NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation and Recently Adopted Accounting
Pronouncements
Basis of Presentation
The accompanying unaudited consolidated financial
statements of Zedge, Inc. and its subsidiary, Zedge Europe AS (the “Company”) have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three and nine months ended April 30, 2021
are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2021 or any other period.
The balance sheet at July 31, 2020 has been derived from the Company’s audited financial statements at that date but does not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer
to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year
ended July 31, 2020, as filed with the U.S. Securities and Exchange Commission (the “SEC”).
The Company’s fiscal year ends on July 31
of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal
2021 refers to the fiscal year ending July 31, 2021).
Restatement of Financial Statements
The Company’s consolidated balance sheet
as of April 30, 2021, consolidated statements of comprehensive income (loss) for the three and nine month periods ended April 30, 2021
and consolidated statement of cash flows for the nine month period ended April 30, 2021 have been restated to reflect a net tax benefit
of $517,000 resulting from the partial release of valuation allowance of $542,000 and additional tax expense of $25,000. The Company’s
previously reported results maintained a 100% of valuation allowance on all of its deferred tax assets in light of primarily its recurring
losses from fiscal 2017 to fiscal 2020 and other negative evidence, without giving consideration of strong positive evidence of three
year cumulative positive income that was achieved due to pretax income of $5.6 million generated in the nine month period ended April
30, 2021. The following table summarizes the effects of our restatement resulting from the correction of this error.
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
|
|
Three
Months
Ended
|
|
|
Nine
Months
Ended
|
|
|
|
April 30, 2021
|
|
|
Adjustment
|
|
|
April 30, 2021
|
|
|
|
Previously Reported
|
|
|
|
|
|
Restated
|
|
|
|
(in thousands, except per share data)
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,976
|
|
|
$
|
5,625
|
|
|
$
|
-
|
|
|
$
|
1,976
|
|
|
$
|
5,625
|
|
Provision for (benefit from) income taxes
|
|
$
|
44
|
|
|
$
|
370
|
|
|
$
|
(517
|
)
|
|
$
|
(473
|
)
|
|
$
|
(147
|
)
|
Net Income
|
|
$
|
1,932
|
|
|
$
|
5,255
|
|
|
$
|
(517
|
)
|
|
$
|
2,449
|
|
|
$
|
5,772
|
|
Income per share attributable to Zedge, Inc. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.42
|
|
|
$
|
0.04
|
|
|
$
|
0.18
|
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
0.39
|
|
|
$
|
0.04
|
|
|
$
|
0.17
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
5,255
|
|
|
$
|
(517
|
)
|
|
|
|
|
|
$
|
5,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
$
|
33,044
|
|
|
$
|
542
|
|
|
|
|
|
|
$
|
33,586
|
|
Total current liabilites
|
|
|
|
|
|
$
|
5,005
|
|
|
$
|
25
|
|
|
|
|
|
|
$
|
5,030
|
|
Total shareholders’ equity
|
|
|
|
|
|
$
|
27,642
|
|
|
$
|
517
|
|
|
|
|
|
|
$
|
28,159
|
|
COVID-19 Impacts on Financial and Operational Results
The COVID-19 pandemic has caused widespread economic
disruption impacting the Company in a number of ways, most notably, with a significant decrease in global advertising spend in the third
quarter of fiscal 2020, followed by a rebound in the following four consecutive quarters. The Company expects the extent of the impact
on its financial and operational results will continue to depend on the duration and severity of the economic disruption caused by the
COVID-19 pandemic, including demand for new phones sales worldwide - a driver of new installs of the Company’s flagship app.
As of April 30, 2021, the Company had $24.9 million
of cash and cash equivalents, including a net of $11.9 million raised from the previously announced “at-the-market” offering
of shares of the Company’s Class B common stock (see Note 15). The Company has developed certain contingency plans to preserve liquidity
if such actions become necessary due to worsening economic conditions, including those related to the COVID-19 pandemic. At the current
time, the Company does not believe taking such actions would be prudent nor, does it expect to need to take such actions based on its
current forecasts. The Company believes that its existing cash and cash equivalents, together with cash generated by operations will be
sufficient to meet its working capital and capital expenditure requirements for the foreseeable future when accounting for the ill effects
of the COVID-19 pandemic.
