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Stock-Based Compensation

12 Months Ended

Jul. 31, 2017

Stock-Based Compensation [Abstract]

Stock-Based Compensation

Note 10—Stock-Based Compensation

2016 Stock Option and Incentive Plan

The Company adopted the Zedge, Inc. 2016 Stock Option and Incentive Plan (“2016 Incentive Plan”), which became effective upon the consummation of the Spin-Off. The 2016 Incentive Plan is intended to provide incentives to executive officers, employees, directors and consultants of the Company. Incentives available under the 2016 Incentive Plan include restricted stock, stock options and stock appreciation rights. The 2016 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors.

On January 18, 2017, the Company’s stockholders ratified an amendment to the 2016 Incentive Plan to increase the number of shares of the Company’s Class B common stock reserved for the grant of awards thereunder by 500,000 shares to an aggregate of 691,000 shares. At July 31, 2017, there were 487,000 shares of the Company’s Class B common stock available for awards under the 2016 Incentive Plan.

On October 18, 2017, the Company’s Board of Directors amended the 2016 Incentive Plan to increase the number of shares of the Company’s Class B common stock available for the grant of awards thereunder by an additional 350,000 shares. The amendment is subject to ratification by the Company’s stockholders.

In the years ended July 31, 2017 and 2016 there was no income tax benefit resulting from tax deductions in excess of the compensation cost recognized for the Company’s stock-based compensation.

Stock Options

The Company’s option awards generally have a maximum term of 10 years from grant date, are exercisable upon vesting unless otherwise designated for early exercise by the Board of Directors at the time of grant, and are pursuant to individual written agreements. Prior to the Spin-Off, historical grants generally vested ratably over a three to four-year period. Subsequent to the Spin-Off, grants generally vest over a three-year period. Certain option agreements provide for accelerated vesting of options upon the effective date of an initial public offering or a change in control of the Company.

In connection with the Spin-Off, in June 2016, the Compensation Committee of the Company’s Board of Directors approved an extension of the expiration dates of all outstanding stock options held by current employees and consultants of the Company that do not reside in the United States. The expiration date of the stock options was extended to May 31, 2026. This extension applied to options to purchase an aggregate of 0.9 million shares of the Company’s Class B common stock. In fiscal 2016, the Company recorded stock-based compensation expense of $123,000 for the modification of the options based on their estimated fair value on June 2, 2016.

In fiscal 2017, the Company received proceeds of $109,790 from the exercise, during that period, of stock options for which the Company issued 280,700 shares of its Class B common stock. In addition, in fiscal 2017, the Company received proceeds of $56,840 from the exercise, in fiscal 2016, of stock options which was recorded as a receivable as of July 31, 2016.

The fair value of stock options was estimated on the date of the grant using a Black-Scholes valuation model and the assumptions in the following table. Expected volatility is based on historical volatility of the Company’s Class B common stock and other factors. The Company uses historical data on exercise of stock options, post vesting forfeitures and other factors to estimate the expected term of the stock-based payments granted. The risk free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The Company used the following weighted average assumptions in its BSM pricing model:

Year ended July 31,		2017				2016
Expected term			6.1 years				6.0 years
Volatility			81	%			113	%
Risk free interest rate			1.7	%			1.3	%
Dividends			—				—
Grant date fair value		$	2.41			$	3.71

A summary of the Company’s stock option activity is as follows:

		Number of Options (in thousands)				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value (in thousands)
Outstanding at July 31, 2016			1,440			$	0.93
Granted			279				3.80
Exercised			(281	)			0.39
Cancelled / forfeited			—				—
Outstanding at July 31, 2017			1,438			$	1.59				8.22			$	1,212
Exercisable at July 31, 2017			1,149			$	1.03				6.37			$	1,212

The total intrinsic value of options exercised during the years ended July 31, 2017 and 2016 was $0.8 million and $0.1 million, respectively. At July 31, 2017, there was $590,000 of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 1.3 years.

Restricted Stock

As part of the Spin-Off, holders of IDT restricted Class B common stock and Deferred Stock Units (“DSUs”) received, in respect of those restricted shares and DSUs, one restricted share of the Company’s Class B common stock for every three restricted shares of IDT and one DSU of the Company for every three DSUs of IDT that they owned as of the record date for the Spin-Off (the same ratio as used for shares of our Class B common stock distributed by IDT in connection with the Spin-Off). As such, 111,842 shares of restricted stock and 7,767 DSUs were issued (adjusted for forfeitures) pursuant to the terms of the 2016 Incentive Plan. Such restricted shares of the Company’s Class B common stock are restricted under the same terms as the IDT restricted stock in respect of which they were issued. The restricted shares of the Company’s Class B common stock received in the Spin-Off are subject to forfeiture on the same terms, and their restrictions will lapse at the same time, as the corresponding IDT shares. The fair value of restricted shares of the Company’s Class B common stock is determined based on the closing price of the Company’s Class B common stock on the grant date. Share awards generally vest on a graded basis over three years of service.

In fiscal 2017, the Company granted 17,349 restricted shares of its Class B common stock, which vested immediately, to its non-employee Board of Directors at a grant date fair value of $3.13 per share. The shares were awarded pursuant to the non-employee Board of Director’s annual automatic grant. There were no other restricted share grants in the years ended July 31, 2017 and 2016. At July 31, 2017, there were 49,474 non-vested shares of restricted stock and 3,885 non-vested DSUs.