| Description of Business and Summary of Significant Accounting Policies | Note 1—Description of Business and Summary of Significant
Accounting Policies Description of Business Zedge, Inc. (the “Company”) offers a state-of-the-art
digital publishing platform. The Company use this platform to power its consumer-facing mobile personalization app, called Zedge,
available in the Google Play store and iTunes, which offers an easy, entertaining and immersive way for end-users to engage with
its rich and diverse catalogue of wallpapers, stickers, ringtones, notification sounds and video wallpapers. The Company is evolving
by developing new, entertainment-focused apps, that will run on its publishing platform. The Company secures its content from artists,
both amateurs and professionals as well as emerging and major brands. Artists have the ability to easily launch a virtual storefront
in the Zedge app where they can market and sell their content to the Company’s user base. Zedge app has been installed more
than 396 million times, boasts more than 33 million monthly active users, or MAU, and has consistently averaged in the ‘Top
60’ most popular free apps in the Google Play store in the United States. The Company conducts business as a single operating
segment. The Company’s fiscal year ends on July 31 of each
calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal
2019 refers to the fiscal year ended July 31, 2019). The Spin-Off The Company was formerly a majority-owned subsidiary of IDT
Corporation (“IDT”). On June 1, 2016, IDT’s interest in the Company was spun-off by IDT to IDT’s stockholders
and the Company became an independent public company through a pro rata distribution of the Company’s common stock held by
IDT to IDT’s stockholders (the “Spin-Off”). Principles of Consolidation The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain items in the prior years’ Consolidated Financial
Statements have been reclassified to conform to the current year presentation reflected in the Consolidated Financial Statements. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from
those estimates. Revenue Recognition The following accounting policy relates to revenue transactions
for fiscal 2018, which were accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 605, “Revenue Recognition.” See Note 2 for a description of the policy for
fiscal 2019. The Company generates approximately 90% of its revenues from
selling its advertising inventory to advertising networks, advertising exchanges, and direct arrangements with advertisers. Advertising
networks and advertising exchanges are third party technology platforms that facilitate the buying and selling of media advertising
inventory from multiple ad networks. The price of advertising inventory is fixed on an advertising network whereas the price for
inventory is determined through bidding on an advertising exchange. The Company recognizes advertising revenue as advertisements
are delivered to users through impressions, ad views or app installs (depending on the terms agreed upon with the advertiser),
as long as evidence of the arrangement with the payer exists (generally through an executed contract), the price is fixed and determinable,
and the Company has assessed collectability as reasonably assured. The advertiser may compensate the Company on a cost-per-impression,
cost-per-click, cost-per-action or cost-per-install basis. The Company also generated revenue from managing and optimizing
the advertising inventory of a third-party mobile application publisher, as well as overseeing the billing, collections and reporting
related to advertising for this publisher. The agreement with the publisher was terminated effective May 31, 2019. In March 2018,
the Company launched Zedge Premium, a marketplace where professional creators and brands can market, distribute and sell their
digital content to our consumers. In January 2019, we started offering a subscription model by which users can remove unsolicited
advertisements from our Zedge app by paying a fee on a monthly or yearly basis. We recognize subscription revenue on a daily ratable
basis over the subscription period. The Company generally reports its advertising revenue net of
amounts due to agencies and brokers because the Company is not the primary obligor in the relevant arrangements, it does not finalize
the pricing, and it does not establish or maintain a direct relationship with the advertiser. Certain advertising arrangements
that are directly between the Company and advertisers are recognized gross equal to the price paid to the Company by the customer
since the Company is the primary obligor and the Company determines the price. Any third-party costs related to such direct relationships
are recognized as direct cost of revenues. In Zedge Premium, the Company generally report revenue net of the 70% share that is
paid to the artists who own the licensed content. The Company reports subscription revenue gross of the fee retained by Google
Play, as the subscriber is Zedge’s customer in the contract and Zedge controls the service prior to the transfer to the subscriber. The Company recognizes revenue based on reports that it receives
from the ad networks and ad exchanges who respectively track and report the installs and impressions and pay the Company based
on these reports. Independently the Company compares and reconciles these reports with data from each of the client sites and dispute
any differences. Depending on the nature of the advertising agreement the Company
records revenue either when it serves an end-user with a paid advertising impression or when a user installs an app from an advertiser
who pays for the install. Being that the advertiser simultaneously receives and consumes the benefits provided by Zedge’s
performance it views this as its output measure. Payment from the Company’s customers are typically received anywhere between
30-60 days from the end-of-month billing cycle, and any revenue adjustments are already factored into the payment. Concentration of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash, cash equivalents and trade accounts receivable. The Company holds cash
and cash equivalents at several major financial institutions, which may exceed FDIC insured limits. Historically, the Company has
not experienced any losses due to such concentration of credit risk. The Company’s temporary cash investments policy is to
limit the dollar amount of investments with any one financial institution and monitor the credit ratings of those institutions.