The Company considered the impacts of the COVID-19
pandemic on its significant estimates and judgments used in applying its accounting policies in the nine months ended April 30, 2021.
In light of the pandemic, there is a greater degree of uncertainty in applying these judgments and depending on the duration and severity
of the pandemic, changes to its estimates and judgments could result in a meaningful impact to its financial statements in future periods.
Recently Adopted Accounting Pronouncements
In June 2016, Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (ASU 2016-13) which changes the impairment model for most financial assets and certain other
instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss”
model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized
losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances
instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more information
about allowances, credit quality indicators and past due securities. The Company adopted this new accounting standard on August 1, 2020,
and the adoption did not have a material impact on the Company’s financial statements and related disclosures.
In August 2018, the FASB issued Accounting Standard
Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) (ASU 2018-13), which improved
the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and
adds certain disclosure requirements. The Company adopted this new accounting standard on August 1, 2020, and the adoption did not have
a material impact on the Company’s financial statements and related disclosures.
In August 2018, the FASB issued Accounting Standard
Update No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract (ASU 2018-15), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement
that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
The Company adopted this new accounting standard on August 1, 2020, using the prospective method, and the adoption did not have a material
impact on the Company’s financial statements and related disclosures.
Note 2—Revenue
Disaggregation of Revenue
The following table summarizes revenue by type of
monetization mechanisms of the Zedge app for the periods presented:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Advertising revenue
|
|
$
|
4,227
|
|
|
$
|
1,501
|
|
|
$
|
11,612
|
|
|
$
|
5,428
|
|
Paid subscription revenue
|
|
|
899
|
|
|
|
455
|
|
|
|
2,358
|
|
|
|
985
|
|
Other revenues
|
|
|
126
|
|
|
|
123
|
|
|
|
358
|
|
|
|
343
|
|
Total Revenues
|
|
$
|
5,252
|
|
|
$
|
2,079
|
|
|
$
|
14,328
|
|
|
$
|
6,756
|
|
Contract Balances
Deferred revenues
The Company records deferred revenues related
to the unsatisfied performance obligations with respect to subscription revenue. As of April 30, 2021, the Company’s deferred revenue
balance related to paid subscriptions was approximately $1,607,000, representing approximately 753,000 active subscribers including those
under the account hold designation implemented by Google Play on November 1, 2020. Account hold is a subscription state that begins
when a user’s form of payment fails and the three-day grace period has ended without payment resolution. The account hold period
lasts for up to 30 days. As of July 31, 2020, the Company’s deferred revenue balance related to paid subscriptions was approximately
$1,169,000, representing approximately 504,000 active subscribers. The amount of revenue recognized in the nine months ended April 30,
2021 that was included in the deferred balance at July 31, 2020 was $1,078,000.
The Company also records deferred revenues when
users purchase or earn Zedge Credits. Unused Zedge Credits represent the value of the Company’s unsatisfied performance obligation
to its users. Revenue is recognized when Zedge App users use Zedge Credits to acquire Zedge Premium content or upon expiration of the
Zedge Credits upon 180 days of account inactivity. As of April 30, 2021, and July 31, 2020, the Company’s deferred revenue balance
related to Zedge Premium was approximately $217,000 and $169,000, respectively.
Total deferred revenues increased $486,000 from
$1,338,000 at July 31, 2020 to $1,824,000 at April 30, 2021, primarily attributed to new paid subscriptions and renewals sold in the nine
months ended April 30, 2021.
Significant Judgments
The advertising networks and advertising exchanges
to which we sell our inventory track and report the impressions and installs to Zedge and Zedge recognizes revenues based on these reports.
The networks and exchanges base their payments off of those reports and Zedge independently compares the data to each of the client sites
to validate the imported data and identify any differences. The number of impressions and installs delivered by the advertising networks
and advertising exchanges is determined at the end of each month, which resolves any uncertainty in the transaction price during the reporting
period.
Practical Expedients
The Company expenses the fees retained by Google
Play related to subscription revenue when incurred as marketing expense because the duration of the contracts for which the Company pays
commissions are less than one year. These costs are included in the selling, general and administrative expenses of the Consolidated Statements
of Comprehensive Income (Loss).
