| 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. (“Zedge”) builds digital marketplaces and friendly competitive games around content that people use to express themselves.
Our leading products include Zedge Ringtones and Wallpapers, a freemium digital content marketplace offering mobile phone wallpapers,
video wallpapers, ringtones, and notification sounds which historically was branded as Zedge Premium, and GuruShots, a skill-based photo
challenge game. Our vision is to connect creators who enjoy friendly competitions with a community of prospective consumers in order
to drive commerce. The
Zedge Ringtones and Wallpapers app (which is named “Zedge Wallpapers” in the App Store), which we refer to as our “Zedge
App,” is a marketplace offering a wide array of mobile personalization content including wallpapers, video wallpapers, ringtones,
and notification sounds, and is available both in Google Play and the App Store. As of July 31, 2022, our Zedge App has been installed
nearly 569 million times since inception and, over the past two years, has had between 32.0 and 36.3 million monthly active users (“MAU”).
MAU is a key performance indicator that captures the number of unique users that used our Zedge App during the final 30 days of the relevant
period. Our platform allows creators to upload content to our marketplace and avail it to our users either for free or for a price, via
‘Zedge Premium.’ In turn, our users utilize the content to personalize their phones and express their individuality. In
April 2022, we acquired GuruShots Ltd (“GuruShots”) a recognized category leader focused on gamifying the photography vertical.
GuruShots offers a platform spanning iOS, Android, and the web that provides a fun, educational and structured way for amateur photographers
to compete in a wide variety of contests showcasing their photos while gaining recognition with votes, badges, and awards. We estimate
that the total addressable market of amateur photographers using their smartphones to take and publicly share artistic photos is 30-40
million people per month and that the market is still in its infancy. Every month, GuruShots stages more than 300 competitions that result
in players uploading in excess of 1 million photographs and casting close to 4.5+ billion “perceived votes,” which are calculated
by multiplying the number of votes that each player casts by a weighting factor based on various factors related to that user. To improve
engagement, GuruShots has adopted a set of retention dynamics focused on individual, team and community dynamics that create a sense
of belonging, inspiration, recognition, improvement, and competition. 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 2022 refers to the fiscal year ended July 31, 2022). 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. 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 consolidated financial statements
and accompanying notes. Actual results may differ from those estimates, such as useful lives of tangible and intangible assets, fair value of contingent consideration, and allowance
for credit losses. Revenue
Recognition The Company generates revenue from the following sources: (1) Advertising;
(2) Paid Subscriptions; (3) Zedge Premium and Others, and (4) following the GuruShots acquisition, from selling in game resources (“Resources”
or “Virtual Goods”) to enhance user’s in-game rate of progress and game experience. The substantial majority of the
Company’s revenue is generated from selling its advertising inventory (“Advertising Revenue”) to advertising networks,
advertising exchanges, and direct arrangements with advertisers. The Company’s monthly and yearly subscriptions allow users to prepay
a fixed fee to remove unsolicited advertisements from its Android Zedge App although the Company is working on adding additional capabilities
to subscriptions including offering subscriptions to iOS Zedge App users. In Zedge Premium, the Company receives 30% as a fee when users
purchase licensed content using Zedge Credits or unlock licensed content by watching a video or taking a survey on Zedge Premium. Sales
and other similar taxes are excluded from revenues. Advertising
Revenue
● Advertising
Networks. An advertising network is a third-party relationship where buyers of advertising
inventory go to purchase either specific targeted inventory or a large scale of inventory
at a set price. Advertising Networks serve as an indirect source of advertising fill to a
variety of branded ad campaigns and performance-based ad campaigns.
● Advertising
Exchanges. An advertising exchange is similar to an advertising network, except that the
exchange typically bids in real-time for inventory. Advertisers may utilize an exchange when
looking for scale or specific audiences, and accept that the price will vary based on when
and how much volume of inventory they wish to buy.
● Direct
Sales to Advertisers. In prior periods, the Company sold, and currently retain the ability
to sell, advertising directly to advertisers through contractual relationships. These relationships
historically offered higher than average pricing than realized from sales via advertising
networks or advertising exchanges. The Company had no direct sales of advertising during
fiscal 2022 and 2021 and have no current expectation that this will represent a material
portion of its sales in the near term. The Company recognizes advertising revenue as advertisements are delivered
to users through impressions or ad views (depending on the terms agreed upon with the advertiser). For in-app display ads, in-app offers,
engagement advertisements and other advertisements, the Company’s performance obligations are satisfied over the life of the relevant
contract (i.e., over time), with revenue being recognized as advertising units are delivered, which is Zedge’s performance obligation.