While the Company may be exposed to credit losses due to the nonperformance of the holders of its deposits, the Company does not
expect the settlement of these transactions to have a material effect on its results of operations, cash flows or financial condition. The Company routinely assesses the financial strength of its
customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited and has not experienced
significant write-downs in its accounts receivable balances. In the year ended July 31, 2019, three customers represented 28%,
28% and 10% of the Company’s revenue, and in the year ended July 31,2018, three customers represented 35%, 22% and 14% of
the Company’s revenue. At July 31, 2019, three customers represented 32%, 17% and 17% of the Company’s accounts receivable
balance and at July 31, 2018, three customers represented 46%, 28% and 14% of the Company’s accounts receivable balance.
All of these significant customers are advertising exchanges operated by leading companies, and the receivables represent many
smaller amounts due from advertisers. Direct Cost of Revenues Direct cost of revenues for the Company consists of fees paid
to third parties that provide the Company with internet hosting, content serving and filtering, and marketing automation services.
Such costs are charged to expense as incurred. Long-Lived Assets Property and equipment is recorded at cost and depreciated on
a straight-line basis over its estimated useful lives, which range as follows: capitalized software and technology development
costs—3 years; and other—3, 5, 7, 10 or 20 years. Other is comprised of furniture and fixtures, office equipment, video
conference equipment, computer hardware and computer software. The Company tests the recoverability of its long-lived assets
with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such asset. If the projected
undiscounted future cash flows are less than the carrying value of the asset, the Company will record an impairment loss, if any,
based on the difference between the estimated fair value and the carrying value of the asset. The Company generally measures fair
value by considering sale prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate
discount rate. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should
the estimates and assumptions prove to be incorrect, the Company may be required to record impairments in future periods and such
impairments could be material. Capitalized Software and Technology Development Costs The Company accounts for capitalized software and technology
development costs in accordance with FASB ASC 350-40. These costs consist of internal development costs on various projects that
the Company invested in specific to the various platforms on which the Company operates its service that are capitalized during
the application development stage. Capitalized software and technology development costs are included in property and equipment,
net and are amortized over the estimated useful life of the software, generally three years. All ordinary maintenance costs are
expensed as incurred. Goodwill Goodwill represents the excess of purchase price and related
costs over the value assigned to the net tangible and identifiable intangible assets of the business acquired. Under ASC 350, Intangibles-Goodwill
and Other The Company performs its annual, or interim, goodwill impairment
test by comparing the fair value of its reporting unit with its carrying amount. The Company would recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not
exceed the total amount of goodwill allocated to that reporting unit. Additionally, the Company considers income tax effects from
any tax-deductible goodwill on the carrying amount of its reporting unit when measuring the goodwill impairment loss, if applicable. The Company’s estimated fair value substantially exceeded
its carrying value in Step 1 of the Company’s annual impairment tests as of May 1st for the years ended July 31, 2019 and
2018. The Company concluded that no goodwill impairment existed in the years ended July 31, 2019 and 2018. The Company uses the
market approach (guideline company method) for its Step 1 analysis. Investment in Privately Held Company The Company’s investments in privately held company is
a non-marketable equity security without readily determinable fair value. On August 1, 2018, the Company adopted a new accounting
standard (see Recently Adopted Accounting Standards below) and adjusts the carrying value of its non-marketable equity securities
to fair value upon observable transactions for identical or similar investments of the same issuer or upon impairment (referred
to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized
in interest and other income (expense), net in the consolidated statements of comprehensive loss. The Company periodically evaluates the carrying value of the
investment in a privately held company, when events and circumstances indicate that the carrying amount of the investment may not
be recovered. The Company estimates the fair value of the investments to assess whether impairment losses shall be recorded using
Level 3 inputs. These investments include the Company’s holdings in privately held company that are not exchange traded and
therefore not supported with observable market prices; hence, the Company may determine the fair value by reviewing equity valuation
reports, current financial results, long-term plans of the private companies, the amount of cash that the privately held company
have on-hand, the ability to obtain additional financing and overall market conditions in which the private companies operate or
based on the price observed from the most recent completed financing. Cash and Cash Equivalents The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents. Income Taxes The accompanying financial statements include provisions for
