| 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 as well as pAInt, a generative AI wallpaper maker, GuruShots, a skill-based photo challenge game, and Emojipedia, the #1 trusted
source for ‘all things emoji’. Our vision is to enable and connect creators who enjoy friendly competitions with a community
of prospective consumers in order to drive commerce. Except where the context clearly indicates otherwise, the terms the “Company,”
“Zedge” “we,” “us” or “our” refer to Zedge, Inc. and its consolidated subsidiaries. The Company is headquartered in New York, New
York, and has international office locations in Norway, Lithuania and Israel. Our 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 2024 refers
to the fiscal year ended July 31, 2024). The Spin-Off The Company was formerly a majority-owned subsidiary
of IDT Corporation (“IDT”). On June 1, 2016, IDT spun off its interest in the Company 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. Reportable Segments Effective Q1 of our fiscal 2023, we revised the
presentation of segment information to reflect our acquisition of GuruShots (see Note 6, Business Combination and Asset Acquisition,
Segment and Geographic Information Use of Estimates The preparation of our consolidated financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. Actual results could differ materially
from our estimates due to risks and uncertainties, including uncertainty in the economic environment due to various global events. To
the extent that there are material differences between these estimates and actual results, our financial condition or operating results
will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances,
and we evaluate these estimates on an ongoing basis. Revenue Recognition We generate revenue from the following sources:
(1) Advertising; (2) Paid Subscription; (3) Other revenues including primarily Zedge Premium, the section of our marketplace where we
offer premium content (i.e., for purchase), and (4) Digital Goods and Services (from the GuruShots acquisition). The substantial majority
of our revenue is generated from selling our advertising inventory (“Advertising Revenue”) to advertising networks and advertising
exchanges. Our weekly. monthly, yearly and life-time subscriptions allow users to prepay a fixed fee to remove unsolicited advertisements
from our Zedge App. In Zedge Premium, we receive 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. We recognize 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, our 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 us on a cost-per-impression, cost-per-click, cost-per-action basis. Paid Subscription Revenue: Zedge Premium Zedge Premium is our
marketplace where artists and brands can market, distribute and sell their digital content to Zedge’s users. The content owner sets
the price and the end user can purchase the content by paying for it with Zedge Credits, our closed virtual currency. Alternatively, the
content owner may opt to place some items behind video ad gates, in which case the end user can acquire the content by watching a brief
video ad. A user can earn Zedge Credits when taking specific actions such as watching rewarded videos or completing electronic surveys.
Alternatively, users can buy Zedge Credits with an in-app purchase. If a user purchases Zedge Credits, Google Play or App Store retains
a fee of 30% of the purchase price. When a user purchases Zedge Premium content using Zedge credits or watching a rewarded video, the
artist or brand receives 70% of the actual revenue after the Google Play or iTunes fee (“Royalty Payment”) and we receive
the remaining 30%, which is recognized as revenue. Digital Goods and
Services 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 in-game 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 We report revenue on a gross or net basis based
on management’s assessment of whether we act as a principal or agent in the transaction. To the extent we act as the principal,
revenue is reported on a gross basis. To the extent we act as the agent, revenue is reported on a net basis. The determination of whether
we act as a principal or an agent in a transaction is based on an evaluation of whether we control the good or service prior to transfer
to the customer. We generally report our advertising revenue net
of amounts due to agencies and brokers because we are not the primary obligor in the relevant arrangements, we do not finalize the pricing,
and we do not establish or maintain a direct relationship with the advertiser. Certain advertising arrangements that are directly between
us and advertisers are recognized on a gross basis equal to the price paid to us by the customer since we are the primary obligor and
we determine 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. We report subscription revenue gross of the fee
retained by Google Play and App Store, as the subscriber is our customer in the contract and we control 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 we
use gross revenue ( net of the 30% fee retained by Google Play or App Store 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. We hold 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 we may be
exposed to credit losses due to the nonperformance of the holders of its deposits, we do not expect the settlement of these transactions
to have a material effect on its results of operations, cash flows or financial condition. We routinely assess the financial strength of
our customers. As a result, we believe that our accounts receivable credit risk exposure is limited and have not experienced significant
write-downs in our accounts receivable balances. In the fiscal year ended July 31, 2024, two customers represented 31% and 9% of our revenue.
In the fiscal year ended July 31, 2023, two customers represented 26% and 16% of our revenue. At July 31, 2024, three customers represented
37%, 15% and 10% of our accounts receivable balance and at July 31, 2023, two customers represented 36% and 18% of our 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 or amortized 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-Internal-Use
Software related to Zedge Marketplace Software and technology development activities
generally fall into three stages:
1 Planning Stage activities
2 Application and Infrastructure Development Stage activities
3 Post-Implementation/Operating Stage activities During the Planning Stage, we charge all costs to expense as incurred. During the Application and Infrastructure Development
Stage, we begin to capitalize costs when the project has been properly authorized and we determine that completion is probable. If a project
is subsequently cancelled prior to placement in service, costs that have been capitalized to date will be reviewed for potential impairment.