The advertiser may compensate the Company on a cost-per-impression, cost-per-click, cost-per-action basis. Paid
Subscription Revenue: Zedge
Premium Virtual
goods used for online game Players
can pay for their virtual item purchases through various widely accepted payment methods offered in the game. Payments from players for
virtual goods are required at the time of purchase, are non- cancellable and relate to non-cancellable contracts that specify GuruShots’
obligations and cannot be redeemed for cash nor exchanged for anything other than virtual goods within the GuruShots’ game. The
purchase price is a fixed amount which reflects the consideration that GuruShots expects to be entitled to receive in exchange for use
of virtual goods by its customers. The platform providers collect proceeds from the game players and remit the proceeds to GuruShots
after deducting their respective platform fees. Sales and other taxes collected from customers on behalf of governmental authorities
are accounted for on a net basis and are not included in revenues or operating expenses. GuruShots’ performance obligation is to display the virtual goods in game play based upon the nature of
the virtual item. GuruShots categorizes its virtual goods as consumable. GuruShots’
game sells only consumable virtual goods. Consumable virtual goods represent items that can be consumed by a specific player action and
do not provide the player any continuing benefit following consumption. GuruShots has determined through a review of game play behavior
that players generally do not purchase additional virtual goods until their existing virtual goods balances have been substantially consumed.
This review includes an analysis of game players’ historical play behavior, purchase behavior, and the amounts of virtual goods
outstanding. Revenue is recognized once the virtual goods are sold. GuruShots monitors its analysis of customer play behavior on a quarterly
basis. As
discussed above, GuruShots concluded that revenue related to the promise of enhancing users’ gaming experience through Resource purchases
should be recognized ratably over the period of benefit period (i.e. the period over which the enhanced gaming experience is provided).
However, for practical reasons, GuruShots does not defer the portion of revenue attributable to future uses of Resources as of any given
balance sheet date. This is due to the duration of the enhanced gaming experience that is provided being, in substantially all of the
cases, and applying the portfolio approach (as GuruShots reasonably expects that the effects on the financial statements of applying
ASC 606 guidance to the portfolio would not differ materially from applying ASC 606 guidance to the individual contracts), a very short
time frame ranging from a few hours to less than two weeks. Therefore, the result of recognizing the related revenues at the point in
time which user first consumes the respective resource would yield a result that is not substantially different then ratable recognition
over the period of benefit. Accordingly, revenue is recognized once the virtual goods are sold. Gross
Versus Net Revenue Recognition The Company reports revenue on a gross or net basis based on management’s
assessment of whether the Company acts as a principal or agent in the transaction. To the extent the Company acts as the principal, revenue
is reported on a gross basis. To the extent the Company acts as the agent, revenue is reported on a net basis. The determination of whether
the Company act as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service
prior to transfer to the customer. 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, the Company does not finalize the pricing, and the Company does not establish or maintain a direct relationship
with the advertiser. Certain advertising arrangements that are directly between the Company and advertisers are recognized on a gross
basis 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. GuruShots
is primarily responsible for providing the virtual goods, has control over the content and functionality of games and has the discretion
to establish the virtual goods’ prices. Therefore, GuruShots is the principal and, accordingly revenues are recorded on a gross
basis. Payment processing fees paid to platform providers are recorded within selling, general and administrative expenses. The
Company reports subscription revenue gross of the fee retained by Google Play, as the subscriber is the Company’s customer in the
contract and the Company controls the service prior to the transfer to the subscriber. With respect to Zedge Premium, Zedge, as provider of the platform, is effectively operating as a broker or intermediary
connecting online content providers with the end user. While the Company uses gross revenue ( net
of the 30% fee retained by Google Play or iTunes when a user purchases Zedge Credits Content
providers are paid their portion of revenue which is a 70% share of the gross revenue calculated. 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 fiscal year ended
July 31, 2022, two customers represented 28% and 15% of the Company’s revenue. In the fiscal year ended July 31, 2021, three customers
represented 30%, 22% and 12% of the Company’s revenue. At July 31, 2022, three customers represented 41%, 17% and 16% of the Company’s
accounts receivable balance and at July 31, 2021, two customers represented 37% and 28% 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, data analytic tools and marketing automation services. Such costs are charged to expense as incurred. Property and Equipment, net Property and equipment is recorded at cost less
accumulated depreciation and amortization, 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—5 years. Other is comprised of furniture and fixtures,
office equipment, video conference equipment, computer hardware and computer software. Normal repairs and maintenance are expensed as
incurred. Replacement property and equipment is capitalized and the property and equipment accounts are relieved of the items being replaced
or disposed of if no longer of value. The related cost and accumulated depreciation of the disposed assets are eliminated and any gain
or loss on disposition is included in the results of operations in the year of disposal. Capitalized
Software and Technology Development Costs The
Company accounts for capitalized software and technology development costs in accordance with Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Codification (“ASC”) 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, after completion of each
specific project, generally three years. All ordinary maintenance costs are expensed as incurred. Business
Combinations The
Company accounts for business combinations using the acquisition method of accounting. The Company allocates the purchase price of the
acquisition to the tangible and intangible assets acquired and liabilities assumed and contingent considerations based on their estimated
fair values at the acquisition dates. The excess of the purchase price over those fair values is recorded as goodwill. During the measurement
period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities
assumed with a corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of
assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements
of income and comprehensive income. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. Intangible
Assets-Net The Company tests the recoverability of its intangible assets (see Note 7) 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. Intangible
assets are carried at cost, less accumulated amortization, unless a determination has been made that their value has been
impaired. Intangible assets are amortized on a straight-line basis over their estimated useful lives of between five to fifteen years.
