Note 8—Equity Investments

On August 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10), that requires the Company to provide more information about recognition, measurement, presentation and disclosure of financial instruments. The ASU included, among other changes, the following: (1) equity investments (except those accounted for under the equity method or that result in consolidation) will be measured at fair value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period to identify impairment of equity investments without readily determinable fair values, (3) financial assets and financial liabilities will be presented separately by measurement category and form of financial asset on the balance sheet or the notes to the financial statements, and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Entities will no longer recognize unrealized holding gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability exception is available for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient (the “measurement alternative”). These investments may be measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will have to reassess at each reporting period whether an investment qualifies for this practicability exception. At August 1, 2018, the cumulative effect of adopting this ASU was a $1.2 million increase in “Equity investments”, a $33,000 decrease in “Accumulated other comprehensive loss” and a $1.1 million decrease in “Accumulated deficit”, primarily from the measurement at fair value of the Company’s shares of Visa Inc. Series C Convertible Participating Preferred Stock (“Visa Series C Preferred”) and the derecognition of unrealized holding losses on equity securities classified as available-for-sale.

At January 31, 2019 and July 31, 2018, the Company owned 42,282 shares of Zedge, Inc. Class B common stock that had a fair value of $0.1 million. In addition, at January 31, 2019 and July 31, 2018, the Company owned 26,587 and 25,803 shares, respectively, of Rafael Class B common stock that had a fair value of $0.4 million and $0.2 million, respectively. The aggregate fair value of these shares was included in “Other current assets” in the accompanying consolidated balance sheets.

The changes in the carrying value of the Company’s equity investments for which the Company elected the measurement alternative was as follows:

	Three Months Ended January 31, 2019			Six Months Ended January 31, 2019
	(in thousands)
Balance, beginning of period	$	3,118		$	1,883
Adoption of change in accounting for equity investments		—			1,213
Adjusted balance, beginning of period		3,118			3,096
Adjustment for observable transactions involving a similar investment from the same issuer		(71	)		(49	)
Redemptions		(2	)		(2	)
Impairments		—			—
Balance, end of period	$	3,045		$	3,045

In the three and six months ended January 31, 2019, the Company decreased the carrying value of its 1,830 shares of Visa Series C Preferred by $71,000 and $49,000, respectively, based on the fair value of Visa Class A common stock and a discount for lack of current convertibility. Each share of Visa Series C Preferred is convertible into 13.886 shares of Visa Class A common stock at Visa’s option starting in June 2020 and will be convertible at the holder’s option beginning in June 2028.

Unrealized gains and losses for all equity investments included the following:

	Three Months Ended January 31,				Six Months Ended January 31,
	2019		2018		2019		2018
	(in thousands)
Net gains recognized during the period on equity investments	$	128	$	3	$	81	$	23
Less: net gains and losses recognized during the period on equity investments redeemed during the period		—		—		—		—
Unrealized gains recognized during the period on equity investments still held at the reporting date	$	128	$	3	$	81	$	23