Note 3—Fair Value Measurements
The following tables present the balance of assets
and liabilities measured at fair value on a recurring basis:
|
|
Level 1 (1)
|
|
|
Level 2 (2)
|
|
|
Level 3 (3)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
April 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
10
|
|
|
$
|
-
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
(1) – quoted prices in active markets
for identical assets or liabilities
(2) – observable inputs other than quoted prices in active markets
for identical assets and liabilities
(3) – no observable pricing inputs in the market
Fair Value of Other Financial Instruments
The Company’s other financial instruments
at April 30, 2021 and July 31, 2020 included trade accounts receivable, trade accounts payable, and loans payable. The carrying amounts
of the trade accounts receivable, trade accounts payable, and loan payables approximated fair value due to their short-term nature.
Note 4—Derivative Instruments
The primary risk managed by the Company using
derivative instruments is foreign exchange risk. Foreign exchange forward contracts are entered into as hedges against unfavorable fluctuations
in the U.S. Dollar (USD) to Norwegian Kroner (NOK) and USD to Euro (EUR) exchange rates. The Company is party to a Foreign Exchange Agreement
with Western Alliance Bank allowing the Company to enter into foreign exchange contracts under its revolving credit facility with the
bank (see Note 9). The Company does not apply hedge accounting to these contracts, and therefore the changes in fair value are recorded
in consolidated statements of comprehensive income (loss). By using derivative instruments to mitigate exposures to changes in foreign
exchange rates, the Company is exposed to credit risk from the failure of the counterparty to perform under the terms of the contract.
The credit or repayment risk is minimized by entering into transactions with high-quality counterparties.
The outstanding contracts at April 30, 2021, are as follows:
Settlement Date
|
|
U.S. Dollar
Amount
|
|
|
NOK
Amount
|
|
May-21
|
|
|
200,000
|
|
|
|
1,694,083
|
|
Jun-21
|
|
|
200,000
|
|
|
|
1,683,155
|
|
Jul-21
|
|
|
200,000
|
|
|
|
1,683,215
|
|
Aug-21
|
|
|
200,000
|
|
|
|
1,683,215
|
|
Sep-21
|
|
|
200,000
|
|
|
|
1,683,275
|
|
Oct-21
|
|
|
200,000
|
|
|
|
1,683,515
|
|
Nov-21
|
|
|
200,000
|
|
|
|
1,683,755
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,400,000
|
|
|
|
11,794,213
|
|
Settlement Date
|
|
U.S. Dollar
Amount
|
|
|
EUR
Amount
|
|
May-21
|
|
|
200,000
|
|
|
|
163,253
|
|
Jun-21
|
|
|
250,000
|
|
|
|
207,164
|
|
Jul-21
|
|
|
250,000
|
|
|
|
207,010
|
|
Aug-21
|
|
|
250,000
|
|
|
|
206,873
|
|
Sep-21
|
|
|
250,000
|
|
|
|
206,753
|
|
Oct-21
|
|
|
250,000
|
|
|
|
206,616
|
|
Nov-21
|
|
|
250,000
|
|
|
|
206,463
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,700,000
|
|
|
|
1,404,132
|
|
The fair value of outstanding derivative instruments
recorded in the accompanying consolidated balance sheets were as follows:
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
(in thousands)
|
|
Assets and Liabilities Derivatives:
|
|
Balance Sheet Location
|
|
|
|
Derivatives not designated or not qualifying as hedging instruments
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
$
|
10
|
|
|
$
|
10
|
|
The effects of derivative instruments on the
consolidated statements of comprehensive income (loss) were as follows:
|
|
|
|
Amount of Gain (Loss) Recognized on Derivatives
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
Amount of Gain (Loss) Recognized on Derivatives
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Derivatives not designated or not qualifying as hedging instruments
|
|
Location of Gain (Loss) Recognized on Derivatives
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Foreign exchange forward contracts
|
|
Net gain (loss) resulting from foreign exchange transactions
|
|
$
|
16
|
|
|
$
|
(273
|
)
|
|
|
67
|
|
|
$
|
(327
|
)
|
Note 5—Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities
consist of the following:
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Accrued vacation
|
|
$
|
565
|
|
|
$
|
392
|
|
Accrued income taxes
|
|
|
389
|
|
|
|
-
|
|
Accrued payroll taxes
|
|
|
459
|
|
|
|
274
|
|
Accrued payroll and bonuses
|
|
|
457
|
|
|
|
132
|
|
Withholding taxes payable (option exercise gains)
|
|
|
560
|
|
|
|
-
|
|
Operating lease liability
|
|
|
89
|
|
|
|
232
|
|
Due to artists
|
|
|
224
|
|
|
|
136
|
|
Other
|
|
|
106
|
|
|
|
44
|
|
Total accrued expenses and other current liabilities
|
|
$
|
2,849
|
|
|
$
|
1,210
|
|
Note 6—Stock-Based Compensation
2016 Stock Option and Incentive Plan
On November 18, 2020, the Company’s
Board of Directors amended the Company’s 2016 Stock Option and Incentive Plan (as amended to date, the “2016 Incentive Plan”)
to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional
250,000 shares to an aggregate of 1,521,000 shares. This amendment was ratified by the Company’s stockholders at the Annual Meeting
of Stockholders held on January 11, 2021. At April 30, 2021, there were 233,000 shares of Class B Stock available for awards under the