The Company reviews identifiable amortizable intangible assets to be held and used for impairment whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of
identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment
loss is based on the excess of the carrying value of the asset over its fair value. There were no impairment charges recorded in the
fiscal years ended July 31, 2022 and 2021 presented in the accompanying consolidated financial statements. 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 exceeded its carrying value in Step 1 of the Company’s annual impairment tests as of May 1st
for the fiscal years ended July 31, 2022 and 2021. The Company concluded that no goodwill impairment existed in the fiscal years ended
July 31, 2022 and 2021. The Company uses the market approach for its Step 1 analysis. Investments
From
time to time, when opportunities present themselves, the Company considers strategic investments in privately-held companies. The Company’s
investment at July 31, 2021, is a simple agreement for future equity (SAFE) in which the Company receives the right to receive equity
at some later date. Investments in SAFE’s are carried at cost due to insufficient observable market inputs to determine fair value.
The Company adjusts the carrying value of its investments 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 investments, realized and
unrealized, are recognized in interest and other income, net in the consolidated statements of income and comprehensive income. The
Company periodically evaluates the carrying value of the investments, when events and circumstances indicate that the carrying amount
of the investment may not be recovered. The Company estimates the fair value of the investment to assess whether impairment losses shall
be recorded using Level 3 inputs. This investment includes the Company’s holding that is 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 company, the amount of cash that the privately-held company has on-hand, the ability
to obtain additional financing and overall market conditions in which the private company operates 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.
There were no cash equivalents as of July 31, 2022 and 2021. 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 consolidated 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 consolidated 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 consolidated 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 included in the provision for (benefit
from) income taxes line item in the accompanying consolidated statements of income and comprehensive income. Contingencies The
Company accrues for loss contingencies when both (a) information available prior to issuance of the consolidated financial statements
indicates that it is probable that a liability had been incurred at the date of the consolidated 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 (“EPS”) 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. As
disclosed in Note 9, the rights of holders of Class A common stock and Class B common stock are identical except for certain voting and
conversion rights and restrictions on transferability. As such, the Company is not required to break out EPS by class. 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:
Fiscal Year Ended
July 31,
2022 2021
(in thousands)
Basic weighted-average number of shares 14,177 13,156
Effect of dilutive securities:
Stock options 570 784
Non-vested restricted Class B common stock 97 66
Deferred stock units 18 32
Diluted weighted-average number of shares 14,862 14,038 The
following shares were excluded from the diluted earnings per share computation because their inclusion would have been anti-dilutive:
Fiscal Year Ended
July 31,
2022 2021
(in thousands)
Stock options 75 31
Deferred stock units 234 -
Shares excluded from the calculation of diluted earnings per share 309 31 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 or the graded vesting method
if awards with market or performance conditions include graded vesting features or if an award includes both a service condition and
a market or performance condition. Stock-based compensation is included in selling, general and administrative expense in the consolidated
statements of income and comprehensive income. 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. The Company’s
financial liabilities (which include contingent considerations as discussed in Note 3 – Fair Value Measurements 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 (“USD”)– NOK and EUR exchange rates. The
Company’s risk management policy allows for the use of derivative financial instruments to prudently manage foreign currency exchange
rate exposure. Foreign currency derivative activities are subject to the management, direction and control of the executive management.
Foreign exchange forward contracts are recognized on the consolidated balance sheets at their fair value in “Prepaid expenses”
or “Accrued expenses and other current liabilities”, and changes in fair value are recognized in “Net loss resulting
from foreign exchange transactions” in the consolidated statements of income and comprehensive income. 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 USD for GuruShots, NOK for Zedge Europe AS and EUR for Zedge Lithuania UAB which is a wholly-owned subsidiary
of Zedge Europe AS, 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 consolidated financial
statement date, and translates accounts from the consolidated statements of income and comprehensive income 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 consolidated statements of income and comprehensive income. Allowance
for Credit Losses The
allowance for credit losses 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. Bad debts
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 income (loss) are comprised principally of foreign
currency translation adjustments. Operating
and Finance Leases The
Company has operating leases primarily for office space. The determination of whether an arrangement is a lease or contains a lease is
made at inception by evaluating whether the arrangement conveys the right to use (“ROU”) an identified asset and whether
the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating leases
are included in other assets, accrued expenses and other current liabilities, and other liabilities, on the Company’s consolidated
balance sheets. The Company does not have any finance leases. Leases
with a term greater than one year are recognized on the consolidated balance sheets in the line items cited above. The Compan |
