs
The Company accounts for capitalized software and technology
development costs that consist of costs to develop software
programs to be used solely to meet the Company’s internal
needs in accordance with ASC (“Accounting Standard
Codification”) 350-40. Costs incurred during the application
development stage for software programs to be used solely to meet
its internal needs are capitalized. Capitalized software and
technology development costs are included in property and
equipment, net and are amortized over the estimated useful life of
the software, generally three years. All ordinary maintenance costs
are expensed as incurred.
Goodwill
Goodwill represents the excess of purchase price and related costs
over the value assigned to the net tangible and identifiable
intangible assets of the business acquired. As of July 31, 2015 and
2014, goodwill that arose from an acquisition was $2,438,000 and
$3,182,000, respectively and is carried on the balance sheet of
Zedge Europe AS. Under ASC 350 Intangibles-Goodwill and Other,
goodwill is not amortized, but instead is tested for impairment
annually, or if certain circumstances indicate a possible
impairment may exist. The Company evaluates the recoverability of
goodwill using a two-step impairment test approach at the reporting
unit level. In the first step, the fair value for the reporting
unit is compared to its book value including goodwill. In the case
that the fair value of the reporting unit is less than the book
value, a second step is performed which compares the implied fair
value of
F-8
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description
of Business and Summary of Significant Accounting Policies
(cont’d)
the reporting unit’s goodwill to the book value of the
goodwill. If the fair value of the goodwill is less than the book
value, the difference is recognized as impairment.
The Company’s estimated fair value exceeded its carrying
value in Step 1 of our annual impairment tests as of May
1
st
for the years ended July 31, 2015 and 2014; therefore it was not
necessary to perform Step 2. The Company uses a combination of
income approach (discounted cash flows) and market approach
(guideline company method) for its Step 1 analysis.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
Investments
The Company consolidates entities that it controls and accounts for
investments in joint ventures using the equity method of accounting
when it owns between 20% and 49% or otherwise exercises significant
influence over the venture. If the Company does not exercise
significant influence, it accounts for the investment using the
cost method of accounting.
Income Taxes
The accompanying financial statements include provisions for
federal, state and foreign income taxes. The Company joins with its
Parent and other subsidiaries in filing a federal income tax return
on a consolidated basis. Income taxes for the Company are
calculated on a separate tax return basis.
The Company recognizes deferred tax assets and liabilities for the
future tax consequences attributable to temporary differences
between the financial statements carrying amounts of existing
assets and liabilities and their respective tax bases. A valuation
allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The
ultimate realization of deferred tax assets depends on the
generation of future taxable income during the period in which
related temporary differences become deductible. The Company
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in its
assessment of a valuation allowance. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date
of such change.
The Company uses a two-step approach for recognizing and measuring
tax benefits taken or expected to be taken in a tax return. The
Company determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the
technical merits of the position. In evaluating whether a tax
position has met the more-likely-than-not recognition threshold,
the Company presumes that the position will be examined by the
appropriate taxing authority that has full knowledge of all
relevant information. Tax positions that meet the
more-likely-than-not recognition threshold are measured to
determine the amount of tax benefit to recognize in the financial
statements. The tax position is measured at the largest amount of
benefit that is greater than 50 percent likely of being realized
upon ultimate settlement. Differences between tax positions taken
in a tax return and amounts recognized in the financial statements
will generally result in one or more of the following: an increase
in a liability for income taxes payable, a reduction of an income
tax refund receivable, a reduction in a deferred tax asset, or an
increase in a deferred tax liability.
The Company classifies interest and penalties on income taxes as a
component of income tax expense.
F-9
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description
of Business and Summary of Significant Accounting Policies
(cont’d)
Contingencies
The Company accrues for loss contingencies when both (a)
information available prior to issuance of the financial statements
indicates that it is probable that a liability had been incurred at
the date of the financial statements and (b) the amount of loss can
reasonably be estimated. When the Company accrues for loss
contingencies and the reasonable estimate of the loss is within a
range, the Company records its best estimate within the range. When
no amount within the range is a better estimate than any other
amount, the Company accrues the minimum amount in the range. The
Company discloses an estimated possible loss or a range of loss
when it is at least reasonably possible that a loss may have been
incurred.
Earnings Per Share
In accordance with ASC 260-10-55,
Share-Based Payment
Arrangements and Participating Securities and the Two-Class
Method,
the Company’s Series A and Series B
Convertible Preferred Shares are considered participating
securities. During periods of net income, the calculation of basic
earnings per share for common stock is reclassified to exclude the
income attributable to the Series A and Series B Convertible
Preferred Shares from the numerator. Diluted earnings per share is
determined in the same manner as basic earnings per share, except
that the number of shares is increased to assume exercise of
potentially dilutive stock options using the treasury stock method
and the Series A and Series B Convertible Preferred Shares using
the if-converted method, unless the effect of such increase is
anti-dilutive. In computing diluted EPS, the average stock price
for the period is used in determining the number of shares assumed
to be purchased from the exercise of stock options or warrants.
Diluted EPS excludes all dilutive potential shares if their effect
is anti-dilutive.
In computing the Basic and Diluted EPS, the Company has included
the 947 Series B Convertible Preferred Shares issued in excess of
the amount authorized and which are included in Mezzanine Equity
(see Note 8).
During periods of net loss, no effect is given to the participating
securities because they do not share in the losses of the
Company.
The following is a reconciliation of the Company’s basic and
diluted earnings per share calculation:
|
|
|
|
|
Numerator for Basic Income (Loss) Per
Share:
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1,587
|
|
|
$
|
(146
|
)
|
Less Allocation of Earnings to Participating
Securities
|
|
|
(1,180
|
)
|
|
|
—
|
|
Net Income (Loss) Available to Common
Stockholders
|
|
$
|
407
|
|
|
$
|
(146
|
)
|
Numerator for Diluted Income (Loss) Per
Share:
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common
Stockholders
|
|
$
|
407
|
|
|
$
|
(146
|
)
|
Allocation of Earnings to Participating
Securities
|
|
|
1,180
|
|
|
|
—
|
|
Less diluted allocation of earnings to
participating securities
|
|
|
(1,078
|
)
|
|
|
—
|
|
Net Income (Loss) Available to Common
Stockholders
|
|
$
|
509
|
|
|
$
|
(146
|
)
|
Basic
Weighted Average Number of Shares
|
|
|
34,355
|
|
|
|
33,317
|
|
Stock Options
|
|
|
12,769
|
|
|
|
—
|
|
Diluted Weighted Average Number of Shares
|
|
|
47,124
|
|
|
|
33,317
|
|
Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
11.84
|
|
|
$
|
(4.38
|
)
|
Diluted
|
|
$
|
10.81
|
|
|
$
|
(4.38
|
)
|
F-10
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description
of Business and Summary of Significant Accounting Policies
(cont’d)
The following shares were excluded from the diluted earnings per
share computations because their inclusion would have been
anti-dilutive:
|
|
|
|
|
Stock Options
|
|
11,628
|
|
27,098
|
Stock-Based Compensation
The Company recognizes compensation expense for all of its grants
of stock-based awards based on the estimated fair value on the
grant date. The Company uses a Black-Scholes valuation model to
estimate the fair value of the options at the grant date.