2016 Incentive Plan.
On November 7, 2019, the Company’s
Board of Directors amended the 2016 Incentive Plan to increase the number of shares of the Company’s Class B common stock available
for the grant of awards thereunder by an additional 230,000 shares, to an aggregate of 1,271,000 shares. This amendment was ratified by
the Company’s stockholders at the Annual Meeting of Stockholders held on January 13, 2020.
Pursuant to the 2016 Incentive Plan,
the option exercise price for all stock option awards that are designated as “Incentive Stock Options” must not be less than
the Fair Market Value of the shares of Class B Common Stock covered by the option award on the date of grant. In general, Fair Market
Value means the closing sale price per share of Class B Common Stock on the exchange on which the Class B Common Stock is principally
traded for the last preceding date on which there was a sale of Class B Common Stock on such exchange.
Stock Options
In August and October 2020, the Compensation
Committee of the Company’s Board of Directors approved grants of options to purchase an aggregate of 90,849 shares of Class B Stock
to various individuals including company executives, employees and consultants. Options with respect to 30,000 shares vested upon grant
with the remaining options with respect to 60,849 shares vesting over a three-year period. Grant date fair value related to the 30,000
vested options was $32,000 which was expensed immediately. Unrecognized compensation expense related to the 60,649 options grants was
an aggregate of $64,000 based on the estimated fair value of the options on the grant date. The unrecognized compensation expense is being
recognized on a straight-line basis over the vesting period.
Also in October 2020, the Compensation
Committee extended the expiration date of options to purchase approximately 182,000 shares of the Company’s Class B Common Stock
held by one of the Company’s executive officers, from October 31, 2021 to May 31, 2026. Such options are fully vested and were granted
under the Company’s 2008 Stock Option and Incentive Plan. The options have an exercise price of $1.73 per share. Compensation expense
related to this modification was $78,000 and was fully expensed on the modification date.
In December 2020 and January 2021, the
Compensation Committee of the Company’s Board of Directors approved grants of options to purchase an aggregate of 37,000 shares
of Class B Stock to four individuals including company executives and employees, vesting over a three-year period with respect to 15,000
options grants with the remaining 22,000 options grants vesting over a four-year period. Unrecognized compensation expense related to
the 37,000 options grants was an aggregate of $141,000 based on the estimated fair value of the options on the grant date. The unrecognized
compensation expense is being recognized on a straight-line basis over the vesting period.
In March 2021, the Compensation Committee
of the Company’s Board of Directors approved grants of options to purchase an aggregate of 42,000 shares of Class B Stock to eight
of its non-executive employees based in Lithuania and one consultant, vesting over a four-year period. Unrecognized compensation expense
related to the 42,000 options grants was an aggregate of $316,000 based on the estimated fair value of the options on the grant date.
The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period.
In November 2019 and January 2020, the
Compensation Committee approved equity grants of options to purchase an aggregate of 180,996 shares of Class B Stock to four employees
and one consultant. The options vest over a three-year period. Unrecognized compensation expense related to these grants was an aggregate
of $242,000 based on the estimated fair value of the options on the grant dates. The unrecognized compensation expense is being recognized
on a straight-line basis over the vesting period.