Capitalization ceases no later than the point at which a computer software project is substantially complete and ready for its intended
use. Amortization, which is generally over three years, begins for each project when the code is ready for use, whether or not it is actually
placed in service at that time (an exception being if the project’s functionality completely depends on the completion of another
project, in which case, amortization begins when that other project is ready for use). During the Post-Implementation/Operating Stage,
we expense training costs and maintenance costs as incurred. However, upgrades and enhancements, defined as modifications to existing
internal-use software that result in additional functionality (modifications to enable the software to perform tasks that it was previously
incapable of performing, normally requiring new software specifications and perhaps a change to all or part of the existing software specifications)
are treated as though they were new projects, and are assessed utilizing the same stages and criteria on a project-by-project basis. As
such, internal costs incurred for upgrades and enhancements are expensed or capitalized based on the requirements noted above, while costs
incurred for maintenance are expensed as incurred. These projects are tracked individually, such that the beginning and ending of the
capitalization can be appropriately established, as well as the amounts capitalized therein. Amortization of these costs is included in depreciation
and amortization in the consolidated statements of operations and comprehensive loss. Capitalized Software and Technology Development Costs-Software to
Be Sold, Leased, or Marketed related to GuruShots We expense research and development costs incurred
in the process of software development until technological feasibility has been established for the product. Once technological feasibility
has been established, software costs are capitalized until the product is available for general release to customers. Costs incurred from
the time that the product is available for general release to customers are expensed as incurred. Costs related to upgrades and enhancements
are capitalized only if they result in added functionality or marketability of the original product. The amortization of these capitalized costs begins
when a product is available for general release to customers and is computed on a product-by-product basis at a rate not less than straight-line
basis over the product’s estimated economic life. At each balance sheet date, we compare the unamortized capitalized costs to the
net realizable value of that product and write off the amount by which the unamortized capitalized costs of that product exceed its net
realizable value. Amortization of these costs is included in depreciation
and amortization in the consolidated statements of operations and comprehensive loss. Intangible Assets, Net We test the recoverability of its intangible assets
(see Note 7, Intangible Assets, Net and Goodwill , 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. We review 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. We performed an interim impairment test during
the second quarter of fiscal 2024 and concluded that the carrying value of the intangible assets of GuruShots reporting unit exceeded
its fair value. Accordingly, we recorded a non-cash impairment charge of $11.9 million during the second quarter of fiscal 2024. See Note
7, Intangible, Net and Goodwill Goodwill Goodwill represents the excess of purchase price
and related costs over the fair value of assets acquired and liabilities assumed of the business acquired. Under ASC 350, Intangibles-Goodwill
and Other We test goodwill for impairment on the first day
of the fourth fiscal quarter or upon the occurrence of events or changes in circumstances that indicate that the asset might be impaired.
Goodwill is assigned to our reporting units, which are our operating segments, or components of an operating segment, that constitute
a business for which discrete financial information is available, and for which segment management regularly reviews the operating results.
During the annual impairment review process we have the option to first perform a qualitative assessment (commonly referred to as “step
zero”) over relative events and circumstances to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying value, or to perform a quantitative assessment (“step one”) where we estimate the fair value
of each reporting unit using primarily a market capitalization approach. We 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, we consider income tax effects from any tax-deductible goodwill on
the carrying amount of its reporting unit when measuring the goodwill impairment loss, if applicable. We performed an interim impairment test during
the third quarter of fiscal 2023 and concluded that the carrying value of the GuruShots reporting unit exceeded its fair value. Accordingly,
we recorded a non-cash goodwill impairment charge of $8.7 million during the third quarter of fiscal 2023. See Note 7, Intangible,
Net and Goodwill Investments From time to time, when opportunities present
themselves, the Company considers strategic investments in privately-held companies. The Company’s sole investment at July 31, 2023,
is a simple agreement for future equity (SAFE) in which the Company holds the right to receive equity at some later date and upon certain
events. 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 operations and comprehensive loss. The Company periodically evaluates the carrying
value of its 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. During fiscal 2024, we reduced the carrying value
of this SAFE investment to $0 and recorded $50,000 loss in the accompanying consolidated financial statements. 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 $9.8 million and $12.2 million in
cash equivalents as of July 31, 2024 and 2023, respectively. Income Taxes The accompanying consolidated financial statements
include provisions for federal, state and foreign income taxes. We recognize 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 basis. 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. We consider the scheduled reversal of deferred tax assets and 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. We use a two-step approach for recognizing and
measuring tax benefits taken or expected to be taken in a tax return. We determine 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, we presume 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. We classify 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 operations and comprehensive loss. Contingencies We accrue 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 we accrue for loss
contingencies and the reasonable estimate of the loss is within a range, we record its best estimate within the range. When no amount
within the range is a better estimate than any other amount, we accrue the minimum amount in the range. We 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 Equity 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
(in thousands):
Fiscal Year Ended
July 31,
2024 2023
Basic weighted-average number of shares 14,092 14,096
Effect of dilutive securities:
Stock options - -
Non-vested restricted Class B common stock - -
Deferred stock units - -
Diluted weighted-average number of shares 14,092 14,096 The following shares were excluded from the diluted
earnings per share computation because their inclusion would have been anti-dilutive (in thousands):
Fiscal Year Ended
July 31,
2024 2023
Stock options 861 832
Non-vested restricted Class B common stock 236 400
Deferred stock units 202 237
Shares excluded from the calculation of diluted earnings per share 1,299 1,469 For the fiscal years ended July 31, 2024 and 2023,
the diluted loss per share equals basic loss per share because the Company incurred a net loss during these periods and the impact of
the assumed exercise of stock options and vesting of restricted stock and deferred stock units (“DSUs”) would have been anti-dilutive. Stock-Based Compensation We account for our share-based compensation arrangements in accordance
with ASC 718, Compensation-Stock Compensation, 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
USD-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) income resulting from foreign exchange transactions” in the consolidated statements of operations and comprehensive
loss. 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 operations and comprehensive loss 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) income resulting from foreign exchange transactions”
in the accompanying consolidated statements of operations and comprehensive loss. 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. There were no allowances for credit losses as of July 31, 2024 and 2023. 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 arra |