Compensation cost for awards is recognized using the straight-line
method over the vesting period. Stock-based compensation is
included in selling, general and administrative expense.
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities is
defined as an exit price, which is the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The three-tier hierarchy for inputs used to measure fair value,
which prioritizes the inputs to valuation techniques used to
measure fair value, is as follows:
Level 1 —
|
|
quoted prices (unadjusted) in active markets for
identical assets or liabilities.
|
Level 2 —
|
|
quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial
instrument.
|
Level 3 —
|
|
unobservable inputs based on the Company’s
assumptions used to measure assets and liabilities at fair
value.
|
A financial asset or liability’s classification within the
hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. The assessment of the
significance of a particular input to the fair value measurement
requires judgment, and may affect the valuation of the assets and
liabilities being measured and their placement within the fair
value hierarchy.
Derivative Instruments — Foreign Exchange Forward
Contracts
The Company’s earnings and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates,
primarily the Norwegian Krone (“NOK”). The
Company’s risk management policy allows for the use of
derivative financial instruments to prudently manage foreign
currency exchange rate exposure. Foreign currency derivative
activities are subject to the management, direction and control of
the executive management. Foreign exchange forward contracts are
recognized on the Consolidated Balance Sheet at their fair value in
other current assets and accrued expenses in fiscal year 2015, with
changes in fair value recognized in the Consolidated Statements of
Comprehensive Income (Loss) in non-operating expenses.
Functional Currency
The U.S. Dollar is the functional currency of our entity operating
in the United States. The functional currency for our entity
operating outside of the United States is the NOK, the currency of
the primary economic environment in which the entities primarily
expend cash. For consolidated entities whose functional currency is
not the U.S. Dollar, the Company translates their financial
statements into U.S. dollars. The Company translates assets and
liabilities at the exchange rate in effect as of the financial
statement date, and translate accounts from the statements of
comprehensive income (loss) using the weighted average exchange
rate for the period. The Company reports gains and losses from
currency exchange rate changes related to intercompany receivables
and payables, currently in non-operating expenses.
F-11
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description
of Business and Summary of Significant Accounting Policies
(cont’d)
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects the Company’s
best estimate of probable losses inherent in the accounts
receivable balance. The allowance is determined based on known
troubled accounts, historical experience and other currently
available evidence. Doubtful accounts are written-off upon final
determination that the trade accounts will not be collected.
Recently Issued Accounting Standard Not Yet Adopted
In February 2016, the FASB issued Accounting Standards Update No.
2016-02, 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 new standard is effective
for fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. 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 of our pending adoption of the new
standard on our consolidated financial statements.
In November 2015, the Financial Accounting Standards Board
(“FASB”) issued an Accounting Standards Update
(“ASU”) to simplify the presentation of deferred income
taxes, as well as align the presentation of deferred income tax
assets and liabilities with International Financial Reporting
Standards (“IFRS”). The ASU requires that deferred tax
assets and liabilities be classified as noncurrent in a classified
balance sheet instead of separated into current and noncurrent
amounts. The ASU is effective for the Company’s financial
statements beginning August 1, 2017. Earlier application is
permitted. The change may be applied either prospectively or
retrospectively. The Company is evaluating when to apply the ASU
for its consolidated balance sheet.
In May 2014, the Financial Accounting Standards Board and the
International Accounting Standards Board jointly issued a
comprehensive new revenue recognition standard that will supersede
most of the current revenue recognition guidance under U.S. GAAP
and International Financial Reporting Standards
(“IFRS”). The goals of the revenue recognition project
were to clarify and converge the revenue recognition principles
under U.S. GAAP and IFRS and to develop guidance that would
streamline and enhance revenue recognition requirements. To
accomplish this objective, the standard requires five basic steps:
i) identify the contract with the customer, (ii) identify the
performance obligations in the contract, (iii) determine the
transaction price, (iv) allocate the transaction price to the
performance obligations in the contract, and (v) recognize revenue
when (or as) the entity satisfies a performance obligation. The
Company will 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.
Note 2—Fair Value
Measurements
The following table presents the balance of assets and liabilities
measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
$
|
38
|
|
$
|
—
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
$
|
39
|
|
$
|
—
|
|
$
|
39
|
At July 31, 2014, the Company did not have any assets or
liabilities measured at fair value on a recurring basis.
F-12
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2—Fair Value
Measurements
(cont’d)
Fair Value of Other Financial Instruments
The Company’s other financial instruments include accounts
receivable, accounts payable, and due to IDT Corporation. The
recorded carrying amount of accounts receivable, accounts payable
and due to IDT Corporation approximates their fair value due to
their short-term nature. The Company did not have any other assets
or liabilities that were measured at fair value on a recurring
basis as of July 31, 2015 and 2014.
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. Zedge Europe
AS is based in Norway and much of its operations are located in
Norway. 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 Company minimizes the credit or
repayment risk by entering into transactions with high-quality
counterparties.
The Company’s outstanding contracts at July 31, 2015 were as
follows:
|
|
|
|
|
September 2015
|
|
750,000
|
|
6,163,000
|
November 2015
|
|
2,729,000
|
|
22,169,000
|
January 2016
|
|
3,000,000
|
|
24,257,000
|
May 2016
|
|
1,000,000
|
|
8,239,000
|
July 2016
|
|
1,000,000
|
|
8,200,000
|
The fair value of outstanding derivative instruments recorded as
assets in the accompanying consolidated balance sheets were as
follows (in thousands):
|
|
|
|
|
|
|
Assets Derivatives:
|
|
Balance Sheet Location
|
|
|
|
|
|
|
Derivatives not designated or not qualifying as
hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other Current Assets
|
|
$
|
38
|
|
$
|
—
|
The fair value of outstanding derivative instruments recorded as
liabilities in the accompanying consolidated balance sheets were as
follows:
|
|
|
|
|
|
|
Liabilities Derivatives:
|
|
Balance Sheet Location
|
|
|
|
|
|
|
Derivatives not designated or not qualifying as
hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Accrued Expenses
|
|
$
|
39
|
|
$
|
—
|
The effects of derivative instruments on the consolidated
statements of comprehensive income (loss) were as follows:
Amount of Loss Recognized on Derivatives
Year Ended July
31
|
|
|
|
|
|
|
Derivatives not designated or not qualifying as
hedging instruments
|
|
Statement of Comprehensive Income (Loss)
Location
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Selling, General and Administrative
Expenses
|
|
$
|
(58
|
)
|
|
$
|
—
|
F-13
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4—Property
and Equipment
Property and equipment consisted of the following (in
thousands):
|
|
|
|
|
Capitalized Software and Technology Development
Costs
|
|
$
|
4,346
|
|
|
$
|
3,485
|
|
Other
|
|
|
174
|
|
|
|
138
|
|
|
|
|
4,520
|
|
|
|
3,623
|
|
Less accumulated depreciation and
amortization
|
|
|
(2,796
|
)
|
|
|
(2,174
|
)
|
Total
|
|
$
|
1,724
|
|
|
$
|
1,449
|
|
Capitalized Software and Technology Development Costs consists
primarily of internal labor for website development capitalized
during the application development stage. Other property and
equipment consists of furniture and fixtures, office and video
conference equipment and miscellaneous computer hardware and
software.
