EX-99.1 11 f1012gposam2ex99i_zedgeinc.htm DEFINITIVE INFORMATION STATEMENT OF IDT CORPORATION, DATED JUNE 1, 2016
Exhibit 99.1

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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SCHEDULE 14C INFORMATION

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Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934

Check the appropriate box:

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Preliminary Information Statement

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Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))

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Definitive Information Statement

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Definitive Additional Materials

ZEDGE, INC.

(Name of Registrant as Specified In Charter)

Payment of Filing Fee (Check the appropriate box):

x

 

No fee required.

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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:

 

 

 

 

 

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Fee paid previously with preliminary materials.

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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 14th 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.

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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.

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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.

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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

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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

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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.

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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.

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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.

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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

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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

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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.

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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,

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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.

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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

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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.

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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

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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.

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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.

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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.

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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.

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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)

 

 

Historical

 

Pro Forma Adjustments

 

Pro Forma

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)

 

 

Historical

 

Pro Forma Adjustments

 

Pro Forma

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)

 

 

Historical

 

Pro Forma Adjustments

 

Pro Forma

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)

 

 

 

 

 

Change

Six months ended January 31,

 

2016

 

2015

 

$

 

%

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)

 

 

 

 

 

Change

Year ended July 31,

 

2015

 

2014

 

$

 

%

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