In the nine months ended April 30, 2021
and 2020, the Company issued 497,252 shares and 29,917 shares respectively of Class B Stock and received $819,000 and $4,000 respectively,
in connection with options exercised during the period.
At April 30, 2021, unrecognized compensation expense
related to unvested stock options was an aggregate of $622,000.
Deferred Stock Units
In August 2019, the Compensation Committee
approved the grant of 90,000 Deferred Stock Units (DSUs) to 11 of its non-executive employees based in Norway and Lithuania. Each DSU
represents a right to receive one share of Class B Common Stock upon vesting. The DSUs vest over a four-year period from August 1, 2019.
On the grant date, unrecognized compensation expense related to this grant was an aggregate of $139,000 based on the estimated fair value
of the DSUs on the grant date. The unrecognized compensation expense is being recognized on a straight-line basis over the vesting period.
At April 30, 2021, unrecognized compensation expense related to unvested DSUs was an aggregate of $44,000.
In the nine months ended April 30, 2021,
the Company purchased 5,625 shares of Class B Stock from various employees for $8,000 to satisfy tax withholding obligations in connection
with the vesting of DSUs.
Restricted Stock Awards
In November 2020, the Compensation Committee and
the Corporate Governance Committee of our Board of Directors approved a grant of 92,593 restricted shares of the Company’s Class
B Common Stock to our Executive Chairman Michael Jonas. Mr. Jonas agreed to accept all of his compensation for his service as Executive
Chairman during fiscal 2021 in the form of equity in the Company and to make receipt of such equity compensation contingent on the Company
achieving certain milestones relative to its fiscal 2021 budget. The grant was made at that time because the milestones previously set
were achieved. These shares shall vest in equal amounts on February 7, 2022, 2023 and 2024.These shares had an aggregate grant date fair
value of $350,000 which is being amortized on a straight-line basis over the vesting period.
In October 2020, the Compensation Committee approved
a grant of 10,619 restricted shares of Class B Common Stock to each of Mr. Elliot Gibber and Mr. Howard Jonas which vest immediately.
These shares had an aggregate grant date fair value of $30,000 and have been fully amortized accordingly.
On November 7, 2019, the Compensation Committee
approved a grant of 30,534 restricted shares of Class B Common Stock to Mr. Elliot Gibber, our Interim Chief Executive Officer in respect
of his service in that capacity through the end of Fiscal 2020 (or such shorter period as he shall serve in that capacity). The grant
vested on February 7, 2020 and May 7, 2020. These shares had an aggregate grant date fair value of $60,000 which was amortized on a straight-line
basis over the vesting period.
At April 30, 2021, unrecognized compensation expense
related to unvested restricted stock awards was an aggregate of $332,000.
In the nine months ended April 30, 2021 and 2020,
the Company purchased 12,005 shares and 18,441 shares respectively of Class B Stock from certain employees for $18,000 and $29,000 respectively,
to satisfy tax withholding obligations in connection with the vesting of restricted stock.
Note 7—Earnings Per Share
Basic earnings per share is computed by dividing
net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of
common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per
share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture, issuances to be
made on the vesting of unvested DSUs and the exercise of potentially dilutive stock options using the treasury stock method, unless the
effect of such increase is anti-dilutive.
The weighted-average number of shares used in
the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Basic weighted-average number of shares
|
|
|
13,676
|
|
|
|
11,979
|
|
|
|
12,531
|
|
|
|
10,793
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
762
|
|
|
|
-
|
|
|
|
715
|
|
|
|
-
|
|
Non-vested restricted Class B common stock
|
|
|
98
|
|
|
|
-
|
|
|
|
48
|
|
|
|
-
|
|
Deferred stock units
|
|
|
34
|
|
|
|
-
|
|
|
|
29
|
|
|
|
-
|
|
Diluted weighted-average number of shares
|
|
|
14,570
|
|
|
|
11,979
|
|
|
|
13,323
|
|
|
|
10,793
|
|
The following shares were excluded from the dilutive
earnings per share computations because their inclusion would have been anti-dilutive:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
24
|
|
|
|
1,326
|
|
|
|
25
|
|
|
|
1,326
|
|
Non-vested restricted Class B common stock
|
|
|
-
|
|
|
|
120
|
|
|
|
-
|
|
|
|
120
|
|
Deferred stock units
|
|
|
-
|
|
|
|
69
|
|
|
|
-
|
|
|
|
69
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
24
|
|
|
|
1,515
|
|
|
|
25
|
|
|
|
1,515
|
|
For the nine months ended April 30, 2020, the
diluted earnings per share equals basic earnings per share because the Company incurred a net loss during that period and the impact of
the assumed exercise of stock options and vesting of restricted stock and DSUs would have been anti-dilutive.