Depreciation and amortization expense pertaining to property and
equipment was $624,000 and $578,000 for the fiscal years ended July
31, 2015 and 2014.
Note
5—Goodwill
The Company’s goodwill related to an acquisition made in a
prior period was $2,438,000 and $3,182,000 as of July 31, 2015 and
2014, respectively.
The table below reconciles the change in the carrying amount of
goodwill for the period from July 31, 2013 to July 31, 2015:
|
|
|
Balance at July 31, 2013
|
|
$
|
3,353
|
|
Foreign Exchange Translation Effect
|
|
|
(171
|
)
|
Balance at July 31, 2014
|
|
|
3,182
|
|
Foreign Exchange Translation Effect
|
|
|
(744
|
)
|
Balance at July 31, 2015
|
|
$
|
2,438
|
|
Goodwill is tested for impairment annually as of May 1, or at an
interim date if an event occurs or conditions change that would
more likely than not reduce the fair value of the Company’s
reporting unit below its carrying value. The Company has determined
that it has one reporting unit.
The Company performed its annual goodwill impairment test and
concluded that no goodwill impairment existed during the fiscal
years ended July 31, 2015 and 2014.
Note
6—Investments
In August 2012, Zedge Europe
AS made an investment to purchase 10.5% of the common shares of
Bizgames Studios AS, a Norwegian corporation. At that time, Zedge,
Inc. entered into a promotional, advertising and porting services
agreement (“PAPS agreement”) with Bizgames for an
additional 4.0% of Bizgames common shares. The fair value ascribed
to the shares transferred in conjunction with the PAPS agreement
was determined based on the price of the shares purchased at that
time by both Zedge and an unaffiliated Norwegian investor. The
combined 14.5% investment in Bizgames common shares was recorded at
$67,000. Additionally, also alongside another investor, Zedge
Europe AS loaned Bizgames approximately $30,000 at an annual
interest rate of 8.0%, which was to be repaid by February
2014.
In determining whether Zedge had sufficient control to account for
Bizgames under the equity method, the Company considered the
following:
•
Zedge and Zedge Europe AS had a total ownership interest of 14.5%
of Bizgames.
•
Zedge Europe AS holds one of five board seats, while material
decisions of Bizgames require a 2/3 majority vote of board
members.
F-14
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
6—Investments
(cont’d)
As such, the Company determined that it did not have significant
influence over Bizgames and accounted for its investment in
Bizgames under the cost method.
As of the date of this report, the loan has not been repaid and
there is currently no timetable for repayment. Additionally, the
Company has not collected any cash associated with Bizgames
revenue, nor has the Company been successful in obtaining timely
financial information. As such, the Company has written-off the
balance of its investment in Bizgames, and reserved for the
entirety of its loan outstanding to Bizgames, inclusive of related
interest, as of July 31, 2014.
Note 7—Accrued
Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
Accrued Vacation
|
|
$
|
356
|
|
$
|
308
|
Accrued Payroll Taxes
|
|
|
172
|
|
|
158
|
Accrued Payroll and Bonuses
|
|
|
90
|
|
|
105
|
Accrued Cost of Advertising
|
|
|
530
|
|
|
139
|
Accrued Foreign Taxes
|
|
|
80
|
|
|
76
|
Other
|
|
|
91
|
|
|
47
|
Total
|
|
$
|
1,319
|
|
$
|
833
|
Note
8—Stockholders’ Equity
Authorized Capital Stock
The Company is authorized to issue a total of 1,000,000 shares of
capital stock consisting of 600,000 shares of Common Stock (par
value $0.10 per share) and 400,000 shares of preferred stock (par
value $0.10 per share).
Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock
Of the Convertible Preferred Stock issued and outstanding, 42,481
shares are designated as Series A Convertible Preferred Stock and
56,295 shares are designated as Series B Convertible Preferred
Stock. The holders of the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock shall be entitled to that
number of votes equal to one vote per share of Common Stock that
would be issuable upon conversion of such holder’s shares of
Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock on the record date of the vote, as well as entitled
to participate in dividends with shares of any other class or
series of stock.
Any holder of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock may, at any time or from time to time,
convert all or part of such shares into that number of fully paid
and non-assessable shares of Common Stock equal to the quotient of
(a) the aggregate Liquidation Price of the shares being converted
divided by (b) the Series A Liquidation Price ($164.80) or Series B
Liquidation Price ($105.50), as applicable, or in the event that
the Conversion Rate shall have been previously adjusted (see
below), the new Protected Conversion Price as so adjusted.
On a distribution of asset’s upon the occurrence of a
Liquidation, the assets of the Company remaining after the payment
of the Company’s liabilities shall be applied in the
following order of priority (to be applied
pro rata
among holders of securities having the same ranking in the event
that the proceeds of the Liquidation shall not suffice to make the
payments hereunder):
(a)
First, in
paying to the holders of the (x) Series A Convertible Preferred
Stock an amount equal to the Series A Liquidation Price for each
share so held, together with a sum equal to any arrears or accruals
of the dividends, if any, on the Series A Convertible Preferred
Stock so held payable through the date on
F-15
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
8—Stockholders’ Equity
(cont’d)
which such payment is made; and (y) Series B Convertible Preferred
Stock, which shall rank
pari passu
to
the Series A Convertible Preferred Stock, an amount equal to the
Series B Liquidation Price for each share so held, together with a
sum equal to any arrears or accruals of the dividends, if any, on
the Series B Convertible Preferred Stock so held payable through
the date on which such payment is made.
(b)
Second, the balance of such assets shall be distributed amongst the
holders of the Company’s equity securities in proportion to
their respective holdings whereby the holders of the Series A
Convertible Preferred Stock and Series B Convertible Preferred
Stock participate in proportion to the number of shares of Common
Stock they would have received had the holders converted their
shares of such Convertible Preferred Stock into Common Stock at the
then applicable Conversion Rate.