federal, state and foreign income taxes. The Company recognizes deferred tax assets and liabilities for the future tax consequences
attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and
their respective tax bases. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred
tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income
during the period in which related temporary differences become deductible. The Company considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in its assessment of a valuation allowance. Deferred
tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date of such change. The Company uses a two-step approach for recognizing and measuring
tax benefits taken or expected to be taken in a tax return. The Company determines whether it is more-likely-than-not that a tax
position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold,
the Company presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant
information. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax
benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and
amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability
for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in
a deferred tax liability. The Company classifies interest and penalties on income taxes
as a component of income tax expense. Contingencies The Company accrues for loss contingencies when both (a) information
available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred at the
date of the financial statements and (b) the amount of loss can reasonably be estimated. When the Company accrues for loss
contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate within the range.
When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range.
The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have
been incurred. Earnings Per Share Basic earnings per share is computed by dividing net income
attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common
stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per
share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume
exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive. The weighted-average number of shares used in the calculation
of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:
Year ended July 31, 2019 2018
Basic weighted-average number of shares 10,083 9,803
Effect of dilutive securities:
Stock options — —
Non-vested restricted Class B common stock — —
Diluted weighted-average number of shares 10,083 9,803 The following shares were excluded from the diluted earnings
per share computation because their inclusion would have been anti-dilutive:
Year ended July 31, 2019 2018
Stock options 1,231 1,314
Non-vested restricted Class B common stock 195 302
Shares excluded from the calculation of diluted earnings per share 1,426 1,616 For both fiscal 2019 and fiscal 2018, the diluted earnings per
share equals basic earnings per share because the Company had a net loss and the impact of the assumed exercise of stock options
and vesting of restricted stock would have been anti-dilutive. Stock-Based Compensation The Company recognizes compensation expense for all of
its grants of stock-based awards based on the estimated fair value on the grant date. Compensation cost for awards is recognized
using the straight-line method over the vesting period. Stock-based compensation is included in selling, general and administrative
expense. Fair Value Measurements Fair value of financial and non-financial assets and liabilities
is defined as an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The three-tier hierarchy for inputs used to measure fair value,
which prioritizes the inputs to valuation techniques used to measure fair value, is as follows:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3 – unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within
the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of
the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the assets
and liabilities being measured and their placement within the fair value hierarchy. Derivative Instruments – Foreign Exchange Forward
Contracts The Company’s earnings and cash flows are subject to fluctuations
due to changes in foreign currency exchange rates, primarily the U.S. Dollar Functional Currency The U.S. Dollar is the
Company’s functional currency. The functional currencies for the Company’s subsidiaries that operate outside of the
United States are NOK for Zedge Europe AS, EURO for Zedge Lithuania UAB which is a wholly-owned subsidiary of Zedge Europe AS,
and the Canadian Dollar for Zedge Canada, Inc., which are the currencies of the primary economic environments in which they primarily
expend cash. The Company translates assets and liabilities denominated in foreign currencies to U.S. Dollars at the exchange rate
in effect as of the financial statement date, and translates accounts from the statements of comprehensive using
the weighted average exchange rate for the period. Gains or losses resulting from foreign currency translations are recorded in
“Accumulated other comprehensive loss” in the accompanying consolidated balance sheets. Foreign currency transaction
gains and losses including gains and losses from currency exchange rate changes related to intercompany receivables and payables
are reported in “Net loss resulting from foreign exchange transactions” in the accompanying Allowance for Doubtful Accounts The allowance for doubtful accounts reflects the Company’s
best estimate of probable losses inherent in the accounts receivable balance. The allowance is determined based on known troubled
accounts, historical experience and other currently available evidence. Doubtful accounts are written-off upon final determination