Note 8—Contingencies
Legal Proceedings
In March 2014, Saregama India, Limited filed a
lawsuit against the Company before the Barasat District Court, seeking approximately $1.6 million as damages and an injunction for copyright
infringement. Saregama India alleged that the Company made available Saregama India’s sound recordings through the Company’s
platform with full knowledge that the sound recordings had been uploaded and were being communicated to the public without obtaining any
license from Saregama India. On August 20, 2019, the Court lifted the injunction and, subsequently, Saregama India executed a consent
pursuant to which the case against the Company was dismissed.
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 9—Revolving Credit Facility
As of September 27, 2016, the Company entered
into a loan and security agreement with Western Alliance Bank for a revolving credit facility of up to $2.5 million for an initial two-year
term which was extended twice for another two two-year term expiring September 26, 2022. At the Company’s request in September 2020,
advances under this facility have been reduced to the lesser of $2.0 million or 80% of the Company’s eligible accounts receivable,
subject to certain concentration limits. The revolving credit facility is secured by a lien on substantially all of the Company’s
assets. Effective with the September 2020 extension, the outstanding principal amount bears interest per annum at the greater of 3.5%
or the prime rate plus 1.25%. Previously the interest rate was capped at 5.0%. Interest is payable monthly and all outstanding principal
and any accrued and unpaid interest is due on the maturity date of September 26, 2022. The Company is required to pay an annual facility
fee of $10,000 to Western Alliance Bank. The Company is also required to comply with various affirmative and negative covenants and to
maintain certain financial ratios during the term of the revolving credit facility. The covenants include a prohibition on the Company
paying any dividend on its capital stock. The Company may terminate this agreement at any time without penalty or premium provided that
it pays down any outstanding principal, accrued interest and bank expenses. At April 30, 2021 and July 31, 2020, there were no amounts
outstanding under the revolving credit facility and the Company was in compliance with all of the covenants.
As of November 16, 2016, the Company entered into
a Foreign Exchange Agreement with Western Alliance Bank to allow the Company to enter into foreign exchange contracts not to exceed $5.0
million in the aggregate at any point in time under its revolving credit facility. This limit was raised to approximately $6.5 million
pursuant to the Loan and Security Modification Agreement dated May 30, 2018. The available borrowing under the revolving credit facility
is reduced by an applicable foreign exchange reserve percentage as determined by Western Alliance Bank, in its reasonable discretion from
time to time, which was initially set at 10% of the nominal amount of the foreign exchange contracts in effect at the relevant time. In
December 2016, the applicable foreign exchange reserve percentage was changed so that the reduction of available borrowing for major currency
forward contracts of less than six months tenor is set at 10% of the nominal amount of the foreign exchange contracts, and for contracts
over six months tenor, 12.5% of the nominal amount of the foreign exchange contracts. At April 30, 2021, there were $3.1 million of outstanding
foreign exchange contracts with the majority being less than six months tenor under the credit facility, which reduced the available borrowing
under the revolving credit facility by $321,250.
Note 10—Business Segment and Geographic Information
The Company is a leading app developer focusing
on mobile phone personalization and entertainment. “Zedge Wallpapers and Ringtones,” the Company’s flagship app, is
a hub for self-expression used by millions for mobile phone personalization, social content and fandom art. The app enables consumers
to showcase who they are, what they like, and amplify their persona. Zedge Premium, the Company’s in-app marketplace, enables content
creators, ranging the gamut from world class celebrities to emerging artists, to display their talent and sell their content to the Company’s
flagship app users. “Shortz – Chat Stories by Zedge” offers serialized, short-form fiction stories delivered as text-messaging
conversations and soon to be available as mini-podcasts. The Company conducts business as a single operating segment.