If the Company issues common stock for non-cash consideration or
for cash or cash equivalents, other than in respect of any common
stock issued to employees or consultants pursuant to a stock option
plan, at a price less than the Protected Conversion Price, then the
conversion rate for the Series A and Series B Convertible Preferred
Stock shall be adjusted to a new price equal to the quotient
obtained by dividing: (a) an amount equal to (x) total number of
shares of common stock outstanding immediately prior to such
issuance or sale multiplied by the then Protected Conversion Price,
plus (y) the aggregate consideration received or deemed to be
received by the Company by (b) the total number of shares of common
stock outstanding immediately after such issuance or sale.
The conversion rate shall also be adjusted any time the Company
declares a stock dividend, subdivides its common stock, combines
the outstanding shares into a smaller number of shares or issues
any shares in a reorganization of the common stock.
The Company evaluated whether the conversion option required
bifurcation from the host contract and concluded that it did not,
because it is clearly and closely related to the host contract.
Mezzanine
Equity
Share Imperfections
In 2012, preferred shares were issued by the Board of Directors of
the Company in excess of the number of shares duly authorized by
the Company’s Certificate of Incorporation. The Company has
classified these preferred shares as mezzanine equity at the
original purchase price in the consolidated balance sheets because
they do not meet the definition of permanent equity as a result of
these legal imperfections.
To address these issues, in February 2016, the Company prepared and
filed a certificate of validation with the State of Delaware for an
amendment to the Restated Certificate of Incorporation requesting
an increase in the number of authorized Series B Convertible
Preferred shares to 57,242. On February 24, 2016, the State of
Delaware certified this validation, which is retroactive to the
date of the defective act.
Statement of Mezzanine Equity
Changes to mezzanine amounts during 2014 and 2015 were as follows
(dollars in thousands):
|
|
Series B Convertible Preferred
|
|
|
|
|
|
Balance at July 31, 2013
|
|
947
|
|
$
|
100
|
2014 Activity
|
|
—
|
|
|
—
|
Balance at July 31, 2014
|
|
947
|
|
$
|
100
|
2015 Activity
|
|
—
|
|
|
—
|
Balance at July 31, 2015
|
|
947
|
|
$
|
100
|
F-16
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9—Commitments
and Contingencies
Legal Proceedings
In March 2014, Saregama India, Limited filed a lawsuit against
Zedge before the Barasat District Court, seeking approximately
US$1,595,700 as damages and an injunction for copyright
infringement. The main ground for the lawsuit was that Zedge
allegedly avails the plaintiff’s sound recordings through
Zedge’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 any possible 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.
Lease Commitments
We have no future contractual obligations or other commercial
commitments as of July 31, 2015, other than as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Real estate leases
|
|
$
|
251
|
|
$
|
214
|
|
$
|
89
|
|
$
|
—
|
|
$
|
554
|
SaaS licensing
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67
|
Total
obligations
|
|
$
|
318
|
|
$
|
214
|
|
$
|
89
|
|
$
|
—
|
|
$
|
621
|
On February 9, 2016, the Company extended one of its real estate
leases through December 2018, increasing the aggregate future
minimum payments for this lease by approximately $284,000.
On February 24, 2016, the Company extended its license to utilize
one of its SaaS (Software as a Service) licenses through March
2018, increasing the aggregate future commitment by $250,000.
The February 2016 extensions are not included in the above
table.
Rental expense under operating leases was $211,000 and $197,000 in
fiscal years 2015 and 2014, respectively.
Note 10—Income
Taxes
The Company is a member of a consolidated group of entities for
which income tax returns are filed for the consolidated group.
Income taxes for the Company are calculated on a separate tax
return basis. The current U.S. Federal and State income tax expense
is recorded as an increase in the payable amount Due to IDT
Corporation.
The Company provides for deferred taxes based on the difference
between the basis of assets and liabilities for financial reporting
purposes and the basis for income tax purposes, calculated using
enacted rates that will be in effect when the differences are
expected to reverse.
The components of income (loss) before income taxes are as follows
(in thousands):
|
|
|
|
|
Domestic
|
|
$
|
1,121
|
|
$
|
(503
|
)
|
Foreign
|
|
|
678
|
|
|
495
|
|
Income (Loss) Before Income Taxes
|
|
$
|
1,799
|
|
$
|
(8
|
)
|
F-17
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10—Income
Taxes
(cont’d)
Provision for income taxes as presented in the Statement of
Comprehensive Income (Loss) consisted of the following (in
thousands):
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
200
|
|
|
$
|
208
|
|
Federal
|
|
|
28
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total current expense
|
|
|
228
|
|
|
|
208
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(16
|
)
|
|
|
(70
|
)
|
Federal
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Total deferred expense
|
|
|
(16
|
)
|
|
|
(70
|
)
|
Income tax expense
|
|
$
|
212
|
|
|
$
|
138
|
|
The differences between income taxes expected at the U.S. federal
statutory income tax rate and income taxes are reported as follows
(in thousands):
|
|
|
|
|
U.S. federal income tax at statutory
rate
|
|
$
|
629
|
|
|
$
|
(3
|
)
|
State income tax
|
|
|
63
|
|
|
|
(28
|
)
|
Valuation allowance
|
|
|
(422
|
)
|
|
|
189
|
|
Foreign tax rate differential
|
|
|
(52
|
)
|
|
|
(35
|
)
|
Permanent differences
|
|
|
3
|
|
|
|
6
|
|
Other
|
|
|
(9
|
)
|
|
|
9
|
|
Income tax expense
|
|
$
|
212
|
|
|
$
|
138
|
|
The Company has not recorded U.S. income tax expense for foreign
earnings, as such earnings are permanently reinvested outside the
United States. The cumulative undistributed foreign earnings are
included in accumulated deficit in the Company’s consolidated
balance sheets and consisted of approximately $1.6 million at July
31, 2015. Upon distribution of these foreign earnings to the
Company’s domestic entities, the Company may be subject to
U.S. income taxes and withholding of foreign taxes; however, it is
not practicable to determine the amount, if any, which would be
paid.
Significant components of the Company’s deferred tax assets
and deferred tax liabilities are as follows (in thousands):
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,413
|
|
|
$
|
1,991
|
|
AMT carryforwards
|
|
|
29
|
|
|
|
1
|
|
Reserves and accruals
|
|
|
289
|
|
|
|
183
|
|
Stock-based compensation
|
|
|
691
|
|
|
|
659
|
|
Gross deferred tax assets
|
|
|
2,422
|
|
|
|
2,834
|
|
Less valuation allowance
|
|
|
(2,305
|
)
|
|
|
(2,733
|
)
|
Total deferred tax assets
|
|
|
117
|
|
|
|
101
|
|
Total deferred tax liabilities
|
|
|
—
|
|
|
|
—
|
|
Deferred tax, net
|
|
$
|
117
|
|
|
$
|
101
|
|
F-18
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10—Income
Taxes
(cont’d)
Net deferred tax assets are included in “Other current
assets” in the consolidated balance sheets.
