XML 31 R13.htm IDEA: XBRL DOCUMENT v3.23.3
Business Combination and Asset Acquisition
12 Months Ended
Jul. 31, 2023
Business Combination and Assets Acquisition [Abstract]  
Business Combination and Asset Acquisition

Note 6—Business Combination and Asset Acquisition

 

GuruShots Acquisition - On April 12, 2022, the Company consummated the acquisition of 100% of the outstanding equity securities of GuruShots, Ltd., an Israeli company that operates a platform used for its competitive photography game available across iOS, Android and the web. The acquisition was effected pursuant to a Share Purchase Agreement (the “SPA”) between the Company, GuruShots and the holders of the GuruShots equity interests. This acquisition was accounted for as a business combination under the acquisition method of accounting and the results of operations of GuruShots have been included in the Company’s results of operations as of the acquisition date.

 

The purchase price for the equity securities of GuruShots consists of approximately $18 million in cash paid at closing and contingent payments (the “Earnout”) of up to a maximum of $8.4 million due on each of the first and second anniversaries from the closing, payable either in cash or Class B common stock of the Company, or a combination thereof, at the Company’s discretion, and subject to GuruShots achieving specified financial targets set forth in the SPA. The fair value of the earnout amount at the acquisition date was estimated at $5.9 million based on a Monte Carlo simulation model in an option pricing framework, whereby a range of possible scenarios were simulated. This fair value was reduced from $5.9 million to $1.9 million as of July 31, 2022 and further reduced to $0 as of July 31, 2023. See Note 3, Fair Value Measurements.

 

Under the SPA, the Company agreed to make certain minimum investments in user acquisition for GuruShots during the period covered by the Earnout, subject to, among other conditions, the acquired users generating minimum levels of Return On Ad Spend (“ROAS”) as set forth in the SPA. The Company was prepared to make the minimum investment, however, GuruShots was unable to achieve those minimum ROAS target conditions. GuruShots’ financial performance during the period from the April 2022 acquisition through July 31, 2023, was materially impacted by a combination of industry specific, macroeconomic, and geopolitical challenges that contributed to negatively impacting ROAS. The conditions for payment of the Earnout for the first year following the acquisition were not met and no Earnout payment was made. One of the prior owners of GuruShots has objected to that determination. The Company has responded to the objection in great detail and believes the assertion to be without merit.

 

In addition to the cash payment at closing and the contingent Earnout, the Company has committed to a retention pool of $4 million in cash and 626,242 shares of the Company Class B common stock (the number of shares was determined based on a value of $4 million or $6.39 per share which was the volume weighted average closing prices of the Class B common stock on the NYSE American Exchange for the sixty trading days ended April 12, 2022) for GuruShots’ founders and employees that will be payable or vest, as applicable, over three years from April 1, 2022, based on the beneficiaries thereof remaining employed by the Company or a subsidiary. On April 17, 2023, 205,618 shares were vested with a fair value of $1.93 per share. On May 8, 2023, an aggregate of $1.3 million in retention bonuses was paid in cash.

 

The parties to the SPA made various representations, warranties and covenants subject to the qualifications and limitations agreed by the respective parties in the SPA. On September 26, 2023, the Company noticed a claim for indemnification regarding material inaccuracies in certain of those representations and warranties. The Company does not currently know how this matter will be resolved and cannot make any assertions as to any eventual outcome.

 

The cash purchase price and the earnout have been allocated to GuruShots’ tangible assets, identifiable intangible assets, and assumed liabilities based on their estimated fair values. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions are subject to change as the Company obtains additional information for those estimates during the measurement period. The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities was recorded as goodwill which was $8.9 million at closing.

 

The Company recorded a measurement period adjustment of $180,000 in the three month period ended July 31, 2022 which reduced the goodwill balance from $8.9 million to $8.7 million. The Company wrote off the remaining goodwill balance and recorded a loss on goodwill impairment of $8.7 million in the fiscal year ended July 31, 2023 as discussed below in Note 7, Intangible Assets, Net and Goodwill.

 

The allocation of the preliminary purchase price is as follows (in thousands):

 

(Dollar Amounts in Thousands)    
Purchase price consideration:    
Cash consideration paid at close  $15,242 
Cash contributed to escrow accounts at close   2,700 
Cash deducted from purchase price and contributed to GuruShots’ working capital   58 
Fair value of contingent consideration to be achieved at year 1   3,396 
Fair value of contingent consideration to be achieved at year 2   2,508 
Fair value of total consideration transferred   23,904 
Total purchase price, net of cash acquired  $23,384 
      
Fair value allocation of purchase price:     
Cash and cash equivalents  $520 
Trade accounts receivable   282 
Prepaid expenses   145 
Property and equipment, net   17 
Other assets (including ROU)   151 
Accounts payable and accrued expenses   (1,351)
Operating lease liabilities, current   (53)
Operating lease liabilities, noncurrent   (34)
Acquired intangible assets   15,320 
Goodwill   8,907 
Total purchase price  $23,904 

 

The cash consideration paid includes $2.7 million deposited with the escrow agent that is available to satisfy for post-closing indemnification claims made within 18 months of the acquisition date. There were no claims outstanding as of July 31, 2023.