Net long-lived assets and total assets held outside
of the United States, which are located primarily in Norway, were as follows:
|
|
United
States
|
|
|
Foreign
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Long-lived assets, net:
|
|
|
|
|
|
|
|
|
|
April 30, 2021
|
|
$
|
2,082
|
|
|
$
|
594
|
|
|
$
|
2,676
|
|
July 31, 2020
|
|
$
|
2,513
|
|
|
$
|
542
|
|
|
$
|
3,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2021
|
|
$
|
27,534
|
|
|
$
|
6,052
|
|
|
$
|
33,586
|
|
July 31, 2020
|
|
$
|
7,730
|
|
|
$
|
4,275
|
|
|
$
|
12,005
|
|
Note 11— Operating Leases
The Company has operating
leases primarily for office space. Effective April 1, 2021, the Company moved its main office in Trondheim, Norway with 11,600 square
feet of office space to a 4,900 square feet facility. There were nine months left on the lease agreement for the old office space and
the Company recognized $14,000 gain as a result of the lease termination. As of March 31, 2021 the Company recorded $281,000 in the right-of-use
assets and the same amount for the lease liabilities for the new lease which has a three years term.
The following table presents
the lease-related assets and liabilities for the new lease recorded on the Consolidated Balance Sheet (in thousands) as of April 30, 2021:
Operating leases:
|
|
As of
April 30,
2021
|
|
Other assets
|
|
$
|
283
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
89
|
|
Other liabilities
|
|
|
179
|
|
Total operating lease liabilities
|
|
$
|
268
|
|
The following table summarizes
the weighted average remaining lease term and weighted average discount rate as of April 30, 2021:
|
|
As of
April 30,
2021
|
|
Weighted average remaining lease term:
|
|
|
|
Operating leases
|
|
|
2.92 years
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
1.00
|
%
|
Future minimum lease
payments under non-cancellable leases at April 30, 2021 are as follows (in thousands):
Years ending July 31,
|
|
Operating
Leases
|
|
Remainder of 2021
|
|
$
|
23
|
|
2022
|
|
|
94
|
|
2023
|
|
|
102
|
|
2024
|
|
|
53
|
|
Total future minimum lease payments
|
|
|
272
|
|
Less imputed interest
|
|
|
4
|
|
Total
|
|
$
|
268
|
|
There were no other material
changes in the Company’s operating and finance leases in the nine months ended April 30, 2021, as compared to the disclosure in the Company’s
Annual Report on Form 10-K for the fiscal year ended July 31, 2020.
Note 12—Provision for Income taxes
At July 31, 2020, the Company had available U.S.
federal and state net operating loss (“NOL”) carryforwards from domestic operations of approximately $5.6 million and $5.9
million, respectively, to offset future taxable income, the Company also had available NOL carryforwards of approximately $433,000 to
offset future foreign taxable income. The Company expects to utilize these NOL carryforwards to offset the taxable income for the nine
months ended April 30, 2021 and for the fiscal year ending July 31, 2021, and reduce its effective tax rate to 0.0% for those periods.
The current tax expense consists of federal and state taxes based on taxable income and allocated net worth and certain income taxes payable
in foreign jurisdictions where our subsidiaries reside.
In light of the Company’s generation of
three year cumulative positive income through April 30, 2021 as compared to the Company’s historical recurring losses from fiscal
2017 to fiscal 2020, the Company believes that it is more-likely-than-not that substantially all of the deferred tax assets except certain
state net operating losses and capital loss carryforward will be realized. Therefore, the Company has released the valuation allowance
on its deferred tax assets (other than as stated above) in the amount of $542,000 for the three and nine month periods ended April 30,
2021. As discussed in Note 1, provision for (benefit from) have been restated to ($473,000) and ($147,000) from $44,000 and $370,000 for
the three and nine month periods ended April 30, 2020, respectively.
On March 27, 2020, the CARES Act was signed into
law. The Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation
threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years),
and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. Most
of these provisions are either not applicable or have no material effect on the Company.