At July 31, 2015 and 2014, the Company has available Federal and
State net operating loss (“NOL”) carryforwards from
domestic operations of approximately $3,476,000 and $4,898,000,
respectively, to offset future taxable income. The Federal and
State NOL carryforwards will begin to expire in 2031. The Company
has no available NOLs from foreign operations. The AMT
carryforwards do not expire.
Due to the history of losses generated in the past, the Company
believes that it is not more-likely-than-not that all of the
deferred tax assets can be realized. Therefore, the Company has a
full valuation allowance on all U.S. deferred tax assets. The
Company’s deferred tax asset valuation allowance decreased by
$428,000 year ended July 31, 2015 and increased by $166,000 for the
year ended July 31, 2014.
The Company has adopted the accounting policy that interest and
penalties will be classified as a component of the provision for
income taxes. As of the date of adoption of ASC 740 and through
July 31, 2015, the Company did not have any interest or penalties
associated with unrecognized tax benefits. The Company does not
anticipate any significant changes to the unrecognized tax benefits
within twelve months of this reporting date.
The Company is a member of IDT’s consolidated group;
therefore its income or loss was included in IDT’s tax
return. IDT currently remains subject to examinations of its
consolidated U.S. federal tax returns for fiscal years 2012 through
2015, and state and local tax returns generally for fiscal years
2011 through 2015. Zedge remains subject to examinations of its
Norwegian tax returns for fiscal years 2012 through 2015.
Note
11—Stock-Based Compensation
Employees of the Company have received grants of options to
purchase the Company’s common stock. Options granted
generally have a maximum term of 10 years from grant date, are
exercisable upon vesting unless otherwise designated for early
exercise by the Board of Directors at the time of grant, are
pursuant to individual written agreements, and generally vest over
a four-year period, with 25% vesting after one year and the
remainder vesting ratably on a monthly basis over the remaining
three years. Certain option agreements provide for accelerated
vesting of options upon the effective date of an initial public
offering or a change in control of the Company.
The Company measures and recognizes compensation expense for all
share-based payment awards made to employees and directors based on
estimated grant date fair values. The fair value of share-based
payment awards to employees and directors on the date of grant is
estimated using the Black-Scholes (“BSM”) pricing
model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over a straight-line
basis over the requisite service period in the Statement of
Comprehensive Income (Loss). As stock-based compensation expense is
based on awards ultimately expected to vest, it has been reduced
for the estimated forfeitures. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.
The determination of fair value of share-based payment awards to
employees on the date of grant using the BSM pricing model is
affected by assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited
to, the current fair value of the Company’s stock price, the
expected stock price volatility over the expected term of the
awards, and actual and projected employee stock option exercise
behaviors. The Company’s historical share option exercise
experience does not provide a reasonable basis upon which to
estimate an expected term because of a lack of sufficient data;
therefore, expected term is estimated using the simplified method,
which computes expected term as the average of the sum of the
vesting term plus the contract term. Historical data is used to
estimate forfeitures. The risk-free rate is based on U.S. Treasury
rates in effect during the corresponding period of grant. The
expected volatility is based on historical volatility of peer
companies. The fair value of common stock was established by
valuations of the Company’s stock, based on estimates
developed by the Company, conducted for each respective date.
F-19
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
11—Stock-Based Compensation
(cont’d)
The Company used the following weighted average assumptions in its
BSM pricing model:
|
|
|
Expected term
|
|
|
5.3 – 6.0 years
|
|
Volatility
|
|
|
145.0
|
%
|
Risk free interest rate
|
|
|
0.023
|
%
|
Dividends
|
|
|
—
|
|
Grant date fair value
|
|
$
|
71.02
|
|
A summary of the stock option activity for the Company’s
employees follows:
|
|
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Grant Date Fair Value
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
Outstanding at July 31, 2013
|
|
26,298
|
|
|
$
|
47.99
|
|
$
|
55.74
|
|
$
|
1,033
|
Granted
|
|
800
|
|
|
|
105.50
|
|
|
71.03
|
|
|
—
|
Exercised
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
Cancelled/Forfeited-Unvested
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
Cancelled/Expired-Vested
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
Outstanding at July 31, 2014
|
|
27,098
|
|
|
$
|
49.69
|
|
$
|
56.19
|
|
$
|
1,003
|
Granted
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
Exercised
|
|
(1,100
|
)
|
|
|
8.20
|
|
|
52.00
|
|
|
58
|
Cancelled/Forfeited-Unvested
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
Cancelled/Expired-Vested
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
Outstanding at July 31, 2015
|
|
25,998
|
|
|
$
|
51.65
|
|
$
|
56.30
|
|
$
|
755
|
The following table summarizes information about currently
outstanding and vested stock options at July 31, 2015:
|
|
|
|
|
|
|
Weighted-Average Remaining Contractual
(Life Years)
|
|
|
$7.80
|
|
12,600
|
|
4.91
|
|
12,600
|
$10.00
|
|
1,770
|
|
3.17
|
|
1,770
|
$105.50
|
|
11,628
|
|
7.15
|
|
10,155
|
|
|
25,998
|
|
|
|
24,525
|
At July 31, 2015, the Company had total unrecognized stock-based
compensation expense for options granted to Company employees of
approximately $12,000, the entirety of which is expected to be
recognized in the year ending July 31, 2016.
Note 12—Related
Party Transactions
The Company continues to maintain an intercompany balance due to
IDT that relates to charges for services provided to us by IDT and
payroll costs for Zedge’s personnel that are paid by IDT. IDT
charges the Company for certain transactions and allocates routine
expenses based on company specific items covered under a Master
Services Agreement. The original expiration of the Master Services
Agreement has passed and services are currently being performed on
a month-to-month basis. This agreement provides for, among other
things: (1) the allocation between the Company and IDT of employee
benefits, taxes and other liabilities and obligations; (2) services
to be provided by IDT relating to human resources and employee
benefits administration; (3) the allocation of responsibilities
relating to employee compensation and benefit plans and programs
and other related matters; and (4) finance, accounting, tax,
facilities and legal services to be provided by IDT to the Company.
In 2015 and 2014, IDT allocated amounts
F-20
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12—Related
Party Transactions
(cont’d)
for payroll, benefits, insurance, facilities and other expenses to
the Company, which were included in “Selling, general and
administrative expense” in the consolidated statements of
comprehensive income (loss) and “Purchase of property and
equipment” in the consolidated statements of cash flows
(relating to capitalized software and technology development
costs). In all periods presented, the Company was included in
IDT’s consolidated federal income tax return.
The change in the Company’s liability to IDT was as
follows:
Years
ended July 31,
(in thousands)
|
|
|
|
|
Balance at beginning of year
|
|
$
|
489
|
|
|
$
|
382
|
|
Payments by IDT on behalf of the
Company
|
|
|
1,982
|
|
|
|
1,292
|
|
Cash repayments, net of advances
|
|
|
(2,102
|
)
|
|
|
(1,185
|
)
|
Balance at end of year
|
|
$
|
369
|
|
|
$
|
489
|
|
Federal tax payments made by IDT on behalf of the Company totaled
$25,000 for the year ended July 31, 2015. No Federal tax payments
were made by IDT on behalf of the Company for the year ended July
31, 2014.