that the trade accounts will not be collected. Comprehensive Income (Loss) Comprehensive income (loss) consists of two components, net
income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that are recorded
as an element of stockholders’ equity and are excluded from net income (loss). The Company’s other comprehensive income
(loss) and accumulated other comprehensive loss are comprised principally of foreign currency translation adjustments. Leases The Company leases office spaces and equipment in multiple locations
under non-cancelable lease agreements. The leases are reviewed for classification as operating and capital leases. For operating
leases, rent is recognized on a straight-line basis over the lease period. For capital leases, the Company records the leased asset
with a corresponding liability. Payments are recorded as reductions to the liability with an appropriate interest charge recorded
based on the then-outstanding remaining liability. Upon adoption of ASU 2016-02 —Leases, the Company will recognize additional
operating liabilities and corresponding right-of-use assets of the same amount based on the present value of the remaining minimum
rental payments under current leasing standards for existing operating leases. See “Recently Issued Accounting Standard Not
Yet Adopted” below for additional information on the impact of ASU 2016-02 —Leases. Recently Adopted Accounting Standards In May 2014, the FASB issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606) In January 2016, the FASB issued ASU 2016-01, Recognition
and Measurement of Financial Assets and Financial Liabilities Recently Issued Accounting Standards Not Yet Adopted In August 2018, the FASB issued a new ASU which aligns the requirements
for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for annual and interim
periods beginning after December 15, 2019, and early adoption is permitted. The Company does not expect that the new standard will
have a significant impact on its consolidated financial statements. In August 2018, the FASB issued an ASU which eliminates, adds
and modifies certain disclosure requirements for fair value measurements. The update eliminates the requirement to disclose the
amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and introduces a requirement to disclose
the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. This guidance
will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and early
adoption is permitted. The Company does not expect that the new standard will have a significant impact on its consolidated financial
statements. In August 2017, the FASB issued an ASU intended to improve the
financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities
in its financial statements. In addition, the ASU includes certain targeted improvements to simplify the application of hedge accounting
guidance in U.S. GAAP. The amendments in this ASU are effective for the Company on August 1, 2019. Early application is permitted.
Entities will apply the amendments to cash flow and net investment hedge relationships that exist on the date of adoption using
a modified retrospective approach. The presentation and disclosure requirements will be applied prospectively. The Company does
not expect that the new standard will have a significant impact on its consolidated financial statements. In June 2016, the FASB issued an ASU that changes the impairment
model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required
to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance
for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar
to current practice, except the losses will be recognized as allowances instead of reductions in the amortized cost of the securities.
In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past
due securities. The new provisions will be applied as a cumulative-effect adjustment to retained earnings. The Company will adopt
the new standard on August 1, 2020. The Company is evaluating the impact that the new standard will have on its consolidated financial
statements. In February 2016, the FASB issued an ASU related to the accounting
for leases. The new standard establishes a right-of-use (“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. In July 2018, the
FASB issued updated guidance which allows an additional transition method to adopt the new lease standard at the adoption date,
as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance
of retained earnings in the period of adoption. The Company will adopt the new standard on August 1, 2019 using a modified retrospective
transition method effective from the adoption date rather than the beginning of the earliest comparative period presented in the
financial statements. The Company will elect the short-term lease recognition exemption for all leases that qualify. Accordingly,
the Company will not recognize right-of-use assets or lease liabilities for leases that qualify, including leases for existing
short-term leases in effect at transition and will recognize those payments on the consolidated statements of comprehensive loss
on a straight-line basis over the lease term. The Company will elect the practical expedient to not separate lease and non-lease
components for all its leases. The standard will have a material impact on the Company’s consolidated balance sheets, but
it will not have a material impact on its consolidated statements of comprehensive loss, its consolidated statements of stockholders’
equity, or its consolidated statements of cash flows. The most significant impact will be the recognition of ROU assets and lease
liabilities for operating leases. The accounting for capital leases remains substantially unchanged. The adoption of the new lease
standard on August 1, 2019 is anticipated to result in the recognition of ROU assets and lease liabilities of approximately $522,000. |