Note 13—Recently Issued Accounting Standards Not Yet Adopted
Recently Issued Accounting Standards Not Yet Adopted
In December 2019, the FASB issued Accounting Standard
Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies
the accounting for income taxes. This guidance will be effective for the Company in the first quarter of fiscal 2022 on a prospective
basis, and early adoption is permitted. The Company will adopt the new standard effective August 1, 2021 and does not expect the adoption
of this guidance to have a material impact on its consolidated financial statements.
With the exception of the accounting standards
discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the nine months
ended April 30, 2021 that are of significance or potential significance to the Company.
Note 14—Loans Payable
On August 1, 2020,
the Company obtained a loan of $181,000 to pay for certain insurance coverage, repayable in nine equal installments of $20,490 starting
from September 1, 2020 which represented a 3.89% annual percentage interest rate.
On July 16, 2019,
the Company obtained a loan of $140,000 to pay for certain insurance coverage, repayable in nine equal installments of $15,976 starting
from September 1, 2019 which represented a 4.79% annual percentage interest rate.
The Company
obtained a loan under the Paycheck Protection Program (PPP) of the CARES Act in the amount of $218,000 from Western Alliance Bank, a loan
servicer and the Company’s lender (see Note 9), on April 22, 2020. The Company used these proceeds in full for payroll purposes
for U.S. employees during the covered period provided under the PPP and therefore expects that all or most of this loan will be forgiven.
Any portion of the loan that is not forgiven will be due two years after inception of the loan. The loan has a 1% fixed interest rate
and does not require collateral or personal guarantees.
The Company submitted
the PPP Loan Forgiveness Application Form 3508EZ on November 25, 2020. On May 21, 2021, the Company was notified that such application
for the loan forgiveness has been approved and the loan, including accrued interest, has been deemed satisfied in full by the Small Business
Administration to Western Alliance Bank. The Company will record a gain of forgiveness of debt in the 4th quarter of fiscal
2021.
Note 15—Sales of Class B Common Stock
The Company filed with the SEC a Registration
Statement on Form S-3 (the “Form S-3”) on November 30, 2020 which became effective on December 4, 2020 to facilitate capital
raising. The Registration Statement registered the issuance and sale by the Company of Class B common stock or related securities for
gross proceeds to the Company of up to $20 million. On November 30, 2020, the Company engaged National Securities Corp. and H.C. Wainwright
& Co, LLC (the “Sales Agents”) to act as the Company’s exclusive co-Sales Agents in connection with the Company’s
“at-the-market” offering of shares of the Company’s Class B common stock up to $5 million. The Company filed a Prospectus
Supplement (supplementing the Prospectus included in the Form S-3) on December 9, 2020 and contemporaneously entered into an At The Market
Offering Agreement with the Sales Agents (the “ATM Sales Agreement”), pursuant to which the Company sold 761,906 shares at
an average price of $6.5625 per share for total proceeds of $5 million as of January 28, 2021. In connection with this offering, the Company
incurred a total issuance costs of $215,000. The Company intends to use the net proceeds from this offering for working capital and other
general corporate purposes.
On March 16, 2021, the Company filed a prospectus
supplement with the SEC which contemplates the sale, for a gross aggregate sale price of up to $10,000,000, of shares of the Company’s
Class B common stock, from time to time in “at the market offerings” pursuant to an At Market Issuance Sales Agreement with
National Securities Corporation and Maxim Group LLC (the “New Sales Agents”), dated as of March 16, 2021 (the “New ATM
Sales Agreement”), pursuant to which the Company sold 489,303 shares at an average price of $15.0334 per share for total proceeds
of $7.4 million as of April 30, 2021. In connection with this offering, the Company incurred a total issuance costs of $254,000. The Company
intends to use the net proceeds from this offering for working capital and other general corporate purposes.
On February
5, 2020, the Company closed on its registered direct offering of 1,734,459 shares of its Class B common stock for gross proceeds of $2.25
million. The Company sold 1,657,813 shares at a purchase price of $1.28 per share which represented a 20% discount from the 10 Day Volume
Weighted Average Price (VWAP) through January 31, 2020, and certain Company insiders purchased an additional 76,646 shares at a purchase
price of $1.67 per share, the closing price on February 3, 2020. In connection with this offering, the Company incurred a total issuance
costs of $141,000. The Company intends to use the net proceeds from this offering for working capital and other general corporate purposes.