Note 13—Business
Segment Information
Zedge 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:
|
|
|
|
|
|
|
July
31, 2015
|
|
|
|
|
|
|
|
|
|
Long-lived Assets, net
|
|
$
|
1,727
|
|
$
|
112
|
|
$
|
1,839
|
Total Assets
|
|
|
5,305
|
|
|
3,047
|
|
|
8,352
|
July
31, 2014
|
|
|
|
|
|
|
|
|
|
Long-lived Assets, net
|
|
$
|
1,382
|
|
$
|
174
|
|
$
|
1,556
|
Total Assets
|
|
|
3,250
|
|
|
3,711
|
|
|
6,961
|
Note 14—Subsequent
Events
The Company evaluated events or transactions that occurred after
July 31, 2015 through March 8, 2016, the date that the financial
statements were available to be issued, for potential recognition
or disclosure in these consolidated financial statements.
Other than noted above, no other subsequent events requiring
disclosure have occurred.
F-21
ZEDGE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
January 31, 2016
(Unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,193
|
|
|
$
|
2,170
|
|
Trade accounts receivable, net of allowance for
doubtful accounts of $0 at January 31, 2016 and July 31,
2015
|
|
|
2,350
|
|
|
|
1,622
|
|
Prepaid expenses
|
|
|
91
|
|
|
|
103
|
|
Other current assets
|
|
|
132
|
|
|
|
180
|
|
TOTAL
CURRENT ASSETS
|
|
|
5,766
|
|
|
|
4,075
|
|
Property and equipment, net
|
|
|
1,753
|
|
|
|
1,724
|
|
Goodwill
|
|
|
2,297
|
|
|
|
2,438
|
|
Other assets
|
|
|
109
|
|
|
|
115
|
|
TOTAL
ASSETS
|
|
$
|
9,925
|
|
|
$
|
8,352
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
75
|
|
|
$
|
116
|
|
Accrued expenses
|
|
|
1,652
|
|
|
|
1,319
|
|
Deferred revenue
|
|
|
4
|
|
|
|
4
|
|
Due to IDT Corporation
|
|
|
364
|
|
|
|
369
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
2,095
|
|
|
|
1,808
|
|
TOTAL
LIABILITIES
|
|
|
2,095
|
|
|
|
1,808
|
|
MEZZANINE EQUITY:
|
|
|
|
|
|
|
|
|
Series B convertible preferred stock
|
|
|
100
|
|
|
|
100
|
|
TOTAL
MEZZANINE EQUITY
|
|
|
100
|
|
|
|
100
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock
(liquidation preference of $7,001 at January 31, 2016 and July 31,
2015) $0.10 par value; authorized shares—42,481 42,481 shares
issued and outstanding at January 31, 2016 and July 31,
2015
|
|
|
4
|
|
|
|
4
|
|
Series B convertible preferred stock
(liquidation preference of $5,939 at January 31, 2016 and July 31,
2015) $0.10 par value; authorized shares—56,295 56,295 shares
issued and outstanding at January 31, 2016 and July 31,
2015
|
|
|
6
|
|
|
|
6
|
|
Common stock $0.10 par value; authorized
shares—600,000; 34,417 shares issued and outstanding at
January 31, 2016 and July 31, 2015
|
|
|
3
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
17,803
|
|
|
|
17,794
|
|
Accumulated deficit
|
|
|
(9,272
|
)
|
|
|
(10,708
|
)
|
Accumulated other comprehensive loss
|
|
|
(814
|
)
|
|
|
(655
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
7,730
|
|
|
|
6,444
|
|
TOTAL
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’
EQUITY
|
|
$
|
9,925
|
|
|
$
|
8,352
|
|
See accompanying notes to consolidated financial statements.
F-22
ZEDGE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
Six
months ended
January 31,
|
(in
thousands, except share and per share data)
|
|
|
|
|
REVENUES
|
|
$
|
6,089
|
|
|
$
|
4,425
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Direct cost of revenue (exclusive of
amortization of capitalized software and technology development
costs included below)
|
|
|
605
|
|
|
|
535
|
|
Selling, general and administrative
|
|
|
3,466
|
|
|
|
2,936
|
|
Depreciation and amortization
|
|
|
317
|
|
|
|
356
|
|
INCOME FROM OPERATIONS
|
|
|
1,701
|
|
|
|
598
|
|
Interest income
|
|
|
2
|
|
|
|
4
|
|
Net (losses) gains resulting from foreign
exchange transactions
|
|
|
(161
|
)
|
|
|
128
|
|
INCOME BEFORE INCOME TAXES
|
|
|
1,542
|
|
|
|
730
|
|
Provision for income taxes
|
|
|
106
|
|
|
|
82
|
|
NET
INCOME
|
|
|
1,436
|
|
|
|
648
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Changes in foreign currency translation
adjustment
|
|
|
(159
|
)
|
|
|
(622
|
)
|
TOTAL
OTHER COMPREHENSIVE LOSS
|
|
|
(159
|
)
|
|
|
(622
|
)
|
TOTAL
COMPREHENSIVE INCOME
|
|
$
|
1,277
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Zedge, Inc.
common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
10.71
|
|
|
$
|
4.84
|
|
Diluted
|
|
$
|
9.76
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares used in
calculation of earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,417
|
|
|
|
34,050
|
|
Diluted
|
|
|
47,343
|
|
|
|
46,745
|
|
See accompanying notes to consolidated financial statements.
F-23
ZEDGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
months ended
January
31,
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,436
|
|
|
$
|
648
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
317
|
|
|
|
356
|
|
Stock-based compensation
|
|
|
9
|
|
|
|
53
|
|
Net losses (gains) resulting from foreign
exchange transactions
|
|
|
161
|
|
|
|
(128
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(728
|
)
|
|
|
(443
|
)
|
Other current assets and prepaid
expenses
|
|
|
60
|
|
|
|
(12
|
)
|
Other assets
|
|
|
6
|
|
|
|
(15
|
)
|
Trade accounts payable and accrued
expenses
|
|
|
172
|
|
|
|
663
|
|
Due to IDT Corporation
|
|
|
(5
|
)
|
|
|
(194
|
)
|
Deferred revenue
|
|
|
—
|
|
|
|
29
|
|
Net cash provided by operating
activities
|
|
|
1,428
|
|
|
|
957
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(344
|
)
|
|
|
(438
|
)
|
Net cash used in investing activities
|
|
|
(344
|
)
|
|
|
(438
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
—
|
|
|
|
9
|
|
Net cash provided by financing
activities
|
|
|
—
|
|
|
|
9
|
|
Effect of exchange rates on cash and cash
equivalents
|
|
|
(61
|
)
|
|
|
(94
|
)
|
Net increase in cash and cash
equivalents
|
|
|
1,023
|
|
|
|
434
|
|
Cash and cash equivalents at beginning of
period
|
|
|
2,170
|
|
|
|
765
|
|
Cash and cash equivalents at end of
period
|
|
$
|
3,193
|
|
|
$
|
1,199
|
|
See accompanying notes to consolidated financial statements.