 

The earnout amount to be paid (up to the maximum of $8.4 million in each of the two annual post-acquisition all earnout periods) is determined based upon the satisfaction of certain defined operational milestones and will be remeasured at fair value at each reporting period through earnings. The conditions were not satisfied for the first annual earnout period and no payment was made. As the fair value is based on unobservable inputs, the liabilities are included in Level 3 of the fair value measurement hierarchy. The unobservable inputs used in the determination of the fair value of the earnout which is assumed to be paid in cash include management’s reasonable assumptions about the likelihood of payment based on the satisfaction of certain defined operational milestones and discount rates based on cost of debt. Please see Note 3, Fair value measurement.

 

The Company has issued 575,099 (net of forfeiture of 51,143 shares for employees who left the Company) shares of the Company’s Class B common in respect of the retention pool to the GuruShots founders and employees, which are held by a trustee based in Israel. These shares will vest over three years from April 1, 2023 assuming that the recipients remain employed by the Company or a subsidiary through the vesting dates, 205,618 shares vested on April 1, 2023. The grant date fair value of these unvested restricted stock of $4 million is not included as purchase consideration above, as it has a post-combination service requirement and will be accounted for separately from the business combination as stock compensation expense. Additionally, the founders and employees are also entitled to receive an aggregate of up to $4 million retention cash bonus over three years subject to the same continued service requirement, which was not included in the purchase price above.

 

Identified intangible assets consist of trade names, technology and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC 805 and are outlined in the table below:

 

(Dollar Amounts in Thousands)  Asset Value   Useful Life
Identified intangible assets:       
Trade names  $3,570   12 years
Acquired developed technology   3,950   5 years
Customer relationships   7,800   10 years
Total identified intangible assets  $15,320    

 

The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the relief-from-royalty method and multi-period excess earnings. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for GuruShots over a multiyear period, as well as determine the weighted average cost of capital to be used as a discount rate.

 

The Company amortizes its intangible assets assuming no residual value over periods in which the economic benefit of these assets is consumed.

 

The Company recorded the excess of the purchase price over the identified tangible and intangible assets as goodwill. The Company believes that the investment value of the future enhancement of the Company’s products and offerings created as a result of this acquisition has principally contributed to a purchase price that resulted in the recognition of $8.9 million of goodwill, which was subsequent reduced by $180,000 as of July 31, 2022 and then to $0 as of July 31, 2023 as discussed below in Note 7, Intangible Assets, Net and Goodwill. Of the 8.7 million of goodwill impairment loss recorded in the third quarter of fiscal 2023, $2.8 million is deductible for tax purposes.

 

Acquisition-related transaction costs (e.g., legal, due diligence, valuation, and other professional fees) are not included as a component of consideration transferred but are required to be expensed as incurred. During fiscal 2022, we incurred approximately $860,000 of acquisition-related costs, which are included in Selling, General and Administrative expenses on the Company’s consolidated statements of (loss) income and comprehensive (loss) income.

 

Unaudited Pro Forma Consolidated Financial Information

 

The unaudited pro forma financial information for all periods presented below has been calculated after adjusting the results of a combined Zedge and GuruShots to reflect the business combination accounting effects resulting from this acquisition, including acquisition costs and the amortization expense from acquired intangible assets as though the acquisition occurred on August 1, 2020. The information below reflects adjustments to Zedge’s historical consolidated financial statements to give effect to pro forma events that are directly attributable to the business combination. The pro forma financial information is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on August 1, 2020.

 

    Year ended July 31,  
    2022     2021  
Revenue   $ 31,506     $ 28,154  
Net income   $ 7,111     $ 3,648  

 

The unaudited pro forma financial information includes the following adjustments, net of any tax impacts:

 

(i)incremental amortization expense recognized based on fair value of intangible assets recorded upon acquisition of GuruShots;

 

(ii)incremental compensation expense related to the vesting of retention awards to GuruShots employees consisting of restricted stock awards and cash payments; and

 

  (iii) the reversal of historical fair value adjustments and interest expense recorded on GuruShots’ convertible notes that were settled on the acquisition date.
     
  (iv) Income tax expense (benefit) was adjusted for the impact of the above adjustments for each period.

 

Emojipedia Acquisition

 

Pursuant to an Asset Purchase Agreement, on August 1, 2021 (“Closing”), the Company consummated the acquisition of substantially all of the assets of Emojipedia Pty Ltd, a proprietary company organized under the laws of Australia. The total purchase price of the assets was $6.7 million, of which $4.8 million was paid on August 2, 2021, $917,000 was paid on February 1, 2022, and the remaining $962,000 paid on August 1, 2022. The $4.8 million was funded into an escrow account and classified as other assets on our consolidated balance sheet as of July 31, 2021.

 

The assets purchased include emojipeida.org, a set of smaller websites, a bank of emoji related URLs related to the seller’s business, including World Emoji Day, the annual World Emoji Awards. The asset purchase does not qualify as a business combination under FASB ASC 805, Business Combinations, and has therefore been accounted for as an asset acquisition. The total purchase price for this acquisition was allocated to intangible assets are amortized on a straight-line basis over their estimated useful lives of fifteen years.