F-24
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Description
of Business and Basis of Presentation
Description of
Business
Zedge, Inc. (“Zedge” or the “Company”), a
Delaware corporation, is currently a majority-owned subsidiary of
IDT Corporation (“IDT”). Zedge was incorporated in
2008. Zedge’s discovery platform offers free games, ringtones
and wallpapers. IDT owns approximately 82% of Zedge, which conducts
business as one operating segment.
The consolidated financial statements include all of the accounts
of Zedge and Zedge Europe AS, a Norwegian corporation. All
significant intercompany accounts and transactions have been
eliminated.
Basis of Presentation
The accompanying unaudited consolidated financial statements 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 six months ended
January 31, 2016 are not necessarily indicative of the results that
may be expected for the year ending July 31, 2016. The balance
sheet at July 31, 2015 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
elsewhere in this information statement.
The assets and liabilities in these financial statements are
recorded at historical cost. Direct expenses historically incurred
by IDT on behalf of the entities are reflected in these financial
statements. The most significant expenses as covered under a Master
Services Agreement with IDT are as follows: legal and professional
fees, salaries and employee benefits have been allocated based on
specific identification; certain facility costs, as well as certain
salaries consisting of payroll, human resources, purchasing,
accounts payable, treasury, network and telephone services, legal,
travel, and consulting fees were allocated to these entities based
on estimates of the incremental cost incurred by IDT; medical and
dental benefits were allocated to these entities based on rates
similar to COBRA health benefit provision rates charged to former
IDT employees; stock-based compensation and retirement benefits
under IDT’s defined contribution plan were allocated to these
entities based on specific identification. Insurance was allocated
to these entities based on a combination of headcount and specific
policy identification. Management believes that the assumptions and
methods of allocation used were reasonable. However, the costs as
allocated are not necessarily indicative of the costs that would
have been incurred if these entities operated on a stand-alone
basis. Therefore, the consolidated financial statements included
herein may not necessarily be indicative of the financial position,
results of operations, changes in stockholders’ equity and
cash flows of the Company to be expected in the future or what they
would have been had the Company been a separate stand-alone entity
during the periods presented.
Significant
Customers
For the six months ended January 31, 2016, three customers
represented 47%, 22% and 12% of the Company’s revenue. For
the six months ended January 31, 2015, three customers represented
28%, 25% and 9% of the Company’s revenue. All were
advertising exchanges operated by leading companies.
F-25
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2—Fair Value
Measurements
The following table presents the balance of assets and liabilities
measured at fair value on a recurring basis:
January 31, 2016
(in thousands)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
$
|
131
|
|
$
|
—
|
|
$
|
131
|
July 31, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
$
|
38
|
|
$
|
—
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
$
|
39
|
|
$
|
—
|
|
$
|
39
|
Fair Value of Other
Financial Instruments
The Company’s other financial instruments at January 31, 2016
and July 31, 2015 included accounts receivable, accounts payable
and Due to IDT Corporation. The carrying amounts of the accounts
receivable, accounts payable and Due to IDT Corporation balances
approximated fair value due to their short-term nature. The Company
did not have any other assets or liabilities that were measured at
fair value on a recurring basis as of January 31, 2016 and July 31,
2015.
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 - Norwegian Krone
(“NOK”) exchange rate. Zedge Europe AS is based in
Norway and much of its operations are located in Norway. 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 Company minimizes the credit or repayment risk by
entering into transactions with high-quality counterparties.
The Company’s outstanding contracts at January 31, 2016 were
as follows:
|
|
|
|
|
February 2016
|
|
800,000
|
|
6,772,360
|
May 2016
|
|
1,000,000
|
|
8,238,600
|
July 2016
|
|
1,000,000
|
|
8,200,000
|
F-26
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3—Derivative
Instruments
(cont’d)
The fair value of outstanding derivative instruments recorded as
assets in the accompanying consolidated balance sheets were as
follows:
|
|
|
|
|
|
|
Assets Derivatives:
|
|
Balance Sheet Location
|
|
|
|
|
|
|
Derivatives not designated or not qualifying as
hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other Current Assets
|
|
$
|
—
|
|
$
|
38
|
The fair value of outstanding derivative instruments recorded as
liabilities in the accompanying consolidated balance sheets were as
follows:
|
|
|
|
|
|
|
Liabilities Derivatives:
|
|
Balance Sheet Location
|
|
|
|
|
|
|
Derivatives not designated or not qualifying as
hedging instruments
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Accrued Expenses
|
|
$
|
131
|
|
$
|
39
|
The effects of derivative instruments on the consolidated
statements of comprehensive income were as follows:
Amount of Loss Recognized on
Derivatives
Six months ended January 31,
(in thousands)
|
|
|
|
|
|
|
Derivatives not designated or not qualifying as
hedging instruments
|
|
Statement of Comprehensive Income
Location
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Net losses resulting from foreign exchange
transactions
|
|
$
|
(225
|
)
|
|
$
|
—
|
Note 4—Accrued
Expenses
Accrued expenses consist of the following:
|
|
|
|
|
Accrued vacation
|
|
$
|
432
|
|
$
|
356
|
Accrued payroll taxes
|
|
|
245
|
|
|
172
|
Accrued payroll and bonuses
|
|
|
48
|
|
|
90
|
Accrued cost of advertising
|
|
|
640
|
|
|
530
|
Accrued foreign taxes
|
|
|
98
|
|
|
80
|
Other
|
|
|
189
|
|
|
91
|
Total
|
|
$
|
1,652
|
|
$
|
1,319
|
F-27
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
5—Equity
Stockholders’
Equity
Changes to the components of Stockholders’ Equity were as
follows for the six months ended January 31, 2016:
|
|
|
|
|
|
Additional Paid-in
Capital
|
|
|
|
Accumulated Other Comprehensive
Loss
|
|
Total Stockholders’
Equity
|
Balance – July
31, 2015
|
|
$
|
3
|
|
$
|
10
|
|
$
|
17,794
|
|
$
|
(10,708
|
)
|
|
$
|
(655
|
)
|
|
$
|
6,444
|
|
Stock-based
compensation
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,436
|
|
|
|
—
|
|
|
|
1,436
|
|
Foreign currency
translation adjustments
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(159
|
)
|
|
|
(159
|
)
|
Total comprehensive
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,436
|
|
|
|
(159
|
)
|
|
|
1,277
|
|
Balance –
January 31, 2016
|
|
$
|
3
|
|
$
|
10
|
|
$
|
17,803
|
|
$
|
(9,272
|
)
|
|
$
|
(814
|
)
|
|
$
|
7,730
|
|
Mezzanine
Equity
Share
Imperfections
In 2012, preferred shares were issued by the Board of Directors of
the Company in excess of the number of shares duly authorized by
the Company’s Certificate of Incorporation. The Company
classified these preferred shares as mezzanine equity at the
original purchase price in the consolidated balance sheets because
they do not meet the definition of permanent equity as a result of
these legal imperfections.
To address these issues, in February 2016, the Company prepared and
filed a certificate of validation with the State of Delaware for an
amendment to the Restated Certificate of Incorporation requesting
an increase in the number of authorized shares of Series B
Convertible Preferred Stock to 57,242 shares. On February 24, 2016,
the State of Delaware certified this validation, which is
retroactive to the date of the defective act.
Statement of Mezzanine Equity
Changes to mezzanine amounts in the six months ended January 31,
2016 were as follows:
|
|
Series B Convertible
Preferred Stock
|
|
|
|
|
|
Balance at July 31, 2015
|
|
947
|
|
$
|
100
|
Changes during the six months ended January 31,
2016
|
|
—
|
|
|
—
|
Balance at January 31, 2016
|
|
947
|
|
$
|
100
|
Note 6—Earnings Per
Share
In accordance with ASC 260-10-55,
Share-Based Payment
Arrangements and Participating Securities and the Two-Class
Method,
the Company’s Series A and Series B
Convertible Preferred Stock are considered participating
securities. During periods of net income, the calculation of basic
earnings per share for common stock is reclassified to exclude the
income attributable to the Series A and Series B Convertible
Preferred Stock from the numerator. Diluted earnings per share is
determined in the same manner as basic earnings per share, except
that the number of shares is increased to assume exercise of
potentially dilutive stock options using the treasury stock method
and the Series A and Series B Convertible Preferred Stock using the
if-converted method, unless the effect of such increase is
anti-dilutive. In computing diluted earnings per share, the average
stock price for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock options.
Diluted earnings per share exclude all dilutive potential shares if
their effect is anti-dilutive.
F-28
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6—Earnings
Per Share
(cont’d)
In computing the basic and diluted earnings per share, the Company
has included the 947 Series B Convertible Preferred Stock shares
issued in excess of the amount authorized that are included in
Mezzanine Equity (see Note 5).
The following is a reconciliation of the Company’s basic and
diluted earnings per share calculation:
Six months ended January 31,
(in thousands, except share and per share data)
|
|
|
|
|
Numerator for basic earnings per share:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,436
|
|
|
$
|
648
|
|
Less allocation of earnings to participating
securities
|
|
|
(1,068
|
)
|
|
|
(483
|
)
|
Net income available to common
stockholders
|
|
$
|
368
|
|
|
$
|
165
|
|
Numerator for diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
368
|
|
|
$
|
165
|
|
Allocation of earnings to participating
securities
|
|
|
1,068
|
|
|
|
483
|
|
Less diluted allocation of earnings to
participating securities
|
|
|
(974
|
)
|
|
|
(441
|
)
|
Net income available to common
stockholders
|
|
$
|
462
|
|
|
$
|
207
|
|
Basic
weighted-average number of shares
|
|
|
34,417
|
|
|
|
34,050
|
|
Stock options
|
|
|
12,926
|
|
|
|
12,695
|
|
Diluted weighted-average number of shares
|
|
|
47,343
|
|
|
|
46,745
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
10.71
|
|
|
$
|
4.84
|
|
Diluted
|
|
$
|
9.76
|
|
|
$
|
4.42
|
|
The following shares were excluded from the diluted earnings per
share computations because their inclusion would have been
anti-dilutive:
Six months ended January 31,
|
|
|
|
|
Stock options
|
|
11,628
|
|
11,628
|
Note 7—Related
Party Transactions
IDT charges the Company for certain transactions and allocates
routine expenses based on company specific items covered under a
Master Services Agreement. The original term of the Master Services
Agreement expired and services are currently being performed on a
month-to-month basis. This agreement provides for, among other
things: (1) the allocation between the Company and IDT of employee
benefits, taxes and other liabilities and obligations; (2) services
to be provided by IDT relating to human resources and employee
benefits administration; (3) the allocation of responsibilities
relating to employee compensation and benefit plans and programs
and other related matters; and (4) finance, accounting, tax,
facilities and legal services to be provided by IDT to the Company.
The charges for payroll, benefits, insurance, facilities and other
expenses were included in “Selling, general and
administrative expense” in the consolidated statements of
comprehensive income and “Purchase of property and
equipment” in the consolidated statements of cash flows
(relating to capitalized software and technology development
costs). In all periods presented, the Company was included in
IDT’s consolidated federal income tax return.
Six months ended January 31,
(in thousands)
|
|
|
|
|
Payments by IDT on behalf of the
Company
|
|
$
|
865
|
|
|
$
|
409
|
|
Cash repayments, net of advances
|
|
$
|
(870
|
)
|
|
$
|
(603
|
)
|
F-29
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8—Business
Segment Information
Zedge 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:
|
|
|
|
|
|
|
January 31, 2016
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
1,672
|
|
$
|
190
|
|
$
|
1,862
|
Total assets
|
|
|
5,650
|
|
|
4,275
|
|
|
9,925
|
July
31, 2015
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net
|
|
$
|
1,727
|
|
$
|
112
|
|
$
|
1,839
|
Total assets
|
|
|
5,305
|
|
|
3,047
|
|
|
8,352
|
Note 9—Recently
Issued Accounting Standards Not Yet Adopted
In March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2016-09,
Improvements to
Employee Share-Based Payment Accounting
. 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 ASU No. 2016-02,
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 November 2015, the FASB issued an ASU to simplify the
presentation of deferred income taxes, as well as align the
presentation of deferred income tax assets and liabilities with
International Financial Reporting Standards (“IFRS”).
The ASU requires that deferred tax assets and liabilities be
classified as noncurrent in a classified balance sheet instead of
separated into current and noncurrent amounts. The ASU is effective
for the Company’s financial statements beginning August 1,
2017. Earlier application is permitted. The change may be applied
either prospectively or retrospectively. The Company is evaluating
when to apply the ASU for its consolidated balance sheet.
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 will 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.
F-30
ZEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10—Legal
Proceedings
In March 2014, Saregama India, Limited filed a lawsuit against
Zedge before the Barasat District Court, seeking approximately
US$1,595,700 as damages and an injunction for copyright
infringement. The main ground for the lawsuit was that Zedge
allegedly avails the plaintiff’s sound recordings through
Zedge’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 any possible 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.
Note 11—Subsequent
Events
The Company evaluated events or transactions that occurred after
July 31, 2015 through April 25, 2016, the date that the financial
statements were available to be issued, for potential recognition
or disclosure in these consolidated financial statements.
Other than noted above, no other subsequent events requiring
disclosure have occurred.
F-31